Paladin Energy
Annual Report 2006

Plain-text annual report

PALADIN RESOURCES LTD A.C.N. 061 681 098 GRAND CENTRAL 1ST FLOOR, 26 RAILWAY ROAD SUBIACO WESTERN AUSTRALIA 6008 PO BOX 201, SUBIACO WESTERN AUSTRALIA 6904 TELEPHONE: (+61 8) 9381 4366 FAX: (+61 8) 9381 4978 EMAIL: paladin@paladinresources.com.au Web: www.paladinresources.com.au Ref:40018 30 August 2006 Company Announcements Office Australian Stock Exchange Limited 20 Bridge Street Sydney NSW 2000 Dear Sir/Madam By Electronic Lodgement 2006 Annual Report Attached please find the 2006 Annual Report including the Management Discussion and Analysis and CEO/CFO certification as required in accordance with Canadian reporting requirements. The printed version is expected to be released early October with the Annual General Meeting scheduled for 9 November 2006. Yours faithfully Paladin Resources Ltd JOHN BORSHOFF Managing Director PALADIN RESOURCES LTD ACN 061 681 098 ANNUAL REPORT 2006 2 CONTENTS _________________________________________________________________________________ CORPORATE DIRECTORY.................................................................................................................... 3 PALADIN – THE COMPANY................................................................................................................... 4 COMPANY SNAPSHOT.......................................................................................................................... 5 CHAIRMAN’S LETTER ........................................................................................................................... 6 NUCLEAR ENERGY – A PARADIGM SHIFT ......................................................................................... 7 MANAGEMENT DISCUSSION AND ANALYSIS .................................................................................. 11 REVIEW OF OPERATIONS............................................................................................................. 13 FINANCIAL REVIEW ....................................................................................................................... 21 CORPORATE GOVERNANCE STATEMENT ...................................................................................... 29 DIRECTORS' REPORT......................................................................................................................... 39 REMUNERATION REPORT ............................................................................................................ 44 CONTENTS OF THE FINANCIAL REPORT......................................................................................... 59 CONSOLIDATED INCOME STATEMENTS ......................................................................................... 61 CONSOLIDATED BALANCE SHEETS................................................................................................. 62 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY............................................................. 63 CONSOLIDATED CASH FLOWS STATEMENTS................................................................................ 65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ......................................................... 66 DIRECTORS’ DECLARATION............................................................................................................ 143 INDEPENDENT AUDIT REPORT - AUSTRALIA................................................................................ 144 INDEPENDENT AUDIT REPORT - CANADA..................................................................................... 146 ADDITIONAL INFORMATION............................................................................................................. 147 The annual report covers both Paladin Resources Ltd as an individual entity and the Consolidated Entity consisting of Paladin Resources Ltd and its controlled entities. Paladin Resources Ltd is a company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Paladin Resources Ltd Grand Central, 1st Floor, 26 Railway Road SUBIACO WA 6008 Through the use of the internet, we have ensured that our corporate reporting is timely, complete, and available globally at minimum cost to the Company. All press releases, financial statements and other information is available on our website www.paladinresources.com.au. CORPORATE DIRECTORY _________________________________________________________________________________ DIRECTORS INVESTOR RELATIONS 3 Non-executive Chairman Mr Rick Crabb Managing Director Mr John Borshoff Non-executive Directors Mr Sean Llewelyn Mr George Pirie Mr Ian Noble COMPANY SECRETARY Ms Gillian Swaby REGISTERED OFFICE Grand Central, 1st Floor, 26 Railway Road Subiaco Western Australia 6008 (PO Box 201, Subiaco, 6904) Telephone: (+61 8) 9381 4366 Facsimile: (+61 8) 9381 4978 Email: paladin@paladinresources.com.au Web: www.paladinresources.com.au SHARE REGISTERS Australia Computershare Investor Services Pty Limited Level 2, 45 St Georges Terrace Perth Western Australia 6000 Telephone: (+61 8) 9323 2000 Facsimile: (+61 8) 9323 2033 Canada Computershare Investor Services Pty Ltd 100 University Avenue, 11th Floor Toronto Ontario M5J 2Y1 Telephone: (+1) 416 263 9200 Facsimile: (+1) 416 263 9261 Australia – Head Office Ms Gillian Swaby Grand Central, 1st Floor, 26 Railway Road Subiaco Western Australia 6008 (PO Box 201, Subiaco, 6904) Telephone: (+61 8) 9381 4366 Facsimile: (+61 8) 9381 4978 Email: gillian.swaby@paladinresources.com.au North America Mr Greg Taylor Ontario Canada Business/Cell: (416) 605 5120 Facsimile: (905) 844 - 6532 Email: greg.taylor@paladinresources.com.au AUDITORS Ernst & Young 11 Mounts Bay Road Perth Western Australia 6000 SOLICITORS TO THE COMPANY Blakiston & Crabb 1202 Hay Street West Perth Western Australia 6005 STOCK EXCHANGE LISTINGS Australian Stock Exchange and Toronto Stock Exchange Code: PDN Munich, Berlin, Stuttgart and Frankfurt Stock Exchanges Code: PUR 4 PALADIN – THE COMPANY _________________________________________________________________________________ THE MEANING AND SIGNIFICANCE OF “PALADIN” Charlemagne (742-814AD) was a Germanic King who ruled with the assistance of his Paladins, a legendary company of knights who formed the elite of the King’s army. These Paladins later became a source of inspiration for the romantic poets for whom they symbolised the highest virtues of chivalry and valour. The word Paladin was originally derived from the early Byzantine era to signify those who were the highest dignitaries of the Court and usually referred to a lord or chieftain, and later a knight errant – a champion on a quest for adventure. Paladin came to describe a person or a special group possessing superlative qualities of loyalty, diligence, and honesty, which is firm and united in support of an honourable cause or objective. Paladin is an apt name for our Company. CORPORATE VALUES • Create shareholder wealth and develop the considerable opportunities it has generated to become a major player in the global uranium supply market. • Operate with a safe best practice philosophy having due regard for the environment. • Reward employee performance and provide a fulfilling work environment. • Contribute to the growth and prosperity of the countries in which Paladin operates by conducting operations in an efficient and effective manner and by seeking out opportunities for expansion. • Respond to the attitudes and expectations of the communities in which it operates as part of its corporate social responsibility obligations. • Act with integrity, honesty and cultural sensitivity in all of its dealings. PALADIN TODAY • Strong project pipeline • Extensive uranium experience • Strong project development team • In good position to expand and attain advantage through M&A by - - - - successfully leading development for new U production proving up a highly competent management team attaining essential recognised company credibility maintaining clear vision for global market outlook  COMPANY SNAPSHOT _________________________________________________________________________________ 5 The New Energy in the Market • Emerging producer with a primary focus in Southern Africa – Paladin clearly differentiated in its market space • Focused uranium energy company Large resource base in 4 deposits with excellent upside – – Strength through geographic diversification – Expertise and funding to deliver • Staged commissioning of Langer Heinrich operations – – – commenced end August 2006 – 1 MONTH EARLY project handover late December 2006 as anticipated ramp up to initial stated production of 2.6Mlb U3O8 by June 2007 • BFS completion on Kayelekera December 2006 • Strategy for expansion in place • Uranium price at all time high – Mid to long term supply shortages Paladin Share Price Performance AUD 1 Sep 2005 1 Nov 2005 1 Jan 2006 1 Mar 2006 1 May 2006 1 Jul 2006 29 Aug 2006 6 CHAIRMAN’S LETTER _________________________________________________________________________________ Dear Shareholder In my past two annual Chairman’s letters, I noted that our Company had experienced and expected to continue to experience exciting times. This has of course been true of the past year but what I wish to now focus on is our Company’s evolution into a “major”. Such was the dire state of the uranium production industry and the rapid change in the global dynamics of fuels for electricity generation, that in the past 2 years (particularly last year) Paladin Resources Limited has emerged as virtually a household name in this business. Our Company occupies a unique position, as the only publicly listed company capable in the short term of creating new uranium supply of sufficient quantity to make a real contribution to world needs. The stock markets in Australia, Canada and Europe have recognised this and accordingly from July 2005 to June 2006 Paladin’s market capitalisation grew from A$471,040,712 to A$1,866,908,708. Paladin’s Directors, staff and consultants are highly conscious of the focus that is upon our Company. Under the strong leadership of Mr John Borshoff, our team is committed to meeting the targets set for the Company’s growth. We have a goal for Paladin to become a major world supplier of uranium with an international multi-mine profile. This involves a long term strategy which recognises, amongst other things, that our Company must achieve world’s best practice in all activities, particularly operating efficiency, mine safety and environment practices. As explained elsewhere in this Annual Report, our Company’s 2 leading Projects (Langer Heinrich and Kayelekera) are progressing on schedule and our growth strategy, through mergers and acquisitions, is in play. Paladin will hold a significant amount of Australian uranium resources in Western Australia (its existing projects) and potentially elsewhere in Australia. With its strong production profile from its African projects and opportunities elsewhere in the world, Paladin can afford to take a patient approach in Australia. Given, as mentioned, the world dynamics for energy fuels, it is in my view inevitable that the opportunity for Paladin to produce Australian sourced uranium will arise in due course. I must express my gratitude to the many loyal shareholders who have supported us; particularly over recent years and those who have injected further equity capital into our Company. Congratulations and thanks to the growing team of Paladin employees and consultants who have all worked, I know, with genuine devotion and drive to what I believe is a noble cause. We are primarily a business enterprise dedicated to achieving a solid return for shareholders but we will also contribute to improving the world environment, by delivering a clean source of fuel. We will also make a valuable contribution to the wellbeing of the peoples of Namibia and Malawi with the establishment of mining operations at Langer Heinrich and Kayelekera. I look forward to sharing the ongoing journey with all shareholders, as Paladin commences production and delivery of uranium from Langer Heinrich. Mr Rick Crabb CHAIRMAN 7 NUCLEAR ENERGY – A PARADIGM SHIFT _________________________________________________________________________________ The availability of energy, particularly electricity, dictates economic well-being. The world as a whole is undergoing drastic reappraisal of its energy needs and the mix of fuels that will sustain production. High oil prices have focused attention on the inexorable growth in demand for energy, and made even the most indifferent of people think about the global implications of continued economic growth in China, and India, as well as the emergence of Russia as a global energy supplier and consumer. In last year’s Annual Report we described the milestones which marked the world’s acceptance and implementation of nuclear electricity. It is now obvious that the change in attitudes to nuclear power reflects a fundamental shift in thinking about the provision of energy worldwide. This change, a paradigm shift, will have enormous implications for the uranium industry. Nuclear power will be, in many countries, the preferred technology for significant new base-load electricity generation. Nuclear power offers energy security without compromising climate change defences or undermining economic performance. The uranium industry must adjust to this new paradigm in terms of undertaking more exploration, creating more production, improving technical and operational efficiency, and developing a sophisticated dialogue with nuclear power utilities to ensure the market adequately reflects the costs of providing nuclear fuel on a sustainable and secure basis. Demand – needs re-appraisal Thirty-one countries currently operate 441 nuclear power reactors, contributing 16% of world electricity production. Electricity production represents 40% of world primary energy consumption, and is growing at an annual rate of 2.7%, which is twice the rate of growth for all energy sources. Last year we said that world uranium requirements for the existing, and currently planned new reactors is about 77,000 mt U3O8 per year, rising by about 1.5% each year to reach a forecast peak of 125,000 mt U3O8 by the early 2020’s. We identified the historical importance of inventories and down-blended weapons grade material in maintaining a market “balance” between primary uranium production, 49,000 mt U3O8 in 2005, and reactor consumption. There was a clear uranium supply deficit which we predicted would exert considerable upwards pressure on uranium prices. In fact, the spot uranium price has risen from US$29 per lb U3O8 in June 2005 to over $47 per lb U3O8 in June 2006. However, these figures do not take account of the new paradigm. 8 NUCLEAR ENERGY – A PARADIGM SHIFT (continued) _________________________________________________________________________________ The challenge of the new paradigm, and Paladin’s opportunities – Supply continues to lag demand Despite the significant rise in reported uranium prices, world primary uranium production only increased by 2,540 mt U3O8 (5%) in calendar year 2005. In fact, in the first six months of 2006, uranium production in the two dominant production centres, Canada and Australia, actually declined by 2,610 mt U3O8 (19.5%), demonstrating the fragility of the existing supply chain. Worldwide the only new uranium production facility built and brought on line in 2006 as part of the industry’s supply response is Paladin’s Langer Heinrich Uranium Project. This illustrates both the difficulty of bringing new production to market, and the skill and dedication of the Paladin people who have made it happen. New reactors and a new nuclear industry There are significant developments at international and national levels which will facilitate the building of new nuclear power stations and increase our reliance on nuclear energy. • USA Resurgence of a major influence - - - - Wide public acceptance with at least 68% of Americans favouring the use of nuclear power New national Enrichment facility granted construction and operation licence Global Energy Partnership proposed to facilitate world nuclear fuel trade 19 applicants expected to seek licences for construction of up to 25 new reactors • Canada Refurbishing a successful program - - Refurbishment and recommissioning of 2 nuclear power plants Applications filed possible 4 new plants • EU Revising nuclear energy policies Finland – New 1600 MWe plant under construction UK Complete turnaround UK Energy Review supports building new nuclear power plants and recommends streamlining licensing process to facilitate construction by private operators. • France Committed to renewing its fleet - New 1600 MWe reactor at Flamanville begins construction 9 NUCLEAR ENERGY – A PARADIGM SHIFT (continued) _________________________________________________________________________________ • Turkey Recognising nuclear’s value - Plans for up to 5 new nuclear plants • Russia World’s most ambitious nuclear energy plans - - - - Structural reorganization of the civil nuclear sector to reflect world’s most ambitious nuclear energy plans 10 new reactors to be built by 2015, with plans for a further 10 announced High Enriched Uranium program terminates in 2013 Significant investments needed to secure long term uranium supplies will impact world market • China Powering up its nuclear energy needs - - - Plans to increase nuclear power to 40 GWe by 2020 (30 new reactors) Entering world uranium market with significant new demand Bi-lateral safeguards agreement signed with Australia • Japan Revitalised plans - 3 yearly revision of the Basic Energy Plan reaffirms commitment to nuclear power in order to meet Kyoto Protocol CO2 targets • India Joining the world nuclear community - - US-India Nuclear Agreement will end nuclear sanctions and open market for uranium and civil technology Significant domestic nuclear program will expand rapidly • Australia A major supplier growing bigger - - - Prime Minister’s Taskforce established to review entire nuclear fuel cycle Bi-lateral safeguards agreement signed with China opens market for Australian uranium sales Federal Labor Party Leader announces proposed abandonment of restrictive “no new uranium mines” policy at 2007 National Conference NUCLEAR ENERGY – A PARADIGM SHIFT (continued) _________________________________________________________________________________ 10 URANIUM SPOT PRICE GRAPH (HISTORICAL) HISTORICAL URANIUM PRICES US$48.50/lb (Term Contracts US$51.00/lb) 8 O 3 U b l / $ S U 60 50 40 30 20 10 0 n a J r p A l u J t c O n a J r p A l u J t c O n a J r p A l u J t c O n a J r p A l u J t c O n a J r p A l u J g u A t c O n a J r p A l u J g u A 2001 2002 2003 2004 2005 2006 YEAR MANAGEMENT DISCUSSION AND ANALYSIS 11 The following Management Discussion and Analysis (MD&A) for Paladin Resources Ltd should be read in conjunction with the Directors’ Report and Financial Report for the year ended 30 June 2006. The effective date of this discussion and analysis is 29 August 2006. The financial information presented in this MD&A has been prepared in accordance with Australian (AIFRS), other authoritative equivalents pronouncements of the Australian Accounting Standard Board, Urgent Issues Group Interpretations and the Corporations Act 2001. International Financial Reporting Standards to This MD&A also includes additional information in order for the Company to comply with reporting requirements of applicable Canadian securities law, as the Company is listed on the Toronto Stock Exchange. Overview The Company operates in the resource industry with a principal business of evaluation and development of uranium projects in Africa and Australia. The Company is incorporated under the laws of Western Australia with a primary share market listing on the Australian Stock Exchange and additional listings on the Toronto Stock Exchange in Canada; and Munich, Berlin, Stuttgart and Frankfurt Stock Exchanges in Europe. The main activities undertaken during the year were: – commencement of construction at the Langer Heinrich Uranium Project in Namibia after granting of a 25 year mining licence and finalisation of US$71 million in bank project finance; – acquisition of the remaining 10% joint venture interest in the Kayelekera Uranium Project in Malawi; – continuing negotiation of development agreement and the Bankable Feasibility Study for the Kayelekera Uranium Project; – completion of resource drilling programs at both Langer Heinrich and Kayelekera Uranium Projects with additional resources discovered; – sale of non-core uranium exploration property and grant of licence over Frome Basin database to Deep Yellow Ltd; – repayment and cancellation of the debt facility established for the Langer Heinrich Bankable Feasibility Study; and – allotment of 35 million fully paid shares via private placement raising A$77 million principally to complete the funding for construction of the Langer Heinrich Uranium Project, fund worldwide uranium project generation activities and provide general working capital. MANAGEMENT DISCUSSION AND ANALYSIS 12 Overview (continued) On 10 July 2006, the Company announced an off-market takeover bid for all the fully paid ordinary shares in Valhalla Uranium Ltd (“Valhalla”). The offer was subject to various conditions, some of which are currently still outstanding. Valhalla is a Western Australian based resource company listed on the ASX with interests in a number of uranium projects in Queensland and the Northern Territory. The most advanced project in Valhalla’s portfolio is the Valhalla/Skal uranium deposits situated in northern Queensland. Valhalla has a 50% interest in these deposits with Summit Resources Limited (“Summit”), which is the manager of the project. Valhalla also holds 41% interests in the Ngalia Basin uranium project containing the Bigrlyi Deposit as well as the Pine Creek uranium project in the East Alligator River area. Valhalla’s share of resources via the Mt Isa Joint Venture according to Summit market releases is 28.5Mlbs U3O8 (230ppm cut off) in the JORC compliant Inferred Resources category. In addition, Valhalla’s share of incremental historical estimates for the adjacent Skal Deposit is 5.5Mlbs U3O8 (based on information released by Valhalla’s joint venture partners). In addition JORC resources have been released for the Bigrlyi Deposit and Valhalla’s shares are 3.5Mlbs U3O8 (100ppm cut off). Should the offer be accepted, Paladin will significantly increase its global uranium resource base. The proposed acquisition is an excellent opportunity to add up to three potential projects to Paladin’s medium to long term project development pipeline. Paladin believes the Valhalla/Skal deposits are deposits with significant resource potential at reasonable grades. While ultimate development of the resource depends not only on further technical and resource definition but also on a change of policy in Queensland, Paladin plans to support Summit in progressing the exploration and appraisal of this deposit to ensure readiness if and when this policy change occurs. The on market, all scrip offer will comprise 1 fully paid ordinary Paladin share for every 3.16 fully paid ordinary Valhalla shares. On 28 August 2006 the Company announced that commencement of commissioning of the Langer Heinrich plant had been achieved one month earlier than originally planned with the successful commissioning of the crusher and associated conveyers to produce a crushed ore stockpile. Staged commissioning will progressively continue through the scrubber and attrition, leach and CCD, the uranium precipitation and reagent areas and the Company is confident that the remaining construction work will be finalised in line with the program. Forward Looking Statements Some of the statements contained in this MD&A, including those relating to strategies and other statements, are predictive in nature, and depend upon or refer to future events or conditions, or include words such as “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates” or similar expressions that are forward looking statements. Forward looking statements include, without limitation, the information concerning possible or assumed further results of operations as set forth herein. These statements are not historical facts but instead represent only expectations, estimates and projections regarding future events and are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations generally. The forward looking statements contained in this MD&A are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict. The future results of the Company may differ materially from those expressed in the forward looking statements contained in this MD&A due to, among other factors, the risks and uncertainties inherent in the business of the Company. The Company does not undertake any obligation to update or release any revisions to these forward looking statements to reflect events or circumstances after the date of this MD&A or to reflect the occurrence of unanticipated events. MANAGEMENT DISCUSSION AND ANALYSIS REVIEW OF OPERATIONS 13 Uranium Resources Paladin’s total mineral resource inventory includes 41910t of U3O8 (92.4Mlbs of U3O8) at 0.076% U3O8 in the Indicated and Measured categories and 38.600t of U3O8 (85Mlbs of U3O8) at 0.061% U3O8 in the Inferred Resource category. The summary of status for each of the advanced projects is detailed in the following table. Uranium Project Summary Table CRITERIA Paladin equity Location Deposit Type Measured & Indicated Resources Inferred Resource Mining Method Previous Owners Past Expenditure Activity Periods Project Status LANGER HEINRICH PROJECT 100% Namibia, Southern Africa Calcrete 32.2Mt of ore @ 0.07% U3O8 (20,200t U3O8) 40Mt of ore @ 0.06% U3O8 (23,800t U3O8) Conventional open pit Gencor Limited (South African Mining Company) and Acclaim A$20M KAYELEKERA PROJECT MANYINGEE PROJECT OOBAGOOMA PROJECT 100% 100% 100% Malawi, Southern Africa Sandstone 15Mt of ore @ 0.09% U3O8 (13,630t U3O8) 3.4Mt of ore @ 0.06% U3O8 (2,040t U3O8) Conventional open pit Central Electricity Generating Board (UK utility) West Pilbara (West Australia) Sandstone 7.9Mt of ore @ 0.1% U3O8 (8,080t U3O8) 4.2Mt of ore @ 0.07% U3O8 (2,810t U3O8) West Kimberley (West Australia) Sandstone ----------------- 9,950t U3O8 @ 0.12% In-Situ Leach In-Situ Leach Cogema (French utility) Cogema (French utility) A$9M A$16M A$5M 1973 - 1980, 1999 to present 1982 – 1990, 1998 to present 1979 - 1988 Acquired 1998 • Bankable Feasibility Study for completion December 2006. • Revised mining concept positive indicating potential for development • Advanced development project. • On hold. • Feasibility Study in readiness. • One of only three Australian advanced ISL projects 1982 - 1985 Acquired 1998 • Advanced exploration project. • On hold. • Resource definition drilling completed. • Large resource potential • Staged commissioning commenced August 2006. Project Significance • Globally first new uranium mine and mill in 25 years Timeframe • Production to commence in 2006 • Production to commence in 2008 • 17 year project • 10 year project life life • 3 year staged feasibility study required • 2 year reserve / resource drilling required MANAGEMENT DISCUSSION AND ANALYSIS REVIEW OF OPERATIONS (continued) 14 Project Locations LANGER HEINRICH URANIUM PROJECT The Langer Heinrich Uranium Project in Namibia is owned 100% by Paladin through its wholly owned Namibian subsidiary, Langer Heinrich Uranium (Pty) Ltd. Paladin purchased the Langer Heinrich Project in August 2002. Langer Heinrich is a surficial, calcrete type uranium deposit containing a mineral resource of 40,000t U3O8 at a grade of 0.06% (250ppm cut off) in seven designated mineralised zones, named as Details 1 to 7, within a 15 kilometre length of an extensive palaeodrainage system. The deposit is located in the Namib Desert, 80 kilometres east of the major seaport of Walvis Bay. The attached Figure shows the location of the uranium mineralisation along the Langer Heinrich valley. A positive Bankable Feasibility Study for the project was completed in April 2005, a 25 year mining lease was obtained in July 2005 and construction started in September 2005 with the Namibian Minister of Mines and Energy commemorating the event with a ground breaking ceremony at the LHU mine site. In 2005 Paladin carried out a 11.534mRC drilling program to test prospective targets along 5km of previously unknown palaeochannel discovered in the 2004 drilling program. The drilling programme consisted of 245 RC drill holes and was confined to certain areas in Detail 2 and Detail 7. Mineral resource specialists Hellman and Schofield (H&S) have completed and independently verified a revised JORC (2004) Code mineral resource estimate of Langer Heinrich. MANAGEMENT DISCUSSION AND ANALYSIS REVIEW OF OPERATIONS (continued) 15 The Mineral Resource estimation has been calculated by H&S as follows:- All Details: 1 to 7 (including new channel drilling) 250ppm Cut-off Measured Resources Indicated Resources Total Measured & Indicated Inferred Resources Mt 19.9 12.4 32.3 40.0 Grade % U3O8 0.07 0.06 0.07 0.06 Tonnes U3O8 13,250 6,950 20,200 23,800 Currently a 4000 metre drilling program is in progress to evaluate similar targets within the palaeochannel in Details 3, 4, 5 and 6. Current total reserves based on a $30/lb U3O8 price are as follows:- Proven Ore Reserves Probable Ore Reserves Mt 16.74 8.63 Grade % U3O8 0.069 0.063 Tonnes U3O8 11,580 5,451 The mining operation is designed to produce 1,180 tonnes (2.6Mlbs) per annum (tpa) of uranium oxide concentrate (U3O8) from 1.5Mtpa of calcrete associated ores by ore beneficiation, alkaline leaching (heating to 75°C), counter-current decantation, ion exchange, precipitation and calcining to produce saleable U3O8. Project construction is progressing within budget and on schedule for project completion by end December 2006. By the end of June 2006, the total project was 83% complete with engineering at 99% complete and all contracts awarded. The 600 strong construction workforce deployed at Langer Heinrich has worked with no lost time incidents and recorded over 600,000 man hours without a Loss of Time through Injury (LTI) for the project to date. Commencement of commissioning of the Langer Heinrich plant was achieved in August 2006, one month earlier than originally planned, with the successful commissioning of the crusher and associated conveyers to produce a crushed ore stockpile. Staged commissioning will now progressively continue through the scrubber and attrition, leach and CCD, the uranium precipitation and reagent areas. The on site high voltage substation and transformers were commissioned and energised early in August 2006, with water flowing along the 85km pipeline from the coast to fill the onsite reservoirs. The contract miner is established on site and has commenced mining the initial pit undertaking topsoil removal and supplying feed for the crusher commissioning while establishing the mine infrastructure. MANAGEMENT DISCUSSION AND ANALYSIS REVIEW OF OPERATIONS (continued) 16 Continual optimisation of the BFS alkaline leach process and subsequent positive confirmatory work by the internationally regarded Australian Nuclear Science and Technology Organisation (“ANSTO”) metallurgical laboratories has resulted in several upgrades in the uranium precipitation and reagent areas. Although the enhancements have impacted the construction schedule they are not expected, at this stage, to impact the staged commissioning of the plant or the project completion date. An 8000m grade control drilling program was carried out to define the reserves for the first 6 months of mining the results showed strong correlation to the resource model used in the BFS. A skilled operational team has been recruited, led by Wyatt Buck (ex Cameco production chief) with necessary business systems and operating processes in place. This group is ready to assist GRD Minproc in the planned commissioning of the plant and then seamlessly accept full responsibility at the operational handover late December 2006. Ramp up to initial annualised design output of 2.6Mlb U3O8 remains as planned for 3rd quarter 2007. The first contracted shipment of uranium oxide concentrate is expected to be shipped late 1st quarter 2007. Paladin was successful in securing three sales contracts which account for more than 6.6 million pounds of Langer Heinrich production over the period 2007 to 2012 and underline Paladin’s confidence in the success of this project. Pricing in all three contracts is market-related at the time of delivery and is subject to escalating floor and ceiling components. LANGER HEINRICH URANIUM (PTY) LTD LANGER HEINRICH URANIUM PROJECT GEOLOGY, ACTIVITY AREAS, BFS MINE MODEL AREA Area of 2005 Resource Addition BFS Mine model Plant Area 2006 resource drilling MANAGEMENT DISCUSSION AND ANALYSIS REVIEW OF OPERATIONS (continued) 17 KAYELEKERA PROJECT The Kayelekera Uranium Project is located in northern Malawi, 40 kilometres west of the provincial town of Karonga and 11 kilometres south of the main road that connects Karonga with the township of Chitipa to the west. The Kayelekera Uranium Project is owned 100% by Paladin through its wholly owned Malawi subsidiary Paladin (Africa) Ltd having purchased the remaining 10% equity interest in August 2005 from Balmain Resources Pty Ltd for a consideration of 4,350,000 fully paid shares in Paladin, valued at the time at A$1.235 per share. In 2004 the original Paladin 2000 Pre-Feasibility Study was updated in the light of increasing uranium prices and in April 2005, Paladin announced the go-ahead of a US$2.3M BFS as a result of the improved economics shown by the pre-feasibility work. Overall project management of the BFS has been awarded to GRD Minproc, based in Johannesburg. On current scheduling it is anticipated the BFS will be completed by December 2006. With early approvals, production start-up is expected in mid to late 2008 with annual production of 1,000t of U3O8 (2.3Mlb) over the currently planned ten-year mine life. A 5394m, 120 hole RC drilling programme commenced in August 2005 to more clearly define the peripheral mineralisation for pit optimisation purposes and increase the resource base. New Mineral Resource estimations, carried out by independent Mineral Resource specialist Hellman and Schofield to JORC (2004) standards, are based on the use of a combination of analytical assays (XRF) and downhole gamma logging results, following the application of standard practice radiometric calibration methods for U3O8. Approximately 50% of the mineralized holes were assayed for U3O8 using analytical methods (XRF) for check purposes and to establish disequilibrium parameters for subsequent application to un-assayed radiometrically logged drill hole intervals. At 300ppm U3O8 Cut-off Measured Resources Indicated Resources Total Measured & Indicated Inferred Resources At 600ppm U3O8 Cut-off Measured Resources Indicated Resources Total Measured & Indicated Inferred Resources Mt 2.20 13.11 15.31 3.40 Mt 1.58 6.98 8.56 1.19 Grade % U3O8 0.12 0.08 0.09 0.06 Grade % U3O8 0.16 0.12 0.13 0.09 Tonnes U3O8 2,730 10,880 13,630 2,040 Tonnes U3O8 2,460 8,240 10,690 1,110 MANAGEMENT DISCUSSION AND ANALYSIS REVIEW OF OPERATIONS (continued) 18 The BFS is progressing well. The metallurgical test work is progressing through South Africa metallurgical laboratory Mintek with encouraging results that should lead to a more simplified process based on the conventional acid leaching and solvent extraction process and flow sheet. For the environmental, geotechnical, hydrological and tailings evaluation, Knights Piesold, a highly reputable South African firm, were selected to carry out this work. Their work is progressing as scheduled with 25 groundwater monitoring wells completed and the geotechnical drilling currently being carried out. The attached Figure shows the current layout of the Kayelekera mine site. The BFS and EIA are planned to be completed for the final submission to the Government and application for a mining licence in December 2006. Paladin (Africa) Limited has been granted three exclusive prospecting licences in Malawi covering an aggregate 1,139 km2. Two of these are contiguous with the Kayelekera exclusive prospecting licence while the third lies along the western shore of Lake Malawi. All three cover areas of Karroo Sandstone which hosts the Kayelekera orebody and the three areas are considered prospective for Kayelekera type uranium deposits. Airborne radiometric and geochemical anomalies were identified during previous work in the 1980’s. PROPOSED MINESITE LAYOUT 19 MANAGEMENT DISCUSSION AND ANALYSIS REVIEW OF OPERATIONS (continued) MANYINGEE PROJECT The Manyingee Uranium Project is located in the north west of Western Australia, 1,100 kilometres north of Perth, the State Capital and 85 kilometres inland from the coastal township of Onslow. The property is comprised of three mining leases covering 13 square kilometres. Paladin purchased the Manyingee Project in 1998 from Afmeco Mining and Exploration Pty Ltd (AFMEX), a subsidiary company of Cogema of France. Paladin’s 100% interest in Manyingee is held through its wholly owned subsidiary, Paladin Energy Minerals NL. AFMEX (previously named Total Mining Australia Pty Ltd) discovered uranium mineralisation at Manyingee in 1973 during regional exploration. Between 1973 and 1984 400 holes were drilled and this established the extent and continuity of sedimentary uranium mineralisation in permeable sandstone in palaeochannels. Field trials by AFMEX demonstrated that the Manyingee uranium deposit is amenable to extraction by in-situ leaching (ISL). The Manyingee Project contains JORC (1999) Code compliant resources as follows: At 300ppm U3O8 Cut-off Indicated Resources Inferred Resources Mt 7.9 4.2 Grade % U3O8 0.10 0.07 Tonnes U3O8 8,080 2,810 The Manyingee project is currently mothballed due to the negative uranium policies of the State Government and feasibility work has been deferred until the policies are reversed by government. OOBAGOOMA PROJECT The Oobagooma Project is located in the West Kimberley Region of Western Australia, 1,900 kilometres north-north-east of Perth, the State Capital, and 75 kilometres north east of Derby on freehold land owned by the Commonwealth Government and used by the military for training purposes. The area is covered by two applications for exploration licences covering 392 square kilometres. Consent of the Commonwealth Government and the Department of Defence will be required before mining tenements can be granted by the State. Paladin acquired a call option in 1998 in relation to the purchase of the Oobagooma Project and, in turn, granted a put option to the original holder of the Project. Both options are subject to the exploration licences being granted by the State. The Oobagooma project area was explored by AFMEX from 1983 to 1986 during which time extensive zones of uranium mineralisation were discovered. Using geostatistical methods AFMEX calculated a historical estimate of uranium mineralisation at Oobagooma. This work was done before the JORC Code had been formulated and was thus not carried out in accordance with the Code. The AFMEX estimate is as follows: At 300ppm U3O8 Cut-off Historic Resources Mt 8.2 Grade % U3O8 Tonnes U3O8 0.12 9,950 MANAGEMENT DISCUSSION AND ANALYSIS REVIEW OF OPERATIONS (continued) 20 The main exploration effort, once the tenements have been granted, will be to confirm continuity of the uranium mineralisation by infill drilling concentrating on mineralised redox fronts as re-interpreted and allow JORC compliant resource estimates to be made. The mineralisation is open and potential exists to increase the currently known resource base. The style of mineralisation is believed to be amenable to recovery of uranium in a future ISL mining operation. QUASAR URANIUM JOINT VENTURE The Joint Venture with Quasar Resources Pty Ltd covers two exploration licences in the northern Frome Basin in South Australia. The two licences cover 1,051 square kilometres. Paladin holds a 15% free carried interest in Exploration Licence 3001 and a 20% free carried interest in Exploration Licence 3078. Quasar is a wholly owned subsidiary of Heathgate Resources Pty Ltd, operator of the Beverley ISL uranium mine which is situated immediately south of the Joint Venture tenements. Quasar is operator and manager of the Joint Venture. Heathgate Resources is an Australian affiliate of General Atomics of the USA. The exploration licences are considered prospective for palaeochannel uranium mineralisation and Quasar has conducted a number of exploration campaigns on the ground. URANIUM DATABASE Paladin owns a unique uranium database, compiled over 30 years of investigations by the international uranium mining house Uranerzbergbau in Germany. The database incorporates all aspects of the uranium mining and exploration industry and includes detailed exploration data for Africa and Australia. It can be used to quickly research uranium prospects, deposits and mineralisation on a country by country basis. Paladin continues to evaluate opportunities for acquiring additional uranium projects from this database. DEEP YELLOW LTD In 2005 Paladin sold three non-core Australian uranium projects to Deep Yellow Ltd which is an Australian company listed on the ASX. As a result of these sales Paladin now holds 6,550,000 fully paid shares in Deep Yellow Ltd, 25,000,000 one-cent options expiring on 31 December 2007 and 12,500,000 twelve-cent options expiring on 15 July 2008. Paladin is also entitled to a 2% gross royalty on production from the Napperby and North East Arunta projects in the Northern Territory. Deep Yellow Ltd is a dedicated uranium exploration company with exploration holdings covering over 75,000 square kilometres in Northern Territory, Queensland and South Australia. MANAGEMENT DISCUSSION AND ANALYSIS FINANCIAL REVIEW 21 INCOME STATEMENTS Revenue from Continuing Operations Other Income Shared Based Payments Expense Exploration and Evaluation Expenditure Write Down of Convertible Note YEAR ENDED 30 JUNE 2005 A$000 2006 A$000 4,298 1,057 772 810 (3,650) (3,009) (4,233) (5,113) - (894) Other Expenses from Continuing Operations (4,958) (2,104) Loss from Continuing Operations Profit from Discontinued Operations (7,486) (9,538) - 128 Loss Before and After Income Tax (7,486) (9,410) Loss Per Share (Australian Dollars) - basic and diluted (0.02) (0.03) Revenue from Continuing Operations has increased to A$4,298,364 in 2006 as a result of an increase in interest revenue derived from higher cash holdings in 2006 when compared to 2005, and the revenue earned from the Frome Basin database licence to Deep Yellow in 2006. Other Income in 2006 relates to a A$441,117 profit on sale of non-core uranium exploration property to Deep Yellow and a A$615,642 foreign exchange gain primarily attributable to cash holdings in South African rand and Namibian dollars for the funding of construction activities of the Langer Heinrich Uranium Project. In 2005 the other income represented a A$810,000 profit on sale of non- core uranium exploration properties to Deep Yellow. Share Based Payments Expense relates to the requirement to recognise the cost of granting options to Directors, employees and consultants under AIFRS over the option vesting period. The first options granted by the Company with vesting periods were in November and December 2004, as a result the expense was lower in 2005 at A$3,008,850. The expense in 2006 of A$3,650,260 reflects the full year impact of the costs of granting options over their vesting periods. 22 MANAGEMENT DISCUSSION AND ANALYSIS FINANCIAL REVIEW (continued) The valuation of options under AIFRS does not allow the consideration of non-market related vesting conditions, which precludes the Company from discounting the option valuations to reflect the vesting conditions relating to positive outcome for the Langer Heinrich Uranium Project bankable feasibility study and completion of acceptable project funding. This has the result of increasing the option valuation when compared to the previously disclosed valuations by the Company, which were prepared based on the normal commercial practice of discounting valuations for non-market related vesting conditions. A change in Exploration and Evaluation Expenditure accounting policy has been retrospectively applied during the year. The new exploration and evaluation expenditure accounting policy is to charge exploration and evaluation expenditure against earnings as incurred; except for acquisition costs and for expenditure incurred after a decision to proceed to development is made, in which case the expenditure is capitalised as an asset. A decrease in exploration and evaluation expenditure in the Income Statement to A$4,232,651 has occurred in 2006 as a decision to proceed to development has been made for the Langer Heinrich Uranium Project, which results in the capitalisation of this project’s expenditure. Write Down of Convertible Note in 2005 of $894,438 related to the provision for non-recovery of convertible note and interest receivable owing from Didasko Technologies Pty Ltd. Other Expenses from Continuing Operations have increased to A$4,958,397 in 2006 as a result of the expanded corporate activities attributable to the significant growth of the Company in the last year. The Profit from Discontinued Operations in 2005 of A$127,739 relates to the commercial property sold on 24 June 2005. The Loss for the year ended 30 June 2006 of A$7,486,185 compares favourably to the loss for the year ended 30 June 2005 of A$9,410,228 as a result of higher revenue and other income, lower exploration and evaluation expenditure and no write down of convertible note in the 2006 Income Statement; despite the higher Share Based Payment Expense and the expanded corporate activities attributable to the significant growth of the Company in the last year. Earnings Per Share The Loss per Share noted on the Income Statements reflects the result for the specific reported periods and the additional shares issued in 2006 compared to 2005. Segment Disclosure In the Namibia geographical segment the Company reflected a foreign exchange loss (primarily on cash holdings of Namibian dollars) as exploration expenditure for the Langer Heinrich Uranium Project has been capitalised as an asset. The Malawi geographic segment primarily reflected the exploration and evaluation expenditure for the Kayelekera Uranium Project. In the Australian geographic segment the Company reflected the remaining Income Statement activities. MANAGEMENT DISCUSSION AND ANALYSIS FINANCIAL REVIEW (continued) 23 BALANCE SHEETS Total Current Assets Total Non Current Assets Total Assets Total Current Liabilities Total Non Current Liabilities Total Liabilities Net Assets 30 JUNE 2006 A$000 30 JUNE 2005 A$000 63,473 96,835 160,308 11,644 23,939 35,583 40,057 5,384 45,441 1,325 - 1,325 124,725 44,116 Current Assets have increased to A$63,472,754 at 30 June 2006 as a result of the A$77 million private placement completed in October 2005 and US$17 million (A$23.2 million) project finance debt drawdown for Langer Heinrich Uranium in June 2006; less the cash spend on construction activities for the Langer Heinrich Uranium Project, bankable feasibility study expenditure for the Kayelekera Uranium Project, project generation exploration and evaluation activities and corporate costs for the year ended 30 June 2006. Of the A$59,777,956 held in cash as at 30 June 2006, A$54,530,658 has been invested in short term commercial bank bills and term deposits. Non Current Assets have increased to A$96,835,232 during the year as a result of mine construction activities/exploration and evaluation expenditure for the Langer Heinrich Uranium Project, acquisition of the remaining 10% joint venture interest in the Kayelekera Uranium Project and increased investment in and financial value of Deep Yellow shares and options. The consideration for the acquisition of the remaining 10% joint venture interest in the Kayelekera Uranium Project from Balmain Resources Pty Ltd was satisfied by the issue of 4,350,000 fully paid ordinary shares which is valued at A$5,611,500. During the year ended 30 June 2006 the Company acquired an additional 15,450,000 shares and 12,500,000 unlisted options (with an exercise price of A$0.12 and expiry of 31 July 2008) in Deep Yellow – 6,950,000 shares from participation in a non-renounceable entitlement issue, 1,000,000 shares from on-market purchase, and the balance of 7,500,000 shares and the options from the sale of a non-core uranium exploration property and grant of licence over the Frome Basin database. Under AIFRS the investments in Deep Yellow are required to be stated at fair value at each reporting date, and the Company has adopted a policy of recording the revaluation amount in Reserves. At 30 June 2006 the Company has a revaluation increment for the investments in Deep Yellow as a result of its share price increasing to A$0.125 from A$0.067 at 30 June 2005. Current Liabilities increased to A$11,643,641 at 30 June 2006 as a result of Langer Heinrich Uranium Project mine construction activities. This increase occurred despite the repayment and cancellation of the debt facility established for the Langer Heinrich Bankable Feasibility Study on 31 October 2005 - the principal repayment was A$500,000. 24 MANAGEMENT DISCUSSION AND ANALYSIS FINANCIAL REVIEW (continued) Non Current Liabilities of A$23,938,271 exist as at 30 June 2006 relating primarily to the US$17 million (A$23.2 million) project finance debt drawdown for the Langer Heinrich Uranium Project in June 2006. The total facilities available are US$71 million consisting of a US$65 million project finance facility and US$6 million cost over-run facility. In addition non current liabilities also relate to the grant of licence for the Frome Basin database to Deep Yellow, and the Company has allocated Deep Yellow shares and options to the value of A$1,452,633 to the granting of this licence which is for a six year period commencing 15 July 2005. Of this unearned licence revenue A$978,510 is non current at 30 June 2006. Non current liabilities also include the recognition of a mine closure and restoration provision for the construction activities of the Langer Heinrich Uranium Project. Segment Disclosure In the Balance Sheet in 2006 the Company reflected a significant increase in the Namibia geographical segment attributable to the focus on the Langer Heinrich Uranium Project. In the Malawi geographical segment the main activity was the acquisition of the remaining 10% joint venture interest in the Kayelekera Uranium Project. STATEMENTS OF CHANGES IN EQUITY Total Equity at the Beginning of the Financial Period Loss for the Year Ended 30 June Movement in Reserves Movement in Equity YEAR ENDED 30 JUNE 2006 A$000 2005 A$000 44,116 (7,486) 5,905 82,190 7,112 (9,410) 4,687 41,727 Total Equity at the End of the Financial Period 124,725 44,116 Loss for the Year Ended 30 June 2006 is discussed under the Income Statements section. Movement in Reserves increased to A$5,905,699 in 2006 relating to both the revaluation increment attributable to the increase in Deep Yellow share price to A$0.125 from A$0.067 at 30 June 2005 and the recognised value of unlisted employee options. This increase is after deduction for the exercise of 14,000,000 unlisted employee options – 11,000,000 exercisable at A$0.22 on or before 26 May 2006 and 3,000,000 exercisable at A$0.32 on or before 26 May 2006. Movements in Equity increased to A$82,190,030 in 2006 from the completion of a 35,000,000 share global private placement, exercise of unlisted employee options and issue of shares to acquire the remaining 10% joint venture interest in the Kayelekera Uranium Project. The number of fully paid ordinary shares on issue at 30 June 2006 is 454,235,713, an increase of 53,350,000 during the year. Share options of 24,215,000 remain outstanding at 30 June 2006 to Directors, employees, and consultants directly engaged in corporate, construction and exploration and evaluation work for the Company. 25 MANAGEMENT DISCUSSION AND ANALYSIS FINANCIAL REVIEW (continued) _________________________________________________________________________________ CASH FLOW STATEMENTS YEAR ENDED 30 JUNE 2005 2006 A$000 A$000 Net Cash Inflow/(Outflow) from Operating Activities 648 (1,281) Net Cash Outflow from Investing Activities (76,496) (5,000) Net Cash Inflow from Financing Activities Net Increase in Cash Held Cash at the Beginning of Financial Period Effects of Exchange Rate Changes 95,080 19,232 39,489 1,057 41,131 34,850 4,639 - Cash at the End of the Financial Period 59,778 39,489 The Net Cash Inflow from Operating Activities in 2006 of A$648,517 is attributable to the increase in interest received from higher cash holdings in 2006 when compared to 2005, despite higher payments to suppliers and employees relating to expanded corporate activities attributable to the significant growth of the Company in the last year. In 2006 Net Cash Outflow from Investing Activities increased to A$76,496,148 as a result of mine construction/exploration and evaluation expenditure for the Langer Heinrich Uranium Project, bankable feasibility study for the Kayelekera Uranium Project, project generation exploration and evaluation activities and acquisition of additional shares in Deep Yellow. Net Cash Inflow from Financing Activities represented a net cash inflow of A$95,079,960 in 2006 as a result of the A$77 million private placement completed in October 2005, net proceeds from exercise of 14,000,000 unlisted employee options, and US$17 million (A$23.2 million) project finance debt drawdown for the Langer Heinrich Uranium Project in June 2006. This inflow was net of share issue costs, establishment costs for the Langer Heinrich project finance facility, and repayment in October 2005 of the debt facility established for the Langer Heinrich Bankable Feasibility Study. The number of shares issued in 2006 was 53,350,000 (including 4,350,000 relating to the non cash acquisition of the remaining 10% joint venture interest in the Kayelekera Uranium Project) a decrease from the 67,200,000 issued in 2005. Overall the Net Increase in Cash in 2006 was A$19,232,329 lower than the net increase in cash in 2005 as a result of the significantly higher cash outflows from investing activities, despite higher cash inflows from financing activities. In 2006 an A$1,056,601 Effects of Exchange Rate Changes exists from the translation of foreign currency holdings of South African rand and Namibian dollars for the funding of construction activities of the Langer Heinrich Uranium Project. The cash at 30 June 2006 of A$59,777,956 represents a considerable increase in cash compared to the year ended 30 June 2005. 26 MANAGEMENT DISCUSSION AND ANALYSIS FINANCIAL REVIEW (continued) _________________________________________________________________________________ LIQUIDITY AND CAPITAL RESOURCES The Company’s principal source of liquidity as at 30 June 2006 is cash of A$59,777,956 (30 June 2005 – A$39,489,026) and project finance debt. Of the total cash an amount of A$54,530,658 has been invested in short term commercial bank bills and term deposits. The Company’s principal sources of cash for the year ended 30 June 2006 were proceeds from a private placement, project finance debt drawdown, receipts from exercise of unlisted employee options and interest received from cash investments. During the year the Company completed Langer Heinrich project finance facilities of US$71 million and a total of US$17 million had been drawn by 30 June 2006, leaving available facilities of US$54 million. The following is a summary of the Company’s outstanding commitments as at 30 June 2006: Payments due by period Mine construction Mineral properties Operating leases Manyingee acquisition Total Less than 1 yr $A $A 1 to 5 yrs Unknown A$ A$ 31,248,279 482,800 724,940 750,000 31,248,279 482,800 221,558 - - - 503,382 - - - - 750,000 Total commitments 33,206,019 31,952,637 503,382 750,000 In relation to the Manyingee Uranium Project, the acquisition terms provide for a payment of A$750,000 by the Company to the vendors when all project development approvals are obtained. In addition to the outstanding commitments above, the Company acquired a call option on 19 June 1998 in relation to the purchase of the Oobagooma Uranium Project and, in turn, granted a put option to the original holder of the Project. Both the call and put options have an exercise price of A$750,000 and are subject to the Western Australian Department of Minerals & Energy granting tenements comprising 2 exploration licence applications. The A$750,000 is payable by the Company within 10 business days of the later of the grant of the tenements or the exercise of either the call or put option. The options will expire 3 months after the date the tenements are granted. As at 30 June 2006 the Group has outstanding A$2,750,628 in current bank guarantees issued to contractors in relation to the mine construction activities for the Langer Heinrich Uranium Project. The Company has no other off Balance Sheet arrangements. OUTSTANDING SHARE INFORMATION As at 29 August 2006 the Company had 455,285,713 fully paid ordinary shares issued and outstanding. The following table sets out the fully paid ordinary shares issuable under the Company Employee Share Incentive Option Plan: As at 29 August 2006 Outstanding shares Issuable under Employee Share Option Plan Total Number 455,285,713 24,565,000 479,850,713 27 MANAGEMENT DISCUSSION AND ANALYSIS FINANCIAL REVIEW (continued) _________________________________________________________________________________ CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant areas requiring the use of management estimates relate to the determination of the carrying value or impairment of interests in mineral properties, financial investments, and property, plant and equipment. FINANCIAL INSTRUMENTS At 30 June 2006 the Company has exposure to interest rate risk which is limited to the floating market rate for cash. The Company does not have foreign currency risk for non-monetary assets and liabilities of the Namibia and Malawi operations as these are deemed to have a functional currency of Australian dollars. The Company had no significant monetary foreign currency assets and liabilities apart from South African rand cash term deposits and United States dollar bank loans held for the purposes of funding a portion of the mine construction for the Langer Heinrich Uranium Project. The Company currently does not engage in any hedging or derivative transactions to manage interest rate or foreign currency risks. TRANSACTIONS WITH RELATED PARTIES During the year ended 30 June 2006 no payments were made to Director-related entities as all Directors throughout this period were employees of the Company and received employee based compensation. INTERNAL CONTROLS The Company has made no changes to its internal controls over financial reporting since 30 June 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. DISCLOSURE CONTROLS The Company has applied its Disclosure Control Policy to the preparation of the Consolidated Financial Statements for the year ended 30 June 2006 and associated Management Discussion and Analysis. An evaluation of the Company’s disclosure controls and procedures used has been undertaken and concluded that the disclosure controls and procedures were effective. 28 MANAGEMENT DISCUSSION AND ANALYSIS FINANCIAL REVIEW (continued) _________________________________________________________________________________ SUBSEQUENT EVENTS Takeover bid for Valhalla Uranium Ltd On 10 July 2006, the Company announced an off-market takeover bid for all the fully paid ordinary shares in Valhalla Uranium Ltd (Valhalla). Under the terms of the offer, each Valhalla shareholder will receive one share of Paladin in exchange for every 3.16 shares of Valhalla held. The offer is subject to various conditions, some of which are currently still outstanding. The directors of Valhalla have unanimously recommended that Valhalla shareholders accept the Company’s offer in the absence of a superior offer. On 24 July 2006 the Company lodged the Bidder’s Statement for the offer with the Australian Securities and Investment Commission. The proposed acquisition represents a significant step forward in the Company’s growth strategy. Allotment of Shares On 20 July 2006, the Company announced the allotment of 650,000 fully paid ordinary shares after exercise of employee options. On 18 August 2006, the Company announced the allotment of 400,000 fully paid ordinary shares after exercise of employee options. Appointment of Mr Brendan O’Hara On 3 July 2006, the Company announced the appointment of Mr Brendan O'Hara as General Manager – Special Projects, based in Perth. Mr O'Hara graduated with Bachelors of Laws and Jurisprudence (with First Class Honours) from the University of Western Australia in 1988, before joining a national Australian law firm specialising in mergers and acquisitions, fundraising, securities industry law and corporate regulation, and then spent 13 years with the Australian Stock Exchange in various roles including Manager, Companies (WA) and WA State Executive Director. Mr O’Hara will assist with the Company’s global expansion strategy and is responsible for development and implementation of a global investor relations strategy. Mr O’Hara has been offered one million unlisted incentive options, exercisable at $5.50; with 500,000 vesting after 18 months and 500,000 vesting after 30 months with a 3 year expiry. Appointment of Mr David Princep On 20 July 2006, the Company announced the appointment of Mr David Princep as Principal Geologist, based in Perth. Mr Princep graduated with a degree in Geology from the University of Liverpool in the UK in 1976 and has had extensive experience in the mineral resource industry including analytical laboratory work. In 2003 he joined Hellman and Schofield, a mineral resource specialist group, as a consulting geologist specialising in resource estimation and assessment, grade control practices and project data management. Mr Princep has been issued 400,000 unlisted incentive options, exercisable at $5.50; with 200,000 vesting after 18 months and 200,000 vesting after 30 months with a 3 year expiry. CORPORATE GOVERNANCE STATEMENT 29 INTRODUCTION CORPORATE GOVERNANCE FRAMEWORK The Board of Directors of Paladin Resources Ltd is responsible for the corporate governance of the Consolidated Entity. Paladin has adopted systems of control and accountability as the basis for the administration of corporate governance. This Corporate Governance Statement outlines the key principles and practices of the Company which, taken as a whole, is the system of governance. Shareholders are reminded that Paladin operates with a dual listing in Australia on the Australian Stock Exchange (ASX) and in Canada on the Toronto Stock Exchange (TSX). In formulating our governance framework, the regulatory requirements in both Australia and Canada have been taken into account. The Company has complied with each of the Ten Essential Corporate Governance Principles and the corresponding Best Practice Recommendations as published by the ASX Corporate Governance Council. Further the Company has also complied with the Ontario Securities Commission’s corporate governance requirements as set out in National Instrument 58-101, Disclosure of Corporate Governance Practices, which came into force on June 30, 2005. The Company reviews and amends its corporate governance policies as appropriate to reflect the growth of The website (www.paladinresources.com.au) includes copies or summaries of key corporate governance policy documents. legislation and good practice. the Company, current RELATIONSHIP WITH SHAREHOLDERS The Company places a high priority on communications with and accountability to shareholders. The Board recognises that shareholders, as the ultimate owners of the Company, are entitled to receive timely and relevant high quality information about their investment. Similarly, prospective investors should be able to make an informed decision when considering the purchase of shares in Paladin. To safeguard the effective dissemination of information, the Board has implemented a Disclosure Control Policy, detailed later in this Statement, and adopted a Shareholder Communications Policy. These reinforce the Company’s commitment to its continuous disclosure obligations imposed by law. Information will be communicated to shareholders by:- • Ensuring that published financial and other statutory reports are prepared in accordance with applicable laws and industry best practice; • Ensuring the disclosure of full and timely information about the Company’s activities in accordance with the general and continuous disclosure principles in the ASX Listing Rules, the Corporations Act in Australia and all relevant legislation in Canada; • Providing detailed reports from the Chairman and the Managing Director at the Annual General Meeting; • Placing all material information released to the market (including notices of meeting and explanatory materials) on the Company’s website as soon as practical following release; and 30 CORPORATE GOVERNANCE STATEMENT (continued) RELATIONSHIP WITH SHAREHOLDERS (continued) • Placing the Company’s market announcements and financial data for the preceding three years on its website. Earlier announcements are available on request. In addition, the website includes a facility to allow interested parties to subscribe to receive, electronically, public releases and other relevant material concerning the Company. Shareholders are encouraged to attend Annual General Meetings and ask questions of Directors and senior management and also the Company’s external auditors, who are required to be in attendance. In the event that shareholders are unable to attend meetings, they are encouraged to lodge proxies signifying their approval or otherwise of the business to be considered. BOARD OF DIRECTORS Role of the Board The Board guides and monitors the business of Paladin on behalf of shareholders, by whom they are elected and to whom they are accountable. The Board is responsible for setting corporate direction, defining policies and monitoring the business of the Company, to ensure it is conducted appropriately and in the best interests of shareholders. The role of the Board is to oversee and guide the management of the Company with the aim of protecting and enhancing the interests of its shareholders, taking into account the interests of other stakeholders including employees, customers, suppliers and the wider community. The Board operates under a Charter and has a written Code of Conduct which establishes guidelines for its conduct. The purpose of the Code is to ensure that Directors act honestly, responsibly, legally and ethically and in the best interests of the Company. The Board is responsible for setting the strategic direction and establishing goals for management and the monitoring of the achievements against these goals. Composition of the Board The Board comprises four Non-executive Directors, including the Chairman and one Executive Director, being the Managing Director. The names of the Directors, both in office at the date of this report and those who held the position during the past year, are set out in the Directors’ Report. This information includes their status as Non-executive, executive or independent, their qualifications and experience and length of service. The structure of the Board has evolved over time to reflect the changing needs of the Company to ensure an appropriate mix of skills and experience are available to oversee the growth of Paladin to its full potential. This was particularly relevant given the progress towards becoming a uranium supplier and, in the last quarter of the 2005 financial year, Board membership underwent a major restructure. Skills sets represented at Board level include managerial, technical, financial, corporate, legal and commercial. Particularly, members have a broad range of qualifications, experience and expertise in the uranium business. 31 CORPORATE GOVERNANCE STATEMENT (continued) Director Independence Directors are expected to bring independent views and judgement to the Board’s deliberations. All of the Non-executive Directors are considered by the Board to be independent. In considering whether a Director is independent, the Board has regard to the independence criteria set out in the ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations and the Corporate Governance Guidelines developed by the Ontario Securities Commission pursuant to National Policy 58-201 and other facts, information and circumstances that the Board considers relevant. The Board assesses the independence of new Directors prior to appointment and reviews the independence of all Directors as appropriate. Mr Rick Wayne Crabb was a principal of the legal firm, Blakiston and Crabb, until 30 June 2004. Blakiston and Crabb is the main provider of legal services to the Company in respect of matters concerning Australian law. Accordingly, Mr Crabb does not fit within paragraph 3 of the Independence Test as determined by box 2.1 of ASX Corporate Governance Council Principles (“Independence Test”) because this paragraph excludes any person who has been a principal of a material advisor within the previous 3 year period. Mr Crabb passes all other aspects of the Independence Test. The Board of Paladin (in the absence of Mr Crabb) considered Mr Crabb demonstrates he consistently makes decisions and takes actions which are designed to be in the best interest of the Company. The Board notes the fees paid to Blakiston and Crabb are not material to the Company and were not high enough to be material to Mr Crabb’s practice at the firm Blakiston and Crabb during the time he was a partner there and are not relevant at all past his date of retirement from that firm. Therefore, the Board considers Mr Crabb to be independent. Meetings of the Board The Board meets formally at least four times a year (each over a 2 day period) and on other occasions, as required. On the invitation of the Board, members of senior management attend and make presentations to the Board. Non-executive Directors are able to meet without the Managing Director and management being present, as considered appropriate. Each of the four principle Board meetings provided this opportunity. The Board holds an annual strategic planning session with management at which the Company’s strategic plans for each operating activity and the Group as a whole are presented. This was held in February 2006 over a 2 day period, on site at the Langer Heinrich Project in Namibia. The Managing Director encourages full access to executive Managers by the Board to ensure transparency at a senior management level. Retirement and Re-election The Constitution of the Company requires one third of the Directors, other than the Managing Director, to retire from office at each Annual General Meeting. Directors who have been appointed by the Board are required to retire from office at the next Annual General Meeting and are not taken into account in determining the number of Directors to retire by rotation at that Annual General Meeting. Directors cannot hold office for a period in excess of three years or later than the third Annual General Meeting following their appointment without submitting themselves for re-election. Retiring Directors are eligible for re-election by shareholders. Details of those Directors seeking re-election at the 2006 Annual General Meeting are set out in the Directors’ Report. The Board does not believe that any Director has served on the Board for a period which could, or be perceived to, materially interfere with his ability to act in the best interests of the Company. In reaching this conclusion, the Board has noted that each of R Crabb (the Chairman) and J Borshoff (the Managing Director) will have each served on the Board for 12 years. Notwithstanding their period of service, the Board concluded that both Directors retain independence of character and judgement and continue to make outstanding contributions at Board level. Both bring their unique skills to the Board and participate in robust constructive debate. 32 CORPORATE GOVERNANCE STATEMENT (continued) Nomination and Appointment of New Directors If it is necessary to appoint a new Director to fill a vacancy on the Board or to complement the existing Board, a wide potential base of possible candidates is considered and external consultants are engaged to assist in the selection process, if required. The Board assesses the qualifications of the proposed new Director against a range of criteria including background, experience, professional skills, personal qualities, the potential for the candidate’s skills to augment the existing Board and the candidate’s availability to commit to the Board’s activities. If these criteria are met and the Board appoints the candidate as a Director, that Director must retire at the next following Annual General Meeting and will be eligible for re-election by shareholders at that Annual General Meeting. New Directors appointed to the Board are invited to participate in an induction programme which includes provision of comprehensive written material regarding the Company such as:- • Information on the financial, strategic and operational position of the Company; • A comprehensive letter of appointment which sets out the Company’s expectations on acceptance of the position; • A written statement which sets out the duties, rights and responsibilities they undertake on becoming a Director together with material detailing the operations, policies and practices of the Company; and • Copies of previous minutes of Board meetings together with recent Annual Reports and interim financial statements. Further, new Directors are invited to attend briefing sessions with the Managing Director and key members of the senior management team where they may ask questions and direct any queries they may have to the Chairman or the Managing Director or obtain any other briefings they feel necessary from the Chairman or the Managing Director. They are encouraged to attend site visits in liaison with the Managing Director, at appropriate times. Directors agree to participate in continuous improvement programs from time to time, as considered appropriate. Evaluation of Board Performance Improvement in Board processes and effectiveness is a continuing objective and the primary purpose of Board evaluation is to identify ways to improve performance. The Chairman is responsible for conducting an annual review of the Board performance. An evaluation of the performance of the Board was carried out in the last quarter of the 2006 financial year. This process involved completion of individual questionnaires focused on process, structure, effectiveness and contributions. Responses to the questionnaire were collated and discussed by the Board and recommendations for improvement considered. 33 CORPORATE GOVERNANCE STATEMENT (continued) Knowledge, Skills and Experience To assist Directors to maintain an appropriate level of knowledge, skill and experience in the operations of the Company, Directors have the opportunity to undertake site visits to familiarize themselves with the Company’s operations. Directors are also provided with papers, presentations and briefings on the Company’s operations and on matters which may affect the Company. These are provided in addition to Board papers and are designed to assist the Directors to gain relevant and timely information to assist in their decision making process. Directors are also encouraged to undertake continuing education relevant to the discharge of their obligations as Directors of the Company. Subject to prior approval by the Company Secretary, the reasonable cost of such education is met by the Company. Position Descriptions The Board has developed and adopted written position descriptions for the Non-executive Chairman of the Board, the Chairman of each Board Committee, the Managing Director and the Company Secretary. These delineate the role and responsibility of each position and provide clarity on the expectations for those individuals occupying these key positions within the Company. Conflicts of Interest The Code of Conduct for Directors, a copy of which is available on the Company’s website, sets out the procedure to be followed if there is, or may be, a conflict between the personal or other interests of a Director and the business of the Company. A Director with an actual or potential conflict of interest in relation to a matter before the Board does not receive the Board papers relating to that matter and when the matter comes before the Board for discussion, the Director withdraws from the meeting for the period the matter is considered and takes no part in the discussions or decision-making process. Minutes reporting on matters in which a Director is considered to have a conflict of interest are not provided to that Director, however, the Director is given notice of the nature of the matter for discussions and, as much as practicable, of the general nature of the discussion or decision reached. Remuneration Details of the remuneration policies and practices of the Company and the remuneration paid to the Directors (Executive and Non-executive) and Senior Executives are set out in the Remuneration Report included in the Directors’ Report. Shareholders will be invited to consider and to approve the Remuneration Report at the Annual General Meeting in November 2006. In relation to the Non-executive Directors there are no termination or retirement benefits. Independent advice The Board and its Committees may seek advice from independent experts whenever it is considered appropriate. With the consent of the Chairman, individual Directors may seek independent professional advice, at the expense of the Company, on any matter connected with the discharge of their responsibilities. No Director availed himself of this right during the course of the year. 34 CORPORATE GOVERNANCE STATEMENT (continued) BOARD COMMITTEES The Board has established Audit, Nomination and Remuneration Committees which assist in the discharge of the Board’s responsibilities. Board approved charters set out the terms of reference and rules governing these Committees. Audit Committee The Audit Committee assists the Board in discharging its responsibilities to ensure that the Company complies with appropriate and effective accounting, auditing, internal control, business risk management, compliance and reporting practices in accordance with the Audit Committee Charter. The role of the Audit Committee is to: • Monitor the integrity of the financial statements of the Company, reviewing significant financial reporting judgments; • Review the Company’s internal financial control system and, unless expressly addressed by a separate risk committee or by the Board itself, risk management systems; • Monitor and review the effectiveness of the Company’s internal audit function (if any); • Monitor and review the external audit function including matters concerning appointment and remuneration, independence and non-audit services; and • Perform such other functions as assigned by law, the Company's constitution, or the Board. The Audit Committee comprises three members, all of whom are independent Non-executive Directors. The current members of the Audit Committee are:- • George Pirie – Chairman Non-executive, Independent Director • Sean Llewelyn – Non-executive Director Independent Director • Ian Noble – Non-executive Director Independent Director The Audit Committee meets at least once a quarter and at any other time requested by a Board member, Company Secretary or external auditor. The external auditors attend at least twice a year and on other occasions where circumstances warrant. The number of meetings of the Audit Committee during the reporting period and the names on the attendance record is set out in the Directors’ Report. The external auditors are Ernst and Young who were appointed as the Company’s auditors in June 2005. 35 CORPORATE GOVERNANCE STATEMENT (continued) Nomination Committee The responsibilities of the Nomination Committee include:- • Reviewing the size and composition of the Board and making recommendations to the Board on any appropriate changes; • Developing and planning for identifying, assessing and enhancing Director competencies; • Making recommendations on the appointment and removal of Directors; • Evaluating Board performance so that individual and collective performance is regularly and fairly assessed; and • Providing new Directors with an induction into the Company and provide all Directors with access to on going education relevant to their position. The Chairman of the Board chairs the Nomination Committee and having regard to the size of the Board, it is considered appropriate that all members of the Board are members of the Nomination Committee. No meetings of the Nomination Committee were held during the financial year to 30 June 2006 as the Board underwent a comprehensive restructure to accommodate the needs of the Company in the last quarter of the 2005 financial year. Remuneration Committee The role of the Committee, in accordance with the Remuneration Committee Charter, is to assist the Board with respect to remuneration by reviewing and making appropriate recommendations on:- a) b) Remuneration packages of executive Directors, Non-executive Directors and senior executives; and Employee incentive and equity based plans including the appropriateness of performance hurdles and total payments proposed. The ASX Listing Rules and the Constitution require that the maximum aggregate amount of remuneration to be allocated among the Non-executive Directors be approved by the shareholders in general meeting. In proposing the maximum amount for consideration by shareholders, and in determining the allocation, the Remuneration Committee will take into account the time demands made on Directors and such factors as fees paid on Non-executive Directors in comparable Australian companies. The remuneration paid to Directors and senior executives is shown in the Directors’ Report. The Remuneration Committee comprises three members, all of whom are independent Directors. The Chairman of the Board is the Chairman of the Remuneration Committee and the Committee shall meet at least twice a year and otherwise as required. CORPORATE GOVERNANCE STATEMENT (continued) 36 Remuneration Committee (continued) The current members of the Remuneration Committee are:- • Rick Crabb – Chairman Non-executive, Independent Director • Sean Llewelyn – Non-executive Director Independent Director • George Pirie – Non-executive Director Independent Director The number of meetings of the Remuneration Committee during the reporting period and the names on the attendance record is set out in the Directors’ Report. FINANCIAL REPORTING CEO and CFO Sign-offs In accordance with the Corporations Act 2001, ASX Corporate Governance Principle 4 (Safeguard Integrity in Financial Reporting) and Canadian Securities Law, relevant declarations, statements and certifications have been provided by the Managing Director and the Chief Financial Officer in relation to the Company’s 30 June 2006 Annual Report, including financial statements. DISCLOSURE CONTROLS Paladin is committed to ensuring that shareholders and the market are provided with full and timely information and that all stakeholders have equal and timely access to material information concerning the Company. The Company understands and respects that timely disclosure of price sensitive information is central to the efficient operation of the Australian Stock Exchange’s and Toronto Stock Exchange’s securities market and has adopted a Disclosure Control Policy with underlying procedures covering public announcements, the prevention of selective or inadvertent disclosure, conduct of investor and analysts briefings, and media communications. This policy reflects the commitment of the Directors and management to promoting consistent disclosure practices aimed at accurate, timely and broadly disseminated disclosure of material information to the market. The Company has formed a Disclosure Control Committee which has responsibility for overseeing and co-ordinating disclosure of all public information. Members of this Committee are the Managing Director, Company Secretary and Chief Finance Officer. 37 CORPORATE GOVERNANCE STATEMENT (continued) RISK MANAGEMENT The Company has established a Risk Management Policy which sets out a framework for a system of risk management and internal compliance and control, whereby the Board delegates day-to-day management of risk to the Managing Director. The Managing Director, with the assistance of senior management as required, has responsibility for identifying, assessing, treating and monitoring risks and reporting to the Board on risk management. A master risk register has been compiled and is subject to periodic review by senior management to ensure adequate risk control measures have been identified. An operational risk assessment system is in place at Langer Heinrich which is continuously reviewed and updated. ENVIRONMENT The Company seeks to prevent, minimise, mitigate and remediate any harmful effects of its operations on the environment and strives to achieve continuous improvement in environmental performance. The Company promotes an excellent standard of environmental performance across its business and has adopted an environmental policy which includes compliance with all applicable environmental laws as a minimum standard, development and implementation of Environmental Management Systems, including Environmental and Radiological Management Plans to identify, assess and manage environmental risks, ensuring its employees and contractors are aware of their environmental responsibilities, consulting with government and community in relation to the Company’s operations and proposed projects, and undertaking regular audits and reviews on environmental performance. SAFETY AND OCCUPATIONAL HEALTH The safety, health and wellbeing of employees, contractors and the community are of core value to Paladin Resources’ operations. A healthy workforce contributes to business success and Paladin’s aim is for zero injuries. The safety and health performance of Paladin will be measured through internal and external internationally recognised auditing and reporting processes. SECURITIES OWNERSHIP AND DEALINGS The Company has a Policy for Trading in Company Securities which is binding on all Directors and employees. The purpose of this policy is to provide a brief summary of the law on insider trading and other relevant laws, set out the restrictions on dealing in securities by people who work for or are associated with Paladin and assist in maintaining market confidence in the integrity of dealings in Paladin’s securities. The Company’s policy prohibits hedging of options granted under share options plans. This relates to both vested and unvested options. Prohibited hedging practices include put/call arrangements over “in money” options to hedge against a future drop in share price. The Board considers such hedging to be against the spirit of a share option plan and inconsistent with shareholder objectives. CODES OF CONDUCT The Board has approved a Code of Conduct for Directors (incorporating underlying Guidelines for the Interpretation of Principles) together with a Code of Business Conduct and Ethics, which applies to all Directors, Officers and Employees including those employed by subsidiaries, in all countries where Paladin does business. A copy of the Code is available on the Company’s website. These Codes demonstrate and codify Paladin’s commitment to appropriate and ethical corporate practices. Compliance with the Codes will also assist the Company to effectively manage its operating 38 CORPORATE GOVERNANCE STATEMENT (continued) CODES OF CONDUCT (continued) risks and meeting its legal and compliance obligations, as well as enhancing Paladin’s corporate reputation. The principles outlined in this document are intended to: • Establish a minimum global standard of conduct by which all Paladin employees are expected to abide; • Protect the business interests of Paladin, its employees and customers; • Maintain Paladin’s reputation for integrity; and • Facilitate compliance by Paladin employees with applicable legal and regulatory obligations. The Code of Business Conduct and Ethics addresses honesty and integrity, following the law, conflicts of interest, confidentiality, protection of Company assets, dealing with public officials, responsibility for international operations, employment practices, record keeping and community relations. The Board has appointed the Company Secretary as the Company’s compliance officer in the case of employees, and the Chairman of the Audit Committee in the case of Directors and officers, as the person responsible for receiving reports of breaches of the Code and this is the mechanism by which compliance with the Code is monitored. The Board has also approved a Whistleblower Policy which documents commitment to maintaining an open working environment in which employees and contractors are able to report instances of unethical, unlawful or undesirable conduct without fear of intimidation or reprisal. The purpose of the Whistleblower Policy is to: • Help detect and address unacceptable conduct; • Help provide employees and contractors with a supportive working environment in which they feel able to raise issues of legitimate concern to them and to the Company; and • Help protect people who report unacceptable conduct in good faith. The Company has a firm commitment to protecting the privacy of any personal information that it collects and holds and recognizes its obligations under the existing privacy legislation. It has adopted a Privacy Policy which provides details on the collection and use of personal information, circumstances under which it can be disclosed, management and security of personal information and how it can be accessed. Any changes to the above Codes and Policies are considered by the Board for approval. 39 DIRECTORS' REPORT _________________________________________________________________________________ The Directors present their report on the Consolidated Entity consisting of Paladin Resources Ltd and the entities it controlled at the end of, or during, the year ended 30 June 2006. Directors The following persons were Directors of Paladin Resources Ltd (“Company”) and were in office for this entire period: Current Mr Rick Wayne Crabb (Non-executive Chairman) Mr John Borshoff (Managing Director) Mr Sean Llewelyn (Non-executive Director) Mr George Pirie (Non-executive Director) Mr Ian Noble (Non-executive Director) Principal Activity The principal activity of the Consolidated Entity was evaluation and development of uranium projects in Africa and Australia. Review and Results of Operations A detailed operational and financial review of the Consolidated Entity is set out on pages 11 to 28 of this report under the section entitled Management Discussion and Analysis. Dividends No dividend has been paid during the financial year and no dividend is recommended for the current year. Significant Changes in the State of Affairs There were no significant changes in the state of affairs of the Consolidated Entity during the financial year not otherwise dealt with in this report. 40 DIRECTORS' REPORT (continued) Significant Events After The Balance Sheet Date Since the end of the financial period, the Directors are not aware of any other matter or circumstance not otherwise dealt with in this report or the Financial Statements, that has significantly or may significantly affect the operations of the Consolidated Entity, the results of those operations or the state of affairs of the Consolidated Entity in subsequent years with the exception of the following the financial effects of which have not been provided for in the 30 June 2006 Financial Report: Takeover bid for Valhalla Uranium Ltd On 10 July 2006, the Company announced an off-market takeover bid for all the fully paid ordinary shares in Valhalla Uranium Ltd (Valhalla). Under the terms of the offer, each Valhalla shareholder will receive one share of Paladin in exchange for every 3.16 shares of Valhalla held. The offer is subject to various conditions, some of which are currently still outstanding. The directors of Valhalla have unanimously recommended that Valhalla shareholders accept the Company’s offer in the absence of a superior offer. On 24 July 2006 the Company lodged the Bidder’s Statement for the offer with the Australian Securities and Investment Commission. The proposed acquisition represents a significant step forward in the Company’s growth strategy. Allotment of Shares On 20 July 2006, the Company announced the allotment of 650,000 fully paid ordinary shares after exercise of employee options. On 18 August 2006, the Company announced the allotment of 400,000 fully paid ordinary shares after exercise of employee options. Appointment of Mr Brendan O’Hara On 3 July 2006, the Company announced the appointment of Mr Brendan O'Hara as General Manager – Special Projects, based in Perth. Mr O'Hara graduated with Bachelors of Laws and Jurisprudence (with First Class Honours) from the University of Western Australia in 1988, before joining a national Australian law firm specialising in mergers and acquisitions, fundraising, securities industry law and corporate regulation, and then spent 13 years with the Australian Stock Exchange in various roles including Manager, Companies (WA) and WA State Executive Director. Mr O’Hara will assist with the Company’s global expansion strategy and is responsible for development and implementation of a global investor relations strategy. Mr O’Hara has been offered one million unlisted incentive options, exercisable at $5.50; with 500,000 vesting after 18 months and 500,000 vesting after 30 months with a 3 year expiry. Appointment of Mr David Princep On 20 July 2006, the Company announced the appointment of Mr David Princep as Principal Geologist, based in Perth. Mr Princep graduated with a degree in Geology from the University of Liverpool in the UK in 1976 and has had extensive experience in the mineral resource industry including analytical laboratory work. In 2003 he joined Hellman and Schofield, a mineral resource specialist group, as a consulting geologist specialising in resource estimation and assessment, grade control practices and project data management. Mr Princep has been issued 400,000 unlisted incentive options, exercisable at $5.50; with 200,000 vesting after 18 months and 200,000 vesting after 30 months with a 3 year expiry. Likely Developments Likely developments in the operations of the Consolidated Entity constituted by the Company and the entities it controls from time to time are set out under the section entitled Management, Discussion and Analysis. DIRECTORS' REPORT (continued) 41 Environmental Regulations The Consolidated Entity is subject to significant environmental regulation in respect to its evaluation and development activities. The Company aims to ensure the appropriate standard of environmental care is achieved, and in doing so, that it is aware of and is in compliance with all environmental legislation. The Directors of the Company reviewed the Company’s projects during the year and are not aware of any breach of environmental legislation for the financial year under review. Information on Directors Mr Rick Wayne Crabb (Non-executive Chairman) Age 49 B. Juris (Hons), LLB, MBA, FAICD Mr Crabb holds degrees of Bachelor of Jurisprudence (Honours), Bachelor of Laws and Master of Business Administration from the University of Western Australia. He has practiced as a solicitor from 1980 to 2004 specialising in mining, corporate and commercial law. He has advised on all legal aspects including financing, marketing, government agreements and construction contracts for many resource development projects in Australia and Africa. Mr Crabb now focuses on his public company directorships and investments. He has been involved as a director and strategic shareholder in a number of successful public companies. He is presently also a director of Alcaston Mining NL (since 2001), Ashburton Minerals Ltd (since 1999), Otto Energy Ltd (since 2004), Port Bouvard Ltd (since 1996), Royal Resources Limited (since 2004) and Thundelarra Exploration Ltd (since 2003). Mr Crabb was appointed a director on 8 February 1994 and Chairman on 27 March 2003. Former directorships of listed companies in last three years ST Synergy Ltd from 2001 to 2005 Deep Yellow Ltd from 2003 to 2004 Aldershot Resources Ltd from 2004 to 2005 Special Responsibilities Chairman of the Board Chairman of Remuneration Committee from 1 June 2005 Chairman of Nomination Committee from 1 June 2005 Mr John Borshoff (Managing Director) Age 61 B.Sc., F.AusIMM, FAICD joining a German mining group, Uranerz Mr Borshoff is a geologist who has been involved in the Australian and African exploration and mining industry for 34 years. Mr Borshoff worked for International Nickel and Canadian Superior Mining before to 1991. He became Chief Geologist/Exploration Manager during the period 1981-1986 and served as its chief executive from 1987 to mid 1991 when the German parent of Uranerz made the decision to close its Australian operations. The primary focus of the Uranerz Group was the search and development of uranium with the company operating extensively throughout Australia, North America and Africa. from 1976 Mr Borshoff founded Paladin Resources Ltd and was appointed a Director on 24 September 1993. He has extensive knowledge of the uranium industry and experience in company management, strategic planning and administration. Special Responsibilities Managing Director Member of Nomination Committee from 1 June 2005 42 DIRECTORS' REPORT (continued) Information on Directors (continued) Mr Sean Reveille Llewelyn (Non-executive Director) Age 58 LL.B Mr Llewelyn, first qualified as a solicitor in Australia and England. His life work however has been in finance and merchant banking having worked for more than 20 years in this capacity in Australia, the UK, the USA and South Africa. His considerable experience has been on derivatives, structured finance and early stage investment relating to the metal markets. He has been involved with uranium for over 10 years and has a comprehensive understanding of the uranium market. Mr Llewelyn was involved as a key player in the formation of a joint venture company between Anglo Gold and First Rand International to assume marketing responsibility for uranium on behalf of Nuclear Fuels Corporation of South Africa (Nufcor). Mr Llewelyn was appointed to the Board on 12 April 2005. Special Responsibilities Member of Audit Committee from 12 April 2005 Member of Remuneration Committee from 1 June 2005 Member of Nomination Committee from 1 June 2005 Mr George Edward Pirie (Non-executive Director) Age 53 B.Com (Hons) Mr Pirie has 24 years experience in the mining business. In 1980 he was with Pamour Porcupine Mines, a division of Noranda and then joined Dome Mines Limited in 1985, holding various positions until April 1999 when he was promoted to Chief Financial Officer for Placer Dome North America, where he was responsible for re-establishing both Placer Dome U.S. and Placer Dome Canada. In January 2000, he joined Placer Dome Canada as Chief Financial Officer and was appointed Acting President and Chief Executive Officer of Placer Dome Canada in October 2001. He was responsible for the formation of the Porcupine Joint Venture in July of 2002 and was promoted to Executive Vice President of Placer Dome Inc. and President and Chief Executive Officer of Placer Dome Canada in December 2002. Mr Pirie resigned his position with Placer Dome effective 31 December 2004. Mr Pirie currently serves on several boards including: Ontario Mining Association, Mining Association of Canada, Canadian Mineral Industry Education Foundation, Mirarco Mining Innovation, Co-Chair of the Mining Cluster Initiative for the Ministry of Northern Development & Mines, and effective 4 July 2005 appointed President and Chief Executive Officer of Breakwater Resources Inc. Mr Pirie was appointed to the Board on 1 June 2005. Special Responsibilities Chairman of Audit Committee from 1 June 2005 Member of Remuneration Committee from 1 June 2005 Member of Nomination Committee from 1 June 2005 43 DIRECTORS' REPORT (continued) _________________________________________________________________________________ Information on Directors (continued) Mr Ian Urquhart Noble (Non-executive Director) Age 65 BSc (Metallurgy), F.AusIMM, ARCST Mr Noble has more than 40 years experience covering the mining, chemical and nuclear industries with a strong emphasis in the mining and mineral processing fields. He is an internationally recognised consultant, specialising in hydrometallurgy and comminution, and has been involved in many of the major mining developments within Australia and overseas. He has held senior management positions with both Wright Engineers Australia Ltd and Fluor Australia and took a lead role in the design of Australia’s two major uranium processing plants. Mr Noble’s initial involvement with uranium was with Wright Engineers Pty Limited on the Rabbit Lake project in Canada. In Australia, in 1976, he was Lead Engineer on the Ranger Uranium Feasibility Study, followed by a three year involvement in the design construction phase, initially as Process Engineering Manager, and then a period as Project Engineer for the hydrometallurgical plant, and finally a year on site as Pre-Commissioning and Commissioning Manager. He was subsequently Lead Process Engineer for the design of Western Mining Corporation’s Olympic Dam Project. Mr Noble was appointed to the Board on 29 June 2005. Special Responsibilities Member of Audit Committee from 29 June 2005 Member of Nomination Committee from 29 June 2005 Company Secretary Ms Gillian Swaby Age 46 B.Bus, FCIS, FAICD Ms Swaby has been involved in financial and corporate administration for listed companies, as both Director and Company Secretary covering a broad range of industry sectors, for over 25 years. Ms Swaby has extensive experience in the area of secretarial practice, management accounting and corporate and financial management and sits on a number of advisory committees. Ms Swaby is past Chair of the Western Australian Council of Chartered Secretaries of Australia, a former Director on their National Board and lecturer for the Securities Institute of Australia. Ms Swaby is the principal of a corporate consulting company and was a member of the Paladin Board for a period of 9 years. 44 DIRECTORS' REPORT (continued) _________________________________________________________________________________ Directors’ Meetings The number of Directors’ meetings and meetings of committees held in the period each Director held office during the financial year, and the number of meetings attended by each Director are: Board of Directors’ meetings Audit Committee meetings Remuneration Committee meetings Name Number attended Number eligible to attend Number attended Number eligible to attend Number attended Number eligible to attend Mr Rick Crabb Mr John Borshoff Mr Sean Llewelyn Mr George Pirie Mr Ian Noble 8 8 8 8 6 8 8 8 8 8 - - 5 5 5 - - 5 5 5 5 - 5 3 - 5 - 5 5 - Resignation, Election and Continuation in Office of Directors In accordance with the Constitution of the Company Messrs Crabb and Llewelyn retire by rotation at the Annual General Meeting and, being eligible, offer themselves for re-election. Remuneration Report Details of Key Management Personnel (i) Directors Mr Rick Crabb Mr John Borshoff Mr Sean Llewelyn Mr George Pirie Mr Ian Noble Chairman (Non-executive) Managing Director Director (Non-executive) Director (Non-executive) Director (Non-executive) (ii) Executives Mr Garnet Halliday Ms Gillian Swaby Mr Ron Chamberlain Mr Wyatt Buck Mr James Eggins Executive General Manager –Operations and Development Company Secretary Chief Financial Officer General Manager – Langer Heinrich Operations Executive General Manager – Sales and Contract Administration – appointed 1 January 2006 Mr Dustin Garrow Mr David Marsh Director of Marketing – commenced as Key Management Personnel on 1 January 2006 Executive General Manager – New Business Development – appointed 1 July 2006 Compensation of Key Management Personnel i) Compensation Policy (audited) The Remuneration Committee, on behalf of the Board of Directors, monitors compensation of Directors and Executives of the Company. 45 DIRECTORS' REPORT (continued) _________________________________________________________________________________ Remuneration Report (continued) i) Compensation Policy (audited)(continued) Generally, compensation is provided by the Company to its Executives (including the Managing Director), by way of base salary, short-term bonus, granting of employee options and superannuation. The overall objective is to ensure that remuneration is fair and reasonable and sufficient to attract and retain qualified and experienced Directors and Executives. The compensation program for the Executives of the Company is designed to ensure that the level and form of compensation achieves certain objectives, including: attracting and retaining talented, qualified and effective Executives; (a) (b) motivating their short and long-term performance; and (c) aligning their interests with those of the Company's shareholders. In line with Corporate Governance principles, Non-executive Directors are remunerated solely by way of fees and statutory superannuation. The total pool of fees available is set by shareholders in general meeting. Given the evolving nature of the Company’s business, (particularly as production start-up is scheduled for the 2006/2007 financial year) the Remuneration Committee continues to review and redesign the overall compensation plan for all employees so as to continue to address the objectives identified above. It is currently undertaking a review with the assistance of external consultants to both revise the share option plan and determine parameters for the payment of cash bonuses to be made in the next financial year, following commencement of production. Company Performance The overall level of compensation takes into account the growth in shareholder wealth of the Company. The chart below compares, assuming an initial investment of $100, the yearly percentage change in the cumulative total shareholder return on the Company’s Ordinary Shares against the cumulative total shareholder return of the S&P/ASX 200 Index for the Company's five most recently completed financial years. 1 4 0 0 0 1 2 0 0 0 1 0 0 0 0 8 0 0 0 6 0 0 0 4 0 0 0 2 0 0 0 0 J u n . 0 2 J u n . 0 3 J u n . 0 4 J u n . 0 5 J u n . 0 6 T h e C o m p a n y S & P / A S X 2 0 0 I n d e x 30 June 2002 30 June 2003 30 June 2004 30 June 2005 30 June 2006 The Company A$100.00 A$35.15 A$468.26 A$4,055.63 A$14,260.41 S&P/ASX 200 Index A$100.00 A$94.09 A$109.85 A$133.01 A$157.77 46 DIRECTORS' REPORT (continued) _________________________________________________________________________________ Remuneration Report (continued) i) Compensation Policy (audited) (continued) As a result of the evaluation and development nature of the Company’s activities the overall level of compensation does not focus on the earnings of the Company. Directors’ Fees At the 2005 Annual General Meeting, shareholders approved an increase in the total pool of fees available to be paid to Non-executive Directors to $400,000. Given the expansion of the Board and the growth of the Company such an increase was considered necessary to attract and retain directors of a calibre required to effectively guide and monitor the business of the Company. Fees payable to Non-executive Directors are set at A$80,000 per annum, effective 1 November 2005, inclusive of any superannuation obligations. Exceptions to this fee structure are the Chairman of the Audit Committee who receives an additional A$5,000 per annum, and the Chairman of the Board who receives an additional A$35,000 per annum. The increased fees were arrived at on the basis of a review by external independent remuneration consultants looking at companies with similar market capitalisation. Compensation paid to the Managing Director is set out under (iv) Contracts for Services. In addition, the Company’s Constitution provides for additional compensation to be paid if any of the Directors are called upon to perform extra services or make any special exertions on behalf of the Company or the business of the Company. The Directors may compensate such Director in accordance with such services or exertions, and such compensation may be either in addition to or in substitution for the Directors’ fees referred to above. Base Salary The first step to attracting and retaining talented, qualified and effective Executives is paying base salaries which are competitive in the markets in which the Company operates. Competitive salary information on companies of a comparable size in the resource industry is complied from a variety of sources, including surveys conducted by independent consultants and national and international publications. Expatriate Benefits Executives who are required to fulfil their responsibilities as an expatriate receive benefits including health insurance, housing and car allowances, educational fees and tax advisory services. Short-term Bonus The Company provides short-term bonuses to Executives of up to 20% of base salary. In respect of the Managing Director, a bonus of up to 100% of base salary can be achieved, to be determined by the Remuneration Committee having consideration to outcomes achieved during the year. Outcomes to be considered include: - - - - - - - acceptable safety and environmental performance by the Group; completion of the Kayelekera Bankable Feasibility Study; increases in uranium resource under Company control; continued successful recruitment of senior personnel; increase in market capitalisation; acquisition of new projects; and achievement of financial budget targets. 47 DIRECTORS' REPORT (continued) _________________________________________________________________________________ Remuneration Report (continued) i) Compensation Policy (audited) (continued) The short-term bonuses are based on achieving the following measures where these are applicable to the specific Executive: (a) performance of the Company in meeting its objectives; (b) additional uranium resources delineated; (c) (d) (e) such other matters determined by the Remuneration Committee in its discretion. financial performance of the Company; increase in market capitalisation of the Company; and These measures have been selected to align the interests of Executives with shareholders. The Remuneration Committee is responsible for assessing whether the measures are met and will take into account, amongst other things, the progress of the Company in meeting its objectives, the increase in uranium resources, the financial performance of the Company, and the growth in market capitalisation. The short term bonus payments may be adjusted up or down in line with under or over achievement against the measures. This is at the discretion of the Remuneration Committee. Company Employee Share Incentive Option Plan The Company believes that encouraging its Executives to become shareholders is the best way of aligning their interests with those of its shareholders. Equity participation is accomplished through the Company’s employee option plan which is currently under review to more appropriately deal with the Company’s emerging producer status. Options are granted to Executives taking into account a number of factors, including the amount and term of options previously granted, base salary, short- term bonuses and competitive factors. Vesting of options will be subject to attainment of targeted measurements aligned with Total Shareholder Return. One feature will be a minimum vesting period of 3 years. Information on the Employee Share Incentive Option Plan is set out under Note 26 Share Based Payment Plan. During the financial year, a number of options were granted to attract high calibre executives, in what continues to be a highly competitive and tight market for human capital. These options granted during the year included specific vesting periods. The Company’s policy prohibits hedging of options granted under share option plans. Prohibited hedging practices include put/call arrangements over “in money” options to hedge against a future drop in share price. The Board considers such hedging to be against the spirit of a share option plan and inconsistent with shareholder objectives. 48 DIRECTORS' REPORT (continued) _____________________________________________________________________________________________________________________________ Remuneration Report (continued) ii) Compensation of Key Management Personnel for the year ended 30 June 2006 (audited)(Consolidated and Company) Short-term Post Employment Share Based Payment Total Total Performance Related Salary & fees Cash bonus Non Other Superannuation Options Monetary Benefits A$ A$ A$ A$ Directors Mr Rick Crabb Mr John Borshoff Mr Sean Llewelyn Mr George Pirie Mr Ian Noble Executives Mr Garnet Halliday Ms Gillian Swaby Mr Ron Chamberlain Mr Wyatt Buck Mr James Eggins Mr Dustin Garrow Mr David Marsh Total 85,627 488,415 61,162 75,417 61,162 - 200,000 - - - - - - - - 459,625 - 162,500 81,435 110,000 - - 1,585,343 - - - - - - - 200,000 46,408 - - 16,009 12,348 - - 74,765 - - - - - - 153,000 - - - 143,856 - 296,856 A$ 7,706 11,585 5,505 - 5,505 A$ A$ A$ 320,942 370,318 - - - 414,275 1,070,318 66,667 75,417 66,667 320,942 570,318 - - - 11,585 - 11,585 9,480 5,792 - - 68,743 256,256 243,600 134,335 506,152 246,534 258,996 224,807 2,561,940 773,874 396,600 308,420 613,076 374,674 402,852 224,807 4,787,647 256,256 243,600 134,335 506,152 246,534 258,996 224,807 2,761,940 49 DIRECTORS' REPORT (continued) ____________________________________________________________________________________________________________________________ Remuneration Report (continued) ii) Compensation of Key Management Personnel for the year ended 30 June 2005 (audited)(Consolidated and Company) Short-term Post Employment Share Based Total Total Salary & fees Cash bonus A$ A$ Non Monetary Benefits A$ Other Superannuation Options Payment Performance Related A$ A$ A$ A$ A$ Directors Directors Mr Rick Crabb Mr John Borshoff Mr Sean Llewelyn Mr George Pirie Mr Ian Noble Mr Michael Blakiston Dr Leon Pretorius Mr Cliff Davis 23,991 64,736 7,645 3,750 - - - - Executives Mr Garnet Halliday Ms Gillian Swaby Mr Ron Chamberlain Total 226,576 - 81,667 408,365 - - - - - - - - - - - - - - - - - - - - 2,675 - - 2,675 - 212,184 - - - 69,788 120,000 - - 70,000 - 471,972 2,159 5,826 688 - - - - - 500,983 578,057 - - - - 500,983 - 527,133 860,803 8,333 3,750 - 69,788 620,983 - 500,983 578,057 - - - - 500,983 - 6,758 - 7,350 22,781 448,445 426,300 119,032 2,573,800 684,454 496,300 208,049 3,479,593 448,445 426,300 119,032 2,573,800  50 DIRECTORS' REPORT (continued) _________________________________________________________________________________ Remuneration Report (continued) iii) Compensation by Category: Key Management Personnel Short-Term Post Employment Share-Based Payment CONSOLIDATED/ COMPANY 2006 A$ 2005 A$ 2,156,964 68,743 883,012 22,781 2,561,940 2,573,800 4,787,647 3,479,593 iv) Contracts for Services (audited) Remuneration and other terms of employment for the Key Management Personnel are normally formalised in contracts for services. All contracts with Key Management Personnel may be terminated early by either party providing between 3 to 6 months written notice or providing payments in lieu of the notice period (based on fixed component of remuneration). On termination notice by the Company, any options that have vested, or that will vest during the notice period, will be released. Options that have not yet vested will be forfeited. Mr John Borshoff, Managing Director Term of agreement – 3 years commencing 1 March 2005 renewable for a further 2 year term subject to agreement. Base salary, inclusive of superannuation, of A$400,000 increased to A$600,000 effective 1 January 2006. Payment of a benefit on retirement or early termination by the Company, other than for gross misconduct, equal to 2 times base salary for the two years immediately preceding the termination date. This benefit was approved by the Company shareholders on 9 November 2005. Mr Garnet Halliday, Executive General Manager - Operations and Development Term of agreement – no fixed term. Base salary, inclusive of superannuation, of A$400,000 + 20% expatriate allowance from 1 August 2005 to be reviewed annually, together with standard expatriate benefits. No termination benefit is specified in the agreement. Ms Gillian Swaby, Company Secretary No contract for service exists for Ms Gillian Swaby and fees are paid in the ordinary course of business for company secretarial services to a company of which Ms Gillian Swaby is a director and shareholder.  51 DIRECTORS' REPORT (continued) _________________________________________________________________________________ Remuneration Report (continued) iv) Contracts for Services (audited)(continued) Mr Ron Chamberlain, Chief Financial Officer Term of agreement – no fixed term. Base salary, inclusive of superannuation, of A$151,585 increased to A$196,585 effective 1 January 2006. No termination benefit is specified in the agreement. Mr Wyatt Buck, General Manager – Langer Heinrich Operations (from 1 February 2006) Term of agreement – no fixed term. Base salary, inclusive of superannuation, of A$220,000 + 10% expatriate allowance to be reviewed annually, together with standard expatriate benefits. No termination benefit is specified in the agreement. Mr James Eggins, Executive General Manager - Sales and Contract Administration (from 1 January 2006) Term of agreement – no fixed term. Base salary, inclusive of superannuation, of A$231,585 to be reviewed annually. No termination benefit is specified in the agreement. Mr Dustin Garrow, Director of Marketing (from 1 January 2006) A contract for service exists for Mr Dustin Garrow with no fixed term at a rate of US$210,000 per annum paid in the ordinary course of business for marketing consulting services to a company of which Mr Dustin Garrow is a director and shareholder. No termination benefit or rate review date is specified in the contract. Mr David Marsh, Executive General Manager - New Business Development (from 1 July 2006) Term of agreement – no fixed term. Base salary, inclusive of superannuation, of A$250,000 to be reviewed annually. No termination benefit is specified in the agreement. Options were granted on acceptance of position prior to his commencement on 1 July 2006.  52 DIRECTORS' REPORT (continued) _________________________________________________________________________________ Remuneration Report (continued) v) Compensation Options: Granted and vested during the year (audited)(Consolidated and Company) During the financial year options were granted as equity compensation benefits under the long term incentive plan to certain Key Management Personnel. The options were issued at no consideration. Each option entitles the holder to subscribe for one fully paid ordinary share in the entity at the exercise price. The contractual life of each option granted is three years. There are no cash settlement alternatives. No options have been granted since the end of the year to the Key Management Personnel listed below. For further details relating to the options, refer to Note 26. Vested Granted Terms & Conditions for each Grant 30 June 2006 No. No. Fair Value per option at grant Grant date (A$) (Note 26) Date Exercise Price per option (A$) (Note 26) Directors Mr Rick Crabb Mr John Borshoff 3,250,000 3,750,000 - - - - - - - - Expiry Date - - First Exercise Date Last Exercise Date - - - - Executives 3,000,000 Mr Garnet Halliday Ms Gillian Swaby 2,750,000 Mr Ron Chamberlain 800,000 Mr Wyatt Buck Mr James Eggins Mr Dustin Garrow Mr David Marsh 350,000 400,000 - - 200,000 - 1,000,000 650,000 600,000 - 1,000,000 - - 13/01/06 16/02/06 13/01/06 19/01/06 27/04/06 - - A$1.44 A$1.84 A$1.44 A$1.68 A$2.42 - - A$2.80 A$2.80 A$2.80 A$2.80 A$5.50 - - 13/01/09 13/01/09 13/01/09 13/01/09 28/04/09 - - 13/01/08 16/02/07 19/01/08 19/01/08 27/10/07 - - 13/01/09 13/01/09 13/01/09 13/01/09 28/04/09 Total 14,300,000 3,450,000 Vested Granted Terms & Conditions for each Grant 30 June 2005 No. No. Fair Value per option at grant Grant date (A$) (Note 26) Date Exercise Price per option (A$) (Note 26) Expiry Date First Exercise Date Last Exercise Date Directors Mr Rick Crabb Mr John Borshoff Dr Leon Pretorius Executives Mr Garnet Halliday Ms Gillian Swaby Mr Ron Chamberlain - 3,250,000 - 3,750,000 - 3,250,000 20/12/04 20/12/04 20/12/04 A$0.25 A$0.25 A$0.25 - 3,000,000 - 2,750,000 800,000 - 30/11/04 30/11/04 30/11/04 A$0.23 A$0.24 A$0.23 $1.00 $1.00 $1.00 $1.08 $1.00 $1.09 20/12/07 20/12/07 20/12/07 30/06/06 30/06/06 30/06/06 20/12/07 20/12/07 20/12/07 30/11/07 30/11/07 30/11/07 30/06/06 30/06/06 30/06/06 30/11/07 30/11/07 30/11/07 Total - 16,800,000  53 DIRECTORS' REPORT (continued) _________________________________________________________________________________ Remuneration Report (continued) vi) Shares Issued on Exercise of Compensation Options (audited)(Consolidated and Company) Shares issued 30 June 2006 No. Paid per share (Note 26) A$ Directors Mr Rick Crabb Mr John Borshoff Executives Ms Gillian Swaby Total 2,250,000 750,000 2,500,000 1,000,000 2,000,000 500,000 9,000,000 A$0.22 A$0.32 A$0.22 A$0.32 A$0.22 A$0.32 Unpaid per share A$ - - - - - - Value at exercise date A$ 10,192,500 3,397,500 11,325,000 4,530,000 9,060,000 2,265,000 No other Key Management Personnel exercised options during the year ended 30 June 2006. Shares issued 30 June 2005 No. Paid per share (Note 26) A$ Directors Mr Rick Crabb Mr John Borshoff Executives Ms Gillian Swaby 1,000,000 1,500,000 A$0.15 A$0.15 1,200,000 A$0.15 Total 3,700,000 Unpaid per share A$ - - - Value at exercise date A$ 485,000 727,500 582,000 No other Key Management Personnel exercised options during the year ended 30 June 2005.  54 DIRECTORS' REPORT (continued) _________________________________________________________________________________ Remuneration Report (continued) vii) Options Holdings of Key Management Personnel (Consolidated and Company) Balance at beginning Granted as Remune of period -ration 01 Jul 05 Net Options Change Exercised Other # Balance at end of period 30 Jun 06 Not Total Exercisable Exercisable 6,250,000 7,250,000 - - (3,000,000) (3,500,000) - - 3,250,000 3,750,000 3,250,000 3,750,000 3,250,000 3,750,000 - - 3,000,000 5,250,000 800,000 - - - - - - 200,000 1,000,000 650,000 600,000 1,000,000 - - - (2,500,000) - - - - - 350,000 - 400,000 - - 3,000,000 2,750,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 3,000,000 2,750,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 3,000,000 2,750,000 800,000 - 350,000 400,000 - - - 200,000 1,000,000 650,000 600,000 1,000,000 30 June 2006 Directors Mr Rick Crabb Mr John Borshoff Executives Mr Garnet Halliday Ms Gillian Swaby Mr Ron Chamberlain Mr Wyatt Buck Mr James Eggins Mr Dustin Garrow Mr David Marsh Total 22,550,000 3,450,000 (9,000,000) 750,000 17,750,000 17,750,000 14,300,000 3,450,000 Balance at beginning Granted as Remune of period -ration 01 Jul 04 Options Exercised Net Change Other # Balance at end of period 30 Jun 05 Not Total Exercisable Exercisable 4,000,000 5,000,000 3,000,000 3,250,000 (1,000,000) 3,750,000 (1,500,000) 3,250,000 - - - (6,250,000) 6,250,000 7,250,000 - 6,250,000 7,250,000 - 3,000,000 3,500,000 - 3,250,000 3,750,000 - - 3,700,000 - 3,000,000 - 2,750,000 (1,200,000) - 800,000 - - - 3,000,000 5,250,000 800,000 3,000,000 5,250,000 800,000 - 2,500,000 - 3,000,000 2,750,000 800,000 30 June 2005 Directors Mr Rick Crabb Mr John Borshoff Dr Leon Pretorius Executives Mr Garnet Halliday Ms Gillian Swaby Mr Ron Chamberlain Total 15,700,000 16,800,000 (3,700,000) (6,250,000) 22,550,000 22,550,000 9,000,000 13,550,000 Mr James Eggins commenced as a Key Management Personnel on 1 January 2006 and as such the required disclosure at this date in the above table has been reflected in the net change other column. Mr Dustin Garrow commenced as a Key Management Personnel on 1 January 2006 and as such the required disclosure at this date in the above table has been reflected in the net change other column. Dr Leon Pretorius resigned from the Board on 12 April 2005 and as such is no longer required to be disclosed in the above table and this fact has been reflected in the net change other column.  55 DIRECTORS' REPORT (continued) _________________________________________________________________________________ Remuneration Report (continued) viii) Shareholdings of Key Management Personnel (Consolidated and Company) Shares held in Paladin Resources Ltd (number) Balance 01 Jul 05 Remuneration Granted as On Exercise Net Change of Options Other Balance 30 June 06 30 June 2006 Directors Mr Rick Crabb Mr John Borshoff Mr Ian Noble 6,464,746 14,591,394 - Executives Mr Garnet Halliday Ms Gillian Swaby Mr James Eggins (1) - 6,600,000 - Total 27,656,140 - - - - - - - 3,000,000 3,500,000 - (500,000) - 16,000 8,964,746 18,091,394 16,000 - 2,500,000 - 125,000 1,116,140 25,000 125,000 10,216,140 25,000 9,000,000 782,140 37,438,280 No other Key Management personnel held shares during the year ended 30 June 2006. 30 June 2005 Balance 01 Jul 04 Remuneration Granted as On Exercise Net Change of Options Other Balance 30 June 05 Directors Mr Rick Crabb Mr John Borshoff Dr Leon Pretorius (2) 5,464,746 13,091,394 8,550,000 Executives Ms Gillian Swaby Total 5,595,515 32,701,655 - - - - - 1,000,000 1,500,000 - - - (8,550,000) 6,464,746 14,591,394 - 1,200,000 (195,515) 6,600,000 3,700,000 (8,745,515) 27,656,140 No other Key Management personnel held shares during the year ended 30 June 2005. (1) Mr James Eggins commenced as a Key Management Personnel on 1 January 2006 and as such this fact has been reflected in the net change other column. (2) Dr Leon Pretorius resigned from the Board on 12 April 2005 and as such is no longer required to be disclosed in the above table and this fact has been reflected in the net change other column.  56 DIRECTORS' REPORT (continued) _________________________________________________________________________________ Shares Under Option Unissued ordinary shares of the Company under option at the date of this report are as follows: Date options granted Expiry date Exercise price of options Number under option ____________________________________________________________________________________________________________________________________________________________________ 30 November 2004 30 November 2004 20 December 2004 15 July 2005 13 January 2006 19 January 2006 16 February 2006 27 April 2006 3 July 2006 20 July 2006 30 November 2007 30 November 2007 20 December 2007 15 July 2008 13 January 2009 13 January 2009 13 January 2009 28 April 2009 3 July 2009 20 July 2009 A$1.00 A$1.25 A$1.00 A$1.50 A$2.80 A$2.80 A$2.80 A$5.50 A$5.50 A$5.50 7,300,000 1,000,000 10,250,000 200,000 1,050,000 600,000 1,200,000 1,565,000 1,000,000 400,000 ____________________________________________________________________________________________________________________________________________________________________ Total 24,565,000 ____________________________________________________________________________________________________________________________________________________________________ No option holder has any right under the options to participate in any other share issue of the Company or of any other entity. Shares issued as a result of the exercise of options During the financial year, employees and executives have exercised options to acquire 14,000,000 fully paid ordinary shares in Paladin Resources Ltd at a weighted average price of $0.24. Since the end of the financial year, a further 1,050,000 options have been exercised, at a weighted average price of $1.07. Insurance of Officers During the financial year, the Company has paid premiums to insure the Directors and Specified Executives against certain liabilities arising out of their conduct while acting as an officer of the Company. Under the terms and conditions of the insurance contract, the nature of liabilities insured against and the premium paid cannot be disclosed. Auditor Ernst & Young were appointed auditors for the Company on 21 June 2005, which was approved by shareholders at the 2005 Annual General Meeting on 9 November 2005.  57 DIRECTORS' REPORT (continued) _________________________________________________________________________________ Auditor Independence and Non-Audit Services The Directors received the following declaration from the auditor of Paladin Resources Ltd.  58 DIRECTORS' REPORT (continued) _________________________________________________________________________________ Non-Audit Services The following non audit services were provided by the Company’s auditor, Ernst & Young. The Directors are satisfied that the provision of non audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act. The nature and scope of each type of non- audit service provided means that auditor independence was not compromised. Ernst & Young received or are due to receive the following amounts for the year ended 30 June 2006 for the provision of non-audit services relating to the provision of Tax Compliance services of A$11,547. Signed in accordance with a resolution of the Directors. Mr John Borshoff Managing Director Perth, Western Australia 29 August 2006  59 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ CONTENTS OF THE FINANCIAL REPORT NOTE PAGE NUMBER _________________________________________________________________________________ TITLE CONSOLIDATED INCOME STATEMENTS CONSOLIDATED BALANCE SHEETS CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY PARENT ENTITY STATEMENTS OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CORPORATE INFORMATION SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES VOLUNTARY CHANGE IN ACCOUNTING POLICY SEGMENT INFORMATION REVENUES AND EXPENSES INCOME TAX DISCONTINUED OPERATION CASH AND CASH EQUIVALENTS TRADE AND OTHER RECEIVABLES OTHER FINANCIAL ASSETS DEFERRED BORROWING COSTS PROPERTY, PLANT AND EQUIPMENT EXPLORATION AND EVALUATION EXPENDITURE TRADE AND OTHER PAYABLES UNEARNED REVENUE INTEREST BEARING LOANS AND BORROWINGS PROVISIONS CONTRIBUTED EQUITY AND RESERVES FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES FINANCIAL INSTRUMENTS DIRECTOR AND EXECUTIVE DISCLOSURES AUDITORS’ REMUNERATION COMMITMENTS AND CONTINGENCIES EMPLOYEE BENEFITS RELATED PARTIES 61 62 63 64 65 66 66 66 78 79 83 84 86 88 89 91 93 93 95 100 100 101 103 104 113 115 119 123 124 126 126 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.  60 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ CONTENTS OF THE FINANCIAL REPORT NOTE PAGE NUMBER _________________________________________________________________________________ TITLE 26. 27. 28. 29. 30. 31. SHARE BASED PAYMENT PLAN INTERESTS IN JOINT VENTURES EVENTS AFTER THE BALANCE SHEET DATE NON CASH FINANCING AND INVESTMENT ACTIVITIES EARNINGS PER SHARE TRANSITION TO AIFRS AND CHANGE IN ACCOUNTING POLICY 127 129 130 131 131 132  61 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES CONSOLIDATED INCOME STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ REVENUE FROM CONTINUING OPERATIONS Other income Notes CONSOLIDATED 2005 2006 A$000 A$000 5(a) 5(b) 4,298 1,057 772 810 PARENT ENTITY 2005 2006 A$000 A$000 4,251 2,487 1,165 - Share based payments expense 5(c) (3,650) (3,009) (3,650) (3,009) Interest expense (149) (354) (16) (354) Exploration and evaluation expenditure 13 (4,233) (5,113) Write down of convertible note Write down of intercompany loans Write off of intercompany investment Write down of intercompany investments - - - - Depreciation and amortisation 12 (223) Employee benefits expense Operating lease expense (1,346) (204) (894) - - - (90) (482) (118) - - - (894) (11,464) (3,624) (261) (58) (95) - - (32) (1,346) (482) (204) (102) Other expenses (3,036) (1,060) (2,765) (1,114) LOSS BEFORE INCOME TAX (7,486) (9,538) (13,121) (8,446) Income tax expense 6(a) - - - - Loss after tax from continuing operations (7,486) (9,538) (13,121) (8,446) Profit after tax from discontinued operations 7(a) - 128 - - LOSS ATTRIBUTABLE TO MEMBERS OF PALADIN RESOURCES LTD (7,486) (9,410) (13,121) (8,446) Loss per share attributed to ordinary equity holders - basic and diluted 30 A$ (0.02) A$ (0.03) The above Consolidated Income Statements should be read in conjunction with the accompanying notes.  62 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES CONSOLIDATED BALANCE SHEETS AS AT 30 JUNE 2006 _________________________________________________________________________________ ASSETS Current assets Cash and cash equivalents Trade and other receivables Notes CONSOLIDATED 2005 2006 A$000 A$000 PARENT ENTITY 2005 2006 A$000 A$000 8 9 59,778 3,695 39,489 568 22,677 151 39,000 472 TOTAL CURRENT ASSETS 63,473 40,057 22,828 39,472 Non current assets 9 Trade and other receivables 10 Other financial assets 11 Deferred borrowing costs Property, plant and equipment 12 Exploration and evaluation expenditure 13 - 7,703 - 80,442 8,690 - 2,430 170 1,098 1,686 44,231 49,637 - 456 - 4,650 426 - 390 - TOTAL NON CURRENT ASSETS 96,835 5,384 94,324 5,466 TOTAL ASSETS LIABILITIES 160,308 45,441 117,152 44,938 Current liabilities 14 Trade and other payables Unearned revenue 15 Interest bearing loans and borrowings 16 Provisions 17 TOTAL CURRENT LIABILITES Non current liabilities 14 Trade and other payables Unearned revenue 15 Interest bearing loans and borrowings 16 17 Provisions 11,074 242 - 328 11,644 41 979 19,334 3,585 TOTAL NON CURRENT LIABILITES 23,939 727 - 533 65 1,325 - - - - - 1,103 - - 266 1,369 41 - - 54 95 591 - 533 65 1,189 334 - - - 334 TOTAL LIABILITES 35,583 1,325 1,464 1,523 NET ASSETS Equity Contributed equity Reserves Accumulated losses TOTAL EQUITY 124,725 44,116 115,688 43,415 18(a) 18(d) 148,182 11,311 (34,768) 65,992 5,406 (27,282) 148,182 6,890 (39,384) 65,992 3,686 (26,263) 124,725 44,116 115,688 43,415 The above Consolidated Balance Sheets should be read in conjunction with the accompanying notes.  63 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ CONSOLIDATED At 1 July 2004 Contributed Notes Equity A$000 Reserves A$000 Accumulated Losses A$000 Total A$000 24,265 719 (17,872) 7,112 Change in fair value of available for sale financial assets (Loss) for the year ended Recognised value of unlisted employee options that have vested Grant of Société Générale Australia Branch share options Exercise of Société Générale Australia Branch share options Exercise of unlisted employee options Contributions of equity, net of transaction costs - - - - 1,720 - 3,009 321 18(b) 321 (321) 18(b) 42 18(b) 41,364 (42) - - (9,410) 1,720 (9,410) - - - - - 3,009 321 - - 41,364 At 30 June 2005 CONSOLIDATED At 1 July 2005 Changes in fair value of available for sale financial assets (Loss) for the year ended Recognised value of unlisted employee options that have vested Exercise of unlisted employee options Contributions of equity, net of transactions costs 18(b) 18(b) 65,992 5,406 (27,282) 44,116 65,992 5,406 (27,282) 44,116 - - - 2,758 - 3,650 503 (503) 81,687 - - (7,486) 2,758 (7,486) - - - 3,650 - 81,687 At 30 June 2006 148,182 11,311 (34,768) 124,725 The above Consolidated Statements of Changes in Equity should be read in conjunction with the accompanying notes.  64 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES PARENT ENTITY STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ PARENT ENTITY At 1 July 2004 Notes Contributed Equity A$000 Reserves A$000 Accumulated Losses A$000 Total A$000 24,265 719 (17,817) 7,167 (Loss) for the year ended Recognised value of unlisted employee options that have vested Grant of Société Générale Australia Branch share options Exercise of Société Générale Australia Branch share options Exercise of unlisted employee options Contributions of equity, net of transaction costs At 30 June 2005 PARENT ENTITY At 1 July 2005 - - - 3,009 321 18(b) 321 (321) 18(b) 42 18(b) 41,364 (42) - - (8,446) (8,446) - - - - - 3,009 321 - - 41,364 Change in fair value of available for sale financial assets (Loss) for the year ended Recognised value of unlisted employee options that have vested Exercise of unlisted employee options Contributions of equity, net of transactions costs 18(b) 18(b) 65,992 3,686 (26,263) 43,415 65,992 3,686 (26,263) 43,415 - - - 57 - 3,650 503 (503) 81,687 - - (13,121) 57 (13,121) - - - 3,650 - 81,687 At 30 June 2006 148,182 6,890 (39,384) 115,688 The above Parent Entity Statements of Changes in Equity should be read in conjunction with the accompanying notes.  65 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES CONSOLIDATED CASH FLOWS STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ Notes CONSOLIDATED 2006 A$000 2005 A$000 PARENT ENTITY 2006 A$000 2005 A$000 CASH FLOWS FROM OPERATING ACTIVITES Payments to suppliers and employees Interest received Interest received from controlled entities Interest paid Dividend received from controlled entities Property rental income Other receipts (3,658) 4,315 - (49) - - 40 (1,831) 414 - (58) - 116 78 (3,506) 4,122 402 (49) 348 - 40 (1,665) 414 - - - - 76 NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITES 8(a) 648 (1,281) 1,357 (1,175) CASH FLOWS FROM INVESTING ACTIVITES Exploration and evaluation expenditure Payments for property, plant and equipment Loans to controlled entities Loans from controlled entities Additional investment in controlled entities Payments for available for sale financial assets Payments for controlled entities net of cash acquired Proceeds on sale of land and buildings Proceeds on sale of tenements (4,711) (71,165) - - - (620) - - - (5,151) (946) - - - - (203) 1,200 100 - (161) (47,314) - (47,478) - - - - - (396) (6,311) 500 - - - - - NET CASH (OUTFLOW) FROM INVESTING ACTIVITES CASH FLOWS FROM FINANCING ACTIVITIES Share placement Proceeds from exercise of share options Equity fundraising costs Project finance facility establishment costs Repayment of borrowings Proceeds from borrowings NET CASH INFLOW FROM FINANCING ACTIVITES NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents CASH AND CASH EQUIVALENTS AT END OF THE FINANCIAL PERIOD (76,496) (5,000) (94,953) (6,207) 77,000 3,380 (4,305) (3,736) (500) 23,241 40,800 1,574 (1,010) - (733) 500 77,000 3,380 (4,305) - (500) - 40,800 1,574 (1,010) - - 500 95,080 41,131 75,575 41,864 19,232 34,850 (18,021) 34,482 39,489 4,639 39,000 4,518 1,057 - 1,698 - 8 59,778 39,489 22,677 39,000 The above Consolidated Cash Flow Statements should be read in conjunction with the accompanying notes.  66 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 1. CORPORATE INFORMATION The financial report of Paladin Resources Limited (the Company) for the year ended 30 June 2006 was authorised for issue in accordance with a resolution of the Directors on 11 August 2006 subject to final audit clearance. Paladin Resources Limited is a company limited by shares incorporated and domiciled in Australia whose shares are publicly traded on Australian Stock Exchange Ltd, with additional listings on the Toronto Stock Exchange in Canada, and Munich, Berlin, Stuttgart and Frankfurt stock exchanges in Germany. The nature of the operations and principal activities of the Group are described in Note 4. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Preparation The financial report is a general purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards. 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. In addition to these Australian requirements further information has been included in the Consolidated Financial Statements for the year ended 30 June 2006 in order to comply with applicable Canadian securities law. The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars (A$’000) unless otherwise stated under the option available to the Company under ASIC Class Order 98/100. The Company is an entity to which the class order applies. (b) Statement of Compliance 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 the financial statements and notes thereto, complies with International Financial Reporting Standards (IFRS). This is the first financial report prepared based on AIFRS and comparatives for the year ended 30 June 2005 have been restated accordingly. Reconciliations of AIFRS equity and profit for 30 June 2005 to the balances reported in the 30 June 2005 financial report and at transition to AIFRS are detailed in Note 31.  67 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (b) Statement of Compliance (continued) The following Australian Accounting Standards that have recently been issued or amended but are not yet effective, have not been applied by Paladin Resources Ltd: AASB Amendment 2004-3 Affected Standard (s) Nature of change to accounting policy AASB 1 First-time Adoption of AIFRS, AASB 101 Presentation of Financial Statements, and AASB 124 Related Party Disclosures No change to accounting policy required. Therefore no impact Application date of standard Application date to Group 1-Jan-06 1-July-06 2005-1 2005-4 2005-5 2005-6 2005-10 AASB 139 Financial Instruments: Recognition and Measurement No change to accounting policy required. Therefore no impact 1-Jan-06 1- July -06 No change to accounting policy required. Therefore no impact 1-Jan-06 1- July -06 No change to accounting policy required. Therefore no impact. 1-Jan-06 1- July -06 1-Jan-06 1- July -06 1- Jan-07 1- July -07 No change to accounting policy required. Therefore no impact. No change to accounting policy required. However there will be changes to the the level of disclosures required in respect of financial instruments. ASSB 1 First–time Adoption of AIFRS, Financial AASB139 Instruments: Recognition and Measurement AASB 132 Financial Instruments: Disclosure And Presentation AASB 1 First-time Adoption of AIFRS, and AASB 139 Financial Instruments: Recognition And Measurement ASSB 3 Business Combinations AASB 132 Financial Instruments Presentation and Disclosure, AASB 101 Presentation of Financial Statements, AASB 114 Segment Reporting, AASB 117 Leases, AASB 133 Earnings per Share, AASB 139 Financial Instruments: Recognition and Measurement AASB 1 First-time adoption of AIFRS 2006-1 AASB 121 The Effects Of Change in Foreign Currency Rates. No change to accounting policy required. Therefore no impact. 1- Jan-06 1- July -06  68 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (b) Statement of Compliance (continued) New Standard AASB 7 Financial Instruments: Disclosures 1-Jan-07 1- July -07 No change to accounting policy required. However there will be changes to the the level of disclosures required in respect of financial instruments. UIG UIG UIG 4 Determining whether an Arrangement contains a Lease No change to accounting policy required. Therefore no impact. 1- Jan-06 1- July -06 UIG 5 Rights to Interests in Decommissioning, Restoration and Environmental Rehabilitation Funds No change to accounting policy required. Therefore no impact. 1- Jan-06 1- July -06 The following amendments are not applicable to the Group and therefore have no impact: AASB Amendment New Standard 2005-4 2005-9 2005-10 UIG UIG UIG Affected Standard (s) AASB 119 Employee Benefits (Revised Dec 04) – Accounting policy options contained within the revised standard affect accounting for defined benefit schemes only. As Paladin Resources Ltd does not contribute to a defined benefit scheme, there is no impact of this change. AASB 1023 General Contracts and AASB 1028 Life Insurance Contracts AASB 4 Insurance Contracts, AASB 1023 General Insurance Contracts, AASB 139 Financial Instruments: Recognition and Measurement and AASB 132 Financial Instruments: Disclosure and Presentation. AASB 4 Insurance Contracts, AASB 1023 General insurance Contracts and AASB 1038 Life Insurance Contracts UIG 7 Applying the Restatement Approach under AASB 129 Financial Reporting in Hyperinflationary Economies UIG 8 Scope of AASB 2 UIG 9 Reassessment of Embedded Derivatives (c) Basis of Consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Paladin Resources Ltd (Company or Parent Entity) as at 30 June 2006 and the results of all subsidiaries for the twelve months then ended. Paladin Resources Ltd and its subsidiaries together are referred to in this financial report as the Group or the Consolidated Entity. Subsidiaries are all those entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group.  69 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (c) Basis of Consolidation (continued) The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group (refer to Note 2(j)). Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. (d) Significant accounting judgements, estimates and assumptions The carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions of future events. The key estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting period are: (I) Impairment of exploration and evaluation expenditure; and property, plant and equipment The Group determines whether exploration and evaluation expenditure; and property, plant and equipment are impaired at least on an annual basis. This requires an estimation of the recoverable amount of cash-generating units to which the exploration and evaluation expenditure; and property, plant and equipment are allocated. (ii) Share based payment transactions The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by an external valuer using a binomial model using assumptions detailed in Note 26. (iii) Available for sale financial assets The Group measures the fair value of available for sale financial assets by reference to the fair value of the equity instruments at the date at which they are valued. The fair value of the unlisted options is determined by an external valuer using a binomial model. (iv) Restoration provision As set out in Note 2(v), the value of this provision represents the discounted value of the present obligation to restore, dismantle and close the mine. The discounted value reflects a combination of management’s assessment of the cost of performing the work required, the timing of the cash flows and the discount rate. A change in any, or a combination, of the three key assumptions used to determine the provisions could have a material impact to the carrying value of the provision (refer to Note 17). (e) Segment reporting A geographical segment is a group of assets and operations engaged in providing products or services within a particular economic environment and is subject to risks and returns that are different from those of segments operating in other economic environments. A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different to those of other business segments. PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 70 (f) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The consolidated financial statements are presented in Australian dollars, which is Paladin Resources Ltd’s functional and presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Income Statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. (iii) Group companies All Group entities have a functional currency of Australian dollars which is consistent with the presentation currency of this financial report. (g) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances and duties and taxes paid. Revenue is recognised for the major business activities as follows: (i) Interest revenue Interest revenue from investments in cash and convertible notes is recognised in the Income Statement in the periods in which it is receivable, as this represents the pattern of legal benefit to the Group. (ii) Database licence revenue Licence revenue generated from granting third parties access to proprietary databases information on mineral property regions is recognised in the Income Statement on a straight line basis over the licence term. (iii) Rental revenue Rental revenue from leasing of the investment property is recognised in the Income Statement in the periods in which it is receivable, as this represents the pattern of service rendered through the provision of the property.  71 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (h) Income tax The income tax expense or benefit for the period is the tax payable on the current period's taxable income based on the notional income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted for each jurisdiction. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. An exception is made for certain temporary differences arising from the initial recognition of an asset or a liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the Parent Entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. Paladin Resources Ltd and all its wholly-owned Australian resident entities are part of a tax- consolidated group under Australian tax law. Paladin Resources Ltd is the head entity in the tax- consolidated group. Tax expense, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate financial statements of the members of the tax-consolidated group using the 'separate taxpayer within group' approach by reference to the carrying amounts in the separate financial statements of each entity and the tax values applying under tax consolidation. (i) Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Incentives received on entering into operating leases are recognised as liabilities. Lease payments are allocated between rental expense and reduction of the lease incentive liability on a straight line basis over the period of the lease. (j) Acquisitions of assets The purchase method of accounting is used to account for all acquisitions of assets (including business combinations) regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange plus costs directly attributable to the acquisition. Where equity instruments are issued in an acquisition, the value of the instruments is their published market price as at the date of exchange. Transaction costs arising on the issue of equity instruments are recognised directly in equity.  72 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (j) Acquisitions of assets (continued) Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the Income Statement, but only after a reassessment of the identification and measurement of the net assets acquired. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity's incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. (k) Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). (l) Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the Balance Sheet. (m) Trade and other receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost, less provision for doubtful debts. Trade receivables are due for settlement no more than 30 days for other debtors. Collectibility of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. A provision for doubtful receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the Income Statement. (n) Investments and other financial assets The Group classifies its investments in the following categories: loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and re-evaluates this designation at each reporting date.  73 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (n) Investments and other financial assets (continued) (i) Loans and receivables Loans and receivables are non derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of selling the receivable. They are included in current assets, except for those with maturities greater than 12 months after the balance sheet date which are classified as non current assets. Loans and receivables are included in receivables in the Balance Sheet. (ii) Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group's management has the positive intention and ability to hold to maturity. (iii) Available-for-sale financial assets Available-for-sale financial assets, comprising principally marketable equity securities, are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Purchases and sales of investments are recognised on trade-date - the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Available-for-sale financial assets are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Unrealised gains and losses arising from changes in the fair value of non monetary securities classified as available-for-sale are recognised in equity in the available-for-sale reserve. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in the Income Statement as gains and losses from investment securities. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include reference to the fair values of recent arm's length transactions, involving the same instruments or other instruments that are substantially the same, discounted cash flow analysis, and option pricing models refined to reflect the issuer's specific circumstances. The Group assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of a security below its cost is considered in determining whether the security is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit and loss - is removed from equity and recognised in the Income Statement.  74 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (o) Fair value estimation The fair value of financial assets must be estimated for recognition and measurement or for disclosure purposes. The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price. The fair value of financial instruments that are not traded in an active market (for example, convertible notes and unlisted options) is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance date. Estimated discounted cash flows are used to determine the fair value of most financial instruments. The nominal value less estimated credit adjustments of trade receivables and payables are assumed to approximate their fair values. (p) Property, plant and equipment All property, plant and equipment are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity of any gains/losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the Income Statement during the financial period in which they are incurred. Property, plant and equipment costs include both the costs associated with construction of equipment associated with establishment of an operating mine, and the estimated costs of dismantling and removing the asset and restoring the site on which it is located. The cost of improvements to or on leasehold properties is amortised over the unexpired period of the lease or the estimated useful life of the improvement to the Group, whichever is the shorter. Land is not depreciated. Depreciation on other assets is calculated using the straight line method to allocate their cost amount, net of their residual values, over their estimated useful lives, as follows: - - - - Buildings Databases Plant and equipment Leasehold improvements 20 years 10 years 3-6 years 2-5 years The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amounts. These are included in the Income Statement. When revalued assets are sold, it is Group policy to transfer the amounts included in other reserves in respect of those assets to retained earnings.  75 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (q) Exploration and evaluation expenditure The Company has made a voluntary change to its accounting policy for exploration and evaluation expenditure – refer to Note 31(3)(vi) for disclosure regarding this change. Exploration and evaluation expenditure is charged against earnings as incurred. Exploration and evaluation expenditure is allocated separately to specific areas of interest. Each area of interest is limited to a size related to a known or probable mineral resource capable of supporting a mining operation. Such expenditure comprises net direct costs and an appropriate portion of related overhead expenditure directly related to activities in the area of interest. Costs related to the acquisition of properties that contain mineral resources are allocated separately to specific areas of interest. These costs are capitalised until the viability of the area of interest is determined. If no mineable ore body is discovered, capitalised acquisition costs are expensed in the period in which it is determined that the area of interest has no future economic value. When a decision to proceed to development is made, all costs subsequently incurred to develop a mine prior to the start of mining operations within the area of interest are capitalised and carried at cost. These costs include expenditure incurred to develop new ore bodies within the area of interest, to define further mineralisation in existing areas of interest, to expand the capacity of a mine and to maintain production. Capitalised amounts for an area of interest maybe written down if discounted future cash flows related to the area of interest are projected to be less than its carrying value. (r) Trade and other payables Trade payables and other payables are carried at amortised costs and represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 30 days of recognition. (s) Interest bearing loans and borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the Income Statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. (t) Borrowing costs Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. Other borrowing costs are expensed.  76 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (t) Borrowing costs (continued) The capitalisation rate used to determine the amount of borrowing costs to be capitalised is the weighted average interest rate applicable to the entity's outstanding borrowings during the year. The fair value of unlisted options granted in relation to establishment of a loan facility is recognised as a borrowing cost with a corresponding increase in equity and is measured at the date a commitment for the loan facility is obtained. The fair value at measurement date is independently determined using the Cox, Ross and Rubinstein Binomial Tree Model that takes into account the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the non tradable nature of the option, the share price at measurement date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option. Upon the exercise of options, the balance of the Option Premium Reserve relating to these options is transferred to share capital. (u) Employee benefits (i) Wages and salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees' services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sick leave are recognised when the leave is taken and measured at the rates paid or payable. (ii) Long service leave The liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Contributions to defined contribution funds are recognised as an expense as they become payable. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. (iii) Share-based payments Share-based compensation benefits are provided to employees via the Paladin Resources Ltd Employee Share Incentive Option Plan. Share options granted on or before 7 November 2002 No expense is recognised in respect of these options. The shares are recognised when the options are exercised and the proceeds received allocated to share capital.  77 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (u) Employee benefits (continued) (iii) Share-based payments (continued) Shares options granted after 7 November 2002 The fair value of options granted under the Paladin Resources Ltd Employee Share Incentive Option Plan after 7 November 2002 are recognised as an employee benefit expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which the employees become unconditionally entitled to the options. The fair value at grant date is independently determined using the Cox, Ross and Rubinstein Binomial Tree option pricing model that takes into account the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the non-tradable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. The fair value of the options granted excludes the impact of any non-market vesting conditions (for example, positive outcome of bankable feasibility study and completion of acceptable project funding). Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each balance sheet date, the entity revises its estimate of the number of options that are expected to become exercisable. The employee benefit expense recognised each period takes into account the most recent estimate. Upon the exercise of options, the balance of the share-based payments reserve relating to those options is transferred to share capital. (v) Mine closure and restoration Mine closure and restoration costs include the costs of dismantling and demolition of infrastructure or decommissioning, the removal of residual material and the remediation of disturbed areas specific to the infrastructure. Mine closure and restoration costs are provided for in the accounting period when the obligation arising from the related disturbance occurs, whether this occurs during the mine development or during the production phase, based on the net present value of estimated future costs. As the value of the provision for mine closure and restoration represents the discounted value of the present obligation to restore, dismantle and close the mine, the increase in this provision due to the passage of time is recognised as a borrowing cost. The discount rate used is a pre-tax rate that reflects the current market assessments of the time value of money and the risks specific to the liability.  78 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (w) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or options, or for the acquisition of a business, are included in the cost of the acquisition as part of the purchase consideration. (x) Earnings per share (i) Basic earnings per share Basic earnings per share are calculated by dividing the profit attributable to equity holders of the company by the weighted average number of ordinary shares outstanding during the period. (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. NOTE 3. VOLUNTARY CHANGE IN ACCOUNTING POLICY The financial report has been prepared on the basis of a retrospective application of a voluntary change in exploration and evaluation expenditure accounting policy. The new exploration and evaluation expenditure accounting policy is to charge exploration and evaluation expenditure against earnings as incurred; except for acquisition costs and for expenditure incurred after a decision to proceed to development is made, in which case the expenditure is capitalised as an asset – refer Note 2(q) for the full detail of the new accounting policy. The previous exploration and evaluation expenditure accounting policy was to carry forward exploration and evaluation expenditure as an asset; subject to ongoing review of the potential for development and that rights to tenure were current. This voluntary change in accounting policy was made at 31 December 2005 as the Group is undergoing a transition from explorer to producer. AASB 6 Exploration for and Evaluation of Mineral Resources allows both the previous and the new accounting policies of the Group. The impact of this change in accounting policy up to 30 June 2005 on the Group is represented in Note 31(3)(vi).  79 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 3. VOLUNTARY CHANGE IN ACCOUNTING POLICY (continued) The carry forward exploration and evaluation asset at 31 December 2005 was decreased by A$8,635,055 to reflect the application of the new accounting policy. Of this adjustment A$7,315,408 represents an increase to accumulated losses at 30 June 2005 in the Balance Sheet and A$1,319,647 as an increase in exploration and evaluation expense for the six months ended 31 December 2005 in the Income Statement. Basic and diluted earnings per share have also been restated. The amount of the impact of the change in accounting policy is a reduction of 0.31 cents per share for the six months ending 31 December 2005; and a reduction of 0.73 cents per share for the six months ending 31 December 2004. NOTE 4. SEGMENT INFORMATION The Group’s primary segment reporting format is geographical segments as the Group’s risks and rates of return are affected predominately by differences in the particular economic environments in which it operates. Secondary segment information is reported by business segments. Geographical segments - primary reporting The Company operates in Australia and in Namibia and Malawi in Africa. The principal activity in these locations is the evaluation and development of uranium projects. Business segments – secondary reporting Resources The resource segment includes ownership of a proprietary database with primary focus on uranium. Financial Investments (consequential activity) This segment consists of investment in listed company shares and options over listed company shares, and in 2005 an unlisted convertible note. The Company has shares and options in Deep Yellow Ltd, a company listed on the Australian Stock Exchange, from the sale of non core uranium properties – refer Note 10(b). Property (consequential activity) Ownership and lease of commercial premises consisting of buildings and telecommunications tower located in Belmont, Perth, Western Australia. The commercial premises were sold on 24 June 2005 – refer Note 7.  80 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 4. SEGMENT INFORMATION (continued) Geographical segments –primary reporting The Group’s geographical segments are determined based on the location of the Group’s assets. The following tables present revenue, expenditure and certain asset information regarding geographical segments for the years ended 30 June 2006 and 30 June 2005. Year Ended 30 June 2006 Other revenue Australia A$000 Namibia A$000 Malawi A$000 Consolidated A$000 4,105 192 1 4,298 ____________________________________________________________________________________________________________________________________________________________________ Total segment revenue 4,105 192 1 4,298 ____________________________________________________________________________________________________________________________________________________________________ Loss from ordinary activities before income tax expense (2,340) (1,304) (3,842) (7,486) Income tax expense - - - - ____________________________________________________________________________________________________________________________________________________________________ Loss from ordinary activities after income tax expense/segment result (2,340) (1,304) (3,842) (7,486) ____________________________________________________________________________________________________________________________________________________________________ Total assets/segment assets 62,551 91,585 6,172 160,308 ____________________________________________________________________________________________________________________________________________________________________ Segment liabilities 26,077 8,616 890 35,583 ____________________________________________________________________________________________________________________________________________________________________ Acquisitions of non current assets 79 80,540 5,694 86,313 ____________________________________________________________________________________________________________________________________________________________________ Cash flow information Net cash inflow/(outflow) from operating activities Net cash (outflow) from investing activities Net cash inflow from financing activities 558 129 (39) 648 (1,419) (72,136) (2,941) (76,496) 95,080 - - 95,080 ____________________________________________________________________________________________________________________________________________________________________ Non cash expenses: Depreciation and amortisation 155 37 31 223 ____________________________________________________________________________________________________________________________________________________________________  81 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 4. SEGMENT INFORMATION (continued) Geographical segments – primary reporting (continued) Year Ended 30 June 2005 Other revenue Australia A$000 Namibia A$000 Malawi A$000 Consolidated A$000 965 - - 965 ____________________________________________________________________________________________________________________________________________________________________ Total segment revenue 965 - - 965 ____________________________________________________________________________________________________________________________________________________________________ Loss from ordinary activities before income tax expense (4,441) (4,145) (824) (9,410) Income tax expense - - - - ____________________________________________________________________________________________________________________________________________________________________ Loss from ordinary activities after income tax expense/ segment result (4,441) (4,145) (824) (9,410) ____________________________________________________________________________________________________________________________________________________________________ Total assets/segment assets 43,831 1,145 465 45,441 ____________________________________________________________________________________________________________________________________________________________________ Segment liabilities 1,195 125 5 1,325 ____________________________________________________________________________________________________________________________________________________________________ Acquisitions of non current Assets 1,105 843 112 2,060 ____________________________________________________________________________________________________________________________________________________________________ Cash flow information Net cash (outflow) from operating activities Net cash inflow/(outflow) from investing activities Net cash inflow from financing activities (1,258) (13) (10) (1,281) 768 (4,851) (917) (5,000) 41,131 - - 41,131 ____________________________________________________________________________________________________________________________________________________________________ Non cash expenses: Depreciation and amortisation Provision for doubtful debts Bad debts written off Write down of convertible note 90 17 5 894 - - - - - - - - 90 17 5 894 ____________________________________________________________________________________________________________________________________________________________________  82 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 4. SEGMENT INFORMATION (continued) Business segments – secondary reporting The following tables present revenue, expenditure and certain asset information regarding business segments for the years ended 30 June 2006 and 30 June 2005. Year Ended 30 June 2006 Total segment revenue Resources A$000 4,298 Discontinued Operations Consolidated Financial Investments A$000 Property A$000 A$000 4,298 - - ____________________________________________________________________________________________________________________________________________________________________ Total assets/segment assets 152,605 7,703 - 160,308 ____________________________________________________________________________________________________________________________________________________________________ Acquisitions of non current 86,313 assets ______________________________________________________________________________________________________________________________________ 85,693 620 - Year Ended 30 June 2005 Resources A$000 Financial Investments A$000 Discontinued Operations Property A$000 Total segment revenue 742 30 193 Consolidated A$000 965 ____________________________________________________________________________________________________________________________________________________________________ Total assets/segment assets 42,996 2,430 15 45,441 ____________________________________________________________________________________________________________________________________________________________________ Acquisitions of non current assets 1,350 710 - 2,060 ____________________________________________________________________________________________________________________________________________________________________  83 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 5. REVENUES AND EXPENSES CONSOLIDATED 2006 A$000 2005 A$000 PARENT ENTITY 2005 A$000 2006 A$000 (a) Revenue from continuing operations Interest income from non related parties Interest income from wholly owned Group Database licence revenue Other revenue (b) Other income Other income includes the following specific income: Profit on sale from tenements Dividends received from wholly owned Group Foreign exchange gains (net) 4,026 769 3,809 - 232 40 4,298 441 - 616 1,057 - - 3 402 - 40 768 322 - 75 772 4,251 1,165 810 - - 810 441 348 1,698 2,487 - - - - (c) Share based payments expense 3,650 3,009 3,650 3,009 This share based payments expense relates to the requirement to recognise the cost of granting options to Directors, employees and consultants under AIFRS over the option vesting period which impacts all periods presented. A greater impact exists for the twelve months ended 30 June 2006 for share based payments expense when compared to 2005, as a result of the larger proportion of options vesting in 2006. The valuation of options under AIFRS does not allow the consideration of non-market related vesting conditions, which precludes the Company from discounting the option valuations to reflect the vesting conditions relating to positive outcome for the Langer Heinrich Uranium Project bankable feasibility study and completion of acceptable project funding. This has the result of increasing the option valuation when compared to the previously disclosed valuations by the Company, which were prepared based on the normal commercial practice of discounting valuations for non-market related vesting conditions. PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 6. INCOME TAX 84 (a) Income tax expense Current income tax Current income tax charge Deferred income tax Tax losses not brought to account as future income tax benefits Temporary differences not brought to account as future income tax benefits Prior year tax losses brought to account as current income tax Income tax expense reported in the income statement (b) Numerical reconciliation of income tax expense to prima facie tax payable Loss from continuing operations before income tax expense Profit from discontinued operations before income tax expense Tax at the Australian tax rate of 30% (2005 – 30%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Depreciation and amortisation Share-based payments Grant of options to Société Générale Australia Branch Write down of convertible note Other expenditure not allowable Capital gain on sale of Belmont Property Other income not assessable Specific tax expenditure allowable Difference in overseas tax rates Prior year tax losses not recognised now recouped Current year tax benefits not recognised Income tax expense reported in the income statement CONSOLIDATED PARENT ENTITY 2006 A$000 2005 A$000 2006 A$000 2005 A$000 (1,564) (2,229) (3,174) (1,368) 801 1,913 - 160 1,176 (413) 332 (16) (261) 3,435 1,208 - - - - - (7,486) (9,538) (13,121) (8,446) - 128 - - (7,486) (9,410) (13,121) (8,446) (2,246) (2,823) (3,936) (2,534) 18 1,095 - - 15 - - (348) 18 902 96 268 11 (103) (21) (90) - 1,095 - - 15 - - (348) - 902 96 268 11 - (21) (90) (1,466) (1,742) (3,174) (1,368) (98) (487) - - (413) 1,977 (16) 2,245 (261) 3,435 - 1,368 - - - -  85 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 6. INCOME TAX (continued) CONSOLIDATED 2006 A$000 2005 A$000 PARENT ENTITY 2006 2005 A$000 A$000 (c) Deferred income tax Deferred tax liabilities Revaluations of available for sale investments to fair value Recognition of restoration asset for accounting purposes Accelerated depreciation for tax purposes Delayed revenue recognition for tax purposes Deferred tax assets Delayed exploration expenditure recognition for tax purposes Revenue losses available for offset against future taxable income Capital losses available for offset against revaluations of investments to fair value Recognition of restoration liability for accounting purposes Provisions for employee benefits Lease incentive recognition for accounting purposes Provisions for write down of intercompany receivables Provisions for write down of intercompany investments Net deferred tax assets not recognised as not probable Net deferred tax assets recognised (d) Tax losses (1,344) (516) (17) (1,325) (165) (107) - (98) - - (107) - - - (27) - 702 267 - - 6,543 5,766 2,260 2,521 1,344 1,325 115 17 - - 7,105 (7,105) - 516 - 20 20 - 17 - 96 17 - - 20 20 6,080 2,641 - 5,975 478 8,824 461 5,636 (5,975) - (8,824) - (5,636) - Australian unused tax losses for which no deferred tax asset has been recognised Namibia unused tax losses for which no deferred tax asset has been recognised Malawi unused tax losses for which no deferred tax asset has been recognised* 7,028 8,404 7,535 8,404 10,556 8,226 1,588 534 - - - - Total unused tax losses for which no deferred tax asset has been recognised 19,172 17,164 7,535 8,404 Potential tax benefit at tax rates between 30% - 37.5% 6,543 5,766 2,260 2,521 * In addition to Malawi unused tax losses the Group has available Malawi accumulated tax exploration expenditure of $A3.5 million at 30 June 2006 (2005: A$1.2 million).  86 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 6. INCOME TAX (continued) This benefit for tax losses will only be obtained if: the Consolidated Entity continues to comply with the conditions for deductibility imposed by the Consolidated Entity derives future assessable income of a nature and of an amount (i) sufficient to enable the benefit from the deductions for the losses to be realised; (ii) tax legislation; and (iii) from the deductions for the losses. no changes in tax legislation adversely affect the Consolidated Entity in realising the benefit (e) Tax Consolidation Legislation The Company and its wholly owned Australian controlled entities have decided to implement the tax consolidation legislation as of 1 July 2003. The Australian Taxation Office has been notified of this decision. The accounting policy on implementation of the legislation is set out in Note 2(h). NOTE 7. DISCONTINUED OPERATION On 24 June 2005 settlement occurred on the sale of land and buildings at 5-7 Belmont Avenue, Belmont which represented the property business segment operations of the Group. Financial information relating to the discontinued operation for the period to the date of disposal is set out below. (a) Financial performance and cash flow information for the year ended 30 June 2006 and the period 1 July 2004 to 24 June 2005 Revenue Expenses Profit before income tax expense Income tax expense Profit from discontinued operation Basic and diluted earnings per share (cents) Net cash inflow from ordinary activities Net cash inflow from sale of commercial premises Net cash outflow from repayment of secured bank loans Net cash outflow from other financing activities Net increase in cash generated by the commercial premises Consolidated 2006 A$000 - - - - - - - - - - - 2005 A$000 193 (65) 128 - 128 0.04 60 1,200 (733) (99) 428  87 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 7. DISCONTINUED OPERATION (continued) (b) Carrying amount of assets and liabilities Cash and cash equivalents Trade and other receivables Property, plant and equipment Total assets Trade and other payables Interest bearing loans and borrowings Intercompany loan Total liabilities Net assets (c) Details of the sale of the commercial premises for the year ended 30 June 2006 and the period 1 July 2004 to 24 June 2005 are as follows: Cash consideration received Carrying amount of net assets sold Gain on sale before related income tax Income tax expense Gain on sale after related income tax expense As at 30 June 2006 A$000 - - - As at 24 June 2005 A$000 10 6 1,114 - - - - - - 1,130 (3) (738) (324) (1,065) 65 Consolidated 2006 A$000 - - 2005 A$000 1,200 (1,114) - - - 86 - 86 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 8. CASH AND CASH EQUIVALENTS 88 Cash at bank and in hand Bank bills Short-Term deposit CONSOLIDATED 2005 A$000 2006 A$000 PARENT ENTITY 2005 2006 A$000 A$000 5,247 21,995 32,536 1,244 38,185 60 160 21,995 522 755 38,185 60 59,778 39,489 22,677 39,000 Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-Term deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. At 30 June 2006, the Group had available A$74,005,000 (2005: A$1,467,000) of undrawn committed borrowing facilities in respect of which all conditions precedent have been met. (a) Reconciliation of net loss after tax to net cash flows from operating activities Net loss (7,486) (9,410) (13,121) (8,446) Adjustments for Depreciation and amortisation Exploration expenditure Provision for non-recovery of intercompany loan Provision for non-recovery of intercompany investments Provision for non-recovery of convertible note Profit on disposal of land and buildings 223 4,233 90 5,113 95 - 32 - - - - - - - 894 (86) 11,464 3,624 319 - - - 894 -  89 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 8. CASH AND CASH EQUIVALENTS (continued) (a) Reconciliation of net profit after tax to net cash flows from operating activities (continued) Profit on disposal of tenements Bad debts written off Provision for doubtful debts Database licence revenue Grant of options on establishment of loan facility Net exchange differences Share options expensed Changes in assets and liabilities Decrease/(increase) in trade and other receivables Increase in trade and other payables Increase in provisions (Decrease)/increase in borrowings Net cash from operating activities (b) Disclosure of financing facilities Refer to Note 16. NOTE 9. TRADE AND OTHER RECEIVABLES Current Trade receivables - (a) Less provision for doubtful debts Net trade receivables Interest receivable Deferred lease rental Prepayments GST and VAT - (b) Sundry debtors - (c) Total current receivables CONSOLIDATED 2005 2006 A$000 A$000 PARENT ENTITY 2005 A$000 2006 A$000 (441) - - (232) - (616) 3,650 362 672 316 (33) (810) 5 17 - 321 - 3,009 (492) 4 31 33 (441) - - - - (1,698) 3,650 321 546 255 (33) - - - - 321 - 3,009 (799) 126 31 33 648 (1,281) 1,357 (1,175) - - - 36 - 70 3,583 6 3,695 27 (17) 10 324 33 84 97 20 568 - - - 11 - 47 91 2 151 - - - 324 33 7 90 18 472  90 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 9. TRADE AND OTHER RECEIVABLES (continued) Current (continued) (a) Trade receivables are non-interest bearing and are generally on 30-90 day terms. An allowance for doubtful debts is made when there is objective evidence that a trade receivable is impaired. An allowance of A$NIL (2005: A$17,469) has been recognised as an expense for the current year for specific debtors for which such evidence exists. (b) GST and VAT debtor primarily arises from the Langer Heinrich Uranium Project in Namibia. Interest is not normally charged and collateral is not normally obtained. (c) Sundry debtors generally arise from transactions outside the usual operating activities of the Consolidated Entity and Company. Interest is not normally charged and collateral is not normally obtained. Non Current Unsecured loans to wholly owned Group - (d) Less provision for non-recovery Net unsecured loans to the wholly owned Group Interest receivable - (e) Less provision for non-recovery Net interest receivable Total non current receivables CONSOLIDATED 2005 2006 A$000 A$000 PARENT ENTITY 2005 A$000 2006 A$000 - - - - - - - - - - 94 (94) - - 64,498 (20,267) 13,453 (8,803) 44,231 4,650 - - - 94 (94) - 44,231 4,650 (d) Of the unsecured loans to the wholly owned Group, the Company charges interest only on the loan to Paladin Finance Pty Ltd (2005: Langer Heinrich Uranium (Pty) Ltd). The interest rate payable is the standard commercial lending rate of National Australia Bank plus 2% (2005: NAB plus 2%). In the year ending 30 June 2006 the average rate charged was 11.4% (2005: 11.2%) and disclosure of interest revenue earned is set out in Note 5(a). (e) During the year ended 30 June 2006 the Company resolved to write-off the interest receivable from Didasko Technologies Pty Ltd. These amounts had been fully provided for in previous periods.  91 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 10. OTHER FINANCIAL ASSETS Non Current Investments in controlled entities – (a) Less provision for non-recovery Net investment in controlled entities CONSOLIDATED 2005 2006 A$000 A$000 PARENT ENTITY 2005 A$000 2006 A$000 - - - - - - 49,180 (1,593) 1,961 (1,535) 47,587 426 Available for sale financial assets – (b) 7,703 2,430 2,050 - Held to maturity investment – (c) Less provision for non-recovery Net held to maturity investment - - - 800 (800) - - - - 800 (800) - Total non current other financial assets 7,703 2,430 49,637 426 (a) Investments in material controlled entities NAME COUNTRY OF INCORPORATION INVESTMENT PERCENTAGE INTEREST HELD COST OF PARENT ENTITY’S INTEREST Paladin Finance Pty Ltd ∫3 Paladin Energy Minerals NL ∫ Eden Creek Pty Ltd * ∫ Etron Properties Pty Ltd ∫ Paladin (Africa) Ltd # Lahndrik Holdings SA¹ Langer Heinrich Uranium (Pty) Ltd Tarquin Investments (Pty) Ltd^ 2 Australia Australia Australia Australia Malawi Luxembourg Namibia 2006 % 100 100 100 - 100 - 100 Namibia 100 Total investments in controlled entities Less provision for non-recovery of investments Net investments in controlled entities 2005 % - 100 100 100 100 100 100 100 2006 A$000 47,480 - 1,700 - - - 2005 A$000 - - 1,700 261 - - - - - - 49,180 (1,593) 47,587 1,961 (1,535) 426  92 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 10. OTHER FINANCIAL ASSETS (continued) (a) Investments in controlled entities (continued) All investments comprise ordinary shares and all shares held are unquoted. ∫ ^ * # 1 2 ³ Held by Paladin Resources Ltd Held by Langer Heinrich Uranium (Pty) Ltd These entities are not required to prepare or lodge audited accounts Held by Paladin Energy Minerals NL Liquidated in June 2006. Acquired on 27 September 2004 for N$900,000 (Namibian dollars) (A$202,548). The only asset in this company is land and building in the form of an office and apartment with a fair value of A$202,548 which equates to the cash consideration paid. No goodwill has arisen on acquisition of this entity. Incorporated on 22 November 2005. Acquisition Disclosure CONSOLIDATED 2005 A$000 2006 A$000 PARENT ENTITY 2005 2006 A$000 A$000 Outflow of cash to acquire controlled entities, net of cash acquired Cash consideration Less: balances acquired Cash Outflow of cash - - - 203 - 203 - - - - - - (b) Available for Sale Financial Assets The Consolidated Entity has an investment in Deep Yellow Ltd (Deep Yellow) as a result of the sale of non-core uranium properties. The Consolidated Entity holds 30,450,000 (2005:15,000,000) fully paid ordinary shares, 25,000,000 (2005: 25,000,000) unlisted options exercisable at one cent on or before 31 December 2007, and 12,500,000 (2005: Nil) unlisted options exercisable at twelve cents on or before 15 July 2008. The holding of these fully paid ordinary shares represents less than 5% (2005: less than 5%) of the ordinary shares of Deep Yellow, a uranium explorer. The quoted market value of the shares and options in Deep Yellow at 30 June 2006 is A$7,703,000 (2005: A$2,430,000) based on a share price of 12.5 cents per share (2005: 6.7 cents). (c) Held to Maturity Investment During the year ended 30 June 2006 the Company resolved to write off the amounts owing from Didasko Technologies Pty Ltd. These amounts had been fully provided for in previous periods.  93 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 11. DEFERRED BORROWING COSTS Non Current Deferred borrowing costs CONSOLIDATED 2005 A$000 2006 A$000 PARENT ENTITY 2006 A$000 2005 A$000 - 170 - - Deferred borrowing costs represent the capitalised costs of establishing the secured bank loan disclosed in Note 16. NOTE 12. PROPERTY, PLANT AND EQUIPMENT Plant and equipment – at cost Less provision for depreciation Total plant and equipment Leasehold improvements – at cost Less provision for depreciation Total leasehold improvements Technical database – at cost Less provision for amortisation Total technical database Project generation database – at cost Less provision for amortisation Total project generation database Land and buildings - at cost Less provision for depreciation Total land and buildings Construction work in progress – at cost CONSOLIDATED 2005 A$000 2006 A$000 PARENT ENTITY 2006 A$000 2005 A$000 1,008 (562) 446 324 (85) 239 270 (263) 7 579 (475) 104 203 (15) 188 79,458 753 (480) 674 (445) 527 (410) 273 294 (14) 280 262 (262) - 579 (415) 164 203 (6) 197 184 229 301 (74) 227 117 287 (14) 273 - - - - - - - - - - - - - - - - - - - - Total non current property, plant and equipment 80,442 1,098 456 390  94 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 12. PROPERTY, PLANT AND EQUIPMENT (continued) Reconciliations Reconciliations of the carrying amounts of each class of property, plant and equipment at the beginning and end of the year are set out below: Equipment Total Plant and Databases Land and Leasehold Construction Building Improvements Work in Progress A$000 A$000 A$000 A$000 A$000 A$000 Consolidated – 2006 Carrying amount at start of year Additions Depreciation and amortisation expense Depreciation capitalised Carrying amount at end of year Parent Entity - 2006 Carrying amount at start of year Additions Depreciation and amortisation expense Carrying amount at end of year Consolidated – 2005 Carrying amount at start of year Additions Depreciation and amortisation expense Depreciation capitalised Carrying amount at end of year Parent Entity - 2005 Carrying amount at start of year Additions Depreciation and amortisation expense Carrying amount at end of year 1,098 79,567 (223) - 80,442 390 161 (95) 456 249 979 (90) (40) 1,098 26 396 (32) 390 273 255 (82) - 446 117 147 (35) 229 26 298 (17) (34) 273 26 109 (18) 117 164 8 (61) - 111 - - - - 223 - (59) - 164 - - - - 197 - (9) - 188 - - - - - 203 - (6) 197 - - - - 280 30 (71) - 239 273 14 (60) 227 - 294 (14) - 280 - 287 (14) 273 184 79,274 - - 79,458 - - - - - 184 - - 184 - - - -  95 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 13. EXPLORATION AND EVALUATION EXPENDITURE Canadian securities law requires the following description of the Consolidated Entity’s interests in mineral property tenements: Langer Heinrich Uranium Project (Namibia) - Paladin 100% The Langer Heinrich Uranium Project consists of one Mining Licence – ML 140 - covering 4,375 hectares in the Namibia Naukluft Desert 180km west of Windhoek, the capital of Namibia, and 80 kilometres east of the major seaport of Walvis Bay. The licence was granted on 26 July 2005 for a 25 year term expiring on 25 August 2030. Rights conferred by the licence include the right to mine and sell base and rare metals and nuclear fuel groups of minerals and to carry on prospecting operations. The project was purchased from Acclaim Uranium NL (now Aztec Mining Ltd) in August 2002. The Langer Heinrich Uranium Project is owned through a wholly owned Namibian entity, Langer Heinrich Uranium (Pty) Ltd. Kayelekera Uranium Project (Malawi) – Paladin 100% The Kayelekera Uranium Project consists of one exclusive prospecting licence – EPL 070 - covering 15,700 hectares in northern Malawi 650 kilometres north of Lilongwe, the capital of Malawi, and 40 kilometres west of the provincial town of Karonga on the shore of Lake Malawi. Rights conferred by the licence include the exclusive right to carry on prospecting operations for uranium and associated minerals. EPL 070 was granted on 26 January 1998 and the licence was renewed on 25 July 2005 for a further two years to 25 July 2007. The Consolidated Entity acquired its interest in the Kayelekera Uranium Project in February 1988 when it entered into a joint venture with Balmain Resources Pty Ltd, an unlisted company based in Perth Western Australia. In 2000 the Consolidated Entity increased its interest in the Kayelekera Project to 90% and in July 2005 acquired the remaining 10% interest held by Balmain Resources Pty Ltd. The Kayelekera Uranium Project is now held 100% through a wholly owned Malawian entity, Paladin (Africa) Limited. Manyingee Uranium Project (Australia) – Paladin 100% The Manyingee Uranium Project consists of three granted mining leases – M08/86, M08/87 and M08/88 - covering 1,307 hectares in the North West of Western Australia, 1,100 kilometres north of Perth, the State Capital and 90 kilometres south of the township of Onslow on the North West coast. The Consolidated Entity purchased the Manyingee Uranium Project in 1998 from Afmeco Mining and Exploration Pty Ltd (“AFMEX”), a subsidiary company of Cogema of France. Under the terms (as amended) of the purchase agreement a final payment of A$750,000 is payable to AFMEX when all development approvals have been obtained. Royalties of 2.5% for the first 2,000 tonnes of uranium oxide and 1.5% for the following 2,000 tonnes of uranium oxide are also payable to AFMEX and associated companies which formerly held interests in the project. The three mining leases were granted on May 18, 1989 for a 21-year term renewable for a further term or terms of 21 years. Rights conferred by the three mining leases include the exclusive right to explore and mine minerals, subject to environmental and other approvals. The interest in Manyingee is held through the wholly owned entity, Paladin Energy Minerals NL.  96 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 13. EXPLORATION AND EVALUATION EXPENDITURE (continued) Oobagooma Uranium Project (Australia) – Paladin 100% The Oobagooma Uranium Project consists of four applications for exploration licences covering 45,200 hectares in the West Kimberley region of northern Western Australia, 1,900 kilometres north-north-east of Perth, the State Capital and 70 kilometres north east of the regional town of Derby. The four applications for exploration licences are 04/145 and 04/146 lodged on December 28, 1983 and 04/776 and 04/777 lodged on November 28, 1991 which largely overly the earlier applications. The Consolidated Entity purchased the Oobagooma Project in 1998 from AFMEX. Under the terms of the purchase agreement a final payment of A$750,000 is payable to AFMEX when the tenements are granted. A gross royalty of 1.0% on production is also payable to AFMEX. The applications for exploration licences remain in the name of Afmeco Pty Ltd (a company associated with AFMEX) until the date that they are granted after which title will be transferred. The interest in Oobagooma is held through the wholly owned entity, Paladin Energy Minerals NL. Other mineral property interests The Consolidated Entity holds various other mineral property interests, however, these are not considered material and as a result no further disclosure of mineral property tenement information has been included in the consolidated schedules of information. Environmental contingency The Consolidated Entity’s exploration, evaluation and development activities are subject to various national, federal, provincial and local laws and regulations governing the protection of the environment. These laws and regulations are continually changing and generally becoming more restrictive. The Consolidated Entity has made, and expects to make in the future, expenditures to comply with such laws and regulations. The impact, if any, of future legislative or regulatory changes cannot be determined.  97 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 13. EXPLORATION AND EVALUATION EXPENDITURE (continued) The following table summarises the Consolidated Entity’s interest in mineral properties as at 30 June 2006: Areas of Interest Acquisition A$000 Expenditure A$000 Carrying value A$000 Langer Heinrich Uranium Project Kayelekera Uranium Project Manyingee Uranium Project Oobagooma Uranium Project Other Projects Balance 30 June 2006 15 5,785 1,157 174 - 7,131 1,559 - - - - 1,559 1,574 5,785 1,157 174 - 8,690 The following table summarises the Consolidated Entity’s interest in mineral properties as at 30 June 2005: Areas of Interest Acquisition A$000 Expenditure A$000 Carrying value A$000 Langer Heinrich Uranium Project Kayelekera Uranium Project Manyingee Uranium Project Oobagooma Uranium Project Other Projects Balance 30 June 2005 15 171 1,157 174 - 1,517 169 - - - - 169 184 171 1,157 174 - 1,686  98 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 13. EXPLORATION AND EVALUATION EXPENDITURE (continued) The following table details the Consolidated expenditures (Parent Entity expenditures $Nil) on interests in mineral properties by area of interest for the year ended 30 June 2006: Langer Kayelekera Manyingee Oobagooma Other Project Heinrich A$000 A$000 Project A$000 Project A$000 Projects Projects A$000 A$000 Total 184 171 1,157 174 - 1,686 Areas of Interest Balance 30 June 2005 Acquisition Property Payments - 5,614 - - - 73 (12) - 255 1 381 Project exploration and evaluation expenditure Interest received Joint venture contributions Tenement Costs Labour Consultants and contractors Materials and utilities Transportation and communications Outside services Legal and accounting Insurance Camp expenses Overheads Other 1 - 13 - 59 182 25 93 - 209 2,029 431 321 873 93 35 68 - - - 30 - 1 - - - - - - - - Total expenditure Exploration expenditure expensed 1,390 3,740 31 - (3,740) (31) Exploration expenditure capitalised 1,390 - - - - - Cost of tenements sold Balance 30 June 2006 - - - - - - - - - - - - - - - - - - - - - 5 137 110 4 147 5,614 (12) - 36 773 615 107 561 - 2,902 1 - 17 - 41 184 25 123 - 309 462 5,623 (462) (4,233) - - - 1,390 - 8,690 1,574 5,785 1,157 174  99 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 13. EXPLORATION AND EVALUATION EXPENDITURE (continued) The following table details the Consolidated expenditures (Parent Entity expenditures $Nil) on interests in mineral properties by area of interest for the year ended 30 June 2005: Langer Kayelekera Manyingee Oobagooma Other Project Heinrich A$000 A$000 Project A$000 Project A$000 Projects Projects A$000 A$000 Total 15 171 1,157 174 - 1,517 Areas of Interest Balance 30 June 2004 Acquisition Property Payments - - - - - (5) 202 6 431 - 201 Project exploration and evaluation expenditure Interest received Joint venture contributions Tenement costs Labour Consultants and contractors Materials and utilities Transportation and communications Outside services Legal and accounting Insurance Camp expenses Overheads Other 109 31 50 228 225 21 5 32 136 58 2,661 293 149 157 34 47 19 - - - 30 2 - - - - - - - 5 2 Total expenditure 4,278 812 39 - - - - - - - - - - - - - 1 1 - - (9) 20 38 37 4 19 - (5) (9) 56 672 258 85 461 2 2,820 5 2 3 19 12 135 38 85 388 298 152 5,282 Exploration expenditure expensed (4,109) Exploration expenditure capitalised 169 Cost of tenements sold Balance 30 June 2005 (812) (39) (1) (152) (5,113) - - - - - - - 184 171 1,157 174 - - - 169 - 1,686  100 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 14. TRADE AND OTHER PAYABLES CONSOLIDATED 2005 A$000 2006 A$000 PARENT ENTITY 2006 A$000 2005 A$000 Current Trade and other payables Lease incentive Total current payables 11,059 15 11,074 660 67 727 1,088 15 1,103 Trade payables are non-interest bearing and are normally settled on 60 day terms. Non Current Lease incentive Unsecured loans from wholly owned Group Total non current payables 41 - 41 - - - 41 - 41 524 67 591 - 334 334 The unsecured loans from wholly owned Group are interest free and have no fixed terms of repayment. NOTE 15. UNEARNED REVENUE Current Unearned revenue Non Current Unearned revenue CONSOLIDATED 2005 A$000 2006 A$000 PARENT ENTITY 2006 A$000 2005 A$000 242 979 - - - - - - Unearned revenue represents the database licence revenue received from Deep Yellow Ltd for the use of the Frome Basin database from 15 July 2005 for a period of 6 years.  101 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 16. INTEREST BEARING LOANS AND BORROWINGS Current Unsecured bank loans Non Current Secured bank loan Deferred borrowing costs Total non current Maturity CONSOLIDATED 2005 A$000 2006 A$000 PARENT ENTITY 2006 A$000 2005 A$000 2007 - 533 2012 23,241 (3,907) 19,334 - - - - - - - 533 - - - Fair value disclosures Details of the fair value of the Group’s interest bearing liabilities are set out in Note 20. Unsecured bank loan The bank loan from Société Générale Australia Branch related to funding the Bankable Feasibility Study for the Langer Heinrich Uranium Project and was repaid during the year. This facility was unsecured but had a negative pledge which imposed certain covenants on the Consolidated Entity. The bank loan bears interest at the bank bill standard yield plus 3%. At 30 June 2005 A$500,000 plus interest had been drawn of the total facility of A$2,000,000. Secured bank loan During the year the Consolidated Entity completed project finance facilities amounting to US$71 million for construction of the Langer Heinrich Uranium Project. The financing has been provided by Société Générale Australia Branch (as lead arranger), Nedbank Capital and Standard Bank Plc and consists of a 7 year Project Finance Facility of US$65 million and a Standby Cost Overrun Facility of US$6 million. The Project Finance Facility bears interest at the London Interbank Offered Rate (LIBOR) plus 3.5% up to and including practical completion of the project, and the interest cost reduces to LIBOR plus 2.5% after practical completion. No requirement for political risk insurance exists under the terms of the Project Finance Facility The facilities are secured with fixed and floating charges over the assets of Langer Heinrich Uranium (Pty) Ltd and its immediate holding companies. Paladin Resources Ltd has provided a project completion guarantee as part of the facilities. At 30 June 2006 US$17 million had been drawn of the project finance facilities, leaving available facilities of US$54 million. The deferred borrowing costs represent the capitalised costs of establishing the facilities.  102 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 16. INTEREST BEARING LOANS AND BORROWINGS (continued) Financing facilities available At reporting date, the following financing facilities had been negotiated and were available: Total facilities: Unsecured bank loans Secured bank loans Facilities used at reporting date Unsecured bank loans Secured bank loans Facilities unused at reporting date Unsecured bank loans Secured bank loans Total facilities Facilities used at reporting date Facilities unused at reporting date CONSOLIDATED 2005 A$000 2006 A$000 PARENT ENTITY 2006 A$000 2005 A$000 - 97,246 2,000 - 97,246 2,000 - 23,241 23,241 533 - 533 - 74,005 1,467 - 74,005 1,467 23,241 74,005 533 1,467 97,246 2,000 - - - - - - - - - - - - 2,000 - 2,000 533 - 533 1,467 - 1,467 533 1,467 2,000 Assets pledged as security The carrying amounts of assets pledged as security for current and non current interest bearing liabilities are: CONSOLIDATED 2005 A$000 2006 A$000 PARENT ENTITY 2006 A$000 2005 A$000 Current Floating charge -Cash and cash equivalents -Trade and other receivables Total current assets pledged as security Non current -Property, Plant and equipment -Exploration and evaluation expenditure 36,862 3,543 40,405 79,719 1,574 Total non current assets pledged as security 81,293 Total assets pledged as security 121,698 - - - - - - - - - - - - - - - - - - - - - PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 17. PROVISIONS 103 Current Employee benefits (Note 24) Non Current Employee benefits (Note 24) Restoration Total non current provisions Restoration – Non Current At 1 July 2005 Arising during the year Utilised FX Movements Discount rate adjustment At 30 June 2006 CONSOLIDATED 2005 A$000 2006 A$000 PARENT ENTITY 2006 A$000 2005 A$000 328 65 266 65 54 3,531 3,585 - - - 54 - 54 - - - CONSOLIDATED 2006 A$000 - 3,574 - (43) - 3,531 Restoration A provision for restoration has been recorded in relation to the Langer Heinrich uranium plant operations for the costs of dismantling and demolition of infrastructure or decommissioning, the removal of residual material and the remediation of disturbed areas specific to the infrastructure to a state acceptable to various authorities. Final restoration is not expected until the cessation of operations, currently estimated to be beyond 2020. Employee Benefits Please refer to Note 24.  104 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 18. CONTRIBUTED EQUITY AND RESERVES (a) Issued and paid up capital Ordinary shares Number of Shares 2005 2006 CONSOLIDATED PARENT ENTITY 2006 A$000 2005 A$000 Issued and fully paid 454,235,713 400,885,713 148,182 65,992 ____________________________________________________________________________________________________________________________________________________________________ Effective 1 July 1998, the Corporations legislation in place abolished the concepts of authorised capital and par value shares. Accordingly, the Parent does not have authorised capital nor par value in respect of its issued shares. Fully paid ordinary shares carry one vote per share and carry the right to dividends. (b) Movements in ordinary shares on issue Date August 2004 August 2004 September 2004 December 2004 December 2004 March 2005 April 2005 Balance 30 June 2004 Options conversions Options conversions Placement Options conversions Options conversions Options conversions Placement Transfer from reserves Less: Transaction costs arising on share issues Number of Shares Issue Price A$ 333,685,713 4,200,000 3,800,000 7,500,000 4,700,000 10,000,000 1,000,000 36,000,000 0.01 0.01 0.40 0.15 0.06 0.22 1.05 Total A$000 24,265 50 49 3,000 705 550 220 37,800 363 (1,010) ____________________________________________________________________________________________________________________________________________________________________ ____________________________________________________________________________________________________________________________________________________________________ Balance 30 June 2005 400,885,713 65,992  105 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 18. CONTRIBUTED EQUITY AND RESERVES (continued) (b) Movements in ordinary shares on issue (continued) Date Number of Shares Issue Price A$ Balance 30 June 2005 Option conversions July 2005 Option conversions August 2005 September 2005 Option conversions September 2005 Kayelekera acquisition October 2005 October 2005 October 2005 February 2006 May 2006 May 2006 Option conversions Option conversions Placement Option conversions Option conversions Option conversions Transfer from reserves Less: Transaction costs arising on share issues 400,885,713 150,000 350,000 550,000 4,350,000 2,250,000 750,000 35,000,000 100,000 7,600,000 2,250,000 0.22 0.22 0.22 1.29 0.22 0.32 2.20 0.22 0.22 0.32 Total A$000 65,992 33 77 121 5,612 495 240 77,000 22 1,672 720 503 (4,305) ____________________________________________________________________________________________________________________________________________________________________ Balance 30 June 2006 454,235,713 148,182 (c) Issued Options Unlisted Options (i) Exercisable at 1.2 cents, on or before 31 December 2004 Number of Options 2005 2006 Balance at 1 July Exercised during year - - 4,200,000 (4,200,000) ____________________________________________________________________________________________________________________________________________________________________ Balance at 30 June - - ____________________________________________________________________________________________________________________________________________________________________ The options above were exercised in August 2004 raising A$50,400 in contributed equity and at the time of exercise the shares had a market value of A$651,000.  106 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 18. CONTRIBUTED EQUITY AND RESERVES (continued) (c) Issued options (continued) Unlisted options (continued) (ii) Exercisable at 1.3 cents, on or before 30 November 2005 Number of Options 2005 2006 Balance at 1 July Exercised during year - - 3,800,000 (3,800,000) ____________________________________________________________________________________________________________________________________________________________________ Balance at 30 June - - ____________________________________________________________________________________________________________________________________________________________________ The options above were exercised in August 2004 raising A$49,400 in contributed equity and at the time of exercise the shares had a market value of A$570,000. (iii) Exercisable at 5.5 cents, on or before 30 September 2007 Balance at 1 July Granted during year Exercised during year - - - - 10,000,000 (10,000,000) ____________________________________________________________________________________________________________________________________________________________________ Balance at 30 June - - ____________________________________________________________________________________________________________________________________________________________________ These options above were granted to Société Générale Australia Branch as part of the establishment of a A$2,000,000 loan facility on 30 September 2004, refer Note 16. The options were exercised in December 2004 raising A$550,000 in contributed equity and at the time of exercise the shares had a market value of A$4,850,000. Unlisted Options – Directors, Employees and Consultants On 23 March 2004 the Directors approved the Employee Share Incentive Option Plan (Plan) for which up to ten percent of the ordinary shares on issue can be on offer at any one time to Directors, employees and consultants directly engaged in corporate, project development, exploration and evaluation work for the Company. The maximum term of the options is 5 years, with the vesting requirements and exercise price of the options determined by the Directors at the time of grant. The options are convertible into fully paid ordinary shares of the Company on a one for one basis and may not be exercised within 12 months of their date of grant, except in the case of a takeover bid or a scheme of arrangement. Options are granted at no cost under the plan and carry no dividend or voting rights. On 23 February 2006 the Board resolved that Non-executive Directors would be remunerated solely by way of fees and statutory superannuation and would not be eligible to receive an allocation of incentive options.  107 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 18. CONTRIBUTED EQUITY AND RESERVES (continued) (c) Issued Options (continued) Unlisted Options – Directors, Employees and Consultants (continued) (iv) Exercisable at 15 cents, on or before 30 November 2004 (granted 20 June 2002) (No vesting requirements) Number of Options 2005 2006 Balance at 1 July Exercised during year - - 4,700,000 (4,700,000) ____________________________________________________________________________________________________________________________________________________________________ Balance at 30 June - - ____________________________________________________________________________________________________________________________________________________________________ in December 2004 raising The options above were exercised A$705,000 in contributed equity and at the time of exercise the shares had a market value of A$2,279,500. (v) Exercisable at 22 cents, on or before 26 May 2006 (granted 28 May 2004 to 30 June 2004) (No vesting requirements) Balance at 1 July Exercised during year 11,000,000 12,000,000 (1,000,000) (11,000,000) ____________________________________________________________________________________________________________________________________________________________________ Balance at 30 June - 11,000,000 ____________________________________________________________________________________________________________________________________________________________________ In July 2005 150,000 options above were exercised raising A$33,000 in contributed equity and at the time of exercise the shares had a market value of A$208,500. In August 2005 350,000 options above were exercised raising A$77,000 in contributed equity and at the time of exercise the shares had a market value of A$546,000. In September 2005 550,000 options above were exercised raising A$121,000 in contributed equity and at the time of exercise the shares had a market value of A$1,078,000. In October 2005 2,250,000 options above were exercised raising A$495,000 in contributed equity and at the time of exercise the shares had a market value of A$4,905,000. In February 2006 100,000 options above were exercised raising A$22,000 in contributed equity and at the time of exercise the shares had a market value of A$340,000. In May 2006 7,600,000 options above were exercised raising A$1,672,000 in contributed equity and at the time of exercise the shares had a market value of A$34,428,000.  108 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 18. CONTRIBUTED EQUITY AND RESERVES (continued) (c) Issued Options (continued) In March 2005 1,000,000 options above were exercised raising A$220,000 in contributed equity and at the time of exercise the shares had a market value of A$1,160,000. (vi) Exercisable at 32 cents, on or before 26 May 2006 (granted 28 May 2004 to 30 June 2004) (No vesting requirements) Number of Options 2006 2005 Balance at 1 July Exercised during year 3,000,000 (3,000,000) 3,000,000 - ____________________________________________________________________________________________________________________________________________________________________ Balance at 30 June - 3,000,000 ____________________________________________________________________________________________________________________________________________________________________ In October 2005 750,000 options above were exercised raising A$240,000 in contributed equity and at the time of exercise the shares had a market value of A$1,635,000. In May 2006 2,250,000 options above were exercised raising A$720,000 in contributed equity and at the time of exercise the share has a market value of A$10,192,500.  109 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 18. CONTRIBUTED EQUITY AND RESERVES (continued) (c) Issued Options (continued) Unlisted Options – Directors, Employees and Consultants (continued) (vii) Exercisable at $1.00, on or before 30 November 2007 (granted 30 November 2004)* Number of Options 2005 2006 Balance at 1 July Granted during year 8,050,000 - - 8,050,000 ___________________________________________________________________________________________________________________________________________________________________ _ Balance at 30 June 8,050,000 8,050,000 ____________________________________________________________________________________________________________________________________________________________________ (viii) Exercisable at $1.00, on or before 20 December 2007 (granted 20 December 2004)* Balance at 1 July Granted during year 10,250,000 - - 10,250,000 ____________________________________________________________________________________________________________________________________________________________________ Balance at 30 June 10,250,000 10,250,000 ____________________________________________________________________________________________________________________________________________________________________ (ix) Exercisable at $1.25, on or before 30 November 2007 (granted 30 November 2004)* Balance at 1 July Granted during year 1,300,000 - - 1,300,000 ____________________________________________________________________________________________________________________________________________________________________ Balance at 30 June 1,300,000 1,300,000 ____________________________________________________________________________________________________________________________________________________________________ (x) Exercisable at $1.50, on or before 15 July 2008 (granted 15 July 2005)* Balance at 1 July Granted during year Lapsed during year - - - _ ___________________________________________________________________________________________________________________________________________________________________ - - 250,000 (50,000) Balance at 30 June 200,000 ____________________________________________________________________________________________________________________________________________________________________ * Vest on positive outcome for Langer Heinrich Uranium Project Bankable Feasibility Study together with completion of acceptable project funding. Vesting conditions were met by 30 June 2006. 110 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 18. CONTRIBUTED EQUITY AND RESERVES (continued) (c) Issued Options (continued) Unlisted Options – Directors, Employees and Consultants (continued) (xi) Exercisable at $2.80, on or before 13 January 2009 (granted 13 January 2006 to 16 February 2006) (900,000 vest 13 January 2007 and 1,950,000 vest 13 January 2008). Number of Options 2005 2006 Balance at 1 July Granted during year - 2,850,000 - - ____________________________________________________________________________________________________________________________________________________________________ Balance at 30 June 2,850,000 - ____________________________________________________________________________________________________________________________________________________________________ (xii) Exercisable at $5.50, on or before 28 April 2009 (granted 27 April 2006) (782,500 vest 31 October 2007 and 782,500 vest October 2008). Balance at 1 July Granted during year - 1,565,000 - - ____________________________________________________________________________________________________________________________________________________________________ Balance at 30 June 1,565,000 - ____________________________________________________________________________________________________________________________________________________________________ 111 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 NOTE 18. CONTRIBUTED EQUITY AND RESERVES (continued) (d) Reserves CONSOLIDATED PARENT Listed option application reserve A$000 Share based payments reserve A$000 Available for sale reserve Total A$000 A$000 Listed option application reserve A$000 Share based payments reserve A$000 Available for sale reserve Total A$000 A$000 At 1 July 2004 174 545 - 719 174 545 Net unrealised gains/ (losses)on available- for-sale investments Share based payments - - At 30 June 2005 174 Net unrealised gains/ (losses)on available- for-sale investments Share based payments - - At 30 June 2006 174 - 1,720 2,967 3,512 - 1,720 1,720 2,967 5,406 - 2,758 2,758 3,147 6,659 - 4,478 3,147 11,311 - - 174 - - 174 - 2,967 3,512 - 3,147 6,659 - - - - 57 - 57 719 - 2,967 3,686 57 3,147 6,890 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 18. CONTRIBUTED EQUITY AND RESERVES (continued) 112 (d) Reserves (continued) Nature and purpose of reserves Listed option application reserve This reserve consists of proceeds for the issue of listed options, net of expenses of issue. These listed options expired unexercised and no restriction exists for the distribution of this reserve. Share based payments reserve This reserve is used to record the value of equity benefits provided to Directors, employees and consultants as part of their remuneration. Refer to Note 26 for further details of the share option plan. Available for sale reserve This reserve records the fair value changes on the available for sale financial assets as set out in Note 10(b).  113 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 19. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group’s principal financial instruments comprise bank loans, cash, short-term deposits, commercial bank bills and investment in shares. The main purpose of these financial instruments is to either raise finance, or maintain finance for the Group’s operations. The Group has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. It is, and has been throughout the period under review, the Group’s policy that no trading in financial instruments shall be undertaken. The main risks arising from the Group’s financial instruments are cash flow interest rate risk, liquidity risk, foreign currency risk and credit risk. Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in Note 2 to the Financial Statements. (a) Credit Risk Exposure The credit risk on financial assets of the Group which have been recognised on the Consolidated Balance Sheets, other than investments in shares, equates to the carrying amount, net of any provisions for doubtful debts or non-recovery. The Group trades only with recognised, credit worthy third parties. In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant. With respect to credit risk arising from other financial assets of the Group, which comprise cash and cash equivalents, the Group’s exposure to credit risk arises from default of the counter party, with a maximum exposure equal to the carrying amount of these instruments. During the year ended 30 June 2005 the Company made full provision for non-recovery of the Didasko Technologies Pty Ltd convertible note and interest receivable, refer Note 10(c). These amounts have been written off in the year to 30 June 2006.  114 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 19. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) (b) Interest Rate Risk Exposure The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s cash, short-term deposits, commercial bank bills and long term debt obligations with floating interest rates. These financial assets and liabilities with variable rates expose the Group to cash flow interest rate risk. All other financial assets and liabilities, in the form of receivables, investments in shares, payables and provisions, are non-interest bearing. The Group currently does not engage in any hedging or derivative transactions to manage interest rate risk. (c) Net Fair Value of Financial Assets and Liabilities The net fair value of cash, convertible note, both secured and unsecured bank loans and non-interest bearing financial assets and financial liabilities of the Group equates to their carrying amount, net of any provision for doubtful debts or non-recovery. The net fair value of other monetary financial assets and financial liabilities is based upon market prices where a market exists or by discounting the expected future cash flows by the current interest rates for assets and liabilities with similar risks profiles. The net fair value of equity investments traded on organised markets have been valued by reference to market prices prevailing at balance date. For non-traded equity investments, the net fair value is an assessment of circumstances pertaining to a particular investment. (d) Price risk The Group is exposed to uranium price risk. Uranium prices can be volatile and are influenced by factors beyond the Group’s control. In order to reduce the exposure to extreme price volatility the Group enters into sales contracts for future production which contain floor prices set at reasonable levels to provide protection in the event of significant price reduction. (e) Liquidity risk The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans. (f) Foreign currency risk The Group does not have foreign currency risk for non-monetary assets and liabilities of the Namibia and Malawi operations as these are deemed to have a functional currency of Australian dollars. The Group had no significant monetary foreign currency assets and liabilities during the year apart from South African rand cash term deposits and United States dollar bank loans held for the purposes of funding a portion of the mine construction for the Langer Heinrich Uranium Project. The Group currently does not engage in any hedging or derivative transactions to manage foreign currency risk.  115 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 20. FINANCIAL INSTRUMENTS Fair values Set out below is a comparison by category of carrying amounts and fair values of all of the Group’s financial instruments recognised in the financial statements, including those classified under discontinued operations. Market values have been used to determine the fair value of listed available-for-sale investments. The fair values of interest bearing loans and borrowings have been calculated by discounting the expected future cash flows at prevailing interest rates. CARRYING AMOUNT/FAIR VALUE CONSOLIDATED 2005 2006 A$000 A$000 PARENT ENTITY 2005 2006 A$000 A$000 59,778 3,695 39,489 568 22,677 151 39,000 472 - - 7,703 - - 2,430 44,231 47,587 2,050 4,650 426 - FINANCIAL ASSETS Current financial assets Cash and cash equivalents Trade and other receivables Non current financial assets Trade and other receivables Other financial assets Available for sale financial assets FINANCIAL LIABILITIES Current liabilities Trade and other payables Interest bearing loans and borrowings Non current liabilities Trade and other payables Interest bearing loans and borrowings 41 19,334 - - 41 - 11,074 - 727 533 1,103 - 591 533 334 -  116 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 20. FINANCIAL INSTRUMENTS (continued) Interest rate risk The following tables sets out the carrying amount, by maturity, of the financial instruments exposed to interest rate risk: Year ended 30 June 2006 CONSOLIDATED FINANCIAL ASSETS Floating rate Cash assets Weighted average effective Interest rate FINANCIAL LIABILITIES Floating rate Secured bank loans Weighted average effective Interest rate <1-year >3-<4 Total years A$000 A$000 A$000 A$000 A$000 A$000 A$000 >4-<5 years >2-<3 years >1-<2 years >5 years Weighted Average Effective Interest rate % 59,778 5.6% 19,334 9.1% - - - - - - - - - - - - - - - - - 59,778 5.6% - - 19,334 9.1% -  117 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 20. FINANCIAL INSTRUMENTS (continued) Interest rate risk (continued) Year ended 30 June 2006 PARENT FINANCIAL ASSETS Floating rate Cash assets Intercompany Weighted average effective Interest rate Year ended 30 June 2005 CONSOLIDATED FINANCIAL ASSETS Fixed rate Convertible notes Weighted average effective Interest rate Floating rate Cash assets Weighted average effective Interest rate FINANCIAL LIABILITIES Floating rate Unsecured bank loans Weighted average effective Interest rate <1-year >3-<4 Total years A$000 A$000 A$000 A$000 A$000 A$000 A$000 >4-<5 years >2-<3 years >1-<2 years >5 years Weighted Average Effective Interest rate % 22,677 43,519 66,196 9.7% - - - - - - - - - - - - - - - - - 22,677 - 43,519 - 66,196 5.9% 11.6% 9.7% - <1-year >3-<4 Total years A$000 A$000 A$000 A$000 A$000 A$000 A$000 >4-<5 years >2-<3 years >1-<2 years >5 years Weighted Average Effective Interest rate % - - - 5% 39,489 5.6% 533 8.9% - - - - - - - - - - - - - - - - - - - - - - - 5% - - - 39,489 5.6% - - - 533 8.9%  118 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 20. FINANCIAL INSTRUMENTS (continued) Interest rate risk (continued) Year ended 30 June 2005 PARENT FINANCIAL ASSETS Fixed rate Convertible notes Weighted average effective Interest rate Floating rate Cash assets Intercompany receivables Weighted average effective Interest rate FINANCIAL LIABILITIES Floating rate Unsecured bank loans Weighted average effective Interest rate <1-year >3-<4 Total years A$000 A$000 A$000 A$000 A$000 A$000 A$000 >4-<5 years >2-<3 years >1-<2 years >5 years Weighted Average Effective Interest rate % - - - 5% 39,000 1,066 40,066 5.8% 533 8.9% - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 5% - - - 39,000 - 1,066 - 40,066 5.6% 11.2% 5.8% - - - 533 8.9% Interest on financial instruments classified as floating rate is repriced at intervals of less than one year. Interest on financial instruments classified as fixed rate until maturity of instrument. The other financial instruments of the Group and Parent Entity that are not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk.  119 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 21. DIRECTOR AND EXECUTIVE DISCLOSURES (a) Details of Key Management Personnel (i) Directors Mr Rick Crabb Mr John Borshoff Mr Sean Llewelyn Mr George Pirie Mr Ian Noble (ii) Executives Mr Garnet Halliday Ms Gillian Swaby Mr Ron Chamberlain Mr Wyatt Buck Mr James Eggins Mr Dustin Garrow Mr David Marsh Chairman (Non-executive) Managing Director Director (Non-executive) Director (Non-executive) Director (Non-executive) Executive General Manager –Operations and Development Company Secretary Chief Financial Officer General Manager – Langer Heinrich Operations Executive General Manager – Sales and Contract Administration – appointed 01/01/06 Director of Marketing – commenced as Key Management Personnel on 01/01/06 Executive General Manager – New Business Development – appointed 01/07/06 (b) Compensation of Key Management Personnel: Compensation by Category Short-Term Post Employment Share-Based Payment CONSOLIDATED/ PARENT ENTITY 2005 2006 A$ A$ 2,156,964 68,743 883,012 22,781 2,561,940 2,573,800 4,787,647 3,479,593 The Company has applied the exemption under Corporations Amendments Regulation 2006 which exempts listed companies from providing remuneration disclosures in relation to their Key Management Personnel in the annual financial reports by Accounting Standard AASB 124 Related Party Disclosures. These remuneration disclosures are provided in the Remuneration Report contained in the Directors’ Report and are designated as audited.  120 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 21. DIRECTOR AND EXECUTIVE DISCLOSURES (continued) (c) Options Holdings of Key Management Personnel (Consolidated and Parent Entity) Balance at beginning Granted as Remuner of period -ation 01 Jul 05 Net Options Change Exercised Other # Balance at end of period 30 Jun 06 Not Total Exercisable Exercisable 6,250,000 7,250,000 - (3,000,000) - (3,500,000) - - 3,250,000 3,750,000 3,250,000 3,750,000 3,250,000 3,750,000 - - 3,000,000 5,250,000 800,000 - - - - - - - - - (2,500,000) - - - - - 350,000 - 400,000 - - 200,000 1,000,000 650,000 600,000 1,000,000 3,000,000 2,750,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 3,000,000 2,750,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 3,000,000 2,750,000 800,000 - 350,000 400,000 - - - 200,000 1,000,000 650,000 600,000 1,000,000 30 June 2006 Directors Mr Rick Crabb Mr John Borshoff Executives Mr Garnet Halliday Ms Gillian Swaby Mr Ron Chamberlain Mr Wyatt Buck Mr James Eggins Mr Dustin Garrow Mr David Marsh Total 22,550,000 3,450,000 (9,000,000) 750,000 17,750,000 17,750,000 14,300,000 3,450,000 Balance at beginning Granted as Remuner of period -ation 01 Jul 04 Options Exercised Net Change Other # Balance at end of period 30 Jun 05 Not Total Exercisable Exercisable 4,000,000 5,000,000 3,000,000 3,250,000 (1,000,000) 3,750,000 (1,500,000) 3,250,000 - - - (6,250,000) 6,250,000 7,250,000 - 6,250,000 7,250,000 - 3,000,000 3,250,000 3,500,000 3,750,000 - - - 3,700,000 - 3,000,000 - 2,750,000 (1,200,000) - 800,000 - - - 3,000,000 5,250,000 800,000 3,000,000 5,250,000 800,000 - 3,000,000 2,500,000 2,750,000 800,000 - 30 June 2005 Directors Mr Rick Crabb Mr John Borshoff Dr Leon Pretorius Executives Mr Garnet Halliday Ms Gillian Swaby Mr Ron Chamberlain Total 15,700,000 16,800,000 (3,700,000) (6,250,000) 22,550,000 22,550,000 9,000,000 13,550,000 Mr James Eggins commenced as a Key Management Personnel on 1 January 2006 and as such the required disclosure at this date in the above table has been reflected in the net change other column. Mr Dustin Garrow commenced as a Key Management Personnel on 1 January 2006 and as such the required disclosure at this date in the above table has been reflected in the net change other column. Dr Leon Pretorius resigned from the Board on 12 April 2005 and as such is no longer required to be disclosed in the above table and this fact has been reflected in the net change other column.  121 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 21. DIRECTOR AND EXECUTIVE DISCLOSURES (continued) (d) Shareholdings of Key Management Personnel (Consolidated and Parent Entity) Shares held in Paladin Resources Ltd (number) Balance 01 Jul 05 Remuneration Granted as On Exercise of Options Net Change Other Balance 30 June 06 30 June 2006 Directors Mr Rick Crabb Mr John Borshoff Mr Ian Noble 6,464,746 14,591,394 - Executives Mr Garnet Halliday Ms Gillian Swaby Mr James Eggins (1) - 6,600,000 - Total 27,656,140 - - - - - - - 3,000,000 3,500,000 - (500,000) - 16,000 8,964,746 18,091,394 16,000 - 2,500,000 - 125,000 1,116,140 25,000 125,000 10,216,140 25,000 9,000,000 782,140 37,438,280 No other Key Management Personnel held shares during the year ended 30 June 2006. 30 June 2005 Balance 01 Jul 04 Remuneration Granted as On Exercise of Options Net Change Other Balance 30 June 05 Directors Mr Rick Crabb Mr John Borshoff Dr Leon Pretorius (2) 5,464,746 13,091,394 8,550,000 Executives Ms Gillian Swaby Total 5,595,515 32,701,655 - - - - - 1,000,000 1,500,000 - - - (8,550,000) 6,464,746 14,591,394 - 1,200,000 (195,515) 6,600,000 3,700,000 (8,745,515) 27,656,140 No other Key Management Personnel held shares during the year ended 30 June 2005. (1) Mr James Eggins commenced as a Key Management Personnel on 1 January 2006 and as such this fact has been reflected in the net change other column. (2) Dr Leon Pretorius resigned from the Board on 12 April 2005 and as such is no longer required to be disclosed in the above table and this fact has been reflected in the net change other column.  122 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 21. DIRECTOR AND EXECUTIVE DISCLOSURES (continued) (e) Other Transactions and Balances with Key Management Personnel Fees paid in the normal course of business in 2006 for geological and consulting services totalling A$NIL (2005: A$212,184) were paid/payable (balance outstanding at 30 June 2006 and included in trade creditors A$NIL (2005: A$NIL)) to a company of which Mr John Borshoff is a director and shareholder. Fees paid in the normal course of business in 2006 for geological and consulting services totalling A$N/A (2005: A$120,000) were paid/payable (balance outstanding at 30 June 2006 and included in trade creditors A$N/A (2005: A$NIL)) to a company of which Dr Leon Pretorius is a director and shareholder. Fees paid in the normal course of business in 2006 for legal services totalling A$N/A (2005: A$24,689) were paid/payable (balance outstanding at 30 June 2006 and included in trade creditors A$N/A (2005: A$ NIL)) to a firm in which Mr Michael Blakiston is a partner. Mr Michael Blakiston was an Alternate Director for Mr Rick Wayne Crabb up until 20 December 2004 and as such ceases to be a Key Management Personnel from this date. Fees paid in the normal course of business in 2006 for company secretarial services totalling A$153,000, (2005: A$70,000) were paid/payable (balance outstanding at 30 June 2006 and included in trade creditors A$34,000, (2005: A$19,800)) to a company of which Ms Gillian Swaby is a director and shareholder. Fees paid in the normal course of business from 1 January 2006 for marketing consulting services totalling A$143,856, (2005: A$N/A) were paid/payable (balance outstanding at 30 June 2006 and included in trade creditors A$NIL, (2005: A$N/A)) to a company of which Mr Dustin Garrow is a director and shareholder. Amounts recognised at the reporting date in relation to other transactions: Liabilities Current liabilities Trade and other payables Expenses Other expenses CONSOLIDATED/ PARENT ENTITY 2006 2005 A$000 A$000 47 20 297 427  123 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 22. AUDITORS’ REMUNERATION The auditor of the Paladin Resources Ltd Group is Ernst & Young. Amounts received or due and receivable by Ernst & Young (Australia) for: • an audit or review of the financial report of the entity and any other entity in the consolidated Group • other services in relation to the entity and any other entity in the consolidated Group. CONSOLIDATED 2006 A$ 2005 A$ PARENT ENTITY 2005 A$ 2006 A$ 93,000 66,500 87,000 63,000 -tax compliance Sub-total 11,547 - 11,183 - 104,547 66,500 98,183 63,000 Amounts received or due and receivable by related practices of Ernst & Young (Australia) for: • an audit or review of the financial report of subsidiaries Amounts received or due and receivable by non Ernst &Young audit firms for: Review of the financial report Taxation services Other non-audit services Amounts received or due and receivable by related practices of non Ernst & Young audit firms for: Other non-audit services 33,565 27,343 18,000 22,503 138,112 93,843 116,183 85,503 - - - - - 13,516 14,095 2,836 30,447 - - - - - - 10,350 9,800 285 20,435 -  124 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 23. COMMITMENTS AND CONTINGENCIES There were no outstanding commitments or contingencies, which are not disclosed in the financial report of the Consolidated Entity and the Company as at 30 June 2006 other than: (a) Tenements CONSOLIDATED 2005 A$000 2006 A$000 PARENT ENTITY 2005 2006 A$000 A$000 Commitments for tenements contracted for at the reporting date but not recognised as liabilities, payable: Within one year Later than one year but not later than 5 years More than 5 years 483 - - 1,776 1,300 - - - - - - - ____________________________________________________________________________________________________________________________________________________________________ Total tenements commitment 483 3,076 - - ____________________________________________________________________________________________________________________________________________________________________ These include commitments relating to tenement lease rentals and, the minimum expenditure requirements of the Namibia, Malawi, Western Australian, and South Australian Mines Departments attaching to the tenements and are subject to re-negotiation upon expiry of the exploration leases or when application for a mining licence is made. These are necessary in order to maintain the tenements in which the Consolidated Entity and other parties are involved. All parties are committed to meet the conditions under which the tenements were granted in accordance with the relevant mining legislation in Namibia, Malawi and Australia. (b) Mine Construction Commitments CONSOLIDATED 2005 A$000 2006 A$000 PARENT ENTITY 2005 2006 A$000 A$000 Commitments for mine construction contracted for at the reporting date but not recognised as liabilities, payable: Within one year Later than one year but not later than 5 years More than 5 years 31,248 - - - - - - - - - - - ____________________________________________________________________________________________________________________________________________________________________ Total mine construction 31,248 - - - ____________________________________________________________________________________________________________________________________________________________________ These commitments relate to mine construction in Namibia. (c) Operating Lease Commitments The Group has entered into commercial property leases relating to rental of offices. These non-cancellable leases have remaining terms of between 1 and 4 years. All leases include a clause to enable upward revision of rental charge on an annual basis according to prevailing market conditions.  125 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 23. COMMITMENTS AND CONTINGENCIES (continued) (c) Operating Lease Commitments (continued) Future minimum rentals payable under non-cancellable operating leases as at 30 June are as follows: CONSOLIDATED 2005 A$000 2006 A$000 PARENT ENTITY 2005 2006 A$000 A$000 Within one year Later than one year but not later than 5 years More than 5 years 222 503 - 143 542 - 183 503 - 100 511 - ____________________________________________________________________________________________________________________________________________________________________ Total operating lease commitment 725 685 686 611 ____________________________________________________________________________________________________________________________________________________________________ (d) Acquisition Costs The Consolidated Entity acquired a call option on 19 June 1998 in relation to the purchase of the Oobagooma Uranium Project and, in turn, granted a put option to the original holder of the Project. Both the call and put options have an exercise price of A$750,000 and are subject to the Department of Minerals & Energy granting tenements comprising 2 exploration licence applications. The A$750,000 is payable by the Consolidated Entity within 10 business days of the later of the grant of the tenements or the exercise of either the call or put option. The options will expire 3 months after the date the tenements are granted. In relation to the Manyingee Uranium Project, the re-negotiated acquisition terms provide for a payment of A$750,000 by the Consolidated Entity to the vendors when all project development approvals are further obtained. (e) Bank Guarantees As at 30 June 2006 the Group has outstanding A$2.75 million (2005:A$Nil) in current bank guarantees issued to contractors in relation to the mine construction activities for the Langer Heinrich Uranium Project, and a A$60,000 (2005:A$60,000) current bank guarantee for the corporate office lease. PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ 126 NOTE 24. EMPLOYEE BENEFITS Provision for Annual Leave and Long Service Leave CONSOLIDATED 2005 A$000 2006 A$000 PARENT ENTITY 2005 2006 A$000 A$000 Aggregate employment benefit liability 382 65 320 65 ____________________________________________________________________________________________________________________________________________________________________ Employee numbers Average number of employees during the financial year Superannuation Number Number 31 14 The Company contributes to employees’ superannuation plans in accordance with the requirements of Occupational Superannuation Legislation. Contributions by the Company represent a defined percentage of each employee's salary. Employee contributions are voluntary. Employee Share Incentive Option Plan Details of the Employee Share Incentive Option Plan for the Company are disclosed in Note 26. NOTE 25. RELATED PARTIES Directors and Specified Executives Disclosures relating to Directors and Specified Executives are set out in the Directors’ Report under the section entitled Remuneration Report and in Note 21. Wholly Owned Group The wholly owned Group consists of the Company and its wholly owned controlled entities set out in Note 10(a). Transactions between the Company and other entities in the wholly owned Group during the years ended 30 June 2006 and 2005 consisted of: (a) (b) (c) (d) loans advanced by the Company (Note 9(d)); loans advanced to the Company (Note 14); the payment of interest on the loans advanced by the Company (Note 5(a)); and the receipt of dividends by the Company (Note 5(b)). Controlled Entities The ultimate Parent Entity in the wholly owned Group is Paladin Resources Ltd.  127 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 26. SHARE BASED PAYMENT PLAN Employee Share Incentive Option Plan Options are granted under the Company Employee Share Incentive Option Plan which was approved by the Directors on 23 March 2004. Staff eligible to participate in the plan is those who have been continuously employed by the Company for a period of at least one year. Options are granted under the plan for no consideration. Options are granted for a three year period, and 100% of each new tranche becomes exercisable after one year of the date of grant. Entitlements to the options are vested as soon as they become exercisable and performance conditions have been met. There are no cash settlement alternatives. Options granted under the plan carry no dividend or voting rights. The expense recognised in the income statement in relation to share-based payments is disclosed in Note 5(c). The following table illustrates the number (No.) and weighted average exercise prices (WAEP) of and movements in share options issued during the year: 2006 No. Outstanding at the beginning of the year Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at the end of the year 33,600,000 4,665,000 (50,000) (14,000,000) - 24,215,000 2006 WAEP A$ 0.69 3.64 1.50 0.24 - 1.52 1 2005 No. 19,700,000 19,600,000 - (5,700,000) - 33,600,000 2005 WAEP A$ 0.22 1.02 - 0.16 - 0.69 2 Exercisable at the end of the year 20,225,000 1.03 14,000,000 0.24 1. The weighted average share price at the date of exercise is A$3.81 2. The weighted average share price at the date of exercise is A$0.60 The outstanding balance as at 30 June 2006 represented by: Date options granted Exercisable Expiry date of options option ____________________________________________________________________________________________________________________________________________________________________ Exercise price Number under 30 November 2004 30 November 2004 20 December 2004 15 July 2005 13 January 2006 13 January 2006 19 January 2006 16 February 2006 16 February 2006 27 April 2006 27 April 2006 30 June 2006 30 June 2006 30 June 2006 30 June 2006 13 January 07 13 January 08 13 January 08 13 January 07 13 January 08 31 October 07 31 October 08 30 November 2007 30 November 2007 20 December 2007 15 July 2008 13 January 2009 13 January 2009 13 January 2009 13 January 2009 13 January 2009 28 April 2009 28 April 2009 A$1.00 A$1.25 A$1.00 A$1.50 A$2.80 A$2.80 A$2.80 A$2.80 A$2.80 A$5.50 A$5.50 8,050,000 1,300,000 10,250,000 200,000 200,000 850,000 600,000 700,000 500,000 782,500 782,500 ____________________________________________________________________________________________________________________________________________________________________ Total 24,215,000 ____________________________________________________________________________________________________________________________________________________________________ Please refer to Shares Under Option table in the Directors’ Report for movements since the year end.  128 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 26. SHARE BASED PAYMENT PLAN (continued) The weighted average remaining contractual life for the share options outstanding as at 30 June 2006 is between 1 and 3 years (2005: 1 and 3 years). The range of exercise prices for options outstanding at the end of the year was A$1.00 – A$5.50 (2005: A$0.22 – A$1.25). The weighted average fair value of options granted during the year was A$1.87 (2005: A$0.25). The fair value of the equity-settled share options granted under the option plan is estimated as at the date of grant using a binominal model taking into account the terms and conditions upon which the options were granted. The following table lists the inputs to the model used for the years ended 30 June 2005 and 30 June 2006: Dividend yield (%) Expected volatility (%) Risk-free interest rate (%) Expected life of option (years) Option exercise price ($) Weighted average share price at grant date ($) 2006 2005 Nil% 83%-126% 5.13%-5.67% 2.5 years $1.50-$5.50 $1.36-$4.88 Nil% 100%-112% 4.90%-4.97% 2.5 years A$1.00-A$1.25 A$0.52-A$0.53 The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome. No other features of options granted were incorporated into the measurement of fair value. The fair value of the cash-settled options is measured at the grant date using the Cox, Ross and Rubinstein Binomial Tree option pricing model taking into account the terms and conditions upon which the instruments were granted. The services received are recognised over the expected vesting period.  129 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 27. INTERESTS IN JOINT VENTURES (a) Kayelekera Uranium Project – Malawi On 6 July 2005, the Company announced the purchase of the remaining 10% joint venture interest in the Kayelekera Uranium Project in Malawi. The consideration of A$5,611,500 was satisfied by the issue by the Company of 4,350,000 ordinary fully paid shares at an issue price of A$1.29 per share. The purchase was conditional upon the joint venture partner entering into a private escrow agreement in dealing with the 4,350,000 shares in the Company. CONSOLIDATED 2005 A$000 2006 A$000 PARENT ENTITY 2005 2006 A$000 A$000 Non current assets Other - mineral properties - 171 - - ____________________________________________________________________________________________________________________________________________________________________ Share of assets employed in joint venture - 171 - - ____________________________________________________________________________________________________________________________________________________________________ For exploration tenement commitments relating to the Kayelekera Uranium Project refer to Note 23(a). (b) The Consolidated Entity also has a number of interests in joint ventures to explore for uranium and other minerals. The Consolidated Entity’s share of expenditure in respect of these exploration activities is expensed in accordance with the accounting policy stated in Note 2(q) and no revenue is generated. The Consolidated Entity’s share of the assets and liabilities in respect of these joint ventures is not material.  130 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 28. EVENTS AFTER THE BALANCE SHEET DATE Since the end of the financial period, the Directors are not aware of any other matter or circumstance not otherwise dealt with in this report or the Financial Statements, that has significantly or may significantly affect the operations of the Consolidated Entity, the results of those operations or the state of affairs of the Consolidated Entity in subsequent years with the exception of the following, the financial effects of which have not been provided for in the 30 June 2006 Financial Report: Takeover bid for Valhalla Uranium Ltd On 10 July 2006, the Company announced an off-market takeover bid for all the fully paid ordinary shares in Valhalla Uranium Ltd (Valhalla). Under the terms of the offer, each Valhalla shareholder will receive one share of Paladin in exchange for every 3.16 shares of Valhalla held. The offer is subject to various conditions, some of which are currently still outstanding. The directors of Valhalla have unanimously recommended that Valhalla shareholders accept the Company’s offer in the absence of a superior offer. On 24 July 2006 the Company lodged the Bidder’s Statement for the offer with the Australian Securities and Investment Commission. The proposed acquisition represents a significant step forward in the Company’s growth strategy. Allotment of Shares and Issue of Employee Options On 5 July 2006, the Company announced the granting of one million unlisted incentive options, exercisable at $5.50; with 500,000 vesting after 18 months and 500,000 vesting after 30 months with a 3 year expiry. On 20 July 2006, the Company announced the allotment of 650,000 fully paid ordinary shares after exercise of employee options and the granting of 400,000 unlisted incentive options, exercisable at $5.50; with 200,000 vesting after 18 months and 200,000 vesting after 30 months with a 3 year expiry. On 18 August 2006, the Company announced the allotment of 400,000 fully paid ordinary shares after exercise of employee options.  131 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 29. NON CASH FINANCING AND INVESTMENT ACTIVITIES CONSOLIDATED 2005 A$000 2006 A$000 PARENT ENTITY 2006 A$000 2005 A$000 Non Cash Financing and Investment Activities Issue of shares to acquire remaining 10% joint venture interest in the Kayelekera Uranium Project 5,612 - 5,612 Value of Deep Yellow shares and options acquired from the sale of exploration properties 441 810 441 Options granted to Société Générale Australia Branch on establishment of loan facility - 321 Value of Deep Yellow shares and options acquired from grant of licence over the Frome Basin database 1,453 - - - - - 321 - NOTE 30. EARNINGS PER SHARE (i) Basic earnings per share Basic earnings per share are calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the period. (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Diluted earnings per share is the same as basic earnings per share in 2006 and 2005 as the Consolidated Entity is in a loss position. The following reflects the income and share data used in the basic and diluted earnings per share computations Net loss attributable to ordinary equity holders of the Parent from continuing operations Profit attributable to ordinary equity holders of the Parent from discontinued operations CONSOLIDATED 2005 A$000 2006 A$000 (7,486) (9,538) - 128 Net loss attributable to ordinary equity holders of the Parent (7,486) (9,410) Weighted average number of ordinary shares (excluding reserved shares) for basic earnings per share 2006 # 2005 # 433,062,353 363,040,234  132 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 31. TRANSITION TO AIFRS AND CHANGE IN ACCOUNTING POLICY For all periods up to and including the year ended 30 June 2005, the Group prepared its financial statements in accordance with Australian generally accepted accounting practices (AGAAP). These annual financial statements for the year ended 30 June 2006 are the first the Group is required to prepare in accordance with Australian equivalents to International Financial Reporting Standards (AIFRS). Accordingly, the Group has prepared financial statements that comply with AIFRS applicable for periods beginning on or after 1 January 2005 and the significant accounting policies meeting those requirements are described in Note 2. In preparing these financial statements, the Group has started from an opening balance sheet as at 1 July 2004, the Group’s date of transition to AIFRS, and made those changes in accounting policies and other restatements required by AASB 1 First-time adoption of AIFRS. This note explains the principal adjustments made by the Group in restating its AGAAP balance sheet as at 1July 2004 and its previously published AGAAP financial statements for the year ended 30 June 2005. Exemptions Applied AASB 1 allows first-time adopters certain exemptions from the general requirement to apply AIFRS retrospectively. The Group has taken the following exemption: • AASB 2 Share-based Payment has not been applied to any equity instruments that were granted on or before 7 November 2002. Change in accounting policy In addition the financial report has been prepared on the basis of a retrospective application of a voluntary change in exploration and evaluation expenditure accounting policy. Explanation of material adjustments to the cash flow statement There are no material differences between the cash flow statement presented under AIFRS and the cash flow statement presented under previous AGAAP.  133 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 31. TRANSITION TO AIFRS AND CHANGE IN ACCOUNTING POLICY (continued) (1) Reconciliation of Equity reported under previous Australian Generally Accepted Accounting Principles (AGAAP) to Equity under Australian equivalents to IFRS (AIFRS) (a) At the date of transition to AIFRS: 1 July 2004 CONSOLIDATED Notes ASSETS Current assets Cash and cash equivalents Trade and other receivables Property, plant and equipment Assets held for sale TOTAL CURRENT ASSETS Non current assets Trade and other receivables Held to maturity investments Property, plant and equipment Exploration and evaluation expenditure TOTAL NON CURRENT ASSETS TOTAL ASSETS LIABILITIES Current liabilities Trade and other payables Interest bearing loans and borrowings Provisions TOTAL CURRENT LIABILITES TOTAL LIABILITES NET ASSETS EQUITY Contributed equity Reserves Accumulated losses TOTAL EQUITY Previous Effect of transition AGAAP A$000 A$000 Accounting policy A$000 AIFRS A$000 4,639 49 1,114 - - (1,114) 5,802 (1,114) - 1,114 i i 5,802 64 800 249 vi 3,815 4,928 10,730 554 733 33 1,320 1,320 9,410 - - - - - - - - - - - - - - - - - - - - - - 4,639 49 - 4,688 1,114 5,802 64 800 249 (2,298) 1,517 (2,298) (2,298) 2,630 8,432 - - - - - 554 733 33 1,320 1,320 (2,298) 7,112 ii ii, vi 24,265 174 (15,029) 9,410 - 545 (545) - - - (2,298) (2,298) 24,265 719 (17,872) 7,112  134 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 31. TRANSITION TO AIFRS AND CHANGE IN ACCOUNTING POLICY (continued) (1) Reconciliation of Equity reported under previous Australian Generally Accepted Accounting Principles (AGAAP) to Equity under Australian equivalents to IFRS (AIFRS) (continued) (a) At the date of transition to AIFRS: 1 July 2004 Previous AGAAP A$000 Effect of transition A$000 Accounting policy A$000 AIFRS A$000 TOTAL CURRENT ASSETS 4,542 PARENT ENTITY Notes ASSETS Current assets Cash and cash equivalents Trade and other receivables Property, plant and equipment Assets held for sale Non current assets Trade and other receivables Held to maturity investments Available for sale financial assets Property, plant and equipment Exploration and evaluation expenditure TOTAL NON CURRENT ASSETS vii vii TOTAL ASSETS LIABILITIES Current liabilities Trade and other payables Interest bearing loans and borrowings Provisions TOTAL CURRENT LIABILITES TOTAL LIABILITES NET ASSETS EQUITY Contributed equity Reserves Accumulated losses 4,518 24 - 4,542 - 4,106 1,352 - 26 - 5,484 10,026 528 - 33 561 561 9,465 - - - - - - - - - - - - - - - - - - - - - - - - - (2,231) (67) - - 4,518 24 - 4,542 - 4,542 1,875 1,285 - 26 - - (2,298) 3,186 (2,298) 7,728 - - - - - 528 - 33 561 561 (2,298) 7,167 ii ii, vii 24,265 174 (14,974) - 545 (545) - - (2,298) 24,265 719 (17,817) TOTAL EQUITY 9,465 - (2,298) 7,167  135 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 31. TRANSITION TO AIFRS AND CHANGE IN ACCOUNTING POLICY (continued) (1) Reconciliation of Equity reported under previous Australian Generally Accepted Accounting Principles (AGAAP) to Equity under Australian equivalents to IFRS (AIFRS) (continued) (b) At the end of the reporting period under previous AGAAP: 30 June 2005 CONSOLIDATED Notes Previous AGAAP A$000 Effect of transition A$000 Accounting policy A$000 AIFRS A$000 39,489 568 - 40,057 - - 710 170 1,098 - - - - - - 1,720 - - iii - - - - - - - - - 39,489 568 - 40,057 - - 2,430 170 1,098 vi 9,001 - (7,315) 1,686 10,979 51,036 1,720 1,720 (7,315) 5,384 (7,315) 45,441 727 533 65 1,325 1,325 - - - - - - - - - - 727 533 65 1,325 1,325 49,711 1,720 (7,315) 44,116 ASSETS Current assets Cash and cash equivalents Trade and other receivables Property, plant and equipment TOTAL CURRENT ASSETS Non current assets Trade and other receivables Held to maturity investments Available for sale financial assets Deferred borrowing costs Property, plant and equipment Exploration and evaluation expenditure TOTAL NON CURRENT ASSETS TOTAL ASSETS LIABILITIES Current liabilities Trade and other payables Interest bearing loans and borrowings Provisions TOTAL CURRENT LIABILITES TOTAL LIABILITES NET ASSETS EQUITY Contributed equity Reserves Accumulated losses iv ii,iii,iv ii, vi 65,950 174 (16,413) 42 5,232 (3,554) - - (7,315) 65,992 5,406 (27,282) TOTAL EQUITY 49,711 1,720 (7,315) 44,116  136 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 31. TRANSITION TO AIFRS AND CHANGE IN ACCOUNTING POLICY (continued) (1) Reconciliation of Equity reported under previous Australian Generally Accepted Accounting Principles (AGAAP) to Equity under Australian equivalents to IFRS (AIFRS) (continued) (b) At the end of the reporting period under previous AGAAP: 30 June 2005 PARENT ENTITY Notes ASSETS Current assets Cash and cash equivalents Trade and other receivables Property, plant and equipment TOTAL CURRENT ASSETS vii vii Non current assets Trade and other receivables Held to maturity investments Available for sale financial assets Deferred borrowing costs Property, plant and equipment Exploration and evaluation expenditure TOTAL NON CURRENT ASSETS TOTAL ASSETS LIABILITIES Current liabilities Trade and other payables Interest bearing loans and borrowings Provisions TOTAL CURRENT LIABILITES Non current liabilities Trade and other payables TOTAL NON CURRENT LIABILITIES Previous AGAAP A$000 Effect of transition A$000 Accounting policy A$000 AIFRS A$000 39,000 472 - 39,472 10,183 488 - - 390 - 11,061 50,533 591 533 65 1,189 334 334 1,523 - - - - 1,720 - - - - - 1,720 1,720 - - - - - - - - - - - 39,000 472 - 39,472 (7,253) (62) - - - 4,650 426 - - 390 - (7,315) 5,466 (7,315) 44,938 - - - - - - - 591 533 65 1,189 334 334 1,523 TOTAL LIABILITES NET ASSETS EQUITY Contributed equity Reserves Accumulated losses TOTAL EQUITY 49,010 1,720 (7,315) 43,415 iv ii,iv ii, vii 65,950 174 (17,114) 42 3,512 (1,834) - - (7,315) 65,992 3,686 (26,263) 49,010 1,720 (7,315) 43,415  137 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 31. TRANSITION TO AIFRS AND CHANGE IN ACCOUNTING POLICY (continued) (2) Reconciliation of Loss under previous AGAAP to Loss under AIFRS (a) Reconciliation of Loss for the year ended 30 June 2005 CONSOLIDATED Notes Previous AGAAP Effect of transition A$000 A$000 Accounting policy A$000 AIFRS A$000 REVENUE FROM CONTINUING OPERATIONS Other income Cost of tenements sold Share based payments expense Interest expense Exploration and evaluation expenditure Write down of convertible note Depreciation and amortisation Employee benefits expense Other expenses ) v v v ii vi 1,582 (810) - (24) - (354) (72) (894) (90) (482) (1,178) 786 24 (3,009) - - - - - - - 24 - - - (5,041) - - - - 772 810 - (3,009) (354) (5,113) (894) (90) (482) (1,178) LOSS BEFORE INCOME TAX (1,512) (3,009) (5,017) (9,538) Income tax expense - - - - Loss from continuing operations (1,512) (3,009) (5,017) (9,538) Profit from discontinued operations i 128 - - 128 LOSS ATTRIBUTABLE TO MEMBERS OF PALADIN RESOURCES LTD (1,384) (3,009) (5,017) (9,410)  138 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 31. TRANSITION TO AIFRS AND CHANGE IN ACCOUNTING POLICY (continued) (2) Reconciliation of Loss under previous AGAAP to Loss under AIFRS (a) Reconciliation of Loss for the year ended 30 June 2005 PARENT ENTITY Notes Previous AGAAP Effect of transition A$000 A$000 Accounting policy AIFRS A$000 A$000 REVENUE FROM CONTINUING OPERATIONS 1,165 - Other income Cost of tenements sold Share based payments expense Interest expense Exploration and evaluation expenditure Write down of convertible note Write down of intercompany loan Depreciation and amortisation Employee benefits expense Other expenses ii vii - - - (354) - (894) (327) (32) (482) (1,216) - - (3,009) - - - 1,720 - - - - - - - - - - (5,017) - - - 1,165 - - (3,009) (354) - (894) (3,624) (32) (482) (1,216) LOSS BEFORE INCOME TAX (2,140) (1,289) (5,017) (8,446) Income tax expense - - - - Loss from continuing operations (2,140) (1,289) (5,017) (8,446) Profit from discontinued operations - - - - LOSS ATTRIBUTABLE TO MEMBERS OF PALADIN RESOURCES LTD (2,140) (1,289) (5,017) (8,446) PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 31. TRANSITION TO AIFRS AND CHANGE IN ACCOUNTING POLICY (continued) 139 (3) Notes to the reconciliations (i) Non current assets held for sale Under AASB 5 Non current Assets Held for Sale and Discontinuing Operations, a non current asset will be classified as held for sale if its carrying amount is to be recovered principally through a sale transaction rather than through continued use. The asset will be measured at the lower of carrying amount and fair value, less costs to sell. Under AASB 5 a non current asset once classified as held for sale is no longer required to be depreciated up to the date of sale. The Group met the definition under AASB 5 of a non current asset held for sale in relation to commercial property located in Belmont, Western Australia at 1 July 2004, with settlement on the property occurring on 24 June 2005. At 1 July 2004 For the Group A$1,114,242 (Company: not applicable) of current property, plant and equipment has been reclassified to assets held for sale. At 30 June 2005 and for the Year Ended 30 June 2005 For the Group there has been a decrease in accumulated losses of A$18,404 (increase in profit from discontinued operation – depreciation expense) (Company: not applicable) and a corresponding decrease in profit on sale (decrease in profit from discontinued operation). (ii) Share-based payment transactions Under AASB 2 Share-based Payment, from 1 July 2004 the Group is required to recognise an expense for those options that were issued to employees under the Company Employee Share Incentive Option Plan after 7 November 2002 but that had not vested by 1 January 2005. The valuations for the options have been determined using the Cox, Ross and Rubinstein Binomial Tree Model. The expense for the options is recognised over the vesting period of the options. At 1 July 2004 For the Group and Company there has been an increase in accumulated losses of A$545,000 and a corresponding increase in reserves. At 30 June 2005 and for the Year Ended 30 June 2005 For the Group and Company there has been a increase in accumulated losses of A$3,552,851 (including recognition of a share based payments expense of $3,008,851) and a increase in reserves of A$3,552,851. (iii) Financial instruments The Group has applied AASB 132 Financial Instruments: Disclosure and Presentation and AASB 139 Financial Instruments: Recognition and Measurement from 1 July 2004. Under AASB 132, the existing classification of financial instruments issued by the Group does not change. PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 31. TRANSITION TO AIFRS AND CHANGE IN ACCOUNTING POLICY (continued) 140 (3) Notes to the reconciliations (continued) (iii) Financial instruments (continued) Under AASB 139, financial assets held by the Group will be classified as either at fair value through the profit and loss, held-to-maturity, available for sale or loans and receivables and, depending upon classification, measured at fair value or amortised cost. Non-traded equity securities will be classified as available for sale and measured at fair value, with changes in fair value recognised directly in equity until the underlying asset is derecognised. At 1 July 2004 There is no effect on the Group and Company. At 30 June 2005 and for the Year Ended 30 June 2005 For the Group there has been an increase in available for sale financial assets of A$1,720,000, (Company: not applicable) and a corresponding increase in reserves. (iv) Exercise of unlisted employee options Under AASB 2 Share-based Payment the Group is required to recognise an expense for options that are issued to employees under the Company Employee Share Incentive Option Plan, with a corresponding increase to reserves. Where options are exercised the balance of the reserve relating to the options is required to be transferred to contributed equity. At 1 July 2004 There is no effect on the Group and Company. At 30 June 2005 and for the Year Ended 30 June 2005 In March 2005 1,000,000 shares were issued in relation to the exercise of unlisted employee options with an exercise price of A$0.22. In relation to this for the Group and Company there has been an increase in contributed equity of A$41,900 and a corresponding decrease in reserves. (v) Revenue disclosures in relation to sale of tenements Under AIFRS the net gain on the sale of tenements is required to be recognised as other income, which is in contrast to the Australian GAAP treatment under which the gross proceeds from the sale are recognised as revenue and the carrying amount of the tenements sold is recognised as an expense. No net impact exists on the Income Statement in relation to these adjustments. At 1 July 2004 There is no effect on the Group and Company.  141 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 31. TRANSITION TO AIFRS AND CHANGE IN ACCOUNTING POLICY (continued) (3) Notes to the reconciliations (continued) (v) Revenue disclosures in relation to sale of tenements (continued) At 30 June 2005 and for the Year Ended 30 June 2005 For the Group there has been a decrease in revenue from continuing operations of A$810,000, (Company: not applicable) a decrease in cost of assets sold of A$24,425 and an increase in other income of A$785,575. (vi) Voluntary change of exploration and evaluation expenditure accounting policy The Group has changed its accounting policy in relation to the treatment of exploration and evaluation expenditure. The new exploration and evaluation expenditure accounting policy is to charge exploration and evaluation expenditure against earnings as incurred; except for acquisition costs and for expenditure incurred after a decision to proceed to development is made, in which case the expenditure is capitalised as an asset – refer Note 2(q) for the full detail of the new accounting policy. The previous exploration and evaluation expenditure accounting policy was to carry forward exploration and evaluation expenditure as an asset; subject to ongoing review of the potential for development and that rights to tenure were current. This voluntary change in accounting policy has been made as the Group is undergoing a transition from explorer to producer. The Langer Heinrich Uranium Project in Namibia is currently under construction and commissioning of the mine is planned to commence in September 2006. The previous accounting policy of the Group is common for exploration companies as a result of this expenditure representing the main asset. The new accounting policy of the Group is common for large mining companies as this expenditure does not represent the main activities and is viewed as an expense of discovery. This does not represent a change in accounting policy as a result of AIFRS, as AASB 6 Exploration for and Evaluation of Mineral Resources allows both the previous and the new accounting policies of the Group. Under AIFRS, the comparatives have been adjusted to reflect the change in exploration and evaluation expenditure accounting policy. The effect of the change in accounting policy is:  142 PALADIN RESOURCES LTD AND CONTROLLED ENTITIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2006 _________________________________________________________________________________ NOTE 31. TRANSITION TO AIFRS AND CHANGE IN ACCOUNTING POLICY (continued) (3) Notes to the reconciliations (continued) (vi) Voluntary change of exploration and evaluation expenditure accounting policy (continued) At 1 July 2004 For the Group there has been an increase in accumulated losses of A$2,298,834 (Company: not applicable) and a decrease in exploration and evaluation expenditure asset of A$2,298,834. At 30 June 2005 and for the Year Ended 30 June 2005 For the Group there has been an increase accumulated losses of A$7,315,408 (including increases in exploration and evaluation expense from continuing operations of A$5,042,202, and other income of A$24,425 relating to the sale of tenements now written off) (Company: not applicable) and a decrease in exploration and evaluation expenditure asset of A$7,315,408. Basic and diluted earnings per share have also been restated. (vii) Impact on Parent Entity of change in accounting policy and AIFRS The voluntary change of exploration and evaluation expenditure accounting policy and AIFRS impacts the Parent Entity’s assessment of the net tangible asset backing of both intercompany receivables and intercompany investments. At 1 July 2004 As a consequence of the voluntary change in accounting policy the Company has had to reduce intercompany receivables by A$2,231,476 and intercompany investments by A$67,358 (Group: not applicable) by way of write down of these assets which impacted accumulated losses by A$2,298,834, as the net tangible assets of subsidiaries has decreased. At 30 June 2005 and for the Year Ended 30 June 2005 As a consequence of the voluntary change in accounting policy, the Company has had to reduce intercompany receivables by A$7,253,191 and intercompany investments by A$62,217 (Group: not applicable) by way of write down of these assets which impacted accumulated losses by A$7,315,408 (including increase in write down of intercompany loan from continuing operations of A$5,016,574) as the net tangible assets of subsidiaries has decreased. As a consequence of AIFRS, the Company has increased intercompany receivables by A$1,720,000 (Group: not applicable) by way of reducing the write down of intercompany receivables by A$1,720,000 (and as such accumulated losses decreased by the same amount). DIRECTORS’ DECLARATION _________________________________________________________________________________ 143 In accordance with a resolution of the Directors of Paladin Resources Ltd, I state that: 1. In the opinion of the Directors: (a) the financial report and the additional disclosures included in the Directors’ Report designated as audited, of the Company and of the Consolidated Entity are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Company’s and Consolidated Entity’s financial position as at 30 June 2006 and of their performance for the year ended on that date; and (ii) complying with Accounting Standards and Corporation Regulations 2001;and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. This declaration has been made after receiving the declarations required to be made to the Directors in accordance with sections 295A of the Corporations Act 2001 for financial period ending 30 June 2006. On behalf of the Board Mr John Borshoff Managing Director Perth, Western Australia 29 August 2006 INDEPENDENT AUDIT REPORT - AUSTRALIA _________________________________________________________________________________ 144 INDEPENDENT AUDIT REPORT - AUSTRALIA (continued) _________________________________________________________________________________ 145 INDEPENDENT AUDIT REPORT - CANADA _________________________________________________________________________________ 146 ADDITIONAL INFORMATION _________________________________________________________________________________ Pursuant to the Listing Requirements of Australian Stock Exchange Limited as at 28 August 2006: 147 (a) Distribution and number of holders SHAREHOLDERS 1 1,001 5,001 10,001 100,001 - - - - - 1,000 5,000 10,000 100,000 maximum 3,230 3,728 944 923 148 8,973 104 shareholders hold less than a marketable parcel of shares. (b) The twenty largest shareholders hold 80.74% of the total shares issued. Holder No. of Shares % CDS & CO Westpac Custodian Nominees Limited J P Morgan Nominees Australia Limited National Nominees Limited ANZ Nominees Limited Cash Income A/C Citicorp Nominees Pty Limited Aylworth Holdings Pty Ltd Mr Robert Anthony Healy & Mrs Helen Maree Healy Gillian Swaby HSBC Custody Nominees (Australia) Limited-GSCO ECSA Mr Rick Wayne Crabb & Mrs Carol Jean Crabb CEDE & CO Queensland Investment Corporation Mr James U Blanchard Ii C/- Jefferson Financial Inc HSBC Custody Nominees (Australia) Limited John Borshoff Mr Zaccaria Rossi & Mrs Thelma Rossi Neoprotec Pty Limited Societe Generale UBS Nominees Pty Ltd 136,971,068 48,566,500 28,938,990 27,034,710 26,977,900 25,044,768 15,976,237 13,012,159 9,411,655 7,793,857 6,198,050 5,117,294 3,356,683 2,777,778 2,572,462 1,605,157 1,601,000 1,600,000 1,530,966 1,481,640 30.08 10.67 6.36 5.94 5.93 5.50 3.51 2.86 2.07 1.71 1.36 1.12 0.74 0.61 0.57 0.35 0.35 0.35 0.34 0.32 __________________ 367,568,874 __________________ 80.74 (c) Voting rights For all shares, voting rights are one vote per member on a show of hands and one vote per share in a poll.  148 ADDITIONAL INFORMATION (continued) _________________________________________________________________________________ Pursuant to the Listing Requirements of Australian Stock Exchange Limited as at 28 August 2006: (d) Tenements held – NAMIBIA – AFRICA URANIUM PROJECTS Project Tenement Interest % JV Partner/s Operator Langer Heinrich Gawib 1 MLI 1 EPL (A) 100% 100% - - - - MALAWI – AFRICA Project Tenement Interest % JV Partner/s Operator Kayelekera Chilumba Chilongo Mpata 1 EPL 1 EPL 1 EPL 1 EPL 100% 100% 100% 100% WESTERN AUSTRALIA - - - - - - - - Project Tenement Interest % JV Partner/s Operator Manyingee Spinifex Well Oobagooma Ponton 3 ML’s 1 EL 4 EL’s (A) 1 EL (A) 100% 100% 100% 100% SOUTH AUSTRALIA - - - - - - - - Project Tenement Interest % JV Partner/s Operator Petermorra Mt Yerila 1 EL 1 EL 20% 15% Quasar Resources Pty Ltd Quasar Resources Pty Ltd Quasar Resources Pty Ltd Quasar Resources Pty Ltd Red Metal Limited J E Risinger Red Metal Limited SOUTH AUSTRALIA NON-URANIUM PROJECTS Project Tenement Interest % JV Partner/s Operator Mt Lofty Ranges Reaphook JV 1 EL 1 EL 90% Absolut Resources Corporation Paladin Resources Ltd 7.5% Perilya Limited Signature Resources NL Perilya Limited Tenement Types EL EPL ML MLI (A) Exploration Licence (Australia) Exclusive Prospecting Licence (Africa) Mining Lease (Australia) Mining Licence (Africa) Pending Application Form 52-109F1 – Certification of Annual Filings I, John Borshoff, Managing Director of Paladin Resources Ltd, certify that: 1. 2. 3. 4. I have reviewed the annual filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings) of Paladin Resources Ltd (the issuer) for the year ending 30 June 2006; Based on my knowledge, the annual filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the annual filings; Based on my knowledge, the annual financial statements together with the other financial information included in the annual filings fairly present in all material respects the financial condition, results of operations and cash flows of the issuer, as of the date and for the periods presented in the annual filings; The issuer’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting for the issuer, and we have: (a) designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that its consolidated the material subsidiaries, is made known to us by others within those entities, particularly during the period in which the annual filings are being prepared; information relating issuer, including to (b) designed such internal control over financial reporting, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP; and (c) evaluated the effectiveness of the issuer’s disclosure controls and procedures as of the end of the period covered by the annual filings and have caused the issuer to disclose in the annual MD&A our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by the annual filings based on such evaluation; and 5. I have caused the issuer to disclose in the annual MD&A any change in the issuer’s internal control over financial reporting that occurred during the issuer’s most recent interim period that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting. Dated: 29 August 2006 John Borshoff Managing Director Form 52-109F1 – Certification of Annual Filings I, Ron Chamberlain, Chief Financial Officer of Paladin Resources Ltd, certify that: 1. 2. 3. 4. I have reviewed the annual filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings) of Paladin Resources Ltd (the issuer) for the year ending 30 June 2006; Based on my knowledge, the annual filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the annual filings; Based on my knowledge, the annual financial statements together with the other financial information included in the annual filings fairly present in all material respects the financial condition, results of operations and cash flows of the issuer, as of the date and for the periods presented in the annual filings; The issuer’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting for the issuer, and we have: (a) designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that its consolidated the material subsidiaries, is made known to us by others within those entities, particularly during the period in which the annual filings are being prepared; information relating issuer, including to (b) designed such internal control over financial reporting, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP; and (c) evaluated the effectiveness of the issuer’s disclosure controls and procedures as of the end of the period covered by the annual filings and have caused the issuer to disclose in the annual MD&A our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by the annual filings based on such evaluation; and 5. I have caused the issuer to disclose in the annual MD&A any change in the issuer’s internal control over financial reporting that occurred during the issuer’s most recent interim period that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting. Dated: 29 August 2006 Ron Chamberlain Chief Financial Officer 

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