ABN 47 109 815 796 annual report 2007 ...positioned for growth ABN 47 109 815 796 Corporate Directory Directors Paul Chapman Non-Executive Chairman Will Robinson Managing Director Peter Bewick Exploration Director Jonathan Hronsky Non-Executive Director Company Secretary Kevin R Hart Principal Registered Office Level 1, 46 Parliament Place West Perth, Western Australia 6005 Telephone (08) 9486 9455 Facsimilie (08) 6210 1578 Web www.enrl.com.au Auditor WHK Horwath Perth Audit Partnership Level 6, 256 St Georges Terrace Perth, Western Australia 6000 Share Registry Security Transfer Registrars Pty Ltd 770 Canning Highway Applecross, Western Australia 6153 Telephone (08) 9315 2333 Facsimilie (08) 9315 2233 Stock Exchange Listing The Company’s shares are quoted on the Australian Stock Exchange. The home exchange is Perth, Western Australia. ASX Code ENR – Ordinary shares Company Information The Company was incorporated and registered under the Corporations Act 2001 in Western Australia on 30 June 2004 and became a public company on 26 May 2005. The Company is domiciled in Australia. Front and Back Cover: Eastern flank of Staten Hill. Encounter Resources is an active and well funded explorer with a focus on uranium and base metals. Encounter controls an exciting portfolio of highly prospective exploration projects in Western Australia. With a focused, experienced and driven management team in place the company is positioned for growth. Contents Letter from the Chairman & Managing Director Exploration Review Summary of Tenements Directors’ Report Auditor’s Independence Statement Income Statement Balance Sheet Statement of Changes in Equity Cash Flow Statement Notes to the Financial Statements Directors’ Declaration Independent Audit Report ASX Additional Information Page 2 3 19 20 29 30 31 32 33 34 53 54 55 Highlights and Achievements Drilling confirmed prospectivity of the Hillview project which has the potential to host a large tonnage near surface uranium deposit Three satellite uranium discoveries made in the Yeelirrie/Lake Way province and the preparation of initial resource estimates has commenced Near surface greenfields uranium discovery at the McPherson’s Bore project Outstanding ground position established in the world class Paterson uranium/base metals province through the Yeneena joint venture with Barrick Successful $4.3 million capital raising Goals for 2008 Complete an initial inferred resource estimate for the Hillview uranium project Prepare an inferred resource statement for the Yeelirrie/Lake Way satellite discoveries Complete follow up aircore drilling and trenching at the McPherson’s Bore uranium project Complete the re-assay and interpretation of historical exploration drill holes, an EM survey and an initial drill program at the Yeneena project Commence a drill program at the large scale Tchintaby zinc target in the Bangemall Basin Identify further business development opportunities An exceptional exploration ground position has been established in Western Australia. The highly accomplished Encounter management team is driven to unlocking its value ENCOUNTER RESOURCES ANNUAL REPORT 2007 1 Letter from the Chairman & Managing Director Dear Fellow Shareholder, During the past year Encounter Resources has made excellent progress in achieving its business objectives. On the uranium exploration front this includes progress on a number of key projects: • Yeelirrie/Lake Way: Exploration to date has uncovered three new areas of uranium mineralisation including the high grade Bellah Bore East discovery. Initial resource estimates in respect of these discoveries will be announced later in 2007. These are valuable deposits given resources and infrastructure. their proximity to existing • Hillview: The scale and consistency of the near surface, calcrete style mineralisation at Hillview suggest that this project has the potential to host a large uranium occurrence. • McPherson’s Bore: Drilling results have shown significant uranium concentrations within 1m of surface over an extensive area. It is interpreted that this mineralisation potentially represents a uranium leakage anomaly from a nearby buried source. In 2008 we hope to explain this highly anomalous near surface uranium occurrence. Encounter has also diversified its exploration portfolio with the addition of high quality base metals targets at its Bangemall Basin projects. Historical data reviews have highlighted the large scale base metals potential of these projects in an under-explored region. The Tchintaby zinc project is one project that that will be seeing a much greater activity level in the upcoming year. We continued to focus on business development opportunities culminating in an earn in transaction with Barrick Gold of Australia in relation to the Yeneena project. The Yeneena project is situated in the world class Paterson mineral province between the Nifty copper mine and Rio Tinto’s Kintyre uranium project. This highly prospective area has not seen systematic modern exploration for uranium or base metals and Barrick’s previous regional exploration work will provide a great springboard to launch our own exploration activities. Our relationship with joint venture partner Avoca Resources Ltd has continued to the benefit of both parties. In April 2007, Avoca elected to contribute to exploration expendi- ture to maintain its equity interest in the joint venture projects. We welcome the ongoing contribution to these projects by Avoca. On the corporate front, Encounter successfully completed a $4.3 million share placement in April 2007 to accelerate exploration activities. A strong cash position of $6.8 million at 30 June 2007 means that Encounter is well funded to aggressively pursue its exploration targets. Our success to date, combined with Encounter’s potential, saw us attract Dr Jon Hronsky as a Non Executive Director. Dr Hronsky enjoyed a distinguished career spanning over 20 years with WMC Resources/BHP Billiton and was head of BHP Billiton’s global project generation team. We would also like to acknowledge the significant con- tribution of Peter Bewick and our exploration team during the past year. By setting high standards, we have been able to attract and retain highly skilled people at a time when there is a critical shortage in our industry. Encounter’s key business objectives for 2008 include: • Establish an initial inferred resource statement for the Hillview uranium project and the Yeelirrie/Lake Way satellite discoveries • Complete follow up drilling at the McPherson’s Bore project to seek to identify the interpreted source of the highly anomalous near surface mineralisation discovered • At the Yeneena project, complete the re-assay and interpretation of historical exploration drill holes, an EM survey and an initial drill program • Commence a drill program at the large scale Tchintaby zinc target in the Bangemall Basin Encounter is well positioned to achieve these goals with a focused management team in place and a strong cash position. In summary, Encounter has the projects, the people and the funding to continue to grow the business towards its goal of becoming a substantial resources company. Paul Chapman Chairman Will Robinson Managing Director ENCOUNTER RESOURCES ANNUAL REPORT 2007 2 Three sections were drilled by Encounter across the main trend as part of the initial aircore program to test the large scale anomaly. These lines centred around the main homestead and utilised existing tracks and fence lines for drill rig access. The drilling successfully outlined a laterally continuous and coherent envelope of near surface mineralisation that is interpreted to be in excess of 3km long and up to 1km wide. This mineralisation is up to 10m thick with results typically within 10 metres of surface. Better results received include: • 5m at 210ppm U3O8 including 1m at 341ppm U3O8 • 4m at 241ppm U3O8 including 2m at 306ppm U3O8 • 4m at 220ppm U3O8 including 2m at 294ppm U3O8 • 5m at 221ppm U3O8 • 10m at 209ppm U3O8 including 6m at 270ppm U3O8 • 4m at 287ppm U3O8 including 3m at 324ppm U3O8 • 7m at 170ppm U3O8 including 1m at 259ppm U3O8 Exploration Review Encounter controls a portfolio comprising over 9,000 square kilometres of strategically located and highly prospective exploration projects in Western Australia. The portfolio includes: • a suite of calcrete style uranium projects located in the Yilgarn and the Gascoyne; • six projects targeting base metals and unconformity style uranium deposits in the Bangemall Basin and; • an earn in agreement with Barrick Gold of Australia in the Paterson Province considered highly prospective for unconformity related uranium mineralisation, SEDEX lead-zinc mineralisation and Nifty/Isa style copper mineralisation. The company has focused a large part its exploration effort since listing on the calcrete uranium projects in the northern Yilgarn. Why? Because calcrete uranium deposits are very near surface, have a low discovery cost and the projects are in proximity to infrastructure and quality existing resources. Moving early to acquire these targets also means Encounter has a competitive advantage in this exploration space. In parallel, the company is advancing its large scale base metals and unconformity uranium projects in the Bangemall Basin and utilising its exceptional multi- commodity targeting skills to continue to expand and diversify its project portfolio. Uranium Since listing in March 2006 Encounter has completed initial drilling campaigns on eleven projects in the Yilgarn and Gascoyne regions that are prospective for near surface uranium mineralisation. This program of drilling has defined new areas of uranium mineralisation at Bellah Bore East, Hillview, Centipede Extension, Lake Way Satellite and McPherson’s Bore. A number of these projects will see follow up drilling in the upcoming year. Hillview (E51/1127) 80% Encounter, 20% Avoca The Hillview project is located 50km south east of Meekatharra. Broad spaced reconnaissance drilling at Hillview, by Western Mining Corporation in the 1970s, identified a 15km long zone of near surface uranium mineralisation. Historical drill sections were between 1.6kms and 2kms apart with holes intersecting between 100-300ppm eU3O8* on every traverse along the defined 15km trend. ENCOUNTER RESOURCES ANNUAL REPORT 2007 3 Exploration Review (continued) The drilling also validates the significance of the 15km long historical WMC anomaly of which Encounter has only drilled a small section. The mineralisation defined in the initial program remains open to the north and east. An additional five aircore drill traverses are planned to test the southern and eastern extent of the mineralisation at the Hillview project. Once the regional sections are completed the next phase of drilling at Hillview will bring line spacing down to 500m spaced sections across the entire 15km mineralised trend. The Hillview project has the size potential to host a large tonnage near surface uranium deposit. The assay results received so far have exceeded the results from regional exploration holes drilled by WMC in the 1970s in terms of uranium grade and thickness. The Hillview mineralisation is over a large area, it is consistent, thick and very near surface which suggests that a deposit may be a future low cost mining opportunity. * Historical uranium mineralisation grades are annotated with a sub-prefix ‘e’ because they have been reported as uranium equivalent grades derived from down-hole gamma ray logging results and should be regarded as approximations only. Gamma logging or “total count gamma logging” (the method used by Western Mining Corporation Limited at Hillview) is a common method used to estimate uranium grade where the radiation contribution from thorium and potassium is very small. Sandstone and calcrete hosted deposits are usually of this type. Gamma logging does not account for energy derived from thorium and potassium (as does spectral gamma logging) and thus the result is expressed as an equivalent value or eU308. The gamma radiation from potassium, uranium and thorium is dominated by gamma rays at specific energy levels. These energy levels are sufficiently well separated such that they can be measured independently of each other. They are typically measured as narrow energy bands that contain the specific energy levels. Bands are used because the measuring systems do not have the resolution to target a specific energy wavelength. There is some scattering of higher energy gamma radiation, e.g.thorium, into lower energy radiation, e.g. uranium and potassium. This scattered radiation can be calculated from suitable calibration procedures and removed from the lower energy level measurements. This method is commonly termed spectral gamma logging. The downhole gamma logging system used by Western Mining Corporation Limited on this project was the ELMAC 2000. ENCOUNTER RESOURCES ANNUAL REPORT 2007 4 Yeelirrie Channel (E53/1154-58, E36/540-542) 80% Encounter, 20% Avoca Encounter controls an exploration tenement holding of over 750km2 encompassing in excess of 40 strike kms of the defined drainage channel that hosts BHP Billition’s Yeelirrie uranium deposit. The Yeelirrie uranium deposit is located approximately 60kms south west of Wiluna and is the world’s largest calcrete associated uranium deposit with a published resource of 52,500 tonnes of U3O8. Drill traverse at Yeelirrie South ENCOUNTER RESOURCES ANNUAL REPORT 2007 5 Exploration Review (continued) Bellah Bore East (E53/1158) In June 2006, five reconnaissance aircore holes (EYN001- 5) were drilled at Bellah Bore East. Drill holes EYN001 and EYN005 intersected a highly anomalous, near surface zone of uraniferous silicified calcrete that remained open along strike and to the west. • • 7m @ 100ppm U3O8 from 1m, including 2m @165ppm U3O8 from 5m 8m @ 123ppm U3O8 from 0m, including 3m @ 204ppm U3O8 from 0m In July 2006 an 18 hole aircore drilling program was completed to test the immediate area to the north, south and west of the uranium mineralisation intersected in EYN001 and EYN005. Drill hole EYN064, located roughly in the centre of this calcareous zone, intersected 3m @ 781ppm U3O8 from 4m including 1m @ 2,111ppm U3O8. A 32 hole follow up program in December 2006 at Bellah Bore East confirmed the continuity of near surface uranium mineralisation at Bellah Bore East. Results included: • • 8m @ 215ppm U3O8 from 0m, including 2m @ 410ppm U3O8 from 1m 10m @ 166ppm U3O8 from 0m, including 2m @ 410ppm U3O8 from 1m The drilling at Bellah Bore East defined an area of near surface uranium mineralisation approximately 500m by 150m and between 2m to 10m thick (see Table 1). Information is currently being compiled in order to complete an Inferred Resource calculation at Bellah Bore East. Encounter was encouraged by the results at Bellah Bore East as they confirmed the initial hypothesis that satellite uranium occurrences are still to be found within the Yeelirrie Channel. TABLE 1: BELLAH BORE EAST MINERALISED INTERSECTIONS Hole # Northing Easting EYN 1 7,025,450 779,400 Dip -90 EYN 5 7,025,140 779,220 -90 EYN 64 7,025,200 779,140 -90 EYN 87 7,025,300 779,300 -90 EYN 90 7,025,200 779,350 EYN 145 7,025,200 779,140 -90 -60 EYN 146 7,025,200 779,260 -60 Azi 360 incl. 360 incl. 360 incl. 360 incl. 360 090 incl. 270 From (m) To (m) Width (m) U3O8 (ppm) V (ppm) 1 5 0 0 4 5 0 1 4 0 1 0 8 7 8 3 7 6 7 2 8 3 3 1 10 10 3 6 8 3 9 2 2 8 2 9 100 165 123 204 781 2111 166 410 110 215 410 123 17 12 49 66 130 320 38 89 19 34 89 17 ENCOUNTER RESOURCES ANNUAL REPORT 2007 6 Altona Gap (E36/541) Encounter Resources controls the 4km gap between BHPB’s mineral claims at Yeelirrie and their South Yeelirrie prospect. A single line of aircore holes was drilled in the area between BHPB tenure that is referred as the Altona Gap prospect. The line of holes was drilled to a depth of 10m and it appears that the drilling failed to test the entire calcrete profile. Uranium assays from this drilling indicated an increase in grade at the bottom of hole which supports the need to extend the holes. The Altona Gap project will be drill tested to a greater depth in the upcoming year. Anomaly 5 (E36/540 & E36/542) Drilling over the Geological Survey of Western Australia (GWSA) uranium geochemical anomaly at Yeelirrie South (Anomaly 5) was completed in January 2007. The program included a series of traverses across the southern extension of the Yeelirrie Channel and a number of specifically targeted drill sections over Anomaly 5. Results from this drilling defined an area of low level anomalism (<50ppm U3O8) within a broad zone of elevated vanadium and uranium in the regolith. Additional work in the area will focus on the anomalous trends defined in the broad drilling to determine the potential for satellite occurrences. Additional drilling will also target the base of the Yeelirrie palaeochannel for ‘roll-front’ style uranium mineralisation. Middle Bore (E36/541) Follow up drilling at Middle Bore to assess anomalous results identified within a broad southwest trending tributary returned similar low level uranium anomalism. Results Air core drilling on Lake Way included 2m @ 93ppm U3O8 and 2m @ 88ppm U3O8. Although these results are of interest, the potential of the area to host a substantial uranium resource has been downgraded. The spacing between drill lines of approxi- mately 3km leaves the potential for small, higher grade pods of mineralisation to be found. Youno Downs (E53/1156) A series of shallow reconnaissance drill traverses were completed over the Youno Downs radiometric anomalies. The areas of radiometric anomalism appeared to be coincident with zones of hydrothermal alteration of the granitic basement. Re-sampling of a number of anomalous 5m composite samples at Youno Downs identified a narrow zone of 2m @ 112ppm uranium within the altered granitic bedrock. A review of the magnetics and radiometrics indicated a potential bedrock target to the west and south of the drilling. Results confirm the near surface radiometric anomalism within these areas is related to weak metasomatic alteration of the subcropping granitic bodies. Coincident low level, rare earth element and uranium anomalism was found within the most altered portions of the granites with broad zones anomalism of up to 25ppm uranium within the bedrock. These results indicate the uranium source rocks in the north of the Yeelirrie Channel are significantly enriched in respect to the regional signature of between 5-10ppm uranium. Additional drilling is planned in the coming year to test the bedrock target at Youno Downs. ENCOUNTER RESOURCES ANNUAL REPORT 2007 7 Exploration Review (continued) Lake Way South (E53/1010 and E53/1232) 60% Encounter, 40% Avoca of uranium rights The Lake Way South project is located approximately 10kms south of the township of Wiluna and covers an area of 117.5km2. The tenement covers approximately 12kms of the Lake Way drainage system and is located between Nova Energy’s Lake Way uranium deposit to the north and its Centipede deposit to the south. A 70 hole aircore drill program was completed along the north eastern margin of Lake Way in September 2006. The program was designed to test a series of subtle radiometric anomalies that are located to the east of the primary radiometric target. The results from this drilling defined a 1.2km long zone of near surface anomalism within lake sediments known at the Lake Way Satellite. Assays from within this zone included: • ELW 146 2m @ 210ppm U3O8 from 7m • ELW 143 1m @ 118ppm U3O8 from 1m • ELW 134 1m @ 159ppm U3O8 from 6m • ELW 136 2m @ 103ppm U3O8 from 0m • ELW 193 2m @ 127ppm U3O8 from 0m • ELW 192 1m @ 147ppm U3O8 from 5m The southern 1km of the 12km long uranium channel radiometric anomaly that crosses Lake Way was aircore drilled in February 2007. The results have extended the area of known uranium mineralisation at Nova Energy’s Centipede uranium at least 150m into the Lake Way JV tenement. Assay results at the Centipede Extension include: • ELW005 1m @ 312ppm U3O8 from 5m • ELW012 1m @ 224ppm U3O8 from 3m • ELW002 1m @ 147ppm U3O8 from 8m The lake based aircore program was suspended following heavy rain associated with Cyclone George. The drill program will re-commence in the upcoming year and it will systematically test the remainder of the uranium channel radiometric anomaly that extends across Lake Way within the area of the JV tenement. ENCOUNTER RESOURCES ANNUAL REPORT 2007 8 McPherson’s Bore (E29/587) 80% Encounter, 20% Avoca The McPherson’s Bore Project is located 120km west of Leonora and is located within the Lake Raeside drainage system. The project covers a coincident uranium channel radiometric anomaly and a GSWA uranium stream sediment anomaly. Four broad spaced auger drill traverses were completed at McPherson’s Bore to test the coincident geochemical and geophysical anomaly. The drilling identified a 4km long uranium geochemical anomaly associated with a near surface zone of calcrete and calcareous sediments. A follow up aircore program was designed to test the area of the uranium geochemical anomaly identified. Near surface uranium mineralisation discovered is hosted in lake clays and extends over 1.7 kms of strike, with results including: • 1m @ 448ppm U3O8 from surface • 1m @ 283ppm U3O8 from surface • 1m @ 271ppm U3O8 from surface The mineralisation remains open to the north. It is interpreted that this mineralisation potentially represents a significant uranium leakage anomaly from a nearby buried source area. Based on these results, the following activities are now planned: a) complete a series of sample pits to confirm the continuity of the mineralisation and to allow in-situ sampling of the mineralised horizon; b) drilling to determine the extent of mineralisation to the north; and c) drilling to locate the potential source of the surface mineralisation. A second mineralised horizon has also been defined along the western margin of the drilling that is not associated with radiometric anomaly. This the primary airborne mineralisation occurs at around 3m depth with assays typically between 50-100ppm U3O8 over 2-3m and remains open to the north, south and west. Additional ground has been acquired to the north and south of the McPherson’s Bore Project to cover the possibility of additional buried mineralisation within the defined trend. ENCOUNTER RESOURCES ANNUAL REPORT 2007 9 Exploration Review (continued) Walling Rock (E30/299) 80% Encounter, 20% Avoca Stone Tank (E09/1296) 80% Encounter, 20% Avoca A single line of auger drilling at Walling Rock, 70kms south of McPherson’s Bore, has intersected uranium mineralisa- tion within lake sediments of up to 1.6m @ 136ppm U3O8. Of the 19 holes drilled, 7 contained intersections in excess of 50ppm U3O8. The line drilled was designed to test an airborne radiometric anomaly located 1km south of a series of historical drillholes drilled by Esso in the 1970s. Re-interpretation of the historic drilling, along with the new data from the recent auger drilling, has outlined a zone of uranium anomalism within lake sediments that extends over 5kms along the eastern margin of a salt lake. A follow up program of auger drilling at 1km section spacing is planned. The Stone Tank Project was granted in February 2007. It is located on the northern margin of the Gascoyne Province approximately 265km east of Carnarvon. The project tenement was pegged to cover a 7km long uranium channel airborne radiometric anomaly with coincident mapped calcrete. During the initial field reconnaissance visit to the project, surface uranium mineralisation, in the form of carnotite, was identified at two sample locations 4kms apart. This work confirmed uranium enrichment within the calcrete at surface. A program of aircore drilling is now planned to test the primary target zone at the water table. Heritage clearance has been received for the initial drill program. The first drill test at the project was completed in October 2007 with assays pending. ENCOUNTER RESOURCES ANNUAL REPORT 2007 10 Yalgar (E51/1137) 80% Encounter, 20% Avoca The Yalgar Project is located 120kms north west of Meekatharra within the upper reaches of the Murchinson River drainage system. The project was pegged over an extensive but subtle airborne radiometric in an area of extensive sheetwash sediments. Minor calcrete occurrences have been noted in shallow pits throughout the project. A program of regional traverse drilling to assess the uranium prospectivity of the target area was completed in October 2007. Assay results are pending. Lakeview (E29/577) 80% Encounter, 20% Avoca A series of five 1km spaced aircore traverses were drilled to test for near surface uranium mineralisation associated with an interpreted palaeochannel position to the south of Lake Raeside. In addition, two holes were drilled to test the base of the palaeochannel for ‘roll-front’ style uranium mineralisation. The results from this drilling did not identify any significant uranium mineralisation. The focus of the program will now move to the main radiometric anomaly on the lake where previous explorers reported the discovery of uranium mineralisation within lake sediments. Lake Darlot (E37/830) 80% Encounter, 20% Avoca The Lake Darlot Project is located downstream of the drainage systems that host the Lake Maitland and Yeelirrie deposits. Local parts of the lake surface appear highly anomalous in the regional radiometric data. A series of shallow auger holes were drilled to determine the nature and source of the airborne radiometric anomalies. Modest levels of uranium anomalism associated with the radiometric highs returned up to 87ppm U3O8 over 0.8 metres, within 2 metres of surface. Highly anomalous levels of strontium (up to 2.88% Sr) were noted and appear to be associated with the higher uranium grades. The significance of the uranium and strontium anomalism will be assessed through an aircore drilling program in the upcoming year. Minneritchie (E09/1197) 80% Encounter, 20% Avoca A program of rock chip sampling was completed during a reconnaissance field trip to the Minneritchie Well project. Sampling was focused in two areas of radiometric anomalism located in the southern half of the tenement. Drilling at Yalgar Eleven samples were taken of various outcropping lithologies. At both locations the most intense radiometric area corresponded with narrow zones of outcropping haematite altered metasediment. Sampling of the metasediment returned assays of up to 165ppm uranium within a broad zone of shearing and alteration. A regional geochemical program at the project has recently been completed with assays pending. Talbot (E70/2956), Shackleton (ELA70/2957), & Wongan HIlls (ELA70/2958) 80% Encounter, 20% Avoca Encounter applied for three exploration licences within the wheatbelt of WA following the release by the Cooperative Research Centre for Landscape Environments and Mineral Exploration (CRC LEME) of the south west Yilgarn laterite multi-element geochemical dataset. This regional laterite sampling was completed on 9km spacing and has identified a series of anomalies that are considered prospective for uranium mineralisation. The Wongan Hills, Shackleton and Talbot targets show coincident anomalism in uranium, vanadium, phosphorous and arsenic. It is anticipated that the tenements will be granted in late 2007. ENCOUNTER RESOURCES ANNUAL REPORT 2007 11 Exploration Review (continued) Base Metals The geological setting targeted for unconformity uranium mineralisation in the Proterozoic is also prospective for base metals mineralisation. Several projects in the Bangemall province have been the focus of historical Zn- Cu-Ag exploration by companies such CRA, BHP, WMC and Pasminco. The compilation of the historical information has identified a number of opportunities for large scale base metal deposits within the Tchintaby Well, Pingandy Creek and Staten projects located in the Bangemall Basin. Within the Yilgarn, a regional auger drilling geochemical program completed during the year has highlighted anomalous zinc and copper assay results requiring follow up at the Lake Irwin project and a rock chip program at the Gidgie Bore and Crossland Hill projects has also indicated interesting base metal potential that will be advanced in the upcoming year. Tchintaby Well (E52/1882 and ELA52/1959) 80% Encounter, 20% Avoca Drilling in the mid 1990s CRA Exploration intersected an extensive area of low grade Zn-Cu-Ag mineralisation extending laterally over 8km by 5km. A total of 29 holes were drilled by CRA tracing the mineralised horizon to a maximum depth of 200m below surface with the shoot remaining open to the south. Typical holes within the mineralised area returned intersections of 10-15m thick- ness, grading 0.5-1% Zn, 500-1000ppm Cu and 5-15g/t Ag. Examples of mineralised holes are tabled below. Preliminary geological investigations indicate that the prospective horizon that hosts the Zn-Cu-Ag mineralisation may be laterally extensive at depth throughout the Tchintaby project area. TABLE 2: TCHINTABY WELL – EXAMPLES OF MINERALISED HISTORICAL DRILL HOLES Hole # Northing Easting From(m) To(m) Zn(ppm) Cu(ppm) Ag(g/t) RC94AN03 RC97AN23 RC97AN26 7339308 7339547 7340506 613388 611570 615360 38 60 70 50 72 85 7722 7262 6865 965 979 882 9.25 7.5 7 Datum AMG z50 ENCOUNTER RESOURCES ANNUAL REPORT 2007 12 • Historical drill holes Interpretation of the 1km by 500m ground gravity data has defined a distinct SSE trending gravity gradient. It is interpreted that this gradient is related to a major basement structure that has been the focus of mineralising fluids at Tchintaby. Significantly, the best part of the known mineralisation defined by CRA also defines a SSE trend. The target at Tchintaby is high grade Zn mineralisation proximal to this structure, downdip to the SSE of the existing low grade halo defined by CRA. Re-modelling of the gravity data has outlined a 1km by 1km gravity high (Laksa anomaly) along the interpreted SSE trend to the immediate south of the past drilling. Further geophysical work will be completed before a drilling program commences to test the defined target. ENCOUNTER RESOURCES ANNUAL REPORT 2007 13 Exploration Review (continued) Pingandy Creek (ELA08/1779) 80% Encounter, 20% Avoca The Pingandy Creek Project encompasses a regional base metals and uranium geochemical anomaly. A series of shallow drill holes were completed by Pasminco in the 1990s that extended over 30km of strike. The drilling inter- sected a sphalerite and chalcopyrite mineralised sequence at the base of the Jillawarra Formation and returned 3m @ 1.25%Zn (including 1m @ 2.88%Zn) within the Pingandy Creek project. The targeted horizon hosts a 9km long uranium channel radiometric anomaly and coincident GSWA regional, multi- element (U-As-Mo-Sb) stream sediment anomaly within the Pingandy Project. Downhole gamma logs of two of the percus- sion holes drilled by Pasminco indicate highly anomalous radiometric responses of over ten times background associated with significant Zn, Cu, As, Mo and Ni anomalism. Base metal anomalism is found within the alteration halo of Outcrop at Pingandy Creek a number of unconformity uranium deposits and the coincident radiometric anomalism at Pingandy Creek is considered to be highly encouraging. No uranium analysis was completed on the historic RC drill holes. ENCOUNTER RESOURCES ANNUAL REPORT 2007 14 Staten (ELA52/2126) 100% Encounter The Staten Project covers over 300km2 and is located near the southern margin of the Bangemall Basin, some 60kms east of Mt Augustus. The tenement covers two historical BHP regional stream sediment gold anomalies and an extensive uranium channel radiometric anomaly along the eastern flank of Staten Hill. A small rock chip sampling program was completed along a 200m section of the greater than 10km long radiometric anomaly at Staten Hill. An interesting multi-element anomaly in U-Ag-Cu-Mo-Ni-Zn was noted within a highly altered and sheared siltstone. This metal association highlights a potentially extensive area of metal enrichment along a key stratigraphic horizon. A systematic program of ground geochemistry and geophysics is planned once the tenement is granted. Eastern flank of Staten Hill Staten Project ENCOUNTER RESOURCES ANNUAL REPORT 2007 15 Exploration Review (continued) Wanna and Waldburg Range (E09/1297 and ELA51/2031) 80% Encounter, 20% Avoca The Wanna and Waldburg Range projects cover two areas of anomalous uranium and base metals geochemistry identified in the GSWA regional stream sediment surveys. The projects are located along the southern margin of the Bangemall Basin and are considered prospective for both base metals mineralisation and for unconformity related uranium mineralisation. A regional lag geochemical survey has commenced at Wanna with infill sampling and surface geophysics to follow up areas of interest. Crossland Hill and Gidgie Bore (E51/1096 and E51/1097) 80% Encounter, 20% Avoca The Crossland Hill and Gidgie Bore Projects are located approximately 60kms northwest of Meekatharra and lie within the Yilgarn Block. The geology of the area consists of extensive granitic and gneissic outcrop. Interpretation of the surface uranium channel radiometrics indicates the area contains a broad zone of metasomatic alteration and Waldburg Range elevated uranium anomalism within the two projects. Recently, a series of regional rock chip traverses were completed at both projects. Results from the rock chip sampling program identified several areas of base metals anomalism that lie within an interpreted major structural trend that cross cuts the projects. A geochemical review and targeting program will be completed with a program of ground geophysics planned for the coming year. Lake Irwin (E38/1784) 80% Encounter, 20% Avoca The Lake Irwin Project is located 95 km north east of Leonora. A series of shallow auger holes were drilled at the project to determine the nature and source of the airborne radiometric anomalism. Drilling results at Lake Irwin did not identify any significant near surface uranium mineralisation. However, multi-element geochemical analysis was completed on all holes with some base metals anomalism noted. Plotting of these results identified broadly coincident Zn and Cu anomalism within the lake sediments of up to 1.7m at 485ppm Zn and 405ppm Cu at the bottom of a 3.2m auger hole. Additional drilling is required to determine the significance of the base metals anomalism. ENCOUNTER RESOURCES ANNUAL REPORT 2007 16 Diamonds Lakeview (E29/577 and ELA37/877) 80% Encounter, 20% Avoca A detailed gravity survey was completed over a discrete magnetic anomaly in the east of the Lakeview Project. The survey successfully defined a circular gravity low over the magnetic body that is likely to be associated with increased weathering of the magnetic body. The coincident geophysical anomaly is located within dunes on the margin of Lake Raeside in a region where De Beers and others have identified a number of kimberlitic bodies and diamond indicator minerals. Modelling of the geophysical data has generated two sub vertical pipe-like bodies within the granitic terrain that are interpreted to be Kimberlitic intrusions. Although diamonds are not the core focus of Encounter, this target is considered to be a high quality opportunity. A drilling program will test the southern of the two anomalies to determine the lithology and prospectivity of the defined geophysical targets. Glen Budge (Field Manager) and Clay Schmidt (Peak Drilling) Lakeview Project Gravity Survey Summary ENCOUNTER RESOURCES ANNUAL REPORT 2007 17 Exploration Review (continued) Business Development Yeneena Joint Venture – Barrick Gold of Australia In September 2007, Encounter executed the Yeneena Joint Venture Agreement with Barrick Gold of Australia. The agreement allows Encounter to earn a 75% interest in a 1500km2 tenement package in the Paterson Province of WA. The project area is considered highly prospective for unconformity related uranium mineralisation and for base metals mineralisation. The project area captures the northern margin of an area of anomalously thick Yeneena Group sedimentary rocks. This margin replicates the geological setting seen on the southern margin some 40kms to the south, which hosts the Kintyre uranium deposits. The Yeneena sediments are also host to the Nifty copper deposit which is located 45km north west of the project. The Kintyre uranium deposits lie within Lower Proterozoic metamorphic rocks of the Rudall Complex. Younger Proterozoic sandstones of the Yeneena Group overlie these rocks and are interpreted to be the source of uranium. The contact between the older Rudall Complex rocks and the younger Yeneena Group is known as an “unconformity”. Such unconformities are critical in the formation of ‘unconformity style’ uranium ores such as at Kintyre and in the Athabasca Basin of Canada. rocks A localised, anomalously thick basin of Yeneena Group sedimentary rocks occurs between the Yeneena project and the area of the Kintyre uranium deposits. The structures at the margins of this basin are considered to be important in controlling uranium mineralisation. Within the Yeneena project, the favourable unconformity position is preserved and interpreted to be present beneath a thin veneer of Yeneena Group sandstones. The area is largely under sand cover with limited outcrop. The overlying sandstones are also considered prospective for base metals with the Nifty copper mine hosted in the same stratigraphy, 45km to the north west of the Yeneena project. Planned activities for the Yeneena Project for the upcoming year include: 1) Access discussions with the Western Desert Lands Aboriginal Corporation 2) Re-logging and assaying of gold exploration drill holes completed by Barrick 3) Interpretation of the airborne EM survey to be com- pleted over the project area by Geoscience Australia as part of the Onshore Energy Security Program 4) Field reconnaissance ENCOUNTER RESOURCES ANNUAL REPORT 2007 18 Summary of Tenements Lease Lease Name Project Name Area Km2 Registered Holders/Applicant Encounter Interest E08/1578 E08/1779 E09/1297 E52/1882 ELA08/1794 ELA52/1959 ELA52/2031 ELA52/2077 ELA52/2089 ELA52/2126 E09/1197 E09/1296 E53/1010 E53/1232 E29/577 E29/587 E30/299 E30/300 ELA29/674 ELA29/675 ELA37/877 E51/1096 E51/1097 E51/1127 E51/1137 E37/830 E38/1784 E38/1786 E38/1787 E38/1969 ELA38/1790 ELA38/1791 ELA38/1792 E45/2500 E45/2501 E45/2502 E45/2503 E45/2561 E45/2657 E45/2658 ELA45/2805 ELA45/2806 E70/2956 ELA70/2957 ELA70/2958 E53/1154 E53/1155 E53/1156 E53/1157 E53/1158 E36/540 E36/541 E36/542 Pingandy Option Pingandy Creek Wanna Tchintaby Table Top Tchintaby South Waldburg Range Turkey Creek Grand Junction Statan Minneritchie Well Stone Tank Well Wiluna South Wiluna South Lakeview McPherson’s Bore Walling Rock Galah Rocks Perrinvale Nth Perrinvale Sth Lakeview East Gidgee Bore Crossland Hill Hillview Yalgar Lake Darlot Lake Irwin Throssell Lake Rason Buldya Lake Yeo 1 Lake Yeo 2 Lake Yeo 3 Yeneena Yeneena Yeneena Yeneena Yeneena Yeneena Yeneena Yeneena Yeneena Talbot Shackleton Wongan Hills Suprise Bore Rubble Bore Mt Merewether Limestone Well Bitter Bore Easter Bore Altona Bore Black Tank Well Bangemall Basin Bangemall Basin Bangemall Basin Bangemall Basin Bangemall Basin Bangemall Basin Bangemall Basin Bangemall Basin Bangemall Basin Bangemall Basin Gascoyne Gascoyne Lake Way Sth JV Lake Way Sth JV Leonora Regional Leonora Regional Leonora Regional Leonora Regional Leonora Regional Leonora Regional Leonora Regional Meekatharra Meekatharra Meekatharra Meekatharra Melrose Melrose Officer Basin Officer Basin Officer Basin Officer Basin Officer Basin Officer Basin Paterson JV Paterson JV Paterson JV Paterson JV Paterson JV Paterson JV Paterson JV Paterson JV Paterson JV SW Regional SW Regional SW Regional Yeelirrie Nth Yeelirrie Nth Yeelirrie Nth Yeelirrie Nth Yeelirrie Nth Yeelirrie Sth Yeelirrie Sth Yeelirrie Sth 73.9 332.8 354.4 172.5 15.7 589.1 224 191.1 360.8 312.6 52.2 100.4 50.7 66.8 126.4 123.4 62.8 65.7 78.5 116 87.3 89.3 30.8 202.1 216.1 164 109 63.2 123.5 88.6 194.1 212.3 133.4 163.4 82.9 216.3 155.8 178 222.8 222.6 63.7 209.7 407.9 583 589.6 44.1 35.2 70.4 9.8 10.5 201.1 176 213.5 Callum Baxter Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Avoca Resources Ltd Avoca Resources Ltd Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Barrick Gold of Australia Barrick Gold of Australia Barrick Gold of Australia Barrick Gold of Australia Barrick Gold of Australia Barrick Gold of Australia Barrick Gold of Australia Barrick Gold of Australia Barrick Gold of Australia Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Encounter Resources Limited Option to earn 100% 80% 80% 80% 100% 80% 80% 80% 80% 100% 80% 80% 60% of Uranium Rights 60% of Uranium Rights 80% 80% 80% 80% 100% 100% 80% 80% 80% 80% 80% 80% 80% 80% 80% 80% 80% 80% 80% earning 75% earning 75% earning 75% earning 75% earning 75% earning 75% earning 75% earning 75% earning 75% 80% 80% 80% 80% 80% 80% 80% 80% 80% 80% 80% ENCOUNTER RESOURCES ANNUAL REPORT 2007 19 Corporate Governance Statement Introduction Since the introduction of the ASX Principles of Good Explanation for Departures from Best Practice Recommendations Corporate Governance and Best Practice Recommendations During the Company’s 2006/2007 financial year the (“ASX Guidelines” or “the Recommendations”), Encounter Company has complied with each of the Ten Essential Resources Limited (“Company”) has made it a priority to Corporate Governance Principles and the corresponding adopt systems of control and accountability as the basis for Best Practice Recommendations as published by the the administration of corporate governance. Some of these ASX Corporate Governance Council (“ASX Principles and policies and procedures are summarised in this report. Recommendations”)i. Significant policies and details of any Commensurate with the spirit of the ASX Guidelines, the significant deviations from the principles are specified below. Company has followed each Recommendation where the Board has considered the Recommendation to be an Corporate Governance Council Recommendation 1 appropriate benchmark for corporate governance practices, Role of the Board of Directors taking into account factors such as the size of the Company, The role of the Board is to increase shareholder value within the Board, resources available and activities of the Company. an appropriate framework which safeguards the rights and Where, after due consideration, the Company’s corporate interests of the Company’s shareholders and ensure the governance practices depart from the Recommendations, Company is properly managed. the Board has offered full disclosure of the nature of, and reason for, the adoption of its own practice. In order to fulfil this role, the Board is responsible for the overall corporate governance of the Company including The Company has adopted systems of control and formulating its strategic direction, setting remuneration and accountability as the basis for the administration of corporate monitoring the performance of Directors and executives. governance. The Board of the Company is committed to The Board relies on senior executives to assist it in approving administering the policies and procedures with openness and monitoring expenditure, ensuring the integrity of and integrity, pursuing the true spirit of corporate governance internal controls and management information systems commensurate with the Company’s needs. and monitoring and approving financial and other reporting. Further information about the Company’s corporate In broad terms, the Board Charter clarifies the respective governance practices is set out on the Company’s website roles of the Board and senior management and assists in at www.enrl.com.au. In accordance with the recommenda- decision making processes. tions of the ASX, information published on the Company’s website includes: Board Charter Nomination Committee Charter Remuneration Committee Charter Code of Conduct Board processes An agenda for the meetings has been determined to ensure certain standing information is addressed and other items which are relevant to reporting deadlines and or regular review are scheduled when appropriate. The agenda is regularly reviewed by the Chairman, the Policy and Procedure for Selection and Appointment Managing Director and the Company Secretary. of New Directors Summary of Policy for Trading in Company Securities Corporate Governance Council Recommendation 2 Summary of Compliance Procedures Procedure for the Selection, Appointment and Rotation of External Auditor Shareholder Communication Strategy Summary of Company’s Risk Management Policy Board composition The Constitution of the Company provides that the number of Directors shall not be less than three. There is no requirement for any share holding qualification. The membership of the Board, its activities and composition is subject to periodic review. The criteria for ENCOUNTER RESOURCES ANNUAL REPORT 2007 20 determining the identification and appointment of a Corporate Governance Council Recommendation 3 suitable candidate for the Board shall include the quality of the individual, background of experience and achievement, compatibility with other Board members, credibility within the scope of activities of the Company, intellectual ability to contribute to Board duties and physical ability to undertake Board duties and responsibilities. Directors are initially appointed by the Board and are subject to re election by shareholders at the next general meeting. In any event one third of the Directors are subject to re election by shareholders at each general meeting. The Board is presently comprised of four members, two non-executive and two executive. The Non-Executive Directors are Mr Paul Chapman (Chairman) and Dr Jonathan Hronsky. The Board believes that Mr Chapman is the most appropriate person for the position as Chairman because of his industry experience and proven track record as a public company director. The skills, experience and expertise of all Directors is set out in the Directors’ Report. Ethical and responsible decision making The Board actively promotes ethical and responsible decision making. Code of Conduct The Board has adopted a Code of Conduct that applies to all employees, executives and Directors of the Company. This Code addresses expectations for conduct in the following areas: Integrity and honesty; • Responsibility to shareholders; • • Respect for laws; • Conflicts of interests; • Protection of assets; • Confidential information; • Employment practices; • Respect for the community; • Respect for individuals; • Fair trading and dealing; • Compliance with Code of Conduct: and • Periodic review of Code. The Board has assessed the independence of its non Security Trading Policy executive directors according to the definition contained The Board has adopted a policy and procedure on dealing within the ASX Corporate Governance Guidelines and has in the Company’s securities by directors, officers and concluded that one of the current non executive directors, employees which prohibits dealing in the Company’s Mr Chapman does not meet the recommended securities when those persons possess inside information. independence criteria, by virtue of his substantial It also provides that the written acknowledgement of the shareholding in the Company. Chairman should be obtained prior to trading. The Board does not have a separate Nomination Committee as the selection and appointment process for Directors is carried out by the full Board. The Company is Corporate Governance Council Recommendation 4 Integrity in financial reporting not of a sufficient size to warrant a separate committee. Managing Director and Chief Financial Officer However, the Company adopted the Nomination Written Statement Committee Charter on 8 February 2006. Only one of the four Directors’ is considered to satisfy the test of independence as set out in the best practice recommendations. However, the Board considers that both its structure and composition are appropriate given the size of the Company and that the interests of the The Board requires the Managing Director and the Company Secretary provide a written statement that the financial statements of company present a true and fair view, in all material aspects, of the financial position and operational results. In addition, confirmation is provided that all relevant accounting standards have been appropriately applied. Company and its shareholders are well met. Audit Committee The full Board fills the role of an Audit Committee. The relevant experience of Board members is detailed in the Directors’ section of the Directors’ Report. ENCOUNTER RESOURCES ANNUAL REPORT 2007 21 Corporate Governance Statement (continued) The Board reviews the performance of the external auditors In addition to electronic communication via the ASX web on an annual basis and meets with them during the year to site, the Company publishes all significant announcements review findings and assist with Board recommendations. together with all quarterly reports. These documents are The Board does not have a separate Audit Committee with a composition as suggested in the best practice recommendations. The full Board carries out the function of an audit committee. The Board believes that the Company is not of a sufficient size to warrant a separate available in both hardcopy form on request and on the Company web site at www.enrl.com.au. Corporate Governance Council Recommendation 7 Recognise and manage risk committee and that the full Board is able to meet Risk management objectives of the best practice recommendations and The Board’s risk management policy sets out a framework discharge its duties in this area. Financial reporting The Board relies on senior executives to monitor the internal controls within the Company. Financial performance is monitored on a regular basis by the Managing Director who reports to the Board at the scheduled Board meetings. Corporate Governance Council Recommendation 5 Timely and balanced disclosure The Board is committed to the promotion of investor 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. Corporate Governance Council Recommendation 8 Encourage enhanced performance confidence by providing full and timely information to all Performance review security holders and market participants about the The Board has not undertaken a formal review of its Company’s activities and to comply with the continuous performance for the year ended 30 June 2007. disclosure requirements contained in the Corporations Act 2001 and the Australian Stock Exchange Listing Rules. The Company established written policies and procedures designed to ensure compliance with the ASX Listing Rule Requirements. The Chairman assesses the performance of the Board, individual directors and key executives on an informal basis. Due to the early stage of development of the Company, it is difficult for quantitative measures of performance to be established. As the Company progresses its current Continuous disclosure is discussed at all regular Board projects, the Board intends to establish appropriate meetings and on an ongoing basis the Board ensures that evaluation procedures. all activities are reviewed with a view to the necessity for disclosure to security holders. Education In accordance with ASX Listing Rules the Company Secretary is appointed as the Company’s disclosure officer. Corporate Governance Council Recommendation 6 Rights of security holders Communications All executives and Directors are encouraged to attend professional education courses relevant to their roles. Independent professional advice and access to information Each Director has the right to access all relevant information in respect to the Company and to make appropriate The Board fully supports security holder participation at enquiries of senior management. general meetings as well as ensuring that communications with security holders are effective and clear. This has been incorporated into a formal shareholder communication strategy. ENCOUNTER RESOURCES ANNUAL REPORT 2007 22 Corporate Governance Council Recommendation 9 Corporate Governance Council Recommendation 10 Remunerate Fairly and Responsibly Recognise the legitimate interests of stakeholders The Board acknowledges the rights of stakeholders and has adopted a Code of Conduct (refer Principle 3) in-line with the recommendations of this Principle 10. The executive Directors and senior executives receive salary packages which may include performance based components designed to reward and motivate. Non executive Directors receive fees agreed on an annual basis by the Board. Current remuneration of Directors is disclosed in the Remuneration Report included in the Directors’ Report. Shareholders will be invited to consider and approve the Remuneration Report at the Annual General Meeting. Remuneration Committee The Board determines all compensation arrangements for Directors. It is also responsible for setting performance criteria, performance monitors, share option schemes, incentive performance schemes, superannuation entitle- ments, retirement and termination entitlements and professional indemnity and liability insurance cover. The Board has not created a separate Remuneration Committee. Due to the early stage of development and small size of the Company, a separate remuneration committee was not considered to add any efficiency to the process of determining the levels of remuneration for the Directors and key executives. The Board considers that it is more appropriate to set aside time at Board meetings to specifically address matters that would ordinarily fall to a remuneration committee. Remuneration is currently in accordance with the general principals recommended by the ASX, that is, non-executive Directors receive a fixed fee for their services and do not receive performance based bonuses. The Board ensures that, all matters of remuneration will continue to be in accordance with Corporations Act requirements, by ensuring that none of the Directors participate in any deliberations regarding their own remun- eration or related issues. To the extent that additional executives are appointed in the future and the scope of the Company’s activities expands the Company will reconsider whether a change in the structure of executive remuneration is appropriate. ENCOUNTER RESOURCES ANNUAL REPORT 2007 23 Directors’ Report The Directors present their report on Encounter Resources Limited for the year ended 30 June 2007. Directors The names and details of the Directors of Encounter Resources Limited during the financial year and until the date of this report are: Paul Chapman – B.Comm, ACA, Grad. Dip. Tax, CFTP(Snr), MAICD, SA Fin Non-Executive Chairman appointed 7 October 2005 Mr Chapman is a Chartered Accountant and has held various senior commercial roles within WMC over a seven- teen year period. This includes experience in North America as CFO of WMC’s Houston based oil and gas division as well as time in Pittsburgh working on the formation of the AWAC bauxite and Alumina business. Mr Chapman was appointed CFO of Anaconda Nickel Limited (now Minara Resources Limited) in 2001 and was responsible for its US$700 million debt restructuring process. Mr Chapman was a founding shareholder and Managing Director of Reliance Mining Limited (2003-2005) culminating in the recommended takeover by Consolidated Minerals Limited. Mr Chapman is a director of Albidon Limited, appointed 18 April 2007. Will Robinson – B.Comm, MAusIMM Managing Director (Executive) appointed 30 June 2004 Mr Robinson is a resources industry commercial and finance specialist with over thirteen years experience in commercial management, transaction structuring and negotiation, business strategy development and London Metals Exchange metals trading. Mr Robinson held various senior commercial positions with WMC in Australia and North America from 1994 to 2003. During his time with WMC he was instrumental in the success of the Kambalda nickel mine outsourcing strategy as the Commercial Manager of the Kambalda Nickel Operations. Mr Robinson has extensive experience in the sale and distribution of commodities and was Vice President – Marketing for WMC’s nickel business from 2001 to 2003. After leaving WMC Mr Robinson formed a consulting company and advised numerous mining companies with interests in Australia, South America and Africa. Mr Robinson founded Encounter Resources Limited in 2004 and has overseen the development of the Company as its Managing Director. Peter Bewick – B.Eng (Hons), MAusIMM Exploration Director (Executive) appointed 7 October 2005 Mr Bewick is an experienced geologist and has held a number of senior mine and exploration geological roles during a fourteen year career with WMC. These roles include Exploration Manager and Geology Manager of the Kambalda Nickel Operations, Exploration Manager for St Ives Gold Operation and Exploration Manager for WMC’s Nickel Business Unit. Most recently he held the position of Exploration Manager for North America based in Denver, Colorado. Whilst at WMC, Mr Bewick gained extensive experience in project generation for a range of commodities including nickel, gold and bauxite. Mr Bewick has been associated with a number of brownfields exploration successes at Kambalda and with the greenfield Collurabbie NI-CU-PGE discovery. Jonathan Hronsky – BAppSci, PhD, MAusIMM, FSEG Non-executive director appointed 10 May 2007 Dr. Jon Hronsky has more than twenty three years of experience in the mineral exploration industry, primarily focused on project generation, technical innovation and exploration strategy development. Dr. Hronsky has particular expertise in targeting for nickel sulfide deposits, but has worked across a diverse range of commodities. His work led to the discovery of the West Musgrave nickel sulfide province in Western Australia. Dr. Hronsky was most recently Manager-Strategy & Generative Services for BHP Billiton Mineral Exploration. Prior to that, he was Global Geoscience Leader for WMC Resources Ltd. Company Secretary Kevin Hart Mr Hart is a Chartered Accountant and was appointed to the position of Company Secretary on 4 November 2005. He has over 20 years experience in accounting and the management and administration of public listed entities in the mining and exploration industry. He is currently a partner in an advisory firm which specialises in the provision of company secretarial services to ASX listed entities. Directors’ Interests As at the date of this report the Directors’ interests in shares and unlisted options of the Company are as follows: Director P Chapman W Robinson P Bewick J Hronsky Directors’ Interests in Ordinary Shares Directors’ Interests in Unlisted Options 4,710,000 21,796,900 4,700,000 – – – – – ENCOUNTER RESOURCES ANNUAL REPORT 2007 24 Directors’ Meetings The number of meetings of the Company’s Directors held during the year ended 30 June 2007 and the number of meetings attended by each Director were: Board of Directors’ Meetings Held Attended 10 10 10 2 10 10 10 2 Director P Chapman W Robinson P Bewick J Hronsky (appointed 10 May 2007) Principal Activities The principal activities of the Company during the financial year consisted of mineral exploration in Western Australia. There were no significant changes in these activities during the financial year. Results of Operations The net loss after income tax for the financial year was $592,664 (2006: $346,270). Included in the loss for the current year is a write-off of deferred exploration expenditure totalling $268,472 (2006: $132,409). Dividends No dividend has been paid since the end of the previous financial year and no dividend is recommended for the current year. Review of Activities Exploration Calcrete Uranium – Yilgarn/Gascoyne Yeelirrie Channel Drilling at Bellah Bore East defined an area of near surface uranium mineralisation approximately 500m by 150m and between 2m to 10m thick. Results include: • 8m @ 215ppm U3O8 from surface including 2m @ 410ppm U3O8 • 10m @ 166ppm U3O8 from surface including 2m @ 410ppm U3O8 • 3m @ 781ppm U3O8 from 4m including 1m @ 2111ppm U3O8. Lake Way South The southern 1km of the 12km long uranium channel radiometric anomaly that crosses Lake Way was drill tested. The results have extended the area of known uranium mineralisation at Nova Energy’s Centipede uranium at least 150m into the Lake Way JV tenement. Results include: • 1m @ 312ppm U3O8 from 5m • 1m @ 224ppm U3O8 from 3m • 1m @ 147ppm U3O8 from 8m An aircore drill program was completed to test series of subtle radiometric anomalies that are located off the north east margin of Lake Way. Results from the drilling were encouraging and have defined a 1.2km long zone of near surface uranium mineralisation. Encounter completed the earn-in phase of the Lake Way South JV and now holds a 60% interest in the uranium rights with Avoca Resources Ltd holding 40%. Regional Auger Geochemical Program A regional reconnaissance auger drilling program was completed to test a series of airborne radiometric anomalies and provide information that will assist in the future prioritisation of field activities. The program successfully identified a 4km long uranium geochemical anomaly at McPhersons Bore. McPherson’s Bore An aircore program identified near surface uranium mineralisation that extends over 1.2kms of strike. Intersections received to date include; • 1m @ 448ppm U3O8 from surface • 1m @ 283ppm U3O8 from surface • 1m @ 271ppm U3O8 from surface Hillview A aircore drill program was completed at Hillview in July 2007 targeting an area of near surface uranium mineralisation outlined by previous explorers. Preliminary assessment of the holes drilled indicates a well developed calcrete profile and elevated radiometric anomalism. Stone Tank Surface sampling of the 7km long zone of outcropping calcrete body has returned elevated uranium oxide values. Samples from three separate locations returned assay between 67 and 105ppm U3O8 and has identified visible uranium mineralisation at two of these locations. Base Metals/Unconformity Uranium – Bangemall Basin Pingandy Creek A review of a airborne geophysical survey released in February 2007 by the GSWA has outlined a 7.5km long uranium channel radiometric anomaly at Pingandy Creek project. ENCOUNTER RESOURCES ANNUAL REPORT 2007 25 Directors’ Report (continued) Review of Activities (continued) Significant Changes in the State of Affairs Exploration (continued) Tchintaby Well A review of the historical drilling and geophysics at Tchintaby has identified multiple large scale targets that are prospective for zinc mineralisation. Diamonds – Yilgarn Lakeview Project A detailed ground gravity survey at the Lakeview Project successfully defined a high quality diamonds target over a bipolar magnetic anomaly. Financial Position At the end of the financial year the Company had $6,775,145 (2006: $4,209,233) in cash and at call deposits. Capitalised mineral exploration and evaluation expenditure is $1,420,229 (2006: $250,822). Mineral exploration and evaluation expenditure during the year for the Company was $1,437,879 (2006: $383,231). Expenditure was principally focused on the exploration for uranium and base metals in Western Australia. Options Over Unissued Capital Unlisted Options Significant changes in the state of affairs of the Company during the end of the prior financial year were as follows: Avoca Resources has held a 20% free carried interest in Encounter’s exploration projects for the two year period which ended on 1st April 2007. In accordance with the Joint Venture and Exploration Agreement between Avoca and Encounter, Avoca has elected to contribute to the six month exploration expenditure program commencing 1st April 2007 to maintain their 20% interest in Encounter’s project portfolio. Encounter completed its joint venture expenditure obligations and has earned a 60% interest in the uranium rights at Lake Way South from Avoca Resources Ltd. The Lake Way South project is now subject to the separate Lake Way Joint Venture dated 31st July 2007. On 5 April 2007 the company issued 8,600,000 ordinary shares under a private placement raising $4,300,000 before costs of the issue. During the financial year the Company granted 250,000 unlisted options over unissued shares to employees of the Company. No ordinary shares were issued on the exercise of options. Since the end of the financial year no unlisted options have been exercised. As at the date of this report unissued ordinary shares of the Company under option are: Number of Options Granted Exercise Price Grant Date Expiry Date 100,000 (i) 100,000 (ii) 250,000 (iii) 50,000 (iv) 50,000 (v) 20 cents 45 cents 52.5 cents 57 cents 50 cents 23 March 2006 15 May 2006 7 December 2006 6 July 2007 9 August 2007 23 March 2011 15 May 2011 7 December 2011 6 July 2012 9 August 2012 (i) Unlisted options have a 12 month vesting period upon grant whereby option exercise can occur after 23 March 2007. (ii) Unlisted options have a 12 month vesting period upon grant whereby option exercise can occur after 15 May 2007. (iii) Unlisted options have a 12 month vesting period upon grant whereby option exercise can occur after 7 December 2007. (iv) Unlisted options have a 12 month vesting period upon grant whereby option exercise can occur after 6 July 2008. (v) Unlisted options have a 12 month vesting period upon grant whereby option exercise can occur after 9 August 2008. These unlisted options do not entitle the holder to participate in any share issue of the Company or any other body corporate. The holders of unlisted options are not entitled to any voting rights until the options are exercised into ordinary shares. Matters Subsequent to the End of the Financial Year There has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors of the Company to affect substantially the operations of the Company, the results of those operations or the state of affairs of the Company in subsequent financial years. ENCOUNTER RESOURCES ANNUAL REPORT 2007 26 Likely Developments and Expected Results of Operations Disclosure of any further information has not been included in this report because, in the reasonable opinion of the Directors to do so would be likely to prejudice the business activities of the Company and is dependent upon the results of the future exploration and evaluation. Environmental Regulation and Performance The Company holds various exploration licences to regulate its exploration activities in Australia. These licences include conditions and regulations with respect to the rehabilitation of areas disturbed during the course of its exploration activities. So far as the Directors are aware, all exploration activities have been undertaken in compliance with all relevant environmental regulations. Remuneration Report Remuneration Policy Remuneration levels are competitively set to attract and retain appropriately qualified and experienced Directors and senior executives. Remuneration packages include fixed remuneration with bonuses or equity based remuneration entirely at the discretion of the Board based on the perform- ance of the Company. Total remuneration for all Non-Executive Directors was last voted on by shareholders on 4 November 2005, whereby it is not to exceed $80,000 per annum. Non-Executive Directors do not receive bonuses. Directors’ fees cover all main Board activities. At the date of this report the Company has not entered into any agreements with Directors or senior executives which include performance based components. Refer also to the Corporate Governance Statement for more detail on the Boards policy in this area. Details of Remuneration for Directors and Executive Officers During the year there were no senior executives which were employed by the Company for whom disclosure is required. Details of the remuneration of each Director of the Company are as follows: 2007 Directors Base Emolument $ Superannuation Contributions $ Other Benefits $ Value of Options $ P. Chapman W. Robinson P. Bewick J. Hronsky (appointed 10 May 2007) Total 2006 P. Chapman W. Robinson P. Bewick Total 20,000 188,750 170,833 5,591 385,174 3,922 74,559 96,616 175,097 1,800 16,988 15,375 503 34,666 2,006 6,710 8,695 17,411 – – – – – – – – – – – – – – – – – – Total $ 21,800 205,738 186,208 6,094 419,840 5,928 81,269 105,311 192,508 Executive Employment Agreements Remuneration and other terms of employment for the Managing Director and Exploration Director are set out in their respective Executive Employment Agreements. Both employment contracts are for a three year term commencing 23 January 2006 and are subject to a three month notice of termination of contract. The contractual arrangements contain certain provisions typically found in contracts of this nature. Payment of termination benefit by the employer, other than amongst other things for gross misconduct is equal to the payment limit set by Sub-section 200G of the Corporations Act 2001. ENCOUNTER RESOURCES ANNUAL REPORT 2007 27 Directors’ Report (continued) Unlisted Options Total remuneration paid to auditors during the financial year: No options over unissued shares have been issued to directors or key management personnel of the Company during or since the end of the financial year. Officer’s Indemnities and Insurance During the year the Company paid an insurance premium to insure certain officers of the Company. The officers of the Company covered by the insurance policy include the Directors named in this report. The Directors and Officers Liability insurance provides cover against all costs and expenses that may be incurred in defending civil or criminal proceedings that fall within the scope of the indemnity and that may be brought against the officers in their capacity as officers of the Company. The insurance policy does not contain details of the premium paid in respect of individual officers of the Company. Disclosure of the nature of the liability cover and the amount of the premium is subject to a confidentiality clause under the insurance policy. The Company has not provided any insurance for an auditor of the Company. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under section 237 of the Corporations Act 2001. Corporate Governance In recognising the need for the highest standards of corporate behaviour and accountability, the Directors of the Company support and have adhered to the principles of corporate governance. The Company’s corporate governance statement is contained in the Annual Report. 2007 $ 2006 $ Audit and review of the Company’s financial statements 17,460 Taxation services 4,250 8,700 3,500 Independent Accountants Report – 11,300 Total 21,710 23,500 The board has considered the non-audit services provided during the year by the auditor and is satisfied that the provision of those non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed by the board to ensure they do not impact the impartiality and objectivity of the auditor; and • the non-audit services provided do not undermine the general principles relating to auditor independence as set out in Professional Statement F1 Professional independence, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards. Auditor’s Independence Declaration A copy of the Auditor’s Independence Declaration as required under Section 307C of the Corporations Act is set out on page 29. This report is made in accordance with a resolution of the Directors. DATED at Perth this 17th day of September 2007. Non-audit Services During the year WHK Horwath, previously Grant Thornton, the Company’s auditor, has performed certain other services in addition to their statutory duties. W Robinson Director ENCOUNTER RESOURCES ANNUAL REPORT 2007 28 AUDITOR’S INDEPENDENCE DECLARATION In accordance with the requirements of section 307C of the Corporations Act 2001, as lead auditor for the audit of Encounter Resources Limited for the year ended 30 June 2007, I declare that, to the best of my knowledge and belief, there have been: (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. WHK HORWATH PERTH AUDIT PARTNERSHIP SEAN MCGURK Principal Perth, WA Dated this 17th day of September 2007 Total Financial Solutions Horwath refers to Horwath International Association, a Swiss verein. Each member of the Association is a separate and independent legal entity. Member Horwath International WHK Horwath Perth Audit Partnership ABN 96 844 819 235 Level 6, 256 St Georges Terrace Perth WA 6000 Australia GPO Box P1213 Perth WA 6844 Australia Telephone +61 8 9481 1448 Facsimile +61 8 9481 0152 Email perth@whkhorwath.com.au www.whkhorwath.com.au A WHK Group firm ENCOUNTER RESOURCES ANNUAL REPORT 2007 29 Income Statement For the financial year ended 30 June 2007 Revenue Total revenue Employee expenses Employee expenses recharged to exploration Equity based remuneration expense Non-executive Director’s fees Corporate advisory expenses Operating lease expenses Depreciation expense Corporate expenses Legal costs Other expenses from ordinary activities Exploration costs written off and expensed Loss before income tax Income tax expense Loss attributable to members for the year Earnings per share for loss attributable to the ordinary equity holders of the Company Basic earnings/(loss) per share Diluted earnings/(loss) per share Note 5 10 6 7 16 27 27 2007 $ 275,313 275,313 (584,551) 443,416 (46,294) (25,591) (90,000) (25,827) (7,529) (81,757) (377) (180,995) (268,472) (592,664) – 2006 $ 90,131 90,131 (244,339) 164,803 (2,625) (5,928) (30,000) (20,464) (1,335) (59,328) (23,653) (81,123) (132,409) (346,270) – (592,664) (346,270) Cents Cents (1.0) (1.0) (1.1) (1.1) The above income statement should be read in conjunction with the accompanying notes. ENCOUNTER RESOURCES ANNUAL REPORT 2007 30 Balance Sheet As at 30 June 2007 Current assets Cash and cash equivalents Trade and other receivables Other current assets Total current assets Non-current assets Property, plant and equipment Capitalised mineral exploration and evaluation expenditure Total non-current assets Total assets Current liabilities Trade and other payables Employee benefits Total current liabilities Total liabilities Net assets Equity Issued capital Accumulated losses Equity remuneration reserve Total equity Note 8 9(a) 9(b) 10 11 13(a) 13(b) 14 16 16 2007 $ 2006 $ 6,775,145 142,123 149,226 4,209,233 56,278 319,842 7,066,494 4,585,353 92,318 1,420,229 1,512,547 92,133 250,822 342,955 8,579,041 4,928,308 57,216 39,800 97,016 97,016 77,566 13,323 90,889 90,889 8,482,025 4,837,419 9,443,330 (1,010,224) 48,919 5,252,354 (417,560) 2,625 8,482,025 4,837,419 The above balance sheet should be read in conjunction with the accompanying notes. ENCOUNTER RESOURCES ANNUAL REPORT 2007 31 Statement of Changes in Equity For the financial year ended 30 June 2007 Total equity at the beginning of the financial year Loss for the year Movement in equity remuneration reserve Transactions with equity holders in their capacity as equity holders: Contributions of equity Transaction costs of equity issued Note 16 16 14 14 2007 $ 2006 $ 4,837,419 (71,289) (592,664) (346,270) 46,294 2,625 4,300,000 5,700,000 (109,024) (447,647) Total equity at the end of the financial year 8,482,025 4,837,419 The above statement of changes in equity should be read in conjunction with the accompanying notes. ENCOUNTER RESOURCES ANNUAL REPORT 2007 32 Cash Flow Statement For the financial year ended 30 June 2007 Cash flows from operating activities Interest received Payments to suppliers and employees Note 2007 $ 2006 $ 282,521 (456,974) 64,921 (388,946) Net cash used in operating activities 26 (174,453) (324,025) Cash flows from investing activities Payments for exploration and evaluation Payments for plant and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Proceeds from the issue of shares Payments for transaction costs relating to share issues Net cash provided by financing activities Net increase in cash held Cash at the beginning of the financial year (1,411,840) (38,771) (443,606) (93,468) (1,450,611) (537,074) – – 4,300,000 (109,024) 30,000 (34,336) 5,500,000 (447,647) 4,190,976 5,048,017 2,565,912 4,209,233 4,186,918 22,315 Cash at the end of the financial year 8(a) 6,775,145 4,209,233 The above cash flow statement should be read in conjunction with the accompanying notes. ENCOUNTER RESOURCES ANNUAL REPORT 2007 33 Notes to the Financial Statements For the financial year ended 30 June 2007 Note 1 Summary of significant accounting policies The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial report includes separate financial statements for Encounter Resources Limited as an individual entity. (a) Basis of preparation This general purpose financial report has been prepared in accordance with Australian equivalents to International Financial Reporting Standards (AIFRS), other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001. The financial statements were approved by the board of Directors on 17th September 2007. Compliance with IFRS The financial report of Encounter Resources Limited complies with Australian Accounting Standards, which include Australian Equivalents to International Financial Reporting Standards (AIFRS), in their entirety. Compliance with AIFRS ensures that the financial report also complies with International Financial Reporting Standards (IFRS) in their entirety. Early adoption of standards The Company has not elected to adopt any standards early as permitted under AASB1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards. The following standards, amendments to standards and interpretations have been identified as those which may impact the group in the period of initial application. They are available for early adoption at 30 June 2007, but have not been applied in preparing this report: AASB 7 AASB 2005-10 AASB 8 AASB 2007-3 Interpretation 10 Interpretation 11 AASB 2 AASB 2007-1 Interpretation 12 AASB-2 Financial Instruments: Disclosures Amendments to Australian Accounting Standards (September 2005) Operating Segments Amendments to Australian Accounting Standards arising from AASB 8. Interim Financial Reporting and Impairment Share Based Payment – Group and Treasury Share Transactions Amendments to Australian Accounting Standards arising from AASB Interpretation 11 Service Concession Arrangements Amendments to Australian Accounting Standards arising from AASB Interpretation 12 Reporting basis and conventions These financial statements have been prepared under the historical cost convention, and on an accrual basis. Critical accounting estimates The preparation of financial statements in conformity with AIFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 3. (b) Segment reporting 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. A geographical segment is 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. (c) Revenue recognition and receivables Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, allowances and amounts collectable on behalf of third parties. Interest income Interest income is recognised on a time proportion basis and is recognised as it accrues. ENCOUNTER RESOURCES ANNUAL REPORT 2007 34 Note 1 Summary of significant accounting policies (continued) (d) Income tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to the 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 timing 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 substantially 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 those timing 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 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. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. (e) Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases (note 22). Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight line basis over the period of the lease. (f) Impairment of assets Assets 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. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash generating units). Non financial assets, other than goodwill, that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. (g) Cash and cash equivalents For cash flow statement presentation purposes, 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. (h) Fair value estimation The nominal value less estimated credit adjustments of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Company for similar financial instruments. ENCOUNTER RESOURCES ANNUAL REPORT 2007 35 Notes to the Financial Statements (continued) For the financial year ended 30 June 2007 Note 1 Summary of significant accounting policies (continued) (i) Property, plant and equipment Property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the assets. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Depreciation of property, plant and equipment is calculated using the straight line and written down value methods to allocate their cost, net of residual values, over their estimated useful lives, as follows: Field equipment Office equipment 33.3% 33.3% The asset’s 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 (note 1(f)). Gains and losses on disposal are determined by comparing proceeds with the carrying amount. These gains and losses are included in the income statement. (j) Mineral exploration and evaluation expenditure Mineral exploration and evaluation expenditure incurred is accumulated in respect of each identifiable area of interest. These costs are carried forward only if they relate to an area of interest for which rights of tenure are current and in respect of which: • such costs are expected to be recouped through the successful development and exploitation of the area of interest, or alternatively by its sale; or • exploration and/or evaluation activities in the area have not reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves and active or significant operations in, or in relation to, the area of interest are continuing. In the event that an area of interest is abandoned or if the Directors consider the expenditure to be of reduced value, accumulated costs carried forward are written off in the year in which that assessment is made. A regular review is undertaken of each area of interest to determine the appropriateness of continuing to carry forward costs in relation to that area of interest. Restoration, rehabilitation and environmental costs necessitated by exploration and evaluation activities are expensed as incurred and treated as exploration and evaluation expenditure. (k) Joint ventures Interests in joint ventures have been brought to account by including the appropriate share of the relevant assets, liabilities and costs of the joint ventures in their relevant categories in the financial statements. Details of these interests are shown in Note 12. (l) Trade and other payables These amounts represent liabilities for goods and services provided to the Company prior to the end of the financial year which are unpaid. The amounts are unsecured and usually paid within 30 days of recognition. ENCOUNTER RESOURCES ANNUAL REPORT 2007 36 Note 1 Summary of significant accounting policies (continued) (m) Employee benefits Wages, salaries and annual leave Liabilities for wages and salaries, including non-monetary benefits, and annual 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. 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 using the projected unit credit method. Consideration is given to expected future salaries, 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. Share based payments Share based compensation payments are made available to Directors and employees. The fair value of options granted is 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 a Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free rate for the term of the option. The fair value of the options granted is adjusted to reflect market vesting conditions. 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 and the proceeds received, net of any directly attributable transaction costs, are credited to share capital. (n) Issued capital 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. (o) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing the earnings attributable to equity holders of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. (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. ENCOUNTER RESOURCES ANNUAL REPORT 2007 37 Notes to the Financial Statements (continued) For the financial year ended 30 June 2007 Note 1 Summary of significant accounting policies (continued) (p) Goods and service tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as a part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to, the taxation authority, are presented as operating cash flow. (q) Comparative figures When required by Accounting Standards, comparative figures have been adjusted to conform to changes in presentation for the current financial year. (r) Investments and other financial assets Recognition When financial assets are recognised initially, they are measured at fair value, plus in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Company determines the classification of its financial assets after initial recognition and, when allowed and appropriate, re-evaluates this designation at each financial year-end. All regular way purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Company commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets under contracts that require delivery of the assets within the period established generally by regulation or convention in the marketplace. Financial assets are fair value through profit or loss Financial assets classified as held for trading are included in the category ‘financial assets at fair value through profit or loss’. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on investments held for trading are recognised in profit or loss. Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Group has the positive intention and ability to hold to maturity. Investments included to be held for an undefined period are not included in this classification. Investments that are intended to be held-to-maturity, such as bonds, are subsequently measured at amortised cost. This cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount. This calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. For investments carried at amortised cost, gains and losses are recognised in profit or loss when the investments are derecognised or impaired, as well as through the amortisation process. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are stated at amortised cost using the effective interest rate method. Financial liabilities Non-derivative financial liabilities are recognised at amortised cost, comprising original debt less principal payments and amortisation. ENCOUNTER RESOURCES ANNUAL REPORT 2007 38 Note 2 Financial risk management The Company’s activities expose it to a variety of financial risks; market risk, credit risk, liquidity risk and cash flow interest risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Company. (a) Market risk Currently the Company is not exposed to any significant market risk. (b) Credit risk The Company currently has no significant concentrations of credit risk. (c) Liquidity risk The Company manages its liquidity risk by monitoring its cash reserves and forecast spending. Management is cognisant of the future demands for liquid finance resources to finance the Company’s current and future operations. (d) Cash flow and fair value interest rate risk As the Company has significant interest bearing assets, the Company’s income and operating cash flows are materially exposed to changes in market interest rates. The assets are short term interest bearing deposits, and no financial instruments are employed to mitigate risk. (Note 17 – Financial Instruments). Note 3 Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the Company and that are believed to be reasonable under the circumstances. Accounting for capitalised exploration and evaluation expenditure The Company’s accounting policy is stated at 1(j). There is some subjectivity involved in the carrying forward as capitalised or writing off to the income statement exploration and evaluation expenditure, however management give due consideration to areas of interest on a regular basis and are confident that decisions to either write off or carry forward such expenditure reflect fairly the prevailing situation. Note 4 Segment information Business segments The Company is involved in the mineral exploration sector. Geographical segments The Company is organised on a national basis with exploration and development interests within Western Australia. ENCOUNTER RESOURCES ANNUAL REPORT 2007 39 Notes to the Financial Statements (continued) For the financial year ended 30 June 2007 Note 5 Revenue Operating activities Interest receivable – other persons Note 6 Loss for the year Loss before income tax includes the following specific expenses: Depreciation Office equipment Rental expenses on operating leases – minimum lease payments Exploration expenditure written off and expensed Note 7 Income tax a) Income tax expense Current income tax Current income tax charge (benefit) Current income tax not recognised Deferred income tax: Relating to origination and reversal of timing differences Deferred income tax benefit not recognised 2007 $ 2006 $ 275,313 90,131 7,529 25,827 268,472 1,335 20,464 132,409 (373,740) 373,740 (222,093) 222,093 (326,410) 326,410 (151,644) 151,644 Income tax expense reported in the income statement – – b) Reconciliation of income tax expense to prima facie tax payable Loss from continuing operations before income tax expense Tax at the Australian rate of 30% (2006 – 30%) Tax effect of permanent differences: Non-deductible share based payment Non-deductible entertainment Net deferred tax asset benefit not brought to account Tax (benefit)/expense (592,664) (177,799) 13,888 625 163,286 – (346,270) (103,881) 788 381 102,712 – ENCOUNTER RESOURCES ANNUAL REPORT 2007 40 Note 7 Income tax (continued) c) Deferred tax – Balance Sheet Liabilities Accrued income Prepaid expenses Capitalised exploration expenditure Assets Revenue losses available to offset against future taxable income Employee provisions Accrued expenses Deductible equity raising costs Net deferred tax asset/(liability) d) Deferred tax – Income Statement Liabilities Accrued income Prepaid expenses Capitalised exploration expenditure Assets Accruals Increase in tax losses carried forward Employee provisions Deferred tax benefit/(expense) not recognised 2007 $ 2006 $ 5,401 44,768 291,182 341,351 700,149 11,940 3,000 106,742 821,831 480,480 2,162 51,185 (215,936) 3,000 373,739 7,943 222,093 7,563 95,953 75,247 178,763 326,410 3,997 – 107,435 437,842 259,079 (7,563) (95,953) (75,247) – 326,410 3,997 151,644 The deferred tax assets of tax losses not brought to account will only be obtained if: (i) The Company derives future assessable income of a nature and an amount sufficient to enable the benefit from the tax losses to be realised; (ii) The Company continues to comply with the conditions for deductibility imposed by tax legislation; and (iii) No changes in tax legislation adversely affect the Company realising the benefit from the deduction of the losses. All unused tax losses were incurred by Australian entities. ENCOUNTER RESOURCES ANNUAL REPORT 2007 41 Notes to the Financial Statements (continued) For the financial year ended 30 June 2007 Note 8 Current assets – Cash and cash equivalents Cash at bank and on hand Deposits at call a) Reconciliation to cash at the end of the year The above figures are reconciled to cash at the end of the financial year as shown in the cash flow statement as follows: 2007 $ 2006 $ 8,721 6,766,424 87,255 4,121,978 6,775,145 4,209,233 Cash and cash equivalents 6,775,145 4,209,233 b) Cash at bank and on hand These attract interest at 2.35% (2006: 2.45%). c) Deposits at call The deposits are bearing fixed interest rates of 6.34% (2006: 5.87% and 5.95%). These deposits have an average maturity of 30 days. Note 9 Current assets – Receivables Trade receivables Accrued interest Recoverable joint venture expenses GST recoverable b) Other current assets Prepaid tenement costs Prepaid insurance Prepaid corporate advisory expenses Details of fair value and exposure to interest risk are included at note 17. 17,273 18,002 93,263 13,586 142,123 141,541 7,685 – 149,226 – 25,210 – 31,068 56,278 219,022 10,820 90,000 319,842 ENCOUNTER RESOURCES ANNUAL REPORT 2007 42 Note 10 Non-current assets – Property, plant and equipment Field equipment At cost Accumulated depreciation Office equipment At cost Accumulated depreciation Reconciliation Field equipment Net book value at start of the year Additions Depreciation Net book value at end of the year Office equipment Net book value at start of the year Additions Depreciation Net book value at end of the year 2007 $ 2006 $ 104,491 (31,057) 73,434 27,748 (8,864) 18,884 92,318 69,702 34,789 (31,057) 73,434 22,431 3,982 (7,529) 18,884 69,702 – 69,702 23,766 (1,335) 22,431 92,133 – 69,702 – 69,702 – 23,766 (1,335) 22,431 No items of property, plant and equipment have been pledged as security by the Company. Note 11 Non-current assets – Capitalised mineral exploration and evaluation expenditure In the exploration and evaluation phase Cost brought forward Exploration and acquisition expenditure incurred during the year at cost on non joint venture assets Share of exploration and acquisition expenditure incurred during the year at cost under joint venture agreements (note 12) Exploration expenditure written off Cost carried forward 250,822 – 988,260 383,231 449,619 (268,472) – (132,409) 1,420,229 250,822 The recoverability of the carrying amount of the exploration and evaluation assets is dependent upon successful development and commercial exploitation, or alternatively, sale of the respective areas of interest. ENCOUNTER RESOURCES ANNUAL REPORT 2007 43 Notes to the Financial Statements (continued) For the financial year ended 30 June 2007 Note 12 Interest in joint ventures Included in the assets and liabilities of the Company were the following items which represented the Company’s interest in the assets and liabilities employed in joint ventures. The total amount of the company’s capitalised exploration and evaluation expenditure employed under joint venture agreements is $449,619 (2006: Nil). 2007 $ 2006 $ (i) Lake Way Joint Venture The company has a 60% interest in the Lake Way Joint Venture. Share of Joint Venture’s assets and liabilities: Cash and cash equivalents Trade and other receivables Capitalised mineral exploration and evaluation expenditure Total Assets Trade and other payables Total Liabilities Net Assets Share of Joint Venture’s revenue, expenses and results: Revenue Expenses Result before tax 4,304 1,033 125,230 130,567 5,919 5,919 124,648 – – – – – – – – – – – – – (ii) Uranium Regional Joint Venture The company has a 80% interest in a portfolio of projects and tenements. At the reporting date the company had incurred all of the expenditure totalling $405,486 in respect of the joint venture since it’s formation on 1 April 2007. The company’s share of the net assets of the joint venture of $324,389 represents the 80% interest that the joint venture will make to the company after the joint venture has been charged the expenditure. Note 13 Current liabilities – Trade and other payables a) Trade and other payables Trade payables and accruals Other payables b) Employee benefits Liability for annual leave 41,252 15,964 57,216 46,568 30,998 77,566 39,800 13,323 Liabilities are not secured over the assets of the company. Details of fair value and exposure to interest risk are included at note 17. ENCOUNTER RESOURCES ANNUAL REPORT 2007 44 Note 14 Issued capital a) Ordinary shares The Company is a public company limited by shares. The Company was incorporated in Perth, Western Australia. The Company’s shares are limited whereby the liability of its members is limited to the amount (if any) unpaid on the shares respectively held by them. Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. Ordinary shares have no par value. There is no limit to the authorised share capital of the Company. 2007 No. 2006 No. 2007 $ 2006 $ b) Share capital Issued share capital c) Share movements during the year At the beginning of the year Share split (33,000:1) 7 October 2005 Share issue 17 October 2005 Share split (93:1) 26 October 2005 Share issue 4 November 2005 Shares issued on IPO 20 March 2006 Shares issued 5 April 2007 Less: costs related to shares issued Issue price – $1.00 – $0.10 $0.20 $0.50 68,596,900 59,996,900 9,443,330 5,252,354 59,996,900 – – – – – 8,600,000 – 1 33,299 300,000 30,663,600 4,000,000 25,000,000 – – 5,252,354 – – – – – 4,300,000 (109,024) 1 – 300,000 – 400,000 5,000,000 – (447,647) At the end of the year 68,596,900 59,996,900 9,443,330 5,252,354 d) Option plan Information relating to the Encounter Resources Limited Directors, Officers and Employees Option Plan is set out in note 15 Note 15 Option Plan The establishment of the Encounter Resources Limited Directors, Officers and Employees Option Plan (‘the Plan”) was adopted at a Meeting of Directors on 8 February 2006, subject to approval by a special resolution at the next General Meeting of shareholders of the Company. All eligible Directors, executive officers and employees of Encounter Resources Limited who have been continuously employed by the Company are eligible to participate in the Plan. The Plan allows the Company to issue free options to eligible persons. The options can be granted free of charge and are exercisable at a fixed price in accordance with the Plan. Options issued under the Plan have a 12 month vesting period prior to exercise, except under certain circumstances whereby options may be capable of exercise prior to the expiry of the vesting period. ENCOUNTER RESOURCES ANNUAL REPORT 2007 45 Notes to the Financial Statements (continued) For the financial year ended 30 June 2007 Note 15 Option Plan (continued) a) Options issued during the year During the financial year the Company granted the following unlisted options over unissued shares: Number of options granted 250,000 Exercise price $0.525 During the year no options were exercised. Expiry date 7 December 2011 b) Options on issue at the balance date The number of options outstanding over unissued ordinary shares at 30 June 2007 is 450,000 (2006: 200,000). The terms of these options are as follows: Number of options outstanding Exercise price Expiry date 100,000 100,000 250,000 450,000 $0.20 $0.45 $0.525 23 March 2011 15 May 2011 7 December 2011 c) Subsequent to the balance date The following options have been granted subsequent to the balance date to the date of signing this report. 50,000 (iv) 50,000 (v) 57 cents 50 cents 6 July 2007 9 August 2007 6 July 2012 9 August 2012 No options have been exercised subsequent to the balance date to the date of signing this report. Reconciliation of movement of options over unissued shares during the period including weighted average exercise price (WAEP) Options outstanding at the start of the year Options granted during the year Options exercised during the year Options expiring unexercised during the year Options outstanding at the end of the year 2007 2006 No. 200,000 250,000 – – 450,000 WAEP (cents) 32.5 53.5 – – 38.7 No. – 200,000 – – 200,000 WAEP (cents) – 32.5 – – 32.5 Basis and assumptions used in the valuation of options The options were valued using the Black-Scholes option valuation methodology. All options are subject to a 12 month vesting period. Date granted Number of options granted Exercise price (cents) Expiry date Risk free interest rate used Volatility applied Option valuation (cents) 7 December 2006 250,000 52.5 7 December 2011 5.87% 50% 22.41 Historical volatility has been used as the basis for determining expected share price volatility, as it is assumed that this is an indicator of future tender, which may not eventuate. ENCOUNTER RESOURCES ANNUAL REPORT 2007 46 2007 2006 Accumulated losses $ Equity remuneration reserve (i) $ Accumulated losses $ Equity remuneration reserve (i) $ Note 16 Reserves and accumulated losses Balance at the beginning of the year Loss for the period Transfer to equity remuneration reserve in respect of options issued (417,560) (592,664) 2,625 – (71,290) (346,270) – 46,294 – Balance at the end of the year (1,010,224) 48,919 (417,560) (i) Equity remuneration reserve The equity remuneration reserve is used to recognise the fair value of options issued but not exercised. – – 2,625 2,625 Note 17 Financial instruments The Company’s exposure to interest rate risk (note 2(d)) is as follows: 2007 Financial assets Cash and cash equivalents Trade and other receivables Total financial assets Financial liabilities Trade and other payables Total financial liabilities Weighted average effective interest % Funds available at fixed interest rates within one year $ Funds available at floating interest rate $ Assets/ (liabilities) non interest bearing $ Total $ 6.34% 0.81% 6,766,424 18,002 8,721 – – 124,122 6,775,145 142,124 6,784,426 8,721 124,122 6,917,269 – – – – – (97,016) (97,016) (97,016) (97,016) Net financial assets/(liabilities) 6,784,426 8,721 27,106 6,820,253 2006 Financial assets Cash and cash equivalents Trade and other receivables Total financial assets Financial liabilities Trade and other payables Total financial liabilities Net financial assets/(liabilities) 5.89% 2.64% – – – – – – 4,209,233 25,210 – 31,068 4,209,233 56,278 4,234,443 31,068 4,265,511 – – (90,889) (90,889) (90,889) (90,889) 4,234,443 (59,821) 4,174,622 Carrying value equates to fair value for the assets and liabilities of the company. ENCOUNTER RESOURCES ANNUAL REPORT 2007 47 Notes to the Financial Statements (continued) For the financial year ended 30 June 2007 Note 18 Dividends No dividends were paid or proposed during the financial year. The Company has no franking credits available as at 30 June 2007. Note 19 Key management personnel disclosures (a) Directors The following persons were directors of Encounter Resources Limited during the financial year: (i) Chairman – non-executive Paul Chapman (ii) Executive directors Will Robinson, Managing Director Peter Bewick, Exploration Director (iii) Non-executive directors Jonathan Hronsky, Director (appointed 10 May 2007) (b) Other key management personnel There were no other persons employed by or contracted to the Company during the financial year, having responsibility for planning, directing and controlling the activities of the Company, either directly or indirectly. (c) Key management personnel compensation Remuneration Policy Remuneration levels are competitively set to attract and retain appropriately qualified and experienced Directors and senior executives. Remuneration packages include fixed remuneration with bonuses or equity based remuneration entirely at the discretion of the Board based on the performance of the Company. Total remuneration for all Non-Executive Directors was last voted on by shareholders on 4 November 2005, whereby it is not to exceed $80,000 per annum. Non-Executive Directors do not receive bonuses. Directors’ fees cover all main Board activities. At the date of this report the Company has not entered into any agreements with Directors or Senior Executives which include performance based components. Details of Remuneration for Key Management Personnel During the year there were no Senior Executives which were employed by the Company for whom disclosure is required. Details of the remuneration of each Director of the Company are as follows: 2007 Directors P Chapman W Robinson P Bewick J Hronsky Total 2006 P Chapman W Robinson P Bewick Total Short Term Post Employment Base Emolument $ Superannuation Contributions $ Other Benefits $ Value of Options $ 20,000 188,750 170,833 5,591 385,174 3,922 74,559 96,616 1,800 16,988 15,375 503 34,666 2,006 6,710 8,695 175,097 17,411 ENCOUNTER RESOURCES ANNUAL REPORT 2007 48 – – – – – – – – – – – – – – – – – – Total $ 21,800 205,738 186,208 6,094 419,840 5,928 81,269 105,311 192,508 Note 19 Key management personnel disclosures (continued) (c) Key management personnel compensation (continued) Executive Employment Agreements Remuneration and other terms of employment for the Managing Director and Exploration Director are set out in their respective Executive Employment Agreements. Both employment contracts are for a three year term commencing 23 January 2006 and are subject to a three month notice of termination of contract. The contractual arrangements contain certain provisions typically found in contracts of this nature. Payment of termination benefit by the employer, other than amongst other things for gross misconduct is equal to the payment limit set by Sub-section 200G of the Corporations Act 2001. d) Equity instrument disclosures relating to key management personnel Unlisted Options provided as remuneration and shares issued on exercise of such options No options over unissued shares have been issued to key management personnel of the Company during or since then end of the financial year. Option holdings Key Management Personnel have held no options over the ordinary shares of the Company. Share holdings The number of shares in the Company held during the financial year by key management personnel of the Company, including their personally related parties are set out below. There were no shares granted during the reporting period as compensation. 2007 Name Directors P. Chapman W. Robinson P. Bewick J. Hronsky 2006 P. Chapman W. Robinson P. Bewick Balance at start of the year 4,710,000 21,796,899 4,700,000 – – 1 – Received during the year on exercise of options Other changes during the year – – – – – – – – – – – 4,710,000 21,796,899 4,700,000 Balance at the end of the year 4,710,000 21,796,900 4,700,000 – 4,710,000 21,796,900 4,700,000 Other changes to the share holdings are in respect of shares purchased or as a result of share splits prior to the Initial Public Offering. Loans made to key management personnel e) No loans were made to key personnel, including personally related entities during the reporting period. f) Other transactions with key management personnel There were no other transactions with key management personnel. ENCOUNTER RESOURCES ANNUAL REPORT 2007 49 Notes to the Financial Statements (continued) For the financial year ended 30 June 2007 Note 20 Remuneration of auditors Audit and review of the Company’s financial statements Taxation services Independent Accountants Report 2007 $ 17,460 4,250 – 21,710 2006 $ 8,700 3,500 11,300 23,500 Note 21 Contingencies (i) Contingent liabilities There were no material contingent liabilities not provided for in the financial statements of the Company as at 30 June 2007 or 30 June 2006 other than: Native Title and Aboriginal Heritage Native title claims have been made with respect to areas which include tenements in which the Company has an interest. The Company is unable to determine the prospects for success or otherwise of the claims and, in any event, whether or not and to what extent the claims may significantly affect the Company or its projects. Agreement is being or has been reached with various native title claimants in relation to Aboriginal Heritage issues regarding certain areas in which the Company has an interest. (ii) Contingent assets There were no material contingent assets as at 30 June 2007 or 30 June 2006. Note 22 Commitments (a) Exploration The Company has certain obligations to perform minimum exploration work on mineral leases held. These obligations may vary over time, depending on the Company’s exploration programmes and priorities. As at balance date, total exploration expenditure commitments on tenements held by the Company have not been provided for in the financial statements and which cover the following twelve month period amount to $1,083,800 (2006: $470,800). These obligations are also subject to variations by farm-out arrangements or sale of the relevant tenements. This commitment does not include the expenditure commitments which are the responsibility of the joint venture partners. (b) Operating Lease Commitments Commitments for minimum lease payments in relation to non-cancellable operating leases are as follows: Within one year Later than one year but not later than five years Later than five years 2007 $ 2006 $ – – – – 26,870 – – 26,870 The operating lease commitment relates to the lease of the Company’s Perth office. The initial lease period was 12 months, thereafter becoming a monthly lease. There are no provisions in the terms of the lease for rental increases. At the reporting date there are no operating lease commitments. (c) Contractual Commitment There are no material contractual commitments as at 30 June 2007 other than those disclosed above and not otherwise disclosed in the Financial Statements. ENCOUNTER RESOURCES ANNUAL REPORT 2007 50 Note 23 Related party transactions There were no related party transactions during the year, other than disclosed at note 19. Note 24 Interests in joint ventures Joint venture agreements have been entered into with third parties. Details of joint venture agreements are disclosed below. Assets employed by these joint ventures and the Company’s expenditure in respect of them is brought to account initially as capitalised exploration and evaluation expenditure (Refer Note 11) until a formal joint venture agreement is entered into. Thereafter, investment in joint ventures is recorded distinctly from capitalised exploration costs incurred on the company’s 100% owned projects. See note 12 for disclosures of interests in the assets and liabilities employed under formal joint venture agreements. Joint Venture and Exploration Agreement Under a Joint Venture and Exploration Agreement dated 1 April 2005 the Company and Avoca Resources Limited (“Avoca”) have agreed to establish an unincorporated joint venture for the purposes of identifying, acquiring, evaluating and developing or selling mining tenements with potential uranium deposits within Western Australia. Encounter is the manager of the joint venture. Avoca Resources held a 20% free carried interest in Encounter’s exploration projects for the two year period which ended on 1st April 2007. In accordance with the Agreement, Avoca has elected to contribute to the six month exploration expenditure program commencing 1st April 2007 to maintain their 20% interest the projects. Either party may elect to dilute their interest to a 1% net smelter royalty. Lake Way Uranium Joint Venture Under the Lake Way Uranium Joint Venture dated 1 July 2007 between Avoca Resources Limited and the Company, the Company has a 60% joint venture interest in the Uranium at the Lake Way South tenement. The parties are contributing to expenditure in accordance with their equity interest. Encounter is the manager of the joint venture. The company’s interest in the joint venture may increase to 75% if Avoca elects to dilute its interest in the tenement and be free carried though to decision to mine. Note 25 Events occurring after the balance sheet date There has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors of the Company to affect substantially the operations of the Company, the results of those operations or the state of affairs of the Company in subsequent financial years. ENCOUNTER RESOURCES ANNUAL REPORT 2007 51 Notes to the Financial Statements (continued) For the financial year ended 30 June 2007 Note 26 Reconciliation of loss after tax to net cash inflow from operating activities Loss from ordinary activities after income tax Depreciation Exploration cost written off Share based payments expense (Increase)/decrease in prepaid expenses (Increase)/decrease in receivables Increase/(decrease) in payables Increase/(decrease) in provisions 2007 $ 2006 $ (592,664) 7,529 268,472 46,294 93,135 596 (24,292) 26,477 (346,270) 1,335 132,409 2,625 (100,820) (32,508) 5,037 14,167 Net cash outflow from operating activities (174,453) (324,025) Note 27 Earnings per share a) Basic earnings per share Loss attributable to ordinary equity holders of the Company b) Diluted earnings per share Loss attributable to ordinary equity holders of the Company c) Loss used in calculation of basic and diluted loss per share Loss after tax from continuing operations d) Weighted average number of shares used as the denominator Weighted average number of shares used as the denominator in calculating basic and dilutive loss per share Cents Cents (1.0) (1.0) $ (1.1) (1.1) $ (592,664) (342,270) No. No. 62,046,763 30,648,129 At 30 June 2007 the Company has on issue 450,000 unlisted options (2006: 200,000) over ordinary shares that are not considered to be dilutive. Note 28 Subsidiary Information During the year Encounter Resources Limited acquired two subsidiary companies. These subsidiary companies are dormant and have no assets or liabilities at the reporting date or any revenue or expenses for the reporting period. Consolidated financial statements have not been prepared as the directors consider to do so would be immaterial to the reporting entity’s net assets at the reporting date and its result and cash flows for the reporting period. Subsidiary Company Country of Incorporation Encounter Operations Pty Ltd Encounter Resources USA LLC Australia USA Encounter Operations Pty Ltd was incorporated in Western Australia on 27 November 2006. Encounter Resources USA LLC was incorporated in the USA on 9 April 2007. The ultimate controlling party of the group is Encounter Resources Limited. Ownership Interest 2007 2006 100% 100% – – ENCOUNTER RESOURCES ANNUAL REPORT 2007 52 Directors’ Declaration In the opinion of the Directors of Encounter Resources Limited (“the Company”) (a) the financial statements and notes set out on pages 34 to 52 are in accordance with the Corporations Act 2001, including: (i) (ii) complying with Accounting Standards and the Corporations Regulations 2001 and other mandatory professional reporting requirements; and give a true and fair view of the financial position as at 30 June 2007 and of the performance for the year ended on that date of the Company. (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. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer for the financial year ended 30 June 2007. This declaration is made in accordance with a resolution of the Directors. Signed at Perth this 17th day of September 2007. W Robinson Director ENCOUNTER RESOURCES ANNUAL REPORT 2007 53 INDEPENDENT AUDIT REPORT TO MEMBERS OF ENCOUNTER RESOURCES LIMITED We have audited the accompanying financial report of Encounter Resources Limited (the company), which comprises the balance sheet as at 30 June 2007, and the income statement, statement of changes in equity and cash flow statement for the year ended on that date, a summary of significant accounting policies and other explanatory notes and the directors’ declaration. Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In Note1, the directors also state, in accordance with Accounting Standard AASB 101: Presentation of Financial Statements that compliance with the Australian equivalents to International Financial Reporting Standards (IFRS) ensures that the financial report, comprising the financial statements and notes, complies with IFRS. Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, provided to the directors of Encounter Resources Limited on 17 September 2007, would be in the same terms if provided to the directors as at the date of this auditor’s report. Auditor’s Opinion In our opinion, the financial report of Encounter Resources Limited is in accordance with the Corporations Act 2001 including: a) i. giving a true and fair view of the company’s financial position as at 30 June 2007 and of its performance for the year ended on that date; and ii. complying with Australian Accounting Standards (including Australian Accounting Interpretations) and the Corporations Regulations 2001. b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1. WHK HORWATH PERTH AUDIT PARTNERSHIP SEAN MCGURK Principal Perth, WA Dated this 17th day of September 2007 Total Financial Solutions Horwath refers to Horwath International Association, a Swiss verein. Each member of the Association is a separate and independent legal entity. Member Horwath International WHK Horwath Perth Audit Partnership ABN 96 844 819 235 Level 6, 256 St Georges Terrace Perth WA 6000 Australia GPO Box P1213 Perth WA 6844 Australia Telephone +61 8 9481 1448 Facsimile +61 8 9481 0152 Email perth@whkhorwath.com.au www.whkhorwath.com.au A WHK Group firm ENCOUNTER RESOURCES ANNUAL REPORT 2007 54 ASX Additional Information Pursuant to the Listing Requirements of the Australian Stock Exchange Limited, the shareholder information set out below was applicable as at 28 September 2007. A. Distribution of Equity Securities Analysis of numbers of shareholders by size of holding: Distribution 1- 1,000 1,001- 5,000 5,001- 10,000 10,001-100,000 More than 100,000 Totals Number of shareholders 88 371 296 378 38 1,171 There were 46 shareholders holding less than a marketable parcel of ordinary shares. B. Substantial Shareholders An extract of the Company’s Register of Substantial Shareholders (who hold 5% or more of the issued capital) is set out below: Shareholder Name William Michael Robinson Jacmew Pty Ltd UBS Nominees Pty Ltd and related bodies corporate Stone Poneys Nominees Pty Ltd Solvista Pty Ltd Eye Investment Fund Limited Issued Ordinary Shares Number of shares Percentage of shares 16,216,900 5,580,000 5,388,074 4,650,000 4,650,000 3,465,776 23.64% 8.13% 7.85% 6.77% 6.77% 5.05% C. Restricted Securities There are 29,496,900 restricted ordinary shares that are held in escrow until 24 March 2008. ENCOUNTER RESOURCES ANNUAL REPORT 2007 55 ASX Additional Information (continued) D. Twenty Largest Shareholders The names of the twenty largest holders of quoted shares are listed below: Shareholder Name William Michael Robinson Citicorp Nominees Pty Ltd Jacmew Pty Ltd Stone Poneys Nominees Pty Ltd Solvista Pty Ltd HSBC Custody Nominees Australia Ltd National Nominees Limited Jorge Bernhard HSBC Custody Nominees Australia Ltd Charles Arthur Bennett Robinson Domain Investment Holdings Pty Ltd HSBC Custody Nominees Australia Ltd ANZ Nominees Ltd Forty Traders Ltd Pieter Los HSBC Custody Nominees Australia Ltd Bruce Birnie Pty Ltd Palir Pty Ltd Eric Roles Andrew Ralph Bewick Total E. Voting Rights Listed Ordinary Shares Number Percentage quoted 16,216,900 5,710,810 5,580,000 4,650,000 4,650,000 3,958,188 2,643,000 1,773,300 1,630,079 825,000 750,000 700,000 633,000 550,000 500,000 400,000 300,000 300,000 300,000 250,000 52,320,277 23.64% 8.33% 8.13% 6.77% 6.77% 5.77% 3.85% 2.59% 2.38% 1.20% 1.09% 1.02% 0.92% 0.80% 0.73% 0.58% 0.44% 0.44% 0.44% 0.36% 76.25 In accordance with the Company’s Constitution, voting rights in respect of ordinary shares are on a show of hands whereby each member present in person or by proxy shall have one vote and upon a poll, each share will have one vote. ENCOUNTER RESOURCES ANNUAL REPORT 2007 56 ...positioned for growth Australia’s major trading partners generate significant electricity from nuclear power (Japan 30%, USA and UK 20%) China is planning a fivefold increase in nuclear power capacity by 2020. Nuclear power generation currently avoids more than 2 billion tonnes annually of CO2 emissions that would other wise be produced from fossil fuels Australia has around 40% of the world's low-cost uranium resources. Australia has the opportunity to contribute significantly to world climate change responses by supplying natural uranium from an expanded and more diversified mining base. ENCOUNTER RESOURCES ANNUAL REPORT 2006 www.enrl.com.au