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1 ANNUAL FINANCIAL REPORT ABN YEAR ENDED 30 JUNE 2012 Page 1

2 CORPORATE DIRECTORY Directors J A Wall (Executive Chairman) R E Besley (Non-Executive Director) S J Lonergan (Executive Director) R J McDonald (Non-Executive Director) (Director until 17 January 2012) J Richards (Non-Executive Director) Company Secretaries S J Lonergan R J Sheridan Registered Office and Principal Place of Business Level 3, 2 Elizabeth Plaza, North Sydney NSW 2060 Telephone: Facsimile: info@kblmining.com.au Share Registry Boardroom Pty Ltd Level 7, 207 Kent Street Sydney, NSW 2000 Telephone: Facsimile: Auditors BDO East Coast Partnership, (Formerly PKF East Coast Practice) Level 10, 1 Margaret Street Sydney, NSW 2000 Web Page Page 2

3 FINANCIAL RESULTS SUMMARY The financial year results and balance sheet reflect the start-up of the Mineral Hill mine and the strengthening of the balance sheet to achieve that outcome. KBL incurred a post-tax loss of $22.9 million for the year, due largely to an impairment charge. The impairment charge of $14.9 million, which is a non-cash item, is taken against the Mineral Hill mine. The charge, which arises from application of the relevant accounting standard and incorporates lower forecast A$ commodity prices, reflects only the existing underground operations at Mineral Hill and not the highly attractive Pearse project which is currently carried as an exploration asset at a nominal value ($0.2 million). The Mineral Hill underground mine is now carried on KBL s books at a value of $28.0 million. At the EBITDA level, the Mineral Hill mine incurred a loss of $1.8 million on sales revenue of $18.3 million in its first seven months of operation. Performance improved during the period and post year end with operating surpluses achieved in June and July. C1 cash costs were A$2.48/lb and A$2.68/lb payable copper (after byproduct credits), respectively. Copper prices (and those of the by-product gold and silver produced at Mineral Hill) have improved since year end and currently stand at a little more than A$3.50/lb. KBL is fully exposed to these higher commodity prices and undertakes hedging only of copper sales revenue for the period between shipping of concentrates and final pricing/payment. This quotational period hedging protected KBL from a falling copper price late in the financial year, resulting in a gain of $0.2 million at balance date. KBL s balance sheet both grew and was strengthened during the period. Financed by capital raisings of $27.5 million (from share placements and a convertible note issue), KBL has invested some $18.1 million at Mineral Hill and and $2.4 million on exploration. Net assets at 30 June 2012 were $38.5 million (post-impairment) and the balance sheet is essentially debt free (excluding the convertible notes). The residual amount payable to the Toho Zinc group on the asset acquisition which founded KBL has been reduced to $1.9 million at balance date and to $1.5 million since. Cash at balance date was $11.9 million. Page 3

4 FINANCIAL RESULTS SUMMARY Gross Revenue from Mineral Hill copper concentrate sales for the 8 months since the commencement of production was $21.4 million, comprising: $3.4 million during trial mining, and $18 million during commercial production from 8 December 2012 Cash and cash equivalents of $11.9 million at year end (2011: $8.4m), the increase generated by: Cash from operating activities: $(2.9) million Cash from investing activities: $(20.6) million Cash from financing activities: $27.0 million Cash from investing activities comprised: $12.4 million for mine development $5.7 million for plant and equipment $2.4 million for exploration Cash from financing activities comprised: $17.6 million equity issuance $10.7 million convertible note issuance $0.8 million of issuance costs $(0.9) million repayment to Triako Resources Excluding Convertible Notes, KBL has no material borrowings. Items classified as borrowings within the financial report include: Insurance Premium Funding with a balance of $0.06 million Hire Purchase Facility with a balance of $0.5 million A residual amount due to Triako Resources relating to the acquisition of certain Mineral Hill assets with a balance of $1.9 million An impairment loss of $14.9 million was recognised in relation to the Mineral Hill Mine at 30 June 2012, following an impairment assessment performed on a value-in-use basis: The impairment was driven by a reduction in expected commodity prices Lower commodity prices and a higher Australian dollar during the reporting period has reduced KBL Board s A$ commodity price outlook Other items: KBL received a refund of $707,579 for Research and Development activities at Mineral Hill for the tax period Available tax losses of $36.5 million are not included in the financial statements Page 4

5 KBL MINING LTD for the year ended 30 June 2012 DIRECTORS REPORT The Directors of KBL Mining Limited ( the Company or KBL ) hereby present the financial report of the Company for the year ended 30 June The Company is registered in Queensland. Directors The names of Directors of the Company who held office during the year and were in office at the date of this report unless otherwise stated are: James Wall Executive Chairman - appointed 29 February 2008, Age 67. Bachelor of Engineering from the University of Western Australia. Mr Wall was Managing Director of Nicron Resources Limited during the 1980s and in 1991 became Executive Director of Aztec Mining Company Limited. From late 1991 until mid-1997, he was Managing Director of Savage Resources Limited during which time its market capitalisation on ASX increased by 40 times to over $600 million. Under his management, Savage Resources was transformed from a loss making company into a profitable mining company with substantial operating assets in coal, copper/gold and zinc in Australia and zinc in the USA. He is a fellow of the Australasian Institute of Mining and Metallurgy and is the former Executive Chairman of CBH Resources Limited, retiring in March He was a non-executive director of Ferraus Limited up until 13 September 2011 due to the completion of a takeover, and has previously been a director of other listed companies including Emperor Mines Limited (Chairman) and BMA Gold Limited. Directorships of other listed companies in the last 3 years: Ferraus Limited from 8 November 2007 to 13 September Mr Wall is considered to be a non Independent Director. Robert Besley Non-Executive Director - appointed 29 February 2008, Age 67. Bachelor of Science with Honours in Geology from the University of Adelaide. Mr Besley has over 40 years experience in the minerals industry in Asia, the Middle East, North and South America, Australia and the Pacific Rim. Mr Besley was General Manager of Australmin Holdings Limited when that company developed a minerals sands project in eastern Australia and a gold mine in Western Australia. Mr Besley was Managing Director of CBH Resources Limited from its inception as an exploration company in October 1989 until 11 November 2008 when it was a significant producer of zinc, lead and silver. He is a fellow of the Australasian Institute of Mining and Metallurgy as well as the Australian Institute of Geoscientists. Directorships of other listed companies in the last 3 years: Silver City Minerals Limited from March 2011, Queensland Mining Corporation Limited from February Mr Besley is considered to be a non Independent Director. Page 5

6 Stephen Lonergan Executive Director - appointed 23 November 2011, Age 65. Honours graduate in Law from the Australian National University, Master s degree in Law from McGill University, Montreal, Canada. Mr Lonergan is a commercial lawyer based in Sydney with more than 30 years experience in the Australian and international mining industry having been General Counsel of Pancontinental Mining Group, a partner at Baker and McKenzie Sydney, and General Counsel and Company Secretary of Savage Resources Limited. Mr Lonergan was until 2010 General Counsel and Company Secretary of CBH Resources Limited. Directorships of other listed companies in the last 3 years: Paradigm Metals Limited from 15 November 2002 and Finders Resources Limited from 1 March Mr Lonergan was also a Director of the Company from 29 February 2008 to 30 October Mr Lonergan is considered to be a non Independent Director. John Richards Non-Executive Director - appointed 27 August 2008, Age 51. Bachelor of Economics (Honours) from the University of Queensland. Mr Richards has more than 25 years experience in the international minerals industry in a variety of executive and investment banking roles. He worked with the Normandy Mining group of companies in Australia and Europe for 11 years, ending as Group Executive of Strategy and Business Development. He was Head of Standard Bank s Mining and Metals Advisory business in the Asia-Pacific region from 2002 to 2004, when he was appointed Managing Director of Buka Minerals Limited, an ASX-listed resources investment company and then as an Executive Director of Scarborough Minerals plc. He now works as a consultant in mining corporate finance. Directorships of other listed companies in the last 3 years: Buka Gold Limited to August 2009 and Integrated Resources Group Ltd from 14 February Mr Richards is considered to be an Independent Director. Rob McDonald Non-Executive Director - appointed 2 May 2008, resigned 17 January 2012, Age 62. B Comm (UWA) and a MBA (Hons) (IMD). Mr McDonald is the principal of The Minera Group, a specialist mining advisory and investment group headquartered in Australia but active in most mining regions of the world. Minera assists a select number of mining companies and mining investment/ finance institutions in developing and executing business plans in the sector and participates in various investment syndicates. Mr McDonald has some 35 years experience in the mining sector firstly in various roles within the Rio Tinto Group and prior to launching Minera, in investment banking as Managing Director of N.M.Rothschild & Sons and as Director and Principal of Resource Finance Corporation. He is a member of the Australasian Institute of Mining and Metallurgy. Directorships of other listed companies in the last 3 years: Sedgman Limited from 8 June 2006 Intrepid Mines Limited from 11March 2008 Principal activities The Company operates in the mineral exploration, resource development and mining industry in Australia. Operating result The loss of the Company for the year, after income tax, amounted to $22,858,427 (2011 loss of $3,213,290). Page 6

7 Review of Operations Mineral Hill Mine, NSW KBL 100% Ownership Background KBL s wholly owned Mineral Hill Mine was successfully re-commissioned between July and November 2011 and is now operating at a steady state producing a copper concentrate with gold and silver credits. The Mine is located 65 kilometres, north of Condobolin in central western New South Wales, in the Cobar Basin on the Lachlan Fold Belt. Mineral Hill was mined as early as the late nineteenth century, however modern mining operations commenced at Mineral Hill from Triako Resources Limited mined Mineral Hill successfully until 2005, when declining head grades following a period of reduced exploration activity, low commodity prices and cash constraints caused the mine to be placed on care and maintenance. Figure 1: Cobar Basin Regional Map Work on refurbishing and modernising the processing plant at Mineral Hill started in June 2011 and some $12.4 million was spent on the plant delivering a facility which is modern, complies with current design and engineering standards and which is capable of modular expansion. Refurbishment and rehabilitation work was also required on the access drives to the Parkers Hill underground workings and some $17.5 million was spent on securing this access before ore production commenced. Since re-commissioning, Mineral Hill has processed 162,497 tonnes of ore recovering 2,791 tonnes of copper, 836 ounces of gold and 85,228 ounces of silver. Ore is currently sourced from the Parkers Hill underground copper mine and processed using a grinding and flotation circuit into a copper concentrate. Concentrate is sent to Port Botany by road and rail before shipment to smelters. Ongoing exploration has resulted in maiden Resource estimates for the Southern Ore Zone (SOZ), Eastern Southern Ore Zone (ESOZ) (See Figure 2) and Iron Duke during the Reporting Period. This expanded Resource base may support a mine life until at least 2020 at a nominal 320,000 tonnes of ore per annum. Page 7

8 Figure 2: Oblique View of Mineral Hill underground operations (Parkers Hill) and SOZ and ESOZ areas Sales Arrangements The initial 6,151 tonnes of Mineral Hill copper concentrates were sold to Yunnan Copper, China s third largest copper producer in Kunming. This contract was completed in April 2012 and the Company has secured a contract to sell 20,000 tonnes of copper concentrate to Daye Non-Ferrous Metals Co. in Hubei, over 12 months to April Concentrates which do not meet the specifications under the Daye contract are being sold under spot arrangements. Safety and Human Resources A total of 80 employees and contractor staff are engaged at the Mineral Hill mine and safety is a key operational performance requirement. One Lost Time Injury occurred during the period under review, from a strain injury. The safety record is good relative to industry averages. Notably, the low rate was achieved over the high risk period of construction and commissioning of the processing plant and re-opening of an underground mine. A full Safety Management System is now established at Mineral Hill and all employees have contributed to a revision of safety policy and procedures. A Take 2 Field Risk Assessment Program has also been set up with all employees now fully trained in its use. Mine and Mill Production Mining is by long-hole open stoping with Cemented Aggregate Fill (CAF) to minimise dilution and maximise mining recovery of the ore body while minimising geotechnical risk. Production for the year, including commissioning, was 2,791 tonnes of copper metal, 836 ounces of gold and 85,228 ounces of silver in copper concentrates as shown in Table 1. Page 8

9 Mineral Hill Performance June QTR Mar QTR Dec QTR FY12 ROM Grade % Stoping Ore t 52,939 49,292 24, ,865 Development Ore t 12,501 9,820 24,527 46,848 Ore Mined t 65,440 59,112 49, ,713 Development metres m ,315 Ore Treated t 62,516 58,230 41, ,497 Cu Grade % Recovery % Concentrate Production DMT 4,907 4,705 2,974 12,586 Cu Grade % Au Grade g/t Ag Grade g/t Contained Metal Cu t 1,046 1, ,791 Au Oz Ag Oz 47,945 24,947 12,336 85,228 Table 1: Mineral Hill 2012 Financial Year Production Pearse Gold-Silver Project A series of successful drilling programs during the 2010 financial year resulted in the discovery and delineation of the high grade Pearse gold-silver deposit, located 800 metres from the processing plant at Mineral Hill and within the current Mining Leases. The first Proven and Probable Ore Reserve estimates for the Pearse project were developed in September 2010, and envisaged a shallow open cut mine to a maximum depth of 100 metres from surface. On 20 October 2011, KBL received the formal Development Approval for the Pearse open cut mine. In January 2012, KBL released high grade drill results confirming the shallow, high grade nature of the mineralisation at Pearse. The results included 51 metres at 9.8g/t gold and 72g/t silver from 32 metres and 14 metres at 25.5g/t gold and 56g/t silver from 13 metres. A Resource upgrade for Pearse from drilling over the 2012 financial year is expected to be released during the December 2012 quarter. Contained precious metal in the Pearse mineral Resource is estimated to be 62,000 ounces of gold and 765,000 ounces of silver. Metallurgical test work is ongoing to confirm the most appropriate method for maximising recovery of gold and silver. Several development plans have been assessed and the focus is now on a plan to exclusively mine and process Pearse ore over a period of some 12 months. During that period, underground operations will switch from mining at Parkers Hill to rehabilitation and development work to access higher value copper gold ores in the SOZ and ESOZ bodies (See Figure 2). Page 9

10 Resources Tabulated Resource numbers have been rounded for reporting purposes The Parkers Hill Sulphide Resource below has not been recalculated for mining depletion to the extent of some 173,713 tonnes of ore mined up to 30 June 2012 and by subsequent mining. In consequence, grade and tonnage numbers for copper, zinc, lead, silver and gold shown immediately below require adjustment. Pearse Category Cut-off Grade 1g/t Au (As released 19 November 2011) Tonnes Grade Contained metal (thousands) Silver g/t Gold g/t Silver (oz) Gold (oz) Indicated ,430 48,769 Inferred ,803 13,085 Total ,232 61,853 Iron Duke Cut-off Grade 0.5% Cu equivalent (As released 4 June 2012) Category Tonnes Grade Contained metal (thousands) Copper % Gold g/t Copper (kt) Gold (oz) Oxidised Transitional ,678 Fresh ,059 Total 1, ,238 Iron Duke Cut-off Grade 1% Cu equivalent (As released 4 June 2012) Category Tonnes Grade Contained metal (thousands) Copper % Gold g/t Copper (kt) Gold (oz) Oxidised Transitional ,164 Fresh ,912 Total ,359 Parkers Hill Sulphide Cut-off Grade 0.6% Cu (As released on 19 September 2011) Category Tonnes Grade Contained metal (thousands) Copper % Lead % Zinc % Silver g/t Gold g/t Copper (kt) Lead (kt) Zinc (kt) Silver (oz) Gold (oz) Indicated 1, ,678,268 13,986 Inferred , Total 1, ,755,429 14,307 Parkers Hill Oxide Cut-off Grade 0.6% Cu, 2% Pb, 100g/t Ag (As released on 13 September 2011) Category Tonnes Grade Contained metal (thousands) Copper % Lead % Zinc % Silver g/t Gold g/t Copper (kt) Lead (kt) Zinc (kt) Silver (oz) Gold (oz) Indicated ,925,957 1,157 Inferred , Total 1, ,478,949 1,460 ESOZ Cut-off Grade 0.6% Cu equivalent (As released on 13 September 2011) Category Tonnes Grade Contained metal (thousands) Copper % Lead % Zinc % Silver g/t Gold g/t Copper (kt) Lead (kt) Zinc (kt) Silver (oz) Gold (oz) Indicated ,731 12,015 Inferred ,042 35,089 Total ,773 47,104 SOZ (Au Zone) Cut-off grade 2.5g/t Au (As released on 1 November 2011) Category Tonnes Grade Contained metal (thousands) Copper % Lead % Zinc % Silver g/t Gold g/t Copper (kt) Lead (kt) Zinc (kt) Silver (oz) Gold (oz) Measured ,111 21,198 Indicated ,705 9,231 Inferred ,172 26,158 Total ,988 56,587 SOZ (Cu / Au Zone) Cut-off grade 1.5% Cu Eq.* (As released on 1 November 2011) Category Tonnes Grade Contained metal (thousands) Copper % Lead % Zinc % Silver g/t Gold g/t Copper (kt) Lead (kt) Zinc (kt) Silver (oz) Gold (oz) Measured ,065 17,094 Indicated ,789 10,355 Inferred ,497 7,018 Total ,350 34,467 SOZ (Pb / Zn Zone) Cut-off grade 4% Pb+Zn (As released on 1 November 2011) Category Tonnes Grade Contained metal (thousands) Copper % Lead % Zinc % Silver g/t Gold g/t Copper (kt) Lead (kt) Zinc (kt) Silver (oz) Gold (oz) Measured ,916 1,103 Indicated ,595 2,624 Inferred ,472 1,767 Total ,982 5,494 Page 10

11 Reserves Tabulated Reserve numbers have been rounded for reporting purposes. Note that the initial 493,600 tonnes in the Parkers Hill Copper Reserve have been depleted by some 173,713 tonnes of ore mined up to 30 June 2012 and by subsequent mining. In consequence, grade and tonnage numbers for copper, zinc, lead, silver and gold shown immediately below require adjustment. Copper Reserve: Probable Reserves 1% Copper Cut-off Grade) (As released on 7 June 2011) Contained Contained Contained Category Tonnes Copper % Zinc % Lead % Silver g/t Gold g/t Copper (T) Zinc (T) Lead (T) Contained Silver (oz) Contained Gold (oz) Probable 493, ,711 5,282 4, ,566 6,824 Lead-Zinc-Low Copper Combined Zone: Probable Reserves (@ 3.5% Combined Lead-Zinc Cut-off Grade) (As released on 7 June 2011) Category Tonnes Copper % Zinc % Lead % Silver g/t Gold g/t Contained Contained Contained Copper (T) Zinc (T) Lead (T) Contained Silver (oz) Contained Gold (oz) Probable 343, ,356 6,483 6, ,563 1,434 Additional information regarding these Resources and Reserves including cutoff information is available on the Company s website Exploration Exploration during the year focused on upgrading existing Resources (Parkers Hill and Pearse), identifying maiden Resources (SOZ, ESOZ, Iron Duke) and advancing the geological model of the relatively under-explored Mineral Hill mining and exploration leases. In particular, drilling at Mineral Hill has historically been limited to relatively shallow holes, no deeper than 350 metres from surface. Regional peers are now mining at depths approximately 1 kilometre from surface. The Company s ambition is to explore the deeper mineral potential at Mineral Hill as and when exploration funding permits. Exploration over the year has resulted in a substantial increase in Mineral Hill region in-ground inventory, including 140% increase in copper to 75,000 tonnes, 40% increase in silver to 6.1million ounces and a 224% increase in gold to 250,000 ounces. Significant potential exists to discover additional economic ore near all current Resources, which remain open in most directions. A maiden Resource for the Pearse North ore body is pending release in the December 2012 Quarter. Environment Operations at Mineral Hill are subject to stringent environmental regulation. It is a no release site and water retention and tailings security are particular concerns. Annually, an environmental management review (AEMR) is required to be prepared and submitted to regulators and this is assessed by site inspection. No major compliance issues were identified in the 2012 AEMR. The main tailings storage facility has recently been increased in capacity by a 2 metre lift which will defer the need for a new additional tailings storage facility. Page 11

12 Sorby Hills, WA KBL: 75% Ownership Background The Sorby Hills project is located in the north-eastern corner of the Kimberley region of Western Australia. It is approximately 50 kilometres from the Kimberley regional centre, Kununurra, and 120 kilometres by sealed road to the operational mineral export port at Wyndham. Figure 3 Sorby Hills project location plan with geology Sorby Hills is the largest, undeveloped near surface silver-lead Resource in Australia and was discovered by Elf Aquitaine in From 1972 to 1988, 889 holes were drilled at Sorby Hills and three feasibility studies were completed between 1974 and 1979, which were closely followed by a collapse in the silver price in 1980 from $50 per ounce to less than $5 per ounce. The project was shelved during the early 2000s due to a proposed compulsory resumption of the tenements for the Ord River Scheme expansion combined with weak silver and lead prices. KBL acquired the project in 2008, and the mining leases at Sorby Hills were renewed for a further 21 years in February The renewal of the leases together with ongoing work with Ord River Scheme authorities has enabled the project to move towards development. The economics of the project have been transformed by higher silver prices and anticipated improvements in the price of lead, together with a change in mine plan from an underground operation to a shallow open pit operation. Page 12

13 Joint Venture and Offtake In September 2010, a two part agreement was reached with the largest silver and lead smelter group in China, Henan Yuguang Gold and Lead Co ( Yuguang ). Yuguang is located in Henan Province and was founded in It listed on the Shanghai Stock Exchange in 2002 has an approximate market capitalisation of RMB5.4billion, assets of RMB5billion and revenue last year of RMB10billion. Under the agreement, Yuguang subscribed for $5.2m shares in KBL and contributed $5m to earn a 25% joint venture interest in the project. Yuguang will be entitled to its 25% joint venture percentage of all minerals produced at Sorby Hills. In addition, it has the right to purchase on market terms a percentage of KBL s 75% entitlement to production, calculated as Yuguang s percentage shareholding in KBL, currently some 7%. Yuguang may be entitled to a higher portion production if it elects to assist KBL in funding its share of development costs A Management Committee controls and oversees all business and affairs of the Joint Venture, with one representative from Yuguang and two from KBL. Exploration Following an 8,560 metre diamond drilling program in September 2010, a 109 RC hole, 5,796 metre infill and Resource extensions drilling program was undertaken during the September 2011 quarter. The drilling program targeted the shallow D-E Deposit, which will be the first ore body mined once Sorby Hills enters production. The results included exceptionally high grade intersections and demonstrated the continuity of the D-E Deposit with a high likelihood that it merges with the F Deposit, fifty metres to the North East. Page 13

14 Figure 4: Deposit map for Sorby Hills project The drilling program was designed to establish shallow, open pit mining Reserves to support a minimum of 10 years operation at an ore production rate of 400,000 to 600,000 tonnes per annum. The program also included a number of sterilisation drill holes in the areas of proposed mining infrastructure. Resource and Mining Inventory A new Resource for the D-E Deposit was released in December 2011, at a 2.5% lead cut-off grade, with 2.91 million tonnes at 4.8% lead, 0.5% zinc and 56g/t silver between 10 and 70 metres below surface. Importantly for the commencement of mining of the D-E Deposit in 2013 is the elevation of 70% of the Resource to Indicated category. The C Deposit to the South also contains a shallow Indicated and Inferred Resource of 1.52 million tonnes at 3.3% lead, 0.4% zinc and 21g/t silver. The combined C and D-E Deposits are expected to provide sufficient ore for a mine life in excess of 10 years. Sorby Hills will be mined in stages, with an initial focus on C and D-E Deposits at 400,000 to 600,000 tonnes per annum, followed by an expanded operation at 1.2 million tonnes per annum (subject to relevant government approvals). Page 14

15 The global Resource at Sorby Hills is 16.7 million tonnes at 4.5% lead, 0.7% zinc and 52g/t silver, covering 8 kilometres of strike with the C and D-E deposits accounting for 1.5 kilometres of strike. Tabulated Resource numbers have been rounded for reporting purposes. Sorby Hills Cut-off Grade 2.5% Pb (As released on 22 December 2011) Tonnes Grade Contained metal Category silver Silver (millions) Lead (%) Zinc (%) (g/t) (million oz) Lead (t) Zinc (t) Indicated ,900 18,800 Inferred , ,000 Total Indicated and Inferred , ,800 Pre-Feasibility Work The Beijing General Research Institute of Mining and Metallurgy has provided an initial plant design. Equipment selection and costing has been completed with work continuing on estimating costs for site erection and operation. Environmental studies, civil engineering design and geotechnical studies are ongoing for the feasibility study and in conjunction with approvals process. A feasibility study is expected to be complete before the end of the 2012 calendar year. Approvals In late December 2011, KBL submitted environmental approval documentation to the Department of Mines and Petroleum, the Environmental Protection Authority (EPA) of Western Australia and the Commonwealth Government under the EPBC legislation. The WA EPA assessed the project as requiring a review through the Public Environmental Review (PER) process. Following discussion with the EPA, the timetable for this process contemplates a public exhibition of the project proposals during October 2012 with final decisions in mid to late March KBL expects that final approval for the commencement of development will be received by the final quarter of the 2013 financial year. This should enable development to commence during the 2014 financial year. Page 15

16 Manbarrum, NT and WA KBL earning 51% to 80% Background During the March 2011 quarter, KBL completed a farmin and joint venture arrangement with TNG Limited over the Manbarrum area which lies to the east of Sorby Hills tenements in the Northern Territory and which includes two tenements in Western Australia. Manbarrum covers a mineralised belt interpreted to be a continuation of the mineralisation at Sorby Hills along a syncline around the Bonaparte Basin. The combination of the Sorby Hills and Manbarrum projects provides KBL with approximately 140 kilometres of prospective strike length. The Manbarrum project provides the potential for an extra source of ore feed for the Sorby Hills plant. Figure 5: Manbarrum and Sorby Hills Project Location Plan Joint Venture Under the farmin arrangements, KBL has the right to earn a 51% interest in the Manbarrum tenements by spending $4.5million over 3 years to 2014 with an initial cash payment of $0.5 million which has been made, $2 million of exploration expenditure and a final cash payment of $2 million. Thereafter, KBL may increase its interest to 80% by sole funding exploration through to a decision to mine. TNG may then maintain its 20% interest or sell a 20% interest to KBL for $3 million (CPI indexed) with a 2% Net Smelter Return (NSR) royalty or convert its 20% interest to a 3% NSR royalty. Exploration TNG has spent more than $15m from 2007 to 2011 on exploration over the Manbarrum project, with a focus on the Sandy Creek and Djibitigan deposits. TNG s aim was the definition of a sufficiently large deposit to feed a standalone operation. The inclusion of Manbarrum within KBL s portfolio of projects enables the potential leverage of Sorby Hills infrastructure, enabling a reduction in the required economic size for Manbarrum deposits. Page 16

17 Resources Review of the Sandy Creek deposit has outlined the potential for a shallow high grade lead-zinc-silver deposit within the larger, lower grade near surface Resource. Initial 3D geological model has been developed in preparation for a new Resource. The Sandy Creek deposit is 45 kilometres by road from the proposed processing facility at Sorby Hills. Tabulated Resource numbers have been rounded for reporting purposes. Sandy Creek Primary Zone Cut-off Grade 1% Pb, 1% Zn (As released on 9 February 2011) Tonnes Grade Contained metal Category silver Silver (millions) Lead (%) Zinc (%) (g/t) (million oz) Lead (t) Zinc (t) Indicated , ,900 Inferred , ,000 Total Indicated and Inferred , ,900 Djibigan Oxide Zone Cut-off Grade 1% Zn, 15g/t Ag (As released on 9 February 2011) Tonnes Grade Contained metal Category silver Silver (millions) Lead (%) Zinc (%) Lead (t) Zinc (t) (g/t) (million oz) Inferred Page 17

18 Constance Range, Qld KBL 30% ownership Background The Constance Range project is located in the north-western corner of Queensland, 30 kilometres west of MMG s Century Zinc mine. Constance Range was initially discovered by BHP in 1956, who undertook intensive exploration until 1963, producing an initial Inferred Resource of 296 million tonnes grading 53.1% Iron Ore (and 10.3% silica). Resources Tabulated Resource numbers have been rounded for reporting purposes. Constance Range Iron Ore Deposit Cut-off Grade 49% Fe (As released on 19 November 2009) Tonnes Grade Aluminium Oxide % Contained metal Iron Ore (million tonnes) (millions) Iron % Silica % Phosphorous % LOI % Within National Park Inferred Within Buffer Zone Inferred Outside Buffer Zone Inferred Total Inferred Total (Excluding National Park) Category Inferred Project Development KBL has a 30% joint venture interest in the Constance Range project and estimates that an exploration target of approximately 8 million tonnes of 56.5% (non-jorc compliant) Fe material may be available for a direct shipping project using truck haulage to the coast and then barges to tranship ore from Burketown to ore carriers in the Gulf of Carpentaria. During the year the operatorship of the joint venture reverted to 70% joint venturer Queensland Iron Pty Ltd (a wholly owned subsidiary of Viento Group Limited). Development options and infrastructure needs are being reviewed in discussions with relevant Queensland government authorities and other key stakeholders. Competent Persons Statement The information in this report that relates to Exploration Results, Ore Reserves and Mineral and Resources is based on information compiled by Anthony Johnston, MSc (Hons), who is a Member of the Australasian Institute of Mining and Metallurgy and is a full-time employee of the Company. Anthony Johnston has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the 2004 Edition of the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves. Mr Johnston consents to the inclusion in the announcement of the matters based on his information in the form and context that the information appears. Page 18

19 Dividends No dividends were paid or declared since the start of the financial period. Significant changes in the state of affairs In the opinion of the Directors there were no significant changes in the state of affairs of the Company other than those noted in the review of operations. Events subsequent to reporting date 1,500,000 shares were issued at 12.5c to the CEO pursuant to the Employee Share Plan and an additional 550,000 shares were issued under that Plan to four executives. Meetings of directors The table below sets out the Board and Board committee meetings held during the financial year including the number of meetings each Director was eligible to attend and the number attended by each Director. DIRECTOR Board Audit Remuneration Eligible Attended Eligible Attended Eligible Attended J A Wall R E Besley S J Lonergan R J McDonald J Richards Remuneration Report (Audited) The remuneration report, which has been audited, outlines the Director and executive remuneration arrangements for the Company, in accordance with the requirements of the Corporations Act 2001 and its Regulations. In the following discussion these terms have the meanings indicated: Key Performance Indicator or KPI is a measure agreed between the Company and an employee, or Director as representing a key deliverable or result against which that employee s or Director s performance is to be measured in a given period. Long Term Incentive or LTI is the amount due to any employee or Director as a long term incentive. LTIs will typically be payable in the form of equity (shares, options or performance rights) and will typically relate to share price performance over a period greater than one year. Short Term Incentive or STI is the amount payable to an employee or Director in cash (or any other form) relating to performance against KPIs in a specific period. Total Fixed Remuneration or TFR is the sum of all salary and related benefits, including Company contributions to superannuation but excluding any STI and LTI payments. Total Remuneration refers to the sum of the TFR, STI and LTI for an employee or Director. Total Shareholder Return or TSR is the Company s share price accretion plus dividends which are assumed to have been reinvested. Director s remuneration and key management personnel remuneration costs totalling $2,242,821 have been recognised in the year ended 30 June 2012 (2011 $1,673,873). Page 19

20 No Director or executive of the Company has received a benefit other than a benefit included in the aggregate amount of remuneration shown below. Remuneration costs included in the financial report for Directors and key management personnel during the year were as follows: Name Title Year Primary Benefits Cost Super- annuation Cost Equity Compensation Cost Total Cost Salaries and Fees Consulting Fees Cash Bonus $ $ $ $ $ $ a) DIRECTORS R E Besley R J McDonald J Richards Non-Executive Director Non-Executive Director Non-Executive Director KEY MANAGEMENT PERSONNEL J A Wall SJ Lonergan A Johnston R Sheridan S Mathews Executive Chairman Executive Director Company Secretary Chief Executive Officer Chief Financial Officer Company Secretary Chief Operating Officer ,000 65,514 50,000 c 5,400 26,744 a 207, ,000 64,500-4,500 37, , ,000 b - - 2,700 24,646 a 57, , ,500 37,483 91, , ,400 43,107 a 108, , ,500 53, , ,000-93,750 c 31,500 60,831 a 536, , ,500 c 22,500 74, , ,250 50,000 c - 30,940 a 317, , , , ,410 d 25,000 19,749 d 19,265 a 299, ,413-4,357-52, ,196 e - 16,933 e 23,439 a 234, ,000 50,000 22,500 59,547 a 482, ,021-22, , ,125 Totals ,279, , , , ,519 2,242, , , ,500 62, ,822 1,673,863 Remuneration costs totaling $288,519 for Directors and key management personnel for equity compensation was due to the amortisation of the fair value determined by Black-Scholes Option Pricing Model. Includes a share based payment cost of $16,363 in respect of options held by Mr Richards. b) Mr McDonald resigned on 17 January Remuneration was from 1 July 2011 to 17 January c) Mr Wall was awarded a bonus for the 2010/2011 year of $281,250, two-thirds was incurred and charged to 2010/2011 and one third was paid in 2011/2012. Messrs Lonergan and Besley also received a bonus in relation to the 2010/2011 year which was paid in 2011/2012 d) Mr Johnston s remuneration as CEO was from 20 March 2012 to 30 June 2012, and as Chief Geologist from 1 July 2011 to 19 March e) Mr Sheridan was appointed on 14 August Page 20

21 Remuneration paid to Directors during the year was as follows: Name Title Year Director Fees $ Consulting fees $ Cash Bonus(*) $ Superannuation $ Total $ R E Besley Non-Executive Director ,000 65,514 50,000 5, , ,000 64,500-4, ,000 R J McDonald Non-Executive Director , ,700 32, , ,500 54,500 J Richards Non-Executive Director , ,400 65, , ,500 54,500 J A Wall Executive Chairman , ,250 31, , , , ,500 SJ Lonergan Executive Director Company Secretary ,250 50, , , ,750 Totals , , ,250 45,000 1,228, , ,250-36, ,250 * The bonus payments were in respect of bonus amounts awarded in respect of 2010/2011 and paid in the year 2011/2012. The Company aims that employees and Directors Total Remuneration (including STI and LTI where appropriate) will fall in the third (i.e. second highest) quartile of industry remuneration. However, it is recognised that in a competitive environment for talent where KBL cannot offer a career path or diversity of opportunity as offered by larger resources companies, a flexible approach needs to be maintained. The Company has a preference for a higher than normal percentage of Total Remuneration to be in the form of STI and LTI. This reflects KBL s size, the importance of minimising fixed costs and the desire for performanceoriented pay structures. This also recognises that KBL has more flexibility in offering equity based LTI s than its larger competitors and this will be used by KBL as a differentiator. In particular, it is the Board s view that KBL s Executive Chairman (and any Chief Executive Officer) should receive Total Remuneration which is heavily weighted to performance-related pay (STI and LTI) to ensure a dynamic focus. It is noted that the current Executive Chairman has Total Fixed Remuneration which is very low in comparison with his peers at similar companies somewhat offset by a relatively higher STI. The current CEO s Total Fixed Remuneration is understood to be approximately at the midpoint of remuneration levels for comparable sized mining/exploration companies and STI and LTI remuneration is estimated to be currently in the second quartile. The Board has adopted the policy that Total Remuneration should be subject to annual review. Except where particular anomalies are identified, salary review increments will be consistent with industry averages with the Board retaining flexibility to ensure a competitive remuneration plan. To identify prevailing industry averages, the Company is guided by independent remuneration data received on a subscription basis. Short Term Incentives are paid in cash following year end and are based on performance against agreed Key Performance Indicators. Where an employee s Total Fixed Remuneration is in the top or second top quartile of industry remuneration, the maximum STI for that person will normally be 33% of TFR recognising that payments Page 21

22 outside this parameter may nevertheless be required to address market circumstances. Where an employee s TFR is in a lower quartile, the employee s STI will be a maximum of 50% of TFR. For KBL s current group of executive Directors and senior executives, the following are currently considered to be appropriate maximum levels of STI: o Executive Chairman: for reasons noted above, 150% of a low TFR relative to peers; o Chief Operating Officer and Chief Executive Officer: 50% of TFR; o Executive Director, Commercial and Chief Financial Officer 50% of TFR; o General Managers 50% of TFR. With respect to contractual arrangements, all employment contracts with key management personnel are ongoing and have no set duration. Contracts do not provide for payment of termination benefits other than accrued entitlements. Employment contracts are terminable on between one and three months notice. The executive Directors (Messrs Wall and Lonergan) do not have formal employment contracts and their services may be terminated on one month s notice without termination benefits. With the commencement of commercial production at Mineral Hill in 2011, the Directors view is that, for the purposes of application of remuneration policy, earnings performance should be the key assessment driver with achievement of development objectives a subsidiary but nevertheless important element. On this measure, the Directors view is that performance was not satisfactory and therefore no STI s were paid in respect of the year. Despite this lack of near term performance, it is noted that the Company s shares were in second highest quartile of TSR returns for companies in the S&P/ASX 300 Metals and Mining Index as of 1 July 2009 measured over the period 1 July 2009 to 31 December Director- Remuneration The Non- Executive Directors (Messrs Besley, McDonald (resigned 17 January 2012) and Richards) were each paid Directors fees at the rate of $60,000 plus an amount equivalent to statutory superannuation during the year. In addition, Mr Besley provided consulting services to the Company for which he received an additional $64,500. The Executive Chairman, Mr Wall, received a salary of $350,000 (plus an amount equivalent to 9% statutory superannuation) during Mr Wall s salary for will be $350,000 plus superannuation on the same basis as in Mr Lonergan was paid aggregate fees of $236,250 in respect of the year for the services provided as Company Secretary. No remuneration was paid in respect of his services as Executive Director Commercial. Mr Lonergan s remuneration for will be $252,000. No payments for STIs were awarded to the executive Directors in respect of the year. Long Term Incentives The Company s policy on Long Term Incentives is that they should be available only to personnel who have an ability to impact the value of the Company whether individually or as part of a group. Directors With respect to Directors, the Company believes that any equity based plan should be aligned with shareholder interests and therefore only reward Directors by reference to the Company s TSR bettering its peers. In February 2012, the following numbers of shares were allotted for nil consideration pursuant to the 2009 Directors Long Term Incentive Plan ( 2009 Plan ) J Wall J Richards R Besley R McDonald S Lonergan Prof I Plimer 750,000 shares 375,000 shares 375,000 shares 375,000 shares 375,000 shares 375,000 shares Page 22

23 The 2009 Plan provided for the award of specified numbers of shares to the Directors if the total shareholder return (TSR) of the Company s shares was in the highest or second highest quartile of TSR returns for companies in the S&P/ASX 300 Metals and Mining Index as of 1 July 2009 measured over the period 1 July 2009 to 31 December These awards were based on independent advice from Orient Capital that KBL s TSR fell within the second highest quartile under the plan. These grants discharged the Company s obligations under the 2009 Plan. The fair value of the underlying performance rights in respect of the 2009 Plan on grant date was assessed as $449,799 ($0.20 per performance right) and 4,500,000 performance rights, with a value of $147,879, were expensed during the period and therefore form part of the share based payment expense for the year. $224,899 was expensed against the 2009 Plan in the financial year. The Company s 2011 Annual General Meeting approved a new Long Term Incentive Plan for Director s ( 2011 Plan ), the terms of which largely follow the terms of the 2009 Plan, as follows the participants in the Plan are the Directors of the Company as of the date of the 2011 Annual General Meeting; the reference index for the assessment of TSR will be the S&P/ASX 300 Metals and Mining Index as of 1 January 2012 but excluding from the Index those companies which derive, or expect to derive, the majority of their revenue from iron ore or coal mining operations ( Reference Index ); the measurement period during which the Company s TSR performance will be assessed will run from 1 January 2012 until 1 November 2014 ( Reference Period ); if at the end of the Reference Period the TSR of the Company is in the highest quartile of the Reference Index, then the Company will forthwith issue to the Directors the following shares for nil consideration: Mr Wall 550,000 shares Mr McDonald 100,000 shares Mr Besley 100,000 shares Mr Lonergan 300,000 shares Mr Richards 100,000 shares; however, if the TSR of the Company is in the second highest quartile of the Reference Index at the end of the Reference Period then the Company will issue to each such Director half the number of shares above. If the TSR of the Company is in any other quartile, then the Company shall not issue any shares to the Directors; if any Director named above ceases to be a Director during the Reference Period and at the end of the Reference Period a number of shares would have been awarded to that Director (as provided above) had he remained as a Director, then the Company shall allot to the former Director a proportion of such number of shares. The proportion shall be the number of days service of the former Director during the Reference Period divided by the total number of days in the Reference Period; if, following a Change of Control and prior to the end of the Reference Period, the Company s shares cease to be listed on the Australian Securities Exchange ( Delisting Date ), then the Reference Period shall be deemed terminate on the Delisting Date and if the TSR performance of the Company requires shares to be issued to Directors then a proportion of those shares shall be issued within 7 days after the Delisting Date. The proportion shall be the number of days in the Reference Period up to the Delisting Date divided by the total number of days in the Reference Period. For the purposes of the Plan Change of Control means that a person has acquired voting power in the Company in excess of 50% as determined in accordance with Section 610 of the Corporations Act 2001; Page 23

24 the Company is to enter into a legally binding Participation Agreement with each of the Directors to give effect to the Plan which shall contain such other terms and conditions not inconsistent with the above as the Board reasonably determines are in the interests of the Company. One Director, Mr Richards also holds 500,000 options exercisable at 42 cents and expiring on 27 August These options do not have performance conditions other than that inherent in an exercise price of 42 cents. Non Directors With respect to LTI s for employees other than Directors, the Company has on issue an aggregate of 1,650,000 employee options presently exercisable at 20 cents following a determination by the Board that commencement of commercial production at Mineral Hill occurred in December In 2011 the Board adopted a new LTI Plan for senior employees and this is structured on the basis of shares being issued to participants at market price at the date of issue. The subscription price for these shares is lent to the participant by the Company on a limited recourse basis. The shares become saleable by the employee in three tranches over the 3 years following the date of issue. Upon sale of some or all of the shares, the employee is obliged to repay the loan in respect of those shares and is entitled to retain the surplus. If an employee leaves the Company then his entitlement to sell shares ceases and his shares are to be either sold to repay the Company s loan or cancelled. At the 2011 Annual General Meeting shareholders approved an Employee Share Plan largely reflecting these principles. Some 2,700,000 Shares have been issued to a total of 13 employees under the LTI Plan/ Employee Share Plan as at 30 June The Directors believe that this award structure provides a real incentive to participants to work to improve the Company s share price and is therefore consistent with the interests of shareholders. In June 2011 the Company also issued an aggregate of 76,659 shares to 23 non-management employees under an Exempt Share Plan. The Plan enabled the tax free issue of $1,000 of KBL shares (3,333 KBL shares at the time) to each participant in accordance with certain conditions imposed under applicable tax legislation. In appropriate circumstances the Company may make further issues under similar arrangements. In summary, the costs of equity based compensation for Directors and key management personnel are as follows: $ $ Employee Share Scheme 42,704 1,205 Performance Rights 169, ,899 Share Options 75, ,923 Share Options Directors and Executives 288, ,027 On 27 August 2008, 1,000,000 options were granted to Mr J Richards with an exercise price 21 cents and expiry date of 27 August On the Company s share consolidation approved on 11 December 2009 the number of these options reduced to 500,000 and the exercise price increased to 42c. Each option entitles the holder to one ordinary fully paid share per option exercised. The fair value at grant date was assessed at $65,319 with an amount of $46,407 treated as vested at year end, including $16,363 which has been treated as part of share based payments costs in 2012 year. Fair value at grant date $0.14 Share price at grant date $0.20 Exercise price $0.42 Expected volatility 110% Page 24