Chalice Mining Limited
Annual Report 2011

Plain-text annual report

ANNUAL REPORT 2011 CORPORATE DIRECTORY DIRECTORS Tim Goyder Executive Chairman Douglas Jones Managing Director Juan Jeffery Executive Director/Chief Operating Officer Anthony Kiernan Non-executive Director Stephen Quin Non-executive Director Michael Griffiths Non-executive Director COMPANY SECRETARY Richard Hacker PRINCIPAL PLACE OF BUSINESS & REGISTERED OFFICE Level 2, 1292 Hay Street WEST PERTH WA 6005 Tel: (+61)(8)9322 3960 Fax: (+61)(8)9322 5800 Web: Email: AUDITORS HLB Mann Judd Level 4, 130 Stirling Street PERTH WESTERN AUSTRALIA 6000 SHARE REGISTRY Australia Computershare Investor Services Pty Limited Level 2, Reserve Bank Building 45 St Georges Terrace PERTH WESTERN AUSTRALIA 6000 Tel: 1300 557 010 Canada Computershare Investor Services 100 University Avenue, 9th Floor Toronto, Ontario M5J 2Y1 HOME EXCHANGE Australian Securities Exchange Limited Exchange Plaza 2 The Esplanade PERTH WESTERN AUSTRALIA 6000 TORONTO STOCK EXCHANGE The Exchange Tower P.O Box 421 130 King Street West Toronto, Ontario M5X 1J2 ASX Share Code: CHN TSX Share Code: CXN CONTENTS CHAIRMAN’S LETTER ACTIVITIES REVIEW THE ZARA PROJECT REVIEW MOGORAIB NORTH AND HURUM PROJECTS GNAWEEDA PROJECT SUSTAINABLE DEVELOPMENT SCHEDULE OF TENEMENTS DIRECTORS’ REPORT 2 4 4 8 8 9 11 12 AUDITOR’S INDEPENDENCE DECLARATION 27 STATEMENT OF COMPREHENSIVE INCOME 28 STATEMENT OF FINANCIAL POSITION STATEMENT OF CHANGES IN EQUITY STATEMENT OF CASH FLOWS NOTES TO THE FINANCIAL STATEMENTS DIRECTORS’ DECLARATION INDEPENDENT AUDITOR’S REPORT CORPORATE GOVERNANCE REPORT ASX ADDITIONAL INFORMATION 29 30 31 32 58 59 61 67 CHALICE GOLD MINES ANNUAL REPORT 2011 CHAIRMAN’S LETTER DEAR SHAREHOLDER I am pleased to report on another very active year for Chalice as we continued to progress towards our goal of becoming a low cost North African-focused gold producer. Our strategy this year was simple: to move the high-grade Koka gold mine toward production as soon as possible, while ensuring that our ongoing exploration efforts in Eritrea generate a strong pipeline of prospective drill targets with the potential to grow our reserve inventory over time. At today’s gold prices and with forecast cash operating costs of US$338 per oz before royalties, it is no surprise that the high-grade, open cut Koka gold deposit – which contains a probable Ore Reserve of 4.6 million tonnes at a grade of 5.1 g/t containing 760,000oz of gold – would generate outstanding returns for shareholders. Cash operating costs are expected to be in the lowest quartile globally and we expect to operate a highly profitable mine. While market conditions have again been volatile this year – with a significant disconnect emerging globally between the value of gold equities and the rising gold price – I am confident that the underlying value of Chalice’s flagship asset will be reflected in our share price as we move closer to development and production. In this regard, I am pleased to report that we achieved several important milestones during the year, including a final agreement with the Eritrean National Mining Corporation (“ENAMCO”) for their right to acquire an additional 30 per cent interest in the Koka Project for approximately US$34 million, including the reimbursement of certain costs. The completion of this transaction – including the signing of a shareholder’s agreement (as between Chalice and ENAMCO to establish the jointly owned operating company) together with ongoing permitting activities – should, subject to obtaining finance, enable Chalice to commence development of the Koka gold mine in the early part of 2012. With ENAMCO now on board, we can look forward to a long and successful partnership. As part of the key deliverables required to bring Koka into production, we have also made excellent progress by substantially completing the Social and Environmental Impact Assessment Study and Social and Environmental Management Plan for the Project. The only major outstanding item to be completed prior to the issue of the Mining Licence is the Mining Agreement between Zara Mining Share Company (the joint operating company in Eritrea which owns the Zara Project) and the Government of Eritrea. Shareholders can rest assured that Chalice and ENAMCO are working hard to complete this agreement on a timely basis. As we are now rapidly approaching the development phase of the Koka mine, we have strengthened our management team with the recent appointment of Juan Jeffery to the Board and to the position of Chief Operating Officer. On behalf of Zara Mining Share Company, we have also appointed Mike Kelly as General Manager; Mike will be based in Eritrea to oversee the permitting process, build the development team and undertake construction of the mine. We are currently inviting reputable international companies to tender for the Engineering, Procurement and Construction (EPC) contract to build the plant and infrastructure required for the operation. Aside from the planned development of the Koka mine, our exploration team in Eritrea has put in an enormous effort to build an inventory of exploration targets in and around the Koka deposit, as well as on the Zara North and Zara South licences. Bearing in mind that little, if any, exploration has been undertaken on the majority of Chalice’s licences prior to our involvement, work undertaken to date has included detailed mapping, stream sediment sampling and soil sampling. While this on-ground work was being completed, we conducted an aeromagnetic survey over all of our licences in Eritrea. A ground IP survey was also conducted over the Koka-Konate corridor to target possible repetitions of the Koka deposit. We expect this extensive groundwork to pay off, as numerous targets have been defined which are now being drilled. We expect that the first results from this drilling will be generated during the December 2011 Quarter, as we seek to expand the mineral resource in and around Koka. At Mogoraib North, which is rapidly becoming a key focus, first-pass stream sediment sampling was conducted, followed up with helicopter-supported mapping and a rock chip sampling program. The surface sampling program identified areas anomalous in base metals, some of which are associated with geophysically-identified basement conductors. 2 Airborne geophysics, including VTEM, was also flown over the Mogoraib North tenement, targeting volcanic-hosted massive sul phide deposits. Our target area has similar geology to that of the world-class Bisha deposit which lies 10km south of our Mogoraib North tenement. The Bisha mine, which recently went into production, is owned by Nevsun Resources Limited and ENAMCO. Geophysical interpretation of the VTEM work will be completed in October 2011. We expect to drill these targets in late 2011 or early 2012. Michael Griffiths recently retired from an executive position with the Company; however, we are thankful that his wealth of experience and knowledge will be retained by the Company as he will remain on the Board as a Non-Executive Director and consultant, as required. In conclusion, I would also like to take this opportunity to thank our growing management team and staff for their continued dedication towards bringing the project to fruition, and our board of directors for their wise counsel and support. I would also like to especially thank our shareholders for your continued support. I am confident that Chalice has a very bright future as we move ahead and deliver positive news regarding the permitting, financing and development of the Zara Project, and continue to ramp up our exploration efforts. Yours faithfully TIM GOYDER Executive Chairman CHALICE GOLD MINES ANNUAL REPORT 2011 3 CHALICE GOLD MINES ANNUAL REPORT 2011 ACTIVITIES REVIEW THE ZARA PROJECT REVIEW Chalice Gold Mines Limited (“Chalice” or “the Company”), together with its 40% partner the Eritrean National Mining Corporation (“ENAMCO”), are planning to develop the high grade, open pit Koka Gold Deposit, part of the greater Zara Project in Eritrea, East Africa. The Koka Gold Deposit hosts a JORC and NI 43 101 compliant Probable Mineral Reserve of 4.6 million tonnes with a grade of 5.1 g/t gold, containing 760,000 ounces. The forecast low cash operating cost of US $338/oz gold is expected to be in the lowest quartile of global gold mine production costs. Planned mine production from the mine will average 104,000 gold ounces per year over a 7 year mine life. In July 2010, Chalice delivered the results of a positive Feasibility Study and since then, significant steps have been taken to advance the project through to development with targeted first production in late 2014, subject to receipt of all necessary approvals and project funding. STRONG ECONOMICS Based on the 2010 Koka Feasibility Study which was undertaken by Lycopodium Minerals, the economics of the deposit are extremely robust with a payback period of less than 2 years and a cash operating margin expected to be well in excess of US$1,200 per ounce at current gold prices. PROJECT FINANCIAL OUTCOMES (US$) (UNLEVERAGED) GOLD PRICE Life-of-mine EBITDA Average annual EBITDA NPV5% after-tax cash flows IRR after-tax $900/oz $381M $54M $99M 22% $1,200/oz $1,500/oz $1,800/oz $589M $84M $196M 35% $797M $114M $293M 45% $1,005M $144M $322M 54% US$338 PER RECOVERABLE oz CONSISTING OF: REFINING CHARGES $4.00 1% G&A COSTS $46.70 14% AVERAGE MINING COSTS $129.80 38% PROCESSING COSTS $157.20 47% PROCESSING COSTS ($/t MILLED) MAINTENANCE MATERIALS 9% PERSONNEL COST 14% Table 1: Key Financial Outcomes from the Koka Feasibility Study OPERATING COST ESTIMATES Average mining costs (incl. pre-strip) US$/t mined 2.01 Processing cost US$/t milled 24.78 General and administration US$/t milled 7.36 Refining charges US$/t milled 0.63 4 POWER 59% CONSUMABLES 18% CHALICE GOLD MINES ANNUAL REPORT 2011 FORECAST ANNUAL GOLD PRODUCTION AND CASH COSTS n o i t c u d o r P ) s ’ z o 0 0 0 ’ ( 160 140 120 100 80 60 40 20 – Enamco (40%) CHN (60%) Cash Costs s t s o C h s a C ) z o / $ S U ( 900 800 700 600 500 400 300 200 100 – 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020 2021 2021 Financial years ended 30 June Chalice has also commenced mine pre-development activities for Koka starting with the recruitment of the senior management team, including the Chief Operating Officer of Chalice and General Manager for the Zara Project. Chalice is currently evaluating a number of options in relation to financing the project. Subject to financing, construction and development of the mine may commence in early 2012. RESERVES AND RESOURCES Koka contains a Probable Mineral Reserve and an Indicated Mineral Resource as listed in Table 2. Table 2: The Mineral Resource estimate using a 1.2 g/t gold cut-off and the Reserve estimate CATEGORY TONNES (Mt) GRADE (g/t AU) CONTAINED GOLD (oz) Probable Mineral Reserve Indicated Mineral Resource 4.6 5.0 5.1 5.3 760,000 840,000 A TECHNICALLY LOW RISK GOLD PROJECT The Koka Gold Mine is to be based on proven mining and processing technology. The Koka Feasibility Study shows simple quartz vein stockwork in a micro-granite that is free milling with a relatively coarse grind and low reagent consumption. Mining is planned on a traditional drill/blast, truck/shovel, open pit operations at a stripping ratio of 1:8 after pre-strip at a 9Mta mining rate. The processing plant design consists of single stage jaw crusher and SAG mill in closed circuit with hydro-cyclones and a centrifugal gravity concentrator, followed by cyanidation and electro-winning. Cyclone overflow leads to a 7 stage carbon-in-leach and Zadra elution circuit for gold and carbon recovery. Processing throughput is planned to be 0.6Mta with an estimated 96.6% gold recovery. THE PATH TO CONSTRUCTION Following the signing of the Shareholders Agreement between Chalice and ENAMCO in July 2011, application was made for the Koka Mining Licence. Discussions are currently underway with the Eritrean Government in relation to a Mining Agreement which will govern the operating protocols for the mine. The Social and Environmental Impact Assessment and Management Plans have been completed and lodged with the Eritrean Ministry of Energy & Mines. These reports form a key component of the documentation required to secure Koka Mining Licence. They represent the culmination of two and a half years of environmental, socio-economic and community studies. The studies were conducted by independent consultants Knight Piésold and Global Resources Development and Management Consultants (GREDMCO) in line with internationally accepted standards. Mine permitting activities, and the grant of the mining licence are expected to be finalised by the end of 2011. 5 CHALICE GOLD MINES ANNUAL REPORT 2011 ACTIVITIES REVIEW (CONTINUED) ENAMCO’S ACQUISITION OF A 30% INTEREST IN THE ZARA PROJECT During the year, Chalice reached agreement with ENAMCO for the acquisition of a 30% participating interest in the Zara Project. This interest is in addition to the 10% free-carried interest also held by the Government of Eritrea. The agreement covers the Koka Gold Deposit, as well as the Zara North, Central and South Exploration Licences, but excludes the Company’s 100% owned Mogoraib North and Hurum Exploration Licences. ENAMCO has agreed to pay US$32 million for its 30% participating interest in the Zara Project, which will be represented by an interest in the operating company, Zara Mining Share Company (“Zara Mining SC” or “Zara”). Zara will own, develop and operate the Koka Gold Mine, and will own and explore the surrounding Zara Project. In addition to this amount, ENAMCO will pay Chalice approximately US$2 million (subject to audit), which represents a reimbursement to Chalice of ENAMCO’s pro-rata share of exploration costs expended up to and including 31 March 2011 on the Zara Project areas that fall outside of the proposed Koka mining licence. Zara Mining SC is owned 60% by Chalice and 40% by ENAMCO. Zara Mining SC has a board of directors of five, comprising three from Chalice and two from ENAMCO. In accordance with the Shareholders’ Agreement Chalice and ENAMCO would contribute to the further development costs of Koka and to future exploration expenditures on the Zara Project on a 2/3rd Chalice and 1/3rd ENAMCO basis, which is in line with their respective shares of the overall participating interest. The signing of the Shareholders’ Agreement allows for the payment of approximately US$34 million to Chalice on or before the 27 January 2012. EXPLORATION AT ZARA The Zara Project consists of six contiguous granted licences, including the Zara North, South and Central tenements covering an area totalling 546km2 situated in northern Eritrea, approximately 160km northwest of the country’s capital, Asmara. Chalice’s commitment to explore for new discoveries at the Zara Project is vital to the Company’s success and growth. Zara - Hurum gold prospects plotted on analytic signal magnetic image. 6 CHALICE GOLD MINES ANNUAL REPORT 2011 IP Resistivity anomalies in the Koka - Konate Corridor Following the completion of the Koka Feasibility Study, exploration during the year has focussed on target generation and, in particular, building a pipeline of drill-ready targets that will be the subject of a significant drilling campaign over the next 12 months. This target generation phase, which is ongoing, has delineated numerous high priority targets across the Company’s tenements and drill testing commenced in June 2011. A number of high priority Induced Polarisation (“IP”) resistivity targets have been identified from an IP survey completed in March 2011. These targets are located within a 7.5km long corridor encompassing both the Koka deposit and the Konate and Fah prospects drilled in 2010. The anomalies are similar to those associated with the mineralisation at the Koka deposit and are considered to be prospective for repeats of Koka-style quartz stockwork gold mineralisation. The resistivity anomalies are also associated with surface soil gold anomalies and in some cases minor artisanal workings. A 10,000 metre diamond drilling campaign has recently commenced and has initially targeted resistivity anomalies 300-500m beneath and immediately along strike from the Koka deposit and the nearby Koka East and Koka South prospects. As part of the focussed target generation program, the Company also conducted extensive soil sampling on the Zara Project. These programs have now covered an area of roughly 75km2 extending from the northern limits of the Company’s tenure to south of Konate with in excess of 3,000 soil samples being collected. Geological mapping and rock-chip sampling have been undertaken in tandem with this work with rock-chip values up to 27.5g/t gold being returned. Numerous artisanal sites have been identified during the course of the mapping. Assay results for the bulk of the soil sampling indicate a number of high priority targets for follow-up, including trenching and drilling. The main prospects identified by the soil sampling include Debre Tsaeda and Hamid Keir. At both sites, high-order soil anomalism extends over strike lengths exceeding 1,000m at levels >200ppb gold. IP Resistivity anomalies in the Koka - Konate Corridor with contoured gold-in-soil anomalies (red) 7 CHALICE GOLD MINES ANNUAL REPORT 2011 ACTIVITIES REVIEW (CONTINUED) MOGORAIB NORTH AND HURUM PROJECTS In addition to the Zara Project, Chalice holds 100% of a further 825km2 of exploration ground consisting of the Mogoraib North license, located just 10km from Nevsun’s Bisha Mine, and the Hurum license, along strike from the Zara Project. This extensive exploration package hosts numerous, high potential, early and advanced stage gold and base metal exploration targets. Chalice is undertaking a systematic exploration effort on these licences with the aim of discovering significant new deposits. MOGORAIB VTEM SURVEY An extensive heliborne VTEM, magnetic and radiometric survey covering the 550km2 Mogoraib North Project was completed in June 2011. This ~3,800 line kilometre survey was designed to detect conductive bodies indicative of possible buried massive sulphide deposits, similar in style to the Bisha polymetallic VHMS (volcanic-hosted massive sulphide) deposit (60% owned by TSX-listed Nevsun Resources). Interpretation is pending with results expected shortly. The results of the VTEM survey will likely form the basis of an exciting drilling program early in 2012. GNAWEEDA PROJECT In 2010, Teck Resources Limited (“Teck”) advised that, having earned a 70% interest in the Gnaweeda Gold Project in Western Australia, it had entered into an agreement with Kent Exploration Inc. (“Kent”) pursuant to which Kent has the right to earn 100% of Teck’s 70% interest in the project. The property was subsequently included as part of the demerger of Archean Star Resources Inc (“Archean”). Under the terms of the underlying agreement between Teck and Chalice, as of February 2011, Chalice's interest in Gnaweeda has been diluted from 30% to 20%. Archean drilled seven diamond holes at the Bunarra prospect during the year and subsequently conducted an IP program at the St. Anne's prospect. Chalice has elected not to participate in the funding for the 2011-2012 joint venture work program and as such will further dilute its interest in the project. 8 Regional geology - Zara Hurum and Mogoraib North area. CHALICE GOLD MINES ANNUAL REPORT 2011 SUSTAINABLE DEVELOPMENT OCCUPATIONAL HEALTH & SAFETY Chalice is committed to ongoing improvement and sustaining high standards of health and safety for all its employees both in Eritrea and Australia. As part of this culture, Chalice actively develops and maintains systems in compliance with applicable laws, regulations and standards in our jurisdictions of operation. Our culture of safety is integrated from the boardroom to the operations fronts and is demonstrated by senior and frontline leaders leading by example. The same culture and proactive behaviour is strongly emphasised with all employees, consultants and contractors. To that end, the Company ensures through due process that external contractors and service providers understand and share our culture. Our local contractors are treated as employees and are encouraged and assisted through active leadership to approach our health and safety focus as a way of life. Chalice continues its formal engagement with the local and regional communities as stakeholders in the development of the Koka Gold Deposit. Chalice has ongoing programmes of involvement with all stakeholders. Ongoing discussions are being held with local communities and the Government regarding appropriate programs to assist and build capacity within both the local and broader Eritrean community. As we are moving forward towards active operations with Zara Mining Share Company (JV between Chalice Gold Ltd and Eritrean Government owned ENAMCO), all new operations employees will be inducted and coached on the importance of relationship with the community. Through leadership and systems, employees will be encouraged to identify, assess, monitor and control existing and potential impacts on the local community. Community leaders are provided with feedback systems and access to operations management. COMMUNITY Chalice understands the importance of being an active community participant and continues to foster the well established long term relationship that has been developed over the past decade, since exploration commenced on the Zara Project. ENVIRONMENT The Company is committed to a practical balance between economic development and protection of the environment. To date, environmental impacts have been minimal during the exploration phase and in areas still being explored, impacts will remain low. As the mining development activities increase, measures are taken to minimise and mitigate potential negative impacts on both the environment and local community. 9 CHALICE GOLD MINES ANNUAL REPORT 2011 COMPETENT PERSONS AND QUALIFIED PERSON STATEMENT The information in this report that relates to Exploration Results is based on information compiled by Dr Doug Jones, a full-time employee and Director of Chalice Gold Mines Limited, who is a Member of the Australasian Institute of Mining and Metallurgy and is a Chartered Professional Geologist. Dr Jones has sufficient experience in the field of activity being reported to qualify as a Competent Person as defined in the 2004 edition of the Australasian Code for Reporting of Exploration Results, Minerals Resources and Ore Reserves, and is a Qualified Person under National Instrument 43-101 – ‘Standards of Disclosure for Mineral Projects’. The Qualified Person has verified the data disclosed in this release, including sampling, analytical and test data underlying the information contained in this release. Dr Jones consents to the release of information in the form and context in which it appears here. The Mineral Resource estimate was prepared by Mr. John Tyrrell who is a Member of the Australasian Institute of Mining and Metallurgy. Mr. Tyrrell is a full time employee of AMC and has sufficient experience in gold resource estimation to act as Competent Person as defined in the 2004 Edition of the 'Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (the JORC Code)' and was a Qualified Person under National Instrument 43-101 – ‘Standards of Disclosure for Mineral Projects’ at the date the National Instrument 43-101 was filed with the Toronto Stock Exchange. Mr Tyrrell consents to the inclusion of this information in the form and context in which it appears. The information in this statement of Ore Reserves is based on information compiled by Mr David Lee who is a Member of the Australasian Institute of Mining and Metallurgy and a full time employee of AMC. Mr Lee has sufficient relevant experience to be a Competent Person as defined in the JORC Code and was a Qualified Person under National Instrument 43-101 – ‘Standards of Disclosure for Mineral Projects’ at the date the National Instrument 43-101 was filed with the Toronto Stock Exchange. Mr Lee consents to the inclusion of this information in the form and context in which it appears. FORWARD LOOKING STATEMENTS This document may contain forward-looking information within the meaning of Canadian securities legislation and forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 (collectively, forward-looking statements). These forward-looking statements are made as of the date of this document and Chalice Gold Mines Limited (the Company) does not intend, and does not assume any obligation, to update these forward-looking statements. Forward-looking statements relate to future events or future performance and reflect Company management’s expectations or beliefs regarding future events and include, but are not limited to, statements with respect to the estimation of mineral reserves and mineral resources, the realization of mineral reserve estimates, the likelihood of exploration success, the timing and amount of estimated future production, costs of production, capital expenditures, success of mining operations, environmental risks, unanticipated reclamation expenses, title disputes or claims and limitations on insurance coverage. In certain cases, forward-looking statements can be identified by the use of words such as plans, expects or does not expect, is expected, will, may, would, budget, scheduled, estimates, forecasts, intends, anticipates or does not anticipate, or believes, or variations of such words and phrases or statements that certain actions, events or results may, could, would, might or will be taken, occur or be achieved or the negative of these terms or comparable terminology. By their very nature forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among others, risks related to actual results of current exploration activities; changes in project parameters as plans continue to be refined; future prices of mineral resources; possible variations in ore reserves, grade or recovery rates; accidents, labour disputes and other risks of the mining industry; delays in obtaining governmental approvals or financing or in the completion of development or construction activities; as well as those factors detailed from time to time in the Company’s interim and annual financial statements and management’s discussion and analysis of those statements, all of which are filed and available for review on SEDAR at . Although the Company has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. CAUTIONARY NOTE For readers to fully understand the technical information in this annual report, they should read the Technical Report for the Koka Gold Deposit dated July 27, 2010 (available at which qualifies that technical information. Readers are advised that mineral resources that are not mineral reserves do not have demonstrated economic viability. The Technical Report is intended to be read as a whole, and sections should not be read or relied upon out of context. The technical information in the report is subject to the assumptions and qualifications contained in the Technical Report. ) in its entirety, including all qualifications, assumptions and exclusions that relate to the information set out in this annual report 10 CHALICE GOLD MINES ANNUAL REPORT 2011 SCHEDULE OF TENEMENTS PROJECTS - ERITREA LICENSE TYPE NATURE OF INTEREST CURRENT EQUITY Zara (1,2,3,4) Exploration License Zara South Exploration License Zara North Exploration License Mogoraib Exploration License Hurum Exploration License Owned Owned Owned Granted Granted PROJECTS - AUSTRALIA 60% 60% 60% 100% 100% TENEMENT # E51/0926 E51/0927 NATURE OF INTEREST CURRENT EQUITY Owned Owned 13% 13% 11 CHALICE GOLD MINES ANNUAL REPORT 2011 DIRECTORS’ REPORT The Directors present their report together with the financial report of the Chalice Gold Mines Limited (‘Chalice’) and its subsidiaries (together ‘the Group’) for the financial year ended 30 June 2011 and the independent auditor’s report thereon. In order to comply with the provisions of the Corporations Act, the Directors report as follows: 1. DIRECTORS T R B Goyder Executive Chairman Tim has over 30 years experience in the resource industry. Tim has been involved in the formation and management of a number of publicly-listed and private companies and is currently a Director of Uranium Equities Limited, Strike Energy Limited and Chairman of Liontown Resources Limited all listed on ASX. Tim is a member of the remuneration committee. D A Jones PhD, AusIMM, CPGeo Managing Director Doug is a geologist with over 30 years experience in mineral exploration, having worked extensively in Australia, Africa, South America and Europe. His career has covered exploration for gold in a wide range of geological settings, volcanic and sediment- hosted zinc-copper-lead, and IOCG style copper-gold. He is also a director of Liontown Resources Limited, TSX and AIM-listed Minera IRL Limited and TSX listed Serabi Mining Plc. A W Kiernan LLB Independent Non-executive Director Tony is a lawyer and corporate advisor with extensive experience in the administration and operation of listed public companies. Tony is Chairman of BC Iron Limited, Uranium Equities Limited, Venturex Resources Limited and is a director of Liontown Resources Limited all listed on ASX. Tony has not been a director of any other ASX listed companies during the past three years other than North Queensland Metals (from January 2007 to July 2008). Tony is chairman of the audit committee and remuneration committee. M R Griffiths BSc Dip Ed, AusIMM, GAIC Non-executive Director (from 1 July 2011) Mike is a geologist with considerable experience in the minerals exploration sector in both Eritrea and Africa. Mike previously held the position of Managing Director of Sub-Sahara Resources NL, which merged with Chalice Gold Mines in August 2009. Mike is also a director of TSX listed Currie Rose Limited and Chairman of ASX listed Mozambi Coal Limited. From 1 July 2011, Mike became a non-executive director. S P Quin PGeo, FGAC, FSEG, MIOM3 Independent Non-executive Director Stephen is a mining geologist with over 30 years experience in the mining and exploration industry. Stephen is based in Vancouver, Canada and is the President of Midas Gold Corp. Stephen was until December 2010 President of Capstone Mining Corp. He is also a director of TSX listed company’s Troon Ventures, Rare Element Resources and Mercator Minerals Ltd. Stephen has extensive experience in the resources sector, and in the development and operation of production companies. Stephen is a member of the audit and remuneration committee. J Jeffery BSc (Engineering), BSc (honours), MBA (Marketing) Executive Director/Chief Operating Officer (appointed 7 July 2011) Juan is a dual qualified engineer and geologist with 28 years of international experience including geology, geotechnical and mine engineering, operations management, business improvement project delivery and engineering management. Juan has held senior management and executive roles in mining operations and consulting engineering in Asia-Pacific and Africa with multinational corporations including BHP Billiton, URS and Parsons Brinckerhoff. 12 CHALICE GOLD MINES ANNUAL REPORT 2011 DIRECTORS’ REPORT (CONTINUED) 2. CHIEF FINANCIAL OFFICER AND COMPANY SECRETARY R K Hacker B.Com, ACA, ACIS Richard is a Chartered Accountant and Chartered Secretary with significant professional and corporate experience in the energy and resources sector in Australia and the United Kingdom. Richard has previously worked in senior finance roles with global energy companies including Woodside Petroleum Limited and Centrica Plc. Prior to this, Richard was in private practice with major accounting practices. Richard is also Company Secretary of Liontown Resources Limited. 3. DIRECTORS’ MEETINGS The number of meetings of directors (including meetings of committees of directors) held during the year and the number of meetings attended by each director were as follows: DIRECTORS’ MEETINGS AUDIT REMUNERATION NOMINATION Number of meetings held: Number of meetings attended: T R B Goyder D A Jones A W Kiernan M R Griffiths S P Quin J Jeffery 7 6 7 7 7 7 - 2 - - 2 - 2 - 1 1 - 1 - 1 - - - - - - - - As at the date of this report, the Company had an audit committee, a remuneration committee and a nomination committee of the board of directors. Members acting on the committees of the board during the year were: AUDIT REMUNERATION NOMINATION A W Kiernan (Chairman) S P Quin A W Kiernan (Chairman) T R B Goyder S P Quin T R B Goyder (Chairman) D A Jones A W Kiernan M R Griffiths S P Quin J Jeffery 4. PRINCIPAL ACTIVITIES The principal activities of the Group during the course of the period were mineral exploration and evaluation. 5. REVIEW OF OPERATIONS 5.1 THE ZARA PROJECT, ERITREA In July 2010, Chalice delivered the results of a positive Feasibility Study on the Koka Gold Deposit (“Koka”), part of its 60% owned Zara Project in Eritrea, East Africa. Since then, significant steps have been taken to advance the project through to development including reaching agreement with the Eritrean Government for their statutory right to acquire 30% of the Zara Project and progression of mine permitting activities. 13 CHALICE GOLD MINES ANNUAL REPORT 2011 DIRECTORS’ REPORT (CONTINUED) ENAMCO’s acquisition of a 30% interest in the Zara Project Chalice has reached agreement with the Eritrean National Mining Corporation (“ENAMCO”) for the acquisition of a 30% participating interest in Chalice’s Zara Project, paving the way for final permitting, financing and development of the project. This interest is in addition to the 10% free-carried interest also held by ENAMCO. The agreement covers the high-grade Koka Deposit, as well as the Zara North, Central and South Exploration Licences (the “Zara Licences”), but excludes the Company’s 100% owned Mogoraib North and Hurum Exploration Licences. ENAMCO has agreed to pay US$32 million for its 30% participating interest in the Zara Licences, which will be represented by an interest in the operating company, Zara Mining Share Company (“Zara Mining SC” or “Zara”). Zara will own, develop and operate the Koka Gold Mine, and will own and explore the surrounding Zara Exploration Licences. In addition to this amount, ENAMCO will pay Chalice approximately US$2 million (subject to audit), which represents a reimbursement to Chalice of ENAMCO’s pro-rata share of exploration costs expended up to and including 31 March 2011 on the Zara Licences which fall outside of the proposed Koka Mining Licence. Zara Mining SC will be owned 60% by Chalice and 40% by ENAMCO. Zara Mining SC will have a board of directors of five, comprising three from Chalice and two from ENAMCO. Chalice and ENAMCO will contribute to the further development costs of Koka and to future exploration expenditures on the Zara Licences on a 2/3rd Chalice and 1/3rd ENAMCO basis, which is in line with their respective shares of the overall participating and contributing interest. The signing of the Shareholders’ Agreement (as between Chalice and ENAMCO for their interest in Zara Mining SC) provides for the payment of the approximately US$34 million to Chalice on or before the 27 January 2012. Koka mine permitting Following execution of the Shareholders Agreement in July 2011, Zara Mining SC will apply for the Koka Mining Licence. Discussions are currently underway with the Eritrean Government in relation to a Mining Agreement which will govern the operating protocols for the mine. The Social and Environmental Impact Assessment and Management Plans have been completed and lodged with the Eritrean Ministry of Energy & Mines. These reports form a key component of the documentation required to secure a mining licence for Koka. They represent the culmination of two and half years of environmental, socio-economic and community studies. The studies were conducted by independent consultants Knight Piésold and Global Resources Development and Management Consultants (GREDMCO) in line with internationally accepted standards. Mine permitting activities, and the grant of the mining licence are expected to be finalised within the next few months. Mine development Chalice has commenced mine pre-development activities for the Koka Gold Mine starting with the recruitment of the senior management team, including a Chief Operating Officer of Chalice and General Manager of Zara Mining SC. Chalice is currently evaluating a number of options in relation to financing the project. Subject to financing, construction and development of the mine may commence in late 2011 or early 2012. Zara Mining SC will shortly be calling for tenders for the Engineering, Procurement and Construction (EPC) contract for the CIL gold plant, camp and assorted infrastructure. 5.2 EXPLORATION ERITREA Following the completion of the feasibility study on the Koka deposit, exploration during the year has focussed on target generation and in particular, building a pipeline of drill ready targets which will be the subject of a significant drilling campaign over the next 12 months. This target generation phase, whilst continuing, has delineated numerous high priority targets across the Company’s tenements and drill testing commenced in June 2011. Chalice has also signed agreements with the Eritrean Ministry of Energy and Mines for two new Exploration Licences totalling 830km2 in northern Eritrea at Mogoraib North and Hurum. These licences add significantly to the Company’s exploration tenure in two highly prospective geological terrains. 14 CHALICE GOLD MINES ANNUAL REPORT 2011 DIRECTORS’ REPORT (CONTINUED) Near mine exploration at the Zara Project A number of high priority Induced Polarisation (“IP”) resistivity targets have been identified from an IP survey completed in March 2011. These targets are located within a 7.5km long corridor encompassing both the Koka deposit (which has a Probable Reserve of 760,000oz at a grade of 5.1g/t gold), and the Konate prospect drilled in 2010. The anomalies are similar to those associated with the mineralisation at the Koka deposit and are considered to be prospective for repeats of Koka-style quartz stockwork gold mineralisation. The resistivity anomalies are also associated with surface soil gold anomalies and in some cases minor artisanal workings. Drilling has recently commenced and will initially target resistivity anomalies 300-500m beneath and immediately along strike from the Koka deposit and the nearby Koka East and Koka South prospects. Zara Project sampling surveys As part of the focussed target generation program, the Company conducted extensive soil sampling on the Zara Project. These programs have now covered an area of roughly 75km2 extending from the northern limits of the Company’s tenure to south of Konate with in excess of 3,000 soil samples being collected. Geological mapping and rock-chip sampling have been undertaken in tandem with this work with rock-chip values up to 27.5g/t being returned. Numerous artisanal sites have been identified during the course of the mapping. Assay results for the bulk of the soil sampling indicate a number of high priority targets for follow-up, including trenching and drilling. The main prospects identified by the soil sampling include Debre Tsaeda and Hamid Keir. At both sites high-order soil anomalism extends over strike lengths exceeding 1,000m at levels >200ppb gold. Mogoraib VTEM survey An extensive heliborne VTEM, magnetic and radiometric survey covering the 550 sq km Mogoraib North property was completed in June 2011. This approximately 3,800 line kilometre survey was designed to detect conductive bodies indicative of possible buried massive sulphide deposits, similar in style to the Bisha polymetallic VHMS (volcanic-hosted massive sulphide) deposit (60% owned by TSX-listed Nevsun Resources). Interpretation is pending with results expected shortly. The results of the VTEM survey will likely form the basis of an exciting targeted drilling program early in 2012. 5.3 CORPORATE TSX listing On 26 November 2010, Chalice commenced trading on the Toronto Stock Exchange (“TSX”) under the symbol “CXN”. Director appointments In July 2011, the Board of Chalice announced the appointment of Mr Juan Jeffery as Chief Operating Officer and Executive Director of the Company. The appointment of Mr Jeffery was the first step in strengthening the Company’s capabilities to enable the construction and development of the Koka Gold Mine. Capital raising In September 2010, Chalice completed a one for six entitlements issue by issuing 30,172,169 shares at $0.42 per share to raise approximately $12.6 million before issue costs. In May 2011, Chalice placed 32,000,000 shares at $0.30 per share to raise approximately $9.6 million before issue costs. A total of 68,997,267 shares were issued as follows: DATE NATURE OF ISSUE NUMBER ISSUED ISSUE PRICE 21 September 2010 Rights Issue 30,172,269 11 November 2010 Options Exercised 7 February 2011 Options Exercised 3 March 2011 Options Exercised 10 March 2011 Options Exercised 21 March 2011 Options Exercised 26 May 2011 Placement 250,000 1,000,000 2,000,000 1,000,000 2,575,000 32,000,000 ($) 0.42 0.20 0.35 0.25 0.25 0.25 0.30 TOTAL CONSIDERATION BEFORE COSTS OF ISSUE ($) 12,672,353 50,000 350,000 500,000 250,000 643,750 9,600,000 15 CHALICE GOLD MINES ANNUAL REPORT 2011 DIRECTORS’ REPORT (CONTINUED) 6. FINANCIAL REVIEW 6.1 RESULTS FOR THE YEAR The loss of the Group for the year ended 30 June 2011 was $3,828,054. Significant items for the year include: • Corporate and administration costs totalling $2,556,512; and • Corporate personnel costs of $1,826,970 which includes $527,851 of non cash equity settled payments for share options issued to the directors. 6.2 FINANCIAL POSITION As at 30 June 2011, the Group had net assets of $48,427,881, including $10,193,836 in cash and cash equivalents, and an excess of current assets over current liabilities of $9,552,927. 6.3 DIVIDENDS No dividend has been paid or declared since the commencement of the period and no dividends have been recommended by the Directors. 7. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS Other than as referred to in section 5, there are no significant changes in the state of affairs of the Group since balance date. 8. REMUNERATION REPORT – AUDITED This report outlines remuneration arrangements in place for directors and executives of Chalice Gold Mines. The Remuneration Report is set out under the following main headings: 8.1 Message from the Board 8.2 Introduction 8.3 Principles used to determine the nature and amount of remuneration 8.4 Directors’ and executive officers’ remuneration 8.5 Equity instruments 8.6 Service agreements 8.1 MESSAGE FROM THE BOARD Through the Remuneration Committee, the Company has been undertaking a comprehensive review of its approach to remuneration. Due to the size and nature of the Company, to date, there has been only a limited link between performance of the Company and remuneration, with the exception of share options. The focus of the review was to ensure alignment between the business strategy, remuneration and shareholder interests. The review was cognisant of the approaches adopted by other ASX listed companies in the mining sector and sought to establish a structure and approach to ensure that Chalice is able to attract and retain the calibre of executives required by its business, particularly as its operations are developed in Eritrea. In this context, the Company, for the 2012 financial year is making the following key changes to its remuneration structure: • implementation of a Short Term Incentive Plan (“STIP”); • implementation of a Long Term Incentive Plan (“LTIP”) (which will be subject to shareholder approval at the Company’s 2011 AGM); • introducing a more robust process for assessing management performance; and • revising the structure of director fees to include a base fee and committee fee component (reflective of the varying workloads of each director). These changes to the Company’s approach are an important step forward as it aligns the remuneration policy with the strategic direction of its business. 16 CHALICE GOLD MINES ANNUAL REPORT 2011 DIRECTORS’ REPORT (CONTINUED) 8.2 INTRODUCTION The information provided in this remuneration report has been audited as required by section 308 (3C) of the Corporations Act 2001. Information regarding the remuneration of key management personnel (“KMP”) is required by Corporations Regulations 2M.3.03. KMP are those individuals who have the authority and responsibility for planning, directing and controlling the activities of the Company and the Group. Based on 2011 compensation levels, the KMPs below are inclusive of the highest paid executives and directors: Tim Goyder Executive Chairman Douglas Jones Managing Director Juan Jeffery Chief Operating Officer and Executive Director Mike Griffiths Non-executive Director (from 1 July 2011) Anthony Kiernan Non-executive Director Stephen Quin Non-executive Director Richard Hacker Chief Financial Officer and Company Secretary Michael Kelly General Manager – Zara Mining Share Company Harry Wilhelmij Country Manager – Eritrea 8.3 PRINCIPLES OF COMPENSATION 8.3.1 Remuneration governance The Board is responsible for ensuring Chalice’s remuneration strategy is aligned with Company performance and shareholder interests and equitable for participants. To assist with this, the Board has established a Remuneration Committee consisting of the following directors: Anthony Kiernan Chair of the Remuneration Committee & Independent Non-Executive Director Stephen Quin Independent Non-Executive Director Tim Goyder Executive Chairman of the Company The Remuneration Committee’s objective is to support and advise the Board in fulfilling its oversight responsibility by focusing on the Company’s approach to Board and executive remuneration plus the use of equity generally across the company. Further detail of the role of the Remuneration Committee is set out in the Remuneration Committee Charter that can be accessed on the Chalice website. To ensure the Remuneration Committee is fully informed when making remuneration decisions, the Remuneration Committee may seek external advice, as required, on remuneration policies and practices. During the year advice was sought from Ernst & Young in relation to the design and implementation of the proposed LTI Plan. Furthermore, the Company obtained benchmark data for the resources sector from Godfrey Remuneration Group Pty Ltd (”Godfrey”) to assist in the setting of executive remuneration. The Company did not receive any specific advice on salaries or remuneration policy from Godfrey. 8.3.2 Remuneration principles and components of remuneration The Company has adopted the following principles in its remuneration framework: 1. The Board seeks to set aggregate remuneration at a level which provides the Company with the ability to attract and retain directors and executives of the highest calibre, while incurring a cost which is acceptable to shareholders and appropriate for the Company’s size; and 2. Directors and executives interests need to be aligned with the creation of shareholder value and Company performance by: • providing fair, consistent and competitive compensation and rewards to attract and retain high calibre employees; • ensuring that total remuneration is competitive with its peers by market standards; • incorporating in the remuneration framework both short and long term incentives linked to the strategic goals and performance of the individuals and the Company and shareholder returns; • demonstrating a clear relationship between individual performance and remuneration; and • motivating employees to pursue and achieve the long term growth and success of the Company. 17 CHALICE GOLD MINES ANNUAL REPORT 2011 DIRECTORS’ REPORT (CONTINUED) The following table is an overview of the components of remuneration: ELEMENT NON-EXECUTIVE DIRECTORS EXECUTIVES Financial year 2011 Financial year 2012 Financial year 2011 Financial year 2012 Fixed remuneration Base salary Base fee Committee fees Superannuation Consultancy fees Other benefits Variable remuneration Short term incentives (STI) Share options Long term incentives (LTI) ×  × # ##  × ### × ×   # ##  × ### ×  × ×  ×  ×  ×  × ×  ×   ×  # Only applies to Australian non-executives ## Some directors are paid consultancy fees on an arm’s length basis (refer below), ### Non-executive directors are eligible to participate in the share option plan at the discretion of the Board (refer below). 8.3.3 Non-executive director remuneration The Company’s Constitution and the ASX Listing Rules specify that the aggregate fees to be paid to non-executive directors for their role as a director are to be approved by shareholders at a general meeting. Shareholders have approved an aggregate amount of $150,000 per year (including superannuation). The fee structure for non-executive directors is reviewed annually and the Remuneration Committee and the Board will consider advice from external consultants, which includes comparative analyses of the fees paid to non-executive directors of comparable companies in the resources sector with similar market capitalisations when undertaking the annual review process. Generally, the Company will position itself within the 50th and 75th percentile band of the comparative market data. For the 2011 financial year, the non-executive directors were paid fees associated with their duties as directors. Each non- executive director was paid a base fee of $35,000 per year. No additional fees were paid for directors undertaking roles on the Audit Committee or the Remuneration Committee. For the 2012 financial year (effective 1 July 2011), non-executive directors will receive a fee of $45,000 (inclusive of superannuation), the members of the Audit Committee and Remuneration Committee also will receive an additional $5,000 for their roles. The additional payments recognise the additional time commitment by non-executive directors who serve on committees. The non-executive directors are not entitled to receive retirement benefits. Non-executive directors, at the discretion of the Board, may participate in the Employee Share Option Plan, subject to the usual approvals required by shareholders. As approved by shareholders at the 2010 Annual General Meeting, Mr Stephen Quin was granted 750,000 share options under the terms of the Employee Share Option Plan with an expiry date of 30 April 2014 on the following basis: Tranche 1: 187,500 options with an exercise price of A$0.55, vesting on issue; Tranche 2: 187,500 options with an exercise price of A$0.65, vesting on 30 April 2011; Tranche 3: 187,500 options with an exercise price of A$0.75, vesting on 30 April 2012; and Tranche 4: 187,500 options with an exercise price of A$0.75, vesting on 30 April 2013. It is not currently envisaged that non-executive directors will be eligible to participate in the proposed LTI Plan (Performance Rights Plan). The Board considers it appropriate to issue options to non-executive directors due to the current nature and size of the Company as, until profits are generated from the Company’s operations, conservation of cash reserves remains a high priority. In future, as the Company grows and the nature of the Company’s operations change from exploration and evaluation of resource projects to production, the composition of non-executive directors remuneration will be reviewed. Apart from their duties as directors, some non-executive directors may undertake work for the Company on a consultancy basis pursuant to the terms of consultancy services agreements. The nature of the consultancy work varies depending on the expertise of the relevant non-executive director. Under the terms of these consultancy agreements non-executive directors would receive a daily rate or monthly retainer for the work performed at a rate comparable to market rates that they would otherwise receive for their consultancy services. The remuneration of non-executive directors for the periods ended 30 June 2011 and 30 June 2010 is detailed further in this Remuneration Report. The amounts listed under ‘Salary & Fees’ includes both Director fees and consultancy fees received by non-executive directors. 18 CHALICE GOLD MINES ANNUAL REPORT 2011 DIRECTORS’ REPORT (CONTINUED) 8.3.4 Executive remuneration Current executive remuneration consists of fixed remuneration and variable remuneration in the form of share options. However, the Board is currently considering the implementation of an STIP and an LTIP intended to more closely align executive remuneration with the interests of shareholders. Further discussion on the proposed structure of these plans is detailed below. Fixed remuneration The level of fixed remuneration is set to provide a base level of remuneration which is both appropriate for the position and competitive in the market. The Company aims to pay within the 50th and 75th percentile band of benchmark data, but the Board has the discretion to pay above this to attract and retain key employees in achieving the Company’s strategic goals. Following the global financial crisis in 2008 and 2009, a decision was taken by the Board to reduce salaries for a number of executives and staff. In 2010, the salaries were re-aligned to market. Fixed remuneration is reviewed annually by the Remuneration Committee and approved by the Board having regard to the Company and individual performance, relevant comparable remuneration for similarly capitalised companies in the mining industry and independently compiled market data. Executives receive their fixed remuneration in the form of cash. The fixed remuneration for executives is detailed further in this Report. Variable remuneration – new Short Term Incentive (STI) During 2011, no executives were entitled to an STI. The Company is evolving from a gold explorer to a gold producer and needs to be competitive in attracting key senior employees to develop the Company’s operations. The Remuneration Committee has therefore recommended to the Board, which has accepted the recommendation, for the implementation of a formal STI Plan, full details of which are currently being considered. Under the Company’s proposed STIP, STI payments may be made to executives and executive directors depending on the individual and group performance in relation to Company’s annual performance goals and individual performance targets. Whilst the quantum of an STI has not yet been established, the objectives will be closely linked to the development of the Koka gold mine and exploration success in Eritrea and elsewhere. The Remuneration Committee retains the discretion to adjust individual bonuses to reward outstanding individual performance subject to Board approval. The payment of any incentive may also be settled with the issue of shares in Chalice at the discretion of the Board. Under the terms of the proposed STIP, the Board will retain absolute discretion to withhold the award of any cash payments depending on the Company’s cash position and financial outlook and reserves the right to meet payment by issuing shares. Subsequent to year end, the Company has appointed Mr Juan Jeffery (Chief Operating Officer and Executive Director) and Mr Michael Kelly (General Manager – Zara Mining Share Company) as the senior members of the mine development team to construct and operate the Koka gold mine in Eritrea. Both executives have been offered an annual STI of up to a maximum of 25% of their fixed remuneration, depending on the achievement of key performance milestones. Broadly speaking, these milestones will be based on the following: 1. Continuing and building upon Chalice’s existing good working relationship with the government and other key stakeholders in Eritrea; 2. Building a team capable of constructing and operating the Koka gold mine; 3. The construction of the Koka gold mine to design specifications and within safety, time and cost parameters; and 4. Managing EPC contractor performance and delivery of project objectives. Variable remuneration – share option plan Equity grants to executives have previously been delivered in the form of employee share options granted under the Company’s Employee Share Option Plan which was approved by shareholders in 2010. Options were issued at an exercise price determined by the Board at the time of issue. No performance hurdles were set on options issued to executives. The Company believed that as options were issued at a price in excess of the Company’s current share price at the date of issue of those options, there was an inherent performance hurdle as the share price of the Company’s shares had to increase before any reward could accrue to the executive. The vesting period for share options is at the discretion of the board. The expiry date of share options is usually between 3 and 5 years. Upon cessation of employment, participants have 3 months from the date of cessation to exercise the share options. This may be waived at the Board’s discretion. 19 CHALICE GOLD MINES ANNUAL REPORT 2011 DIRECTORS’ REPORT (CONTINUED) Variable remuneration – new Long Term Incentive Plan (LTIP) Within the context of the review of the Company’s remuneration approach the Company will introduce, subject to shareholder approval at the Company’s 2011 AGM, a Performance Rights Plan (PRP). The objectives of the PRP will be to: • align employee incentives with personal and Company performance; • balance the short term with the long term Company focus; and • assist in attracting and retaining high calibre employees by providing an attractive long term retention tool that builds an ‘ownership of the Company’ mindset. Under the proposed PRP, the Board has the discretion to make annual awards of performance rights to executives and employees. The level of the award of performance rights is dependent on an employee’s position within the Company. Subject to the performance criteria set out in the terms of the PRP, performance rights held by an employee may convert into shares in the Company. In the event the performance criteria are not achieved, the employee’s performance rights lapse with no shares being issued. No performance rights have yet been granted. A summary of the key design criteria of the proposed PRP is set out below: KEY DESIGN FEATURE PROPOSED DESIGN Eligibility Award Quantum Performance Conditions The PRP is for executive directors, executives and selected other individuals at the discretion of the Board. Performance Rights to executive directors would be subject to shareholder approval. The award quantum will be determined in consideration of total remuneration of the individual, market relativities and business affordability. The performance conditions that must be satisfied in order for the performance rights to vest will be determined by the Board. The performance conditions may include one or more of the following: • Employment of a minimum period of time; • Achievement of specific objectives by the participant and/or the Company. This may include the achievement of share price targets and other major long term milestone targets. Vesting Vesting will occur at the end of a defined period, usually three years, and upon the achievement of the performance conditions. Price Payable by Participant No consideration. Cessation of Employment If an employee leaves the Company prior to the expiration of the relevant vesting period for a particular award of performance rights, generally such performance rights would lapse except in certain limited situations such as disability, redundancy or death. 8.3.5 Link between performance and executive remuneration The focus of executive remuneration over the financial year was fixed remuneration and the share options (i.e., growing the value of the company as reflected through share price). The current review of the Company’s remuneration approach seeks to ensure that executive remuneration is appropriately aligned with the business strategy and shareholder interests. The share price performance over the last 5 years is as follows: Share price 30 JUNE 2007 $0.12 30 JUNE 2008 $0.14 30 JUNE 2009 $0.25 30 JUNE 2010 $0.39 30 JUNE 2011 $0.33 20 CHALICE GOLD MINES ANNUAL REPORT 2011 DIRECTORS’ REPORT (CONTINUED) 8.4 DIRECTORS’ AND EXECUTIVE OFFICERS’ REMUNERATION (AUDITED) KEY MANAGEMENT PERSONNEL SHORT-TERM PAYMENTS POST-EMPLOYMENT PAYMENTS SHARE- BASED PAYMENTS Salary & fees Non-monetary benefits Total Superannuation benefits Termination benefits Options (A) Total $ $ $ $ $ $ $ Value of options as proportion of remuneration Directors T R B Goyder 2011 229,358 2010 137,615 D A Jones 2011 284,404 2010 172,018 A W Kiernan 2011 165,527 2010 126,027 M R Griffiths 2011 275,229 2010 229,357 S P Quin 2011 35,000 2010 2011 2010 5,833 - - J Jeffery (1) Executive 2,601 3,062 2,601 3,062 2,601 3,062 2,601 2,584 2,601 487 - - 231,959 20,642 140,677 12,385 287,005 25,596 175,080 15,482 168,128 129,089 2,973 2,973 277,830 24,771 231,941 20,643 37,601 6,320 - - - - - - R K Hacker 2011 239,358 2010 206,422 3,189 3,256 242,547 21,542 209,678 18,578 M P Kelly (2) 2011 2010 - - - - - - - - Total Compensation 2011 1,228,876 16,194 1,245,070 95,524 2010 877,272 15,513 892,785 70,061 - - - - - - - - - - - - - - - - - - - - 252,601 153,062 269,740 582,341 741,062 931,624 - - 171,101 132,062 95,072 397,673 138,127 390,711 163,039 200,640 - - - - 6,320 - - 264,089 2,555 230,811 - - - - 527,851 1,868,445 881,744 1,844,590 -% -% 46% 80% -% -% 24% 35% 81% -% -% -% -% 1% - - (1) Mr Jeffery commenced employment as Chief Operating Officer and Executive Director in July 2011. Mr Jeffery has a base salary of $325,000 plus superannuation of 9%. (2) Mr Kelly commenced employment as General Manager – Zara Mining Share Company in September 2011. Mr Kelly has a base salary of US$360,000, an additional living allowance of US$30,000 and other benefits. Mr Kelly may make a one off election to be paid in a currency other than US$. Notes in relation to the table of directors’ and executive officers’ remuneration A. The fair value of the options are calculated at the date of grant using a binomial option-pricing model and allocated to each reporting period evenly over the period from grant date to vesting date. The value disclosed is the portion of the fair value of the options allocated to this reporting period. In valuing the options, market conditions have been taken into account. The following factors and assumptions were used in determining the fair value of options on grant date: GRANT DATE EXPIRY DATE FAIR VALUE PER OPTION EXERCISE PRICE 25 November 2010 30 April 2014 25 November 2010 30 April 2014 25 November 2010 30 April 2014 $ 0.35 0.32 0.30 $ 0.55 0.65 0.75 EXPECTED VOLATILITY RISK FREE INTEREST RATE DIVIDEND YIELD PRICE OF ORDINARY SHARES ON GRANT DATE $ 0.62 0.62 0.62 71% 71% 71% 5.12% 5.12% 5.12% 0 0 0 Details of performance-related remuneration Details of the Group’s policy in relation to the proportion of remuneration that is performance-related are discussed at 8.1 above. 21 CHALICE GOLD MINES ANNUAL REPORT 2011 DIRECTORS’ REPORT (CONTINUED) 8.5 EQUITY INSTRUMENTS (AUDITED) 8.5.1 Options and rights over ordinary shares granted as compensation Details of options over ordinary shares in the Group that were granted as compensation to key management personnel during the reporting period and details of options that vested during the reporting period are as follows: GRANT DATE NUMBER OF OPTIONS GRANTED DURING 2011 NUMBER OF OPTIONS VESTED DURING 2011 FAIR VALUE PER OPTION AT GRANT DATE $ Directors S P Quin 187,500 25 November 2010 187,500 187,500 25 November 2010 187,500 375,000 25 November 2010 - 0.35 0.32 0.30 EXERCISE PRICE EXPIRY DATE $ 0.55 0.65 0.75 30 April 2014 30 April 2014 30 April 2014 8.5.2 Exercise of options granted as compensation During the reporting period, the following shares were issued on the exercise of options previously granted as compensation: NUMBER OF SHARES AMOUNT PAID $/SHARE Director T R Goyder 2,000,000 0.25 There are no amounts unpaid on the shares issued as a result of the exercise of the options in the 2011 financial year. 8.5.3 Analysis of options and rights over ordinary shares granted as compensation Details of the vesting profile of the options granted as remuneration to each key management person of the Group and each of the named Company executives are outlined below. NUMBER GRANTED DATE GRANTED % VESTED IN YEAR FORFEITED IN YEAR DATE ON WHICH Director S P Quin 187,500 187,500 187,500 187,500 25 November 2010 25 November 2010 25 November 2010 25 November 2010 D A Jones 1,250,000 16 November 2009 M R Griffiths 375,000 375,000 16 November 2009 16 November 2009 100% 100% - - 100% 100% - - - - - - - - GRANT VESTS 25 November 2010 30 April 2011 30 April 2012 30 April 2013 31 March 2011 1 September 2010 1 September 2011 22 CHALICE GOLD MINES ANNUAL REPORT 2011 DIRECTORS’ REPORT (CONTINUED) 8.5.4 Analysis of movements in options The movement during the reporting period, by value, of options over ordinary shares in the Group held by each key management person and each of the named Company executives is detailed below. VALUE OF OPTIONS GRANTED IN YEAR (A) $ 238,404 - VALUE OF OPTIONS EXERCISED IN YEAR (B) $ - 580,000 VALUE OF OPTIONS LAPSED IN YEAR (C) $ - - S Quin T R B Goyder (A) The value of options granted in the year is the fair value of the options calculated at grant date using the Black Scholes option-pricing model. The total value of the options granted is included in the table above. This amount is allocated to remuneration over the vesting period. (B) The value of options exercised during the year is calculated as the market price of shares of the Company on ASX as at close of trading on the date the options were exercised after deducting the price paid to exercise the option. (C) The value of options that lapsed during the year represents the benefit foregone and is calculated at the date the option lapsed using the Black Scholes option-pricing model with no adjustments for whether the performance criteria have or have not been achieved. 8.6 SERVICE AGREEMENTS Remuneration arrangements for Key Management Personnel are formalised in employment agreements. Details of these contracts are provided below. Tim Goyder (Executive Chairman) TERMINATION Mr. Goyder’s employment agreement may be terminated by the Company or Mr. Goyder upon giving three months notice. Douglas Jones (Managing Director and Chief Executive Officer) Dr Jones’ employment agreement may be terminated by the Company or Dr Jones upon giving three months notice. DIMINUTION OF RESPONSIBILITY If Mr Goyder ‘s role in the Company undergoes a material variation or diminution of responsibilities, including a material change in authority or in his reporting relationship to the Board, he may terminate his employment and would then receive a payment equal to 12 months salary. If Dr Jones’ role in the Company undergoes a material variation or diminution of responsibilities, including a material change in authority or in his reporting relationship to the Board, he may terminate his employment and would then receive a payment equal to 12 months salary. Other Key Management Personnel All other Key Management Personnel employment agreements may be terminated by the Company or the employee upon giving three months notice. Non-Executive Directors Nil Nil Nil OTHER PROVISIONS Standard Chalice terms and conditions of employment. Standard Chalice terms and conditions of employment. Standard Chalice terms and conditions of employment. 23 CHALICE GOLD MINES ANNUAL REPORT 2011 DIRECTORS’ REPORT (CONTINUED) 9. DIVIDENDS No dividends were declared or paid during the period and the directors recommend that no dividend be paid. 10. LIKELY DEVELOPMENTS The Group will continue activities in the exploration and evaluation of minerals tenements with the objective of developing a significant minerals business. However, as the final stages of mine permitting at the Zara Project are soon to be completed, the business will focus on the development of the mine in conjunction with exploration activities at its projects in Eritrea. 11. EVENTS SUBSEQUENT TO REPORTING DATE There were no events subsequent events to reporting date. 12. DIRECTORS’ INTERESTS The relevant interest of each Director in the shares, rights or options over such instruments issued by Chalice and other related bodies corporate, as notified by the directors to the ASX in accordance with S205G(1) of the Corporations Act 2001, at the date of this report is as follows: ORDINARY SHARES OPTIONS OVER ORDINARY SHARES T R B Goyder 29,199,342 - D A Jones M R Griffiths S P Quin 296,278 600,960 26,321 A W Kiernan 1,062,041 2,500,000 750,000 750,000 500,000 J Jeffery - - 13. SHARE OPTIONS Options granted to directors and officers of the Group During or since the end of the financial year, Chalice granted options for no consideration over unissued ordinary shares in the company to the following directors and officers of the Group as part of their remuneration. Directors S P Quin NUMBER OF OPTIONS GRANTED 750,000 24 CHALICE GOLD MINES ANNUAL REPORT 2011 DIRECTORS’ REPORT (CONTINUED) Unissued shares under option At the date of this report 8,250,000 unissued ordinary shares of the Company are under option on the following terms and conditions: EXPIRY DATE EXERCISE PRICE ($) NUMBER OF SHARES 1 December 2012 31 July 2013 31 March 2014 31 March 2014 1 September 2012 16 November 2011 31 March 2012 30 April 2014 30 April 2014 30 April 2014 31 March 2014 14 September 2014 0.25 0.20 0.35 0.45 0.50 0.35 0.36 0.55 0.65 0.75 0.40 0.45 500,000 500,000 1,250,000 1,250,000 750,000 1,000,000 1,000,000 187,500 187,500 375,000 500,000 750,000 These options do not entitle the holder to participate in any share issue of Chalice or any other body corporate. Shares issued on exercise of options During or since the end of the period, Chalice issued ordinary shares of the Company as a result of the exercise of options as follows (there are no amounts unpaid on the shares issued): NUMBER OF SHARES AMOUNT PAID $/SHARE 5,575,000 1,000,000 250,000 0.25 0.35 0.20 INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS 14. Chalice has agreed to indemnify all the directors and officers who have held office during the year, against all liabilities to another person (other than Chalice or a related body corporate) that may arise from their position as directors and officers of Chalice, except where the liability arises out of conduct involving a lack of good faith. The agreement stipulates that Chalice will meet the full amount of any such liabilities, including costs and expenses. During the year the Group paid insurance premiums of $15,607 in respect of directors and officers indemnity insurance contracts, for current and former Directors and officers. The insurance premiums relate to: • costs and expenses incurred by the relevant officers in defending proceedings, whether civil or criminal and whatever their outcome; and • other liabilities that may arise from their position, with the exception of conduct involving a wilful breach of duty or improper use of information or position to gain a personal advantage. The amount of insurance paid is included in Directors and executives remuneration on page 21. 15. NON-AUDIT SERVICES During the year HLB Mann Judd, the Company’s auditors, performed no other services in addition to their statutory duties. 25 CHALICE GOLD MINES ANNUAL REPORT 2011 DIRECTORS’ REPORT (CONTINUED) 16. AUDITOR’S INDEPENDENCE DECLARATION The auditor’s independence declaration is set out on page 27 and forms part of the directors’ report for the year ended 30 June 2011. This report is made in accordance with a resolution of the Directors: Tim R B Goyder Executive Chairman Dated at Perth the 15th day of September 2011 COMPETENT PERSONS AND QUALIFIED PERSON STATEMENT The information in this report that relates to Exploration Results is based on information compiled by Dr Doug Jones, a full-time employee and Director of Chalice Gold Mines Limited, who is a Member of the Australasian Institute of Mining and Metallurgy and is a Chartered Professional Geologist. Dr Jones has sufficient experience in the field of activity being reported to qualify as a Competent Person as defined in the 2004 edition of the Australasian Code for Reporting of Exploration Results, Minerals Resources and Ore Reserves, and is a Qualified Person under National Instrument 43-101 – ‘Standards of Disclosure for Mineral Projects’. The Qualified Person has verified the data disclosed in this release, including sampling, analytical and test data underlying the information contained in this release. Dr Jones consents to the release of information in the form and context in which it appears here. The Mineral Resource estimate was prepared by Mr. John Tyrrell who is a Member of the Australasian Institute of Mining and Metallurgy. Mr. Tyrrell is a full time employee of AMC and has sufficient experience in gold resource estimation to act as Competent Person as defined in the 2004 Edition of the 'Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (the JORC Code)' and was a Qualified Person under National Instrument 43-101 – ‘Standards of Disclosure for Mineral Projects’ at the date the National Instrument 43-101 was filed with the Toronto Stock Exchange. Mr Tyrrell consents to the inclusion of this information in the form and context in which it appears. The information in this statement of Ore Reserves is based on information compiled by Mr David Lee who is a Member of the Australasian Institute of Mining and Metallurgy and a full time employee of AMC. Mr Lee has sufficient relevant experience to be a Competent Person as defined in the JORC Code and was a Qualified Person under National Instrument 43-101 – ‘Standards of Disclosure for Mineral Projects’ at the date the National Instrument 43-101 was filed with the Toronto Stock Exchange. Mr Lee consents to the inclusion of this information in the form and context in which it appears. Forward Looking Statements This document may contain forward-looking information within the meaning of Canadian securities legislation and forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 (collectively, forward-looking statements). These forward-looking statements are made as of the date of this document and Chalice Gold Mines Limited (the Company) does not intend, and does not assume any obligation, to update these forward-looking statements. Forward-looking statements relate to future events or future performance and reflect Company management’s expectations or beliefs regarding future events and include, but are not limited to, statements with respect to the estimation of mineral reserves and mineral resources, the realization of mineral reserve estimates, the likelihood of exploration success, the timing and amount of estimated future production, costs of production, capital expenditures, success of mining operations, environmental risks, unanticipated reclamation expenses, title disputes or claims and limitations on insurance coverage. In certain cases, forward-looking statements can be identified by the use of words such as plans, expects or does not expect, is expected, will, may would, budget, scheduled, estimates, forecasts, intends, anticipates or does not anticipate, or believes, or variations of such words and phrases or statements that certain actions, events or results may, could, would, might or will be taken, occur or be achieved or the negative of these terms or comparable terminology. By their very nature forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among others, risks related to actual results of current exploration activities; changes in project parameters as plans continue to be refined; future prices of mineral resources; possible variations in ore reserves, grade or recovery rates; accidents, labour disputes and other risks of the mining industry; delays in obtaining governmental approvals or financing or in the completion of development or construction activities; as well as those factors detailed from time to time in the Company’s interim and annual financial statements and management’s discussion and analysis of those statements, all of which are filed and available for review on SEDAR at . Although the Company has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. Cautionary Note For readers to fully understand the technical information in this financial report, they should read the Technical Report for the Koka Gold Deposit dated July 27, 2010 (available at which qualifies the technical information. Readers are advised that mineral resources that are not mineral reserves do not have demonstrated economic viability. The Technical Report is intended to be read as a whole, and sections should not be read or relied upon out of context. The technical information in the report is subject to the assumptions and qualifications contained in the Technical Report. ) in its entirety, including all qualifications, assumptions and exclusions that relate to the information set out in this financial report 26 CHALICE GOLD MINES ANNUAL REPORT 2011 AUDITOR’S INDEPENDENCE DECLARATION AUDITOR’S INDEPENDENCE DECLARATION As lead auditor for the audit of the financial report of Chalice Gold Mines Limited for the year ended 30 June 2011, I declare that to the best of my knowledge and belief, there have been no contraventions of: a) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) any applicable code of professional conduct in relation to the audit. Perth, Western Australia 15 September 2011 W M CLARK Partner, HLB Mann Judd HLB Mann Judd (WA Partnership) ABN 22 193 232 714 Level 4 130 Stirling Street Perth 6000 PO Box 8124 Perth BC 6849 Western Australia. Telephone +61 (08) 9227 7500. Fax +61 (08) 9227 7533. Email: hlb@hlbwa.com.au. Website: http://www.hlb.com.au Liability limited by a scheme approved under Professional Standards Legislation HLB Mann Judd (WA Partnership) is a member of International, a world-wide organisation of accounting firms and business advisers 27 CHALICE GOLD MINES ANNUAL REPORT 2011 STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2011 Continuing Operations Loss on sale of exploration and evaluation assets Change in fair value of options held through profit and loss Other income Share of loss of associate Reversal of share of loss of associate Project transaction costs expensed Exploration expenditure not capitalised Impairment of exploration and evaluation assets Corporate administrative expenses Loss before tax Income tax expense Loss for the period attributable to owners of the parent Other comprehensive income Net change in fair value of available for sale investments Exchanges differences on translation of foreign operations NOTE CONSOLIDATED 2011 $ 2010 $ 3(a) 3(b) 11 11 10 3(c) 5 - (146,677) (2,978) 615,748 - 1,508 (11,732) 658,509 (1,508) - - (655,400) (15,720) - (41,130) (1,172,071) (4,385,482) (4,246,999) (3,828,054) (5,575,878) - - (3,828,054) (5,575,878) 17(b) 17(b) 12,000 (5,776,792) (34,000) 70,084 Total comprehensive income after tax attributable to owners of the parent (9,592,846) (5,539,794) Basic and diluted loss (cents per share) 6 (0.02) (0.04) The above statement of comprehensive income should be read in conjunction with the accompanying notes. 28 CHALICE GOLD MINES ANNUAL REPORT 2011 STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2011 NOTE CONSOLIDATED 2011 $ 2010 $ 7 8 9 10 11 12 13 14 15 10,193,836 7,688,905 478,080 329,587 10,671,916 8,018,492 919,136 214,255 36,492,204 27,056,158 - 684,934 1,508,705 1,257,494 38,920,045 29,212,841 49,591,961 37,231,333 941,382 177,607 2,534,272 110,038 1,118,989 2,644,310 45,091 45,091 39,312 39,312 1,164,080 2,683,622 48,427,881 34,547,711 16 64,200,112 41,254,947 17(a) 17(b) (12,108,824) (8,280,770) (3,663,407) 1,573,534 48,427,881 34,547,711 Current assets Cash and cash equivalents Trade and other receivables Total current assets Non-current assets Financial assets Exploration and evaluation assets Investments in associates Property, plant and equipment Total non-current assets Total assets Current liabilities Trade and other payables Employee benefits Total current liabilities Non-current liabilities Other Total non-current liabilities Total liabilities Net assets Equity Share capital Accumulated losses Reserves Total equity The above statement of financial position should be read in conjunction with the accompanying notes. 29 CHALICE GOLD MINES ANNUAL REPORT 2011 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2011 Issued capital Accumulated losses CONSOLIDATED Share based payments reserve Investment revaluation reserve Total Foreign currency translation reserve $ $ $ $ $ $ Balance at 1 July 2010 41,254,947 (8,280,770) 1,501,450 2,000 70,084 34,547,711 Revaluation of available for sale investments Exchange differences on translation of foreign operations Loss for the year Total comprehensive income for the year Share issue – rights issue (net after costs) Share placement (net after costs) Exercise of options Share based payments - - - - - - (3,828,054) (3,828,054) 12,044,217 9,107,198 1,793,750 - - - - - - - - - - - - 527,851 12,000 - 12,000 - - (5,776,792) (5,776,792) - (3,828,054) 12,000 (5,776,792) (9,592,846) - - - - - 12,044,217 - 9,107,198 - 1,793,750 - 527,851 Balance at 30 June 2011 64,200,112 (12,108,824) 2,029,301 14,000 (5,706,708) 48,427,881 Issued capital Accumulated losses CONSOLIDATED Share based payments reserve Investment revaluation reserve Total Foreign currency translation reserve $ $ $ $ $ $ Balance at 1 July 2009 13,974,454 (2,704,892) 618,018 36,000 Revaluation of available for sale investments Exchange differences on translation of foreign operations Loss for the year Total comprehensive income for the year - - - - - - (5,575,878) (5,575,878) Share issue – merger by scheme of arrangement 6,802,388 Share placement (net after costs) 19,578,105 Share issue – consideration 900,000 Share based payments - - - - - - - - - - - - 883,432 (34,000) - - - - 11,923,580 (34,000) 70,084 70,084 - (5,575,878) (34,000) 70,084 (5,539,794) - - - - - 6,802,388 - 19,578,105 - - 900,000 883,432 Balance at 30 June 2010 41,254,947 (8,280,770) 1,501,450 2,000 70,084 34,547,711 The above statement of changes in equity should be read in conjunction with the accompanying notes. 30 CHALICE GOLD MINES ANNUAL REPORT 2011 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2011 NOTE CONSOLIDATED 2011 $ 2010 $ 244,230 181,323 (3,016,741) (3,130,431) 376,724 320,575 21 (2,395,787) (2,628,533) (13,079,323) (16,203,270) - 270,000 (863,056) (852,974) - - - (3,048,675) (1,034,819) 154,416 164,509 (686,442) - - - - - (1,210,000) 252,054 (655,400) (18,025,873) (18,767,107) - (50,000) 24,066,103 20,678,494 (1,120,938) (1,100,389) - 3,169 22,945,165 19,531,274 Cash flows from operating activities Cash receipts from operations Cash paid to suppliers and employees Interest received Net cash used in operating activities Cash flows from investing activities Payments for mining exploration and evaluation Proceeds from sale of tenements Acquisition of property, plant and equipment Proceeds from sale of investments Proceeds from joint venture termination Payments for investment in associates Tax payment for acquisition of exploration assets Stamp duty paid on acquisition of exploration assets Payments for acquisition of subsidiary Cash acquired on merger by scheme of arrangement Payments for costs of business combinations Net cash used in investing activities Cash flows from financing activities Lodgement of bank guarantee and security deposits Proceeds from issue of shares Payments for share issue costs Funds held on trust Net cash from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the period Effect of exchange rate fluctuations on cash held Cash and cash equivalents at 30 June 2,523,505 (1,864,366) 7,688,905 9,623,637 (18,574) (70,366) 7 10,193,836 7,688,905 The above statement of cash flows should be read in conjunction with the accompanying notes. 31 CHALICE GOLD MINES ANNUAL REPORT 2011 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 1. SIGNIFICANT ACCOUNTING POLICIES Chalice Gold Mines Limited is a dual listed Australian Securities Exchange (“ASX”) and Toronto Stock Exchange (“TSX”) listed public company domiciled in Australia at Level 2, 1292 Hay Street, Perth, Western Australia. The consolidated financial report comprises the financial statements of Chalice Gold Mines Limited (‘Company’) and its subsidiaries (‘the Group’) for the year ended 30 June 2011. (a) Basis of preparation and statement of compliance The financial report has also been prepared on a historical cost basis, except for available-for-sale investments, which have been measured at fair value. Cost is based on the fair values of the consideration given in exchange for assets. Chalice is domiciled in Australia and all amounts are presented in Australian dollars, unless otherwise noted. The financial report complies with Australian Accounting Standards, which include Australian equivalents to International Financial Reporting Standards (AIFRS). Compliance with AIFRS ensures that the financial report, comprising of the consolidated financial statements and notes thereto, complies with International Financial Reporting Standards (IFRS). The financial report was authorised for issue by the Directors on 15 September 2011. (b) Adoption of new and revised standards In the year ended 30 June 2011, the Group has reviewed all of the new and revised Standards and Interpretations issued by the AASB that are relevant to its operations and effective for the current annual reporting period beginning on or after 1 July 2010. As part of the annual improvements process, AASB 2009-10 Amendments to Australian Accounting Standards-Classification of Rights Issues was released to amend AASB 132 Financial Instruments: Presentation and is applicable for annual periods beginning on or after 1 February 2010. Previously, rights issues denominated in a foreign currency other than the entity’s functional currency were classified as derivative liabilities and accounted through the profit and loss. However, the amending standards now requires these rights to be classified as equity, regardless of the denomination provided that the entity offers the rights to all existing owners of the same class of its own non-derivative equity instruments. AASB 2009-8 Amendments to Australian Standards – Group Cash-settled Share-based Payment Transactions amends AASB 2 and supersedes Interpretation 8 Scope of AASB 2 and Interpretations 11 Group and Treasury Share Transactions. The amendments clarify the scope of AASB 2 by requiring an entity that receives goods and services in a share based payment arrangement to account for those goods or services regardless of which entity in the group settles the transaction, and regardless of whether the transaction is settled in cash or shares. It is applicable to annual reporting period commencing on or after 1 January 2010. AASB 2009-5 Further Amendments from the Annual Improvement Project applies from 1 January 2010 and improves disclosures and classification of items under existing standards. These amendments as per above have been reviewed and there is no impact, material or otherwise on the Group’s accounting policies and therefore, no change is necessary to Group accounting policies. The Group has also reviewed all new Standards and Interpretations that have been issued but are not yet to be effective for the year ended 30 June 2011. In particular, these are amendments to AASB 9 and AASB 124. Amendments to AASB 9 – Financial Instruments, have been released and is mandatory for periods beginning on or after 1 January 2013, with early adoption permitted. The amended standards requires two measurement models – amortised cost and fair value. Entities with significant equity investments that are classified as available for sale under AASB 139 may early adopt AASB 9 to benefit from the changes which now allow fair value increases and decreases to be consistently recorded through other comprehensive income. AASB 124 Related Parties was amended and applies to annual reporting periods beginning on or after 1 January 2011. The changes to the standard incorporates amendments to the definition of a related party to make it clearer and to ensure it treats related party transactions consistently regardless of whether a person or an entity is involved. As a result of this review of the above amended standards, the Directors have determined that there is no impact, material or otherwise, of the new and revised Standards and Interpretations on its business and, therefore, no change necessary to Group accounting policies. 32 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 CHALICE GOLD MINES ANNUAL REPORT 2011 (c) Basis of consolidation The consolidated financial statements comprise the financial statements of Chalice Gold Mines Limited (“Company” or “Parent”) and its subsidiaries as at 30 June each year (the “Group”). Interests in associates are equity accounted and are not part of the consolidated Group. Subsidiaries are all those entities over which the Company has the power to govern the financial and operating policies so as to obtain benefits from their activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether a group controls another entity. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. In preparing the consolidated financial statements, all intercompany balances and transactions, income and expenses and profit and losses resulting from intra-group transactions have been eliminated in full. Subsidiaries are fully consolidated from the date on which control is transferred to the Company and cease to be consolidated from the date on which control is transferred out of the Group. Control exists where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing when the Company controls another entity. Investments in subsidiaries held by Chalice Gold Mines Limited are accounted for at cost in the accounts of the parent entity less any impairment charges. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. The acquisition method of accounting involves recognising at acquisition date, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquire. The identifiable assets acquired and the liabilities assumed are measured at their acquisition date fair values. The difference between the above items and the fair value of consideration (including the fair value of any pre-existing investment in the acquiree) is goodwill or a discount on acquisition. A change in ownership interest of a subsidiary that does not result in a loss of control is accounted for as an equity transaction. (d) Significant accounting judgements, estimates and assumptions The preparation of a financial report in conformity with Australian Accounting Standards requires management to make judgements, estimates and assumptions that affect the application of policies and reported amount of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. These accounting policies have been consistently applied by the Group. The key estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting period are: (i) Recoverability of exploration expenditure The recoverability of the carrying amount of exploration and evaluation expenditure carried forward has been reviewed by directors and it is dependent on the future successful outcome from exploration activity or alternatively the sale of the respective areas of interest. Where exploration results are unsuccessful, or no further work is to be undertaken, the directors will then assess whether an impairment write-down is required, which will be recognised in the statement of comprehensive income. (ii) Share-based payment transactions The Group measures the cost of equity-settled share-based payments at fair value at the grant date using a binomial formula taking into account the terms and conditions upon which the instruments were granted. The details and assumptions used in determining the value of these transactions are detailed in note 14. (iii) Impairment of available for sale assets The Group follows the guidance of AASB 139 Financial Instruments: Recognition and Measurement to determining when an available-for-sale financial asset is impaired. This determination requires significant judgement. In making this judgement, the Group evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its costs and the financial health of and short-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flows. 33 CHALICE GOLD MINES ANNUAL REPORT 2011 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 (e) Foreign currency translation The functional currency of the Company is Australian dollars, and the functional currency of subsidiaries based in Eritrea is United States dollars (US$). The presentation currency of the Group is Australian dollars. Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of the exchange ruling at the reporting date. All exchange differences in the consolidated financial report are taken to profit or loss as incurred. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated at exchange rates as at the date of the initial transaction. As at the balance date the assets and liabilities of these subsidiaries are translated into the presentation currency of Chalice Gold Mines Limited at the rate of exchange ruling at the balance date and their income statements are translated at the weighted average exchange rate for the year. The exchange differences arising on the translation are taken directly to a separate component of recognised foreign currency translation reserve in equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in profit or loss. (f) Operating segments An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity, whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available. This includes start up operations which are yet to earn revenues. Management will also consider other factors in determining operating segments such as the existence of a line manager and the level of segment information presented to the board of directors. Operating segments have been identified based on the information provided to the chief operating decision makers – being the board. Operating segments that meet the quantitative criteria as described in AASB 8 are reported separately. However, an operating segment that does not meet the quantitative criteria is still reported separately where information about the segment would be useful to users of the financial statements. (g) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable, net of returns, trade allowances, rebates and amounts collected on behalf of third parties. (i) Sale of goods Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and the costs incurred or to be incurred in respect of the transaction can be reliably measured. Risks and rewards of ownership are considered passed to the buyer at the time of delivery of the goods to the buyer. (ii) Services rendered Revenue from services rendered is recognised in the statement of comprehensive income in proportion to the stage of completion of the transaction at balance date. The stage of completion is assessed by reference to surveys of work performed. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due and the costs incurred or to be incurred cannot be measured reliably. (iii) Interest received Interest income is recognised in the statement of comprehensive income as it accrues, using the effective interest method. The interest expense component of finance lease payments is recognised in the statement of comprehensive income using the effective interest method. (h) Expenses Operating lease payments Payments made under operating leases are recognised in the statement of comprehensive income on a straight-line basis over the term of the lease. Lease incentives received are recognised in the statement of comprehensive income as an integral part of the total lease expense and spread over the lease term. 34 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 CHALICE GOLD MINES ANNUAL REPORT 2011 (i) Depreciation Depreciation is calculated on a diminishing value basis over the estimated useful lives of each part of an item of property, plant and equipment. Land is not depreciated. The depreciation rates used in the current and comparative periods are as follows: • plant and equipment 7%-40% • fixtures and fittings 11%-22% • Motor Vehicles 18.75%-25% The residual value, if not insignificant, is reassessed annually. (j) Income tax and other taxes The income tax expense for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantially enacted at the end of the reporting period in the country where the company’s subsidiaries operate and generate taxable income. Provisions are established where appropriate on the basis of amounts expected to be paid to the tax authorities. Current tax liabilities for the current period and prior periods are measured at the amount expected to be recovered from or paid to taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantially enacted by the balance date. Income tax in the statement of comprehensive income comprises current and deferred tax. Income tax is recognised in the statement of comprehensive income except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Deferred income tax is provided on all temporary differences at reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at reporting date. Deferred income tax liabilities are recognised for all taxable temporary differences except: • When the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or • When the taxable temporary difference is associated with investments in subsidiaries, associates or interests in joint ventures, and the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (k) Other taxes Revenue, expenses and assets are recognised net of the amount of goods and services tax (‘GST’) or other taxes, except where the amount of GST or other taxes incurred are not recoverable from the taxation authority. In these circumstances, the GST or other taxes incurred, are recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the Australian Taxation Office (‘ATO’) is included as a current asset or liability in the statement of financial position. Other taxes payable in foreign jurisdictions are included as a current payable 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. Taxes paid in foreign jurisdictions are classified as investing cash flows in the statement of cash flows. 35 CHALICE GOLD MINES ANNUAL REPORT 2011 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 (l) Impairment At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount. Recoverable amount is the greater of fair value less costs to sell and value in use. Value in use is the present value of the future cash flows expected to be derived from the asset or cash generating unit. In estimating value in use, a pre-tax discount rate is used which reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cashflows, the recoverable amount is determined for the cash generating unit to which the asset belongs. Impairment losses are recognised in the statement of comprehensive income unless the asset has previously been revalued, in which case the impairment loss is recognised as a reversal to the extent of that previous revaluation with any excess recognised through the statement of comprehensive income. Receivables with a short duration are not discounted. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in profit or loss unless the asset is carried at revalued amount, in which case the reversal is treated as a revaluation increase. After such a reversal the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. (m) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with an original maturity of six months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. (n) Trade and other receivables Trade and other receivables are stated at cost less impairment losses (see accounting policy (l)). (o) Non-current assets held for sale and discontinued operations Immediately before classification as held-for-sale, the measurement of the assets (and all assets and liabilities in a disposal group) is brought up to date in accordance with applicable AIFRS. Then, on initial classification as held-for-sale, non-current assets and disposal groups are recognised at the lower of carrying amount and fair value less costs to sell. Impairment losses on initial classification as held-for-sale are included in profit or loss, even when there is a revaluation. The same applies to gains and losses on subsequent re-measurement. A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations or is a subsidiary acquired exclusively with a view to resale. (p) Plant and equipment Plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Such cost includes the cost of replacing parts that are eligible for capitalisation when the cost of replacing the parts is incurred. The assets' residual values, useful lives and amortisation methods are reviewed, and adjusted if appropriate, at each financial year end. An item of property, plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the year the asset is derecognised. The carrying values of plant and equipment are reviewed for impairment at each balance date in line with the Group’s impairment policy (see policy (l)). 36 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 CHALICE GOLD MINES ANNUAL REPORT 2011 (q) Financial assets Financial assets in the scope of AASB 139 Financial Instruments: Recognition and Measurement are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale investments, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value, through profit or loss, directly attributable transactions costs. The Group determines the classification of its financial assets at initial recognition and, when allowed and appropriate, re-evaluates this designation at each financial year end. (i) Financial assets at fair value through profit or loss Financial assets classified as held-for-trading are included in the category ‘financial assets at fair value through profit or loss’. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held-for-trading unless they are designated as effective hedging instruments. Gains or losses on investments held- for-trading are recognised in profit or loss. (ii) Held-to-maturity investments If the Group has the positive intent and ability to hold debt securities to maturity, then they are classified as held-to-maturity. Held-to-maturity investments are measured at amortised cost using the effective interest method, less any impairment losses. (iii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in profit or loss when the loans and receivables are derecognised or impaired, as well as through the amortisation process. (iv) Available-for-sale investments Available-for-sale investments are those non-derivative financial assets that are designated as available-for-sale or are not classified as any of the three preceding categories. After initial recognition available-for sale investments are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is recognised in profit or loss. The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business on reporting date. For investments with no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions; reference to the current market value of another instrument that is substantially the same; discounted cash flow analysis and option-pricing models. (r) Exploration, evaluation, development and tenement acquisition costs Exploration, evaluation, development and tenement acquisition costs in relation to separate areas of interest for which rights of tenure are current, are capitalised in the period in which they are incurred and are carried at cost less accumulated impairment losses. The cost of acquisition of an area of interest and exploration expenditure relating to that area of interest is carried forward as an asset in the statement of financial position so long as the following conditions are satisfied: 1) the rights to tenure of the area of interest are current; and 2) at least one of the following conditions is also met: (i) (ii) the exploration and evaluation expenditures are expected to be recouped through successful development and exploitation of the area of interest, or alternatively, by its sale; or exploration and evaluation activities in the area of interest have not at the reporting date reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in, or in relation to, the area of interest are continuing. Exploration and evaluation expenditure is initially measured at cost and include acquisition of rights to explore, studies, exploratory drilling, trenching and sampling and associated activities. General and administrative costs are only included in the measurement of exploration and evaluation expenditures where they are related directly to operational, activities in a particular area of interest. Exploration and evaluation expenditure is assessed for impairment when facts and circumstances suggest that their carrying amount exceeds their recoverable amount and where this is the case an impairment loss is recognised. Should a project or an area of interest be abandoned, the expenditure will be written off in the period in which the decision is made. Where a decision is made to proceed with development, accumulated expenditure will be amortised over the life of the reserves associated with the area of interest once mining operations have commenced. 37 CHALICE GOLD MINES ANNUAL REPORT 2011 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 (s) Trade and other payables Trade and other payables are stated at amortised cost. Trade and other payables are presented as current liabilities unless payment is not due within 12 months. (t) Provisions and employee benefits A provision is recognised when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, when appropriate, the risks specific to the liability. Employee benefits (i) Wages, salaries and annual leave Liabilities for employee benefits for wages, salaries, annual leave and sick leave represent present obligations resulting from employees' services provided to reporting date, calculated at undiscounted amounts based on remuneration wage and salary rates that the Group expects to pay as at reporting date including related on-costs, such as, workers’ compensation insurance and payroll tax. (ii) Long service leave and other long term employee benefits The Group’s net obligation in respect of long-term employee benefits other than defined benefit plans is the amount of future benefit that employees have earned in return for their service in the current and prior periods plus related on-costs. This benefit is discounted to determine its present value, and the fair value of any related assets is deducted. The discount rate is the yield at the reporting date on government bonds that have maturity dates approximating the terms of the Group’s obligations. The calculation is performed using the projected unit cost method. (iii) Superannuation Obligations for contributions to defined contribution pension plans are recognised as an expense in the statement of comprehensive income as incurred. (iv) Share-based payment transaction The Group currently provides benefits under an Employee Share Option Plan. The cost of these equity-settled transactions with employees and Directors is measured by reference to the fair value at the date at which they are granted. The fair value is determined using a Black-Scholes model and further details are provided at note 14. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of the Company (‘market conditions’). The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (‘vesting date’). The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects: (i) the extent to which the vesting period has expired; and (ii) the number of awards that, in the opinion of the Directors, will ultimately vest. This opinion is formed based on the best available information at reporting date. No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition. Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph. The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of earnings per share. 38 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 CHALICE GOLD MINES ANNUAL REPORT 2011 (u) Share capital (i) Ordinary share capital Ordinary shares and partly paid shares are classified as equity (ii) Transaction costs Transaction costs of an equity transaction are accounted for as a deduction from equity, net of any related income tax benefit. (v) Investments in associates The Group’s investment in associates is accounted for using the equity method of accounting in the consolidated financial statements and at cost in the parent. The associates are entities over which the Group has significant influence and that are neither subsidiaries nor joint ventures. The Group generally deems they have significant influence if they have over 20% of the voting rights. Under the equity method, investments in associates are carried in the consolidated statement of financial position at cost plus post acquisition changes in the Group’s share of net assets of the associates. Goodwill relating to an associate is included in the carrying amount of the investment and is not amortised. After application of the equity method, the Group determines whether it is necessary to recognise any impairment loss with respect to the Group’s net investment in associates. Goodwill included in the carrying amount of the investment in the associate is not tested separately; rather the entire carrying amount of the investment is tested for impairment as a single asset. If an impairment is recognised, the amount is not allocated to the goodwill of the associate. The Group’s share of its associates’ post acquisition profits or losses is recognised in the statement of comprehensive income, and its share of post-acquisition movements are adjusted against the carrying amount of the investment. Dividends receivable from the associates are recognised in the parent entity’s statement of comprehensive income as a component of other income. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any unsecured long term receivables and loans, the Group does not recognise further losses unless it has incurred obligations or made payments on behalf of the associate. 39 CHALICE GOLD MINES ANNUAL REPORT 2011 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 2. SEGMENT REPORTING The Group has identified its operating segments based on internal reports that are reviewed and used by the Board of Directors in assessing performance and in determining the allocation of resources. The operating segments are identified by management based on the allocation of costs; whether they are corporate related costs or exploration and evaluation costs. Results of both segments are reported to the Board of Directors at each Board meeting. Exploration expenditure is reflected as a segment as exploration expenditure occurs in one geographical area – Eritrea. EXPLORATION AND EVALUATION CORPORATE TOTAL 2011 $ 2010 $ 2011 $ 2010 $ 2011 $ 2010 $ Loss on sale of exploration assets - (146,677) Impairment of exploration and evaluation assets (41,130) (1,172,071) Exploration costs not capitalised (15,720) - - - - - - - - (146,677) (41,130) (1,172,071) (15,720) - Other Income Corporate and administrative expenses Merger costs expensed - - - 125,000 232,230 181,323 232,230 306,323 - - (4,385,482) (4,246,999) (4,385,482) (4,246,999) - (655,400) - (655,400) Segment loss before tax (56,850) (1,193,748) (4,153,252) (4,721,076) (4,210,102) (5,914,824) Unallocated income/(expenses) Net financing income Profit on sale of shares Reversal of associates net loss Share of associates net loss Change in fair value of options Loss before income tax 383,518 347,770 - 4,416 1,508 - - (1,508) (2,978) (11,732) (3,828,054) (5,575,878) EXPLORATION AND EVALUATION CORPORATE TOTAL 30 June 2011 30 June 2010 30 June 2011 30 June 2010 30 June 2011 30 June 2010 $ $ $ $ $ $ Segment assets: Exploration and evaluation assets 36,492,204 27,056,158 - - 36,492,204 27,056,158 Other 1,124,354 857,204 862,431 729,877 1,986,785 1,587,081 37,616,558 27,913,362 862,431 729,877 38,478,989 28,643,239 Unallocated assets Total assets Segment Liabilities (745,807) (2,169,248) (418,273) (514,374) (1,164,080) (2,683,622) 11,112,972 8,588,094 49,591,961 37,231,333 40 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 CHALICE GOLD MINES ANNUAL REPORT 2011 3. REVENUE AND EXPENSES (a) Loss on sale of exploration and evaluation assets Loss on sale of exploration and evaluation assets CONSOLIDATED 2011 $ 2010 $ - - (146,677) (146,677) (b) Other income Corporate and administration service fees 232,230 181,323 Profit on sale of shares Net finance income Other income (c) Corporate administrative expenses Depreciation and amortisation Consultants Insurance Legal fees Travel Office costs Regulatory and compliance Personnel expenses (note 3(d)) Other (d) Personnel expenses Wages and salaries Directors’ fees Other associated personnel expenses Contributions to defined contribution plans (Decrease)/increase in liability for annual leave (Decrease)/increase in liability for long service leave Equity-settled share- based payment transactions 4. AUDITORS’ REMUNERATION AUDIT SERVICES HLB Mann Judd: Audit and review of financial reports - 383,518 - 615,748 474,327 381,751 103,253 136,358 356,438 192,670 519,486 4,416 347,770 125,000 658,509 264,793 - 59,173 193,864 292,789 413,668 507,270 1,826,970 2,094,734 394,229 420,708 4,385,482 4,246,999 899,082 71,000 128,826 132,643 35,413 32,155 877,932 41,833 175,226 109,341 2,877 4,093 527,851 883,432 1,826,970 2,094,734 2011 $ 43,815 43,815 2010 $ 31,215 31,215 41 CHALICE GOLD MINES ANNUAL REPORT 2011 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 5. INCOME TAX Current tax expense Deferred tax expense relating to the origination and reversal of temporary differences Tax losses not brought to account as deferred tax assets Total income tax expense reported in the statement of comprehensive income Numerical reconciliation of income tax expense to prima facie tax payable CONSOLIDATED 2011 $ 2010 $ (403,278) (642,832) 19,789 383,489 - (62,726) 705,558 - Loss from continuing operations before income tax expense Tax at the Australian corporate rate of 30% (3,828,054) (5,575,878) (1,148,416) (1,672,763) Tax effect of amounts which are not tax deductible (taxable) in calculating taxable income: Non-deductible expenses s.40-880 allowable deductions Non-deductible temporary differences Difference in overseas tax rates Current year tax benefits not recognised Income tax expense reported in the statement of comprehensive income 745,138 1,029,931 (189,819) (161,206) 19,789 32,564 62,726 - (540,744) (741,312) 540,744 741,212 - - The tax rate used in the above reconciliation is the corporate rate of 30% payable by Australian corporate entities on taxable profits under Australian tax law. There has been no change in this tax rate since the previous reporting period. Deferred income tax Deferred tax liabilities Delayed revenue recognition for tax purposes Exploration and evaluation expenditure Net deferred tax liabilities Deferred tax assets Revenue losses available to offset against future taxable income Employee benefits Accrued expenses Net deferred tax assets recognised Tax losses 560 (188,939) (188,379) 19,789 (20,271) 188,861 - 20,648 (83,625) (62,977) (62,726) 4,288 (4,539) - Unused tax losses for which no deferred tax asset has been recognised 16,359,373 14,448,346 Potential tax benefit at 30% tax rate 4,907,812 4,334,504 Deferred tax liabilities have not been recognised in respect of these taxable temporary differences as the entity is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. 42 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 CHALICE GOLD MINES ANNUAL REPORT 2011 6. EARNINGS PER SHARE Basic and diluted earnings per share The calculation of basic earnings per share for the year ended 30 June 2011 was based on the loss attributable to ordinary shareholders of $3,828,054 [2010: loss of $5,575,878] and a weighted average number of ordinary shares outstanding during the year ended 30 June 2011 of 209,469,399 [2010: 133,806,990]. Gain/(loss) attributable to ordinary shareholders CONSOLIDATED 2011 $ 2010 $ Gain/(loss) attributable to ordinary shareholders 3,828,054 (5,575,878) Gain/(loss) attributable to ordinary shareholders (diluted) 3,828,054 (5,575,878) Weighted average number of ordinary shares No. No. Weighted average number of ordinary shares at 30 June 209,469,399 133,806,990 Effect of share options on issue 1,980,348 3,534,181 Weighted average number of ordinary shares (diluted) at 30 June 211,449,747 137,341,171 7. CASH AND CASH EQUIVALENTS Bank balances Term deposits Petty cash CONSOLIDATED 2011 $ 2010 $ 2,177,448 2,619,390 8,000,000 5,060,542 16,388 8,973 Cash and cash equivalents in the statement of cash flows 10,193,836 7,688,905 8. TRADE AND OTHER RECEIVABLES Other trade receivables Prepayments 9. FINANCIAL ASSETS Non-current Available for sale investments (see note 11) Bond in relation to office premises Bank guarantee and security deposits 181,355 296,725 478,080 239,844 89,743 329,587 744,442 88,070 86,624 48,977 84,325 80,953 919,136 214,255 43 CHALICE GOLD MINES ANNUAL REPORT 2011 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 10. EXPLORATION AND EVALUATION EXPENDITURE Costs carried forward in respect of: Exploration and evaluation phase – at cost Balance at beginning of year Expenditure incurred CONSOLIDATED 2011 $ 2010 $ 27,056,158 1,950,775 10,943,633 9,461,445 Acquisitions through business combinations Acquisition of exploration and evaluation assets from Dragon Mining Limited: – Purchase price - - – Eritrean profits tax paid on behalf of Dragon Mining Limited 3,048,675 – Stamp duty 1,034,819 Reimbursement of exploration costs on merger Sale of tenements Refund of tenement costs - - - 7,790,911 8,900,000 - - 455,304 (166,021) (286,651) Impairment of exploration and evaluation assets (41,130) (1,172,071) Effects of movements in exchange rate Total exploration expenditure (5,549,951) 122,466 36,492,204 27,056,158 The recoupment of costs carried forward in relation to areas of interest in the exploration and evaluation phases is dependent on the successful development and commercial exploitation or sale of the respective areas. 11. INVESTMENTS IN ASSOCIATES Chalice held a 20% interest in unlisted United Kingdom based London Africa Limited (“London Africa”). London Africa is registered in England and Wales and the principal activity of the company is exploring and developing precious and base metal deposits in Eritrea. Chalice’s interest in London Africa was diluted to 12.04% in January 2011, therefore Chalice’s investment is no longer recognised as an associate, and has been reclassified to an available for sale investment and stated at fair value (see note 9). Reconciliation of movements in investments in associate: Balance at 1 July Payments made to acquire interest Share of loss of associate Differences in fair value on loss of significant influence Transfer of balance on loss of significant influence Balance at 30 June Summary of financial information of associate: Financial Position Total Assets Total Liabilities Net Assets Share of associate’s net assets Financial Performance Total revenue Total loss for the year Share of associate’s loss 44 684,934 - - 1,508 (686,442) - - - - - - - - - 686,442 (1,508) - - 684,934 705,428 (93,507) 611,921 122,384 10 (7,541) (1,508) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 CHALICE GOLD MINES ANNUAL REPORT 2011 12. PROPERTY, PLANT AND EQUIPMENT CONSOLIDATED Plant and Equipment Office Furniture and Equipment Computer Equipment and Software Motor Vehicles Total $ $ $ $ $ 344,876 206,993 193,291 512,334 1,257,494 Year ended 30 June 2011 At 1 July 2010 net of accumulated depreciation and impairment Additions Exchange differences 422,170 1,675 91,782 347,429 863,056 (37,172) (7,775) (6,527) (86,044) (137,518) Depreciation charge for the year (162,827) (40,325) (97,959) (173,216) (474,327) At 30 June 2011 net of accumulated depreciation and impairment 567,047 160,568 180,587 600,503 1,508,705 At 30 June 2010 Cost 717,874 486,164 383,680 677,006 2,264,724 Accumulated depreciation and impairment (372,998) (279,171) (190,389) (164,672) (1,007,230) Net carrying amount 344,876 206,993 193,291 512,334 1,257,494 At 30 June 2011 Cost 1,027,765 466,464 466,927 894,596 2,855,752 Accumulated depreciation and impairment (460,718) (305,896) (286,340) (294,093) (1,347,047) Net carrying amount 567,047 160,568 180,587 600,503 1,508,705 Year ended 30 June 2010 At 1 July 2009 net of accumulated depreciation and impairment 29,648 121,686 81,232 - 232,566 Additions Acquired through business combinations 215,983 211,905 40,940 95,412 176,244 445,720 878,887 - 118,844 426,161 Exchange differences (9,433) (1,784) (92) (4,018) (15,327) Depreciation charge for the year (103,227) (49,261) (64,093) (48,212) (264,793) At 30 June 2010 net of accumulated depreciation and impairment 344,876 206,993 193,291 512,334 1,257,494 At 30 June 2009 Cost 46,243 174,930 207,436 Accumulated depreciation and impairment (16,595) (53,244) (126,204) Net carrying amount 29,648 121,686 81,232 - - - 428,609 (196,043) 232,566 At 30 June 2010 Cost 717,874 486,164 383,680 677,006 2,264,724 Accumulated depreciation and impairment (372,998) (279,171) (190,389) (164,672) (1,007,230) Net carrying amount 344,876 206,993 193,291 512,334 1,257,494 45 CHALICE GOLD MINES ANNUAL REPORT 2011 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 13. TRADE AND OTHER PAYABLES CONSOLIDATED 2011 $ 147,973 80,153 713,256 941,382 2010 $ 821,110 877,185 835,977 2,534,272 95,300 82,307 59,887 50,151 177,607 110,038 Trade payables Eritrean services and withholding tax payable Accrued expenses 14. EMPLOYEE BENEFITS Annual leave accrued Provision for long service leave SHARE BASED PAYMENTS (a) Employee Share Option Plan The Group has an Employee Share Option Plan (‘ESOP’) in place. Under the terms of the ESOP, the Board may offer options for no consideration to full-time or part-time employees (including persons engaged under a consultancy agreement), executive and non-executive directors. In the case of the directors, the issue of options under the ESOP requires shareholder approval. Each option entitles the holder, on exercise, to one ordinary fully paid share in the Company. There is no issue price for the options. The exercise price for the options is determined by the Board. An option may only be exercised after that option has vested and any other conditions imposed by the Board on exercise satisfied. The Board may determine the vesting period, if any. The number and weighted average exercise prices of share options is as follows: WEIGHTED AVERAGE EXERCISE PRICE $ NUMBER OF OPTIONS 2011 0.30 - 0.25 0.68 0.42 0.60 2011 10,075,000 - (5,825,000) 750,000 5,000,000 3,250,000 Outstanding at the beginning of the period Forfeited during the period Exercised during the period Granted during the period Outstanding at the end of the period Exercisable at the end of the period 46 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 CHALICE GOLD MINES ANNUAL REPORT 2011 WEIGHTED AVERAGE EXERCISE PRICE $ NUMBER OF OPTIONS 2010 0.25 - - 0.42 0.30 0.26 2010 6,825,000 - - 3,250,000 10,075,000 8,450,000 Outstanding at the beginning of the period Forfeited during the period Exercised during the period Granted during the period Outstanding at the end of the period Exercisable at the end of the period The options outstanding at 30 June 2011 have a weighted average exercise price of $0.42 [2010: $0.30] and a weighted average contractual life of 5 years. During the period, 5,825,000 options were exercised, with an exercise price of $0.25. The fair value of the options is estimated at the date of grant using the binomial option-pricing model. The following table gives the assumptions made in determining the fair value of the options granted in the year to 30 June 2011. Weighted average share price at grant date Exercise price Expected volatility (expressed as weighted average volatility used in the modelling under binominal option-pricing model) Option life (expressed as weighted average life used in the modelling under binomial option-pricing model) Expected dividends Risk-free interest rate WEIGHTED AVERAGE FAIR VALUE OF SHARE OPTIONS AND ASSUMPTIONS 2011 $0.62 $0.68 71% 2010 $0.55 $0.42 89% 4 years 5 years - 5.12% - 4.74% Share options are granted under service conditions. Non-market performance conditions are not taken into account in the grant date fair value measurement of the services received. Share options granted in 2010 - equity settled Share options granted in 2011 – equity settled Total expense recognised as personnel expenses 15. OTHER LIABILITIES Non-current Make good provision CONSOLIDATED 2011 $ 364,813 163,038 527,851 2010 $ 883,432 - 883,432 45,091 45,091 39,312 39,312 47 CHALICE GOLD MINES ANNUAL REPORT 2011 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 16. ISSUED CAPITAL There were 250,030,886 (2010: 181,033,617) shares on issue at 30 June 2011. (a) Movements in ordinary shares on issue 2011 2010 No. $ No. $ Balance at beginning of financial year 181,033,617 41,254,947 72,800,000 13,974,454 Shares issued on completion of merger - - 48,320,537 6,802,388 Shares issued under non-renounceable rights issue 30,172,269 12,672,353 Share placement 32,000,000 9,600,000 57,913,080 Shares issued on exercise of unlisted options 6,825,000 1,793,750 - - 20,678,494 - - Issued as consideration for acquisition of controlled entity Cost of share issues - - - 2,000,000 900,000 (1,120,938) - (1,100,389) Balance at end of financial year 250,030,886 64,200,112 181,033,617 41,254,947 Issuance of Ordinary Shares Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders’ meetings. In the event of winding up of the Company, the ordinary shareholders rank after all other shareholders and creditors and are fully entitled to any proceeds on liquidation. (b) Share options On issue at 1 July Options forfeited 2011 No. 2010 No. 13,075,000 6,825,000 - - - Options exercised during the year (6,825,000) Options issued during the year 750,000 6,250,000 On issue at 30 June 7,000,000 13,075,000 At 30 June 2011 the Company had 7,000,000 unlisted options on issue under the following terms and conditions: NUMBER EXPIRY DATE EXERCISE PRICE 500,000 1 December 2012 500,000 31 July 2013 1,250,000 31 March 2014 1,250,000 31 March 2014 750,000 1 September 2012 1,000,000 31 March 2012 1,000,000 16 November 2011 187,500 30 April 2014 187,500 30 April 2014 375,000 30 April 2014 48 $ 0.25 0.20 0.35 0.45 0.50 0.36 0.35 0.55 0.65 0.75 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 CHALICE GOLD MINES ANNUAL REPORT 2011 17. ACCUMULATED LOSSES AND RESERVES (a) Movements in accumulated losses were as follows: CONSOLIDATED 2011 $ 2010 $ Balance at beginning of financial year (8,280,770) (2,704,892) Loss for the year (3,828,054) (5,575,878) Balance at end of financial year (12,108,824) (8,280,770) (b) Reserves CONSOLIDATED Share based payments reserve Foreign currency translation reserve Total Investment revaluation reserve $ $ $ $ At 1 July 2010 2,000 1,501,450 70,084 1,573,534 Currency translation differences Share-based payments Revaluation movements At 30 June 2011 - - 12,000 14,000 - (5,776,792) (5,776,792) 527,851 - - - 527,851 12,000 2,029,301 (5,706,708) (3,663,407) CONSOLIDATED Share based payments reserve Foreign currency translation reserve Total Investment revaluation reserve At 1 July 2009 36,000 618,018 - $ $ $ Currency translation differences Share-based payments Revaluation movements At 30 June 2010 - - (34,000) - 70,084 883,432 - - - $ 654,018 70,084 883,432 (34,000) 2,000 1,501,450 70,084 1,573,534 49 CHALICE GOLD MINES ANNUAL REPORT 2011 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 18. FINANCIAL INSTRUMENTS (a) Capital risk management The Group manages its capital to ensure that it will be able to continue as a going concern while maximising the return to shareholders. The capital structure of the Group consists of equity attributable to equity holders, comprising issued capital, reserves and accumulated losses as disclosed in notes 16 and 17. The Board reviews the capital structure on a regular basis and considers the cost of capital and the risks associated with each class of capital. The Group will balance its overall capital structure through new share issues as well as the issue of debt, if the need arises. (b) Market risk exposures Market risk is the risk that changes in market prices such as foreign exchange rates, equity prices and interest rates will have on the Group’s income or value of its holdings of financial instruments. (i) Foreign exchange rate risk The Group undertakes certain transactions denominated in foreign currencies, hence exposes to exchange rate fluctuations arise. The Group does not hedge this exposure. The Group manages its foreign exchange risk by constantly reviewing its exposure and ensuring that there are appropriate cash balances in order to meet its commitments. At 30 June 2011, Chalice had the following exposures to USD foreign currency: USD IMPACT CONSOLIDATED THE PARENT 2011 $ 2010 $ 2011 $ 2010 $ Financial Assets Cash and cash equivalents 169,403 371,278 115,223 76,016 Financial Liabilities Trade and other payables 598,983 760,347 - - The following tables summarises the impact of increases/decreases in the relevant foreign exchange rates on the Group’s post-tax result for the year and on the components of equity. The sensitivity analysis uses a variance of 10% movement in the USD against AUD. Impact on gain/(loss) AUD/USD +10% AUD/USD -10% Impact on equity AUD/USD +10% AUD/USD -10% CONSOLIDATED THE PARENT 2011 $ 39,052 (42,958) 39,052 (42,958) 2010 $ 35,372 (38,909) 35,372 (38,909) 2011 $ 10,475 (11,522) 10,475 (11,522) 2010 $ - - - - Equity prices The Group currently has no significant exposure to equity price risk. 50 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 CHALICE GOLD MINES ANNUAL REPORT 2011 Interest rate risk At reporting date the Group’s exposure to market risk for changes in interest rate relates primarily to the Group’s short term cash deposits. The Group is not exposed to cash flow volatility from interest rate changes on borrowings, as it does not have any short or long term borrowings. Chalice constantly analyses its exposure to interest rates, with consideration given to potential renewal of existing positions and the period to which deposits may be fixed. At reporting date the following financial assets were exposed to fluctuations in interest rates: CONSOLIDATED THE PARENT 2011 $ 2010 $ 2011 $ 2010 $ Cash and cash equivalents 10,193,836 7,688,904 10,125,788 7,386,176 The following sensitivity analysis is based on the interest rate risk exposures in existence at reporting date. The sensitivity is based on a change of 100 basis points in interest rates at reporting date. In the year ended 30 June 2011, if interest rates had moved by 100 basis points, with all other variables held constant, the post tax result for the Group would have been affected as follows: Impact on gain/(loss) 100 bp increase 100 bp decrease Impact on equity 100 bp decrease 100 bp increase IMPACT ON PROFIT CONSOLIDATED THE PARENT 2011 $ 54,382 (49,438) 54,382 (49,438) 2010 $ 29,366 (26,656) 29,366 (26,656) 2011 $ 54,382 (49,438) 54,382 (49,438) 2010 $ 29,366 (26,656) 29,366 (26,656) (c) Credit risk exposure Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The maximum exposure to credit risk, excluding the value of any collateral or other security, at balance sheet date to recognised financial assets is the carrying amount, net of any allowance for doubtful debts, as disclosed in the notes to the financial statements. The company only trades with recognised, creditworthy third parties, and as such collateral is not requested nor is it the Company’s policy to securitise its trade and other receivables. Receivable balances are monitored on an ongoing basis with the result that the Company’s experience of bad debts has not been significant. (d) Liquidity risk exposure Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Board of Directors actively monitors the Group’s ability to pay its debts as and when they fall due by regularly reviewing the current and forecast cash position based on the expected future activities. The Group has non-derivative financial liabilities which include trade and other payables of $919,136 (2010: $2,534,272) all of which are due within 60 days. (e) Net fair values of financial assets and liabilities The carrying amounts of all financial assets and liabilities approximate the net fair values. 51 CHALICE GOLD MINES ANNUAL REPORT 2011 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 19. PARENT ENTITY Financial Position Assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Net assets Equity Issued capital 2011 $ 2010 $ 37,466,387 16,447,615 18,643,038 18,686,641 56,109,425 35,134,256 373,180 45,091 998,972 39,312 418,271 1,038,284 55,691,154 34,095,972 64,200,112 41,254,947 Accumulated losses (10,552,259) (8,662,425) Reserves Total equity Financial Performance Loss for the year 2,043,301 1,503,450 55,691,154 34,095,972 (1,889,834) (5,957,533) Total comprehensive income (1,889,834) (5,991,533) Commitments and Contingencies (i) Contingencies The parent entity has no contingent assets or liabilities. (ii) Operating lease commitments Within 1 year Within 2-5 years Later than 5 years 370,766 1,058,200 207,170 232,234 178,964 - 1,636,136 411,198 52 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 CHALICE GOLD MINES ANNUAL REPORT 2011 20. COMMITMENTS AND CONTINGENCIES Exploration expenditure commitments In order to maintain current rights of tenure to exploration tenements, the Group is required to perform minimum exploration work to meet the minimum expenditure requirements specified by various governments. These obligations are subject to renegotiation when application for a mining lease is made and at other times. The amounts stated are based on the maximum commitments. The Group may in certain situations apply for exemptions under relevant mining legislation or enter into joint venture arrangements which significantly reduce working capital commitments. These obligations are not provided for in the financial report and are payable: CONSOLIDATED 2011 $ 2010 $ Within 1 year - 713,287 Within 2-5 years 3,509,114 Later than 5 years - - - 3,509,114 713,287 Operating lease commitments Within 1 year Within 2-5 years Later than 5 years 370,766 1,058,200 207,170 268,015 205,799 - 1,636,136 473,814 Contingent liability There are no contingent liabilities Contingent assets On 15 June 2011, Chalice executed a Deed of Acquisition with the Eritrean National Mining Corporation (“ENAMCO”) for the sale to ENAMCO of a 30% participating interest in Chalice’s Zara Project for US$32 million. This is in addition to a 10% free carried interest in the Zara Licences. The ENAMCO interest will be represented by a 40% shareholding in the operating company, Zara Mining Share Company (“Zara Mining SC”) which will be owned 60% by Chalice and 40% by ENAMCO. In addition, ENAMCO have agreed to pay Chalice approximately US$2 million (subject to audit), which represents a reimbursement to Chalice of ENAMCO’s pro-rata share of exploration costs expended up to and including 31 March 2011 on the Zara Licences which fall outside of the proposed Koka Mining Licence. At 30 June 2011, the Deed of Acquisition was unconditional; however, should ENAMCO fail to pay the US$32 million for its participating interest by 27 January 2012, ENAMCO shall immediately transfer its 30% participating interest in Zara Mining SC to Chalice resulting in Chalice owning 90% of Zara Mining SC. The transaction has not been recorded as a receivable in the financial statements at 30 June 2011, as ENAMCO is able to default with no other remedy other than the forfeiture of its 30% participating interest. Completion of the transaction, whilst probable, is contingent upon Chalice receiving the funds from ENAMCO and until this uncertainly is removed, an asset will not be recorded in the financial statements. On completion of the transaction, it is estimated that the income tax payable on sale of the 30% interest will be approximately US$8.8 million resulting in a net increase in cash at bank of US$25.2 million. The impact on net profit after tax is expected to be approximately US$15.2 million. 53 CHALICE GOLD MINES ANNUAL REPORT 2011 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 21. RECONCILIATION OF CASH FLOWS FROM OPERATING ACTIVITIES Loss for the period Adjustments for: Depreciation and amortisation Loss on sale of exploration and evaluation assets Reversal of share of associate’s loss Contract termination fee Foreign exchange losses Share of associate’s loss Net gain on sale of securities Changes in fair value of available-for-sale investments Costs of business combinations Exploration assets expensed Impairment of exploration and evaluation assets CONSOLIDATED 2011 $ 2010 $ (3,828,054) (5,575,878) 474,327 - (1,508) 264,793 146,677 - - (125,000) 18,574 - - 2,978 - 15,720 41,130 70,366 1,508 (4,416) 11,732 655,400 - 1,172,071 Equity-settled share-based payment expenses 527,851 883,432 Operating loss before changes in working capital and provisions (2,748,982) (2,792,669) (Increase) in trade and other receivables (Increase)/decrease in financial assets Increase in trade creditors and other liabilities (decrease)/increase in provisions (decrease)/increase in non-current financial assets (175,352) (9,415) (65,999) 1,750 464,613 245,745 67,570 5,779 (13,260) (4,100) Net cash used in operating activities (2,395,787) (2,628,533) 22. KEY MANAGEMENT PERSONNEL The following were key management personnel of the Group at any time during the reporting period and unless otherwise indicated were key management personnel for the entire period: Executive Directors T R B Goyder (Executive Chairman) D A Jones (Managing Director) M R Griffiths (Executive Director) Non-executive Directors A W Kiernan S P Quin Executives R K Hacker (Chief Financial Officer) 54 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 CHALICE GOLD MINES ANNUAL REPORT 2011 The key management personnel compensation included in ‘personnel expenses’ (see note 3) are as follows: CONSOLIDATED 2011 $ Short-term employee benefits 1,245,070 Post-employment benefits Equity settled transactions 95,524 527,851 2010 $ 892,785 70,061 881,744 1,868,445 1,844,590 Individual director’s and executive’s compensation disclosures The Group has transferred the detailed remuneration disclosures to the Directors’ Report in accordance with Corporations Amendment Regulations 2006 (No. 4). These remuneration disclosures are provided in the Remuneration Report section of the Directors’ Report under Details of Remuneration and are designated as audited. Loans to key management personnel and their related parties No loans were made to key management personnel and their related parties. Other key management personnel transactions with the Group A number of key management persons, or their related parties, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. A number of these entities transacted with the Group in the reporting period. The terms and conditions of the transactions with management persons and their related parties were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-Director related entities on an arm’s length basis. The aggregate expense/(income) recognised during the year relating to key management personnel and their related parties were as follows: KEY MANAGEMENT PERSONS TRANSACTION NOTE 2011 2010 $ $ A W Kiernan Legal and consulting services (i) 140,500 81,000 Other related parties Liontown Resources Limited Corporate services Uranium Equities Limited Corporate services Liontown Resources Limited Corporate services (ii) (iii) (144,000) (144,000) (401) - (8,750) 49,078 (i) The Group used the consulting and legal services of Mr Kiernan during the course of the financial year. Amounts were billed based on normal market rates for such services and were due and payable under normal payment terms. (ii) The Group supplies corporate services including accounting and company secretarial services under a Corporate Services Agreement to Liontown Resources Limited. Messrs Goyder and Kiernan are both Directors of Liontown Resources Limited during the year and Mr Hacker was the Company Secretary. Amounts were billed on a proportionate share of the cost to the Group of providing the services and are due and payable under normal payment terms. (iii) The Group supplied company secretarial services during the year to Uranium Equities Limited. Messrs Goyder and Kiernan are both Directors of Uranium Equities Limited. Amounts were billed at cost to the Group and are due and payable under normal payment terms. 55 CHALICE GOLD MINES ANNUAL REPORT 2011 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 Amounts payable to key management personnel at reporting date arising from these transactions were as follows: ASSETS AND LIABILITIES ARISING FROM THE ABOVE TRANSACTIONS Current payables Trade debtors 2011 2010 $ (8,000) - (8,000) $ (6,000) 13,200 7,200 Options and rights over equity instruments granted as compensation The movement during the reporting period in the number of options over ordinary shares in the Group held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: HELD AT 1 JULY 2010 GRANTED AS COMPENSATION EXERCISED/ FORFEITED HELD AT 30 JUNE 2011 VESTED DURING THE YEAR VESTED AND EXERCISABLE AT 30 JUNE 2011 T R B Goyder 2,000,000 A W Kiernan 500,000 D A Jones 2,500,000 M R Griffiths 750,000 S P Quin Executive - 750,000 R K Hacker 500,000 - - - - - (2,000,000) - - - - - - 500,000 - - - 500,000 2,500,000 1,250,000 2,500,000 750,000 750,000 375,000 375,000 375,000 375,000 500,000 - 500,000 HELD AT 1 JULY 2009 GRANTED AS COMPENSATION EXERCISED/ FORFEITED HELD AT 30 JUNE 2010 VESTED DURING THE YEAR VESTED AND EXERCISABLE AT 30 JUNE 2010 T R B Goyder 2,000,000 A W Kiernan 500,000 D A Jones M R Griffiths Executive - - 2,500,000 750,000 R K Hacker 500,000 - - - - - - - - 2,000,000 500,000 - - 2,000,000 500,000 2,500,000 1,250,000 1,250,000 750,000 - - 500,000 375,000 500,000 56 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2011 CHALICE GOLD MINES ANNUAL REPORT 2011 Movements in ordinary shares The movement during the reporting period in the number of ordinary shares in the Group held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: HELD AT 1 JULY 2010 ADDITIONS RECEIVED ON EXERCISE OF OPTIONS HELD AT 30 JUNE 2011 SALES HELD AT 30 JUNE 2011 T R B Goyder 19,951,206 5,306,043 2,000,000 27,257,249 A W Kiernan D A Jones M R Griffiths S P Quin Executive 820,074 235,000 600,960 241,967 61,278 - - 26,321 R K Hacker 40,000 58,334 - - - - - 1,062,041 296,278 600,960 26,321 98,334 HELD AT 1 JULY 2009 ADDITIONS RECEIVED ON EXERCISE OF OPTIONS HELD AT 30 JUNE 2010 SALES T R B Goyder 17,240,458 2,710,748 A W Kiernan 820,074 35,000 - - 200,000 600,960 D A Jones M R Griffiths Executive R K Hacker 19,951,206 820,074 235,000 600,960 - - - - - - - - - - - - - - - 27,257,249 1,062,041 296,278 600,960 26,321 98,334 HELD AT 30 JUNE 2010 19,951,206 820,074 235,000 600,960 51,982 40,000 40,000 (51,982) 40,000 No shares were granted to key management personnel during the reporting period as compensation. 23. RELATED PARTY DISCLOSURE The consolidated financial statements include the financial statements of Chalice Gold Mines Limited and its subsidiaries listed in the following table: NAME COUNTRY OF INCORPORATION % EQUITY INTEREST INVESTMENT 2011 2010 2011 2010 Parent Entity Chalice Gold Mines Limited Subsidiaries Chalice Operations Pty Ltd (i) Yolanda International Limited Australia Australia British Virgin Islands Chalice Gold Mines (Eritrea) Pty Ltd Australia (i) Subsidiaries of Chalice Operations Pty Ltd Western Rift Pty Ltd Keren Mining Pty Ltd Universal Gold Pty Ltd Sub-Sahara Resources (Eritrea) Pty Ltd Australia Australia Australia Australia 24. SUBSEQUENT EVENTS There are no events subsequent to reporting date. 100 100 100 100 100 100 100 100 100 100 100 100 100 100 6,802,388 6,802,388 1,210,000 1,210,000 - - - - - - 1,358,223 1,358,223 - - 57 CHALICE GOLD MINES ANNUAL REPORT 2011 DIRECTORS’ DECLARATION 1. In the opinion of the directors of Chalice Gold Mines Limited (the ‘Company’): a. the financial statements, notes and the additional disclosures in the directors’ report designated as audited, of the Group are in accordance with the Corporations Act 2001 including: i. giving a true and fair view of the Group’s financial position as at 30 June 2011 and of its performance for the year ended on that date; and ii. complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; b. c. there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. the financial statements and notes thereto are in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board. 2. This declaration has been made after receiving the declarations required to be made to the directors in accordance with Section 295A of the Corporations Act 2001 for the financial year ended 30 June 2011. This declaration is signed in accordance with a resolution of the Board of Directors. Dated at Perth the 15th day of September 2011 Signed in accordance with a resolution of the Directors: TIM R B GOYDER Executive Chairman 58 CHALICE GOLD MINES ANNUAL REPORT 2011 INDEPENDENT AUDITOR’S REPORT INDEPENDENT AUDITOR’S REPORT To the members of Chalice Gold Mines Limited Report on the Financial Report We have audited the accompanying financial report of Chalice Gold Mines Limited (“the company”), which comprises the statement of financial position as at 30 June 2011, the statement of comprehensive income, the statement of changes in equity and the statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration for the consolidated entity. The consolidated entity comprises the company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1(a), the directors also state, in accordance with Accounting Standard AASB 101: Presentation of Financial Statements, that the consolidated financial report complies with International Financial Reporting Standards. Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. Our audit did not involve an analysis of the prudence of business decisions made by directors or management. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. HLB Mann Judd (WA Partnership) ABN 22 193 232 714 Level 4, 130 Stirling Street Perth WA 6000. PO Box 8124 Perth BC 6849 Telephone +61 (08) 9227 7500. Fax +61 (08) 9227 7533. Email: hlb@hlbwa.com.au. Website: http://www.hlb.com.au Liability limited by a scheme approved under Professional Standards Legislation HLB Mann Judd (WA Partnership) is a member of International, a worldwide organisation of accounting firms and business advisers. 59 CHALICE GOLD MINES ANNUAL REPORT 2011 INDEPENDENT AUDITOR’S REPORT (CONTINUED) Matters relating to the electronic presentation of the audited financial report This auditor’s report relates to the financial report and remuneration report of Chalice Gold Mines Limited for the financial year ended 30 June 2011 included on Chalice Gold Mines Limited’s website. The company’s directors are responsible for the integrity of the Chalice Gold Mines Limited website. We have not been engaged to report on the integrity of this web site. The auditor’s report refers only to the financial report and remuneration report identified in this report. It does not provide an opinion on any other information which may have been hyperlinked to/from the financial report. If users of the financial report are concerned with the inherent risks arising from publication on a website, they are advised to refer to the hard copy of the audited financial report and remuneration report to confirm the information contained in this website version of the financial report. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s Opinion In our opinion: (a) the financial report of Chalice Gold Mines Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2011 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1(a). Report on the Remuneration Report We have audited the Remuneration Report included in the directors’ report for the year ended 30 June 2011. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor’s Opinion In our opinion, the Remuneration Report of Chalice Gold Mines Limited for the year ended 30 June 2011 complies with section 300A of the Corporations Act 2001. HLB MANN JUDD Chartered Accountants Perth, Western Australia 15 September 2011 W M CLARK Partner 60 CHALICE GOLD MINES ANNUAL REPORT 2011 CORPORATE GOVERNANCE REPORT APPROACH TO CORPORATE GOVERNANCE Chalice Gold Mines Limited ("Company") has made it a priority to adopt systems of control and accountability as the basis for the administration of corporate governance. Some of these policies and procedures are summarised in this statement. Commensurate with the spirit of the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations 2nd edition ("Principles & Recommendations"), the Company has followed each recommendation where the Board has considered the recommendation to be an appropriate benchmark for its corporate governance practices. Where the Company's corporate governance practices follow a recommendation, the Board has made appropriate statements reporting on the adoption of the recommendation. In compliance with the “if not, why not” regime, where, after due consideration, the Company's corporate governance practices depart from a recommendation, the Board has offered full disclosure and an explanation for the adoption of its own practice. Further information about the Company's corporate governance practices may be found on the Company's website at , under the section marked "Corporate Governance". The Company reports below on how it has followed (or otherwise departed from) each of the Principles & Recommendations during the 2010/2011 financial year ("Reporting Period"). The Principles & Recommendations were amended in 2010. These amendments apply to the Company's first financial year commencing on or after 1 January 2011. Accordingly, disclosure against the Principles & Recommendations as amended in 2010 will be made in relation to the Company's financial year ending 30 June 2012. The report below is made against the Principles and Recommendations prior to their amendment in 2010. However, the Company does wish to report that on 29 June 2011 it adopted a Diversity Policy in accordance with the new Recommendation 3.2. A copy of the Company’s Diversity Policy is available on the Company’s website at . BOARD Roles and responsibilities of the Board and Senior Executives (Recommendations: 1.1, 1.3) The Company has established the functions reserved to the Board, and those delegated to senior executives and has set out these functions in its Board Charter. The Board is collectively responsible for promoting the success of the Company through its key functions of overseeing the management of the Company, providing overall corporate governance of the Company, monitoring the financial performance of the Company, engaging appropriate management commensurate with the Company's structure and objectives, involvement in the development of corporate strategy and performance objectives, and reviewing, ratifying and monitoring systems of risk management and internal control, codes of conduct and legal compliance. Senior executives are responsible for supporting the Managing Director and assisting the Managing Director in implementing the running of the general operations and financial business of the Company in accordance with the delegated authority of the Board. Senior executives are responsible for reporting all matters which fall within the Company's materiality thresholds at first instance to the Managing Director or, if the matter concerns the Managing Director, directly to the Chair or the lead independent director (currently Anthony Kiernan), as appropriate. The Company's Board Charter is available on the Company's website at . Skills, experience, expertise and period of office of each Director (Recommendation: 2.6) A profile of each Director setting out their skills, experience, expertise and period of office is set out in the Directors' Report. 61 CHALICE GOLD MINES ANNUAL REPORT 2011 CORPORATE GOVERNANCE REPORT (CONTINUED) Director independence (Recommendations: 2.1, 2.2, 2.3, 2.6) The Board does not have a majority of directors who are independent. The Board considers that the current composition of the Board is adequate for the Company’s current size and operations, and includes an appropriate mix of skills and expertise relevant to the Company’s business. The Board continues to monitor its composition as the Company’s operations evolve and will appoint further independent directors if considered appropriate. The independent directors of the Company are Anthony Kiernan and Stephen Quin. These directors are independent as they are non-executive directors who are not members of management and who are free of any business or other relationship that could materially interfere with, or could reasonably be perceived to materially interfere with, the independent exercise of their judgement. Independence is measured having regard to the relationships listed in Box 2.1 of the Principles & Recommendations and the Company's materiality thresholds. The materiality thresholds are set out below. The Board has agreed on the following guidelines for assessing the materiality of matters, as set out in the Company's Board Charter: • Balance sheet items are material if they have a value of more than 1% of pro-forma net asset. • Profit and loss items are material if they will have an impact on the current year operating result of 2% or more. • Items are also material if they impact on the reputation of the Company, involve a breach of legislation, are outside the ordinary course of business, could affect the Company’s rights to its assets, if accumulated would trigger the quantitative tests, involve a contingent liability that would have a probable effect of 1% or more on balance sheet or profit and loss items, or will have an effect on operations which is likely to result in an increase or decrease in net income or dividend distribution of more than 2%. • Contracts will be considered material if they are outside the ordinary course of business, contain exceptionally onerous provisions in the opinion of the Board, impact on income or distribution in excess of the quantitative tests, there is a likelihood that either party will default, and the default may trigger any of the quantitative or qualitative tests, are essential to the activities of the Company and cannot be replaced or cannot be replaced without an increase in cost which triggers any of the quantitative tests, contain or trigger change of control provisions, are between or for the benefit of related parties, or otherwise trigger the quantitative tests. The non-independent directors of the Company are Timothy Goyder, Doug Jones, Juan Jeffery and Michael Griffiths. The non-independent Chair of the Board is Timothy Goyder. The Chair is an executive director and does not satisfy the test of independence as set out in Box 2.1 of the Principles and Recommendations. The Board believes that Timothy Goyder is the most appropriate person for the position as Chair because of his seniority and industry experience. However, the Board has appointed Anthony Kiernan to act as lead independent director when any conflicts of interest arise. The Managing Director is Doug Jones who is not Chair of the Board. Independent professional advice (Recommendation: 2.6) To assist directors with independent judgement, it is the Board's policy that if a director considers it necessary to obtain independent professional advice to properly discharge the responsibility of their office as a director then, provided the director first obtains approval from the Chair for incurring such expense, the Company will pay the reasonable expenses associated with obtaining such advice. 62 CHALICE GOLD MINES ANNUAL REPORT 2011 CORPORATE GOVERNANCE REPORT (CONTINUED) Selection and (Re) Appointment of Directors (Recommendation: 2.6) In determining candidates for the Board, the Nomination Committee (or equivalent) follows a prescribed process whereby it evaluates the mix of skills, experience and expertise of the existing Board. In particular, the Nomination Committee (or equivalent) is to identify the particular skills that will best increase the Board's effectiveness. Consideration is also given to the balance of independent directors. Potential candidates are identified and, if relevant, the Nomination Committee (or equivalent) recommends an appropriate candidate for appointment to the Board. Any appointment made by the Board is subject to ratification by shareholders at the next general meeting. The Board recognises that Board renewal is critical to performance and the impact of Board tenure on succession planning. Each director other than the Managing Director, must not hold office (without re-election) past the third annual general meeting of the Company following the Director's appointment or three years following that director's last election or appointment (whichever is the longer). However, a Director appointed to fill a casual vacancy or as an addition to the Board must not hold office (without re-election) past the next annual general meeting of the Company. At each annual general meeting a minimum of one director or a third of the total number of directors must resign. A director who retires at an annual general meeting is eligible for re-election at that meeting. Re-appointment of directors is not automatic. The Company's Policy and Procedure for the Selection and (Re)Appointment of Directors is available on the Company's website at . BOARD COMMITTEES Nomination Committee (Recommendations: 2.4, 2.6) The Company has not established a separate Nomination Committee. Given the current size and composition of the Board, the Board believes that there would be no efficiencies gained by establishing a separate Nomination Committee. Accordingly, the Board performs the role of the Nomination Committee. Items that are usually required to be discussed by a Nomination Committee are marked as separate agenda items at Board meetings when required. When the Board convenes as the Nomination Committee it carries out those functions which are delegated to it in the Company’s Nomination Committee Charter. The Board deals with any conflicts of interest that may occur when convening in the capacity of the Nomination Committee by ensuring that the director with conflicting interests is not party to the relevant discussions. The full Board did not officially convene as a Nomination Committee during the Reporting Period, however nomination-related discussions occurred from time to time during the year as required. The Company's Nomination Committee Charter is available on the Company's website at . 63 CHALICE GOLD MINES ANNUAL REPORT 2011 CORPORATE GOVERNANCE REPORT (CONTINUED) Audit Committee (Recommendations: 4.1, 4.2, 4.3, 4.4) The Company has established an Audit Committee. The Audit Committee is not structured in compliance with Recommendation 4.2. Given the composition of the Board, the formation of an Audit Committee in accordance with Recommendation 4.2 is not possible. However, the Audit Committee follows Recommendation 4.2 to the extent it is possible and therefore, the Audit Committee is comprised of Anthony Kiernan and Stephen Quin (the Board’s two independent non-executive directors) and is chaired by Anthony Kiernan, who is not Chair of the Board. The Board considers this present structure is the best mix of skills and expertise to carry out the function of an Audit Committee available to the Company and appropriate for its current needs. The Board has adopted an Audit Committee Charter which the Audit Committee applies to assist it to fulfil its function. The Audit Committee Charter makes provision for the Audit Committee to meet with the external auditor as required. The Audit Committee held two meetings during the Reporting Period. Details of the directors who are members of the Audit Committee and their attendance at Audit Committee meetings are set out in the Directors’ Report. Details of each of the director's qualifications are set out in the Directors' Report. No members of the Audit Committee have formal accounting or financial qualifications, however, all are considered to be financially literate. The Company has established procedures for the selection, appointment and rotation of its external auditor. The Board is responsible for the initial appointment of the external auditor and the appointment of a new external auditor when any vacancy arises, as recommended by the Audit Committee. Candidates for the position of external auditor must demonstrate complete independence from the Company through the engagement period. The Board may otherwise select an external auditor based on criteria relevant to the Company's business and circumstances. The performance of the external auditor is reviewed on an annual basis by the Audit Committee and any recommendations are made to the Board. The Company's Audit Committee Charter and the Company's Procedure for Selection, Appointment and Rotation of External Auditor are available on the Company's website at . Remuneration Committee (Recommendations: 8.1, 8.2, 8.3) The Company has established a Remuneration Committee comprising Anthony Kiernan, Stephen Quin and Timothy Goyder. The Remuneration Committee held one meeting during the Reporting Period, which all members attended. To assist the Remuneration Committee to fulfil its function as the Remuneration Committee, the Board has adopted a Remuneration Committee Charter. Details of remuneration, including the Company’s policy on remuneration, are contained in the “Remuneration Report” which forms of part of the Directors’ Report. Non-executive directors are remunerated at a fixed fee for time, commitment and responsibilities. Remuneration for non-executive directors is not directly linked to individual performance; however, due to the stage of the Company in its evolution from a mineral explorer to a producer, the Board considers that Non-executive Directors should be entitled to participate in the Company’s Employee Share Option Plan. Pay and rewards for executive directors and senior executives consists of a base salary and performance incentives. Long term performance incentives may include options granted at the discretion of the Board and subject to obtaining the relevant approvals. Executives are offered a competitive level of base pay at market rates and are reviewed annually to ensure market competitiveness. There are no termination or retirement benefits for non-executive directors (other than for superannuation). The Company's Remuneration Committee Charter includes a statement of the Company's policy on prohibiting transactions in associated products which limit the risk of participating in unvested entitlements under any equity based remuneration schemes. The Company's Remuneration Committee Charter is available on the Company's website at . 64 CHALICE GOLD MINES ANNUAL REPORT 2011 CORPORATE GOVERNANCE REPORT (CONTINUED) PERFORMANCE EVALUATION Senior executives (Recommendations: 1.2, 1.3) The Managing Director and Executive Chairman currently review the performance of the senior executives. This is conducted by informal interviews. During the Reporting Period a formal evaluation of senior executives did not occur. However, due to the size of the group, the Executive Chairman takes an active role in assessing the performance of executives on an informal basis. A more formal performance evaluation process is currently being implemented as part of a review of the Company’s remuneration policy and structure – see the Remuneration Report. Board, its committees and individual directors (Recommendations: 2.5, 2.6) The Chair evaluates the performance of the Board, individual directors, the Managing Director and any applicable committees of the Board. These evaluations are undertaken by each director completing a questionnaire which is then evaluated by the Chair. During the Reporting Period an evaluation of the Board took place in accordance with the process disclosed. However, an evaluation of the individual directors and the committees of the Board did not occur during the Reporting Period. ETHICAL AND RESPONSIBLE DECISION MAKING Code of Conduct (Recommendations: 3.1, 3.3) The Company has established a Code of Conduct as to the practices necessary to maintain confidence in the Company's integrity, practices necessary to take into account their legal obligations and the expectations of their stakeholders and responsibility and accountability of individuals for reporting and investigating reports of unethical practices. A summary of the Company's Code of Conduct is available on the Company website at . Policy for Trading in Company Securities (Recommendations: 3.2, 3.3) The Company has established a Policy for Trading in Company Securities by directors, senior executives and employees. A summary of the Company's Policy for Trading in Company Securities is available on the Company's website at . Continuous Disclosure (Recommendations: 5.1, 5.2) The Company has established written policies and procedures designed to ensure compliance with ASX Listing Rule disclosure and accountability at a senior executive level for that compliance. A summary of the Company's Policy on Continuous Disclosure and a summary of the Company's Compliance Procedures are available on the Company's website at . Shareholder Communication (Recommendations: 6.1, 6.2) The Company has designed a communications policy for promoting effective communication with shareholders and encouraging shareholder participation at general meetings. The Company's Shareholder Communication Policy is available on the Company's website at . 65 CHALICE GOLD MINES ANNUAL REPORT 2011 CORPORATE GOVERNANCE REPORT (CONTINUED) Risk Management Recommendations: 7.1, 7.2, 7.3, 7.4) The Board has adopted a Risk Management Policy, which sets out the Company's risk profile. Under the policy, the Board is responsible for approving the Company's policies on risk oversight and management and satisfying itself that management has developed and implemented a sound system of risk management and internal control. Under the policy, the Board delegates day-to-day management of risk to the Managing Director, who is responsible for identifying, assessing, monitoring and managing risks. The Managing Director is also responsible for updating the Company's material business risks to reflect any material changes, with the approval of the Board. In fulfilling the duties of risk management, the Managing Director may have unrestricted access to Company employees, contractors and records and may obtain independent expert advice on any matter they believe appropriate, with the prior approval of the Board. The Board has established a separate Audit Committee to monitor and review the integrity of financial reporting and the Company's internal financial control systems and risk management systems As the Company continues to evolve from an explorer to a gold producer, the Board will enhance the processes and procedures to manage and report on material business risk, and may engage external risk management consultants to assist. In addition, the following risk management measures have been adopted by the Board to manage the Company's material business risks: • the Board has established authority limits for management, which if proposed to be exceeded, requires prior Board approval; • the Board has developed and implemented a range of emergency response and other health and safety policies and procedures relevant to its operations in Eritrea; • the Board has adopted a compliance procedure for the purpose of ensuring compliance with the Company's continuous disclosure obligations; and • the Board has adopted a corporate governance manual which contains other policies to assist the Company to establish and maintain its governance practices. In June 2011, the Board was provided with the material business risks, strategies adopted and funds allocated to mitigate these risks where possible. In 2012, the Board will receive a report from management as to the effectiveness of the Company's management of these material business risks. The Board has also implemented a system to review, formalise and document the management of its material business risks. This system includes a risk register used by management to identify the Company's material business risks and risk management strategies for these risks. In addition, the process of managing material business risks is allocated to members of senior management. The risk register is reviewed regularly and updated, as required. The categories of risk to be reported on or referred to as part of the Company’s systems and processes for managing material business risk include market-related, financial reporting, operational, environmental, human capital, sustainability, occupational health and safety, political, strategic, economic cycle/marketing, and legal and compliance. The Managing Director and the Chief Financial Officer have provided a declaration to the Board in accordance with section 295A of the Corporations Act and have assured the Board that such declaration is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risk. A summary of the Company's Risk Management Policy is available on the Company's website at . 66 CHALICE GOLD MINES ANNUAL REPORT 2011 ASX ADDITIONAL INFORMATION Additional information required by the Australian Securities Exchange Limited Listing Rules and not disclosed elsewhere in this report is set out below. SHAREHOLDINGS Substantial shareholders The number of shares held by substantial shareholders advised to the Company and their associated interests as at 13 September 2011 were: SHAREHOLDER NUMBER OF ORDINARY SHARES HELD PERCENTAGE OF CAPITAL HELD (%) National Nominees Limited Timothy R B Goyder Lujeta Pty Ltd 39,628,968 29,199,342 19,796,813 15.85 11.68 7.92 Class of Shares and Voting Rights At 13 September 2011 there were 2,740 holders of the ordinary shares of the Company. The voting rights to the ordinary shares set out in the Company’s Constitution are: “Subject to any rights or restrictions for the time being attached to any class or Classes of shares - a) at meetings of members or classes of members each member entitled to vote in person or by proxy or attorney; and b) on a show of hands every person who is a member has one vote and on a poll every person in person or by proxy or attorney has one vote for each ordinary share held.” Holders of options do not have voting rights. Distribution of equity security holders as at 13 September 2011: Category Ordinary Shares Unlisted Share Options NUMBER OF EQUITY SECURITY HOLDERS 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,000 – 100,000 100,001 and over Total 421 846 477 827 169 2,740 - - - - 10 10 The number of shareholders holding less than a marketable parcel at 13 September 2011 was 518. 67 CHALICE GOLD MINES ANNUAL REPORT 2011 ASX ADDITIONAL INFORMATION (CONTINUED) TWENTY LARGEST ORDINARY FULLY PAID SHAREHOLDERS AS AT 13 SEPTEMBER 2011 Name Number of ordinary shares held Percentage of capital held National Nominees Limited Timothy R B Goyder Lujeta Pty Ltd Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) Limited JP Morgan Nominees Australia Limited UBS Nominees Pty Ltd Balfes (QLD) Pty Ltd Sundowner International Limited Calm Holdings Pty Ltd Colbern Fiduciary Nominees Pty Ltd Claw Pty Ltd Dragon Mining Limited Canadian Register Control Mr Scott Andrew Grundmann Bell Potter Nominees Ltd Twynam Agricultural Group Pty Ltd Greenslade Holdings Pty Ltd Lost Ark Nominees Pty Ltd Mr Ross Francis Stanley Total 39,628,968 29,199,342 19,796,813 17,105,850 14,301,032 13,667,478 11,723,079 4,250,000 3,664,782 3,350,000 2,899,333 2,833,333 2,333,334 1,987,036 1,890,631 1,759,365 1,673,484 1,516,667 1,400,000 1,333,334 % 15.85 11.68 7.92 6.84 5.72 5.47 4.69 1.70 1.47 1.34 1.16 1.13 0.93 0.79 0.76 0.70 0.67 0.61 0.56 0.53 176,313,861 70.52 68 Designed by: Chameleon Creative CHALICE GOLD MINES LIMITED 2/1292 Hay Street WEST PERTH WA 6005 Tel: +618 9322 3960 Fax: +618 9322 5800 Web: Email: 

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