North Australian Diamonds Limited (formerly Striker Resources NL) and it s Controlled Entities. Financial Statements

Transcription

1 North Australian Diamonds Limited (formerly Striker Resources NL) and it s Controlled Entities Financial Statements For the year ended 30 th June 2005

2 Table of Contents REVIEW OF ACTIVITIES...3 SCHEDULE OF EXPLORATION TENEMENTS...13 CORPORATE GOVERNANCE STATEMENT...16 DIRECTORS' REPORT...21 AUDITORS INDEPENDENCE DECLARATION...27 STATEMENTS OF FINANCIAL PERFORMANCE...28 STATEMENTS OF FINANCIAL POSITION...29 STATEMENTS OF CASH FLOWS...30 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS...31 DIRECTORS' DECLARATION

3 Review of Activities 1. INTRODUCTION The primary focus for North Australian Diamonds Limited (NADL) in 2005 was exploration and evaluation activities in the North Kimberley and Merlin regions as well as the commencement of the staged redevelopment of the Merlin Diamond Field. The company purchased the Merlin Diamond Project from Ashton Mining Limited (a wholly owned subsidiary of the Rio Tinto Group) in November This acquisition complemented the surrounding Merlin exploration tenements which had been acquired earlier from Rio Tinto. The x-ray sorthouse tailings are currently being processed for the recovery of diamonds as part of the Stage 1 re-development. A total of 828 carats have been recovered to date, with the largest diamond recovered being a 14.21ct white gem. The largest diamond ever recovered from the Merlin Diamond during previous mining activities weighed carats. It was valued at approximately US525,000 at that time and remains the largest diamond to be recovered in Australia. The Merlin Project has significant near-term production potential and high priority exploration targets within the tenements surrounding the former diamond mine. Trial mining activities at Seppelt 2 kimberlite pipe were completed in late 2004, the results of which led to a decision to put further work on hold. The diamonds recovered from these and other previous operations including Ashmore were sold through an agent in Dubai and achieved an average price of US36/ct. Exploration is still being maintained in the Seppelt area, aimed at identifying additional occurrences of the high-grade 200cpht kimberlite. North Australian Diamonds Limited continues to add to its Arnhem Land tenement portfolio where it has a farm-in agreement with De Beers Exploration Australia Limited (DBAE) to earn 100% interest in tenements with a total project area of 13,500km². The Arnhem Land tenements which now encompass an area in excess of 21,000km² are situated some 400km to the north of the Merlin Kimberlite Field. These tenements are considered to have potential not only for diamonds but also for other minerals. The Company has successfully established and continues to hold a major diamond exploration position in Australia. 2. MERLIN PROJECT NORTHERN TERRITORY The Merlin Project comprises the former Merlin Diamond Mine operations and the surrounding exploration tenements (Merlin Orbit) totalling approximately 3,000km² which effectively encompasses the currently known extent of the Merlin Kimberlite Field. Project Highlights Combined Indicated and Inferred Resource (JORC): is 19.1 million tonnes of kimberlite grading 17 carats per100/tonne for 3.3M carats of contained diamonds. A potentially economic project has been identified by AMC Consultants Pty Ltd based on a staged approach and achieving optimized diamond liberation and recovery. Processing of sorthouse tails is underway, with results to date confirming significant diamond losses across all size ranges during previous recovery operations. A total of 828cts of diamonds have been recovered to date, including two large diamonds, 14.21cts and 10.27cts. A leased High Pressure Grinding Roll (HPGR) is on site and has commenced crushing and diamond liberation test work. Investigation of geophysical targets and indicator mineral anomalies within the Merlin orbit tenements is continuing. 3

4 2.1 Merlin Mineral Lease The Merlin Diamond Mine Lease encompasses eleven kimberlite pipes (of which nine were subject to open-pit operations) producing approximately 500,000 carats of diamonds between 1998 and 2003 which was sold at that time for an average value of US108 per carat. Two pipes with potential economic ore grades remain to be evaluated Resource Within the mineral lease the known kimberlite pipes form three clusters, namely Southern, Central and Northern. The current known resource at Merlin is as follows; Indicated Inferred Total Southern Cluster PalSac 4,015,000t 2,713,000t 20cpht Launfal 730,000t 510,000t 22cpht Excalibur 464,000t 309,000t 34cpht Tristam 410,000t 18cpht 21.4cpht (1,955,000cts) Central Cluster Gawain 868,000t 1,252,000t 30cpht Ywain 68,000t 105,000t 60cpht 32.3cpht (740,000cts) Northern Cluster Gareth 125,000t 143,000t 22cpht Kaye 1,498,000t 1,335,000t 9cpht Ector 2,357,000t 2,221,000t 7cpht 8.3cpht (634,000cts) Total 19.1Mt 17.3cpht average 3.3 million carats Inferred and indicated resource grades are based on a lower screen size of 1.2mm Resource Drilling Resource definition and exploration drilling at the Merlin project commenced in December 2004 and was completed in late February The program was aimed at defining the geometry at depth of the kimberlite pipes within the three pipe clusters which comprise the Merlin Field, these being the Southern (PalSac/Launfal/Excalibur/Tristram), Central (Gawain/Ywain) and Northern (Kaye/Ector/Gareth) pipe clusters. The northern pipe cluster, which overall appear to be of a lower grade based on Rio Tinto published data, includes the Gareth pipe which produced Australia s largest diamond of carats. A total of 15 combined RC and diamond core holes were drilled for a total of 3,616m. The drilling did not confirm a shallow joining of the joint pipe PalSac (joined pipes Palomides and Sacramore) to the nearby pipe Launfal as had been predicted based on the geological tendency of the pipes to join together at depth as demonstrated at pipes Palomides and Sacramore. The drilling did demonstrate that PalSac has a footprint of 1.2 hectares at a depth of 300m below surface. Drilling at the higher grade (historic mining grade of 34cpht) pipe Gawain added an additional 478,000cts to the Merlin resource. Overall the drilling program improved the resource tonnage by 1,800,000 tonnes for a contained 500,000 carats. All of the pipes remain open at depth indicating significant additional tonnages are likely to be present below base of drilling Testing of Tailings Due to an often significant discrepancy between the recovered mining grades and higher grade expectations from early bulk sampling undertaken by Ashton Mining, the Company undertook investigations into the recovery efficiency of the previous mining operation. Preliminary testing undertaken by NADL of small parcels of diamonds available from the early Merlin evaluation sampling confirmed the presence of significant numbers of non-fluorescence octahedral shaped diamonds, which 4

5 would not have been recovered using x-ray fluorescence recovery techniques. Various mine tailings including the x-ray sorthouse tails were tested for commercial diamonds aimed at identifying, and if possible, quantifying any diamond losses due to recovery or liberation inefficiencies. Results of these small tests support the premise that diamond grades can be improved if predicted liberation and recovery improvements can be achieved. The largest diamonds to be recovered from these test samples were 1.59cts, 0.47cts and 0.43cts.The recoveries are as follows:- Diamond Recoveries from Tailings (-25mm+0.7mm Dry weight) Sample Weight Grade Frequency Sample Description Stones Carats Number (dry tonnes) (cpht) (stones/tonne) Sorthouse tailings Plant Stockpile Sorthouse tailings Ywain Pit Stockpile TOTAL DMS tails Excalibur Waste dump The average grade of the sorthouse tailings samples is 963.4cpht. While the consistency of grade is not known due to the small sample size, it is anticipated that the sorthouse rejects could contain in excess of 50,000cts. Records indicate there is approximately 10,000 tonnes of x-ray sorted tails (sorthouse rejects) which NADL has recently commenced processing (refer section 2.1.6) Diamond fluorescence Tests Analysis of the diamond fluorescence characteristics was undertaken on a 259 stone parcel of Merlin diamonds recovered from the sorthouse rejects. This data has been compared with previous analytical studies undertaken on a parcel of 400 diamonds representing the run of mine diamond population. Together the data provides a significant insight into the Merlin diamond fluorescence characteristics and one of the likely reasons for the loss of diamonds at the recovery stage of the previous operations. FTIR (Fourier Transform Infra-red Spectrometry) combined with X-Ray fluorescence studies reveal that the Merlin diamonds are comprised of two main sub-populations, one of which is dominated by diamonds with low or non fluorescing characteristics. This work was done under the direction of Dr W. Taylor, an independent diamond specialist. The ability of a diamond to fluoresce when irradiated by X-Rays is dependant on particular attributes of Nitrogen atoms and the amount of Nitrogen impurity contained within the diamond. A study of diamonds available from four of the Merlin pipes indicates 19% of the diamonds fall into non- to very-low fluorescing categories with only 5% of the diamonds having high fluorescence characteristics. Since X-Ray fluorescence was the only diamond recovery technique employed at Merlin it is likely that a high proportion of the diamonds would have been consigned to the sorthouse rejects as a consequence of their non or very low fluorescence characteristics. Fluorescence characteristics of Run of Mine diamond Fluorescence characteristics of Sorthouse Tails diamond Fluorescence Total Population Fluorescence Total Population Non/Very Low 19% Non-fluorescing 40% Low/Moderate 76% Fluorescing 60% High 5% X-Ray fluorescence tests completed on the diamonds recovered from the sorthouse rejects revealed that 40% had non-fluorescing characteristics, with the remainder spread through the low to moderate fluorescing fields (These tests were undertaken at Ultrasort an independent diamond recovery laboratory specialising in the application of X- Ray fluorescence to recover diamonds). The presence of fluorescing diamonds in the tailings indicates that issues other than fluorescence characteristics have contributed to the loss of the diamonds. 5

6 2.1.5 AMC Report In early 2005 the Company commissioned AMC Consultants Pty Ltd (AMC) to undertake a scoping study to evaluate the economics of open-pit and underground mining of several of the kimberlite pipes within the Merlin Diamond Project area. AMC S brief was to identify, from a study of Merlin mining and production and exploration data provided by the Company, a potential mining project and to cost appropriate mining techniques. The study incorporated new information generated by the Company as well as significant diamond price increases experienced since the closure of the mine in The scoping study incorporated grades based on the expectation of improved liberation and recovery of diamonds. Sampling undertaken by the Company in early 2005 of the x-ray sorthouse and other tailings at Merlin demonstrated significant diamond losses during previous mining operations due to poor liberation and inefficient diamond recovery. Reconstruction of mass balances indicates these losses may have exceeded 25%. The AMC study indicated that there is potential for an economic mining operation based on the expectation of improved recovery due to better liberation and more suitable diamond recovery techniques. At an anticipated diamond value of US140/ct and a US exchange rate of 78 cents, the Stage 1 and 2 project could produce a surplus cash flow of 11.4M over a two year operation based on the AMC assumptions. In addition to this, there is potential for an underground mining project which provides a further 10.1 million tonnes with a contained 2.36 million carats. STAGE 1 - Processing of Sorthouse Tailings Mine records indicate there is approximately 10,000 tonnes of x-ray sorted tails (sorthouse rejects) which were deposited in Ywain pit on cessation of previous mining operations. This pit has been dewatered giving access to these tailings. Some 1,500 tonnes of these tailings have been excavated and transported to the processing plant site where processing is underway. It is anticipated that this reprocessing will be completed before year end and is expected to generate a net surplus of 3.3M based on a conservative diamond value of US60 per carat assuming that the diamonds in the sorthouse tailings may not be representative of the full range of Merlin diamonds. However based on the diamond recoveries to date there is now reason to believe that the sorthouse tails diamonds may be similar to run-of-mine in both sizing and quality. STAGE 2 - Surface mining The Company is currently disassembling its North Kimberley Ashmore modular HMS plant in preparation for relocating it to Merlin. With some modifications this plant will have the capacity to process up to 400,000tpa. A commitment to surface mining operations will be made upon the satisfactory completion of the liberation and recovery testwork during Stage 1 and the relocation of the HMS processing plant. It is anticipated that this preliminary test work and relocation of the plant will be completed by the end of The capital costs of this operation are estimated to be less than 1M. Re-optimisation of the current pits by AMC has led to the identification of 475,000 tonnes of kimberlite which could be exploited by surface and open-pit mining operations. This stage will involve the processing of ore contained in surface tailings and reject stockpiles, remnant ore sourced from previously mined pits and ore mineable as a consequence of re-optimized pit design. Processing of ore from pipes Ywain, Gawain, and Gareth should recover approximately 20,000cts from 60,000 tonnes of ore. An additional 180,000cts is expected to be recovered from the estimated remaining balance of 415,000t of Stage 2 resources. This operation will be completed in two years and is estimated to produce a cash flow surplus of 8.1M at an expected diamond price of US140/ct and a US exchange rate of 78 cents. STAGE 3 Potential Dual Pipe Cutback - PalSac During the first two stages of operation the feasibility of undertaking a large cutback on the pipe PalSac and other pipe cutbacks will be further investigated. At current anticipated diamond values and exchange rates, at least 1.7M tonne of kimberlite containing an estimated 380,000cts has the potential to be economically exploited from PalSac alone. This feasibility will also examine the options for increasing process capacity and reducing processing cost. STAGE 4 Potential Underground Mining Project The Company will also be investigating two potential underground mining operations based on the exploitation of kimberlite resources within the southern and central pipe clusters which have been identified from the AMC study. 6

7 The potential underground mining project provides a total of 10.1 million tonnes for a contained 2.36Mcts. This multi-staged approach will allow the Company to gain a better understanding of the diamond grade and diamond recovery potential before committing to the major capital investment required for a large cut-back on PalSac and any ensuing underground operations Commencement of Merlin Operations Treatment of Sorthouse Tailings On 14 July 2005 North Australian Diamonds Limited commenced the recovery of diamonds from the sorthouse tailings, generated from previous mining operations at the Merlin diamond mine. This is the first stage of a program of testing to lead to the re-establishment of diamond mining and processing operations at Merlin since operations ceased in Since the recommencement of development activities at Merlin by NADL, operations have been focussed on optimizing the treatment plant throughput to handle the 100% heavy mineral concentrate feed of the sorthouse tailings, whilst achieving maximum diamond recovery. This process has resulted in plant modification and some circuit re-designs to eliminate bottlenecks. It is anticipated that this work will benefit the design of future process operations at Merlin as well as increasing the rate of this Stage 1 processing of sorthouse tailings. A summary of the diamonds produced to 20th September are listed in the table below: Carats Recovered Diamonds Recovered mm -10+4mm -4+1mm Total mm -10+4mm -4+1mm Total Diamond Size and Colour A total of 8403 diamonds for a total of 828 carats have now been produced from the sorthouse tails to date. This is not yet a sufficiently large enough sample from which to draw conclusions concerning the grade and diamond type variability within the sorthouse tails. However, several general comments can be made: 1. The mean stone size of 0.10 carats is approaching that reported from previous operations. This is an unexpected result at such an early stage and is encouraging for the recovery of diamonds in the larger size ranges. 2. The largest stones recovered weigh carats and carats and a further 24 diamonds over 1 carat have been recovered. This is strong evidence that previous diamond losses have affected all size ranges. 3. The colour range of the diamonds is comparable to descriptions of previous run-of-mine production. Colours include 35% white, 5% yellow, 29% browns and 31% mixed. The presence of a high proportion of yellow stones is consistent with the large percentage of non- and low fluorescence diamonds present within the sorthouse tailings. The recovery of further significant numbers of diamonds from the Merlin sorthouse tailings is confirmation of NADL s laboratory and desktop studies which identified that the previous processing operation had failed to recover all diamonds Diamond Liberation Tests In conjunction with the processing of the sorthouse tailings, grinding and crushing tests utilizing the High Pressure Grinding Rolls Crusher (HPGR) are underway on both reject ore stockpiles as well as on large samples of primary kimberlite obtained from several of the previously mined pipes. This testwork is aimed at identifying procedures for the improved liberation of diamonds from the kimberlite during processing, which the Company believes contributed to reduced overall diamond recoveries. These liberation related losses appear to be a consequence of the increased competency of the kimberlite with depth. The work will also provide information on recoverable grade as well as processing requirements. In addition test work will be done on a number of the reject ore stockpiles including trommel rejects and cyclone floats to ascertain their diamond content and economic potential. It is anticipated that these tests will be completed by year end. 7

8 2.2 Merlin Exploration The Merlin Orbit exploration properties consist of nine tenements surrounding the mining lease of the former Merlin Diamond Mine and totals approximately 3,000km². A heritage clearance was undertaken in August of last year which cleared the way for field activities to commence. The presence of significant numbers of alluvial diamonds in drainages, emanating from the southern tenements, provides strong evidence for the potential to discover new diamond-bearing kimberlite pipes. In addition a number of geophysical targets have previously been identified in close proximity to the former mine site. One of these, HUM 7, was drill tested in late 2004, but no kimberlite was identified. The remaining targets will be tested as access permits New Targets A review of the Merlin exploration sampling data has identified 25 indicator mineral and diamond anomalies of which 17 are considered to be high priority exploration targets. In addition there remain 26 geophysical anomalies, 8 of which are high priority which warrant follow-up investigation. Follow-up sampling and ground inspection has been carried out on 16 of the geophysical targets and 14 of the indicator mineral anomalies resulting in the collection of 14 loam, 17 gravel and 84 soil samples. These samples have been despatched to the Company s Perth laboratory for analysis Diamond Fingerprinting Fingerprinting work undertaken on diamonds recovered from bulk stream samples, taken within the southern exploration tenements; indicate that the diamonds are not sourced from the known Merlin kimberlite pipes. Work is currently underway following up the diamond indicator trains to unearth the new diamond source. 3. SEPPELT DIAMOND PROJECT The Seppelt Diamond Project comprises a number of related kimberlite dykes, blows and pipes constrained within a narrower corridor over a strike length of some 6km. Seppelt 2 is a kimberlite pipe of which the upper portion is comprised of both weathered kimberlite and infill gravels. The gravels have a variable grade of approximately 25cpht and persist to a depth of 36m. Beneath the gravels is weathered kimberlite with a grade of 211cpht. The Seppelt 2 pipe has an inferred resource of 200,000 tonnes to 200m depth. Seppelt 5 is located 3km north of Seppelt 2 and is a kimberlite and breccia-bearing fissure over a strike length of some 1,650m. The maximum thickness of this body at surface is 3m where it is associated with a blow some 10m long. The average width of the kimberlite and breccia-bearing fissure over its length, based on costeaning at surface, is 1.4m. Previous testing of the kimberlite material has confirmed it is of the same high grade 200cpht type as comprises the Seppelt 2 pipe. The trial mining activities at both Seppelt 2 and Seppelt 5 were completed in late 2004 and the results assessed. As a consequence a decision was made that no further trial mining be undertaken at Seppelt 2 during Project Highlights A total of 12,488 tones of infill material and heavily diluted kimberlite from Seppelt 2 was processed in A total of 6,126cts were recovered, the largest stone being 8.5cts and of gem quality which was recovered in Trenching of the kimberlite fissure at Seppelt 5 was completed with 293 tonnes excavated and processed, producing a total of carats of diamonds. 8

9 3.1 Seppelt 2 Trial Mining The pilot modular HMS processing facility at Seppelt 2 completed the treatment of material from the upper portion of the Seppelt 2 pipe. A total of 6,126cts of diamonds were recovered from the Seppelt 2 pipe in 2003/2004 from the processing of some 17,000 tonne of material, giving an average grade of 36cpht for the upper part of the pipe which is dominated by these infill gravels. The high grade 200cpht kimberlite lies beneath the infill gravels at a depth of 36m. The largest diamonds to be recovered were 8.5, 6.3cts, 5.8cts and 4.6cts. Given the company s immediate focus on advancing the Merlin Project, the directors considered it prudent that no further trial mining be undertaken at Seppelt 2 during A number of factors which include the lower near surface grades caused by dilution of the pipes by gravel, small open pitable tonnages due to the small diameters of the pipes, and the poor diamond size-frequency distribution have combined to increase the financial risk associated with exploiting the Seppelt 2 pipe. Because Seppelt 2 continues to have economic potential, exploration will continue in the surrounding area, concentrating on discovering larger pipes with the Seppelt 2 high grade. Any future discoveries will allow a reassessment of the entire project. The Seppelt Mark III DMS Plant will remain at the Seppelt site to undertake any future processing of evaluation or exploration samples which may be required. Total Seppelt 2 Trial Mining Results Sample Type Feed Dry Grade Carats (tonnes) (cpht) Kimberlite 1,383 2, Infill 15,445 3, TOTAL 16,828 6, cpht = carats per hundred tonne Sale of Diamonds A 7,921ct parcel of diamonds representing the diamonds recovered from the various evaluation programs at Ashmore, Seppelt 1, 2 and 5 was sold through an agent in Dubai. In addition, two larger diamonds were sold to private collectors achieving prices in excess of their valuations. Details of the sales are as follows; Summary of Diamond Sale Pipe Carats US/carat Total US Ashmore 1, US45 US76,692 Seppelt 2 / 5 5, US35 US196,634 Seppelt US15 US9,192 TOTAL 7, US36 US282,518 Exchange Rate: AUS = US0.79 AUS357,618 The average value per carat achieved by the sale is consistent with valuations of the diamonds completed prior to the sale. The values have been strongly affected by the size-frequency distribution and the 1mm lower screen size with the parcels being dominated by diamonds in the smaller size ranges. The Seppelt diamonds have previously been valued by independent valuer, M. Farrer, at US35.46/ct. The average diamond value using a lower screen size of 1.5mm which would better reflect run of mine recovery is shown below: Estimated Sale Value using 1.5mm lower screen Pipe Carats US/carat Total US Ashmore 1,226 US56 US68,656 Seppelt 2 / 5 4,107 US46 US188,922 Seppelt US20 US6,760 TOTAL 5,671 US47 US264,338 9

10 3.2 Seppelt 5 A 200m section of the Seppelt 5 kimberlite dyke and blow system excavated in the 2004 providing 293 dry tonnes of mixed kimberlite and country rock material was processed through the HMS facility established at the Seppelt 2 site. A total 82.21cts of diamonds were recovered, representing a grade of 26.64cpht representing the first commercial size diamonds to be recovered from that project area. The parcel included 3 diamonds greater than 1 carat, 15 greater than 0.5 carat and 22 diamonds greater than 0.25 carat in size. The diamonds are mainly gem quality of white colour and good clarity. The narrowness of the dyke being 0.1m to 0.15m in width at depth resulted in substantial dilution to the sample during excavation. The dyke was trenched in a further 3 localities confirming the narrow nature of the dyke. It is considered that the Seppelt 5 dyke could not be mined economically. 3.3 Seppelt Regional Exploration The forward exploration program at Seppelt is focusing on the discovery and testing of kimberlite pipes within the already identified Seppelt 2/ Seppelt 5/ Seppelt 1 kimberlite corridor. Exploration techniques include ground inspection, trenching and sampling. Any kimberlite pipe discovered will be tested, aimed at identifying the high grade Seppelt 2 type kimberlite. The Seppelt orbit exploration has focussed on bulk stream sampling in three areas (Coolabah, Collison and King George River). A total of 9 samples were collected in late 2004 and stored at the Seppelt plant site. All of these samples, as well as 4 bulk stream samples collected in 2003 from the Seppelt 4 anomaly, have been partially processed and are awaiting completion Coolabah The Coolabah Prospect which is located 5km north of Seppelt 1, is a surface indicator mineral and diamond anomaly that reported to surface loam samples. Recent exploration has resulted in the identification of kimberlitebearing fractures. A total of 6 bulk stream samples were collected in 2004 (October, November) from the vicinity of the Coolabah anomaly. These are aimed at providing information on the diamond potential of the anomaly and diamond type represented here. The samples have been partially processed and are awaiting completion. 4 RIO TINTO KIMBERLEY DATA BASE LICENSE AGREEMENT In 2005 NADL entered into an exclusive licensing agreement with Rio Tinto Exploration Pty Ltd (Rio Tinto) over the majority of its extensive Kimberley diamond database. The non-transferable licence is for a three year period for a licence fee of 50,000 per year and various milestone payments. NADL s access and use of the Kimberley diamond database will be limited to diamond exploration. NADL has undertaken to spend 250,000 per annum on exploration in the first two years and 500,000 in the third year of the licence. The Kimberley diamond database contains information relating to approximately 13,000 sample sites. The data has been accumulated over a thirty year period and includes SEM probe as well as indicator-mineral and diamond recovery data. Rio Tinto will retain a 1% gross royalty from any diamond production and has an option to claw back 51% in the event a discovery results in an insitu resource exceeding A1 billion. 4.1 Narrie Prospect The first exploration target to be identified from the database was secured by a tenement application in 2004 (ELA80/3390). Limited follow-up sampling by NADL in this area has confirmed the presence of kimberlitic 10

11 chromite with probe analysis indicating the source rock has good diamond bearing potential. The recovery of a single +0.3mm microdiamond associated with the chromite supports this analysis. Follow-up exploration to locate the source of these indicator minerals is subject to the grant of the tenement. Ongoing review of the Kimberley data set data has led to the identification of a further 4 priority anomalous areas which are the subject of ongoing investigation. 5. JOINT VENTURES 5.1 De Beers Australia Exploration Limited Arnhem Land Northern Territory NADL has a farm-in agreement with De Beers Exploration Australia Limited (DBAE) to earn 100% interest in tenements with a total project area of 13,500km² in the Arnhem Land region of the Northern Territory. The De Beers project area covers eighteen separate tenements some of which have been held by DBAE since 1979 Due to veto restrictions imposed by Aboriginal groups, no exploration had been conducted in recent times. Work programs have been submitted for two of the tenements, totalling 1,800km² that are granted and are available for immediate exploration. Field programs are scheduled to commence in The company not only considers these tenements to be highly prospective for diamond-bearing kimberlites but also prospective for a number of other minerals. 5.2 AKD Limited Farm-in and Joint Venture Seppelt-Casuarina NADL has an agreement with AKD Limited to earn 70% interest in Exploration Licence 80/1590 by expenditure of 1.5 million. Exploration work in this tenement is focused on locating the kimberlite source for samples reporting significant numbers of indicator-minerals. 5.3 Collison/Thompson Farm-in and Joint Venture Recent sampling in this project area has resulted in the two stream samples in close proximity reporting significant and exceptional numbers of indicator-minerals. One sample reported 3,272 chromites, 11 pyrope and 3 diamonds, whilst another sample reported 2,312 chromite, 6 pyrope. These significant numbers clearly indicate their closeness to source. Two bulk stream samples were collected in late 2004 (November) aimed at testing the diamond potential of this prospect. The samples have been partially processed and are awaiting completion. Two Mining Leases (MLA80/588 and 589) have been applied for. 5.4 North King George Falcon System Joint Venture In August 2002, the Company entered into a joint venture agreement with Diamond Mines Australia Pty Ltd, (DMA) a wholly owned subsidiary of Gravity Diamonds Limited, over three tenements which comprise the Company s North King George Project area. In June 2003, the agreement was amended to include AKD Limited s tenement, Exploration Licence 80/2461. The joint venture area, which lies to the north of NADL s Seppelt Project, covers approximately 701km². In June 2003, an airborne survey was flown over this area using BHP Billiton s Falcon airborne gravity gradiometer. A total of 7,619 line kilometres were flown. NADL is managing the field program on behalf of the joint venture partners. To date, 24 targets identified from the Falcon TM survey have been sampled with the collection of 57 loam samples, 7 stream samples, 4 rock samples and 34 geochemical samples. In addition, 10 costeans have been excavated across 4 targets with a view to identifying kimberlite rock. Future work programs will be planned upon receipt and assessment of all outstanding sample results. 11

12 6. GOLD PROJECTS Creek Area The Oombulgurri Gold Project, originated as a consequence of the discovery in early 2002 by De Beers of significant evidence supporting the possible presence of gold mineralisation. This evidence was the recovery of particles of free gold in some 14 stream samples, together with the interpretation by De Beers from multi-spectral scanner data of a broad area, some 70km in length of argillic alteration. Primary gold mineralisation was subsequently confirmed at two prospects, namely 88 Creek and Magnesite Creek where some 4,750m of RC drilling was completed in At 88 Creek, anomalous gold responses in excess of 100ppb, and peaking at 1.39g/t reported over small drill intervals however, most responses were less than 100ppb within a 20m thick flat lying mineralised sandstone horizon. At Magnesite Creek, some 12km north-west of 88 Creek, three coherent and welldefined gold in soil anomalies were defined by soil sampling. They occurred within a broad zone of intersecting NW, NS and NE structures that cut through the flat sedimentary sequence. Drill testing of these anomalies reported anomalous gold in drill intervals of up to 40m and showing peak assay responses of up to 127ppb for the 1m sample intervals. This exploration demonstrated that primary gold mineralisation is present in a Proterozoic province not previously known to host the precious metal. Potentially, this offers highly significant future exploration opportunities linked to the detection of hydrothermal gold mineralisation of mesothermal or possibly epithermal style. The 88 Creek Area has been joint-ventured to Alloy Resources Limited. Details of the joint venture are as follows; Creek Project: E80/2504 and E80/ Alloy to contribute 700,000 to JV expenditure (including the cost of diamond drilling with a minimum of 1,000m in two or more drill holes) to acquire a 51% interest. 3. Alloy is manager of JV Under the terms of the agreement Alloy Resources Limited has until 30 th January 2006 to complete its listing on the Australian Stock Exchange. 12

13 Schedule of Exploration Tenements Project Tenement Area (Km²) Equity Berkeley ELA80/ % North Australian Diamonds Limited: 100% Beta Creek E80/ % North Australian Diamonds Limited: 90% (Consolidated New Sage Resources Ltd: 10%) Ashmore M80/ % North Australian Diamonds Limited: 90% M80/ % (Consolidated New Sage Resources Ltd: 10%) Collison E80/ % North Australian Diamonds Limited: 90% (Consolidated New Sage Resources Ltd: 10%) Forrest River E80/ % North Australian Diamonds Limited: 100% E80/ % E80/ % M80/ % Pteropus E80/ % North Australian Diamonds Limited: 80% E80/ % (Thompson: 20%) MLA80/ % MLA80/ % Merlin Orbit Tenements ELA % North Australian Diamonds Limited: 100% EL % Rio Tinto: 1% Royalty (except EL24500 and EL % ELA24737) EL % EL % EL % EL % EL % ELA % 13

14 Project Tenement Area (Km²) Equity Merlin Mineral Lease North Australian Diamonds Limited: 100% MLN % Rio Tinto: 1% Royalty Seppelt E80/ % North Australian Diamonds Limited: 90% E80/ % (Consolidated New Sage Resources Ltd: 10% M80/ % except E80/2724, ELA80/3430 and ELA80/3465) ELA80/ % ELA80/ % Booroloola ELA % North Australian Diamonds Limited: 100% ELA % North King George-Falcon System JV E80/ % Diamond Mines Australia Pty Ltd 50% E80/ % E80/ % Seppelt Joint Venture-AKD Limited North Australian Diamonds Limited: earning E80/ Earning 70% 70% in E80/1590 E80/ Earning 40% Diamond Mines Australia Pty Ltd earning 40% in E80/2461 North Australian Diamonds Limited earning 40% Rio Tinto Data Licensing Agreement Narrie ELA80/ % North Australian Diamonds Limited: 100% 14

15 Project Tenement Area (Km²) Equity Arnhem Land Joint Venture - De Beers ELA Earning 100% North Australian Diamonds Limited earning ELA331 1,098 Earning 100% 100% diamonds only by expenditure of 5m or ELA Earning 100% upon discovery of diamondiferous kimberlite EL Earning 100% ELA Earning 100% EL3338 1,097 Earning 100% ELA Earning 100% ELA6531 1,665 Earning 100% ELA6532 1,669 Earning 100% ELA Earning 100% ELA Earning 100% ELA Earning 100% ELA Earning 100% ELA Earning 100% ELA Earning 100% ELA Earning 100% ELA Earning 100% ELA Earning 100% Arnhem Land Project ELA % North Australian Diamonds Limited 100% ELA % ELA % ELA % ELA % 15

16 CORPORATE GOVERNANCE STATEMENT The Directors of North Australian Diamonds Ltd (NADL) support the establishment and ongoing development of good corporate governance for the Company and the consolidated entity. In August 2002 the Australian Stock Exchange established a Corporate Governance Council (CGC) and in March 2003 the CGC put forward a number of best practice recommendations. These best practice recommendations are embodied in ten corporate governance principals which have been broadly adopted by the ASX and the Financial Community generally. The recommendations are not prescriptions and are intended as guidelines only. The Board has sought to apply the recommendations to the extent relevant to the consolidated entity s size and scale of operations. This Statement sets out the corporate governance practices in place as at the date of this report and throughout the year which comply with the recommendations of the Corporate Governance Council unless otherwise stated. Corporate Governance Council Recommendation 1 Role of the Board of Directors The role of the Board is to build long term sustainable value for its security holders whilst respecting the interests of its stakeholders. In order to fulfil this role, the Board is responsible for the overall corporate governance of the consolidated entity including formulating its strategic direction, setting remuneration and monitoring the performance of Directors and Senior Executives. The Board relies on Senior Executives to assist it in approving and monitoring expenditure, ensuring the integrity of internal controls and management information systems and monitoring and approving financial and other reporting. The Board has adopted a Charter which formalises existing practises and can be viewed on the Company s web site. In broad terms the Board Charter clarifies the respective roles of the Board and senior management and assists in decision making processes. Corporate Governance Council Recommendation 2 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 determining the identification and appointment of a 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 consolidated entity, 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, three non-executive and one executive. 16

17 CORPORATE GOVERNANCE STATEMENT The Board has assessed the independence of it s non executive directors according to the definition contained within the ASX Corporate Governance Guidelines and has concluded that the non-executive directors Messrs Tyler, Duchatel and Lamont are independent. Ewen Tyler is an independent Chairman. 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 consolidated entity is not of a sufficient size to warrant a separate committee. The Board at this point in time does have a majority of independent directors. Corporate Governance Council Recommendation 3 Ethical and Responsible decision making Code of conduct The Board believes in and supports ethical and responsible decision making. The Company has not at this point in time established a formal code of conduct to guide the directors, the chief executive officer (or equivalent), the chief financial officer (or equivalent) and any other key executives as to the practices necessary to maintain confidence in the Company s integrity, and the responsibility and accountability of individuals for reporting and investigating reports of unethical practices. Given the Company s size and scale of activity an informal code of conduct is considered appropriate at this point in the Company s development. Security Trading Policy The Company does not have a formal security trading policy concerning trading in company securities by directors, officers and employees. The law prohibits insider trading and the Corporations Act and the ASX Listing Rules require disclosure of any trading undertaken by directors or their related entities in the Company s securities. The laws with respect to insider trading are communicated to potential insiders from time to time and on engagement of new employees. Corporate Governance Council Recommendation 4 Integrity in financial reporting Chief Executive Officer and Company Secretary The Board requires the Chief Executive Officer and the Company Secretary provide a written statement that the financial statements of Company and the consolidated entity 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. Audit Committee The Company does not have a separately constituted audit committee. The consolidated entity is not of a size nor are the affairs of a complexity sufficient to warrant the existence of a separate audit committee. All matters which could be delegated to such a committee are dealt with by the full board. External audit recommendations, internal control matters and any other matters arising from the half-year audit review and the annual statutory audit are discussed directly between the Chairman and the audit engagement partner and reported to the full board. 17

18 CORPORATE GOVERNANCE STATEMENT External Auditors The Company does not have a procedure for the selection and appointment of an external auditor or rotation. It is PricewaterhouseCoopers policy to regularly rotate audit engagement partners on listed companies as required by the Corporations Act. The external auditor is requested to attend the annual general meeting and be available to answer shareholder questions about the conduct of the audit Corporate Governance Council Recommendation 5 Timely and balanced disclosure The Board is committed to the promotion of investor confidence by providing full and timely information to all security holders and market participants about the consolidated entity s activities and to comply with the continuous disclosure requirements contained in the Corporations Act 2001 and the Australian Stock Exchange Listing Rules. In view of the size of the Company and its experienced board and management structure, the Company has not adopted written policies and procedures designed to ensure compliance with ASX Listing Rule disclosure requirements at this time. 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 The Board fully supports security holder participation at general meetings as well as ensuring that communications with security holders are effective and clear. In addition to electronic communication via the ASX web site, the Company publishes all ASX releases including Annual and Half-Yearly financial statements on the Company s website as soon as it is disclosed to the ASX at 18

19 Corporate Governance Council Recommendation 7 Recognise and Manage Risk CORPORATE GOVERNANCE STATEMENT Risk Management The identification and development of strategies to mitigate risks associated with the consolidated entity s operation is the responsibility of the Board. The Board recognises that as the Company progresses through exploration to evaluation, there are new issues and risks that need to be prudently addressed. If necessary, the Board draws on the expertise of external consultants to assist in dealing with and mitigating risk. The consolidated entity is not currently considered to be of a size, nor its affairs of such complexity to justify the implementation of a formal system for identifying, assessing, monitoring and managing risk in the organisation. The Company does not have an internal audit function. The Chief Executive Officer and Company Secretary are not required at this time to provide a statement to the Board on the Company s risk management and internal compliance and control systems. Corporate Governance Council Recommendation 8 Encourage Enhanced Performance Performance Review Due to the size and structure of the Board the Company does not have a formal process for performance evaluation of the board, individual directors and key executives. Independent professional advice and access to information Each Director has the right to access all relevant information in respect to the Company and the consolidated entity and to make appropriate enquiries of senior management. The Directors have access to the Company Secretary at all times. Each Director has the right to seek independent professional advice on matters relating to him as a director of the company at the company s expense, subject to prior approval of the Chairman which shall not be unreasonably withheld Corporate Governance Council Recommendation 9 Remunerate Fairly and Responsibly The Company s remuneration policy is to ensure that the remuneration package properly reflects the person s duties and responsibilities and that remuneration is competitive in attracting, retaining and motivating people of the highest quality. Disclosure of the details of the nature and amount of each element of directors, including non-executive directors, and executives remuneration is included in the financial statements. No bonuses and/or incentive payments have been paid and are not anticipated. Remuneration Committee A remuneration committee is established consisting of the two non-executive directors, Messrs Tyler and Duchatel. There were no formal meetings of the remuneration committee held during the year. The remuneration committee does not have a formal charter. Equity Based Remuneration The Company has established the North Australian Diamonds Ltd Directors, Officers, Employees and other Permitted Persons Option Plan. 19

20 CORPORATE GOVERNANCE STATEMENT The Board believes the Plan will, amongst other things, encourage management to focus on creating shareholder value and encourage valued employees to stay with the Company by giving them the opportunity to participate in the creation of a valuable personal asset, being a financial stake in the Company. The Plan was approved by shareholders at a general meeting held on 28 July Corporate Governance Council Recommendation 10 Recognise the legitimate interests of Stakeholders It is expected that all directors, managers and employees observe the highest standards of integrity, objectivity and business ethics in conducting its business, striving at all times to enhance the reputation and performance of the Company in respect of legal and other obligations to all legitimate stakeholders. It is considered the consolidated entity is not of a size, nor are the affairs of a complexity sufficient to warrant the establishment of a formal code of conduct to guide compliance with legal and other obligations to legitimate stakeholders. The Board considers that an informal code of conduct is appropriate at this stage to guide executives, management and employees in carrying out their duties and responsibilities. 20

21 DIRECTORS' REPORT The directors present their report together with the financial statements of North Australian Diamonds Ltd ( the Company ) and consolidated financial report of the consolidated entity, being the Company and its controlled entities for the year ended 30 June DIRECTORS The directors of the Company at any time during or since the end of the financial year are: Ewen W.J. Tyler AM, BSc (Hons), FAusIMM, FAIM, CPGeo, C.Eng (Chairman) Mr Tyler is a leading figure in the Australian Diamond Industry with a career spanning 50 years. He is a former chairman of the Argyle Diamond Mines Joint Venture up until the decision to mine in 1983 and of its exploration until He is currently Chairman of Lion Selection Group Limited and AuSelect Limited. He is a former director of Helix Resources Limited ( ). Mr Tyler was appointed a director on 26 February 2001 and Chairman on 9 July Thomas H. Reddicliffe BSc(Hons) (Geology) MSc FAus (Chief Executive Officer) Mr Reddicliffe was appointed to the position of Technical Director of the company on 6 May He was exploration manager for Ashton Mining Ltd and was directly responsible for the discovery of the Merlin Diamond Mine in the Northern Territory. Mr Reddicliffe has over 28 years of experience in the diamond industry. Mr Reddicliffe joined the Company in February 2001 and was the Company s General Manager of Exploration and Evaluation prior to his appointment as technical director. Charles William (Bill) Duchatel BE(Mining), FAusIMM, FIE(Aust),CPEng, FAICD Mr Duchatel is a mining engineer and has been involved in the mining industry for over 40 years with wide operational and project construction experience. He is a former director of Ashton Mining Limited and more recently Giants Reef Mining Limited ( ) and past President of the Australian Mineral Industry Research Association. Mr Duchatel is a non-executive director and was appointed a director on 9 July He is currently Chairman of Australis Mining Corporation Limited. Glenister Lamont (B.Eng.(Hons), MBA, ASIA, FAICD, MAusIMM) Non Executive Director Mr Lamont is principal of Logmaor Services, which focuses on providing strategic advice and investor relations services to a variety of listed and private companies. He has participated at all levels through to board, both as an adviser and as practitioner in the formulation of strategy, identification, structuring and execution of domestic and international corporate developments. Previously he was General Manager Corporate for Ashton Mining Ltd where he led strategic planning and commercial implementation of business development initiatives, managed all aspects of investor relations and public affairs and oversaw IT for the group. He has operational management experience in the resource and energy industries both in Australia and overseas. He is a former director of Bounty Oil and Gas NL until 2002 and is currently a non-executive director of Regis Resources NL. Mr Lamont is a non-executive director and was appointed a director on 24 May Clayton J Dodd Mr Clayton Dodd was Managing Director from the beginning of the financial year until his resignation on 20 June Craig Readhead Mr Craig Readhead was alternate director for Clayton Dodd until his resignation on 20 June COMPANY SECRETARY Kevin R Hart B.Com, ACA Mr Hart is a Chartered Accountant and was appointed to the position of Company Secretary on 31 July 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. Particulars of directors interests in the shares and options of North Australian Diamonds Limited as at the date of this report are as follows: Shares held in North Australian Diamonds Limited Options held in North Australian Diamonds Limited E.W.J. Tyler 210,527 2,070,176 T. H. Reddicliffe 210,264 5,070,089 C.W. Duchatel 195,000 2,000,000 G. Lamont

22 DIRECTORS' REPORT (continued) DIRECTORS MEETINGS The number of directors meetings and number of meetings attended by each of the directors of the Company during the year ended 30 June 2005 are: Number of Meetings Held Eligible to attend Number of Meetings Attended E.W.J. Tyler 8 8 T.H. Reddicliffe 8 8 C.W. Duchatel 8 8 C. Readhead (alternate to C.J. Dodd - resigned 20/6/05) - - G. Lamont (appointed 24/5/05) 1 1 C.J. Dodd (resigned 20/6/05) 7 7 During the year six meetings, in addition to the above, were convened by signing circulatory resolutions. As at the date of this report the Company does not have a separately constituted audit committee. The Company is not of a size nor are the affairs of a complexity sufficient to warrant the existence of a separate audit committee. All matters, which could be delegated to such a committee, are dealt with by the full board. A remuneration committee has been established consisting of the two non-executive directors Messrs Tyler and Duchatel. There were no formal meetings of the remuneration committee held during the year. PRINCIPAL ACTIVITIES The principal activity of the economic entity during the financial year was diamond exploration in the North Kimberley project areas and the Northern Territory. DIVIDENDS No amounts have been paid or declared by way of dividend by the Company. The directors do not recommend the payment of a dividend. REVIEW AND RESULTS OF OPERATIONS Operating Loss The net amount of the consolidated loss for the year to 30 June 2005 was 15,715,050 (2004: 5,312,321). Included in the consolidated loss for the current year is a write-off of deferred exploration expenditure totalling 14,320,667. (2004: 4,178,137). The exploration write-off is in respect of the consolidated entities North Kimberley Projects including Seppelt and the Oombulgurri gold project. Given the consolidated entities focus on the Merlin Mining Lease and surrounding tenements it was considered prudent at this time to review the carrying value of North Kimberley tenements. This review has resulted in the write-off of deferred exploration expenditure amounting to 14,320,667. Exploration A detailed review of the consolidated entities activities during the financial year is set out in the Review of Activities accompanying these financial statements. FINANCIAL POSITION At the end of the financial year the consolidated entity had 338,591 (2004: 2,111,728) in cash assets. Subsequent to the end of the financial year, the Company has announced capital raisings of 4,338,000 and advance sale of rough diamonds from the Merlin diamond operations of 500,000 before costs. At the end of the financial year capitalised exploration and evaluation expenditure amounted to 4,855,282 (2004: 14,851,924). 22

23 DIRECTORS' REPORT (continued) FINANCIAL POSITION (continued) Exploration and evaluation expenditure during the year for the consolidated entity was 4,324,025 (2004: 3,988,093) and was focused on the Merlin Project area. Impact of Legislation and other External Requirements From 1 July 2005 the consolidated entity is required to comply with Australian equivalents to International Financial Reporting Standards (AIFRS) issued by the Australian Accounting Standards Board. The expected impact of the resulting changes in accounting policies are disclosed in Note 30 of the Financial Report. ENVIRONMENTAL REGULATION The consolidated entity is subject to environmental regulation, under both Commonwealth and State legislation regulations in respect to its exploration and bulk sampling activities which are conducted in Western Australia and the Northern Territory. The Company is committed to the protection of the environment and to compliance with all applicable environmental laws, rules and regulations under the relevant Mining Acts. Licence requirements relating to waste disposal, water and air pollution exist in relation to the Company s activities. So far as the Directors are aware there have been no instances of non-compliance with legislative requirements during the financial year. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS Significant changes in the state of affairs of the consolidated entity during the financial year were as follows: In November 2004 the Company announced the placement of 61,061,109 ordinary fully paid shares at price of 4.5 cents each raising 2,747,750. On 12 May 2005 the Company announced the placement of 25,411,730 shares at 3 cents each to raise 762,352. Shareholders at a meeting held on 27 June 2005 resolved to convert the company from a No Liability Company to a Limited Company and change the name to North Australian Diamonds Limited and adopt a new constitution. MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR On 19 August 2005, the Company announced the placement of 20,598,000 ordinary fully paid shares at 3.0 cents per share to raise 617,940 together with the agreement for an advanced sale of 500,000 of rough diamonds from the Merlin operation. On 20 September 2005 the Company announced the placement of million ordinary fully paid shares at 2.8 cents per share raising 3.72 million. Other than the above, 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 significantly the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity, in future financial years. LIKELY DEVELOPMENTS Further information (other than that included elsewhere in this report) as to likely developments of the consolidated entity and the expected results of those operations in subsequent financial years, has not been included in this report as it is dependent upon the results of future exploration and evaluation. REMUNERATION REPORT The Company s remuneration policy is to ensure that the remuneration package properly reflects the person s duties and responsibilities and that remuneration is competitive in attracting, retaining and motivating people of the highest quality. The remuneration of executives and other terms of employment are reviewed by a remuneration committee comprising of two non-executive directors. Remuneration and other terms of employment for the Chief Executive Officer and senior executives are formalised in service agreements. 23

24 DIRECTORS' REPORT (continued) REMUNERATION REPORT (continued) Directors Fees Non-executive The current base remuneration was last reviewed with effect from April Remuneration of non-executive directors including the Chairman is determined by the Board within the maximum amount approved by the shareholders from time to time. The maximum amount of non-executive directors fees currently stands at 125,000. Executive Pay Executive pay has three components; base pay and other benefits such as car allowances; long term incentives through participation in the North Australian Diamonds Limited Directors, Officers and other Permitted Persons Option Plan; and superannuation. The combination of these comprises the executive s total remuneration. There are currently no short term performance incentives. Details of the remuneration of each director and executive of the parent and consolidated entity including their personally related entities are as follows: 2005 PRIMARY POST EMPLOYMENT Directors Cash salary & Fees Other Superannuation Value of Options % (1) Termination Benefit C.J. Dodd (resigned 215,000 12,389 15, , ,911 20/06/05) T.H. Reddicliffe 164,320 17,851 24, ,500 38% - 333,671 E.W.J. Tyler 45,000 12,000-51,000 47% - 108,000 C.W. Duchatel 32,110 1,470 2,890 51,000 58% - 87,470 G.Lamont (appointed 3, ,270 24/05/05) Total 459,430 43,710 42, , ,000 1,125,322 Specified Executive * K.R. Hart 105, ,500 42% - 181,500 (i) The percentage of the value of remuneration consisting of options based on the value at grant date. Total remuneration of directors and specified executives of North Australian Diamonds Limited for the year ended 30 June 2004 is set out below PRIMARY POST EMPLOYMENT Directors Cash salary & Fees Other Superannuation Total C.J. Dodd 215,000 10,988 14, ,950 T.H. Reddicliffe 164,320 14,207 22, ,019 E.W.J. Tyler 45,000 12,000-57,000 C.W. Duchatel 32,110 3,503 2,820 38,433 Total 456,430 40,698 40, ,402 Specified Executive * K.R. Hart 148,000 6,518 10, ,025 Total * The consolidated entity has only one specified executive. 24

25 DIRECTORS' REPORT (continued) REMUNERATION REPORT (continued) Service Agreements Remuneration and other terms of employment for the chief executive officer/technical director is formalised in a service agreement. Major provisions of the agreement relating to remuneration are set out below. T.H. Reddicliffe Chief Executive Officer / Technical Director Term of Agreement 2 years commencing 1 May 2004 and any extension thereof. Base salary for the year ended 30 June 2004 of 180,000 together with statutory superannuation and motor vehicle operating costs to be reviewed annually by the remuneration committee. The Company will also reimburse all reasonable out of pocket expenses incurred by Mr Reddicliffe. There are no performance based components. Payment of termination benefit on early termination by the employer, other than amongst other things, for gross misconduct equal to the lesser of two times annual salary or the payment limit set by subsection 200G of the Corporations Act Non-Executive Directors The non-executive directors do not have service agreements and do not receive any benefits on retirement. Other Transactions with Directors A former alternate director of North Australian Diamonds Limited, Mr C. Readhead, has an interest as partner in the legal firm, Pullinger Readhead Lucas. This firm provided legal advice to the group in the ordinary course of business. The value of transactions during the year amounted to 45,515 (2004: 47,873). The Company during the prior year engaged the services of Keith C. Dodd, Consulting Engineers. The value of transactions for engineering services during 2004 was 4,224. Equity Instrument Disclosures Relating to Directors and Executives Options The number of options over ordinary shares in the Company held during the financial year by each director of North Australian Diamonds Limited and the specified executive of the consolidated entity, including their personally related entities are set out below. Directors Employee Options Expiring 31 July 2008 Options Expiring 30 November 2005 Vested and exercisable at year end T.H. Reddicliffe 5,000,000 70,089 5,070,089 E.W.J. Tyler 2,000,000 70,176 2,070,176 C.W. Duchatel 2,000,000-2,000,000 G. Lamont (appointed 24/5/05) Specified Executive K.R. Hart 3,000,000-3,000,000 During the financial year 15,000,000 options expiring 2 August 2004 issued to Directors and the Specified Executive in 2001 expired unexercised. On 19 August 2004, pursuant to the terms of the North Australian Diamonds Limited Directors, Officers, Employees and other Permitted Persons Option Plan approved by shareholders at a meeting held on 23 July 2004, a total of 17,000,000 options exercisable by payment of 7.5 cents each on or before 31 July 2008 were issued to directors and the specified executive. The options were independently valued at the date of issue using the Black and Scholes option valuation methodology to be 2.55 cents each. A total of 5,000,000 options expiring 31 July 2008, previously issued to Mr Dodd, were cancelled on termination of his service agreement. Share Holdings Directors Balance at Year End T.H. Reddicliffe 210,264 E.W.J. Tyler 210,517 C.W. Duchatel 195,000 G. Lamont - Specified Executive K.R. Hart - There was no movement in director or specified executive shareholdings in the Company during the financial year. 25

26 DIRECTORS' REPORT (continued) OPTIONS During the financial year, the Company granted 23,500,000 options to subscribe for ordinary shares. Five million options issued to Clayton Dodd were cancelled on termination of his service contract with the Company. No shares were issued pursuant to the exercise of options during the financial year and to the date of this report. On 2 August ,950,000 options exercisable by payment of 13 cents each expired unexercised. At the date of this report, unissued ordinary shares of the Company under option are as follows: Expiry Date Exercise Price Number of Options 30 November cents 139,999, October cents 2,000, July cents 18,500,000 These options do not entitle the holder to participate in any share issue of the Company or any other body corporate. INSURANCE OF OFFICERS During the financial year, the Company has, in accordance with normal practice, paid premiums in respect of a contract insuring directors and executives of the Company against any liability incurred in the conduct of the business of the Company. The directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of the directors and officers liability, and legal expenses insurance contracts, as such disclosure is prohibited under the terms of the contract. NON-AUDIT SERVICES During the year PricewaterhouseCoopers, the Company s auditor, has performed certain other services in addition to their statutory duties. The Board has considered the non-audit services provided during the year by the auditor and is satisfied that the provision of these 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 reason: 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. A copy of the Auditor s Independence Declaration as required under Section 307C of the Corporations Act is sent out on page 27. Dated at Perth this 29 th day of September Signed in accordance with a resolution of the directors. Thomas H Reddicliffe Director 26

27 PricewaterhouseCoopers ABN Auditors Independence Declaration for North Australian Diamonds Limited (formerly Striker Resources NL) QV1 250 St Georges Terrace PERTH WA 6000 GPO Box D198 PERTH WA 6840 DX 77 Perth Australia Telephone Facsimile As lead auditor for the audit of North Australian Diamonds Limited (the Company ) for the year ended 30 June 2005, I declare that to the best of my knowledge and belief, the only contravention of: a) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) any applicable code of professional conduct in relation to the audit; is as set out below. On 8 February, 2005, one partner of my firm reported having purchased during the audit period an immaterial investment in the Company through a family company. The investment was sold by the partner within 3 business days of reporting the purchase to the firm. I report that this matter has been resolved. I do not believe this matter has impacted my objectivity and impartiality for the purpose of this audit. This declaration is in respect of North Australian Diamonds Limited during the year. Nick Henry Perth Partner 30 September 2005 PricewaterhouseCoopers Liability is limited by the Accountant's Scheme under the Professional Standards Act 1994 (NSW)

28 STATEMENTS OF FINANCIAL PERFORMANCE FOR THE YEAR ENDED 30 JUNE 2005 CONSOLIDATED PARENT ENTITY Note Revenue from ordinary activities 2,3 232, , , ,351 Employee benefits expense 3 (834,787) (490,375) (834,787) (490,375) Borrowing costs expense 3 (9,109) (8,020) (9,109) (8,020) Exploration written-off 3 (14,320,667) (4,178,137) (10,539,285) (3,982,128) Depreciation 3 (16,815) (10,382) (16,815) (10,382) Provision for non-recovery of loan to controlled entities (249,565) - Reversal of provision for non-recovery of 3 loan to controlled entities ,920 Provision for diminution in investment in - - (4,088,308) - controlled entities Property costs 3 (104,377) (108,298) (104,377) (108,298) Insurance expense (175,607) (184,406) (175,607) (184,406) Other expenses from ordinary activities (486,347) (461,731) (478,265) (457,986) Loss from ordinary activities before income tax expense 3 (15,715,050) (5,312,321) (16,267,898) (5,102,324) Income tax expense Net loss (15,715,050) (5,312,321) (16,267,898) (5,102,324) Total changes in equity other than those resulting from transactions with owners as owners. 17 (15,715,050) (5,312,321) (16,267,898) (5,102,324) Basic loss per share cents 1.01 cents Diluted loss per share cents 1.01 cents The above statements of financial performance should be read in conjunction with the accompanying notes. 28

29 STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 2005 CURRENT ASSETS Cash assets Receivables Inventory Other Note CONSOLIDATED , ,645 26, , ,111, , , ,107 PARENT ENTITY , ,645 26, , ,109, , , ,107 TOTAL CURRENT ASSETS 628,855 2,563, ,210 2,561,917 NON-CURRENT ASSETS Receivables 6 234, ,052 2,588, ,721 Other financial assets 9(a) 2,500-2,500 4,088,310 Investments accounted for using the equity method 9(b) , ,000 Plant and equipment , , , ,844 Exploration and evaluation expenditure 11 4,855,282 14,851,924 2,445,263 10,851,734 TOTAL NON-CURRENT ASSETS 5,513,589 15,703,820 5,808,450 16,717,609 TOTAL ASSETS 6,142,443 18,267,505 6,435,660 19,279,526 CURRENT LIABILITIES Payables , , , ,291 Provisions ,331 78, ,331 78,460 TOTAL CURRENT LIABILITIES 1,010, ,755 1,011, ,751 NON-CURRENT LIABILITIES Borrowings , ,238 TOTAL NON-CURRENT LIABILITIES , ,238 TOTAL LIABILITIES 1,010, ,755 1,639,874 1,486,989 NET ASSETS 5,131,846 17,575,750 4,795,786 17,792,537 EQUITY Contributed equity 15 71,969,377 68,698,231 71,969,378 68,698,231 Reserves 16 1,301,902 1,301,902 1,301,902 1,301,902 Accumulated losses 17 (68,139,433) (52,424,383) (68,475,494) (52,207,596) TOTAL EQUITY 5,131,846 17,575,750 4,795,786 17,792,537 The above statements of financial position should be read in conjunction with the accompanying notes. 29

30 STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2005 Note CONSOLIDATED PARENT ENTITY CASH FLOWS FROM OPERATING ACTIVITIES Proceeds from sale of diamonds (inclusive of 350, ,458 - GST) Received from laboratory customers (inclusive 177, ,911 - of GST) Payments made in the course of operations (1,229,099) (1,396,673) (1,221,014) (1,371,341) (inclusive of GST) Interest received 54, ,028 50, ,351 Borrowing costs (9,109) (8,020) (9,109) (8,020) Net cash outflow from operating activities 23 (655,091) (1,275,665) (651,445) (1,251,010) CASH FLOWS FROM INVESTING ACTIVITIES Exploration expenditure (4,042,129) (2,948,154) (1,983,308) (2,839,550) Payments for acquisition of plant and equipment (130,427) (223,143) (130,427) (223,143) Payment for purchase of prospects - Merlin (133,000) (250,000) - - Orbit Loan to other entities - (40,000) - (40,000) Loan to related party (105,052) Security deposits (73,000) (70,514) - 34,538 Net cash out flows from investing activities (4,378,556) (3,531,811) (2,113,735) (3,173,207) CASH FLOWS FROM FINANCING ACTIVITIES Issue of equity securities 3,510,102 6,712,515 3,510,102 6,712,515 Equity securities issue transaction costs (238,955) (226,457) (238,955) (226,457) Advances to controlled entities - - (2,268,344) (366,895) Advance to associate entity (10,636) - (10,636) - Net cash inflow from financing activities 3,260,511 6,486, ,167 6,119,163 Net increase/(decrease) in cash held (1,773,136) 1,678,582 (1,773,013) 1,694,946 Cash at the beginning of the financial year 2,111, ,146 2,109, ,014 CASH AT THE END OF THE FINANCIAL 5 YEAR 338,592 2,111, ,947 2,109,960 Non-cash financing and investing activities 24 The above statements of cash flows should be read in conjunction with the accompanying notes. 30

31 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This general purpose financial report has been prepared in accordance with Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Consensus Views and the Corporations Act It is prepared in accordance with the historical cost convention, except for certain assets which, as noted, are at valuation. Unless otherwise stated, the accounting policies adopted are consistent with those of the previous year. The Australian Accounting Standards Board (AASB) has adopted International Financial Reporting Standards (AIFRS) for application to reporting periods beginning on or after 1 January The AASB has issued Australian equivalents to IFRS, and the Urgent Issues Group has issued abstracts corresponding to IASB interpretations originated by the International Financial Reporting Interpretations Committee or the former Standing Interpretations Committee. The adoption of Australian equivalents to IFRS will be first reflected in the consolidated entity s financial statements for the half-year ending 31 December 2005 and the year ending 30 June Information about how the transition to AIFRS is being managed, and the key differences in accounting policies that are expected to arise, is set out in note 30. (a) Principles of consolidation The consolidated financial statements of the economic entity include the assets and liabilities of the Company and the entities it controlled at the end of the financial period and the results of the Company and the entities it controlled during the period. Where entities are not controlled throughout the financial period, the consolidated results include the results of those entities for that part of the period during which control exists. The controlled entities are listed in Note 19 to the financial statements. The effect of all transactions between entities in the economic entity and inter-entity balances are eliminated in full in preparing the consolidated financial statements. In the consolidated financial statements investments in associates are accounted for using equity accounting principles. Investments in associates are carried at the lower of the equity accounted amount and recoverable amount. Under this method the consolidated entity s share of the profits or losses after tax of associates is recognised in the consolidated statement of financial performance and its share of movements in reserves is recognised directly in consolidated reserves. Associates are those entities over which the consolidated entity exercises significant influence but not control. (b) Exploration, evaluation and development expenditure Exploration, evaluation and development expenditure, including costs of acquisition in relation to separate areas of interest for which rights of tenure are current, are brought to account in the year in which they are incurred and are carried at cost. The exploration expenditure will be carried forward as an asset in the Statement of Financial Position where: (i) it is expected that the expenditure will be recovered through the successful development and exploitation of an area of interest or by its sale; or (ii) exploration activities are continuing in an area and activities have not reached a stage which permits a reasonable estimate of the existence or otherwise of economically recoverable reserves. Where a project or an area of interest has been abandoned, the expenditure incurred thereon is written off in the year in which the decision is made. Where there has been a decision to proceed with development, accumulated expenditure is amortised over the life of the associated resource once mining operations commence. Revenue received from sale or disposal of product during the exploration, evaluation or development phases of operations is offset against expenditure in respect of the area of interest or mineral resource concerned. 31

32 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005(Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (c) Joint ventures Where exploration, evaluation and development activities of the economic entity are carried on through joint ventures with other parties, the economic entity's interest in the assets and liabilities in the joint venture are included under the relevant headings in the Statement of Financial Position. (d) Income tax Income tax has been brought to account using the liability method of tax effect accounting. The future tax benefit relating to tax losses is not carried forward as an asset unless the benefit is virtually certain of realisation. (e) Investments Investments (other than investments in controlled or associated entities) are stated at lower of cost or net realisable value except where the directors are of the opinion that a diminution in value is not of a permanent nature. (f) Depreciation Depreciation is provided on a straight line basis on all depreciable tangible assets at a rate calculated to allocate their cost based on their estimated useful lives. Profits and losses on disposal of plant and equipment are taken into account in determining the operating result for the year. (g) Foreign currency Foreign currency transactions are translated to Australian currency at the rates of exchange ruling at the dates of the transactions. Amounts receivable and payable in foreign currencies are translated at the rate of exchange ruling at balance date. Realised and unrealised gains or losses are brought to account in determining the operating results for the period. (h) Revenue Revenue includes interest income on short term investments, proceeds from the disposal of plant and equipment and mining tenements and sundry other revenue items. Interest is brought to account as income over the term of each financial instrument on an accrual accounting basis. Other revenue is recognised as it accrues. (i) Receivables All trade debtors are recognised at the amounts receivable as they are due for settlement no more than 30 days from the date of recognition. (j) Inventories Raw materials, diamond stocks and stores are stated at the lower of cost and net realisable value. (k) Trade and other creditors These amounts represent liabilities for goods and services provided to the company prior to the end of the financial year and which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. (l) Cash For the purpose of the statements of cash flows, cash includes cash on hand, deposits held at call with banks and investments in money market instruments. (m) Comparative figures Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. 32

33 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005(Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (n) Earnings per share Basic earnings per share (i) Basic earnings per share is determined by dividing operating loss after income tax attributable to members 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. (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 financial 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. (o) Employee Entitlements (i) Wages and salaries, annual leave Liabilities for wages and salaries and annual leave are recognised and are measured as the amount expected to be paid when the liabilities are settled. (ii) (iii) Long service leave A liability for long service leave is recognised, and is measured as the present value of expected future payment to be made in respect of services provided by employees at the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using interest rates on national government guaranteed securities with terms to maturity that match, as closely as possible, the estimated future cash outflows. Equity-based compensation benefits Equity-based compensation benefits are provided to employees via the North Australian Diamonds Limited Employee Option Plan. No accounting entries are made in relation to the North Australian Diamonds Limited Employee Option Plan until options are exercised, at which time the amounts receivable from employees are recognised in the statement of financial position as share capital. The amounts disclosed for remuneration of directors and executives in note 25, where applicable, include the assessed fair values of options at the date they were granted. (p) Leases Operating lease payments are charged to the Statement of Financial Performance in the periods in which they are incurred, as this represents the patterns of benefits derived from the leased assets. (q) Acquisition of assets The purchase method of accounting is used for all acquisitions of assets regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus incidental costs directly attributable to the acquisition. Where equity instruments are issued in an acquisition, the value of the instruments is their market price as at the acquisition date, unless the notional price at which they could be placed in the market is a better indicator of fair value. Transaction costs arising on the issue of equity instruments are recognised directly in equity. 33

34 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005 (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (r) Borrowing costs Borrowing costs are recognised as expenses in the period in which they are incurred and includes interest and charges incurred in connection with the borrowings. 34

35 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005(Continued) CONSOLIDATED PARENT ENTITY 2. REVENUE FROM ORDINARY OPERATING ACTIVITIES Interest received 54, ,028 50, ,351 Provision of laboratory services 177, , , , , , (a) OPERATING LOSS Operating loss before income tax has been determined after: CREDITING: Interest attributable to: - other parties 54, ,028 50, ,351 CHARGING AS EXPENSE: Provision for employee entitlements 2,226 36,097 2,226 36,097 Lease rental expense operating leases 104, , , ,298 Provision for diminution of investment in controlled entities - - 4,088,308 - Provision for non-recovery of loan to controlled entities ,565 - Reversal of the provision for non-recovery of loan to controlled entities (10,920) Borrowing costs: Interest and finance charges 9,109 8,020 9,109 8,020 Depreciation of plant and equipment 303, , , ,462 Less: Capitalised depreciation expense (286,272) (561,080) (286,272) (561,080) 16,815 10,382 16,815 10,382 Employee benefits expense - gross expense (1) 955, , , ,969 Less: Allocated to exploration (121,187) (122,594) (121,187) (122,594) 834, , , ,375 Exploration expenditure written off (14,320,667) (4,178,137) (10,539,285) (3,982,128) (1) Includes an amount of 350,000 payable on termination of managing director s service agreement. (b) Remuneration of Auditors During the year the auditor of the parent entity and its related practices earned the following remuneration: PricewaterhouseCoopers Australian firm Audit or review of financial reports of the entity or any entity in the consolidated entity CONSOLIDATED PARENT ENTITY ,970 25,000 25,970 25,000 Taxation 16,655 15,615 16,655 15,615 42,625 40,615 42,625 40,615 35

36 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005(Continued) CONSOLIDATED PARENT ENTITY INCOME TAX The amount of income tax attributable to the financial year differs from the prima facie benefit on the operating loss. The difference is reconciled as follows: Prima facie income tax benefit on operating loss at 30%: (2004: 30%) (4,714,515) (1,593,696) (4,880,369) (1,530,697) Tax effect of permanent differences: - non deductible expenditure 9,494 19,540 9,494 19,540 - provision for diminution in investment - - 1,226, provision non-recovery loan to controlled entity ,869 (3,275) Prima facie tax benefit adjusted for permanent differences (4,705,021) (1,574,156) (3,569,513) (1,514,432) Future income tax benefit due to timing differences and tax losses not brought to account 4,705,021 1,574,156 3,569,513 1,514,432 Income tax attributable to operating loss Tax losses The directors estimate that the potential future income tax benefit at 30 June 2005 in respect of tax losses not brought to account is * 14,769,691 13,102,251 10,518,531 9,851,963 * The quantum of these losses has not yet been confirmed by the taxation authorities. The future income tax benefit arising from these balances has not been recognised as an asset because recovery is not virtually certain. The benefit of these tax losses will only be obtained if: a) the economic entity derives future assessable income of the nature and of an amount sufficient to enable the benefit to be realised; b) the economic entity continues to comply with the conditions for the deductibility imposed by tax legislation; and c) no changes in the income tax legislation adversely affect the economic entity in realising the benefit from the deduction of the loss. Tax consolidation legislation North Australian Diamonds Limited and its wholly-owned Australian controlled entities have decided not to implement the tax consolidation legislation as of 1 July The Australian Taxation Office has not yet been notified of this decision. 36

37 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005(Continued) CONSOLIDATED PARENT ENTITY 5. CASH ASSETS Cash at bank and on hand 338, , , ,960 Deposits at call - 1,900,000-1,900, ,592 2,111, ,947 2,109, RECEIVABLES CURRENT Loan to other entity - secured 40,000 40,000 40,000 40,000 Loan to other entity unsecured 10,636-10,636 - Other debtors 80,009 83,375 80,009 83, , , , ,375 NON-CURRENT Security deposits 234, ,052 56,000 56,000 Loan to controlled entities unsecured ,576,944 11,475,169 Less: Provision for non-recovery - - (11,044,012) (10,794,448) 234, ,052 2,588, ,721 Loans to controlled entities is in respect of exploration and evaluation expenditure incurred by the holding company on the controlled entities mining tenements. 7. INVENTORY Rough Diamonds at net realisable value - 168, ,199 Fuel stores at cost 26,305 13,276 26,305 13,276 26, ,475 26, , OTHER CURRENT ASSETS Prepayments 133, , , , OTHER FINANCIAL ASSETS 9 (a) (i) Controlled entities Not quoted on a prescribed stock exchange: Shares in controlled entities - at cost - - 4,695,180 4,695,180 Less: Provision for diminution (Refer note 19) - - (4,695,180) (606,870) ,088,310 (a)(ii) Quoted on prescribed stock exchange Market value 6,250 2,500-2,500-9 (b) Investments accounted for using the Equity Method Quoted on a prescribed stock exchange: Shares in associated entity - at cost 1,118,787 1,118,787 1,118,787 1,118,787 Share of retained losses brought forward (940,169) (940,169) - - Less: Provision for diminution (178,618) (178,618) (768,787) (768,787) Market value: 412,755 (2004: 392,874) (Refer also note 20) , ,000 37

38 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005(Continued) CONSOLIDATED PARENT ENTITY 10. PLANT AND EQUIPMENT Plant and equipment - at cost 4,235,198 4,201,200 4,206,014 4,172,016 Less: Accumulated depreciation (3,813,443) (3,510,356) (3,784,259) (3,481,172) 421, , , ,844 Reconciliations of the carrying amounts of each class of plant and equipment at the beginning and end of the current financial year are set out below: Plant and Equipment Carrying amount at start of year 690, , , ,310 Additions 33, ,996 33, ,996 Depreciation (303,087) (571,462) (303,087) (571,462) Carrying amount at end of year 421, , , , EXPLORATION & EVALUATION EXPENDITURE Carrying amount at start of year 14,851,924 15,284,365 10,851,734 11,693,027 Expenditure incurred during the year 4, ,988,093 2,482,862 3,140,835 Proceeds from sale of diamonds (350,048) - (350,048) - Refund on tenement applications - (242,397) - - Expenditure written off during the year (14,320,667) (4,178,137) (10,539,285) (3,982,128) Carrying amount at end of year 4,855,282 14,851,924 2,445,263 10,851,734 Ultimate recoupment of exploration and evaluation expenditure carried forward is dependent on successful development and commercial exploitation, or alternatively, sale of the respective areas. CONSOLIDATED PARENT ENTITY 12. PAYABLES Trade creditors 588, , , , (a) PROVISIONS Provision for employee entitlements 422,331 78, ,331 78,460 Employee numbers Number of employees at the end of the financial year (b) North Australian Diamonds Limited Employee Option Plan At a meeting held on 27 July 2001, shareholders approved the issue of options to employees at an exercise price of 13 cents each and exercisable on or before 2 August The options were granted for no consideration and vested on grant. These options expired unexercised during the financial year. On 23 July 2004, shareholders approved the establishment of the North Australian Diamonds Directors, Officers, Employees and other Permitted Persons Option Plan. All eligible directors, officers and employees, and consultants of the Company who have been continuously employed by the Company are eligible to participate in the Plan. Refer note 15(c) for details of options granted during the year and outstanding at the end of the financial year. 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 calculated in accordance with the Plan. Options granted under the Plan carry no voting rights

39 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005(Continued) CONSOLIDATED 14. BORROWINGS NON CURRENT Loan controlled entities (refer Note 26) , PARENT ENTITY PARENT ENTITY , No. of Shares 15. CONTRIBUTED EQUITY (a) Issued paid up capital Ordinary fully paid shares 662,961, ,488,525 71,969,378 68,698,231 (b) Movements in ordinary share capital Opening balance 576,488, ,286,044 68,698,231 61,962,173 Share placement on 29 July 3.5 cents per share - 19,285, ,000 Share placement on 23 October 5 cents per share - 50,750,000-2,537,500 Options conversion Share Purchase Plan on 17 November 5 cents per share - 70,000,000-3,500,000 Share placement on 7 May 6 cents per share acquisition of Merlin Orbit tenements - 4,166, ,000 Share placement in November 4.5 cents per share 61,061,109-2,747,750 - Share placement in May 3.0 cents per share 25,411, ,352 - Transaction costs arising on share issues - - (238,955) (226,457) Balance as at the end of the year 662,961, ,488,525 71,969,378 68,698,231 Holders of ordinary shares are entitled to one vote per share at shareholder meetings. In the event of winding up of the company, ordinary shareholders are fully entitled to any proceeds of liquidation subject to prior entitlement. (c) Options Over Unissued Shares The number of options outstanding over unissued ordinary shares at 30 June 2005 is 160,499,771 (2004: 160,949,771). The terms of these options are as follows: PARENT ENTITY Listed options exercisable by payment of 15 cents each on or before 30 November ,999, ,999,771 Unlisted employee and director options exercisable by payment of 13 cents each on or before 2 August 2004 (refer also note 13(b)) - 18,950,0000 Unlisted options exercisable by payment of 8 cents in Year 1 or 12 cents in year 2 expiring on or before 31 October ,000,000 2,000,000 Unlisted options exercisable by payment of 7.5 cents each on or before 31 July 2008 (refer also note 13(b)) 18,500,000 - Total options outstanding at the end of the year 160,499, ,949,771 Option holders are not entitled to participate in any share issue of the company or any other body corporate and have no voting rights at shareholder meetings. 39

40 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005(Continued) CONSOLIDATED PARENT ENTITY 16. RESERVES Share option reserve 1,301,902 1,301,902 1,301,902 1,301,902 On 11 November 2002, the Company invited shareholders to subscribe to an option entitlement issue of 134,333,205 options at an issue price of 1 cent per option on the basis of 1 option for every three (3) fully paid shares. Such options to be exercisable on or before 3 November 2005 by payment of 15 cents each. CONSOLIDATED PARENT ENTITY 17. ACCUMULATED LOSSES Accumulated losses at the beginning of the financial year (52,424,383) (47,112,062) (52,207,596) (47,105,272) Loss attributable to members of the parent entity (15,715,050) (5,312,321) (16,267,898) (5,102,324) Accumulated losses at the end of the financial year (68,139,433) (52,424,383) (68,475,494) (52,207,596) 18. COMMITMENTS (a) Operating Lease Commitments Future non-cancellable operating lease rentals for premises not provided for in the financial statements and payable: Not later than 1 year 67, ,364 67, ,364 Later than one year but not later than 2 years 2,870 36,023 2,870 36,023 70, ,387 70, ,387 (b) Remuneration commitments Commitments for the payment of salaries and other remuneration under long-term employment contracts in existence at the reporting date but not recognised as liabilities, payable: Within one year 165, , , ,282 Later than 1 year but not later than 2 years - 504, , ,267 1,109, ,267 1,109,683 (c) Exploration Expenditure In order to maintain mining tenements, the economic entity is committed to meet the prescribed conditions under which the tenements were granted. Minimum Department of Industry and Resources annual expenditure commitments on tenements held at 30 June 2005 amount to 1,761,038 (2004: 1,744,534). These commitments may be met in the normal course of operations by future capital raisings and/or farmout and under certain circumstances are subject to the possibility of adjustment to the amount and timing of such obligations or by tenement relinquishment. (d) Balanggarra Native Title Accord In August 1997, a native title accord was signed between the Company and the traditional owners of the Balanggarra native title claims. The agreement covers both mining and exploration activities within the Balanggarra claim area which covers 27,000 sq km of the north Kimberley. The Balanggarra claimant group will receive a fee based on a percentage of on-ground costs as compensation for disruption and impact on the land. If a mining operation is established a payment equal to 1.5% of the capital cost on building the plant will be payable. In addition, the agreement has a financial component whereby the group will receive a percentage of sales proceeds generated from the mining operation. 40

41 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005(Continued) 18. COMMITMENTS (continued) (e) Rio Tinto Kimberly Base Data Licensing Agreement Under the terms of the agreement dated 19 April 2004 the company has undertaken to spend 250,000 per annum in the first two years and 500,000 in the third year of the license. INTEREST OF IMMEDIATE PARENT ENTITY BOOK VALUE OF IMMEDIATE PARENT ENTITY INVESTMENT 2005 % 2004 % INVESTMENTS IN CONTROLLED ENTITIES Striker Diamonds Pty Ltd , ,870 Bulgurri Diamonds Pty Ltd Arnhem Land Pty Ltd Napier Minerals Ltd Jade Creek Resources Pty Ltd Less : Provision for diminution , ,864 3,099,443 3,099,443 (4,695,180) (606,870) - 4,088,310 All shares owned in controlled entities are ordinary shares. All companies are incorporated in Western Australia. 20. INVESTMENT IN ASSOCIATE PRINCIPAL ACTIVITY BALANCE DATE OWNERSHIP INTEREST CONSOLIDATED CARRYING AMOUNT Mineral 2005 % 2004 % Consolidated New Sage Resources Ltd Exploration 31 March At 30 June 1999 the consolidated entity s share of losses of the associate reduced the carrying value of the investment to nil on consolidation. During the year Consolidated New Sage Resources Ltd undertook a private placement consisting of 500,000 units at CND0.10 per unit to raise CND50,000. Consolidated New Sage s principal asset is a 10% free carried interest to decision to mine in the Beta Creek Diamond and Seppelt 2 project areas. At balance date, there were no material commitments or contingent liabilities of Consolidated New Sage Resources Ltd. 21. SEGMENT INFORMATION The economic entity operates predominantly in mineral exploration and investment in Australia. Revenue was predominantly earned from investment activities in Australia. 22. CONTINGENT LIABILITIES (a) Bank Guarantees The Company has contractual obligations in respect of leased premises and mining/exploration tenements. These obligations are secured by bank guarantees amounting to 234,000 (2004: 161,000) 41

42 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005(Continued) 22. CONTINGENT LIABILITIES (continued) (b) Financial Support - Controlled Entities The parent entity has given unsecured undertakings to its controlled entities that it intends to provide the necessary financial support to enable them to meet their obligations as and when they fall due. No material losses are anticipated in respect of the above contingent liabilities. (c) Merlin Diamond Mine Acquisition Pursuant to the Sale and Purchase Agreement entered into with Ashton Mining Limited for the Merlin Diamond Mine Lease, the following contingent milestone payments exist: 1) 2,000,000 on the commissioning of a mine; 2) 200,000 on completing the first bulk sample of kimberlite from a new kimberlite pipe of at least 200 tonnes. 3) 100,000 for each subsequent and discrete bulk sample of kimberlite of at least 200 tonnes from additional kimberlite pipes, where the diamond grade of the kimberlite bulk sample is in excess of 10 carats per 100 tonnes. The milestone payments are secured by a mortgage over the Merlin Diamond Mine tenement. (d) Litigation Australian Gold Fields NL (in liquidation) ( AFN ) AFN had an obligation to underwrite a pro-rata offer by the Company to raise a minimum amount of 7.5 million by prospectus with the shares to be offered at a price at least equal to 12.5 cents ( AFN s Underwriting Obligation ). Due to delays requested by AFN in proceeding with the rights issue, AFN provided interim funding of 2.2 million to the Company pending completion of the rights issue. AFN had a funding obligation in the order of 3.0 million. Repayment of the advance was not to the detriment of the Company or any of its controlled entities until at the earliest after 12 December 1998 and only out of the proceeds of a rights issue ( AFN s Funding Obligation ). The Company obtained the opinion of Senior Counsel that both AFN s Underwriting and Funding obligations are valid and enforceable. The Liquidators of AFN denied liability in respect of both such obligations. On 25 August 1998, the Company advised the then Administrators of AFN that AFN s continuing failure to comply with its Underwriting Obligation was a repudiatory breach which the company accepted, and reserved all of its rights against AFN including a claim for all the loss and damages suffered by the Company as a result of the breach which the company accepted. AFN was placed into liquidation on 11 December The Company has lodged with the liquidator of AFN a formal proof of debt claiming the amount of 11,567,000 being the loss and damage suffered by the Company as a consequence of the failure of AFN to comply with its Underwriting Obligation. To the Company s knowledge, the claim has not yet been adjudicated by the liquidator. On 11 October 2000, the Company (having obtained leave from the court) filed proceedings against AFN (in liquidation) for: (a) A Declaration that the Company has suffered loss and damage as claimed: (b) (c) A Declaration that in respect of any indebtedness on the Company s part by reason of the receipt of funds from AFN, that any obligation to repay those amounts have been set-off and fully extinguished at law or in equity; and A Declaration that the liquidators of AFN are bound to accept the proof of debt of the applicant having made due allowance for amounts set off therein. It is Senior Counsel s opinion that the repudiatory breach by AFN will give rise to substantial issues of set-off and counter claim which will bear on any obligation by the Company to repay the amounts advanced. The right of set-off for the counter claim by AFN makes the future sacrifice of economic benefits unlikely, however this is contingent on the outcome of future court proceedings. The parties are currently attending to pre-trial directions and the matter will be proceeding to trial. No material gains or losses are anticipated in respect to the above contingent liabilities. 42

43 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005(Continued) 43 CONSOLIDATED PARENT ENTITY RECONCILIATION OF OPERATING LOSS AFTER TAX TO NET CASH FLOWS FROM OPERATING ACTIVITIES Operating loss after income tax (15,715,050) (5,312,321) (16,267,896) (5,102,324) Exploration expense written off 14,320,667 4,178,137 10,539,285 3,982,128 Provision for (reversal of) non-recovery of loan to controlled - 249,565 (10,920) entity Provision for diminution of investments in controlled - - 4,088,308 - entities Depreciation 16,813 10,382 16,813 10,382 (Increase)/decrease in sundry debtors/prepayments 355,407 7, ,407 4,493 Increase/(decrease) in employee provisions (31,090) (74,876) (31,090) (74,876) Increase/(decrease) in creditors 398,162 (84,640) 398,162 (59,893) Net cash flows used in operating activities (655,091) (1,275,665) (651,445) (1,251,010) 24. NON-CASH FINANCING AND INVESTING ACTIVITIES CONSOLIDATED PARENT ENTITY Acquisition of Merlin Orbit tenements by issuing shares - 250, , DIRECTORS AND EXECUTIVE DISCLOSURES Remuneration of Directors and Executives The Company s remuneration policy is to ensure that the remuneration package properly reflects the person s duties and responsibilities and that remuneration is competitive in attracting, retaining and motivating people of the highest quality. The remuneration of executives and other terms of employment are reviewed by a remuneration committee comprising of two nonexecutive directors. Remuneration and other terms of employment for the managing director and senior executives are formalised in service agreements. Remuneration of non-executive directors is determined by the Board within the maximum amount approved by the shareholders from time to time. Directors Fees Non-executive The current base remuneration was last reviewed with effect from April Remuneration of non-executive directors including the Chairman is determined by the Board within the maximum amount approved by the shareholders from time to time. The maximum amount of non-executive directors fees currently stands at 125,000. Executive Pay Executive pay has three components; base pay and other benefits such as car allowances; long term incentives through participation in the North Australian Diamonds Limited Directors, Officers and other Permitted Persons Option Plan; and superannuation. The combination of these comprises the executive s total remuneration.

44 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005(Continued) 25. DIRECTOR AND EXECUTIVE DISCLOSURES (Continued) Details of the remuneration of each director and executive of the consolidated entity including their personally related entities are as follows: 2005 PRIMARY POST EMPLOYMENT Directors Cash salary & Fees Other Superannuation Value of Options Termination Benefit C.J. Dodd (resigned 20/6/05) 215,000 12,389 15, , ,911 T.H. Reddicliffe 164,320 17,851 24, , ,671 E.W.J. Tyler 45,000 12,000-51, ,000 C.W. Duchatel 32,110 1,470 2,890 51,000-87,470 G.Lamont (appointed 24/5/05) 3, ,270 Total 459,430 43,710 42, , ,000 1,125,322 Specified Executive * K.R. Hart 105, ,500 Total - 181,500 Total remuneration of directors and specified executives of North Australian Diamonds Limited for the year ended 30 June 2004 is set out below PRIMARY POST EMPLOYMENT Directors Cash salary & Fees Other Superannuation Total C.J. Dodd 215,000 10,988 14, ,950 T.H. Reddicliffe 164,320 14,207 22, ,019 E.W.J. Tyler 45,000 12,000-57,000 C.W. Duchatel 32,110 3,503 2,820 38,433 Total 456,430 40,698 40, ,402 Specified Executive * K.R. Hart 148,000 6,518 10, ,025 * The consolidated entity has only one specified executive. Service Agreements Remuneration and other terms of employment for the chief executive officer/technical director is formalised in a service agreement. Major provisions of the agreement relating to remuneration are set out below. T.H. Reddicliffe Chief Executive Officer / Technical Director Term of Agreement 2 years commencing 1 May 2004 and any extension thereof. Base salary for the year ended 30 June 2004 of 180,000 together with statutory superannuation and motor vehicle operating costs to be reviewed annually by the remuneration committee. The Company will also reimburse all reasonable out of pocket expenses incurred by Mr Reddicliffe. There are no performance based components. Payment of termination benefit on early termination by the employer, other than amongst other things, for gross misconduct equal to the lesser of two times annual salary or the payment limit set by subsection 200G of the Corporations Act

45 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2004(Continued) 25. DIRECTOR AND EXECUTIVE DISCLOSURES (Continued) Non-Executive Directors The non-executive directors do not have service agreements and do not receive any benefits on retirement. Other Transactions with Directors A former alternate director of North Australian Diamonds Limited, Mr C. Readhead, has an interest as partner in the legal firm, Pullinger Readhead Lucas. This firm provided legal advice to the group in the ordinary course of business. The value of transactions during the year amounted to 45,515 (2004: 47,873). The Company during the prior year engaged the services of Keith C. Dodd, Consulting Engineers. The value of transactions for engineering services during 2004 was 4,224. Equity Instrument Disclosures Relating to Directors and Executives Options The number of options over ordinary shares in the Company held during the financial year by each director of North Australian Diamonds Limited and the specified executive of the consolidated entity, including their personally related entities are set out below. Directors Employee Options Expiring 31 July 2008 Options Expiring 30 November 2005 Vested and exercisable at year end T.H. Reddicliffe 5,000,000 70,089 5,070,089 E.W.J. Tyler 2,000,000 70,176 2,070,176 C.W. Duchatel 2,000,000-2,000,000 G. Lamont (appointed 24/5/05) Specified Executive K.R. Hart 3,000,000-3,000,000 During the financial year 15,000,000 options expiring 2 August 2004 issued to directors and the specified executive in 2001 expired unexercised. On 19 August 2004, pursuant to the terms of the North Australian Diamonds Limited Directors, Officers, Employees and other Permitted Persons Option Plan approved by shareholders at a meeting held on 23 July 2004, a total of 17,000,000 options exercisable by payment of 7.5 cents each on or before 31 July 2008 were issued to directors and the specified executive. The options were independently valued at the date of issue using the Black and Scholes option valuation methodology to be 2.55 cents each. A total of 5,000,000 options expiring 31 July 2008, previously issued to Mr Dodd, were cancelled on termination of his service agreement. Share Holdings Directors Balance at Year End T.H. Reddicliffe 210,264 E.W.J. Tyler 210,527 C.W. Duchatel 195,000 G. Lamont - Specified Executive K.R. Hart - There was no movement in director or specified executive shareholdings in the Company during the financial year. 45

46 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005(Continued) 26. RELATED PARTY INFORMATION Directors Disclosures relating to directors and specified executives are set out in note 25. Wholly-owned Group The wholly-owned group consists of North Australian Diamonds Limited and its wholly-owned controlled entities, Striker Diamonds Pty Ltd, Bulgurri Diamonds Pty Ltd, Arnhem Land Pty Ltd, Napier Minerals Ltd and Jade Creek Resources Pty Ltd. Ownership interest in these controlled entities are set out in note 19. Transactions between North Australian Diamonds Limited and other entities in the wholly-owned group during the years ended 30 June 2005 and 2004 consisted of: a) loans advanced by North Australian Diamonds Limited b) loans repaid to North Australian Diamonds Limited Aggregate amounts included in the determination of loss from ordinary activities before income tax that resulted from transactions with entities in the wholly-owned group: PARENT ENTITY Provision for diminution in investment (4,088,308) - Provision for non-recovery of loan (249,565) 10,920 Aggregate amounts receivable from and payable to entities in the wholly-owned group at balance date: Non-current receivables (loans) 13,576,944 10,899,500 Provision for non-recovery (11,044,012) (10,794,448) Non-current payables (loans) 628, ,238 a) controlled entities - note 19 b) associates - note EARNINGS PER SHARE Loss used in calculation of loss per share 15,715,050 5,312,321 Basic loss per share 2.51 cents 1.01 cents Diluted loss per share is the same as basic loss per share. Number of Shares Weighted average number of ordinary shares on issue used in the calculation of basic and diluted earnings per share 626,519, ,978,571 Options on issue are non dilutive 28. SUBSEQUENT EVENTS On 19 August 2005, the Company announced the placement of 20,598,000 ordinary fully paid shares at 3.0 cents per share to raise 617,940 together with the agreement for an advanced sale of 500,000 of rough diamonds from the Merlin operation. On 20 September 2005 the Company announced the placement of million ordinary fully paid shares at 2.8 cents per share raising 3.72 million. 46

47 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005(Continued) 29. FINANCIAL INSTRUMENTS DISCLOSURE (a) Interest Rate Risk The economic entity s exposure to interest rate risk and the effective weighted average interest rate for each class of financial assets and financial liabilities is set out below. Exposures arise predominantly from assets and liabilities bearing variable interest rates. 30 June 2005 Notes Floating Non interest Total Interest bearing Assets Cash 5 338, ,592 Receivables 6 284,688 80, ,697 Other Financial Assets - 2,500 2,500 Total Financial Assets 623,280 82, ,789 Weighted average effective interest rate 5.19% p.a. Liabilities Trade and other creditors , ,267 Total Financial Liabilities - 588, ,267 Net Financial Assets (Liabilities) 623,280 (505,758) 117, June 2004 Notes Floating Non interest Total Interest bearing Assets - Cash 5 2,111,728-2,111,728 Receivables 6 201,052 83, ,427 Total Financial Assets 2,312,780 83,375 2,396,155 Weighted average effective interest rate 5.27% Liabilities Trade and other creditors , ,295 Total Financial Liabilities - 613, ,295 Net Financial Assets (Liabilities) 2,312,780 (529,920) 1,782,860 (b) Net Fair Value of Financial Assets and Liabilities The net fair value of financial assets and financial liabilities of the economic entity approximates their carrying value. (c) Credit Risk Exposures The credit risk on financial assets of the economic entity which have been recognised on the Statement of Financial Position, other than investments in shares, is generally the carrying amount, net of any provisions for doubtful debts. 47

48 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005(Continued) 30. IMPACTS OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS For reporting periods beginning on or after 1 January 2005, the consolidated entity must comply with IFRS. The AASB has issued AASB equivalents to IFRS. The adoption of the Australian IFRS Equivalents (AIFRS) will be first reflected in the Company s financial statements for the half-year ending 31 December 2005, and the year ending 30 June The financial report has been prepared in accordance with Australian accounting standards and other financial reporting requirements (Australian GAAP). The differences between Australian GAAP and AIFRS identified to date as potentially having a significant effect on the consolidated entity s financial performance and financial position are summarised in this note. The consolidated entity has reviewed the transition to AIFRS. The project is the responsibility of the Company Secretary who reports to the Managing Director and the Board of Directors. The Company Secretary will be managing the transition to AIFRS to achieve compliance with AIFRS reporting for the financial year commencing 1 July The impact of transition to AIFRS, including transitional adjustments disclosed are based on AIFRS standards that management expect to be in place, or where applicable, early adopted, when preparing the first AIFRS financial report (being half-year ending 31 December 2005). Only a complete set of financial statements and notes together with comparative balances can provide a true and fair presentation of the Company s and consolidated entity s financial position, results of operations and cash flows in accordance with AIFRS. This note only provides a summary, therefore, further disclosure and explanations will be required in the first complete AIFRS financial report for a true and fair view to be presented under AIFRS. There is a significant amount of judgement involved in the preparation of the reconciliations from current Australian GAAP to AIFRS, consequently the final reconciliation presented in the first financial report prepared in accordance with AIFRS may vary from the disclosures provided in this Note. Revisions to the selection and application of the AIFRS accounting policies may be required as a result of: Changes in financial reporting requirements that are relevant to the Company s and consolidated entity s first complete AIFRS financial report arising from new or revised accounting standards or interpretations issued by the Australian Accounting Standards Board subsequent to the preparation of the 30 June 2005 financial report. Additional guidance on the application of AIFRS in a particular industry or to a particular transaction. Changes to the Company s and consolidated entity s operations. Where the applicable interpretation of an accounting standard is currently being debated, the accounting policy adopted reflects management s current assessment of the likely outcome to those deliberations. The rules for first adoption of AIFRS are set out in AASB 1 First Time Adoption of Australian Equivalents to International Financial Reporting Standards. In general, AIFRS accounting policies must be applied retrospectively to determine the opening AIFRS balance sheet as at transition date, being 1 July The Standard allows a number of exemptions to this general principle to assist in the transition to reporting under AIFRS. The significant changes in accounting policies expected to be adopted in preparing the AIFRS reconciliations and the elections expected to be made under AASB 1 are set out below. 1. Exploration and Evaluation - AASB6 Exploration and Evaluation of Mineral Resources has now been released which grandfathers accounting treatments which have previously been adopted by AASB1022. No material change is expected from the implementation of this standard. 2. Impairment of Assets The recoverable amount of non-current assets will be assessed as the higher of net selling price and value in use, on a discounted basis. The consolidated entity currently assesses recoverable amounts of non-current assets based on undiscounted future net cash flows. The impact of this is not expected to result in a material change. 48

49 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005(Continued) 30. IMPACTS OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued) 3. Restoration, rehabilitation and environmental expenditure Environmental obligations associated with the retirement or disposal of long lived assets will be recognised when the disturbance occurs and is based on the extent of damage incurred. The provision is measured as the present value of the future expenditure and a corresponding rehabilitation asset is also recognised. On an ongoing basis the rehabilitation liability will be re-measured in line with the changes in the time value of money (recognised as an expense in the statement of financial performance and an increase in the provision) and additional disturbances will be recognised as additions to a corresponding asset and rehabilitation liability. The rehabilitation asset will be accounted for in accordance with the accounting policy applicable to the asset to which it relates (ie Exploration and Evaluation). The consolidated entity would be required to remeasure existing environmental rehabilitation provision to the present value of the future expenditure and recognize a related rehabilitation asset. The consolidated entity currently has no such liabilities, therefore no material impact is expected to the accounts. 4. Income Tax - Under AASB12 Income Taxes, deferred tax balances are determined using the balance sheet method, which calculates temporary differences based on the carrying amounts of an entity s assets and liabilities in the statement of financial position and their associated tax bases. In addition, current and deferred taxes attributable to amounts recognised directly in equity are also recognised directly in equity. This will result in a change to the current accounting policy, under which deferred tax balances are determined using the income statement method, items are only tax-effected if they are included in the determination of pre-tax accounting profit or loss and/or taxable income or loss and current and deferred taxes cannot be recognised directly in equity. Under AIFRS deferred tax assets will be recognised for the carry forward or unused tax losses to the extent the future taxable profit is probable rather than virtually certain. There is expected to be no material impact from this change. 5. Equity-based compensation benefits Under AASB2 Share-based Payment, equity-based compensation will be recognised as an expense in respect of the services received. This will result in a change to the current accounting policy, under which no expense is recognised for equity-based compensation. 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 options, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the riskfree interest rate for the term of the option. No adjustment will be made for options granted before 7 November 2002 which have vested before 1 January There were no options granted after 7 November 2002 remaining unvested at 1 January There is expected to be no material impact from this change. 6. Statement of cashflows No material impacts are expected in relation to the statement of cashflows. 49

50 DIRECTORS' DECLARATION 1. In the opinion of the Directors of North Australian Diamonds Ltd: (a) the financial statements and notes, set out on pages 28 to 49 are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the financial position of the Company and consolidated entity as at 30 June 2004 and of their performance, as represented by the results of their operations and their cash flows, for the year ended on that date; and (ii) complying with Accounting Standards in Australia and the Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. 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 year ended 30 June Dated at Perth this 29 th day of September Signed in accordance with a resolution of the Directors: Thomas H. Reddicliffe Director 50

51 PricewaterhouseCoopers ABN Independent audit report to the members of North Australian Diamonds Limited (Formerly Striker Resources NL) QV1 250 St Georges Terrace PERTH WA 6000 GPO Box D198 PERTH WA 6840 DX 77 Perth Australia Telephone Facsimile Audit opinion In our opinion, the financial report of North Australian Diamonds Limited: gives a true and fair view, as required by the Corporations Act 2001 in Australia, of the financial position of North Australian Diamonds Limited and the North Australian Diamonds Limited Group (defined below) as at 30 June 2005, and of their performance for the year ended on that date, and is presented in accordance with the Corporations Act 2001, Accounting Standards and other mandatory financial reporting requirements in Australia, and the Corporations Regulations This opinion must be read in conjunction with the rest of our audit report. Scope The financial report and directors responsibility The financial report comprises the statement of financial position, statement of financial performance, statement of cash flows, accompanying notes to the financial statements, and the directors declaration for both North Australian Diamonds Limited (the company) and the North Australian Diamonds Limited Group (the consolidated entity), for the year ended 30 June The consolidated entity comprises both the company and the entities it controlled during that year. The directors of the company are responsible for the preparation and true and fair presentation of the financial report in accordance with the Corporations Act This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report. Audit approach We conducted an independent audit in order to express an opinion to the members of the company. Our audit was conducted in accordance with Australian Auditing Standards, in order to provide reasonable assurance as to whether the financial report is free of material misstatement. The nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected. For further explanation of an audit, visit our website Liability limited by a scheme approved under Professional Standards Legislation

52 We performed procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001, Accounting Standards and other mandatory financial reporting requirements in Australia, a view which is consistent with our understanding of the company s and the consolidated entity s financial position, and of their performance as represented by the results of their operations and cash flows. We formed our audit opinion on the basis of these procedures, which included: examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report, and assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the directors. Our procedures include reading the other information in the Annual Report to determine whether it contains any material inconsistencies with the financial report. While we considered the effectiveness of management s internal controls over financial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls. Our audit did not involve an analysis of the prudence of business decisions made by directors or management. PricewaterhouseCoopers Nick Henry Perth Partner 30 September 2005