VISION MISSION VALUES. To become the leading independent Australian coal company. To grow total shareholder value by: them in line with market demand

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2 VISION To become the leading independent Australian coal company. MISSION To grow total shareholder value by: > identifying world class, grass roots assets and developing them in line with market demand > minimising capital investment through innovative arrangements with suppliers of services and infrastructure > responding quickly to cost effective opportunities to expand production and markets > continually seeking innovative ways to reduce operating costs and minimise risks > meeting or exceeding production targets > forging long-term, mutually-rewarding relationships with customers, suppliers, regulators, staff and the communities in which mining operations are based. VALUES Safe production: targeting zero injuries Customer focus: acknowledging that customers are key to the Company s success Responsible corporate citizenship: caring about the Company s global footprint. Pictured: Coppabella Mine at sunset. Front cover: The dragline at Coppabella Mine operating at sunset. From left to right: Maureen McDermott, Coal Quality and Logistics Officer. Michael Collins, Manager, Technical Services Gillian Hammelswang, Office Administrator, Site Office

3 MACARTHUR COAL LIMITED ANNUAL REPORT 2006 ABN Highlights 1 Profile 3 Chairman s Report 4 CEO s Report 6 Operational Performance 9 Overview 10 The Coal Market 12 Coppabella Mine 14 Moorvale Mine 16 Project Pipeline 19 Exploration Prospects 20 Acquired Exploration Prospects 25 Coke Plant 26 Resources 27 Social Performance 29 Our People 30 Our Community 33 Environmental Performance 37 Our Environment 38 Leadership and Management 43 Board of Directors 44 Management 45 New Management Structure 46 Corporate Governance 48 Directors Report 55 Financial Performance 65 Five Year Performance History 66 Financial Overview 68 Financial Statements 71 Investor Quick Reference Guide 132 Glossary 135 Index 136 Company Information IBC Pictured: Coal Mining at Coppabella Mine

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5 COAL, 24 / 7 pp 1 Highlights Record revenue of $534.8 million exceeding 2005 revenue by $164.6 million (up 44%) pp 68 Record NPAT of $149.6 million exceeding 2005 NPAT by $85.4 million (up 133%) pp 68 Record level of attributable Moorvale Mine sales of 2 million tonnes (up 18%) pp 17 Increased holding in exploration tenements to enhance growth opportunities pp 11 Coal resources increased by 177 million tonnes (on a 100% project basis) pp 27 Water supply ceased to be a critical issue due to good local rainfall and the progress made on construction of the Burdekin and Eastern Spur pipelines pp 10 Additional port allocation from late 2007 obtained at Dalrymple Bay Coal Terminal (DBCT) pp 13 All bank loans and convertible notes repaid pp 96 FINANCIAL RESULTS Variance Revenue from coal sales $M % EBITDA $M % EBIT $M % NPAT $M % Diluted earnings per share cents % Dividends per share cents % Gearing (net debt/shareholders equity) % N/A Net interest cover (EBITDA/interest paid) times N/A Return on invested capital % N/A Net Tangible Assets per share $/share N/A EBITDA (Earnings before interest, tax, depreciation and amortisation) EBIT (Earnings before interest and tax) NPAT (Net profit after tax)

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7 COAL, 24 / 7 pp 3 Profile Macarthur Coal Limited and its controlled entities (Macarthur Coal) are involved ved in exploration, development and mine management. Coal mines operated and tenements owned are listed below. > Macarthur Coal Limited (the Company) is a public company that listed on the Australian Stock Exchange (ASX) in July The ASX code is MCC. > Macarthur Coal is Queensland-based with its mining assets situated in Queensland s Bowen Basin and its corporate offi ce located in Brisbane. > Macarthur Coal s principal product is low volatile pulverised coal injection coal (PCI coal) for use in the production of steel. A key supplier of low volatile PCI coal to the steel mills of Asia, Europe and Brazil, Macarthur Coal also produces some thermal and coking coal. > Macarthur Coal s major assets are the Coppabella Mine and the Moorvale Mine which together provide approximately 47% of the low volatile PCI coal exported from Australia. > Macarthur Coal has large prospective exploration tenement holdings which provide a project pipeline for the development of new coal mines. > Macarthur Coal s mines and exploration tenements are held within unincorporated joint ventures, a structure which has allowed the Company to gain signifi cant strategic benefi ts by involving other parties in its projects. > Macarthur Coal provides the expertise eto manage the mines and exploration program on behalf of the joint venture participants. Contractors are engaged to undertake mining activities such as overburden removal, coal mining and coal processing. > Macarthur Coal has all the production at the Coppabella and Moorvale mines under its management and is entitled to 73.3% of the coal produced at the two mines. All sales and production statistics in the Annual Report represent Macarthur Coal s 73.3% attributable share unless otherwise stated. MACARTHUR COAL ASSETS ASSET Interest Held in Asset Subsidiary Company Holding Asset Joint Venture and Manager Coppabella Mine 73.3% Coppabella Coal Pty Ltd Coppabella and Moorvale Joint Venture managed by Macarthur Coal (C&M Management) Pty Ltd Moorvale Mine 73.3% Coppabella Coal Pty Ltd Coppabella and Moorvale Joint Venture managed by Macarthur Coal (C&M Management) Pty Ltd Monto 51% Monto Coal 2 Pty Ltd Monto Coal Joint Venture managed by Monto Coal Pty Ltd Amaroo 85% BB Interests Pty Ltd Bowen Basin Coal Joint Venture managed by BB Interests Pty Ltd Codrilla 85% BB Interests Pty Ltd Bowen Basin Coal Joint Venture managed by BB Interests Pty Ltd Vermont East 85% BB Interests Pty Ltd Bowen Basin Coal Joint Venture managed by BB Interests Pty Ltd Wilunga 85% BB Interests Pty Ltd Bowen Basin Coal Joint Venture managed by BB Interests Pty Ltd Capricorn 85% Capricorn Coal Pty Ltd Capricorn Joint Venture managed by Capricorn Coal Pty Ltd Moorvale West 90% Moorvale West Coal Pty Ltd Moorvale West Joint Venture managed by Moorvale West Coal Pty Ltd Olive Downs 90% Olive Downs Coal Pty Ltd Olive Downs Joint Venture managed by Olive Downs Coal Pty Ltd West/North Burton 65% West Burton Coal Pty Ltd West/North Burton Joint Venture managed by West Burton Coal Pty Ltd West Walker 85% West Walker Coal Pty Ltd West Walker Joint Venture managed by West Walker Coal Pty Ltd West Rolleston 90% West Rolleston Coal Pty Ltd West Rolleston Joint Venture managed by West Rolleston Coal Pty Ltd

8 pp 4 COAL, 24 / 7 Chairman s Report Product stockpile with bulldozer at Moorvale Mine. Shareholders, Now in its fifth year as a publicly listed company, Macarthur Coal has built on the hard work of the past to deliver an excellent performance for Keith De Lacy Chairman IMPRESSIVE FINANCIAL PERFORMANCE Macarthur Coal posted its best fi nancial results to date with revenue from coal sales up by 44.5% from 2005 to $534.8 million in EBITDA improved by 106.1% to $227.6 million for the year and NPAT was up 133.2% to $149.6 million. A fully franked dividend of 18 cents per share is to be paid on 9 October 2006, providing a total dividend of 41 cents fully franked for Macarthur Coal s aim is to increase the value of the Company through entrepreneurial approaches to innovation, development and exploration for the benefit of shareholders. GROWING SHAREHOLDER VALUE Macarthur Coal s aim is to increase the value of the Company through entrepreneurial approaches to innovation, development and exploration for the benefi t of shareholders. Organisational changes were made recently to enhance the Company s ability to grow. A new management structure was put in place, empowering several members of the management team to pursue wealth creation opportunities. Other members of the management team are to focus on optimising performance at the Coppabella and Moorvale mines. Macarthur Coal has outperformed the S&P/ASX 200 Accumulation Index since listing on the ASX in 2001 and has the resolve to continue to outperform the Index on a long term basis.

9 7000 pp /7/01 30/11/01 31/3/02 31/7/02 30/11/02 31/3/03 31/7/03 30/11/03 31/3/04 31/7/04 30/11/04 31/3/05 31/7/05 30/11/05 31/3/06 31/7/06 Macarthur Coal S&P/ASX 200 Accumulation Index MACARTHUR COAL LIMITED SHAREHOLDER RETURN VERSUS S&P/ASX 200 ACCUMULATION INDEX (Index level by time period) Performance of the Company has been given offi cial recognition by stakeholders and other parties. During the year, the Company was awarded: > The Australian British Chamber of Commerce Outstanding Exporter Award 2005 > The Queensland Japan Chamber of Commerce and Industry Inc. Minerals and Energy Award 2005 > Premier of Queensland s Export Awards Mineral and Energy Award > Gerdau Açominas (a Brazilian steel mill) High Supply Performance Award > Silver Award for best practice reporting at the Australasian Reporting Awards. Additionally, Ken Talbot, the Company s CEO, received: > The 2005/06 Australia Export Hero Award from the Advisory Council of the Australian Export Heros Awards and Board of Australian Institute of Export > The Champion of Entrepreneurship Award at the Northern Region Entrepreneur of the Year Award Presentation, a program founded and sponsored by Ernst & Young. TARGETING INFRASTRUCTURE Growth requires infrastructure. Existing rail and port infrastructure is fully utilised as a consequence of high overseas demand for resources. Demand is expected to continue. Macarthur Coal welcomes the initiatives taken by infrastructure providers in 2006 to provide additional rail and port infrastructure. The Queensland state government announced that it has committed to over $1 billion of expenditure to upgrade coal infrastructure and allow state coal exports to increase to 235 million tonnes per annum. The upgrades, partly fi nanced through government owned corporations, will enable Macarthur Coal to increase its current annual capacity from 4.5 million tonnes to 8.8 million tonnes per annum by late Access to water is important for growth. Measures were taken in 2006 to increase water supply. Macarthur Coal, in conjunction with other coal producers, facilitated the construction of pipelines to increase water supply to the coal producers in the northern Bowen Basin. The pipelines provide access to the Burdekin Falls Dam and extend the network connected to the Eungella Dam. The new pipelines increase Macarthur Coal s access from one offsite dam to three, supplementing supply from its onsite dams at the Coppabella and Moorvale mines. FOSTERING RELATIONSHIPS One of Macarthur Coal s greatest strengths remains its commitment to fostering productive and mutually benefi cial relationships with its customers, service providers and joint venture participants to further the Company s strategic goals and to generate shareholder wealth. The value derived from the effort expended by the Company to provide excellent customer service and maintain standards should not be underestimated as it is the strong customer, supplier and joint venture relationships that underpin the Company s stability, long-term sustainability and reputation in the resources sector. SUPPORTING THE COMMUNITY Macarthur Coal has an active program of community interaction and support. In 2006 the Company supported a range of initiatives which focus on the communities within which Macarthur Coal operates and Queensland s youth. The Shares for Schools program is now in its fourth year of operation and was expanded by a further six schools in 2006 to now have a total of 31 schools in the program. After two years in the scheme the schools have the option to keep the shares or to sell them with the proceeds going to the schools parents and citizens organisations. Some other social initiatives focus on the mining community such as Macarthur Coal s sponsorship of the 4RFM Moranbah Community Radio Station, Nebo Medical Centre and the Nebo Newsletter. Macarthur Coal is also joining with other organisations to help address the skill shortages in the resources sector through activities such as sponsoring the Queensland Minerals and Energy Academy. In summary, Macarthur Coal is vigorously pursuing its vision of being the leading independent Australian coal company to provide wealth to shareholders and benefi ts to the community and the Australian economy. Keith De Lacy Chairman

10 pp 6 COAL, 24 / 7 CEO s Report Coal mining at Coppabella Mine. Shareholders, In 2005/06, Macarthur Coal posted a record net profit, exceeded its sales targets and continued to progress its project pipeline by increasing its holding in exploration tenements and increasing the quantity of resources compliant with the JORC Code. Ken Talbot CEO/Managing Director The Company is committed to maintaining this success by focusing on: > Maximising profi t from existing operations; and > Creating value by growing our project pipeline. RECORD SALES REVENUE Record revenues of $534.8 million occurred due to the PCI coal price increase of approximately 120% for the 2005 contract year (1 April 2005 to 31 March 2006). Furthermore, a record profi t of $149.6 million was achieved despite the PCI coal price for the 2006 contract year falling by approximately 30% and affecting the June 2006 quarter. Shipments of 4.9 million tonnes (Macarthur Coal s share of 6.7 million tonnes exported from the Coppabella and Moorvale mines) exceeded the 4.5 million tonne sales target. The target was achieved at a time when new competitors entered the PCI coal market and the Queue Management System was introduced, placing an allocation quota on users of the Dalrymple Bay Coal Terminal. Macarthur Coal is seeking to strengthen its position in the market by diversifying its product base through production of a coking coal. Sales of a coking coal product have commenced. SUSTAINABLE PRODUCTION In 2005/06 production at the Coppabella Mine was below 2005 levels primarily due to Roche Mining continuing to underperform on its contractual obligations by approximately 20%. However, all sales contracts for 2005/06 were met as a result of drawing down run of mine stockpiles and record saleable coal production at the Moorvale Mine.

11 pp 7 Macarthur Coal is seeking to strengthen its position in the market by diversifying its product base through production of a coking coal. Sales of a coking coal product have commenced. RISING COSTS As with most other companies in the resources sector, Macarthur Coal is experiencing rising costs. During 2005/06 cost of sales and distribution costs rose by approximately 18.4% mainly due to higher royalties and commissions as a result of the higher coal sale prices, and increased overburden removal costs due to the increased cost of fuel, labour, tyres and explosives. In response to the pressures of increasing costs, action has been taken to reduce operating costs through the introduction of an electric shovel for overburden removal and is planning to progressively replace contractors with its own employee operators. It is expected that the benefi ts will materialise from January In addition, the introduction of a range of new mining methodologies is being considered to reduce costs. FINANCIAL STRENGTH Macarthur Coal is in a strong fi nancial position following the record result for 2006 and profi table trading in previous years. The Company has attained a position of having large cashfl ows, no bank debt and a market capitalisation of approximately $0.9 billion. The Company is well placed to secure funding for growth opportunities. PROGRESSING THE PROJECT PIPELINE Macarthur Coal recognises the importance of exploration, discovering new projects and developing them in line with market demand. Throughout the year resources were increased by 177 million tonnes to 1,578 million tonnes (on a 100% project basis). Macarthur Coal also increased its level of ownership in its Bowen Basin tenements with interests in West/North Burton tenements increasing to 65% and interests in other tenements increasing to 85% or 90%. The Company currently has eleven prospects in the pipeline, compared to ten in the 2005 financial year, as the Moorvale underground project has been added to the list. Coking coal has been confi rmed at Moorvale West and Olive Downs and is indicated at Vermont East. PCI coal is confi rmed at Moorvale West, Olive Downs, Vermont East, West Walker, Codrilla and Wilunga. During the year exploration activities were focused on advancing the Moorvale West and Moorvale underground projects. FOCUSING ON HEALTH AND SAFETY The health and safety of the workforce at Macarthur Coal s mines remains a priority with a goal of zero injuries. The Queensland average lost time injury frequency rate (LTIFR) for open-cut coal mines is 3.1 for 2005/06. LTIFR is a measure of the actual time lost from the workplace due to injury per million hours worked. The LTIFR for the Moorvale Mine fell from 6.00 in 2004/05 to 3.13 in 2005/06 which represents a signifi cant improvement in safety practices and it is now in line with the industry average. However, the ongoing challenge remains to achieve a zero result. The LTIFR for Coppabella Mine fell from 4.61 in 2004/05 to 4.28 in 2005/06. Some contractors have excellent safety records, for example, the Sedgman Coppabella Joint Venture achieved a very signifi cant milestone in 2006 when it recorded fi ve years continuous operation without a single lost time injury. It s a commendable achievement and I congratulate staff on this accomplishment. However the Coppabella LTIFR remains above the industry average primarily due to the safety record of the principal mining contractor, Roche Mining. As part of the ongoing commitment to health and safety, Macarthur Coal has initiated a more comprehensive independent auditing process at the Coppabella and Moorvale mines. We are developing a whole of mine Health, Safety, Environment and Community (HSEC) plan which will provide a standardised approach to health and safety across all operations (including contract operations). The plan is currently being trialled at the Moorvale Mine and once Macarthur Coal is fully confi dent that the plan is effective, it will be rolled out to include the Coppabella Mine in 2006/07. I anticipate that we will start to see the benefi ts in the latter part of CLEAN COAL TECHNOLOGY The coal mining industry must embrace the concept of clean coal technology in order to take its place as a good corporate citizen and also to remain viable and sustainable. The 2006 announcements of the industryfunded Coal21 fund of $300 million followed by a $500 million dollar investment by the federal government and an additional $300 million investment by the Queensland government demonstrate that all levels of government and industry are serious about the commitment to clean coal technology. The investment of $1.1 billion represents a cooperative framework to expedite this important work. Macarthur Coal is a contributor to the fund. The contribution is being made in recognition of the priority that must be given to developing new ways of using coal that have zero harm on people and the environment coupled with keeping it one of the cheapest forms of energy. FORGING THE FUTURE Macarthur Coal has a track record of growth since commencing business in The Company aims to continue to grow to increase the wealth of its shareholders. In August 2006, the Board approved a new management structure to place a focus on increasing Macarthur Coal s competitiveness and to maximise shareholder value. The Company has been separated into two parts: the fi rst which will focus on the day to day operations of the Company and the second which focuses on longer-term development and growth. I look forward to the next exciting phase in Macarthur Coal s growth and development and reporting its progress to you next year. Ken Talbot CEO/Managing Director

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13 1 OPERATIONAL PERFORMANCE pp 9 Overview pp 10 The Coal Market pp 12 Coppabella Mine pp 14 Moorvale Mine pp 16 Pictured: Dragline and excavator in operation at Coppabella Mine.

14 OPERATIONAL PERFORMANCE pp 10 COAL, 24 / 7 Overview Dragline at sunset at Coppabella Mine Demand for coal remains strong due to the growth in world steel production, although some softening in demand was experienced in late The majority of future increased steel production is expected to take place in China, India and Brazil COAL SALES HISTORY (excludes purchased coal) 28% Japan 32% Europe 9% Domestic % Taiwan 11% Brazil 17% Korea MARKET SPREAD FOR 2006 Tonnes COAL MARKETS > Demand for coal remains strong due to the growth in world steel production, although some softening in demand was experienced in late The majority of future increased steel production is expected to take place in China, India and Brazil. For more information see page 12. SALES > Record revenue of $534.8 million for the 2006 fi nancial year. > Increased revenue largely due to the prices for fi xed and long-term contracts for PCI coal increasing by approximately 120% for the contract year to 31 March > Record revenues achieved despite a 30% sales price decrease for PCI coal for the contract year to 31 March MAJOR PROJECTS > The Olive Downs project was progressed. A decision to commence mining will be considered subject to markets and progress of the Dalrymple Bay Coal Terminal expansion project. The decision is likely to be made in > Water supply is no longer a critical issue for mining operations. Good rainfalls in May and June 2006 ensured that onsite water storages were replenished and will provide suffi cient water until access to the Eastern Spur is facilitated. Construction of the Eastern Spur Pipeline (from Moranbah to Coppabella Mine) is on schedule to provide water from Eungella Dam by September Construction of the Burdekin to Moranbah pipeline is also in progress and it is expected that Macarthur Coal will commence drawing its full water allocations from mid calendar year 2007 following the completion of the supporting power infrastructure.

15 pp 11 Macarthur Coal increased its level of ownership in Bowen Basin coal exploration tenements with interest in West/North Burton tenements increasing to 65% and interests in other tenements increasing to 85% or 90%. Gemma Boswell, Receptionist, Site Office > Macarthur Coal is purchasing a P&H 4100C electric shovel to supplement the existing dragline in removing overburden at the Coppabella Mine. The shovel is expected to commence operation by mid calendar year > Work continued on assessing the feasibility of a coke making facility in Queensland. SALES Macarthur Coal s Share s s Variance Coppabella Mine (excluding sale of purchased coal) (tonnes) 2, ,342.8 (12.0%) Moorvale Mine (excluding sale of purchased coal) (tonnes) 1, , % Total (tonnes) 4, ,022.8 (1.8%) INVESTMENT PRODUCTION COPPABELLA MINE Macarthur Coal s Share s s Variance Macarthur Coal increased its level of ownership in Bowen Basin coal exploration tenements with interest in West/North Burton tenements increasing to 65% and interests in other tenements increasing to 85% or 90%. EXPLORATION The Moorvale West and Moorvale underground projects were advanced further along the project pipeline. It is envisaged that the development of the Moorvale West Mine will allow further diversifi cation into coking coal. The Moorvale underground project provides another opportunity to extend the life of the Moorvale Mine. Overburden removed (bcm) 32, ,729.2 (14.7%) Run of mine coal production (tonnes) 3, ,529.5 (26.1%) Saleable coal production (tonnes) 3, ,401.5 (11.2%) PRODUCTION MOORVALE MINE Macarthur Coal s Share s s Variance Overburden removed (bcm) 8, , % Run of mine coal production (tonnes) 2, ,816.8 (13.7%) Saleable coal production (tonnes) 2, , % PCI coal found at West Walker was confi rmed to be similar in quality to coal at the Coppabella Mine. Further exploration is to be undertaken to establish the size of the resource. Resources have increased by 177 million tonnes to 1,578 million tonnes (on a 100% project basis). Additionally, 94% of resources at Moorvale West have been upgraded to Measured and Indicated Resource status (see table on page 27). Visitors inspect operations at Coppabella Mine.

16 pp 12 OPERATIONAL PERFORMANCE The Coal Market COAL, 24 / 7 Dalrymple Bay Coal Terminal. Macarthur Coal is pleased to report great success in the 2006 financial year. The prices for fixed and long-term contracts, which were negotiated with customers in 2005, were a major contributor to the excellent result: a record profit of $149.6 million. The global steel market was very strong in the first half of calendar year 2005 due mainly to increased production in China and the growth of the steel industry in India and Brazil. The growth in steel production increased the demand for coal, however, supply of coal was adversely affected by coal and rail infrastructure limitations in Queensland. In the latter part of 2005, the demand for steel softened resulting in a fall in steel prices and production thereby reducing the demand for coal for blast furnaces. Additionally, new entrants to the PCI coal market increased supply which led to a reduction in the global price of PCI coal of 30% which took effect in the June 2006 quarter. The price reduction will adversely impact profi tability for the 2007 financial year. Despite the softening in demand for coal, new competition and infrastructure limitations, Macarthur Coal s sales volume of 4.9 million tonnes was only 0.1 million tonnes below the record tonnage achieved in Sales volume was maintained through the sales of trial cargoes of a coking coal product and increased sales of thermal coal from the Moorvale Mine. Since the start of the 2006 calendar year steel prices have improved considerably and production of Western World pig iron, the output from the blast furnace and used to make steel, has recovered. According to MEPS International Ltd (a leading consultancy company operating in the steel sector worldwide analysis.htm) the estimate for crude steel output in 2006 is 1,176 million tonnes, an increase of 4.1% over the 2005 output. The majority of this increase will take place in China and India. In Queensland the state government, through its government owned corporations, has committed to over $1 billion of expenditure in infrastructure upgrades which will benefi t the coal industry and allow state coal production capacity to increase to 235 million tonnes per annum. Signifi cant aspects of the upgrade program include the upgrades to the Abbot Point Coal Terminal and RG Tanna and Barney Point terminals in Gladstone, the acquisition of additional rail rolling stock and upgrading electrical locomotives, other coal and rail port infrastructure, and a detailed feasibility study into a 69km rail link between the North Goonyella and Newlands rail systems. The rail link between North Goonyella and Newlands is commonly referred to as the Northern missing link which will allow coal from the Bowen Basin to be transported to the Abbot Point Coal Terminal. In addition to the government-funded investment, signifi cant investment is also being made directly by the mining industry in the development of DBCT and Hay Point and in the development of water infrastructure in the Bowen Basin, ( infrastructure/coal_taskforce.shtm).

17 pp 13 The global steel market was very strong in the first half of calendar year 2005 due mainly to increased production in China and the growth of the steel industry in India and Brazil. STRATEGIES Macarthur Coal seeks to benefi t from steel industry growth in China, India and Brazil. The Company also seeks to operate in the longterm by continuing to generate sustainable returns for shareholders by adopting the following strategies: > Diversifying the product range to minimise the impact of competitive pressures: The high prices paid for PCI coal have attracted newcomers to the PCI coal market creating increased competitive pressure. Macarthur Coal is responding to the new competition by adding coking coal to its product range to ensure a stable basis for its operations. In 2006, trial cargoes of coking coal were sent from the Moorvale Mine to potential customers in Asia and Europe and early feedback is positive. Queensland Coke & Energy Pty Ltd, a wholly owned subsidiary of Macarthur Coal, is continuing to examine the feasibility of building a coke plant. The investigation of the commercial viability of producing coke was initiated in response to the growth in global steel production, closure of old coke ovens and development of technology allowing coke to be produced in an environmentally responsible manner. For more information on the coke plant see page 26. > Targeting organic growth opportunities to maximise economic return: Exploration to facilitate organic growth is a priority. Macarthur Coal s exploration portfolio comprises eleven potential coal projects. The development of the projects will be timed to capitalise on market demand and availability of infrastructure. Interests in the exploration tenement portfolio were increased during the year by acquiring interests from Ken Talbot and CITIC in Interest in the West/North Burton tenements increased to 65% and interests in other tenements increased to 85% or 90%. Macarthur Coal s increased holdings give the Company the fl exibility of holding, developing and selling down interests in identifi ed potential coal projects to partners of strategic importance. Attention was given to the development of an open-cut mine at Olive Downs and an application for a mining lease was lodged during the year. The mine will have minor infrastructure requirements as coal processing will take place at the Moorvale Mine. Once the mining lease is granted, a decision to mine will be considered in light of the coal market and access to port capacity. Studies on the establishment of underground mines at Moorvale West and Moorvale are in progress. The Moorvale West deposit has the potential to produce both coking coal and PCI coal. The development of an underground mine off the high wall at the existing Moorvale Mine would provide access to coal excluded from previous mine plans. > Building relationships Macarthur Coal considers it critical to build & maintain excellent relationships with customers and with the providers of infrastructure. Macarthur Coal has built an enviable reputation of being one of the most customer focused and reliable suppliers of coal to the international market evidenced by such examples as Brazilian steel company, Gerdau Açominas, awarding its outstanding supplier award to Macarthur Coal for the past two years. Macarthur Coal maintains strong, long-term, mutually rewarding relationships with international clients and currently supplies customers in Japan, Korea, Taiwan, Brazil, the United Kingdom, France, Belgium, Italy and Germany. Macarthur Coal is building its markets for coking coal and PCI coal in India which has no coking coal resources of its own to fuel its growing steel industry. SHIPPING > Macarthur Coal s sales of 4.9 million tonnes (excluding sales of purchased coal) in 2006 exceeded the 4.5 million tonne target. The strong sales performance was achieved despite continued logistical constraints within the Goonyella infrastructure corridor. Macarthur Coal was able to exceed its port allocation quota under the Queue Management System at DBCT by fi lling allocations that other companies were unable to use as well as shipping coal through Abbot Point. > Work has begun on a major upgrade to a DBCT which will be completed in two phases. Phase 1, to be completed in late 2007, will increase total shipping capacity from 60Mtpa to 68Mtpa. Phase 2 is planned to be completed in late 2008 and will give the DBCT a total shipping capacity of 85Mtpa. > Macarthur Coal has been successful in obtaining increased allocation at both phases of the upgrade. At Phase 1 additional allocation will take the Company s total to 5.13Mtpa. Macarthur Coal will also receive a progressive allocation increase up to 3.7Mtpa additional capacity from Phase 2 increasing the Company s total allocation to 8.8Mtpa. Macarthur Coal is in advanced discussions with Queensland Rail to obtain rail access to match the increased port entitlement. Queensland Rail has recently released its 2006 Master Plan for the Queensland Coal System which includes provision for expansion of the Goonyella coal system to 140Mtpa to complement the proposed DBCT and Hay Point expansions. > In order to overcome the ongoing capacity constraints at DBCT, Macarthur Coal supplemented its export sales by shipping approximately 332,000 tonnes of coal through Abbot Point Coal Terminal near Bowen. Access to Abbot Point may be restricted for some periods during 2006/07 due to expansion works that are also being undertaken at the terminal. Macarthur Coal is working closely with Ports Corporation of Queensland, the terminal owner and Queensland Rail to maximise opportunities to export through Abbot Point during this time. Macarthur Coal intends to continue to use Abbot Point to complement its DBCT exports until the expansion works at DBCT are completed. Paul Smallbone, General Manager, Coppabella Mine

18 OPERATIONAL PERFORMANCE pp 14 COAL, 24 / 7 Coppabella Mine Dragline and coal seam at Coppabella Mine. Coal is mined in the Johnson, Southern and East pits and blended to optimise coal quality and coal processing yield. % Ownership 73.3% Tenements ML 70161, ML 70163, ML 70164, ML and ML Location Coal types Manager Contractors 2007 attributable production target 140km south-west of Mackay near the townships of Nebo and Moranbah 8.5% ash low volatile PCI coal Macarthur Coal (C&M Management) Pty Ltd on behalf of the Coppabella and Moorvale Joint Venture Mining operations are carried out by Peter Champion Mining Pty Ltd and Roche Mining Pty Ltd Coal handling and preparation is carried out by Sedgman Coppabella Joint Venture Mining and coal preparation activities are carried out 24/7 3.0 million tonnes History The mining lease was granted on 1 June 1998 Development from a greenfields prospect to a coal producing mine was completed within a 14 month timeframe Overburden removal commenced in July 1998 First coal was mined in October 1998 The replenishment of stockpiles and restoring run of mine production to the levels achieved in the previous year to give Macarthur Coal attributable run of mine annual production of 3 million tonnes is a priority. For the past year, attributable run of mine production was 3.3 million tonnes, 26.1% below the production results achieved in the previous year. Coal stockpile levels were reduced to approximately 50,000 tonnes as a result of drawing down run of mine (ROM) inventories to cover a portion of the run of mine production shortfall. Run of mine production was constrained by: > a blast failure in the September 2005 quarter which delayed access to coal > reduced equipment availability as a consequence of: major structural damage to two principal excavators extensive damage to an EX5500 Hitachi excavator caused by rock falling away from the Creek Pit high wall shut down of the dragline for scheduled major maintenance > low wall slip in the South Pit caused by a geological fault running parallel to the high wall. The reduced run of mine production had a fl ow on effect on saleable coal production and coal shipments which were 11.2% and 12.0% respectively below levels for the previous year. The shortfall at the Coppabella Mine was met by the increased coal production at the Moorvale Mine.

19 pp 15 Coppabella Mine layout. The replenishment of stockpiles and restoring run of mine production to the levels achieved in the previous year to give Macarthur Coal attributable run of mine annual production of 3 million tonnes is a priority Cost management is also a priority as mining costs are adversely affected by the increased cost of tyres, diesel fuel and explosives. Several initiatives were undertaken during the year to reduce costs: > A dragline improvement team has been established to optimise the use of the dragline. > A recent initiative to reduce costs has been decision to purchase of a P&H 4100 electric shovel. Delivery of the shovel and availability of additional power supply to meet the shovel s requirements are scheduled for mid 2008 enabling the shovel to go into operation soon after. A reduction in the number of excavators, trucks and ancillary equipment operating at the Coppabella Mine is planned to occur when the shovel is commissioned, providing benefi ts in reduced diesel consumption and labour. The shovel operation will supplement overburden removal by the dragline OVERBURDEN REMOVAL 100% Project Basis (bcm millions) 2006 > Securing a cost-effective and reliable supply of tyres is also very important. Currently the demand for tyres exceeds supply due to tyre production capacity remaining static despite the increased usage of tyres by the mining industry as a consequence of the mining boom. Macarthur Coal is investigating several options to address this issue ROM COAL PRODUCTION 100% Project Basis (Tonnes millions) 2006

20 OPERATIONAL PERFORMANCE pp 16 COAL, 24 / 7 Moorvale Mine Product stockpile at Moorvale Mine. The mine has a coal seam with an average thickness of approximately nine metres. Mining occurs within one strip that is approximately three kilometres long. % Ownership 73.3% Tenements ML 70290, ML and MLA Location Coal types Manager Contractors 2007 attributable production target 156km south-west of Mackay near the townships of Nebo and Moranbah 8.5% ash low volatile PCI coal 13% to 15% ash thermal coal 8.0% ash coking coal Macarthur Coal (C&M Management) Pty Ltd on behalf of the Coppabella and Moorvale Joint Venture Mining operations are carried out by Leighton Contractors Pty Ltd Coal handling, preparation and train loading are carried out by Sedgman Ltd Mining and coal preparation activities are carried out 24/7 1.5 million tonnes Attributable run of mine production was 2.4 million tonnes which was 13.7% less than the previous year. Full run of mine stockpiles in the September 2005 quarter (due to record production in the June 2005 quarter) constrained production in the September 2005 quarter. Mining was also adversely affected by rain throughout the June 2006 quarter and moving mining activities downdip to the second strip. The removal of coal from the second strip recommenced in August 2006 after completion of pre-stripping and overburden removal from the fi rst block in the second strip. Attributable saleable coal production was at a record level of 2 million tonnes, exceeding the previous record of 1.7 million tonnes achieved in During the year a coking coal product was developed to provide access to the higher value coking coal market and provide fl exibility through product diversifi cation. Macarthur Coal s attributable thermal coal production was 853,000 tonnes in 2006 compared with 425,000 tonnes in History The mining lease was granted on 5 December 2002 Development from a greenfields prospect to a coal producing mine was completed within a 12 month timeframe Overburden removal commenced in December 2002 First coal was mined in March 2003

21 pp 17 Moorvale Mine layout The increase in thermal coal production resulted from production of the coking coal product. The bottom ply of the coal seam was used for the coking coal product, leaving the higher ash middle ply for thermal coal production and the top ply for PCI coal production. PCI coal was also produced by blending the full seam The strong saleable coal production also enabled attributable shipments of coal from the Moorvale Mine to occur at a record level of 2 million tonnes, exceeding the previous year s shipments by 18.5% OVERBURDEN REMOVAL 100% Project Basis (bcm millions) ROM COAL PRODUCTION 100% Project Basis (Tonnes millions) 2006 During the year a coking coal product was developed to provide access to the higher value coking coal market and provide flexibility through product diversification. Luke Mears, Safety Superintendent.

22 pp 18

23 2 PROJECT PIPELINE pp 19 Exploration Prospects pp 20 Acquired Exploration Projects pp 25 Coke Plant pp 26 Resources pp 27 Pictured: Coal trucks awaiting loading at Coppabella Mine.

24 pp 20 PROJECT PIPELINE Exploration Prospects COAL, 24 / 7 Drilling rig exploration. Macarthur Coal s strategy to increase shareholder value includes the discovery of new projects and developing them in line with market demand. At this stage, eleven prospects are in the pipeline. Ten undeveloped deposits have been identifi ed in addition to the brown fields development of an underground mine at Moorvale. Exploration activities during the year were directed at advancing the Moorvale West and Moorvale underground projects. The development of Moorvale West Mine should provide the opportunity to diversify further into coking coal. The Moorvale underground project will further extend the life of the mine. Mining is planned to advance underground from the open cut highwall and target a soft coking coal in the lower portion of the seam. Drilling at West Walker commenced during the year and the PCI coal found in the target seam was of similar quality to that at Coppabella Mine. The coal types that have been confi rmed in the exploration tenements include: > coking coal at Moorvale West and Olive Downs > PCI coal at Moorvale West, Olive Downs, Vermont East, West Walker, Codrilla and Wilunga. The West/North Burton and Vermont East prospects have the potential to contain coking coal. Large core drilling and testing has been commissioned for Moorvale West, Olive Downs and Moorvale Underground to provide process engineering design data and to provide samples for coke oven testing. The exploration program for the 2007 fi nancial year is to progress Vermont East and Wilunga along the project pipeline and undertake grass roots exploration on recently granted tenements at West/North Burton (coking coal), West Walker (PCI coal) and West Rolleston (thermal coal). OPPORTUNITIES EMERGING FROM EXPLORATION Of the eleven current exploration prospects, the following have had their resources defi ned to Joint Ore Reserve Committee (JORC) level: > Moorvale West > Moorvale underground > Olive Downs > Codrilla > West Rolleston > Wilunga > Monto A table specifying resources is provided on page 27. Work continues on defi ning the resources of the other four prospects which comprise: > Capricorn > West/North Burton > Vermont East > West Walker

25 pp 21 > CAPRICORN Ownership 85% Tenements EPC 769 Location Nearest port Coal types Resource status Project status Activity undertaken in 2006 North-east of the town of Dingo Gladstone Port It is inferred from the coal type at Yarrabee Mine that the Capricorn prospect may be a source of semi-anthracite which can be used as a thermal coal and a PCI coal Unquantified coal occurrences have been drill defined by over 50 non-company open holes over an elongated, segmented target area of 146 square kilometres. Coal occurs adjacent to the Blackwater to Gladstone rail line in the Aries, Castor and Pollux Seams at depths which may prove suitable for both open cut and/or underground extraction A grassroots prospect 2D seismic survey to assist with the structural interpretation of potential Castor and Pollux Seam crop zones in the southern part of the tenement > CODRILLA Ownership 85% Tenements EPC 676 Location Nearest port Coal types Resource status Project status Activity undertaken in kilometres south-east of Moorvale Mine Dalrymple Bay Coal Terminal Low volatile PCI coal and thermal coal similar to that produced at the Coppabella Mine A U shaped deposit in which drill defined JORC Code resources to 150 metres depth comprise: > 41.5 million tonnes of Measured Resource > 17.9 million tonnes of Indicated Resource These Coal Resources adjoin another 28 square kilometres of target area to 450 metres depth outlined by 78 Macarthur Coal drill sites cored mostly updip and 26.5 kilometres of seismic coverage by Macarthur Coal in which coal is known to occur in a 7 metre thick seam thought to be the Vermont Upper Seam A grassroots prospect, ready for initial mine planning > Geological modelling extended downdip as part of the mapping of the Coxendean Sub-Basin > Scout drilling on an adjacent tenement immediately to the east At this stage, eleven prospects are in the pipeline. Ten undeveloped deposits have been identified in addition to the brown fields development of an underground mine at Moorvale.

26 PROJECT PIPELINE pp 22 > Drilling rig exploration. MOORVALE UNDERGROUND Ownership 73.3% Tenements ML and ML Location Nearest port Coal types Resource status Project status Activity undertaken in 2006 Immediately downdip to west of Moorvale Mine Dalrymple Bay Coal Terminal Low volatile PCI coal and coking coal Coal Resources for Moorvale Mine to a depth of 300 metres in addition to those resources currently set aside for open-cut mining comprise: > 8.8 million tonnes Measured > 62.8 million tonnes Indicated > 14.9 million tonnes Inferred A brownfields project > Detailed drilling, testing, 2D seismic and geotechnical investigations > Geological modelling, calculation of resources to JORC Code and issue of resource statements > MOORVALE WEST Ownership 90% Tenements EPC 680 Location Nearest port Coal types Resource status Project status Activity undertaken in kilometres west of Moorvale Mine Dalrymple Bay Coal Terminal Low volatile PCI coal and coking coal Coal Resources to a depth of 450 metres comprise: > 24.5 million tonnes Measured > million tonnes Indicated > 8.5 million tonnes Inferred The bulk of the million tonnes is drill defined to Measured status but awaiting final assay results. Some 91 million tonnes is less than 300 metres deep. The seams outcrop next to the Peak Downs rail line affording drift entry and access to some 3.2 million tonnes of coal at less than 100 metres depth A grassroots project being fast-tracked for conceptual mine planning > Detailed drilling, testing and geotechnical investigations > Geological modelling, calculation of resources to JORC Code and issue of resource statements > Conceptual mine planning

27 > OLIVE DOWNS pp 23 Ownership 90% Tenements EPC 649 Location Nearest port Coal types Resource status Project status Activity undertaken in kilometres south of Moorvale Mine Dalrymple Bay Coal Terminal Coking coal, low volatile PCI coal and high energy thermal coal Coal Resources to a depth of 450 metres comprise: > 56.4 million tonnes of Measured Resource of which 42.3 million tonnes are at less than 100 metres depth > 34.1 million tonnes of Indicated Resource of which 8 million tonnes are at less than 100 metres depth > 306 million tonnes of Inferred Resource of which 26 million tonnes are at less than 100 metres depth. The calculations also reveal the potential availability of comparable additional tonnage from 300 metres to 450 metres depth which is, as yet, not appropriately drill defined A mining lease application has been lodged over the initial open-cut mine area > Preparation of large core drill sites prepared > Olive Downs geological modelling extended downdip as part of the mapping of the Coxendean Sub-Basin > WEST/NORTH BURTON Ownership 65% Tenements EPC 682, EPC 708 and EPC 836 Location Nearest port Coal types Resource status Project status Activity undertaken in kilometres north-west of Coppabella Mine, west and north of Burton Mine and east of the North Goonyella Mine Dalrymple Bay Coal Terminal It is inferred from the coal types at nearby Burton Mine and projects that the West Burton prospect may be a source of low to medium volatile coking coal, PCI coal and thermal coal in the Rangal Coal Measures 2D seismic survey identified areas prospective for shallow coal, but limited follow-up scout drilling to date has failed to locate economic thicknesses of the target seams (Leichhardt and Vermont Seams) at mineable depths A grassroots prospect > 2D seismic with limited follow-up scout drilling > VERMONT EAST Ownership 85% Tenements EPC 850, EPC 721 and EPC 688 Location Nearest port Coal types Resource status Project status Activity undertaken in kilometres south of Moorvale Mine Dalrymple Bay Coal Terminal Initial results indicate the likely presence of a medium volatile coking coal and confirm the presence of thermal coal and PCI coal, as inferred from the nearby Lake Vermont Project An elongated, segmented target area of 61 square kilometres adjoining the Wilunga prospect. The prospect is outlined by 27 Macarthur Coal and non-company open holes, 24 kilometres of Macarthur Coal seismic survey and 7.5 kilometres of non-company seismic survey. Coal occurs within the prospect in the 4 metre thick Leichhardt seam and 3.5 metre thick Vermont Seam at depths suitable for both open-cut and underground extraction A grassroots prospect currently under the exploration spotlight > Minor scout drilling > Cultural heritage clearance for a detailed drilling layout > Regional structure contour mapping of the Coxendean Sub-Basin to derive base for geological modelling

28 PROJECT PIPELINE pp 24 > WEST WALKER Ownership 85% Tenements EPC 657, EPC 666, EPC 757 and EPC 712 Location Nearest port Coal types Resource status Project status Activity undertaken in 2006 Adjoining Coppabella Mine tenements to the north Dalrymple Bay Coal Terminal (via the adjacent Hail Creek rail spur) PCI coal similar in quality to the PCI coal at Coppabella and South Walker Creek mines An elongated target area of 36 square kilometres immediately alongstrike from drill defined resources at Coppabella Mine has been outlined by 47 Macarthur Coal and non-company open holes and 9 kilometres of non-company seismic coverage. Coal could occur in the 6 metre thick Leichhardt Seam at depths suitable for underground mining and in close proximity to the Hail Creek rail spur A grassroots prospect > Slimcore drilling and testing of the prospect confirmed the existence of PCI coal in the target seam > WEST ROLLESTON Ownership 90% Tenements EPC 786, EPC 781, EPC 833, EPC 856, EPC 871 and EPC 896 Location Nearest port Coal types Resource status 40 kilometres south of Springsure in Central Queensland and 25 kilometres west of Xstrata s Rolleston Mine Gladstone Port Thermal coal for the domestic and export markets in four seams similar to those which occur at Rolleston Mine, 25 kilometres to the east Drill defined Coal Resource estimates in EPC 786 to 100 metres comprise: > 43.6 million tonnes of Measured Resource > 15.5 million tonnes of Indicated Resource > 21 million tonnes of Inferred Resource Project status A grassroots prospect that has progressed to the preliminary mine planning stage for EPC 786. Additional resources are to be sought alongstrike in recently granted EPCs 871 and 896 Activity undertaken in 2006 > Rehabilitation of drillsites in EPC 786 > Scout drilling in EPC 781 > Coal outcrops located by geological mapping in EPCs 871 and 896 alongstrike from the resources in EPC 786 > WILUNGA Ownership 85% Tenements EPC 688 and EPC 721 Location Nearest port Coal types Resource status Project status Activity undertaken in kilometres south-east of Moorvale Mine Dalrymple Bay Coal Terminal Low volatile PCI coal An S shaped target area of 55 square kilometres outlined by 34 drill sites, including 10 sites cored, plus 17.5 kilometres of relevant seismic surveying by Macarthur Coal in which 7.5 metres of coal is known to occur in the Leichhardt and Vermont Seams at depths suitable for both open cut and underground mining. A limited area has been drill defined and JORC Code resource estimates currently stand at 38 million tonnes of Inferred Resource to 100 metres A grassroots prospect currently under the exploration spotlight > Cultural heritage clearance for a detailed drilling layout in conjunction with Vermont East > Regional structure contour mapping of the Coxendean Sub-Basin used to derive base for geological modelling

29 COAL, 24 / 7 pp 25 Acquired Exploration on Projects Visitors inspect operations at Coppabella Mine. > MONTO Ownership 51% Tenements ML 80101, EPC 613 and EPC 683 Location Nearest port Coal types Resource status Activity undertaken in kilometres south-west of Gladstone Gladstone Port Thermal coal with less carbon dioxide and nitrous oxide related emissions than most other thermal coals exported from Australia The Coal Resources defined in accordance with JORC Code (1999 Version) comprise: > Measured Resource of 55.7 million tonnes > Indicated Resource of 66 million tonnes > Inferred Resource of 397 million tonnes > One large bore core drilled for comprehensive analysis including washability tests > Six 100mm diameter cores were drilled in and to the north of the proposed mining area for raw coal and washed coal product analysis Large core drilling and testing has been commissioned for Moorvale West, Olive Downs and Moorvale Underground to provide process engineering design data and to provide samples for coke oven testing.

30 pp 26 PROJECT PIPELINE Coke Plant COAL, 24 / 7 Macarthur Coal, through its wholly owned subsidiary, Queensland Coke & Energy Pty Ltd (QCE), is continuing to investigate the feasibility of establishing a coke making facility. Growing global demand for steel products over the past few years has resulted in increased demand for the raw materials needed to make steel including coke which is used in steel blast furnaces. The proposed coke plant will use modern heat recovery coke-making technology in a costeffective and socially responsible way with signifi cantly less environmental impacts than conventional coke-making plants. Emission levels are signifi cantly lower than those resulting from older, by-product coke oven type technologies. The proposed plant is also designed to generate low emission electricity using excess heat from the coking process. The coke making process does not rely on the combustion of coal. The coal is heated and volatile matter in the coal (gas) is driven off. The gas is combusted in an environmentally smart way and heat is used to produce both coke and electricity. The Queensland Coke and Power Plant Project has been declared a signifi cant project by the Coordinator General of Queensland. The Project has also received Australian Government recognition by being granted Major Project Facilitation by the Federal Minister for Industry, Tourism and Resources. Substantial progress has been made toward completion of the detailed feasibility study for the project. Some of the key milestones achieved to date include: > selection of preferred technology > development of preliminary plant design > completion of the Environmental Impact Statement process > development of infrastructure plans for rail, water and port facilities to support the project. As reported in the half-yearly report to December 2005, it was expected that the Feasibility Study would be complete and a fi nal decision on the project made by the end of Unfortunately, at present, QCE has not been able to secure land title for the project. QCE has now made a decision to defer any material additional expenditure on the project, until clear land title is available - at which time, QCE would again reassess the coke market. QCE will work closely with government to secure title to the proposed Stanwell site and/or alternative sites. QCE will continue to liaise with potential partners in the best long-term interests of the coke project. Further details on the project are available at

31 COAL, 24 / 7 pp 27 Resources Product stockpile at Moorvale Mine. RESOURCE STATEMENT (100% PROJECT BASIS) AS AT 30 JUNE 2006 Resources (Mt) Recoverable Coal Reserves (Mt) Measured Indicated Inferred Total Proved Reserve Probable Reserve Total Competent Person (Reference) Coppabella Mine ,2 Moorvale Mine ,2 Moorvale West * ,4 Olive Downs ,4,5 Codrilla ,4 West Rolleston ,4 Wilunga Monto ,8 Total , Resources have been upgraded. JORC Resources have been increased to million tonnes at Moorvale and to million tonnes at Moorvale West. Resource confi dence at both underground projects has been signifi cantly enhanced by drilling, testing, geotechnical investigation and seismic data. At Moorvale West, the bulk of the resources are Indicated (*) Status. but are actually drill defi ned to Measured Status awaiting completion of laboratory analysis. All Resources, with the exception of those at Monto, comply with the JORC Code Monto Resources currently comply with the 1999 edition of the JORC Code. The information in this report that relates to Coal Reserves at the Coppabella and Moorvale mines is based on information compiled by Mark Bryant, BE Mining (Hons), MAusIMM (1). Mark Bryant is a member of The Minserve Group Pty Ltd (ABN ). The information in this report that relates to Coal Resources at the Coppabella and Moorvale mines is derived from geological modelling by Mal Blaik BSc App (Geol) (Hons), MAusIMM, (2). Mal Blaik is employed by JB Mining Services Pty Ltd (ABN ). The information in this report that relates to Coal Resources at Moorvale West, Olive Downs, Codrilla and West Rolleston is derived in part from geological modelling by Greg Jones BSc (Hons) MAusIMM, MAIG (3) with information compiled by Lance Grimstone BSc (Hons) (Geol), Grad Dipl Mngt, FAus IMM, CPGeo, MMICA (4). Inferred Resources at Wilunga were compiled by Lance Grimstone (6). Greg Jones is employed by JB Mining Services Pty Ltd (ABN ). Lance Grimstone, is employed by Lance Grimstone & Associates (Consulting) Pty Ltd (ABN ). The information in this report that relates to Coal Reserves at Olive Downs is based on information compiled by Alwyn Hyde-Page, BE Mining (Hons), FAusIMM CP (5). Alwyn Hyde-Page is a member of The Minserve Group Pty Ltd (ABN ). The information in this report that relates to Coal Resources at Monto is derived from geological modelling by Greg Jones (7). The information in this report that relates to Coal Reserves at Monto is based on information compiled by Leigh McTavish BE (Hons), Grad Dip Bus Admin, FAusIMM (8). Leigh McTavish, is a member of The Minserve Group Pty Ltd (ABN ). Mark Bryant, Mal Blaik, Greg Jones, Lance Grimstone, Alwyn Hyde-Page and Leigh McTavish have sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which they are undertaking to qualify as Competent Persons as defi ned in the 1999 and 2004 editions of the Australasian Code of Reporting of Mineral Resources and Ore Reserves. Mark Bryant, Mal Blaik, Greg Jones, Lance Grimstone, Alwyn Hyde-Page and Leigh McTavish consent to the inclusion in the report of the matters based on the information in the form and context in which it appears.

32 pp 28

33 3 SOCIAL PERFORMANCE pp 29 Our People pp 30 Our Community pp 33 Pictured: Annette Fraser, Communications Offi cer, talking on 4RFM Moranbah Community Radio station.

34 SOCIAL PERFORMANCE pp 30 COAL, 24 / 7 Our People Michael Gray, Manager, Infrastructure, explaining layout of Coppabella Mine to visitors. Through intelligent and targeted recruitment Macarthur Coal has built up an enviable staff profile. The breadth and depth of knowledge and experience inherent within the Macarthur Coal team provide a solid basis for operations, future development, sustainability, exploration and innovation to maintain the Company s industry standing and also to face the challenges and opportunities of the future / / / / /06 Coppabella Moorvale Industry LOST TIME INJURY FREQUENCY RATES At Macarthur Coal s mines (per million person hours including contractors) Macarthur Coal has 52 employees; 34 at its corporate offi ce in Brisbane and 14 in its site offi ce which services Coppabella and Moorvale mines. Four people are employed at Queensland Coke & Energy Pty Ltd. Approximately 600 people are employed on the mine sites by contractors to undertake coal mining activities. Macarthur Coal s goal is to be an employer of choice, that is, a company which attracts highly skilled and enthusiastic employees to join its team. The Company aims to recruit talented and dedicated people and provide them with the inspiration, leadership, skills, resources and support necessary for them to work safely and achieve their full potential. It does this in the following ways: Highlighting health and safety Macarthur Coal continues to work closely with all mine site and corporate offi ce personnel to cultivate a culture of safety improvement and vigilance in the control of hazards. The target is zero injuries and fatalities. The following activities were undertaken throughout the year in support of health and safety goals: > Following independent audits of Coppabella and Moorvale mines in early 2005, Macarthur Coal worked with contractors to design and implement a new Health, Safety, Environment and Community (HSEC) plan which will provide standard and consistent procedures for all Macarthur Coal and contract staff working in both mines. On commencement, all new contract and Macarthur Coal staff will receive training in the new procedures and current staff will be retrained to ensure all are aware of the new requirements. The HSEC is currently being implemented at Moorvale Mine and then, once established in 2007, it will be implemented at Coppabella Mine. A company-wide crisis management plan, which puts in place the procedures and protocols to be followed should a crisis occur either on site or in the corporate offi ce, forms part of the HSEC.

35 pp 31 Approximately 600 people are employed on the mine sites by contractors to undertake coal mining activities. > A major Fatigue Management Survey of all staff and contractors at Coppabella and Moorvale mine sites was completed. The purpose of the survey was to determine practical ways to decrease the risks associated with fatigue, particularly with respect to travel to and from work. Macarthur Coal is examining several strategies to deal with issues highlighted in the survey such as fl exible working hours, car pooling, better housing close to site and alternative travel options. > Macarthur Coal supports its employees in achieving and maintaining fi t and healthy lifestyles. It sponsors a free mobile gym for use by mine site personnel, their families and the community. Students from Nebo State School attend the gym weekly. Corporate offi ce employees receive fi nancial reimbursement of up to $1,500 per employee per annum for gym memberships or use of personal trainers. In addition, Macarthur Coal sponsors a weekly exercise session provided by a personal trainer which is held in the Macarthur Coal corporate offi ce for any employees wishing to attend. Investing in its people > Training and development are highly regarded. Employees are encouraged to attend conferences and courses in their specialised areas. Professional development sessions are conducted throughout the year for all employees. Training needs are determined as part of the performance review process. During 2006 Macarthur Coal employees and directors attended over 50 seminars and short courses in areas such as occupational health and safety, transport infrastructure, rescue training, budgeting, financial analysis, mergers and acquisitions, report writing, bulk freight systems, corporate social responsibility, and computer skills. Several staff are currently undertaking university degrees in international business, law and business management. > Financial support and study leave are available for employees undertaking further business-related study. Investing in its future employees > The Queensland Minerals and Energy Academy was launched in November It is a partnership between the Queensland Government s Department of Education and the Arts, the Queensland Resources Council, training providers and academic providers. The Academy provides high school students with a direct route into the resources sector, helping to ease the skill shortages currently affecting the sector. Macarthur Coal is a sponsor of the Academy which is an important initiative for the ongoing sustainability of the resources sector in Queensland. More information on the Academy is available at the website at Taking steps to provide a satisfying workplace where employees are valued and respected > Discussions and workshops were held with mine site-based Macarthur Coal employees to investigate initiatives which could be implemented to overcome some of the problems faced by staff working in remote locations. A number of measures to improve conditions are being analysed and it is expected that remedial action will be taken during > Policies and procedures are in place to ensure employees are aware of their entitlements and obligations with respect to achieving a workplace free of harassment, discriminatory employment practices and unethical business practices. The documents are reviewed regularly and are provided to new employees on commencement. No instances of harassment, inequality of employment or unethical business practices were reported during the year. > Macarthur Coal implemented a new orientation process for commencing employees to ensure that they are provided with the necessary administrative information and Company policies and procedures to allow them to settle in quickly as a member of the Macarthur Coal team. > Macarthur Coal maintains a culture of open communication which fosters the free fl ow of information, enhances innovation and improves management. Directors and management are accessible and information sharing across all levels of the Company is encouraged and facilitated. > Weekly information meetings for all employees were implemented in The meetings are held at the corporate offi ce with mine site employees joining the meetings using teleconference facilities. The meetings enable the sharing of information and the highlighting of any issues or events which are relevant to staff, changes in the Company, policy updates and major outcomes from Board meetings. > Each year all Macarthur Coal staff attend a Culture Day. The purpose of the day is to bring employees, Board members and other relevant personnel (such as appropriate contractors) together to reaffi rm Macarthur Coal s values and principles and also to enable the sharing of ideas and information to help maintain and improve employee satisfaction and commitment levels. > Macarthur Coal relocated its corporate offi ce in late 2005 to better accommodate its growing team. Encouraging, recognising and rewarding outstanding performance > Executives and full-time employees may be eligible for bonuses for work or projects undertaken beyond the scope of their normal roles. Details of Macarthur Coal s Remuneration Policy are provided on pages 56 to 61 of this report. > Wherever possible and appropriate, Macarthur Coal pursues a policy of internal promotion. Macarthur Coal s staff profile ranges from those just starting out in the coal mining industry to those who have had a long and satisfying career in mining and who continue to make valuable contributions to the Company. The following story highlights just one of Macarthur Coal s employees and showcases the benefi ts to be gained by both parties when an employer values and supports its employees.

36 SOCIAL PERFORMANCE pp 32 Brian Shepherd: A career in mining, an invaluable asset for Macarthur Coal Brian Shepherd, Manager Engineering and Construction, epitomises the type of staff member Macarthur Coal strives to employ. Intelligent, articulate and dedicated to the mining industry, through his long and varied working life, he has brought a wealth of knowledge and insight to the Company. Born and raised in New Zealand, Brian trained as an electrical engineer at the University of Canterbury. Gaining employment as a graduate electrical engineer in Mount Isa, Brian found himself undertaking just about any and all engineering-based tasks that occur in the mining industry including design and construction. Brian says that being in this situation taught him a great deal about the mining industry, its people and its culture. Brian stayed at Mount Isa for six years before moving on to Kaiser Engineers and Constructors Inc. In 1976 Brian left Kaiser and went to Utah Development Co where he fi rst met future Macarthur Coal stalwarts Ken Talbot and Roger Marshall. The Utah Development Co was somewhat unique where all workers were valued for their experience and skills and emphasis was placed on giving employees the support and resources they needed to be able to do their jobs effectively. As Brian puts it, They were simply a great bunch of guys to work with. In 1984, Utah was bought out by BHP and Brian stayed with BHP Coal for 12 years before leaving to go into semi-retirement. While in retirement, Brian undertook a few consulting jobs but missed working full-time in the mining industry and so it was serendipitous when Ken Talbot contacted Brian to say he was building a mine and would Brian be interested in being an engineer on the project. Brian met with Bob Adams, Company Secretary, and Denis Wood who at the time was Managing Director of Macarthur Coal (C&M Management) Pty Ltd, and was offered the job. The project came in on time and on budget and, from the day that the fi rst washed coal came through, 26 January 1999, Coppabella Mine was a successful mine. Within 18 months it was delivering 3.5Mt per annum. Brian was also heavily involved in the planning and development of Macarthur Coal s second project, Moorvale Mine. And so, 2006 fi nds Brian nearing 70 and still getting as much satisfaction from his work as he was at the beginning of his career. He acknowledges that the ability to manage a personal life with a working life has also enabled him to extend his career well past the age when many men retire for good. Macarthur Coal looks after its people, he says. There have been times when I ve needed a break and, although it may not have been the most convenient time for the company, I was able to take a couple of months and go trekking with my wife and come back refreshed and ready to get to work again. Brian shows no signs of slowing down: While I m still fit and I have contributions to make I will keep working.

37 COAL, 24 / 7 pp 33 Our Community High school students from schools participating in the Shares for Schools Program. Macarthur Coal is an active and dedicated corporate citizen. In addition to working to provide wealth for shareholders, Macarthur Coal recognises that in order to be successful, it must be fully integrated into both the local and broader Queensland communities in which it operates. To this end, Macarthur Coal has a sponsorship and donations policy by which organisations seeking funding are assessed in order to determine which projects will be supported. The policy states that priority is given to those projects which impact on the local community and those which involve children. Macarthur Coal s contributions to these individual projects add to the $33.8 million of coal royalties which the Company paid to government in the 2006 fi nancial year and which go toward providing infrastructure for communities across Queensland. Joe Koch, General Manager, Operations Services. Macarthur Coal recognises that in order to be successful, it must be fully integrated into both the local and broader Queensland communities in which it operates.

38 SOCIAL PERFORMANCE pp 34 THE SCHOOLS INVOLVED IN THE PROGRAM Grouped according to the year in which they became involved Group Group Group Group Brisbane SHS Biloela SHS Beerwah SHS Burnside SHS Cavendish Road SHS Bowen SHS Blackwater SHS Ingham SHS Heatley Secondary College Brisbane Girls Grammar School Brisbane School of Distance Education Lourdes Hill College Mackay North SHS Bundamba SHS Gympie SHS Redcliffe SHS Mackay SHS Cairns SHS Proserpine SHS Rockhampton SHS Marist College Ashgrove Indooroopilly SHS Springwood SHS Warwick SHS Mitchelton SHS Moranbah SHS Toowoomba SHS Monto SHS Southport SHS SHARES FOR SCHOOLS SCHEME PERFORMANCE Group Initial no of shares Additional shares Total no of shares held Victoria Point SHS Value of initial shares Value when transferred from share Value at scheme 30 June , ,789 $2,000 $7,693 N/A 2 1, ,513 $2,000 $7,035 N/A $2,000 N/A $2, $5,000 N/A $4,202 Groups 1 and 2 have had their shares transferred and so the value at 30 June 2006 is unknown. Groups 3 and 4 have not yet had their shares transferred SHARES FOR SCHOOLS PROGRAM Since 2002, the Shares for Schools Program has been providing high school students with the opportunity to gain an insight into the business of a public company. In September, each school that participates in the program receives a parcel of the Company s shares. For the first three years of the program, schools received shares to the value of $2,000 however in 2005 this was increased to $5,000. The shares are held in trust for two years with dividends reinvested on behalf of the schools. Schools are encouraged to track the performance of the Company from the perspective of real shareholders. Shares held in trust mature after two years and schools are then given a choice of retaining their shares with ownership transferred to the school or selling the shares for the benefi t of their parents and citizens associations. To date, two groups have matured. All the schools in Group 1 opted to retain their shares as did all but one school in Group 2. A teacher and a student representative from each school are invited to attend the Company s Annual General Meeting. Students are then invited to submit a report on matters concerning fi nancial markets and issues affecting publicly listed companies to be eligible for the Macarthur Coal Award which is a $5,000 scholarship towards university fees and an additional $5,000 worth of Macarthur Coal shares for their school. Peter Chiesa of Ingham State High School received the award in Macarthur Coal is proud of the positive feedback received from the students and teachers involved in the program. Peter Chiesa of Ingham State High School, winner of the 2005 Macarthur Coal Award Since 2002, the Shares for Schools Program has been providing high school students with the opportunity to gain an insight into the business of a public company.

39 pp 35 The show features energetic, upbeat music to assist in keeping listeners alert while they are driving. Macarthur Coal also sponsors the Drive Home program which airs from 6pm to 8pm on weeknights. > MacArthur Museum The Bom Pasteur Therapeutic Community in Brazil. Some of the other social and community activities with which Macarthur Coal is involved are listed below: Macarthur Coal is a principal sponsor of the MacArthur Museum in Brisbane. The museum opened in 2004 and details Brisbane s role in World War II. The museum features the restored offi ce of General Douglas MacArthur, the Commander in Chief Allied Forces, South West Pacifi c Area. Information about the museum is available from > Abused Child Trust Macarthur Coal is committed to supporting initiatives which aid young people within Queensland. In 2006 the Company supported the Abused Child Trust, a registered charity which works to break the cycle of child abuse and neglect in Australia. Information about the Trust is available at > Nebo Medical Centre Macarthur Coal continued to support the local community by contributing $10,000 to the Nebo Medical Centre. The Centre, which was established in 2004, operates for two days per week and provides general practice services as well as WorkCover treatment for injury and rehabilitation. > Tennis Queensland Winter Circuit Macarthur Coal once again sponsored the Tennis Queensland Winter Circuit for The circuit involved three months of continuous competition for Australia s rising tennis stars. Tennis Queensland s website is at > Blackwater International Coal Centre Macarthur Coal became a major sponsor of the Blackwater International Coal Centre which is to be established in Blackwater to promote and showcase the Australian coal industry to tourists. The Centre will include a coal industry interpretive centre, an education and community centre, exhibition space, a theatre cinema and café merchandise outlet. It will also feature themed landscaping. > Nebo Newsletter Macarthur Coal is continuing its sponsorship of a monthly newsletter which is distributed to the Nebo and Coppabella communities. The newsletter highlights news and events which impact the local communities and provides a means of further communications with the local mines and mining companies. > Gorden Tallis Cup Macarthur Coal donated $10,000 towards the Gorden Tallis Cup, an under 10 rugby league competition in North Queensland held on the May Day weekend. It is a signifi cant event for Under 10 Rugby League development. > 4RFM Moranbah Community Radio Station The 4RFM community radio station at Moranbah is staffed almost entirely by volunteers and provides a range of programs and music to cater for the whole community. The station commenced in 1997 as a youth project but has since expanded and was granted a permanent broadcast licence in October Macarthur Coal sponsors the Triple A Morning Show which airs from 6am to 8am, seven days a week, and focuses on issues of safety and health in the community including the major issue of driver fatigue. > Natural Resources Conference 2006 Macarthur Coal sponsored the inaugural Queensland Natural Resources Conference held in Brisbane in May This conference, organised by the Department of Natural Resources, Mines and Water, addressed major issues confronting the resources sector such as sustainable uses of water, innovative agriculture and the shortage of skilled workers in the mining industry. > Queensland Minerals and Energy Academy The Queensland Minerals and Energy Academy (QMEA), a partnership between the Queensland government, the Queensland Resources Council and training and academic providers aims to give high school students clear pathways into one of the state s most innovative and economically important sectors. Macarthur Coal, along with other relevant organisations, sponsors the Academy which aims to help to reduce the skill shortages in the resources sector. See > Bom Pastuer Therapeutic Community The Bom Pasteur Therapeutic Community is a non-government drug and rehabilitation centre in Brazil. Macarthur Coal became a sponsor of the centre through its business relationship with Brazilian steel company, Gerdau Açominas.

40 pp 36

41 4 ENVIRONMENTAL PERFORMANCE pp 37 Our Environment pp 38 Pictured: Rehabilitated area at Moorvale Mine.

42 pp 38 ENVIRONMENTAL PERFORMANCE Our Environment COAL, 24 Top: Recently seeded and mulched rehabilitation area at Moorvale Mine. Bottom: Rehabilitated area at Moorvale Mine. Responsible environmental management is a priority for Macarthur Coal. It not only underpins our value of good corporate citizenship, but we believe that it is also integral to good business management. As part of its overall business approach and culture, and fundamental to the growth of shareholder valute, the Company is committed to undertaking its activities in a sustainable and responsible manner. Macarthur Coal operates within site-specifi c plans of operations, which have been approved by the Environmental Protection Agency (EPA). Amendments to these plans are also subject to EPA approval. Environmental activities at Coppabella and Moorvale mines are managed by the joint venture manager, Macarthur Coal (C&M Management) Pty Ltd (MCCM). MCCM is responsible for ensuring that all site contractors install, maintain and operate all plant and equipment in compliance with the conditions of the EPA. An Environmental and Government Liaison Offi cer oversees Macarthur Coal s environmental obligations and a full-time Environmental Coordinator is engaged to manage day-to-day environmental matters including monitoring environmental impacts and ensuring compliance with environmental regulations. The Environmental Coordinator s responsibilities include: > Setting, communicating and evaluating environmental objectives and targets. This involves working to management plans approved by the EPA to identify priorities for the coming year. Such priorities may include: evaluating and identifying how much rehabilitation will be undertaken and within which areas; monitoring and evaluating water management on an ongoing basis; and communicating with the EPA where necessary. > Developing and implementing environmental management documentation. During 2005 a database was established to enhance the management of environmental activities and objectives. Throughout 2006 the database was evaluated and streamlined to improve its effi cacy. As more data is collected and collated the database will be able to be used to produce comparative reports which will aid in tracking the progress Macarthur Coal is making in regard to environmental management objectives and targets. > Identifying requirements for corrective action. This involves regular inspection of rehabilitated areas and areas which are scheduled for rehabilitation to ensure that there are no issues which need to be addressed. When problems such as erosion or water quality issues are identifi ed, the Environmental Coordinator maps out corrective actions to address such issues and communicates them to the necessary parties. > Monitoring and reporting compliance against legislative requirements. Five years after rehabilitation of an area is undertaken, the Environmental Coordinator is required to report on progress to the EPA. In order to report comprehensively, regular ongoing inspections and audits of rehabilitated areas and information about any corrective action required is recorded. The Environmental Coordinator is also responsible for ensuring that any necessary actions or programs are implemented.

43 pp 39 Successful rehabilitation of mined areas is fundamental to Macarthur Coal s operating culture... ENSURING ENVIRONMENTAL AWARENESS All Macarthur Coal employees, contractors and suppliers of goods and services are informed of statutory and contractual obligations with reference to environmental requirements. The program to make employees aware of these obligations requires each site-based employee to undergo a site specifi c mine induction when they commence their employment which includes training in environmental awareness. If there are any changes to environmental statutes or policies, the Environmental Coordinator will liaise with the management of the contracting companies to ensure that all employees are informed of the new requirements. CONTINUOUS ENVIRONMENTAL REPORTING Management is provided with monthly environmental performance reports and any non-compliance issues are reported to the Board. There were no non-compliance issues in COMMUNICATING WITH THE LOCAL COMMUNITY Maintaining open communication and consultation with local communities is a priority for Macarthur Coal. Neighbouring landowners are contacted and informed of any blasting which is to take place and they are also sent selected environmental monitoring results such as those dealing with dust and/or water. Macarthur Coal realises the importance of building and maintaining local relationships through communication with and involvement in the local communities. REHABILITATION Successful rehabilitation of mined areas is fundamental to Macarthur Coal s operating culture. The Company aims to ensure that, in the long-term, its mining activities impact on the local ecosystem as little as possible. Rehabilitation is undertaken progressively on the mine sites and commences as soon as possible after disturbance ceases or areas are identifi ed as no longer reserved for infrastructure or subject to further disturbance. Provision for the cost of rehabilitation activities is made in the fi nancial statements and is detailed in Note 21 of the fi nancial report. Rehabilitation involves reprofi ling the designated area and replacing the stockpiled topsoil which was stripped and set aside during the commencement of the mining operations. The area then undergoes revegetation involving seeding, fertilising and mulching. After the seed has become established, trees are planted to provide further stability and to meet EPA requirements for end of mine life. Revegetation activities are undertaken just prior to the wet season as this timing maximises the success rates of the revegetation. Drought conditions meant that some of the planned rehabilitation activities for 2006 were delayed however good rainfall in May and June of 2006 ensured that areas that had previously undergone past rehabilitation are now established. Coppabella Mine has extended its funding to Stage 2 of an Australian Centre for Mining Environmental Research (ACMER) project involved in researching procedures to improve the identifi cation and management of the dispersive soils typically found at Coppabella Mine. The project objectives include predicting erosion risks, providing recommendations on the most suitable placement of dispersive topsoil and managing existing spoil dumps. The research fi ndings will be used to refi ne the rehabilitation program at Coppabella Mine. EXPLORATION Macarthur Coal s exploration activities are undertaken with sensitivity to match the particular circumstances that exist on each tenement, in accordance with the conditions of the relevant environmental authority and in consultation with landowners. The impact to landowners and the environment is minimised as much as possible and damage to any ecosystem is avoided. Environmental advice and guidance is sought from the EPA as needed. Once an exploratory hole is drilled, logged and surveyed, the hole is plugged and capped. The drill site is then rehabilitated with the backfi lling of any depressions and levelling of the site. Revegetation of drill sites and traverses is monitored over time and reseeded where necessary to the landowners satisfaction. Rehabilitation undertaken at Macarthur Coal s mines Coppabella Mine (hectares) Moorvale Mine (hectares) Prior to June Should the prospect progress to a mine development project, extensive environmental fi eld surveys are completed in support of the application for the grant of a mining lease Total as at 30 June Planned

44 ENVIRONMENTAL PERFORMANCE pp 40 Water storage at Moorvale Mine. WASTE MANAGEMENT Waste at Coppabella and Moorvale mines is managed by integrating the principles of the waste management hierarchy (avoidance, reduction, recycling or disposal) and avoiding any direct or indirect impact on the health of the local community or the diverse ecology surrounding the mine site. The Company has a waste management plan which has been approved by the EPA. The plan includes provision for the ongoing monitoring of waste management. Macarthur Coal s waste management policy does not permit landfi lls on site. All waste is removed by registered waste management contractors for recycling or disposal. Macarthur Coal s corporate office participates in reuse and recycling programs for laser printer cartridges, fax and ink cartridges and photocopier toner bottles. Waste paper is also collected and recycled. In 2006, Macarthur Coal undertook a Green Offi ce Audit of its corporate offi ce to identify any further areas where savings could be made. The results of the audit are now being analysed. WATER MANAGEMENT With Queensland in the grip of one of the worst droughts on record, water management at Macarthur Coal s two mines remains a priority. Water is recycled wherever possible and new ways of conserving water are currently being investigated. In 2006, a water simulation model for Moorvale Mine was completed. The computer-based system allows for the modelling of different scenarios depending on the data entered. The model uses catchment size, pump and material fl ow, topographical survey data, water quality estimations and historical rainfall data to simulate the performance of the site water management system. The model contains over 100 years of rainfall data which allows for robust predictions. In addition to rainfall, the model can also be used to simulate water quality, runoff patterns and the probability of signifi cant rain events. For example, it allows for the modelling of a scenario which would show where runoff would occur should an exceptional rain event take place. By observing the output from the model and taking into account the detailed historical data, plans can be put in place to deal with such an event if necessary. The model can also be used to prioritise water management projects by predicting the likelihood of the occurrence of signifi cant events. Output from the model is reviewed when necessary. Data is currently being collated to allow adaptation of the model for use at Coppabella Mine as well as Moorvale. Good rainfalls in May and June of 2006 ensured that onsite water storages were replenished and will provide enough water until the Moranbah and Eastern Spur pipelines are completed. Construction of the Eastern Spur Pipeline (from Moranbah to Coppabella Mine) is on schedule to provide water from Eungella Dam by September Construction of the Burdekin to Moranbah pipeline is also in progress and it is expected that Macarthur Coal will commence drawing its full water allocations from mid 2007 following the completion of the supporting power infrastructure. SUSTAINABLE PRODUCTION AND COAL USE INITIATIVES The drive to increase research and development into clean coal technology and sustainable production has grown during the past year with major funding announcements from the federal and Queensland governments as well as the coal mining industry. The federal government announced a $500 million Low Emissions Technology Demonstration Fund which will support the commercial demonstration of technologies that have the potential to deliver large-scale greenhouse gas emission reductions in the mining sector.

45 pp 41 Macarthur Coal is a participant in COAL21 which is an initiative of the Australian Coal Association aimed at reducing greenhouse emissions. The Queensland government announced that it has created a Clean Coal Technology Board to foster the development of and investment in clean coal technologies. The government has earmarked $300 million from the Queensland Future Growth Fund to develop the technology. COAL21 Macarthur Coal is a participant in COAL21 which is an initiative of the Australian Coal Association aimed at reducing greenhouse emissions arising from the use of coal in electricity generation in Australia. It is a collaborative, consensus-building program involving participants from federal and state government, the coal and electricity industries, and research organisations. The Australian black coal mining industry, including Macarthur Coal, will provide up to $300 million over the next fi ve years to work with the electricity generation industry to develop promising technologies for reducing greenhouse gas emissions from coal-fi red power stations. The objectives of COAL21 are to: 1. Create a national plan to scope, develop, demonstrate and implement near zero emissions coal-based electricity generation that will achieve major reductions in greenhouse gas emissions over time while maintaining Australia s low cost electricity advantage. 2. Use the plan to inform governments and industry as an input to policy development. 3. Facilitate the demonstration, commercialisation and early uptake of technologies identifi ed in the plan. 4. Promote relevant Australian research development and demonstration (RD&D) so that it can both build upon and make a unique contribution to international RD&D in the area. 5. Foster greater public awareness of the role of coal and the potential for near zero emissions coal-based electricity generation to signifi cantly reduce or eliminate greenhouse gas emissions and other environmental impacts associated with its use. 6. Provide a mechanism for effective interaction and integration with other international zero emission coal initiatives. More information about COAL21 can be found at Greenhouse Challenge Plus Macarthur Coal (C&M Management) Pty Ltd, manager of the Coppabella and Moorvale Joint Venture, is a signatory to the Greenhouse Challenge Plus which enables Australian companies to form working partnerships with the Australian government to improve energy effi ciency and reduce greenhouse gas emissions. As a signatory, MCCM undertakes to integrate greenhouse issues into its decision making processes. Examples of the commitment minimising CO2 emissions include: > use of a Marion 8200 electric dragline for overburden removal at Coppabella Mine. It is estimated that the dragline reduces CO2 emissions by approximately 1,400 tonnes annually compared to an equivalent truck and excavator fl eet. > use of combo-body trucks in the Roche Mining truck fl eet at Coppabella Mine. Combo body trucks are lighter than other trucks and provide fuel savings and reductions in CO2 emissions. It is estimated that up to fi ve tonnes of CO2 can be saved annually by using combo trucks as part of the fl eet rather than standard trays. > ordering of a P&H 4100C electric shovel to supplement the dragline. The shovel is expected to commence operation in mid As the shovel is electric, its use will help to reduce diesel usage and reduce CO2 emissions. More information about the Greenhouse Challenge Plus can be found on the website at Australian Coal Association Research Program (ACARP) ACARP s mission is to research, develop and demonstrate technologies that lead to the safe, sustainable production and use of coal. Australian black coal producers, including Macarthur Coal, contribute fi ve cents per tonne of coal sold towards research undertaken by ACARP. Key research areas are greenhouse gas mitigation, occupational health and safety, the environment and rehabilitation of mined land, community concerns and land access, cost of production and technical support for marketing Australian coals. Macarthur Coal is participating in an ACARP study to determine best practice for water and mine management in northern Bowen Basin coal mines. ACARP s website is at Environmental Coordinator, Scott Golding, inspecting a rehabilitated area at Moorvale Mine.

46 pp 42

47 5 LEADERSHIP AND MANAGEMENT pp 43 Board of Directors pp 44 Management pp 45 New Management Structure pp 46 Corporate Governance pp 48 Directors Report pp 55 Pictured: Richard Boothby, Coal Quality and Logistics Offi cer Mark Van Moolenbroek, Coal Quality and Logistics Coordinator Maureen McDermott, Coal Quality and Logistics Offi cer.

48 LEADERSHIP AND MANAGEMENT pp 44 COAL, 24 / 7 Board of Directors BOARD OF DIRECTORS Ken Talbot, 56 Don Nissen, 62 Keith De Lacy, AM, 66 Roger Marshall, OBE, 67 Peter Forbes, 58 BE, ME, ASIA, FAICD, FAusIMM Chief Executive Officer/ Managing Director FAIM, FAICD Independent, non-executive director BA, HonDLitt, DUniv, QDA,FAICD, FAIM Chairman Independent, non-executive director BE, MAusIMM, FAIM, FAICD Deputy Chairman Non-executive Director FCPA, FCIS, FAICD, SA Fin. Independent, non-executive director Ken began his career as a cadet mining engineer in 1971 and has more than 35 years of industry experience. He has been Chief Executive Officer/Managing Director of Macarthur Coal since the company was listed on the Australian Stock Exchange on 5 July Ken received the 2006 Australian Export Heroes Award, presented by the Australian Institute of Export, in recognition of an extraordinary contribution to the growth and development of Australian Exports. Ken was named the Champion of Entrepreneurship at the Northern Region Entrepreneur of the Year Award Presentation for 2006, a program founded and produced by Ernst & Young. This award recognises an individual who has a long-term record of outstanding entrepreneurial achievement and has driven the growth of an Australian company over a sustained period of time. Ken was appointed to the Nomination and Remuneration Committee on 13 June Don has more than 41 years of experience in banking and finance including ten years as the Queensland General Manager for the Commonwealth Bank. He has been a Macarthur Coal director since 5 July Don was appointed as Chairman of the Audit and Risk Management Committee on 18 February Don s appointments to boards of other publicly listed companies include Ariadne Australia Limited from 17 February 2001 and Brisbane Broncos Limited from 16 November 1998 to 25 October Keith has extensive commercial experience. He is a former Treasurer of Queensland and is a prominent company director. He has been Macarthur Coal Chairman since the Company s public listing on 5 July Keith was appointed to the Audit and Risk Management Committee on 18 February 2003 and the Nomination and Remuneration Committee on 13 June Keith is Chairman of Queensland Sugar Limited and the Global Sugar Alliance and Cubbie Group Ltd. Keith s appointments to boards of other publicly listed companies include Chairman of Trinity Consolidated Group Limited from 14 December 2004 and Director of Reef Corporate Services Limited from 1 December In the 2006 Queen s Birthday Honours, Keith was made a Member of the Order of Australia for service to the Queensland Parliament as Treasurer, to business and public administration and to the community of Cairns. Roger has extensive domestic and international coal industry experience covering management, marketing, fi nance and operational roles. He has been Macarthur Coal s Deputy Chairman since 5 July Roger was appointed to the Nomination and Remuneration Committee on 13 June Roger s appointments to boards of other publicly listed companies include Chairman of Queensland Ores Limited from 18 May 2005, CITIC Australia Trading Limited from 3 April 2002, Copper Resources Corporation Ltd from 1 November 2005 and A.G.D. Mining Limited from 20 July 1999 to 4 May Peter has more than 30 years of experience in senior financial and corporate management roles, including 14 years as Deputy Chief Executive and Executive General Manager Equities for Queensland Investment Corporation, one of Australia s largest wholesale fund managers. Peter was appointed as a Macarthur Coal director on 14 November He was appointed to the Audit and Risk Management Committee on 14 November Peter is Chairman of Emerging Growth Capital Pty Ltd and Director of both Cubbie Group Ltd and QIC Private Capital Pty Ltd.

49 COAL, 24 / 7 pp 45 Management The following shows the management team as it was during Shane Stephan, 43 BBus (Dist), MBA (AGSM), MAusIMM, Certifi ed Mine Manager Vice President Open-cut Production Shane was appointed to this position in May 2006 having formerly held the position of Vice President Strategy and Corporate Development. He is responsible for managing the operations of Macarthur Coal s opencut mines. Shane has more than 18 years of coal mining experience including senior line management roles, experience as the District Inspector of Mines in Queensland and as a member of the Coal Industry Health and Safety Advisory Council in Queensland. Shane was also previously employed as an executive in the structured and corporate finance divisions of an international investment bank. Gary Lee, 51 BAppSc (Hons) Vice President Marketing Gary was appointed in January 2004 and is responsible for the sales and marketing of all coal types from Coppabella and Moorvale mines. Gary has more than 29 years of coal industry experience in both technical and marketing roles. He has extensive experience in all of Australia s major coal markets for both metallurgical and thermal coal. Brett Garland, 47 BE (Hons) (Mining), Certifi ed Mine Manager, FAusIMM, CP (Mining) Vice President Underground Mine Development Brett was appointed to this portfolio in March 2006 and is responsible for the development of the company s underground mine projects along with production systems and innovation. Brett has over 28 years of experience in the coal mining industry including 15 years in senior management roles. He gained extensive underground experience working in the southern and western coalfi elds of New South Wales and in the Queensland Bowen Basin coalfi elds in operational and management roles. Ian Neill, 45 BE (Hons) (Mining), MAppSc (Mining Geomechanics), AAICD, Certifi ed Mine Manager Vice President Open-cut Development and Business Improvement Ian was appointed in November 2004 and is responsible for the management and coordination of Macarthur Coal s exploration program and the development of new open-cut projects identified through exploration. Ian has over 23 years of experience in the mining industry in technical, operational and senior mine management roles at large scale opencut mines in Queensland and New South Wales. Nicole Hollows, 35 BBus (Acctg), Grad Dip CSP, Grad Dip Adv Acctg (Dist), ACIS, CA Chief Financial Officer Nicole was appointed in November 2002 having formerly held the position of Chief Financial Officer for Macarthur Coal (C&M Management) Pty Ltd the manager of the Coppabella and Moorvale Joint Venture since Nicole is responsible for all commercial aspects of the business including treasury, finance and financial reporting. Nicole has more than 14 years of commercial experience including debt finance, financial reporting, commercial negotiations and business analysis as well as over six years experience in the accounting profession. Bob Adams, 52 BBus (Acctg), Grad Dip CSP, ACIS, CA, GAICD Company Secretary Bob has worked at Macarthur Coal since its inception in 2001 and is responsible for the administrative support of the Board, compliance with the ASX Listing Rules and all shareholder reporting. Macarthur Coal benefits from Bob s more than 25 years of mining industry experience covering commercial functions including financial management, equity raising and debt fi nance as well as experience in the accounting profession. Ian McAleese, 53 Certifi cate in Geology, DipAICD, MAusIMM Vice President Corporate Development Ian McAleese was appointed in April 2006 having been previously General Manager, Investor Relations and Corporate Development. He is responsible for managing Macarthur Coal s growth strategy, investor relations program and equity raisings. Originally trained as a geologist, Ian worked in a variety of countries and companies in both exploration and mine geology before moving into the financial sector where he gained over 20 years of experience in funds management and business analysis working firstly as a mining analyst and subsequently as a portfolio manager. Denis Wood, 55 BSc (Geology), Metallurgy Certifi cate Managing Director, Queensland Coke & Energy Pty Ltd Denis has been associated with Macarthur Coal since 2001 and has responsibility for investigating the feasibility of the coke project. If the decision is taken to proceed with the project, Denis responsibilities will extend to the construction and commissioning of the coke plant. Denis has 37 years of experience in the steel and coal industry. His previous experience includes steel production, coal preparation, marketing, business development and new mine development. Ken Carnes, 58 MA Economics Vice President Marketing (Asia) Ken was appointed in December 2003 and is responsible for the marketing of all coal types in the Asia Pacific region. Ken has more than 31 years of experience in the coal industry in Canada and Australia and has been involved in the marketing of Coppabella and Moorvale coals since the mines were developed.

50 pp 46 LEADERSHIP AND MANAGEMENT COAL, 24 / 7 New Management Structure Coal conveyor belt at Moorvale Mine. Macarthur Coal is a company which is growing in both size and complexity. In order to ensure that the Company remains effective and efficient, in August 2006, the Board approved a new management structure for the Company. The new structure refl ects the growth in the Company and provides the necessary mix of skills, experience and expertise to continue to expand the Company and increase shareholder wealth. Board of Directors Audit and Risk Management Committee CEO/Managing Director Ken Talbot Nomination and Remuneration Committee Deputy Chief Executive Officer Nicole Hollows VIP Operations Ian Neill Chief Financial Officer Shane Stephan VP Marketing Gary Lee Company Secretary Bob Adams VP Business Improvement Derick Wilford VP Corporate Development M&A Ian McAleese General Manager Open-Cut Development & Infrastructure Michael Gray VP Underground Development & Exploration Brett Garland General Manager Marketing Scott Croger VP Marketing Asia Ken Carnes

51 pp 47 The major changes are: > Nicole Hollows has been appointed Deputy Chief Executive Offi cer. > Shane Stephan moves to the role of Chief Financial Offi cer. > Ian Neill becomes Vice President Operations. > Michael Gray has been promoted to the position of General Manager Open-cut Development and Infrastructure. > Brett Garland s role alters slightly to Vice President Underground Development and Exploration. > Ian McAleese retains the role of Vice President Corporate Development and also takes on Mergers and Acquisitions. > Bob Adams, Company Secretary, Gary Lee, Vice President Marketing, and Ken Carnes, Vice President Marketing (Asia), retain their roles. > Scott Croger has been promoted to the position of General Manager Marketing. > Derick Wilford has been promoted to the position of Vice President Business Improvement. Derick Wilford, 58 Assoc. Dip. Engineering (Coal Mining), Certifi ed Mine Manager Vice President Business Improvement Derick was appointed to this position in August 2006 and is responsible for investigating opportunities to enable Macarthur Coal to better respond to an increasingly more complex and competitive business environment. Derick has worked in the mining industry for over 35 years and has experience in technical, operational and senior mine management roles at large scale open-cut mines in Queensland. Michael Gray, 38 BE (Civil), MBA General Manager Open-cut Development and Infrastructure Michael was appointed to this position in August 2006 having previously held the position of Manager- Infrastructure. In his new role he is responsible for the development of new open-cut projects and the management of Macarthur Coal s long-term infrastructure requirements. Michael has over 15 years of experience in the planning and development of major mining, industrial and infrastructure projects in Queensland and has had extensive involvement in resource development, environmental management and native title issues. Scott Croger, 32 BAppSci, Grad Dip Management (Marketing) General Manager Marketing Scott was appointed in January 2005 and is responsible for assisting with the sales and marketing of all coal types from Coppabella and Moorvale mines. Scott has ten years of coal industry experience in both operational and marketing roles and has also worked within the aluminium industry.

52 pp 48 LEADERSHIP AND MANAGEMENT Corporate Governance COAL, 24 / 7 Coal mining at Coppabella Mine. Macarthur Coal s Corporate Governance System (the way a company is directed and managed) seeks to encourage shareholder value creation through entrepreneurial approaches to innovation, development and exploration with control systems in place and the Board of Directors being accountable to shareholders for the performance of the Company. Macarthur Coal s Corporate Governance System accords with the ASX Corporate Governance Council s Principles for Good Corporate Governance with all best practice recommendations having been adopted. Details of the Company s main corporate governance practices throughout the fi nancial year are outlined below. BOARD OF DIRECTORS Role of the Board The Board s primary role is to protect and enhance long-term shareholder value. The Board has responsibility for the effective oversight of Macarthur Coal and guiding and monitoring its activities to ensure proper management and constant improvement. Specifi cally the Board has responsibility for: > approving, evaluating and monitoring strategic objectives, plans and budgets > approving and overseeing major expenditure, acquisitions/divestments and business operations > overseeing the Chief Executive Offi cer s (CEO) performance > approving the appointment/removal of senior management > determining acceptable risk and overseeing the risk management system and internal control system > approving fi nancial reports > setting remuneration Further details of the responsibilities are provided in the Company s Board Charter and Directors Code of Conduct. Copies of the Company s corporate governance documents are on its website: 2.5, 3.3, 4.5, 5.2, 6.2, 7.3, 9.5 The documents are: > Board Charter 1.1 > Audit and Risk Management Committee Charter 4.4 > Nomination and Remuneration Committee Charter > Corporate Code of Conduct 3.1, 10.1 > Directors Code of Conduct 3.1 > Continuous Disclosure Policy 5.1 > Share Trading Policy 3.2 > Shareholder Communication Policy 6.1 > Risk Management Policy 7.1 Day-to-day operation of Macarthur Coal is delegated to the CEO and senior management team. The roles of Chairman and CEO are not exercised by the same person 2.3. Board processes Board meetings are generally held monthly and additional meetings are convened for matters requiring special attention. Senior management is invited to participate in Board meetings as required. Board meeting agendas are developed in consultation between the Chairman and CEO. Standard agenda items include: operations; marketing; health, safety and environment; fi nance; business development and investor relations. Agendas and Board papers are provided to the Board approximately one week prior to meetings to allow suffi cient time for review. The Board has established two committees to assist in the execution of its responsibilities: the Audit and Risk Management Committee 4.2 and the Nomination and Remuneration Committee 2.4, 9.2.

53 pp 49 Each committee s mandates and procedures are detailed in their respective charters. The charters are required to be reviewed annually to ensure their continued appropriateness. The charters have been reviewed within the past 12 months. The Board has also developed a framework that includes a system of internal control, a business risk management process and appropriate ethical standards. Composition of the Board Details of the directors of the Company at the date of this report are set out on pages 31 to 32 of this report 2.5, 4.5. The Board comprises fi ve directors, the number determined as appropriate for ensuring the effi cient oversight of Macarthur Coal s business as an explorer for coal, coal mine developer and coal mine operator. Five directors are also deemed appropriate to enable the requirements of Board committees to be fully satisfi ed. Directors collective experience includes coal mine operation, project development, corporate governance, capital markets, banking, government and marketing. The Board has been structured to add value to Macarthur Coal. The majority of directors are independent and an independent, non-executive director serves as Chairman 2.1, 2.2. One third of the directors (excluding the CEO) are required to retire from offi ce each year. The number of directors retiring is to be greater than one third if the number of directors on the Board (excluding the CEO) is not divisible by three. Retiring directors may be re-elected. The ASX Corporate Governance Council s Principles for Good Corporate Governance and Best Practice Recommendations deem a director to be independent if the director is not a member of management (i.e. a non-executive director) and is free of any benefi t, business or other relationship that could materially interfere with or reasonably be perceived to interfere with the exercise of unfettered independent judgment. Keith De Lacy, Don Nissen and Peter Forbes are independent directors 2.1, 2.5. Each: > Holds less than 5% of the Company s ordinary shares and is not an offi cer of or otherwise associated directly with a shareholder with 5% or more of the Company s ordinary shares > Has never been employed as an executive by Macarthur Coal > Has never been a consultant or an advisor to Macarthur Coal > Has never been a customer or supplier to Macarthur Coal > Has no contractual relationship with Macarthur Coal other than as a director and shareholder > Is free from any interest and any business relationship which could be perceived to materially interfere with the director s ability to act in the best interests of Macarthur Coal. Roger Marshall, while a non-executive director, is not classifi ed as independent because he receives a consulting fee of $100,000 per annum for directing the exploration program. He also is a party to an arrangement with CITIC Resources Australia Pty Ltd which provides for the payment to him of an amount equal to 1% of any net realised profi t before tax made from the sale of CITIC s interests in exploration tenements held in certain joint ventures in which Macarthur Coal participates. Director education Macarthur Coal has a formal induction process to educate new directors about the nature of the business, current issues, the corporate strategy and Macarthur Coal s expectations concerning director performance. Other initiatives undertaken to enable directors to remain abreast of latest industry and corporate developments include: > Memberships of professional associations such as the Australian Institute of Company Directors, Australian Institute of Management, Securities Institute of Australia, Chartered Secretaries of Australia, CPA Australia and Australian Institute of Mining and Metallurgy > Visits to Macarthur Coal s mining operations > Visits to Macarthur Coal s customers > Attendance at industry related conferences, seminars and professional education programs. Independent professional advice and access to Company information Each director has the right of access to Company information and employees. An open communication policy applies throughout Macarthur Coal to facilitate this process, enabling the Board of Directors to access any member of staff at any time and vice versa. Directors may access independent professional advice, subject to prior consent from the Chairman. The cost of such advice is met by the Company. The Chairman may determine that any advice received by an individual director will be circulated to the remainder of the Board 2.5. NOMINATION AND REMUNERATION COMMITTEE The Nomination and Remuneration Committee has responsibility for ensuring that the Board comprises individuals best able to discharge their responsibilities as directors and that remuneration arrangements are equitable and transparent. Nomination functions The Committee has responsibility for the following nomination functions: > determining the skills and competencies necessary for the effi cacy of the Board > establishing guidelines for the evaluation of the Board and its individual members > identifying suitable candidates for appointment to the Board > recommending the appointment or removal of directors > selecting and appointing the Company s CEO. The Committee comprised the following directors during , 9.5 : > Keith De Lacy - Chairman, independent, nonexecutive director > Roger Marshall - non-executive director > Ken Talbot - executive director. Although the majority of committee members are non-executive directors as opposed to independent directors, the Board believes that the Committee has the necessary level of independence to be effective and to provide impartial recommendations to the Board.

54 LEADERSHIP AND MANAGEMENT pp 50 NOMINATION AND REMUNERATION COMMITTEE (CONTINUED) Nomination functions (continued) Ken Talbot remains a non-independent director due to his position as CEO of Macarthur Coal and as a result of being in control of an entity that holds 35.57% of the Company s issued capital. The committee met twice during the year. Attendance is detailed in the table of directors meetings on page , 9.5. The policy and procedure for selection and appointment of directors is set out in the Nomination and Remuneration Committee Charter, available on the Company s website: In June 2006 the Chairman of the Nomination and Remuneration Committee reviewed the performance of directors, Board committees and the CEO 8.1. The review also considered the nomination of directors due for reappointment. Re-appointment is contingent on positive performance and contribution to Macarthur Coal and the ability to contribute to the future needs of the Board. The evaluation revealed that all directors collectively contribute the desired skills and competencies to the Board and Board committees. The Board therefore supports the re-election of Keith De Lacy and Don Nissen who are subject to retirement and re-election at the AGM in November Remuneration functions The Nomination and Remuneration Committee also has responsibility for: > reviewing and making recommendations on the appropriateness and relevance of the remuneration policy, having regard to market factors and the requirements of the Company and including the requirement, where necessary, for shareholder approval of remuneration practices > considering the remuneration of executive and non-executive directors and management and making recommendations to the Board > recommending the design and total proposed payments for all management incentive plans. Remuneration Report The Remuneration Report which includes the Company s remuneration policy is set out on pages 56 to The report distinguishes the structure of nonexecutive directors remuneration from that of executive directors 9.3. Equity based executive remuneration is limited to interest free loans provided by Macarthur Coal to facilitate the purchase of shares in the Company. The loans were provided to employees in December The Company has limited recourse only to the lower of the value of the shares or loan balance. If the market value of the shares is less than the loan balance, the employee is liable only for the lower amount. These loans are in substance options which are equity settled share based payments within the scope of AASB 2 Share based payment. Directors receive shares to the value of $10,000 as equity based remuneration. The provision of shares was approved at the 2004 AGM 9.4. AUDIT AND RISK MANAGEMENT COMMITTEE The Audit and Risk Management Committee oversees fi nancial reporting, risk management and disclosure processes. The Committee comprises the following directors: 4.5 > Don Nissen - Chairman > Keith De Lacy > Peter Forbes. All directors are independent, non-executive directors and possess fi nancial expertise. The Chairman of the Audit and Risk Management Committee is not the Chairman of the Board 4.3. The Committee is required to meet at least four times annually and met six times during Details of attendance are provided on page The Audit and Risk Management Committee operates in accordance with the Audit and Risk Management Committee Charter approved by the Board and available on the Company s website 4.5. Audit function The Committee has responsibility for: > the adequacy and effi cacy of the accounting system > the appropriateness and consistency of accounting policies with Australian Accounting Standards and other mandatory fi nancial reporting requirements in Australia > the integrity and quality of external fi nancial reporting > the independence, objectivity, scope and quality of external audits. KPMG were appointed auditors on 22 June 2001 and Macarthur Coal s engagement partner has been the same since. Macarthur Coal intends to adhere to the principle of rotating audit engagement partners every fi ve years > assessment as to whether non-audit services provided by the external auditor are consistent with maintaining the external auditor s independence. Each reporting period the external auditor provides a declaration of independence in relation to the audit or half year review > provision of advice to the Board regarding the non-audit services performed by the external auditor and compatibility with the general standard of independence of auditors imposed by the Corporations Act 2001 > the review and monitoring of related party transactions and compliance with director related party transaction regulations > evaluation of the corporate risk assessment processes and the adequacy of the internal control framework > evaluation of the performance and objectivity of the internal audit function. Ernst & Young provide internal audit services > management of any outstanding matters with auditors, the Australian Taxation Office, Australian Securities and Investments Commission, ASX and fi nancial institutions. The CEO and Chief Financial Offi cer (CFO) provided written confi rmation to the Audit and Risk Management Committee and the Board that Macarthur Coal s financial report for the year ended 30 June 2006 presented a true and fair view in all material respects of the consolidated entity s financial position and performance, and accords with the relevant accounting standards 4.1. The Committee has unrestricted access to employees, the external and internal auditors and appropriate external advisors. The external auditor is provided with the opportunity to meet with the Committee without senior management being present to ensure that issues can be discussed in an uninhibited manner. The CFO, the Financial Controller and the Company Secretary attended all committee meetings at the invitation of the Committee. The external auditor, KPMG, attended four meetings at the Committee s invitation. The internal auditor, Ernst & Young, also attended four meetings at the Committee s invitation.

55 RISK MANAGEMENT Oversight of the risk management system The Audit and Risk Management Committee also has responsibility for ensuring Macarthur Coal s maintenance of a structured and documented approach to risk management and that it is integrated into day-to-day operations. Management has implemented a Risk Management System for assessing, monitoring and managing operational fi nancial reporting and compliance risks. The CEO and CFO have declared in writing to the Board 7.2 that: > The integrity of Macarthur Coal s financial statements is founded on a sound system of risk management and internal compliance and control system which, in all material respects, implements the fi nancial policies adopted by the Board of Directors either directly or through delegation to senior executives > The risk management and internal compliance and control systems to the extent they relate to fi nancial reporting are operating effectively in all material respects. Detailed risk registers have been developed to cover Macarthur Coal s business activities. The registers detail: > events with the potential to cause loss > consequences > existing mitigators > an assessment of the mitigators > an assessment of residual risk > a judgment on whether residual risk is within Board approved tolerance levels > action plans to reduce residual risks below tolerance levels. Management is required to implement the improvements detailed in the action plans. Risk profile A risk profi le has been developed from the risk registers to prioritise identifi ed risks that require monitoring and the action required reducing risks to below tolerable levels. The major risks identifi ed include coal price volatility, major changes in markets, contractor non-performance, business interruption, inability to increase coal reserves, ineffective management of joint ventures, ineffective management of mining operations and foreign exchange volatility. A Risk Management Policy 7.1 has been developed requiring Macarthur Coal s activities to be undertaken within Board approved risk tolerance levels to protect profi tability and assets. A copy of the Risk Management Policy and Framework is available on the company s website: www. macarthurcoal.com.au. The policy complements Macarthur Coal s other policies, procedures and codes to manage risk: > Continuous Disclosure 5.1 : to ensure that price sensitive information is released to the market through a structured process in compliance with the ASX continuous disclosure rules and that third party briefi ngs are conducted only by authorised personnel > Delegation of Authority Policy: to ensure that commitment of Macarthur Coal funds, the subsequent expenditure of those funds and asset disposals are approved by personnel with proper delegated authority > Short-term Investments: to ensure that liquidity to meet operational requirements is maintained, that adequate controls are maintained to minimise loss of capital and that only authorised products are used > Foreign Exchange: to ensure exposure to currency risk caused by foreign exchange rate volatility is minimised and that only low risk hedging products are used > Environment: to ensure that Macarthur Coal s operations are carried out at all times in compliance with all legislated environmental legislative requirements, with adherence to all relevant business codes of practice and with due regard to acceptable environmental standards > Employment: to ensure that staff carry out operations in compliance with legislative requirements, adhere to all relevant business codes of practice and have due regard to required ethical standards > Share Trading: to ensure that all trading in the Company s securities by employees and directors accords with Macarthur Coal s share trading policy, Common Law, the Corporations Act and the ASX Listing Rules > Fraud and Corruption: to protect Macarthur Coal, its revenue, property, information and other assets from any attempt - either by members of the public, contractors or its own employees - to gain by deceit, fi nancial or other benefi ts > Segregation of Duties: to minimise the opportunity for fraud to be committed or an error to be overlooked by ensuring that Macarthur Coal s financial activities are adequately segregated > Code of Conduct: to ensure legal and ethical obligations to all stakeholders are met. Written confi rmation of compliance with the above policies and other corporate policies is obtained from all employees. No material issues of non-compliance were reported in the 2006 fi nancial year. Assessment of effectiveness of risk management Internal Audit Ernst & Young have assisted the Board in ensuring compliance with internal control and risk management programs. The audit program includes a review of the effectiveness of the compliance and control systems. Audit activity is structured around the risk registers with a focus on the risks identifi ed as having the greatest potential to adversely affect Macarthur Coal. ETHICAL STANDARDS All directors and employees are expected to adhere to certain basic principles in all activities in recognition of the fact that Macarthur Coal s reputation is an essential element of its success. The ethical requirements for directors and employees are contained in the Company s Corporate Code of Conduct and Directors Code of Conduct 3.1, The manuals are reviewed annually and made available to directors and all staff. New employees are made aware of the obligations as part of their induction process. Corporate Code of Conduct Macarthur Coal has ensured that all employees and directors are aware of their obligation to comply with its Corporate Code of Conduct. The Code sets out the standards to which staff will adhere in conducting business, including: > commitment to shareholders > compliance with the law > environmental protection > occupational health and safety > equal employment > confi dentiality > confl ict of interest > general conduct > reporting unethical behaviour. The Corporate Code of Conduct can be accessed on the Company s website: pp 51

56 LEADERSHIP AND MANAGEMENT pp 52 Directors Code of Conduct The Directors Code of Conduct sets out the principles that apply to directors in addition to those stipulated in the Corporate Code of Conduct, including: > behaviour that serves the best interests of Macarthur Coal > exercise of care and diligence > proper use of information > full and frank disclosure of potential or actual confl icts of interest > enquiring, open and independent processes at meetings > maintenance of confi dentiality > avoidance of any activity which could bring Macarthur Coal into disrepute > adherence to all corporate governance policies > devotion of suffi cient time to execute duties > compliance with the spirit as well as the letter of all laws > trading in Company securities in accordance with the Company s Share Trading Policy. The Directors Code of Conduct can be accessed on the Company s website: Conflict of interest Directors declare any personal material interest to the Board as it arises to provide the Board with standing notice of potential confl icts of interest and factors that may affect independence. Any director with an interest in a transaction is required to withdraw themselves from the Board decision making process. Decisions related to the matter creating the confl ict are determined in the absence of the affected director. Additionally, standing notices of material personal interests are tabled for noting in Board minutes. Details of director related entity transactions with Macarthur Coal are set out in Note 33 to the fi nancial statements. Trading in company securities by directors and employees Macarthur Coal encourages ownership of Company shares by directors, employees and contractors as a means of aligning their interests with shareholders interests. However, trading in the Company s securities is to occur only in accordance with the Company s Share Trading Policy, 3.2 Common Law, the Corporations Act and the ASX Listing Rules. The Company established its Share Trading Policy to succinctly inform directors, employees and contractors of the permissible trading windows, thus minimising the risk of securities being traded by a director, employee or contractor when in possession of price sensitive information that is not in the public domain. Key elements of the policy are: > an explanation of the need for a Share Trading Policy > details of permissible and prohibited trading periods > an explanation of what constitutes price sensitive information. The Share Trading Policy requires directors, employees and contractors to inform the Company Secretary of any trading in Company securities, whether conducted personally, through a family member, through a trust or through a company in which they have any infl uence or control. The Share Trading Policy can be accessed on the Company s website: COMMUNICATION WITH SHAREHOLDERS The Company takes its obligations to communicate with shareholders seriously and is committed to monitoring and improving communication. The Shareholder Communication Policy 6.1 was established to ensure that shareholders are provided with timely, balanced communication that is written in plain language. Shareholder communication is conducted in accordance with the Company s Continuous Disclosure Policy, the ASX Listing Rules and the Corporations Act. The Company Secretary has been appointed to deal with shareholder queries, whether in person, via the telephone, or post. Principally, the Company communicates with shareholders in the following ways: 1 ASX announcements Information with the potential to affect the price or value of the Company s securities or to infl uence an investor s decision to trade in the Company s securities is released to the ASX and then placed on Macarthur Coal s website. Selective or differential disclosure is obviated, thereby ensuring that no individual or group benefi ts from possession of market sensitive information. The procedure for dealing with sensitive material is as follows: > Any matter which has the potential to infl uence the Company s share price or that is required to be released to the market is to be disclosed to the Company Secretary > The Company Secretary drafts an ASX announcement if the CEO or Chairman deems one necessary > The draft is circulated to the Board for comment. Final approval is then obtained from the CEO. > Following receipt by the ASX, a copy of the announcement is placed on the Company s website. The Company made 68 ASX announcements during the year including quarterly, half year and full year reports. The major announcements were: 28 July 2005 China Huaneng Group to Join Monto Thermal Coal Project The Directors of Macarthur Coal reported that the Company entered into an agreement with a member of the China Huaneng Group to sell half of Macarthur Coal s existing 51% interest in the Monto thermal coal project (25.5%) for a total consideration of A$ million subject to the satisfaction of several conditions precedent. 23 August Appendix 4E and Directors and Financial Reports 6 October 2005 Increased Holdings in Exploration Tenements Macarthur Coal Limited is entering into an agreement to acquire certain joint venture interests in the Bowen Basin Coal Exploration Joint Venture and interests in other tenements from its joint venture partners Bowen Basin Exploration Pty Ltd and CITIC Australia Coal Exploration Pty Ltd for a total acquisition price of A$48.7 million.

57 11 October 2005 Monto Coal Transaction Update On 28 July 2005 Macarthur Coal Limited entered into an agreement with a member of the China Huaneng Group to sell half of Macarthur Coal s existing 51% interest in the Monto thermal coal project (25.5%) for a total consideration of A$ million, subject to the satisfaction of several conditions precedent. The conditions precedent included: > the pre-emptive rights of the other Monto Coal Joint Venture Participants under the Monto Coal Joint Venture Agreement being waived or not exercised > obtaining agreement from the other Monto Coal Joint Venture Participants to certain changes to the existing joint venture documentation, including a revised development plan for the Monto Project. The other Monto Coal Joint Venture Participants recently challenged, on a number of grounds, the validity of the pre-emption notices issued to them in respect of the sale to China Huaneng. The Supreme Court of Queensland has found in favour of the other Monto Coal Joint Venture Participants. Macarthur Coal is currently considering its position in relation to these developments and the implications for the proposed transaction. 12 October 2005 Letter to Convertible Noteholders re Final Conversion 16 November 2005 AGM Presentations 15 December 2005 Increased Interests in Exploration Tenements Macarthur Coal Limited advised that completion of its acquisition of interests in Bowen Basin exploration tenements from its joint venture partners Bowen Basin Exploration Pty Ltd and CITIC Australia Coal Exploration Pty Ltd occurred. 15 February 2006 Project Pipeline Development Timetable Unveiled 1 March 2006 Appendix 4D and December 2005 Half Year Report 2 Website Macarthur Coal s contains information on its investments, marketing, investor relations - including the share price (subject to a 20 minute delay), all ASX announcements lodged since listing on the ASX in July 2001, the share registry contact information, the top 20 shareholder list marketing, and corporate governance documents. Shareholders and other interested parties may subscribe to receive the Company s ASX announcements via at: feedback/ _enquiry.php 3 Reports to Shareholders Shareholders are provided with quarterly, half year and annual reports. In preparing its reports, the Company attempts to present not only its achievements, but also the challenges that confront Macarthur Coal, so that shareholders are able to form an accurate assessment of the consolidated entity. The Company also strives to ensure that language used in shareholder communication is readily understandable and free from unnecessary jargon. To assist readers the Company provides a glossary of mining industry and fi nancial terminology in each annual report and also makes this available on the Company s website at: abbreviations_glossary.php 4 General Meetings The Company encourages shareholders and other interested parties to attend and participate at its general meetings. The Company views the meetings as open forums that facilitate discussion between the Board, management and shareholders. The meetings also provide the opportunity to demonstrate the Company s commitment to accountability to shareholders and to gain valuable insight from shareholder feedback. All notices of general meetings and agendas are lodged with the ASX, mailed to shareholders and placed on the Company website. The external auditor attends annual general meetings and is available to answer questions regarding the audit 6.2. Shareholders may submit questions prior to the meetings via or the website. The rules for convening a general meeting are detailed in the Company s constitution. Shareholders are welcome to view the constitution by visiting the Company s corporate offi ce or requesting a copy. ENVIRONMENTAL REGULATION Macarthur Coal s mining and exploration activities are located within the Bowen Basin in central Queensland and are subject to environmental regulation under the Environmental Protection Act 1994 (Qld). Macarthur Coal values the environment and is conscious of the Company s environmental impact. Macarthur Coal aims to maximise the economic recovery of coal while minimising the consumption of resources in the production process and minimising the environmental impact on the areas affected by its operations. To achieve a high level of environmental care, an Environmental and Government Liaison Offi cer oversees Macarthur Coal s environmental obligations and a full-time Environmental Coordinator is engaged to manage day-to-day environmental matters including monitoring environmental exposures and compliance with environmental regulations. The offi cers have responsibility for: > setting, communicating and evaluating environmental objectives and targets > developing and implementing environmental documentation > identifying requirements for corrective action > monitoring and reporting compliance against legislated requirements. Reports on environmental performance are provided to management on a monthly basis and any instances of non-compliance are reported to the Board. No issues of noncompliance occurred in pp 53

58 LEADERSHIP AND MANAGEMENT pp 54 ASX CORPORATE GOVERNANCE COUNCILS CORPORATE GOVERNANCE PRINCIPLES AND BEST PRACTICE RECOMMENDATIONS The ASX Corporate Governance Councils corporate governance principles and best practice recommendations are set out for reference. Symbols are used to denote which of the ASX Corporate Governance Council s recommendation is met by particular sections of the corporate governance report. 1 Lay solid foundations for management and oversight 1.1 Formalise and disclose the functions reserved to the board and those delegated to management. 2 Structure the board to add value 2.1 A majority of the board should be independent directors 2.2 The chairperson should be an independent director 2.3 The roles of chairperson and chief executive offi cer should not be exercised by the same individual 2.4 The board should establish a nomination committee 2.5 Provide the information indicated in Guide to Reporting on Principle 2. 3 Promote ethical and responsible decision making 3.1 Establish a code of conduct to guide the directors, the chief executive offi cer (or equivalent), the chief fi nancial offi cer (or equivalent) and any other key executives as to: The practices necessary to maintain confi dence in the company s integrity The responsibility and accountability of individuals for reporting and investigating reporting of unethical practices 3.2 Disclose the policy concerning trading in company securities by directors, offi cers and employees 3.3 Provide the information indicated in Guide to Reporting on Principle 3. 4 Safeguard integrity in financial reporting 4.1 Require the chief executive offi cer (or equivalent) and the chief fi nancial offi cer (or equivalent) to state in writing to the board that the company s financial reports present a true and fair view, in all material respects, of the company s fi nancial condition and operational results and are in accordance with relevant accounting standards 4.2 The board should establish an audit committee 4.3 Structure the audit committee so that it consists of: Only non-executive directors A majority of independent directors An independent chairperson, who is not chairperson of the board At least three members. 4.4 The audit committee should have a formal charter 4.5 Provide the information indicated in Guide to Reporting on Principle 4. 5 Making timely and balanced disclosure 5.1 Establish written policies and procedures designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior management level for that compliance 5.2 Provide the information indicated in Guide to Reporting on Principle 5. 6 Respect the rights of shareholders 6.1 Design and disclose a communications strategy to promote effective communication with shareholders and encourage effective participation at general meetings 6.2 Request the external auditor to attend the Annual General Meeting and be available to answer shareholder questions about the conduct of the audit and the preparation and content of the auditor s report. 7 Recognise and manage risk 7.1 The board or appropriate board committee should establish policies on risk oversight and management 7.2 The chief executive offi cer (or equivalent) and the chief fi nancial offi cer (or equivalent) should state to the board in writing that: The statement given in accordance with best practice recommendation 4.1 (the integrity of fi nancial statements) is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the board The company s risk management and internal compliance and control system is operating effi ciently and effectively in all material respects 7.3 Provide the information indicated in Guide to Reporting on Principle 7. 8 Encourage enhanced performance 8.1 Disclose the process for performance evaluation of the board, its committees and individual directors, and key executives. 9 Remunerate fairly and responsibly 9.1 Provide disclosure in relation to the company s remuneration policies to enable investors to understand (i) the costs and benefi ts of those policies and (ii) the link between remuneration paid to directors and key executives and corporate performance 9.2 The board should establish a remuneration committee 9.3 Clearly distinguish the structure of nonexecutive directors remuneration from that of executives 9.4 Ensure that payment of equity-based executive remuneration is made in accordance with thresholds set in plans approved by shareholders 9.5 Provide the information indicated in Guide to Reporting on Principle Recognise the legitimate interests of shareholders 10.1 Establish and disclose a code of conduct to guide compliance with legal and other obligations to legitimate stakeholders. Further details regarding the ASX Corporate Governance Council can be found on the ASX website: CorporateGovernancePractices_as2.shtm

59 COAL, 24 / 7 pp 55 Directors Report Coal mining at Coppabella Mine. DIRECTORS Details of the directors of the Company at any time during or since the end of the fi nancial year are set out on page 44. Directors meetings The number of directors Board and committee meetings and respective attendance during the fi nancial year is detailed below: Details of the responsibilities of the Board, the two Board committees and the Board s corporate governance practices are provided on pages 48 to 54. COMPANY SECRETARY Bob Adams is the Company Secretary and his experience and qualifi cations are provided on page 45. PRINCIPAL ACTIVITIES The principal activities of Macarthur Coal during the course of the year were coal exploration, project evaluation and coal mining. All coal is predominately exported to Asia, Europe and Brazil. There were no signifi cant changes in the nature of Macarthur Coal s activities during the year. Board Meetings Audit and Risk Management Committee Meetings Nomination and Remuneration Committee Meetings A B A B A B Keith De Lacy Roger Marshall * * 2 2 Don Nissen * * Peter Forbes * * Ken Talbot * * 2 2 A = Number of meetings attended B = Number of meetings held during the time the director held office during the year * Not a member of the relevant committee BUSINESS STRATEGY Macarthur Coal will continue to pursue its policy of growth in order to fulfi l its vision to become the leading independent Australian coal company. The strategy for growth entails: > targeting high growth sectors of the coal market > targeting organic growth opportunities to maximise economic return > recognising that customers are key to the Company s success. Further details of Macarthur Coal s strategy with respect to future performance are provided on page 13. REVIEW OF OPERATIONS The Review of Operations is set out on pages 10 to 17.

60 LEADERSHIP AND MANAGEMENT pp 56 FINANCIAL PERFORMANCE The Financial Overview is set out on pages 68 to 70. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS There are no signifi cant changes in the state of affairs of Macarthur Coal. REMUNERATION REPORT Principles of remuneration - audited Macarthur Coal s Remuneration Policy is designed to facilitate the alignment of individual performance with the Company s goals and the creation of shareholder value. The key elements of the Remuneration Policy include: > remuneration practices that are fairly and responsibly structured to attract and retain talented team members and to motivate them to achieve both near term and longer-term success > reward arrangements that comprise appropriate At Risk incentives based on financial and non-fi nancial performance measures that are relevant to the business and connected to the individual s actual accountabilities > remuneration outcomes that are competitively positioned against the appropriate market, taking into consideration the individual s role, company and individual performance and relevant market conditions. In the 2006 fi nancial year, remuneration for executives comprised: > Fixed remuneration Remuneration levels for executives fall within the salary range for comparable companies while maintaining the fl exibility to attract and retain people of high calibre. Two reviews have been undertaken in the past 12 months to ensure salaries are aligned with the market. The structure of fi xed remuneration is determined at the executive s discretion and may be a combination of cash and non-cash benefi ts. > At Risk Payment At Risk payments were based on company performance and the achievement of individual performance objectives considered to impact Company performance and create shareholder value. The performance objectives were set at the beginning of the 2006 financial year and included special projects. Performance was monitored by the CEO and formally assessed after the end of the year. Executive Remuneration The remuneration policy was recently amended to strengthen the alignment of executive remuneration with the creation of shareholder wealth. The components of executive remuneration will comprise: > Fixed annual remuneration (FAR) > At Risk opportunities comprising: Short-term incentive (STI) - tied to achievement of individual performance objectives and Company fi nancial targets over a 12 month period. A portion is deferred to vest in future years with no further hurdle Long-term incentive (LTI) - equity based award tied to performance hurdles measured over three years. Fixed Annual Remuneration The FAR comprises: > the annual salary which can be structured as a cash benefi t and/or non-cash benefi t including salary sacrifi ce packaging and the fringe benefi ts tax applicable to the packaging. > statutory superannuation contributions. The FAR for each employee is to be reviewed annually having regard to the individual s performance and effectiveness, the Company s circumstances and the indicative market levels of fi xed and total reward for comparable roles from salary survey information provided by remuneration consultants. Short-term Incentive The goal of the STI is to focus attention on short-term strategic and fi nancial objectives. The award varies based on the year s accomplishments. The STI provides employees with an opportunity to earn an amount that is additional to their FAR. The additional amount is At Risk and the level is linked to the employee s role and responsibility. For each employee, their manager and the CEO set the individual performance targets and the relative weightings of those targets at the commencement of each fi nancial year. The targets are linked to each employee s area of responsibility. At the end of the fi nancial year the amount of any incentive payment is determined based on measured achievement against those goals and a review of the employee s overall performance by the employee s manager and the CEO. The targets and potential reward outcomes are designed to encourage employees to strive for exceptional performance. > Financial measures: The consideration of fi nancial measures is subject to the employee s level of influence on fi nancial items. > Qualitative measures: An employee s qualitative measures will include measures such as leadership, teamwork, culture, risk and compliance as well as strategic projects and measures specifi c to their business unit or function. Employees who receive an STI incentive in excess of 20% of FAR will receive 50% of their STI reward in the form of a right to shares. The shares will vest after 24 months from the date of award. If an employee s employment ceases other than due to disability, death, redundancy, or retirement, the employee forfeits the entitlement to any shares that have not vested. Long-term Incentive The LTI programme is an equity based incentive designed to provide employees with the incentive to deliver long-term growth in shareholder value. The remuneration value of the reward is conditional on the strategic importance of the employee in creating shareholder value. Employees will receive share rights as a result of meeting earnings per share (EPS) and total shareholder return (TSR) targets measured over a rolling three year period.

61 pp 57 REMUNERATION REPORT (CONTINUED) Long-term Incentive (continued) The provision of share rights is divided into two portions. The fi rst portion will vest based on growth in the Company s EPS. The EPS hurdle requires the company s EPS growth from the grant of the share rights to the date of vesting to be greater than the target set by the Nomination and Remuneration Committee. The EPS vesting schedule is: Growth in EPS EPS growth less than target EPS growth equal to or greater than target % of the entitlement to shares that will vest Nil 100% The second portion will vest when total shareholder return (TSR), that is, share price growth and dividends for Macarthur Coal, equals or exceeds milestones linked to the ASX S&P 300 Index. The TSR vesting schedule is: Growth in TSR relative to ASX S&P 300 Index Less than the 50th percentile At the 50th percentile Greater than the 50th percentile up to the 75th percentile Greater than the 75th percentile Percentage of shares that will vest Nil 50% 50% plus 2% for every one percentile increase in Macarthur Coal s relative position 100% If, on the fi rst performance date, some or all of the rights in a particular tranche do not vest, performance will be retested 12 months later. Company performance will then be measured over a four year period. If the growth targets are met, shares will be acquired on market, avoiding dilution of shareholder equity and held in trust for employees for three years. Employees have the option to have the shares transferred to them after the third year. No consideration is payable by the employees for the rights to shares or on transfer of shares. If an employee s employment ceases other than due to disability, death, redundancy, or retirement, the employee forfeits the entitlement to any deferred shares that have not vested. The three year retention reinforces the priority of providing satisfactory returns to shareholders. Non-executive Director Remuneration The level of fees paid to non-executive directors is to refl ect the demands on the directors and the responsibilities they carry. Director remuneration is to be a fi xed amount which can comprise: > cash > statutory superannuation > non-cash benefi ts including superannuation contributions above the statutory amount using salary sacrifi ce arrangements > shares to strengthen directors alignment with shareholder interests. Shares are to be held for a minimum of three years. Non-executive director remuneration is to be reviewed in conjunction with the annual director performance assessment to evaluate each director s performance and the Board s effectiveness as a value adding body. Directors are to be excluded from bonus and option arrangements and retirement benefi ts other than superannuation contributions. Individual non-executive director remuneration is to be approved by the Board. The aggregate amount of director remuneration is to be approved by shareholders. Total aggregate remuneration payable to nonexecutive directors of $350,000 per annum was approved at the Annual General Meeting held on 18 November Non-executive directors receive a base fee of $45,000 plus $10,000 in Company securities in order to strengthen alignment with shareholder interests. The provision of shares is not subject to performance conditions. The Chairman of the Board receives an additional fee of $25,000. The annual fee for committee membership is $10,000 and the Chairman of the Audit and Risk Management Committee receives a further $5,000. Individual director performance is formally assessed by the Chairman. The Board carries out a self-evaluation process to assess its effectiveness as a value adding body. The Board has reviewed the level of non-executive directors fees taking into account the level of fees paid by comparable companies and the Company s growth which is placing increasing demands on the directors. The Company will seek shareholder approval at the 2006 Annual General Meeting to increase the cap on non-executive directors fees to $650,000 per annum. The $650,000 limit is to include the cost of replacing the $10,000 in company securities with 10,000 shares acquired on the market each year for each non-executive director to: > further align directors remuneration with shareholders interests > provide for an additional director to be appointed if considered appropriate. Other benefits In May 2005 Macarthur Coal established an employee share loan scheme to encourage employee share ownership and to assist in aligning employees interests with shareholders interests. In November 2005 an invitation to participate in the loan scheme was extended to all Macarthur Coal employees and employees of approved contractors. Each employee who accepted the invitation was provided with a loan to finance the purchase of shares in the Company. The loan limit applicable to each person falling within the Key Management Personnel classifi cation was $20,000. The loan limit for other employees ranged from $6,000 to $18,000 with the amount varying according to seniority.

62 LEADERSHIP AND MANAGEMENT pp 58 REMUNERATION REPORT (CONTINUED) Other benefits (continued) The shares were acquired on market at market value on behalf of the employees. The loan does not give rise to fringe benefi ts tax as the loan was used to acquire income producing shares. Loans are interest free. Loan repayments comprise the retention of dividends plus a monthly payment by employees of an amount equal to 1% of monthly gross salary. Loans are repayable on termination. Shares are held within a trust on behalf of employees. When an employee resigns, the trustee sells the shares and uses the proceeds to reduce the loan balance. Any surplus is then given to the employee. The Company bears the expense of any loan shortfall. Consequences of performance on shareholders wealth - unaudited Performance in respect of the current fi nancial year and previous four fi nancial years, covering the period in which Macarthur Coal has been operating, is detailed in the table below. The Company s performance is not only impacted by market factors but also by employee performance. The measures of Company performance set out in the table below have been taken into consideration when setting remuneration levels. Paul Smallbone, General Manager, Coppabella Mine and Michael Collins, Manager, Technical Services. Service contracts Denis Wood is a director of Queensland Coke & Energy Pty Ltd (QCE), a wholly owned controlled subsidiary of the Company. By a Services Agreement dated 1 August 2005, Coal Industry Services Pty Ltd, a director related entity, has agreed to provide the services of Denis Wood to QCE at $392,400 per annum plus the provision of car parking. The contract relates to the development of a coke project and is for an initial period of three years, but is able to be extended. If the project is successfully developed, a royalty is payable for 15 years at $0.50 per tonne up to 1.6 million tonnes per annum and $0.25 per tonne for each tonne over 1.6 million tonnes per annum. The contract may be terminated for particular stated events, in which case no termination payments are payable. If terminated for other stated events, the royalty remains payable. Ken Talbot is the Managing Director and Chief Executive Offi cer of the Company. Ken Talbot was originally employed under an executive employment contract dated 14 May 2001, which was renewed in 2004 for three years (until May 2007) on similar terms and conditions. The contract is capable of termination for particular stated events upon the giving of three months notice. Upon termination, Mr Talbot is entitled to a payment for untaken long-service leave and holiday leave at his salary rate. The salary for the 2007 fi nancial year is $500, Net profit $15,381,000 $10,900,000 $11,743,000 $61,420,000 $149,589,000 Dividends paid $4,113,410 $8,226,820 $1,285,791 $17,750,606 $61,412,000 Change in share price $ $ 0.34 $1.09 $5.44 -$2.97 Return on invested capital 10.3% 6.5% 7.3% 24.9% 36.8% Earnings per share (diluted) 11.8 cents 8.5 cents 8.6 cents 38.5 cents 83.2 cents 1 Old AGAAP profits 2 AIFRS profits

63 pp 59 REMUNERATION REPORT (CONTINUED) Directors and executive officers remuneration (Company and Consolidated) Details of the nature and amount of each major element of remuneration of each director of the Company and each of the fi ve named Company executives and relevant group executives who receive the highest remuneration are: Salary & fees STI cash bonus Short term Post employment benefits Superannuation Nonmonetary benefits Total Long term employee benefits Termination benefits Share based payment Shares Options Total Directors $ $ $ $ $ $ $ $ $ $ Non-executive Keith De Lacy ,569-1,674 84,243 7, , , ,012-5,305 78,317 6, ,996-94,884 Roger Marshall ,459-1, ,133 4, , , ,813-8, ,082 3, , ,931 Don Nissen ,046-6,430 61,476 4, ,988-76, ,312-4,480 53,792 4, ,996-68,226 Peter Forbes ,459-6,430 56,889 4, ,988-71, ,725-8,223 52,948 4, ,996-66,969 Executive Ken Talbot ,660-6, ,629 12,139 13, , ,010-15, ,056 28, ,356 All directors ,193-23, ,370 33,606 13,967-39, , ,872-41, ,195 47, , ,366 There was no performance based remuneration paid or options granted to directors.

64 LEADERSHIP AND MANAGEMENT pp 60 REMUNERATION REPORT (CONTINUED) Directors and executive officers remuneration (Company and Consolidated) (continued) Salary & fees STI cash bonus Short term Value of options as a proportion of remuneration Nonmonetary benefits Total Long term employee benefits Post employment benefits Superannuation Termination benefits Share based payment Executives $ $ $ $ $ $ $ $ $ $ % % Nicole Hollows 1, Chief Financial Officer Macarthur Coal Limited ,131 84,765 22, ,670 12,139 28, , Shares Options Total Proportion of remuneration performance related ,053 40,000 23, ,395 11, , Shane Stephan, VicePresident 1 - Open-cut Production Macarthur Coal Limited ,935 86,385 42, ,604 25,454 7, , , ,520 40,000 31, ,740 19, , Ian Neill, Vice President 1 - Open-cut Mine Development, Macarthur Coal Limited ,404 86,000 8, ,984 36, , , ,900-7, ,144 17, , Gary Lee, Vice President - Marketing, Macarthur Coal Limited ,039 87,900 42, ,226 32,160 3, , , ,242 30,000 35, ,421 32, , Brett Garland, Vice President - Underground Mine Development, Macarthur Coal Limited ,514 74,300 8, ,752 40, , , ,200-6, ,033 21, , Denis Wood, CEO & Director - Queensland Coke & Energy Pty Ltd ,400-7, , , , ,136-12, ,976 31, , Bob Adams, Company Secretary, Macarthur Coal Limited ,000 72,070 56, , ,587 22, , , ,375 40,000 52, ,586 95, , Ken Carnes, Vice President - Marketing Asia, Macarthur Coal Limited , , , ,467-4, , , Ian McAleese, Vice President - Corporate Development, Macarthur Coal Limited (Commenced 16 January 2006) ,114 16,300 8,328 98,742 19, , Former Executives Mark Turner, Vice President - Opencut Northern District (Appointed 16 January 2006) (Resigned 10 May 2006) , ,608 16, , Bruce Denney, Chief Operating Officer, Macarthur Coal Limited. (Resigned 16 July 2004) ,232-4,480 22,712 1,032-75, , Total remuneration - key management personnel Consolidated ,426, , ,162 3,131, ,788 61, ,170 3,623, ,827, , ,829 2,154, ,908-75, ,461,862 Total remuneration - key management personnel Company ,969, , ,645 2,667, ,791 61, ,170 3,041, ,472, , ,989 1,787, ,036-75, ,063,014 STI cash bonus comprises: > amounts paid in the 2006 fi nancial year after the issue of the 2005 Directors Report relating to the 2005 fi nancial year > amounts approved in September 2006 for the 2006 fi nancial year 1 The titles and roles of these employees have changed. For the new management structure please see page 46.

65 pp 61 REMUNERATION REPORT (CONTINUED) Notes in relation to the table of directors and executive officers remuneration - audited The fair value of the options is calculated at the date of grant using a binomial option-pricing model and allocated to each reporting period evenly over the period from grant date to vesting date. The value disclosed is the portion of the fair value of the options allocated to this reporting period. In valuing the options, market conditions have been taken into account. The following factors and assumptions were used in determining the fair value of options on grant date: Grant date Expiry date Fair value per option Exercise price Price of shares on grant date Expected volatility Risk free interest rate Dividend yield 15 Dec Dec 2010 $2.51 $4.04 $ % 5.78% 0.0% Analysis of bonuses included in remuneration - unaudited Details of the vesting profi le of the short-term incentive cash bonuses awarded as remuneration to each of the fi ve named Company executives and relevant group executives are detailed below. There were no bonuses paid to directors. Short-term incentive bonus Executives Included in remuneration $ Vested in year % Forfeited in year % The Company Nicole Hollows 84, Shane Stephan 86, Ian Neill 86, Gary Lee 87, Brett Garland 74, Bob Adams 72, Ian McAleese 16, Equity instruments audited No options were granted during the year or have been granted since the end of the fi nancial year. There have been no forfeited options during the fi nancial year. During or since the end of the year the Company issued 110,000 ordinary shares as a result of the exercise of 50,000 options at an exercise price of $1.30 per share and 60,000 options at an exercise price of $1.45 per share. There are no amounts unpaid on the shares issued. At the date of this report there were no options as all options held as at 1 July 2005 have been exercised. DIRECTORS SHAREHOLDING AND INTERESTS The relevant interest of each director in the shares or options over shares issued by the Company and other related body corporates, as notifi ed by the directors to the Australian Stock Exchange in accordance with S205G(1) of the Corporations Act 2001, at the date of this report is as follows: Macarthur Coal Limited Ordinary shares Options over ordinary shares Keith De Lacy 274,240 Nil Roger Marshall 124,240 Nil Don Nissen 309,240 Nil Peter Forbes 22,240 Nil Ken Talbot 66,645,063 Nil

66 LEADERSHIP AND MANAGEMENT pp 62 INDEMNIFICATION OF OFFICERS The Company has agreed to indemnify each person who is or has been a director, offi cer or agent of the Company and/or of its controlled entities against all liabilities to another person (other than the Company or a related body corporate) that may arise from their position as director, offi cer or agent, except where the liability arises out of conduct involving a lack of good faith. The Company is required to meet the full amount of any such liabilities, including costs and expenses. No liability has arisen since the end of the previous fi nancial year which the Company would, by operation of the above indemnities, be required to meet. EVENTS SUBSEQUENT TO BALANCE DATE In the interval between the end of the financial year and the date of this report, there has not arisen any item, transaction or event of a material or unusual nature likely, in the opinion of the directors of the Company, to affect signifi cantly the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in future fi nancial years. ENVIRONMENTAL REGULATION Macarthur Coal s mining and exploration activities are located within the Bowen Basin in central Queensland and are subject to environmental regulation under the Environmental Protection Act 1994 (Qld). Details of Macarthur Coal s environmental regulation and environmental performance are provided on pages 37 to 41. LIKELY DEVELOPMENTS Information on likely developments is provided in the Strategy and Project Pipeline sections on pages 12 to 13 and 19 to 27 respectively. Information about the expected results in future fi nancial years has not been included in this report because the directors believe that disclosure of the information would be likely to result in unreasonable prejudice to Macarthur Coal. NON-AUDIT SERVICES During the year KPMG, 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. It is satisfied that, in accordance with written advice provided by resolution of the Audit and Risk Management Committee, the provision of those non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: > All non-audit services were provided subject to the corporate governance procedures adopted by Macarthur Coal and have also been reviewed by the Audit and Risk Management Committee to ensure they do not impact the integrity and objectivity of the auditor. > 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 Macarthur Coal, acting as an advocate for Macarthur Coal or jointly sharing risks and rewards. Details of the amounts paid to the auditors of the Company, KPMG, for audit and non-audit services provided during the year are set out in Note 6 to the fi nancial statements included on page 88. A copy of the auditors independence declaration as required under Section 307C of the Corporations Act 2001 is attached to the directors report on page 63. ROUNDING OFF The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, amounts in the fi nancial report and directors report have been rounded off to the nearest thousand dollars, unless otherwise stated. Signed in accordance with a resolution of the directors. Keith De Lacy Chairman 12 September 2006

67 pp 63 LEAD AUDITOR S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT 2001 To: the directors of Macarthur Coal Limited I declare that, to the best of my knowledge and belief, in relation to the audit for the fi nancial year ended 30 June 2006 there have been: > no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and > no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Robert S Jones Partner Brisbane 12 September 2006 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.

68 pp 64

69 6 FINANCIAL PERFORMANCE pp 65 5 Year Performance History pp 66 Financial Overview pp 68 Financial Statements pp 71 Pictured: Coppabella Mine.

70 pp 66 FINANCIAL PERFORMANCE COAL, 24 / 7 Five Year Performance History Profit and Loss Sales revenue $000 s 534, , , , ,568 EBITDA $000 s 227, ,407 37,259 28,675 31,386 Depreciation and amortisation $000 s 16,011 15,734 11,612 7,401 6,582 EBIT $ 000 s 211,590 94,673 25,647 21,274 24,804 Borrowing costs $000 s 5,189 7,418 10,814 4, Interest income $000 s 7,645 2,385 1, Income tax expense $000 s 64,456 25,493 4,127 6,652 8,483 NPAT $000 s 149,589 64,147 11,743 10,900 15,381 Balance Sheet Current assets $000 s 319, , ,766 88,241 57,929 Non-current assets $000 s 272, , , , ,008 Total assets $000 s 592, , , , ,937 Current liabilities $000 s 121, ,953 64,759 63,014 37,562 Non-current liabilities $000 s 78,957 73, , ,197 43,176 Total liabilities $000 s 200, , , ,211 80,738 Interest bearing debt $ 000 s 10,716 36,452 82,185 63,787 19,696 Net debt $000 s (157,887) 18,314 70,410 56,962 5,773 Net assets $000 s 391, , , , ,199 Shareholders equity $000 s 391, , , , ,199 Cash flow Net receipts/(payments) in the course of operations $000 s 221, ,614 28,412 7,268 28,355 Other receipts/(payments) from operating activities $000 s (20,139) 5,370 (9,465) (7,885) (2,451) Cash flows from operating activities $ 000 s 201, ,984 18,947 (617) 25,904 Payments for exploration, evaluation and development $ 000 s (6,729) (3,640) (3,993) (10,192) (11,165) Payments for property, plant and equipment $ 000 s (7,301) (5,848) (15,008) (37,271) (4,464) Other receipts/(payments) from investing activities $000 s 51,121 (47,082) (28,455) (2,500) (28,499) Cash flows from investing activities $000 s 37,091 (56,570) (47,456) (49,963) (44,128) Proceeds from issue of shares $000 s 152 1,789 29, ,387 Net increase/(repayment) of borrowings $ 000 s (20,434) (21,646) 2,420 44,523 3,873 Dividends paid $000 s (61,412) (17,751) (1,286) (8,227) (4,113) Other receipts/(payments) from financing activities $000 s (6,423) (7,443) 2,332 7,186 0 Cash flows from financing activities $000 s (88,117) (45,051) 33,459 43,482 32,147

71 pp Shares Number of shares on issue at year end 000 s 187, , , , ,544 Closing share price $/share Earnings per share basic cents Earnings per share diluted cents Net tangible assets per share $/share Dividends per share cents Dividend payout ratio % Market capitalisation $000 s 839,464 1,287, , , ,966 Ratios Return on average shareholders equity % Return on invested capital % Return on assets % Net interest cover (EBITDA/interest paid) times Net debt to equity % (40.4) Other Average coal price A$/tonne Cost excluding ITDA/tonne sold A$/tonne EBITDA/tonne sold A$/tonne NPAT/tonne sold A$/tonne Shipments - excluding purchased coal Coppabella - 100% tonnes 000 s 4,014 4,560 3,751 4,198 4,091 Moorvale - 100% tonnes 000 s 2,715 2,292 1, Macarthur Coal s attributable tonnage tonnes 000 s 4,933 5,023 3,801 2,152 1,841 Production - attributable to Macarthur Coal Coppabella Overburden removed bcm 000 s 32,189 37,729 29,878 24,248 16,852 Run of mine production tonnes 000 s 3,347 4,530 3,979 2,833 2,525 CHPP feed tonnes 000 s 3,824 4,252 3,795 2,803 2,538 Average CHPP plant yield % Saleable coal production tonnes 000 s 3,020 3,401 2,874 2,131 1,787 Moorvale Overburden removed bcm 000 s 8,650 8,444 4,764 1,623 0 Run of mine production tonnes 000 s 2,432 2,817 1, CHPP feed tonnes 000 s 2,607 2,495 1, Average CHPP plant yield % Saleable coal production tonnes 000 s 2,002 1,705 1, Total Overburden removed bcm 000 s 40,839 46,173 34,642 25,871 16,852 Run of mine production tonnes 000 s 5,779 7,346 5,448 3,065 2,525 CHPP feed tonnes 000 s 6,430 6,747 5,295 2,888 2,538 Saleable coal production tonnes 000 s 5,022 5,106 3,984 2,183 1,787

72 pp 68 FINANCIAL PERFORMANCE Financial Overview COAL, 24 / 7 Dragline bucket at Coppabella Mine. NET PROFIT > Net profi t after tax was $149,589,000 (2005: $64,147,000). The increase is principally attributable to sales revenue increasing to $534,755,000 (2005: $370,157,000) due to price increases for Contract Year 2005, which commenced on 1 April > The benefi t of increased sales revenue was partially reduced by: Higher sales related variable costs such as royalties and commissions Increase of overburden removal costs as a result of increased fuel and explosive costs Coke plant feasibility study costs Increased corporate and development costs to support company growth CASH FLOWS Cash at 30 June 2006 was $168,603,000, increasing from $18,138,000 at 30 June The major items that impacted liquidity during the 2006 Financial Year were: > A surplus of $201,491,000 in cash fl ows from operating activities (2005: $107,984,000). The increase was attributable to the cash fl ow surplus achieved in the course of operations of $221,630,000 for the year, exceeding the previous year surplus by $119,016,000. The increase in the US dollar coal price was responsible for higher surplus. > Net cash received from investing activities of $37,091,000 (2005: Net cash used $56,570,000). The major investing infl ow was the cash contribution of $52,609,000 generated by the Coppabella and Moorvale Joint Venture. > Net cash incurred on fi nancing activities of $88,117,000 (2005: $45,051,000). The major items incurred in 2006 were: Repayment of borrowings of $20,434,000 (2005: $43,826,000) Dividend payments of $61,412,000 (2005: $17,751,000)

73 pp 69 RETURN ON INVESTMENT Return on invested capital was 36.8% (2005: 24.9%). The increase is due to improved earnings which resulted from higher prices. Earnings before interest and tax increased by 123.5% to $211,590,000 (2005: $94,673,000). Invested capital increased by 47.5% to $401,889,000 (2005: $272,540,000). DEBT AND GEARING Net debt to equity was nil (2005: 7.8%) as a result of the term loan for Coppabella and Moorvale mines being repaid and the convertible notes issued in 2002 maturing during the year. Interest cover (EBITDA/interest paid) was 67.9 times (2005: 23.9 times). HEDGING > Foreign Exchange Coal sales occur in United States dollars. Consequently, increases in the value of the Australian dollar relative to the United States dollar expose Macarthur Coal to lower Australian dollar revenues. Forward exchange contracts and option based products are entered into to manage the foreign exchange risk. In 2006, forward exchange contracts at an average A$:US$ exchange rate covered 86.2% of United States dollar revenues. The average spot A$:US$ exchange rate (excluding any foreign exchange hedging benefi t) applicable to sales for 2006 was US$ The value of forward exchange contracts held at 30 June 2006 to hedge United States dollar revenues was: Period covered by FX Hedge Contracts United States dollar value FX rate A$1.00=US$ July 06 to June ,584, July 07 to June 08 11,096, Total 193,680, DIVIDENDS The annual dividend accords with Macarthur Coal s policy of paying approximately 50% of NPAT as dividends. Dividends paid or declared by the Company to members since the end of the previous fi nancial year were: Declared and paid during the year 2006 Cents per share Total amount $ 000 Franked/ Unfranked Date of payment Final 2005 ordinary 11 19,011 Franked 1 30 September 2005 Interim 2006 ordinary 23 42,401 Franked 2 31 March ,412 Franked dividends declared as paid during the year were franked at the rate of 30 per cent.

74 FINANCIAL PERFORMANCE pp 70 After the balance sheet date the following dividends were proposed by the directors. The dividends have not been provided and there are no income tax consequences. Declared after end of year Cents per share Total amount $ 000 Franked/ unfranked Date of payment Final ordinary 18 33,728 Franked 2 9 October 2006 The fi nancial effect of these dividends has not been brought to account in the fi nancial statements for the year ended 30 June 2006 and will be recognised in subsequent fi nancial reports. Franked dividends declared after the end of the year are franked at the rate of 30%. Dealt within the financial report as: Note Total amount $ 000 Dividends 24 61,412 Noted as a subsequent event 24 33,728 1 Paid out of old AGAAP profits 2 Paid out of AIFRS profits

75 Financial section contents pp 71 For the year ended 30 June 2006 Page Income statements 72 Statements of recognised income and expense 73 Balance sheets 74 Statements of cash flows 75 Notes to the financial statements Note 1: Signifi cant accounting policies 76 Note 2: Segment reporting 85 Note 3: Other income 87 Note 4: Other expenses 87 Note 5: Personnel expenses 87 Note 6: Auditors remuneration 88 Note 7: Net fi nancing costs 88 Note 8: Income tax expense 89 Note 9: Deferred tax assets and liabilities 90 Note 10: Earnings per share 92 Note 11: Cash and cash equivalents 93 Note 12: Trade and other receivables 93 Note 13: Inventories 93 Note 14: Other fi nancial assets 93 Note 15: Other assets 94 Note 16: Property, plant and equipment 94 Note 17: Exploration and evaluation assets 96 Note 18: Trade and other payables 96 Note 19: Interest-bearing loans and borrowings 96 Note 20: Employee benefi ts 99 Note 21: Provisions 102 Note 22: Other fi nancial liabilities 103 Note 23: Other liabilities 103 Note 24: Capital and reserves 103 Note 25: Financial instruments 106 Note 26: Interests in joint venture operations 110 Note 27: Capital and other commitments 111 Note 28: Contingencies 114 Note 29: Consolidated entities 115 Note 30: Investments in associated entities 115 Note 31: Acquisitions of subsidiaries and joint venture interests 116 Note 32: Reconciliation of cash fl ows from operating activities 117 Note 33: Related parties 118 Note 34: Impact of transition to AIFRS 122 Note 35: Change in accounting policy 129 Directors declaration 130 Independent audit report to the members of Macarthur Coal Limited 131

76 Financial performance pp 72 Income statements For the year ended 30 June 2006 Consolidated The Company Note $ 000 $ 000 $ 000 $ 000 Revenue from coal sales 2 534, , Cost of coal sold (287,574) (232,509) - - Gross profit 247, , Other income 3 2, ,944 21,031 Distribution expenses (22,836) (29,765) - - Administration expenses (14,325) (8,584) (10,680) (6,496) Other expenses 4 (893) (4,787) (84) (25) Results from operating activities 211,590 94,673 54,180 14,510 Financial income 7 7,644 2,385 8,694 10,518 Financial expenses 7 (5,189) (7,418) (1,704) (2,647) Net financing income/(costs) 2,455 (5,033) 6,990 7,871 Profit before tax 214,045 89,640 61,170 22,381 Income tax (expense)/benefi t 8 (a) (64,456) (25,493) 55 (917) Profit for the year attributable to equity holders of the parent 149,589 64,147 61,225 21,464 Earnings per share for profit attributable to the ordinary equity holders of the Company: Basic earnings per share from continuing operations 10 $0.83 $0.40 Diluted earnings per share from continuing operations 10 $0.83 $0.39 Dividends per share ordinary shares 24 $0.41 $0.18 The income statements are to be read in conjunction with the notes of the fi nancial statements set out on pages 76 to 129.

77 Statements of recognised income and expense For the year ended 30 June 2006 pp 73 Consolidated The Company Note $ 000 $ 000 $ 000 $ 000 Recognised directly in equity Cash fl ow hedges: Losses taken to equity (4,089) Gains transferred to income statement (8,595) Net expense recognised directly in equity 24 (12,684) Profit for the period 149,589 64,147 61,225 21,464 Total recognised income and expense for the period attributable to equity holders of the parent ,905 64,147 61,225 21,464 Effect of change in accounting policy Effect of adoption of AASB 132 and AASB 139 on 1 July 2005 (with 2005 not restated): Net increase in Cash Flow Hedging Reserve: Cumulative changes in fair value of effective cash fl ow hedges 20, Related deferred income tax (4,748) , 35 15, Other movements in equity arising from transactions with owners as owners are set out in Note 24. The amounts recognised directly in equity are disclosed net of tax see Notes 8 and 9 for tax effect. The statements of recognised income and expense are to be read in conjunction with the notes to the fi nancial statements set out on pages 76 to 129.

78 Financial performance pp 74 Balance sheets As at 30 June 2006 Consolidated The Company Note $ 000 $ 000 $ 000 $ 000 Current assets Cash and cash equivalents ,603 18,138 18,038 17,685 Trade and other receivables 12 52,662 32,558 71,346 8,409 Inventories 13 15,412 24, Other fi nancial assets 14 8,810 78, Other assets 15 74,206 46, Total current assets 319, ,250 89,384 26,351 Non-current assets Trade and other receivables 12 4,603 13, , ,754 Other fi nancial assets 14-2,783 73,343 56,385 Deferred tax assets Property, plant and equipment , , Exploration and evaluation assets 17 94,809 40, Other assets 15 2,904 7, Total non-current assets 272, , , ,941 Total assets 592, , , ,292 Current liabilities Trade and other payables 18 68,538 61,346 1,137 1,176 Interest-bearing loans and borrowings 19 1,931 26,662-5,627 Income tax payable 8 (c) 44,395 16,505 44,395 16,505 Employee benefi ts Provisions 21 3,344 1, Other fi nancial liabilities 22 3,272 4, Other liabilities 23-20, Total current liabilities 121, ,953 45,970 23,506 Non-current liabilities Trade and other payables ,499 - Interest-bearing loans and borrowings 19 8,785 9, Deferred tax liabilities 9 42,335 33, Employee benefi ts Provisions 21 16,600 12, Other fi nancial liabilities 22 11,081 12, Other liabilities 23-4, Total non-current liabilities 78,957 73,621 52, Total liabilities 200, ,574 98,723 23,545 Net assets 391, , , ,747 Equity Issued capital , , , ,563 Reserves 24 2, Retained earnings ,010 53,525 4,305 4,184 Total equity , , , ,747 The balance sheets are to be read in conjunction with the notes to the financial statements set out on pages 76 to 129.

79 Statements of cash flows pp 75 For the year ended 30 June 2006 Consolidated The Company Note $ 000 $ 000 $ 000 $ 000 Cash flows from operating activities Cash receipts from customers 525, ,709 2,774 2,051 Cash paid to suppliers and employees (303,899) (259,095) (16,839) (6,036) Cash generated from operations 221, ,614 (14,065) (3,985) Dividends received ,488 19,034 Interest received 7,644 2,385 8,694 10,518 Interest paid - - (1,122) - Income taxes refunded - 8,847-8,847 Income taxes paid (27,783) (5,862) (27,783) (5,862) Net cash from operating activities , ,984 27,212 28,552 Cash flows from investing activities Proceeds from sale of property, plant and equipment Acquisition of property, plant and equipment (7,301) (5,848) (744) (85) Exploration and evaluation expenditure (6,729) (3,640) - - Contributions (to)/from joint ventures 52,609 (40,674) - - Advances (to)/from subsidiaries ,395 (4,494) Advances to related entities (1,868) (6,408) - - Net cash from investing activities 37,091 (56,570) 34,651 (4,579) Cash flows from financing activities Proceeds from the issue of share capital 152 1, ,789 Proceeds from borrowings - 22, Repayment of borrowings (20,434) (43,826) - - Payment of fi nance costs: Convertible notes (250) (2,012) (250) (2,012) Other (3,103) (2,602) - - Repayment of other fi nancial liabilities (3,070) (2,829) - - Dividends paid 24 (61,412) (17,751) (61,412) (17,751) Net cash from financing activities (88,117) (45,051) (61,510) (17,974) Net increase in cash and cash equivalents 150,465 6, ,999 Cash and cash equivalents at 1 July 18,138 11,775 17,685 11,686 Cash and cash equivalents at 30 June ,603 18,138 18,038 17,685 The statements of cash flows are to be read in conjunction with the notes to the financial statements set out on pages 76 to 129.

80 Financial performance pp 76 Notes to the consolidated financial statements For the year ended 30 June SIGNIFICANT ACCOUNTING POLICIES Macarthur Coal Limited (the the Company ) is a company domiciled in Australia. The consolidated fi nancial report of the Company for the year ended 30 June 2006 comprise the Company and its subsidiaries (together referred to as the consolidated entity ) and the consolidated entity s interest in associates. The fi nancial report was authorised for issue by Directors on 12 September (a) Statement of compliance The fi nancial report is a general purpose fi nancial report which has been prepared in accordance with Australian Accounting Standards adopted by the Australian Accounting Standards Board ( AASB ) and the Corporations Act International Financial Reporting Standards ( IFRS ) form the basis of Australian Accounting Standards adopted by the AASB, and for the purpose of this report are called Australian equivalents to IFRS ( AIFRS ) to distinguish from previous Australian AGAAP. This is the consolidated entity s fi rst fi nancial report prepared in accordance with Australian Accounting Standards, being AIFRS and AASB 1 First-Time Adoption of Australian Equivalents to International Financial Reporting Standards has been applied. An explanation of how the transition to AIFRS has affected the reported fi nancial position, fi nancial performance and cash fl ows of the consolidated entity and the Company is provided in Note 34. (b) Basis of preparation The fi nancial report is presented in Australian dollars. The fi nancial report is prepared on the historical cost basis except that derivative fi nancial instruments are stated at their fair value. The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 (updated by CO 05/641 effective 28 July 2005 and CO 06/51 effective 31 January 2006) and in accordance with that Class Order, amounts in the Financial report and Directors report have been rounded off to the nearest thousand dollars, unless otherwise stated. The preparation of a fi nancial report in conformity with Australian Accounting Standards requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. These estimates and associated assumptions are based on historic experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. These accounting policies have been consistently applied by each entity in the consolidated entity. The estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgements made by management in the application of Australian Accounting Standards that have a signifi cant effect on the fi nancial report and estimates with a signifi cant risk of material adjustment in the next year are discussed in accounting policy (ab). Issued standards early adopted The entity has elected to early adopt the following accounting standards and amendments as at transition date: u AASB Amendments to Australian Accounting Standards (June 2005) amending AASB 139 Financial Instruments: Recognition and Measurement, AASB 132 Financial Instruments: Disclosure and Presentation, AASB 1 First-Time Adoption of Australian Equivalents to International Financial Reporting Standards (July 2004), AASB 1023 General Insurance Contracts, AASB 1038 Life Insurance Contracts u AASB Amendments to Australian Accounting Standards (June 2005) amending AASB 1 First-Time Adoption of Australian Equivalents to International Financial Reporting Standards (July 2004) and AASB 139 Financial Instruments: Recognition and Measurement u UIG 4 Determining whether an Arrangement contains a Lease. Issued standards not early adopted The following standards and amendments were available for early adoption but have not been applied by the consolidated entity in these fi nancial statements: u AASB 7 Financial Instruments: Disclosure (August 2005) replacing the presentation requirements of fi nancial instruments in AASB 132. AASB 7 is applicable for annual reporting periods beginning on or after 1 January 2007 u AASB Amendments to Australian Accounting Standards (June 2005) amending AASB 3 Business Combinations. AASB is applicable to annual reporting periods beginning on or after 1 January 2006 u AASB Amendments to Australian Accounting Standards (September 2005) requires that liabilities arising from the issue of fi nancial guarantee contracts are recognised in the balance sheet. AASB is applicable for annual reporting periods beginning on or after 1 January 2006 u AASB Amendments to Australian Accounting Standards (September 2005) makes consequential amendments to AASB 132 Financial Instruments: Disclosures and Presentation, AASB 101 Presentation of Financial Statements, AASB 114 Segment Reporting, AASB 117 Leases, AASB 133 Earnings per Share, AASB 139 Financial Instruments: Recognition and Measurement, AASB 1 First-Time Adoption of Australian Equivalents to International Financial Reporting Standards, AASB 4 Insurance Contracts, AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts, arising from the release of AASB 7. AASB is applicable for annual reporting periods beginning on or after 1 January 2007 The consolidated entity plans to adopt the above standards and amendments in the 2007 fi nancial year. The initial application of AASB 7 and AASB is not expected to have an impact on the fi nancial results of the Company and the consolidated entity as the standard and the amendment are concerned only with disclosures. The initial application of AASB could have an impact on the fi nancial results of the Company and the consolidated entity as the amendment could result in liabilities being recognised for fi nancial guarantee contracts that have been provided by the Company and the consolidated entity. However, the quantifi cation of the impact is not known or reasonably estimable in the current fi nancial year as an exercise to quantify the fi nancial impact has not been undertaken by the Company and the consolidated entity to date.

81 Notes to the consolidated financial statements For the year ended 30 June 2006 pp SIGNIFICANT ACCOUNTING POLICIES (continued) (b) Basis of preparation (continued) Issued standards not early adopted (continued) The initial application of AASB is not expected to have an impact on the fi nancial results of the Company and the consolidated entity as the amendments are concerned with areas that the Company and the consolidated entity have not transacted in. The following standards and amendments have been issued and are available for early adoption at reporting date. However, they have not been early adopted as they are not applicable to the Company and the consolidated entity and have no impact on their fi n a n ci al r e s ul t s : u AASB 119 Employee Benefits (December 2004) u AASB 1039 Concise Financial Reports (April 2005) u A A S B Amendments to Australian Accounting Standards (December 2004) amending AASB 1 First-Time Adoption of Australian Equivalents to International Financial Reporting Standards (July 2004), AASB 101 Presentation of Financial Statements and AASB 124 Related Party Disclosures u A A S B Amendments to Australian Accounting Standards (May 2005) amending AASB 139 Financial Instruments: Recognition and Measurement u A A S B Amendments to Australian Accounting Standards (June 2005) amending AASB 119 Employee Benefits (either July or December 2004) u A A S B Amendments to Australian Accounting Standards (January 2006) amending AASB 121 The Effects of Changes in Foreign Exchange Rates (July 2004) u AASB Amendments to Australian Accounting Standards (March 2006) u UIG 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds u UIG 6 Liabilities arising from participating in a Specific Market- Waste Electrical & Electronic Equipment u UIG 7 Applying the Restatement Approach under AASB 129 Financial Reporting in Hyperinflationary Economies u UIG 8 Scope of AASB 2 u UIG 9 Reassessment of Embedded Derivatives The accounting policies set out below have been applied consistently to all periods presented in the consolidated fi nancial report and in preparing an opening AIFRS balance sheet at 1 July 2004 for the purposes of the transition to Australian Accounting Standards AIFRS, except for the adoption of AASB 132 Financial Instruments: Disclosure and Presentation and AASB 139 Financial Instruments: Recognition and Measurement. The Company and the consolidated entity have applied the AASB 1.36A exemption and elected not to apply AASB 132 and AASB 139 to the comparative period. A reconciliation of opening balances impacted by AASB 132 and AASB 139 at 1 July 2005 has been provided in Note 35. The accounting policies have been applied consistently by all entities in the consolidated entity. (c) Basis of consolidation Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the fi nancial and operating policies of an entity so as to obtain benefi ts from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The fi nancial statements of subsidiaries are included in the consolidated fi nancial report from the date that control commences until the date that control ceases. Investments in subsidiaries are carried at their cost of acquisition in the Company s fi nancial statements. Associates Associates are those entities in which the consolidated entity has signifi cant infl uence, but not control, over the fi nancial and operating policies. The consolidated fi nancial statements includes the consolidated entity s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that signifi cant infl uence commences until the date that signifi cant infl uence ceases. When the consolidated entity s share of losses exceeds its interest in an associate, the consolidated entity s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the consolidated entity has incurred legal or constructive obligations or made payments on behalf of an associate. Investments in associates are carried at their cost of acquisition in the Company s fi nancial statements. Joint ventures The interest of the consolidated entity in unincorporated joint ventures and jointly controlled assets are brought to account by recognising in its fi nancial statements the assets it controls, the liabilities that it incurs, the expenses it incurs and its share of income that it earns from the sale of goods or services by the joint venture. Transactions eliminated on consolidation Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated fi nancial statements. Unrealised gains arising from transactions with associates are eliminated to the extent of the consolidated entity s interest in the entity with adjustments made to the Investment in associates and Share of associate s net profi t accounts. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Gains and losses are recognised as the contributed assets are consumed or sold by the associates or, if not consumed or sold by the associate, when the consolidated entity s interest in such entities is disposed of.

82 Financial performance pp 78 Notes to the consolidated financial statements For the year ended 30 June SIGNIFICANT ACCOUNTING POLICIES (continued) (d) Foreign currency Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Australian dollars at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Australian dollars at foreign exchange rates ruling at the dates the fair value was determined. (e) Derivative financial instruments Current accounting policy The consolidated entity uses derivative fi nancial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational and fi nancing activities. In accordance with its treasury policy, the consolidated entity does not hold or issue derivative fi nancial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative fi nancial instruments are recognised initially at fair value. Subsequent to initial recognition, derivative fi nancial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in the profi t or loss. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged (see accounting policy (f)). The fair value of interest rate swaps is the estimated amount that the consolidated entity would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. Comparative period policy The consolidated entity is exposed to changes in interest rates, foreign exchange rates and commodity prices from its activities. The consolidated entity uses forward foreign exchange contracts to hedge foreign exchange risk and interest rate options and interest rate swaps to hedge interest rate risk. Derivative fi nancial instruments are not held for speculative purposes. The quantitative effect of the change in accounting policy is set out in Note 35. (f) Hedging Current accounting policy On entering into a hedging relationship, the consolidated entity formally designates and documents the hedge relationship and the risk management objective and strategy for undertaking the hedge. The documentation includes identifi cation of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument s effectiveness in offsetting the exposure to changes in the hedged item s fair value or cash fl ows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash fl ows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the fi nancial reporting periods for which they are designated. Cash flow hedges Where a derivative fi nancial instrument is designated as a hedge of the variability in cash fl ows of a recognised asset or liability, or a highly probable forecasted transaction, the effective part of any gain or loss on the derivative fi nancial instrument is recognised directly in equity. When the forecasted transaction subsequently results in the recognition of a non-fi nancial asset or non-fi nancial liability, or the forecast transaction for a non-fi nancial asset or non-fi nancial liability, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-fi nancial asset or liability. If a hedge of a forecasted transaction subsequently results in the recognition of a fi nancial asset or fi nancial liability, the associated gains and losses that were recognised directly in equity are reclassifi ed into the income statement in the same period or periods during which the asset acquired or liability assumed affects profi t or loss. For cash fl ow hedges, other than those covered by the preceding two policy statements, the associated cumulative gain or loss is removed from equity and recognised in the income statement in the same period or periods during which the hedged forecast transaction affects profi t or loss. The ineffective part of any gain or loss is recognised immediately in the income statement. When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship, but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognised in equity is recognised immediately in the income statement. Comparative period policy Anticipated transactions Transactions are designated as a hedge of the anticipated specifi c purchase or sale of goods or services, purchase of qualifying assets, or an anticipated interest transaction, only when they are expected to reduce exposure to the risks being hedged, are designated prospectively so that it is clear when an anticipated transaction has or has not occurred and it is probable the anticipated transaction will occur as designated. Gains or losses on the hedge arising up to the date of the anticipated transaction, together with any costs or gains arising at the time of entering into the hedge, are deferred and included in the measurement of the anticipated transaction, when the transaction has occurred as designated. Any gains or losses on the hedge transaction after that date are included in the income statement.

83 Notes to the consolidated financial statements For the year ended 30 June 2006 pp SIGNIFICANT ACCOUNTING POLICIES (continued) (f) Hedging (continued) Comparative period policy (continued) Anticipated transactions (continued) The net amounts receivable or payable under forward foreign exchange contracts and the associated deferred gains or losses are recorded on the balance sheet from the date of inception of the hedge transaction. The net receivables or payables are revalued using the foreign currency rate current at reporting date. The net amounts receivable or payable under open swaps and the associated deferred gains or losses are not recorded on the balance sheet until the hedge transaction occurs. When recognised the net receivables or payables are revalued using the interest rates current at reporting date. Option premiums are recorded when paid and included in the measurement of the transaction when it occurs. When the anticipated transaction is no longer expected to occur as designated, the deferred gains and losses relating to the hedged transaction are recognised immediately in the income statement. Where a hedge transaction is terminated early and the anticipated transaction is still expected to occur as designated, the deferred gains and losses that arose on the hedge prior to its termination continue to be deferred and are included in the measurement of the purchase or sale when it occurs. Where a hedge transaction is terminated early because the anticipated transaction is no longer expected to occur as designated, deferred gains or losses that arose on the hedge prior to its termination are included in the income statement for that period. Where a hedge is redesignated as a hedge of another transaction, gains and losses arising on the hedge prior to its redesignation are only deferred where the original anticipated transaction is still expected to occur as designated. When the original anticipated transaction is no longer expected to occur as designated, any gains or losses relating to the hedge instrument are included in the income statement for that period. Gains and losses that arise prior to and upon the maturity of transactions entered into under hedge rollover strategies are deferred and included in the measurement of the hedged anticipated transaction if the transaction is still expected to occur as designated. If the anticipated transaction is no longer expected to occur as designated, the gains and losses are recognised immediately in the income statement. Other hedges All other hedge transactions are initially recorded at the relevant rate at the date of the transaction. Hedges outstanding at reporting date are valued at the spot rate ruling on that date and any gains or losses are brought to account in the income statement. Costs or gains arising at the time of entering into the hedge are deferred and amortised over the life of the hedge. (g) Property, plant and equipment Owned assets Items of property, plant and equipment are stated at cost or deemed cost less accumulated depreciation (see below) and impairment losses (see accounting policy (n)). The cost of selfconstructed assets includes the cost of materials, direct labour, and an appropriate proportion of production overheads. The cost of self-constructed assets and acquired assets includes: (i) the initial estimate at the time of installation and during the period of use, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located; and (ii) changes in the measurement of existing liabilities recognised for these costs resulting from changes in the timing or outfl ow of resources required to settle the obligation or from changes in the discount rate. Mining property and development assets include costs transferred from exploration and evaluation assets once feasibility and commercial viability of an area of interest are demonstrable and subsequent costs to develop the mine to the production phase. Where signifi cant parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Subsequent costs The consolidated entity recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefi ts embodied within the item will fl ow to the consolidated entity and the cost of the item can be measured reliably. All other costs are recognised in the income statement as an expense as incurred. Depreciation Assets, excluding freehold land, that have limited useful lives and are depreciated using the straight line method over their estimated useful lives, taking into account estimated residual values, with the exception of mining property and development assets. Mining property and development assets are depreciated on a units of production basis over the life of the economically recoverable reserves, being 61,327,267 (2005: 74,524,110) tonnes for the Coppabella Mine and 20,458,515 (2005: 19,427,050) tonnes for the Moorvale Mine at the beginning of the fi nancial year or, where it is likely the consolidated entity will obtain ownership of the asset, the life of the asset. Assets are depreciated from the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and held ready for use. Depreciation rates and methods are reviewed annually for appropriateness. When changes are made, adjustments are refl ected prospectively in current and future periods only. Depreciation is expensed, except to the extent that it is included in the carrying amount of another asset (eg inventory stocks) as an allocation of production overheads.

84 Financial performance pp 80 Notes to the consolidated financial statements For the year ended 30 June SIGNIFICANT ACCOUNTING POLICIES (continued) (g) Property, plant and equipment (continued) Depreciation (continnued) The depreciation rates or useful lives used for each class of asset are as follows: asdf Property, plant and equipment Mining property and development 6 14 years 7 15 years Buildings and infrastructure 6.5% 40% 6.5% 40% Plant and equipment 13% 40% 13% 40% The residual value is reassessed annually. (h) Exploration and evaluation expenditure Exploration and evaluation costs, including the costs of acquiring licences, are capitalised as exploration and evaluation assets on an area of interest basis. Costs incurred before the consolidated entity has obtained the legal rights to explore an area are recognised in the Income Statement. Exploration and evaluation assets are only recognised if the rights of the area of interest are current and either: (i) the expenditures are expected to be recouped through successful development and exploitation of the area of interest; or (ii) activities in the area of interest have not at the reporting date, reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves and active and signifi cant operations in, or in relation to, the area of interest are continuing. Exploration and evaluation assets are assessed for impairment if (i) suffi cient data exists to determine technical feasibility and commercial viability, and (ii) facts and circumstances suggest that the carrying amount exceeds the recoverable amount (see accounting policy (n)). For the purposes of impairment testing, exploration and evaluation assets are allocated to cash-generating units to which the exploration activity relates. The cash generating unit shall not be larger than the area of interest. Once the technical feasibility and commercial viability of the extraction of mineral resources in an area of interest are demonstrable, exploration and evaluation assets attributable to that area of interest are fi rst tested for impairment and then reclassifi ed to mining property and development assets within property, plant and equipment. Any exploration conducted within an operating Mining Lease area is expensed as incurred. (i) Development expenditure Development costs related to an area of interest are capitalised if the expenditures are expected to be recouped through sale or successful exploitation of the area of interest. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses (see accounting policy (n)), and is included in Property, plant and equipment Mining property and development (see accounting policy (g)). (j) Overburden in advance Expenditure incurred in the removal of overburden from coal deposits is deferred and expensed in operating expenditure as the coal is extracted. The balance of the amount deferred is reviewed at each reporting date to determine the amount (if any) which is no longer recoverable out of future revenue. Any amounts so determined are written-off. (k) Trade and other receivables (l) Current accounting policy Trade and other receivables are stated at amortised cost less impairment losses (see accounting policy (n)). Comparative period policy Trade and other receivables to be settled within 90 days are carried at amounts due. The collectibility of debts is assessed at reporting date and where appropriate, specifi c provision is made for any doubtful accounts. Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Cost is allocated on a monthly fi rst in and fi rst out basis and includes direct material, overburden removal, coal mining, coal processing, labour, related transportation costs to the point of sale and other fi xed and variable overhead costs directly related to mining activities. The site overheads and rehabilitation cost component of inventory is allocated using standard costing. Depreciation is allocated to inventories on a units of production basis. (m) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. (n) Impairment The carrying amounts of the consolidated entity s assets, other than inventories (see accounting policy (l)) and deferred tax assets (see accounting policy (x)), are reviewed at each balance date to determine whether there is any indication of impairment. If any such indication exists, the asset s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of cash-generating units are allocated to the carrying amount of the assets in the unit on a pro rata basis. Calculation of recoverable amount The recoverable amount of the consolidated entity s receivables carried at amortised cost is calculated as the present value of estimated future cash fl ows, discounted at the original effective interest rate (ie the effective interest rate computed at initial recognition of these fi nancial assets). Receivables with a short duration (ie less than 12 months) are not discounted. Impairment of receivables is not recognised until objective evidence is available that a loss event has occurred. Receivables are individually assessed for impairment.

85 Notes to the consolidated financial statements For the year ended 30 June 2006 pp SIGNIFICANT ACCOUNTING POLICIES (continued) (n) Impairment (continued) Calculation of recoverable amount (continued) The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash fl ows are discounted to their present value using a pre-tax discount rate that refl ects current market assessments of the time value of money and the risks specifi c to the asset. For an asset that does not generate largely independent cash infl ows, the recoverable amount is determined for the cashgenerating unit to which the asset belongs. Reversals of impairment An impairment loss in respect of a receivable carried at amortised cost is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. In respect of other assets, an impairment loss is reversed when there is an indication that the impairment no longer exists and there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (o) Share capital Current accounting policy Dividends Dividends are recognised as a liability in the period in which they are declared. Transaction costs Transaction costs of an equity transaction are accounted for as a deduction from equity, net of any related income tax benefi t. Comparative period policy Dividends A provision for dividends payable is recognised in the reporting period in which the dividends are declared, for the entire undistributed amount, regardless of the extent to which they will be paid in cash. Transaction costs Transaction costs arising on the issue of equity instruments are recognised directly in equity subject to the extent of proceeds received, otherwise expensed. (p) Convertible notes Current accounting policy Convertible notes that can be converted to share capital at the option of the holder, where the number of shares issued does not vary with changes in their fair value, are accounted for as compound fi nancial instruments. Transaction costs that relate to the issue of a compound fi nancial instrument are allocated to the liability and equity components in proportion to the allocation of proceeds. The equity component of the convertible notes is calculated as the excess of the issue proceeds over the present value of the future interest and principal payments, discounted at the market rate of interest applicable to similar liabilities that do not have a conversion option. The interest expense recognised in the income statement is calculated using the effective interest rate method. To the extent that the liability element of a compound fi nancial instrument was no longer outstanding at 1 July 2004, the date of transition to Australian Accounting Standards AIFRS, the amounts within equity that are attributable to the equity and liability elements have not been identifi ed separately. Comparative period policy Where convertible notes issued by the Company, give rise to a contractual obligation to deliver cash to the holder, they are classifi ed as liabilities to the extent of the obligation. Where fi nancial instruments are redeemable at the option of the holder, redeemable at a fi xed date with cumulative interest obligations, the proceeds received are classifi ed as a liability and related distributions as interest expense. (q) Interest-bearing borrowings Current accounting policy Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. (r) Comparative period policy Bank loans are recognised at their principal amount, subject to set-off arrangements. Interest expense is accrued at the contracted rate and included in Other trade payables and accrued expenses. There is no quantitative effect from the change in accounting policy as the consolidated entity has no net draw-downs on its borrowings during the period. Employee benefits Defined contribution plans Obligations for contributions to defi ned contribution plans are recognised as an expense in the income statement as incurred. Long-term service benefits The consolidated entity s net obligation in respect of long-term service benefi ts is the amount of future benefi t that employees have earned in return for their service in the current and prior periods. The obligation is calculated using expected future increases in wage and salary rates including related on-costs and expected settlement dates, and is discounted using the rates attached to the Commonwealth Government bonds at the balance sheet date which have maturity dates approximating the terms of the consolidated entity s obligations. Share based payment transactions The fair value of shares granted under the employee share loan plan are recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and is measured using a binomial option-pricing model, taking into account the terms and conditions upon which the shares were granted.

86 Financial performance pp 82 Notes to the consolidated financial statements For the year ended 30 June SIGNIFICANT ACCOUNTING POLICIES (continued) (r) Employee benefits (continued) Share based payment transactions (continued) Non-executive directors are required to apply $10,000 of their director s fees each year to purchase the Company securities, in order to strengthen alignment with shareholder interests. The shares are purchased on the Australian Stock Exchange at the market value prevailing on the date of purchase. The provision of shares is not subject to performance conditions. The fair value of shares granted to non-executive directors is recognised as an expense. Employee loans The employee share loan plan allows eligible persons of the consolidated entity and approved contractors to acquire shares of the Company. Eligible persons include permanent full-time or part-time employees, eligible contractors, or an agent of the Company or a related body corporate. No up-front payment is required for the shares as the Company offers all eligible persons an interest free, limited-recourse loan. Any dividends received on the allocated shares are applied to repay the loan balance. Fixed regular loan repayments are also made to repay the loan balance. The shares are purchased on the Australian Stock Exchange at the market value prevailing on the date of purchase. The outstanding loan balance will be recognised as a receivable at amortised cost less impairment losses (see accounting policy (n)). Wages, salaries, annual leave, sick leave and nonmonetary benefits Liabilities for employee benefi ts for wages, salaries and annual leave represent present obligations resulting from employees services provided to reporting date, calculated at undiscounted amounts based on remuneration wage and salary rates that the consolidated entity expects to pay as at reporting date including related on-costs, such as, workers compensation insurance and payroll tax. Non-accumulating non-monetary benefi ts, such as housing, cars and subsidised services, are expensed based on the net marginal cost to the consolidated entity as the benefi ts are taken by the employees. Director and Executive Option Plan The Company established an Option Plan for the Board of Directors and key employees of the Company as a retention strategy at the time of the Initial Public Offering. All options have been exercised prior to their expiry date (4 July 2006) or have expired on the date the holder ceased to be a director or executive. There were no voting rights attached to unissued ordinary shares. Voting rights are attached to unissued ordinary shares when the options were exercised. (s) Provisions A provision is recognised in the balance sheet when the consolidated entity has a present legal or constructive obligation as a result of a past event, and it is probable that an outfl ow of economic benefi ts will be required to settle the obligation. Provisions are determined by discounting the expected future cash fl ows at a pre-tax rate that refl ects current market assessments of the time value of money and, where appropriate, the risks specifi c to the liability. Rehabilitation and dismantling Provisions are made for the estimated cost of rehabilitation relating to areas disturbed during the mine s operation up to reporting date but not yet rehabilitated. Provision has been made in full for all disturbed areas at the reporting date based on current estimates of costs per hectare to rehabilitate such areas, discounted to their present value based on expected future cashfl ows. The estimated cost of rehabilitation includes the current cost of recontouring, topsoiling and revegetation employing legislative requirements. Changes in estimates are dealt with on a prospective basis as they arise. Signifi cant uncertainty exists as to the amount of rehabilitation obligations which will be incurred due to the impact of changes in environmental legislation. Assumptions have been made as to the remaining life of existing sites based on studies conducted by independent technical advisors and on the basis of current environmental legislation. Infrastructure assets and dismantling The present value of rehabilitation and dismantling obligations is recognised at commencement of the mining project and/or construction of the assets where a legal or constructive obligation exists at that time. The provision is recognised as a non-current liability with a corresponding asset. At each reporting date the rehabilitation liability is re-measured in line with changes in discount rates, and timing or amount of the costs to be incurred. As the assets are not revalued, any changes in the liability are added or deducted from the related asset, other than the unwinding of the discount which is recognised as a fi nance cost in the income statement as it occurs. If the change in the liability results in a decrease in the liability that exceeds the carrying amount of the asset, the asset is writtendown to nil and the excess is recognised immediately in the income statement. If the change in the liability results in an addition to the cost of the asset, the recoverability of the new carrying amount is considered. Where there is an indication that the new carrying amount is not fully recoverable, an impairment test is performed with the write-down recognised in the income statement in the period in which it occurs. Non-infrastructure areas Rehabilitation obligations relating to non-infrastructure areas are discounted to their present value based on expected future cashfl ows. At each reporting date the rehabilitation liability is re-measured in line with changes in discount rates, timing or amount of the costs to be incurred and areas to be rehabilitated. Any changes in the liability are charged to the income statement as rehabilitation expense, other than the unwinding of the discount which is recognised as a fi nance cost.

87 Notes to the consolidated financial statements For the year ended 30 June 2006 pp SIGNIFICANT ACCOUNTING POLICIES (continued) (t) Onerous contracts A provision for onerous contracts is recognised when the expected benefi ts to be derived by the consolidated entity from a contract are lower than the unavoidable cost of meeting its obligations under the contract. (u) Trade and other payables Current accounting policy Trade and other payables are stated at amortised cost. Trade payables are non-interest bearing and are normally settled on 30-day terms. Comparative period policy Trade and other payables are carried at cost which is the fair value of the consideration to be paid in the future for goods and services received, whether or not billed to the Company. (v) Revenue Goods sold Revenue from the sale of coal is recognised (net of penalties, returns, discounts, allowances and hedging gains/losses) in the income statement when the signifi cant risks and rewards of ownership have been transferred to the customer. No revenue is recognised if there are: (i) signifi cant uncertainties regarding recovery of the consideration due; (ii) the costs incurred or to be incurred cannot be measured reliably; (iii) there is a risk of return of goods; or (iv) there is continuing management involvement with the goods. (w) Expenses Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense and spread over the lease term. Net financing costs Current accounting policy Net fi nancing costs comprise interest payable on borrowings calculated using the effective interest rate method, interest receivable on funds invested, amortisation of ancillary costs incurred in connection with arrangement of borrowings, and gains and losses on hedging instruments that are recognised in the income statement (see accounting policy (f)). Borrowing costs are expensed as incurred, unless costs relate to a qualifying asset, and included in net fi nancing costs. Borrowing costs relating to a qualifying asset, being an asset that necessarily takes a substantial period to prepare for its intended use, are capitalised as part of the cost of the asset. Interest income is recognised in the income statement as it accrues, using the effective interest method. Comparative period policy Borrowing costs include interest, amortisation of discounts or premiums relating to borrowings, amortisation of ancillary costs incurred in connection with arrangement of borrowings, fi nance charges in respect of fi nance leases and foreign exchange differences net of the effect of hedges of borrowing. Interest payments in respect of fi nancial instruments classifi ed as liabilities are included in borrowing costs. Where interest rates are hedged or swapped, the borrowing costs are recognised net of any effect of the hedge or the swap. Ancillary costs incurred in connection with the arrangement of borrowings are capitalised as deferred expenditure and amortised over the life of the borrowings or over fi ve years, whichever is lesser. Borrowing costs are expensed as incurred unless they relate to qualifying assets. Qualifying assets are assets which take more than 12 months to get ready for their intended use or sale. In these circumstances, borrowing costs associated with qualifying assets are capitalised to the cost of the assets. Where funds are borrowed specifi cally for the acquisition, construction or production of a qualifying asset, the amount of borrowing costs capitalised is the amount incurred in relation to that borrowing, net of any interest earned on those borrowings. Where funds are borrowed generally, borrowing costs are capitalised using a weighted average capitalisation rate. Exploration and evaluation expenditure carried forward relating to areas of interest which have not reached a stage permitting reliable assessment of economic benefi ts are not qualifying assets. (x) Income tax Income tax on the profi t or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for fi nancial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profi ts will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefi t will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend.

88 Financial performance pp 84 Notes to the consolidated financial statements For the year ended 30 June SIGNIFICANT ACCOUNTING POLICIES (continued) (x) Income tax (continued) Tax consolidation The Company and its wholly-owned Australian resident entities have formed a tax-consolidated group with effect from 1 July 2003 and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated group is Macarthur Coal Limited. Current tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate fi nancial statements of the members of the tax-consolidated group using the separate taxpayer within group approach by reference to the carrying amounts of assets and liabilities in the separate fi nancial statements of each entity and the tax values applying under tax consolidation. Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries is assumed by the head entity in the tax-consolidated group and are recognised as amounts payable (receivable) to (from) other entities in the tax-consolidated group in conjunction with any tax funding arrangement amounts (refer below). Any difference between these amounts is recognised by the Company as an equity contribution or distribution. The Company recognises deferred tax assets arising from unused tax losses of the tax-consolidated group to the extent that it is probable that future taxable profi ts of the tax-consolidated group will be available against which the asset can be utilised. Any subsequent period adjustments to deferred tax assets arising from unused tax losses, as a result of revised assessments of the probability of recovery are recognised by the head entity only. Nature of tax funding arrangements and tax sharing agreements The head entity, in conjunction with other members of the taxconsolidated group, has entered into a tax funding arrangement which sets out the funding obligations of members of the taxconsolidated group in respect of tax amounts. The tax funding arrangements require payments to/from the head entity equal to the current tax liability (asset) assumed by the head entity and any tax-loss deferred tax asset assumed by the head entity, resulting in the head entity recognising an inter-entity receivable (payable) equal in amount to the tax liability (asset) assumed. The interentity receivable (payable) is at call. The head entity recognises the assumed current tax amounts as current tax liabilities (assets), adding to its own current amounts, since they are also due to or from the same taxation authority. The current tax liabilities (assets) are equivalent to the tax balances generated by external transactions entered into by the taxconsolidated group. Contributions to fund the current tax liabilities are payable as per the tax funding arrangement and refl ect the timing of the head entity s obligation to make payments for tax liabilities to the relevant tax authorities. The head entity in conjunction with other members of the taxconsolidated group, has also entered into a tax sharing agreement. The tax sharing agreement provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the fi nancial statements in respect of this agreement as payment of any amounts under the tax sharing agreement is considered remote. (y) Segment reporting A segment is a distinguishable component of the consolidated entity that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. (z) Goods and services tax Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the Australian Tax Offi ce ( ATO ) is included as a current asset or liability in the balance sheet. Cash fl ows are included in the statement of cash fl ows on a gross basis. The GST components of cash fl ows arising from investing and fi nancing activities which are recoverable from, or payable to, the ATO are classifi ed as operating cash fl ows. (aa) Derecognition of financial assets and liabilities Current accounting policy A fi nancial asset (or, where applicable, a part of a fi nancial asset or part of a group of similar fi nancial assets) is derecognised when: (i) the rights to receive cash fl ows from the asset have expired; (ii) the consolidated entity retains the right to receive cash fl ows from the asset, but has assumed an obligation to pay them in full without material delay to a third party; or (iii) the consolidated entity has transferred its rights to receive cash fl ows from the asset and either: (a) has transferred substantially all the risks and rewards of the asset; or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. A fi nancial liability is derecognised when the obligation under the liability is discharged, cancelled or expired. When an existing fi nancial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modifi ed, such an exchange or modifi cation is treated as a derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in profi t or loss.

89 Notes to the consolidated financial statements For the year ended 30 June 2006 pp SIGNIFICANT ACCOUNTING POLICIES (continued) (aa) Derecognition of financial assets and liabilities (continued) Comparative period policy financial instruments impairment and derecognition The carrying amounts of non-current fi nancial assets valued on the cost basis were reviewed to determine whether they are in excess of their recoverable amount at reporting date. If the carrying amount of a non-current fi nancial asset exceeded its recoverable amount (ie was not considered probable of recovery), the fi nancial asset was written down to the lower amount. The write-down was expensed in the reporting period in which it occurred. Where a group of assets working together supported the generation of cash infl ows, recoverable amount was assessed in relation to that group of assets. In assessing recoverable amounts of non-current fi nancial assets, the relevant cash fl ows were discounted to their present value. Impairment losses were reversed through the profi t and loss but only to the extent of original cost. An asset was derecognised when the contractual right to receive or exchange cash no longer existed. A liability was derecognised when the contractual obligation to deliver or exchange cash no longer existed. (ab) Accounting estimates and judgements Management discussed with the Audit and Risk Management Committee the development, selection and disclosure of the consolidated entity s critical accounting policies and estimates and the application of these policies and estimates. The estimates and judgements that have a signifi cant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next fi nancial year are discussed below. Key sources of estimation uncertainty Note 25 contains detailed analysis of the foreign exchange exposure of the consolidated entity and risks in relation to foreign exchange movements. Rehabilitation and dismantling provisions As set out in accounting policy (s) and Note 21, certain assumptions are required to be made in determining the amount the consolidated entity is expected to incur to settle its obligations in relation to rehabilitation of the mine sites and dismantling of infrastructure. Key assumptions include the amount and timing of future cash fl ow estimates and discount rates. Contingent liabilities litigation Certain claims have been made on the consolidated entity by a mining contractor. Judgements about the validity of the claims have been made by the directors. Further details are included in Note SEGMENT REPORTING Segment information is presented in respect of the consolidated entity s business and geographical segments. The primary format, business segments, is based on the consolidated entity s management and internal reporting structure. Inter-segment pricing is determined on an arm s length basis. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly income-earning assets and revenue, interest-bearing loans, borrowings and expenses, and corporate assets and expenses. Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period. All segments are continuing operations. Business segments The consolidated entity comprises the following main business segments: Operating coal mines: Coppabella and Moorvale mines Exploration and evaluation: Various tenements in the exploration and evaluation phase Other: Corporate and other business development activities Geographical segments The consolidated entity operates predominately in Australia. All segment assets from ordinary activities relate to operations in Australia. In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of assets. Recoverability of non-current assets As set out in accounting policy (n), certain assumptions are required to be made in order to assess the recoverability of non-current assets. Key assumptions include the future coal price, future cash fl ows, an estimated discount rate and estimates of coal reserves. Estimates of coal reserves in themselves are dependant on various assumptions, in addition to those described above, including operating cost assumptions. Changes in these estimates could materially impact on coal reserves, and could therefore affect estimates of future cash fl ows used in the assessment of recoverable amount, estimates of the life of mine and depreciation.

90 Financial performance pp 86 Notes to the consolidated financial statements For the year ended 30 June SEGMENT REPORTING (continued) Operating coal Exploration mines and evaluation Other Eliminations Consolidated $ 000 $ 000 $ 000 $ 000 $ 000 Business segments 30 June 2006 External sales revenue 534, ,755 Inter-segment revenue Total revenue 534, ,755 Segment result 225,715 (530) (13,595) - 211,590 Unallocated expenses - Results from operating activities 211,590 Net fi nancing income 2,455 Income tax expense (64,456) Profit for the period 149,589 Segment assets 455, , ,365 (304,026) 592,116 Segment liabilities 249, ,113 97,861 (304,026) 200,943 Cash fl ows from operating activities 247,132 - (45,641) - 201,491 Cash fl ows from investing activities 44,564 (6,729) (744) - 37,091 Cash fl ows from fi nancing activities (25,135) (1,472) (61,510) - (88,117) Capital expenditure 7,277 54, ,451 Impairment losses June 2005 External sales revenue 370, ,157 Inter-segment revenue Total revenue 370, ,157 Segment result 93,933 (2,859) 3,599-94,673 Unallocated expenses - Results from operating activities 94,673 Net fi nancing costs (5,033) Income tax expense (25,493) Profit for the period 64,147 Segment assets 376,803 46, ,410 (156,204) 440,662 Segment liabilities 254,160 49,796 57,605 (156,987) 204,574 Cash fl ows from operating activities 110,736 - (2,752) - 107,984 Cash fl ows from investing activities (52,845) (3,640) (85) - (56,570) Cash fl ows from fi nancing activities (25,771) (1,306) (17,974) - (45,051) Capital expenditure 5,445 3, ,833 Impairment losses 1, ,471

91 Notes to the consolidated financial statements For the year ended 30 June 2006 pp 87 Asia Europe Americas Other regions Consolidated $ 000 $ 000 $ 000 $ 000 $ SEGMENT REPORTING (continued) Geographical segments 30 June 2006 Revenue from external customers 260, ,805 62,403 21, ,755 Segment assets , ,116 Capital expenditure ,451 62, June 2005 Revenue from external customers 159, ,490 40,912 17, ,157 Segment assets , ,662 Capital expenditure ,833 8, OTHER INCOME Consolidated The Company $ 000 $ 000 $ 000 $ 000 Management fee related parties ,358 1,994 Dividends related parties ,488 19,034 Net foreign exchange gains 1, Sundry other parties , ,944 21, OTHER EXPENSES Net foreign exchange losses - 1, Exploration and evaluation expensed as incurred Increase in rehabilitation provision Depreciation (242) Impairment loss on receivables 91 1, Net loss on disposal of non-current assets , PERSONNEL EXPENSES Wages and salaries 4,605 3,182 3,284 2,072 Other associated personnel expenses Contributions to defi ned contribution superannuation funds Increase in liability for annual leave Increase in liability for long-service leave Equity-settled transactions ,508 4,076 5,186 2,966

92 Financial performance pp 88 Notes to the consolidated financial statements For the year ended 30 June AUDITORS REMUNERATION Consolidated The Company $ $ $ $ Audit services Auditors of the Company KPMG u Audit and review of fi nancial reports (A) (F) 176, , , ,000 u Audit of joint venture operations (C) 87,159 68, , , , ,000 Other services Auditors of the Company KPMG u Other assurance services (A) (B) 63,290 62,413 63,290 62,413 u Taxation services (A) 54,605 66,520 54,605 66,520 u Joint venture operations (C) Other services (D) 16,969 32, KPMG related practices u Other (E) 30,273 55,136 30,273 55, , , , ,069 (A) (B) (C) (D) (E) (F) All auditors remuneration is borne by the Company for the consolidated entity. Represents advice in relation to accounting and AIFRS. Represents the consolidated entity s share of remuneration paid for audit and other services incurred by joint ventures. Represents tax advice and assistance with financial modelling. Represents license and other fees paid to a related entity, of which KPMG holds a 50% interest, for purchase of tax compliance software by the consolidated entity. Includes audit relating to transition to AIFRS and restated comparative fi nancial information. 7. NET FINANCING COSTS Consolidated The Company $ 000 $ 000 $ 000 $ 000 Interest income (7,644) (2,385) (8,694) (10,518) Financial income (7,644) (2,385) (8,694) (10,518) Interest expense 5,189 7,418 1,704 2,647 Financial expenses 5,189 7,418 1,704 2,647 Net fi nancing costs/(income) (2,455) 5,033 (6,990) (7,871)

93 Notes to the consolidated financial statements For the year ended 30 June 2006 pp 89 Consolidated The Company $ 000 $ 000 $ 000 $ INCOME TAX EXPENSE (a) Recognised in the income statement Current tax expense Current year 55,851 20,385 (219) 785 Adjustments for prior years ,878 20,542 (192) 942 Deferred tax expense Origination and reversal of temporary differences 8,578 4, (25) 8,578 4, (25) Total income tax expense/(benefi t) in income statement attributable to continuing operations 64,456 25,493 (55) 917 (b) Numerical reconciliation between tax expense and pre-tax net profit Profi t before tax continuing operations 214,045 89,640 61,170 22,381 Income tax using the domestic corporation tax rate of 30% (2005: 30%) 64,213 26,892 18,351 6,714 Increase in income tax expense due to: u Non-deductible expenses 2, Decrease in income tax expense due to: u Non-assessable revenues (2,094) (1,731) (18,446) (5,971) 64,429 25,336 (82) 760 Under/(over) provided in prior years Income tax expense/(benefi t) on pre-tax net profi t 64,456 25,493 (55) 917 (c) Current tax liability/(asset) Movements during the year Balance at the beginning of the year 16,505 (7,000) 16,505 (7,000) Under/(over) provision in prior period Income tax paid (27,783) (5,862) (27,783) (5,862) Income tax received - 8,847-8,847 Current year s income tax provision 55,646 20,363 (192) 722 Income tax expense related to wholly-owned subsidiaries in a tax-consolidated group ,838 19,728 44,395 16,505 44,395 16,505 (d) Deferred tax recognised directly in equity Relating to foreign currency derivative contracts

94 Financial performance pp 90 Notes to the consolidated financial statements For the year ended 30 June DEFERRED TAX ASSETS AND LIABILITIES Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Assets Liabilities Net $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Consolidated Property, plant and equipment - - 2,434 2,629 2,434 2,629 Employee benefi ts (198) (71) - - (198) (71) Inventories (36) (36) 409 Interest-bearing loans and borrowings (3,215) (3,517) - - (3,215) (3,517) Provisions (5,984) (3,922) - - (5,984) (3,922) Amounts payable for future user charges (3,719) (4,199) - - (3,719) (4,199) Overburden in advance ,133 15,984 23,133 15,984 Mining property ,091 20,913 19,091 20,913 Exploration and evaluation ,354 6,978 17,354 6,978 Other items (7,466) (377) (6,525) 78 Tax value of loss carry-forwards recognised - (1,626) (1,626) Tax (assets)/liabilities (20,618) (13,712) 62,953 47,368 42,335 33,656 Set off of tax Net tax (assets)/liabilities (20,618) (13,712) 62,953 47,368 42,335 33,656 The Company Property, plant and equipment Employee benefi ts (178) (71) - - (178) (71) Provisions (29) (29) - Other items (347) (596) - - (347) (596) Tax (assets)/liabilities (554) (667) 7 3 (547) (664) Set off of tax Net tax (assets)/liabilities (554) (667) 7 3 (547) (664) Unrecognised deferred tax assets All deferred tax assets have been recognised within the Company or the consolidated entity.

95 Notes to the consolidated financial statements For the year ended 30 June 2006 pp DEFERRED TAX ASSETS AND LIABILITIES (continued) Consolidated The Company Recognised Recognised Balance Recognised in equity/ Balance Balance Recognised in equity/ Balance 1 July 05 in income transfers 30 June 06 1 July 05 in income transfers 30 June 06 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Movement in temporary differences during the year Property, plant and equipment 2,629 (195) - 2, Inventories 409 (445) - (36) Interest-bearing loans and borrowings (3,517) (3,215) Employee benefi ts (71) (79) (48) (198) (71) (87) (20) (178) Provisions (3,922) (2,062) - (5,984) - (29) - (29) Amounts payable for future user charges (4,199) (3,719) Overburden in advance 15,984 7,149-23, Mining property 20,913 (1,822) - 19, Exploration and evaluation 6,978 10,376-17, Other items 78 (6,752) 149 (6,525) (596) (347) Tax value of loss carry-forwards (recognised)/derecognised (1,626) 1, ,656 8, ,335 (664) 137 (20) (547) Consolidated The Company Recognised Recognised Balance Recognised in equity/ Balance Balance Recognised in equity/ Balance 1 July 04 in income transfers 30 June 05 1 July 04 in income transfers 30 June 05 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Property, plant and equipment 1, , Inventories Interest-bearing loans and borrowings (3,770) (3,517) Employee benefi ts (34) (37) - (71) (34) (37) - (71) Provisions (3,520) (402) - (3,922) Amounts payable for future user charges (4,775) (4,199) Overburden in advance 11,640 4,344-15, Mining property 24,084 (3,171) - 20, Exploration and evaluation 6, , Other items (175) 78 (772) (596) Tax value of loss carry-forwards (recognised)/derecognised (3,164) 1,538 - (1,626) ,880 4,951 (175) 33,656 (805) (25) 166 (664)

96 Financial performance pp 92 Notes to the consolidated financial statements For the year ended 30 June EARNINGS PER SHARE Basic earnings per share The calculation of basic earnings per share at 30 June 2006 was based on the profi t attributable to ordinary shareholders of $149,589,000 (2005: $64,147,000) and a weighted average number of ordinary shares outstanding during the year ended 30 June 2006 of 179,603,247 (2005: 162,350,704), calculated as follows: Consolidated $ 000 $ 000 Profit attributable to ordinary shareholders Profi t attributable to ordinary shareholders 149,589 64,147 Number Number Weighted average number of ordinary shares Issued ordinary shares at 1 July 172,824, ,724,477 Effect of shares issued on exercise of options 76, ,505 Effect of shares issued conversion of convertible notes 2,106,564 6,746,722 Effect of shares issued in December ,104,894 - Effect of shares issued in May ,704 - Weighted average number of ordinary shares at 30 June 179,603, ,350,704 Diluted earnings per share The calculation of diluted earnings per share at 30 June 2006 was based on profi t attributable to ordinary shareholders of $149,589,000 (2005: $64,147,000) and a weighted average number of ordinary shares outstanding during the year ended 30 June 2006 of 179,703,275 (2005: 166,732,761), calculated as follows: Consolidated $ 000 $ 000 Profit attributable to ordinary shareholders (diluted) Profi t attributable to ordinary shareholders 149,589 64,147 Number Number Weighted average number of ordinary shares (diluted) Weighted average number of ordinary shares at 1 July 179,603, ,350,704 Effect of share options on issue 100, ,247 Effect of convertible notes on issue - 3,880,810 Weighted average number of ordinary shares (diluted) at 30 June 179,703, ,732,761

97 Notes to the consolidated financial statements For the year ended 30 June 2006 pp 93 Consolidated The Company $ 000 $ 000 $ 000 $ CASH AND CASH EQUIVALENTS Cash at bank and in hand 4, , Bank cash deposit account at call 35,777 4,675 8,165 4,675 Bank bills 128,496 12,558 7,497 12,558 Cash and cash equivalents in the statement of cash fl ows 168,603 18,138 18,038 17, TRADE AND OTHER RECEIVABLES Current Trade receivables 32,659 23, Other receivables and prepayments 10,334 7, Tax related receivables ,560 7,831 Receivables due from associates and related entities unsecured 9,669 1, ,662 32,558 71,346 8,409 Non-current Security deposits Other receivables and prepayments 3,977 5, Loans to employees Employee Share Plan Amounts receivable from controlled entities unsecured , ,747 Receivables due from associates and related entities unsecured - 7, ,603 13, , ,754 Current and non-current receivables due from associates and related entities unsecured are shown net of impairment losses of $91,000 (2005: $Nil) and $Nil (2005: $1,471,000), respectively, recognised in the current year. 13. INVENTORIES Coal stocks, at cost 15,412 24, Refer Note 19 for details of security over inventories. 14. OTHER FINANCIAL ASSETS Current Cash and deposits not at call 6,099 58, Foreign currency derivative contracts 2,711 19, ,810 78, Non-current Investments in controlled entities at cost ,343 56,385 Foreign currency derivative contracts - 2, ,783 73,343 56,385

98 Financial performance pp 94 Notes to the consolidated financial statements For the year ended 30 June OTHER ASSETS Consolidated The Company $ 000 $ 000 $ 000 $ 000 Current Deferred expenditure Overburden in advance 74,206 45, ,206 46, Non-current Deferred expenditure - 2,239-1,452 Less accumulated amortisation - (2,239) - (1,452) Overburden in advance 2,904 7, ,904 7, PROPERTY, PLANT AND EQUIPMENT Mining property and development (including mining rights and coal resources) u At cost 141, , u Less accumulated depreciation (34,230) (26,431) , , Freehold land u At cost 4,958 4, Buildings and infrastructure u At cost 72,856 67, u Less accumulated depreciation (21,867) (14,855) ,989 53, Plant and equipment u At cost 3,949 2, u Less accumulated depreciation (912) (723) (134) (80) 3,037 1, Capital works in progress u At cost 3,733 4, , , Refer to Note 19 for details of security over property, plant and equipment.

99 Notes to the consolidated financial statements For the year ended 30 June 2006 pp 95 Consolidated The Company $ 000 $ 000 $ 000 $ PROPERTY, PLANT AND EQUIPMENT (continued) Reconciliations Reconciliation of the carrying amounts for each class of property, plant and equipment are set out below: u Mining property and development Carrying amount at beginning of year 113, , Additions, including acquisitions through acquisition of interest in joint venture 1, Disposals - (604) - - Depreciation (7,798) (9,896) - - Carrying amount at end of year 107, , u u u u Freehold land Carrying amount at beginning of year 4,953 4, Additions Carrying amount at end of year 4,958 4, Buildings and infrastructure Carrying amount at beginning of year 53,110 59, Additions, including acquisitions through acquisition of interest in joint venture 1, Transfer from capital works in progress 3, Disposals (377) (62) - - Depreciation (7,178) (6,477) - - Carrying amount at end of year 50,989 53, Plant and equipment Carrying amount at beginning of year 1,436 1, Additions, including acquisitions through acquisition of interest in joint venture Transfer from capital works in progress 1, Disposals (132) (74) (23) - Depreciation (333) (232) (61) (25) Carrying amount at end of year 3,037 1, Capital works in progress Carrying amount at beginning of year 4, Additions, including acquisitions through acquisition of interest in joint venture 4,751 5, Transfers to property, plant and equipment (5,475) (848) - - Carrying amount at end of year 3,733 4, The following depreciation expense was recognised as an expense in the income statement: Mining property and development 8,759 9, Buildings and infrastructure 6,919 6, Plant and equipment ,011 15,

100 Financial performance pp 96 Notes to the consolidated financial statements For the year ended 30 June EXPLORATION AND EVALUATION ASSETS Consolidated The Company $ 000 $ 000 $ 000 $ 000 Costs carried forward in respect of areas of interest in: u Exploration and/or evaluation intangible 94,809 40, ,809 40, Cost Balance at beginning of year 40,390 37, Acquisitions of subsidiaries and joint venture interests 48, Exploration and evaluation capitalised 5,766 3, Balance at end of year 94,809 40, The ultimate recoupment of costs carried forward as exploration and evaluation assets is dependent on the successful development and commercial exploitation or sale of the respective area of interest. 18. TRADE AND OTHER PAYABLES Current Trade payables 1,633 6, Other payables and accrued expenses 66,905 54, ,538 61,346 1,137 1,176 Non-current Amounts payable to controlled entities unsecured , INTEREST-BEARING LOANS AND BORROWINGS This note provides information about the contractual terms of the consolidated entity s interest-bearing loans and borrowings. For more information about the consolidated entity s exposure to interest rate and foreign currency risk, see Note 25. Current liabilities Secured bank loans - 19, Redeemable convertible notes - 5,627-5,627 Deferred liability for acquisition of mining interest unsecured 1,931 1, ,931 26,662-5,627 Non-current liabilities Deferred liability for acquisition of mining interest unsecured 8,785 9, ,785 9,

101 Notes to the consolidated financial statements For the year ended 30 June 2006 pp INTEREST-BEARING LOANS AND BORROWINGS (continued) Redeemable convertible notes In December 2002 the Company issued 20,689,660 convertible notes at an issue price of $1.45 each with interest at 10% per annum payable half-yearly. The notes were convertible, at the option of the holder, on any interest payment date up to 11 December 2005 to ordinary shares on the basis of one share per note. The Company had the option, on receiving the conversion request from the holder, to either issue ordinary shares or to pay the cash equivalent. Any notes not converted by the maturity date were redeemed by the Company at the issue price on the maturity date. During the year 3,833,946 (2005: 16,719,850) notes were converted at $1.45 (refer Note 24). Deferred liability for acquisition of mining interest unsecured In December 2003 the consolidated entity purchased an additional 23.3% interest in the Coppabella Project. As part of the acquisition, the consolidated entity entered into an arrangement to progressively purchase the 23.3% interest in the exploration tenements each six months, over a 10 year period. In accordance with Australian Accounting Standards the deferred liability has been refl ected at its present value in the fi nancial statements, discounted at 10.2% (2005: 10%) based on 6% interest plus risk adjusted margin. Consolidated The Company $ 000 $ 000 $ 000 $ 000 Financing facilities Bank loans Corporate Facility u Amortising cash advance facility (US$24,000,000) 32, u Revolving cash advance facility (US$20,000,000) 26, Bank loans Project Finance Facility u Cash advance term loan (US$14,552,000) - 19, u Revolving cash advance working capital loan - 17, Bank Guarantee Facility 60,000 33, ,195 69, Facilities utilised at reporting date Bank loans Corporate Facility u Amortising cash advance facility u Revolving cash advance facility Bank loans Project Finance Facility u Cash advance term loan (US$14,552,000) - 19, u Revolving cash advance working capital loan Bank Guarantee Facility 57,787 32, ,787 51, Facilities not utilised at reporting date Bank loans Corporate Facility u Amortising cash advance facility (US$24,000,000) 32, u Revolving cash advance facility (US$20,000,000) 26, Bank loans Project Finance Facility u Cash advance term loan (US$Nil) u Revolving cash advance working capital loan - 17, Bank Guarantee Facility 2,213 1, ,408 18,

102 Financial performance pp 98 Notes to the consolidated financial statements For the year ended 30 June INTEREST-BEARING LOANS AND BORROWINGS (continued) Corporate Facility Bank loans During the year ended 30 June 2006 the consolidated entity replaced its Project Finance Facility with a Corporate Facility. The purpose of the Corporate Facility was to replace the project fi nancing and provide additional funds for general corporate purposes within the consolidated entity. The facility is held by a controlled entity, Coppabella Coal Pty Ltd. Bank loans provided as part of the Corporate Facility are: (1) Cash advance facility (a) Amortising cash advance facility The facility limit is denominated in United States dollars as US$30,000,000 and is to be amortised on a straight line basis to 30 June A$Nil (US$Nil) has been drawn down at 30 June The facility can be drawn in Australian dollars or United States dollars. The amortised facility limit at 30 June 2006 is US$24,000,000. A commitment fee of 0.45% per annum is payable on the unused portion of the amortising cash advance facility. The interest rate applicable to the cash advance facility comprises LIBOR plus a minimum margin of 0.95% per annum. The effective interest rate was 6.46% per annum at 30 June (b) Revolving cash advance facility The revolving cash advance facility loan limit is denominated in United States dollars as US$20,000,000. A$Nil (US$Nil) has been drawn down at 30 June The facility is in place until 30 June The facility can be drawn down in Australian dollars or United States dollars. A commitment fee of 0.45% per annum is payable on the unused portion of the revolving cash advance facility. The interest rate applicable to the cash advance facility comprises LIBOR plus a minimum margin of 0.95% per annum. The effective interest rate was 6.46% per annum at 30 June (2) Bank guarantee facility The bank guarantee facility is denominated in Australian dollars as a A$60,000,000 limit amortising to A$Nil at maturity 30 June The facility can be drawn in Australian dollars, incorporating a sub-limit of the equivalent of A$4,000,000 which can be drawn in United States dollars. Bank guarantee fees are payable at 0.55% per annum and a fee of 0.22% per annum applies to the unused portion of the bank guarantee facility. Security The Corporate Facility is secured by a guarantee provided by Macarthur Coal Limited and charges over the consolidated entity s interest in the Coppabella and Moorvale Joint Venture including all of the assets and undertakings of the controlled entity, Coppabella Coal Pty Ltd and charges over the assets and undertakings of the controlled entity, Macarthur Coal Management Pty Ltd and the Company s shares in Coppabella Coal Pty Ltd and Macarthur Coal Management Pty Ltd and intercompany loans to the controlled entities. Project Finance Facility A non-recourse Project Finance Facility applicable to the Coppabella and Moorvale mines, with the debt being held by the controlled entities, was in place until its cancellation on 17 October Bank loans provided as part of the Project Finance Facility were: (1) Cash advance term loan The loan was denominated in United States dollars. An amount of A$19,102,000 (US$14,552,000) was included in current liabilities at 30 June 2005, being the amount payable within one year due to the loan being fully repaid in October The interest rate applicable to the cash advance term loan comprised LIBOR plus a margin of 1.55% per annum. The effective interest rate was 5.05% per annum at 30 June (2) Revolving cash advance working capital loan The revolving cash advance working capital loans were denominated in Australian dollars. The interest rate comprised a base rate based on BBSY plus a margin of 1.55% per annum. The effective interest rate at 30 June 2005 was 7.24%. Additionally, a commitment fee of 0.70% per annum was payable on the unused portion of the revolving cash advance working capital loan facility. (3) Bank guarantee facility The bank guarantee facility was denominated in Australian and United States dollars of up to A$33,000,000 equivalent. Bank guarantee fees were payable at 0.775% per annum and a fee of 0.35% per annum applied to the unused portion of the bank guarantee facility. Security The Project Finance Facility was secured by changes over the consolidated entity s interest in the Coppabella and Moorvale Joint Venture including all of the assets and undertakings of the controlled entity, Coppabella Coal Pty Ltd, and the Company s shares in Coppabella Coal Pty Ltd and intercompany loans to the controlled entity.

103 Notes to the consolidated financial statements For the year ended 30 June 2006 pp 99 Consolidated The Company $ 000 $ 000 $ 000 $ INTEREST-BEARING LOANS AND BORROWINGS (continued) Assets pledged under security arrangements The carrying amount of the pledged non-current assets are as follows: Mining property and development 107, , Land 3,730 3, Buildings and infrastructure 50,989 53, Plant and equipment 2,203 1, Capital works in progress 3,733 4, Receivables 6,039 7, Other fi nancial assets - 2, Other 2,904 12, Shares in controlled entities ,385 56,385 Amounts receivable from controlled entities ,400 79, , ,282 98, ,586 Convertible notes Convertible notes on issue at 1 July 5,627 29,871 5,627 29,871 3,833,946 conversions during the period (2005: 16,719,850) (5,559) (24,244) (5,559) (24,244) Debt repaid to non-converting note holders (68) - (68) - Carrying amount of liability at 30 June - 5,627-5, EMPLOYEE BENEFITS Current liabilities Liability for annual leave Liability for long-service leave Non-current liabilities Liability for long-service leave Defined contribution superannuation funds The consolidated entity makes contributions to several defi ned contribution superannuation funds. The amount recognised as an expense was $603,000 for the fi nancial year ended 30 June 2006 (2005: $323,000).

104 Financial performance pp 100 Notes to the consolidated financial statements For the year ended 30 June EMPLOYEE BENEFITS (continued) Share based payments Directors Option Plan The Company has a directors option plan for the Board of Directors. There are no voting rights attached to unissued ordinary shares. Voting rights will be attached to unissued ordinary shares when the options have been exercised. All options expire on the earlier of their expiry date or the date the holder ceases to be a director of the Company or the date the holder is dismissed for misconduct or for reasons involving fraud. The number and weighted average exercise prices of share options is as follows: Weighted Weighted average Number average Number exercise of options exercise of options Outstanding at the beginning of the period - - $ ,000 Exercised during the period - - $1.32 (800,000) Outstanding at the end of the period Exercisable at the end of the period - - No options are outstanding at 30 June 2006 and no options were exercised during the year. During the fi nancial year, no share options were exercised (2005: 800,000, fully paid). The weighted average share price at the date of exercise was $Nil (2005: $4.26). Executive Option Plan The Company has an executive option plan for key employees of the Company and Macarthur Coal (C&M Management) Pty Ltd, an associated entity. There are no voting rights attached to unissued ordinary shares. Voting rights will be attached to unissued ordinary shares when the options have been exercised. All options expire on the earlier of their expiry date or the date the holder ceases to be an executive or the date the holder is dismissed for misconduct or for reasons involving fraud. The number and weighted average exercise prices of share options is as follows: Weighted Weighted average Number average Number exercise price of options exercise price of options Outstanding at the beginning of the period $ ,000 $ ,000 Exercised during the period $1.38 (110,000) $1.34 (580,000) Outstanding at the end of the period - - $ ,000 Exercisable at the end of the period - 110,000 No options are outstanding at 30 June During the fi nancial year, 110,000 share options were exercised (2005: 580,000), fully paid. The weighted average share price at the date of exercise was $6.12 (2005: $3.81). Employee Share Plan The Company established an Employee Share Plan (ESP) which was used to provide an opportunity for employees to participate in the Initial Public Offering. On 2 July 2001, 180,000 shares were issued to 60 eligible employees at an issue price of $1.00 per share with a limit of 3,000 shares per employee. All shares issued under the ESP rank equally with all other shares for time being on issue. The Company provided interest free loans to employees to enable them to acquire shares under ESP to 100% of the total acquisition price for the shares. Any dividends declared on the shares issued under ESP will, to the extent determined by the directors, be fi rst used to offset any loans outstanding on the shares. Employees have also provided irrevocable authority to the Company to deduct 1% of their gross salary each month in repayment of the loan.

105 Notes to the consolidated financial statements For the year ended 30 June 2006 pp EMPLOYEE BENEFITS (continued) Share based payments (continued) Employee Share Plan (continued) The loan will be repayable: a) if default is made by the employee on the repayment of the loan; or b) the employee s employment with the Company, its subsidiary or associate or the relevant contractor is terminated for any reason; or c) the employee becomes insolvent or commits an act of bankruptcy. The Company holds security over the shares the subject of a loan until the loan is repaid. The market price of shares issued under the ESP as at 30 June 2006 was $4.48 (2005: $7.45). There were no other shares eligible for issuance under the ESP at 30 June Consolidated The Company $ $ $ $ The amount recognised in the fi nancial statements of the consolidated entity and the Company in relation to employee shares during the year were: Issued ordinary share capital (180,000 shares at $1 each) - 180, ,000 Employee loans payable at 30 June ,744-6,744 Employee Share Loan Plan The Company established an Employee Share Loan Plan (ESLP) which was used to provide an opportunity for eligible persons of the consolidated entity and approved contractors to acquire shares of the Company. On 15 December 2005, 122,935 shares were issued to 86 eligible employees at an issue price of $5.43 per share with a value limit of between $6,000 to $20,000 per employee. All shares issued under the ESLP rank equally with all other shares for time being on issue. The Company provided interest free loans to all eligible persons to enable them to acquire shares under ESLP to 100% of the total acquisition price for the shares. Any dividends declared on the shares issued under ESLP will be used to offset any loans outstanding on the shares. Employees and contractors have also provided irrevocable authority to the Company to deduct 1% of their gross salary each month in repayment of the loan. The loan will be repayable: a) if default is made by the employee on the repayment of the loan; or b) the employee s employment with the Company, its subsidiary or associate or the relevant contractor is terminated for any reason; or c) the employee becomes insolvent or commits an act of bankruptcy. The Company holds security over the shares the subject of a loan until the loan is repaid. The market price of shares issued under the ESLP as at 30 June 2006 was $4.48. There were no other shares eligible for issuance under the ESLP at 30 June The number and weighted average exercise prices of shares is as follows: Weighted Weighted average Number average Number exercise price of shares exercise price of shares Outstanding at the beginning of the period Granted during the period $ , Sold during the period $4.91 (16,930) - - Outstanding at the end of the period - 106,

106 Financial performance pp 102 Notes to the consolidated financial statements For the year ended 30 June PROVISIONS Rehabilitation and Onerous dismantling contracts Other Total $ 000 $ 000 $ 000 $ 000 Consolidated Balance at 1 July , ,929 Provisions made during the year 3,854 1, ,912 Provisions used during the year (622) - - (622) Unwind of discount Balance at 30 June ,886 1, ,944 Current 1,384 1, ,344 Non-current 16, ,600 17,886 1, ,944 The Company Balance at 1 July Provisions made during the year Balance at 30 June Current Non-current During the fi nancial year ended 30 June 2006, $622,000 was recognised as an expense in the income statement in respect of rehabilitation incurred (2005: $928,000). Rehabilitation and dismantling In accordance with State Government legislative requirements, a provision has been recognised for mine rehabilitation works throughout the life of the mines in relation to the consolidated entity s coal mining operations. A provision for dismantling of infrastructure assets on cessation of operations at the mines has also been recognised in relation to the consolidated entity s coal mining operations. The basis for accounting is set out in Note 1(s). Onerous contracts Macarthur Coal (C&M Management) Pty Ltd, the manager for the Coppabella and Moorvale Joint Venture, entered into a contract with Queensland Rail for the transport of 625,000 tonnes of coal to Abbot Point for the period 1 March 2006 to 31 December The port contract at Abbot Point expired on 28 February 2006 and therefore there is no corresponding port contract during the period 1 March 2006 to 31 December The obligation under the Queensland Rail contract for the remaining period 1 July 2006 to 31 December 2006 has been fully provided for at year end.

107 Notes to the consolidated financial statements For the year ended 30 June 2006 pp 103 Consolidated The Company $ 000 $ 000 $ 000 $ OTHER FINANCIAL LIABILITIES Current Mining exploration and evaluation costs (refer Note 27(d)) 131 1, Amounts payable for future user charges (refer Note 27(e)) 1,694 1, Foreign currency derivative contracts 1,447 1, ,272 4, Non-current Mining exploration and evaluation costs (refer Note 27(d)) Amounts payable for future user charges (refer Note 27(e)) 10,704 12, Foreign currency derivative contracts ,081 12, OTHER LIABILITIES Current Deferred unrealised gains on foreign currency derivative contracts - 17, Deferred unrealised gains on US dollar bank loans - 2, , Non-current Deferred unrealised gains on foreign currency derivative contracts - 2, Deferred unrealised gains on US dollar bank loans - 2, , CAPITAL AND RESERVES Share Hedging Retained Total Note capital reserve earnings equity $ 000 $ 000 $ 000 $ 000 Reconciliation of movement in capital and reserves attributable to equity holders of the parent Consolidated Balance at 1 July ,530-7, ,659 Total recognised income and expense ,147 64,147 Adjustment to prior period transaction costs (43) - - (43) Shares issued on exercise of options 1, ,832 Shares issued on conversion of convertible notes 24, ,244 Dividends to shareholders - - (17,751) (17,751) Balance at 30 June ,563-53, ,088 Balance at 1 July ,563-53, ,088 Effect of change in accounting policy 35-15,504-15,504 Balance at 1 July 2005 restated 182,563 15,504 53, ,592 Total recognised income and expense - (12,684) 149, ,905 Shares issued on acquisition of joint venture interests 48, ,078 Shares issued on exercise of options Shares issued on conversion of convertible notes 5, ,559 Equity settled transactions 9, ,299 Dividends to shareholders - - (61,412) (61,412) Balance at 30 June ,343 2, , ,173

108 Financial performance pp 104 Notes to the consolidated financial statements For the year ended 30 June CAPITAL AND RESERVES (continued) Share Hedging Retained Total capital reserve earnings equity $ 000 $ 000 $ 000 $ 000 Reconciliation of movement in capital and reserves attributable to equity holders of the parent (continued) The Company Balance at 1 July , ,001 Total recognised income and expense ,464 21,464 Adjustment to prior period transaction costs (43) - - (43) Shares issued on exercise of options 1, ,832 Shares issued on conversion of convertible notes 24, ,244 Dividends to shareholders - - (17,751) (17,751) Balance at 30 June ,563-4, ,747 Balance at 1 July ,563-4, ,747 Effect of change in accounting policy Balance at 1 July 2005 restated 182,563-4, ,747 Total recognised income and expense ,225 61,225 Shares issued on acquisition of joint venture interests 48, ,078 Shares issued on exercise of options Shares issued on conversion of convertible notes 5, ,559 Equity settled transactions 9, ,299 Dividends to shareholders - - (61,412) (61,412) Balance at 30 June ,343-4, ,648 The Company Ordinary shares Share capital On issue at 1 July 172,824, ,724,477 Shares issued on acquisition of joint venture interests 7,584,677 - Shares issued on equity settled transaction 3,027,396 - Shares issued on exercise of options 110,000 1,380,000 Shares issued on conversion of convertible notes 3,833,946 16,719,850 On issue at 30 June fully paid 187,380, ,824,327 Effective 1 July 1998, the Company Law Review Act abolished the concept of par value shares and the concept of authorised capital. Accordingly, the Company does not have authorised capital or par value in respect of its issued shares. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. In the event of winding up of the Company, ordinary shareholders rank after creditors and are fully entitled to any proceeds. Hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash fl ow hedging instruments related to hedged transactions that have not yet occurred.

109 Notes to the consolidated financial statements For the year ended 30 June 2006 pp CAPITAL AND RESERVES (continued) Cents Total Franked/ Date of per share amount unfranked payment $ Dividends Dividends recognised in the current year by the Company are: 2006 Interim 2006 ordinary ,401,179 (1) Franked 31 March 2006 Final 2005 ordinary ,010,676 (2) Franked 30 September 2005 Total amount ,411, Interim 2005 ordinary ,877,073 (2) Franked 31 March 2005 Final 2004 ordinary ,873,533 (2) Franked 30 September 2004 Total amount ,750,606 Franked dividends declared or paid during the year were franked at the tax rate of 30%. (1) Paid out of AIFRS profits (2) Paid out of old AGAAP profits After the balance sheet date the following dividends were proposed by the directors. The dividends have not been provided. The declaration and subsequent payment of dividends has no income tax consequences. Cents Total Franked/ Date of per share amount unfranked payment $ Final ordinary ,728,462 (1) Franked 9 October 2006 The fi nancial effect of these dividends have not been brought to account in the fi nancial statements for the year ended 30 June 2006 and will be recognised in subsequent fi nancial reports. The Company $ 000 $ 000 Dividend franking account 30% franking credits available to shareholders of the Company for subsequent fi nancial years 45,981 16,628 The above available amounts are based on the balance of the dividend franking account at year-end adjusted for: (a) franking credits that will arise from the payment of the current tax liabilities; (b) franking debits that will arise from the payment of dividends recognised as a liability at year-end; (c) franking credits that will arise from the receipt of dividends recognised as receivables by the tax-consolidated group at year-end; and (d) franking credits that the entity may be prevented from distributing in subsequent years. The ability to utilise the franking credits is dependent upon there being suffi cient available profi ts to declare dividends. The impact on the dividend franking account of dividends proposed after the balance sheet date but not recognised as a liability is to reduce it by $14,455,055 (2005: $8,147,433). In accordance with the tax consolidation legislation, the Company as the head entity in the tax-consolidated group has also assumed the benefi t of $45,981,000 (2005: $16,628,000) franking credits.

110 Financial performance pp 106 Notes to the consolidated financial statements For the year ended 30 June FINANCIAL INSTRUMENTS Exposure to credit, interest rate and currency risks arises in the normal course of the Company s and the consolidated entity s business. Derivative fi nancial instruments are used to hedge exposure to fl uctuations in foreign exchange rates and interest rates. Credit risk Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. The credit risk on fi nancial assets of the consolidated entity, which have been recognised on the balance sheet, is the carrying amount, net of impairment. The consolidated entity minimises concentrations of credit risk by undertaking transactions with a number of customers in various countries. Credit risk on customers is also reduced by entering into letters of credit with customers and discounting receivables on a limited recourse basis. Concentration of credit risk at balance date on trade receivables are: Asia 63% (2005: 43%), Europe 35% (2005: 44%), Americas Nil% (2005: 13%) and Other 2% (2005: Nil%). The maximum exposure to credit risk is represented by the carrying amount of each fi nancial asset, including derivative fi nancial instruments, in the balance sheet. Credit risk on cash, deposits and derivative contracts is managed by ensuring that counterparties are recognised fi nancial intermediaries with acceptable credit ratings and using several counterparties for transactions. Foreign exchange contracts are subject to credit risk in relation to the relevant counterparties, which are principally large fi nancial institutions. The maximum credit risk exposure on foreign currency contracts is the full amount of the foreign currency the consolidated entity pays when settlement occurs, should the counterparty fail to pay the amount which it is committed to pay the consolidated entity. Interest rate risk The consolidated entity adopts a policy of ensuring an appropriate amount of its exposure to changes in interest rates on borrowings is on a fi xed rate basis. Interest rate swaps denominated in United States dollars had been entered into to achieve an appropriate mix of fi xed and fl oating rate exposure within the consolidated entity s policy. The swaps had a fl oating interest rate of 5.17% and a fi xed interest rate of 2.73% and were closed out during the year. The consolidated entity does not have any debt borrowings outstanding at 30 June 2006 and therefore classifi es its interest swaps as ineffective and recognised a gain of $214,000 for the year ended 30 June At 30 June 2006, the Company and the consolidated entity had no interest rate swaps (2005: $29,572,000 notional contract amount). Effective interest rate and repricing analysis In respect of income-earning fi nancial assets and interest-bearing fi nancial liabilities, the following tables indicate their effective interest rates at the balance sheet date and the periods in which they reprice.

111 Notes to the consolidated financial statements For the year ended 30 June 2006 pp FINANCIAL INSTRUMENTS (continued) Effective interest rate and repricing analysis (continued) Effective interest 6 months More than rate Total or less months years years 5 years Note % $ 000 $ 000 $ 000 $ 000 $ 000 $ Consolidated Cash and cash equivalents , , Cash and deposits not at call ,099 6, Secured bank loans (1) Redeemable convertible notes (2) Deferred liability for acquisition of mining interest (10,716) (990) (941) (1,747) (4,310) (2,728) Amounts payable for future user charges 22 - (12,398) (835) (859) (1,796) (6,057) (2,851) 151, ,877 (1,800) (3,543) (10,367) (5,579) Interest rate swaps and options (1) Consolidated Cash and cash equivalents ,138 18, Cash and deposits not at call ,630 58, Secured bank loans (1) (19,102) (19,102) Redeemable convertible notes (2) (5,627) (5,627) Deferred liability for acquisition of mining interest (11,723) (990) (943) (1,754) (4,342) (3,694) Amounts payable for future user charges 22 - (13,997) (788) (811) (1,694) (5,715) (4,989) 26,319 50,261 (1,754) (3,448) (10,057) (8,683) Interest rate swaps and options (1) - (29,572) 13,919 5,566 10, (1) (2) The effect of interest rate hedging is incorporated into the average interest rate. These assets/liabilities bear interest at a fixed rate.

112 Financial performance pp 108 Notes to the consolidated financial statements For the year ended 30 June FINANCIAL INSTRUMENTS (continued) Foreign currency risk The consolidated entity enters into forward foreign exchange contracts and some option based products (smart forwards) to economically hedge a proportion of anticipated coal sale proceeds denominated in United States dollars and Australian dollar costs funded by United States dollar loans, subject to Board approved limits. The terms of these contracts are not more than 3 years. The amount of anticipated future sales and costs is forecast in light of current conditions in foreign markets, commitments from customers and to suppliers and experience. All sales from the fi rst of each quarter, after allowing for the natural hedge designations referred to below, are designated as being hedged until all hedge contracts are fully utilised. Notes 1(e) and (f) set out the accounting treatment for foreign currency transactions and hedges. Natural hedge A specifi c natural hedge existed between the United States dollar denominated cash advance term loan and United States dollar denominated coal sales revenue. The natural hedge position was established in prior periods when the cash advance term loan was restructured and the Australian dollar denominated debt was redrawn as a United States dollar denominated debt and upon further drawings of United States dollar denominated debt. The United States dollar denominated debt was repaid during the period and the unrealised foreign exchange gains deferred under previous AGAAP continue to be deferred and included in the measurement of the anticipated transaction when the transaction has occurred as originally designated. Forecasted transactions The consolidated entity classifi es its forward exchange contracts hedging forecasted sales as cash fl ow hedges and measures them at fair value. The fair value of forward exchange contracts at 1 July 2005 was adjusted against the opening balance of the hedging reserve at that date. The net fair value of forward exchange contracts used as hedges of forecasted sales at 30 June 2006 was $887,000 (2005: $15,829,000), comprising assets of $2,711,000 (2005: $18,962,000) and liabilities of $1,824,000 (2005: $3,133,000) that were recognised as derivatives measured at fair value. Recognised assets and liabilities Changes in the fair value of forward exchange contracts that economically hedge monetary assets and liabilities in foreign currencies and for which no hedge accounting is applied are recognised in the income statement. Both the changes in fair value of the forward contracts and the foreign exchange gains and losses relating to the monetary items are recognised as part of net fi nancing costs (see Note 7). The fair value of forward exchange contracts used as economic hedges of monetary assets and liabilities in foreign currencies at 30 June 2006 was $Nil (2005: $Nil) for the consolidated entity and $Nil (2005: $Nil) for the Company recognised in the fair value derivatives. Sensitivity analysis In managing interest rate and currency risks the consolidated entity aims to reduce the impact of short-term fl uctuations on the consolidated entity s earnings over the longer-term, however, permanent changes in foreign exchange and interest rates would have an impact on consolidated earnings. At 30 June 2006, it is estimated that a general increase of one percentage point in interest rates would increase the consolidated entity s profi t before tax by approximately $1,460,000 (2005: $578,000). Interest rate swaps have been included in this calculation. It is estimated that a general increase of one percentage point in the value of the Australian dollar against other foreign currencies would have decreased the consolidated entity s profi t before tax by approximately $332,000 for the fi nancial year ended 30 June 2006 (2005: $2,000). The forward exchange contracts have been included in this calculation.

113 Notes to the consolidated financial statements For the year ended 30 June 2006 pp FINANCIAL INSTRUMENTS (continued) Fair values The fair values together with the carrying amounts shown in the balance sheet are as follows: Carrying Fair Carrying Fair amount value amount value Note $ 000 $ 000 $ 000 $ 000 Consolidated Cash and cash equivalents , ,603 18,138 18,138 Trade and other receivables 12 51,075 51,075 38,368 38,368 Cash and deposits not at call 14 6,099 6,099 58,630 58,630 Foreign currency derivative contracts: Assets 14 2,711 2,711 22,426 18,962 Liabilities 22 (1,824) (1,824) (1,906) (3,133) Trade and other payables 18 (68,538) (68,538) (61,346) (61,346) Secured bank loans (19,102) (19,102) Redeemable convertible notes (5,627) (27,825) Deferred liability for acquisition of mining interest 19 (10,716) (10,716) (11,723) (11,723) Employee benefi ts 20 (662) (662) (237) (237) Other fi nancial liabilities 22 (12,529) (12,529) (15,599) (15,599) Unrecognised (losses)/gains - (26,889) Estimation of fair values The following summarises the major methods and assumptions used in estimating the fair values of fi nancial instruments refl ected in the table. Derivatives Foreign currency derivative contracts are either marked to market using listed market prices or by discounting the contractual forward price and deducting the current spot rate. For interest rate swaps broker quotes are used. Those quotes are back tested using pricing models or discounted cash fl ow techniques. Where discounted cash fl ow techniques are used, estimated future cash fl ows are based on management s best estimates and the discount rate is a market related rate for a similar instrument at the balance sheet date. Where other pricing models are used, inputs are based on market related data at the balance sheet date. Interest-bearing loans and borrowings Fair value is calculated based on discounted expected future principal and interest cash fl ows. Convertible notes The fair value is based on quoted market prices. Trade and other receivables/payables For receivables/payables with a remaining life of less than one year, the notional amount is deemed to refl ect the fair value. All other receivables/payables are discounted to determine the fair value. Interest rates used for determining fair value The entity uses the government yield curve as of 30 June 2006 plus an adequate constant credit spread to discount fi nancial instruments. The interest rates used are as follows: % % Derivatives Loans and borrowings Deferred liability for acquisition of mining interest Receivables

114 Financial performance pp 110 Notes to the consolidated financial statements For the year ended 30 June INTERESTS IN JOINT VENTURE OPERATIONS The consolidated entity holds the following interests in various joint ventures whose principal activities are coal production, exploration and evaluation, and development. Joint venture interest held Principal activity % % Coppabella and Moorvale Joint Venture Coal production Monto Coal Joint Venture Exploration and evaluation Olive Downs Joint Venture 90 - Exploration and evaluation Moorvale West Joint Venture 90 - Exploration and evaluation West/North Burton Joint Venture 65 - Exploration and evaluation West Rolleston Joint Venture 90 - Exploration and evaluation West Walker Joint Venture 85 - Exploration and evaluation Bowen Basin Coal Joint Venture 85 - Exploration and evaluation Capricorn Joint Venture 85 - Exploration and evaluation Bowen Basin Coal Exploration Joint Venture - 58 (1) Exploration and evaluation (1) Per the farm-in agreement, Macarthur Exploration Pty Ltd held a 50% interest in the tenements held in Bowen Basin Coal Exploration Joint Venture, except for West Rolleston and Capricorn in which it held a 75% interest. The 58% interest was applied based upon weighted contributions of existing (prior to farm-in arrangements) and new mining exploration permits. On 15 December 2005, the consolidated entity acquired additional interests in Bowen Basin exploration tenements. Following the acquisition, the joint venture participants agreed to restructure the joint venture into seven new joint ventures. For the year ended 30 June 2006, the contributions of the Coppabella and Moorvale Joint Venture to the operating profi t before tax of the consolidated entity was $227,524,000 (2005: $100,412,000). The value of the consolidated entity s 73.3% share of coal mined during the year by Coppabella and Moorvale Joint Venture was $525,510,000 (2005: $345,240,000). There was no coal mined by the other joint ventures during the year. Included in the assets and liabilities of the consolidated entity are the following items which represent the consolidated entity s interest in the assets and liabilities employed in the joint ventures, recorded in accordance with the accounting policies described in Note 1(c).

115 Notes to the consolidated financial statements For the year ended 30 June 2006 pp 111 Consolidated The Company $ 000 $ 000 $ 000 $ INTERESTS IN JOINT VENTURE OPERATIONS (continued) Current assets Cash and cash equivalents Trade and other receivables 11,448 6, Inventories 15,412 24, Other fi nancial assets 6, Other assets 74,206 47, Total current assets 107,164 78, Non-current assets Trade and other receivables 4, Property, plant and equipment 166, , Exploration and evaluation assets 94,809 40, Other assets 2,904 12, Total non-current assets 268, , Total assets 375, , Current liabilities Trade and other payables 65,815 48, Provisions 3,265 1, Other fi nancial liabilities 1,825 1, Total current liabilities 70,905 51, Non-current liabilities Provisions 16,502 12, Other fi nancial liabilities 10,704 12, Total non-current liabilities 27,206 25, Total liabilities 98,111 76, Refer to Notes 27 and 28 for details of commitments and contingent liabilities. 27. CAPITAL AND OTHER COMMITMENTS (a) Capital expenditure commitments joint ventures Buildings and infrastructure contracted but not provided for and payable: Not later than one year 9, Later than one year but not later than fi ve years 3, , (b) Operating lease commitments Future operating lease rentals not provided for in the fi nancial statements and payable: Not later than one year Later than one year but not later than fi ve years 1,632 1,452 1,618 1,452 Later than fi ve years ,474 2,571 2,381 2,571 The consolidated entity leases a number of offi ce spaces under operating leases. The leases typically run for a period of 2 to 7 years. Lease payments are increased every year to refl ect market rentals. During the fi nancial year ended 30 June 2006, $386,000 was recognised as an expense in the income statement in respect of operating leases (2005: $177,000).

116 Financial performance pp 112 Notes to the consolidated financial statements For the year ended 30 June CAPITAL AND OTHER COMMITMENTS (continued) Consolidated The Company $ 000 $ 000 $ 000 $ 000 (c) Mining leases joint ventures Future mining lease rentals not provided for in the fi nancial statements and payable: Not later than one year Later than one year but not later than fi ve years 1,194 1, Later than fi ve years 2,959 3, ,425 4, (d) Exploration and evaluation expenditure Exploration obligations In order to maintain current rights of tenure to exploration tenements, the consolidated entity is required to perform minimum exploration work to meet the minimum expenditure requirements specifi ed by various State governments. The expenditure obligations are subject to renegotiation when application for a mining lease and/or renewal of exploration permits is made and at other times. These obligations are not provided for in the fi nancial statements and are payable: Not later than one year 1, Later than one year but not later than fi ve years 1, , Exploration costs Committed costs for exploration and evaluation areas not provided for in the fi nancial statements and payable: Not later than one year Later than one year but not later than fi ve years (e) Operating commitments joint ventures Commitments under the electricity, water, rail, port, coal washing plant and train loading facility agreements for joint ventures not provided for in the fi nancial statements and payable: Not later than one year 27,884 28,260 2,094 - Later than one year but not later than fi ve years 101,549 82,576 25,698 - Later than fi ve years 153,342 20, , , , ,489 - In addition to the operating commitments in (e) above, other contracts on commercial terms and conditions have been entered into with contractors for overburden and mining operations at Coppabella and Moorvale mines and with original owners regarding royalty arrangements. As the amounts payable under the contracts vary with the quantities mined and sold, future commitments are not able to be reliably assessed and quantifi ed. On 23 October 2002, the Coppabella and Moorvale Joint Venture participants agreed to pay a user charge to the Queensland Government for the facilitation of the transport infrastructure corridor (TIC) relocation. The user charge comprises 40 quarterly payments (consolidated entity share of $596,000 per quarter; 2005: $596,000 per quarter), commencing 1 October 2002, which have been included in the above operating commitments less the amounts payable for future user charges brought to account at 30 June 2006 (refer Note 22).

117 Notes to the consolidated financial statements For the year ended 30 June 2006 pp 113 Consolidated The Company $ 000 $ 000 $ 000 $ CAPITAL AND OTHER COMMITMENTS (continued) (f) Employee compensation commitments Key management personnel Commitments under non-cancellable employment contracts not provided for in the fi nancial statements and payable: Within one year Later than one year but not later than fi ve years , Denis Wood is a director of Queensland Coke & Energy Pty Ltd (QCE), a wholly controlled entity of the Company. By a Services Agreement dated 1 August 2005, Coal Industry Services Pty Ltd, a director related entity, has agreed to provide the services of Denis Wood to QCE at $392,400 per annum. The contract relates to the development of a coke project and is for an initial period of 3 years but is able to be extended. If the project is successfully developed, a royalty is payable for 15 years at $0.50 per tonne for up to 1.6 million tonnes per annum and $0.25 per tonne for each tonne over 1.6 million tonnes per annum. The contract may be terminated for particular stated events, in which case no termination payments are payable. If terminated for other stated events, the royalty remains payable. The above amounts represent minimum commitments under these arrangements offset by any amounts brought to account as liabilities at 30 June (g) Other commitments Joint ventures Deeds of cross charge (i) The payment of future cash calls by Coppabella Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the Coppabella and Moorvale Joint Venture is secured by a guarantee from the Company and a charge over Coppabella Coal Pty Ltd s interest in the Coppabella and Moorvale Joint Venture in favour of the other joint venturers and Macarthur Coal (C&M Management) Pty Ltd as the manager of the Coppabella and Moorvale Joint Venture. (ii) The payment of future cash calls by Monto Coal 2 Pty Ltd, a controlled entity, for its share of operating and capital costs in the Monto Coal Joint Venture is secured by a charge over Monto Coal 2 Pty Ltd s interest in the Monto Coal Joint Venture in favour of the other joint venturers. (iii) The payment of future cash calls by Olive Downs Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the Olive Downs Joint Venture is secured by a charge over Olive Downs Coal Pty Ltd s interest in the Olive Downs Joint Venture in favour of the other joint venturers. (iv) The payment of future cash calls by Capricorn Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the Capricorn Joint Venture is secured by a charge over Capricorn Coal Pty Ltd s interest in the Capricorn Joint Venture in favour of the other joint venturers. (v) The payment of future cash calls by West Burton Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the West/North Burton Joint Venture is secured by a charge over West Burton Coal Pty Ltd s interest in the West/North Burton Joint Venture in favour of the other joint venturers. (vi) The payment of future cash calls by West Rolleston Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the West Rolleston Joint Venture is secured by a charge over West Rolleston Coal Pty Ltd s interest in the West Rolleston Joint Venture in favour of the other joint venturers. (vii) The payment of future cash calls by West Walker Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the West Walker Joint Venture is secured by a charge over West Walker Coal Pty Ltd s interest in the West Walker Joint Venture in favour of the other joint venturers. (viii) The payment of future cash calls by Moorvale West Coal Pty Ltd, a controlled entity, for its share of operating and capital costs in the Moorvale West Joint Venture is secured by a charge over Moorvale West Coal Pty Ltd s interest in the Moorvale West Joint Venture in favour of the other joint venturers. (ix) The payment of future cash calls by BB Interests Pty Ltd, a controlled entity, for its share of operating and capital costs in the Bowen Basin Coal Joint Venture is secured by a charge over BB Interests Pty Ltd s interest in the Bowen Basin Coal Joint Venture in favour of the other joint venturers. Other (x) The Company has guaranteed the commitments of Coppabella Coal Pty Ltd and Monto Coal 2 Pty Ltd, controlled entities, in relation to royalty arrangements. Associates Refer Note 30.

118 Financial performance pp 114 Notes to the consolidated financial statements For the year ended 30 June CONTINGENCIES Indemnities Indemnities have been provided to directors and certain executive offi cers of the Company in respect of liabilities to third parties arising from their positions, except where the liability arises out of conduct involving a lack of good faith. No monetary limit applies to these agreements and there are no known obligations outstanding at 30 June (1) (1) These contingent liabilities are considered remote. Guarantees Coppabella Coal Pty Ltd, a controlled entity, as a participant of the Coppabella and Moorvale Joint Venture, has provided bank guarantees totalling $57,787,000 (2005: $32,324,000) in respect of rehabilitation works, electricity, water, transport infrastructure corridor facilities and customers. (1) The consolidated entity, as a participant of the Coppabella and Moorvale Joint Venture, has entered into a Residual Value Guarantee (RVG) with a bank regarding the lease residual value of the dragline used by a contractor at the Coppabella Mine for $10,775,000 (2005: $10,775,000). The lease term expires on 30 June Management of Macarthur Coal (C&M Management) Pty Ltd, the manager of the Coppabella and Moorvale Joint Venture, expect the future value of the dragline to be in excess of the residual value at 30 June 2008 provided the contractor performs to the Asset Management Plan. The fi nancier of the dragline also holds a fi xed and fl oating charge over Coppabella Coal Pty Ltd s interests up to the agreed share of the residual value being $10,775,000 (2005: $10,775,000). (1) Coppabella Coal Pty Ltd, a controlled entity, as a participant of the Coppabella and Moorvale Joint Venture, has entered into the Coppabella Dragline Agreement dated 19 April 2002 requiring purchase guarantees to be provided in relation to the Marion 8200 dragline erected by Roche Mining Pty Ltd (Roche) and that will be used by Roche in undertaking a contract, being for the removal of overburden and mining of coal. In the event of a termination of the contract, the guarantees in place require Macarthur Coal (C&M Management) Pty Ltd, as agent for the Coppabella and Moorvale Joint Venture, to assume all the reasonable continuing liabilities of the dragline, any items that relate to the construction or operation of the dragline (including spare parts) and any fi nancing responsibilities in relation to the operating lease between Roche and the Lease Financiers including Investec Bank (Australia) Limited. (1) The Company has provided fi nancial guarantees totalling $11,840,000 to GE Commercial Finance in respect of mining equipment leased by a contractor, in the event of fi nancial default by the contractor. (1) (1) These contingent liabilities are considered remote. Environmental Current Queensland Government environment policy requires the preparation of an Environmental Management Overview Strategy (EMOS) and a Plan of Operations detailing the quality, timing and standards of planned mine rehabilitation work. The Coppabella and Moorvale Joint Venture has prepared its EMOS and its Plans of Operations has been accepted by the Environmental Protection Agency. In addition to the EMOS and the Plans of Operations, the consolidated entity is required to lodge securities with the Department of Natural Resources, Mines and Water to ensure compliance with relevant legislation. The total amount of the guarantees lodged with the Department of Natural Resources, Mines and Water as at 30 June 2006 is $13,760,006 (2005: $11,074,000) (included in the amount of guarantees referred to above). (1) (1) These contingent liabilities are considered remote. Memorandum of Understanding During the year ended 30 June 2005, Queensland Coke & Energy Pty Ltd (QCE), a wholly owned controlled entity of the Company entered into a memorandum of understanding with a contractor to develop an estimated cost and execution plan for the design and construction of the coke plant as part of the feasibility study. If the memorandum of understanding is terminated by QCE and an alternative contractor is ultimately appointed to construct the plant, a fee of $1,500,000 will be payable. Litigation On 19 December 2003, Macarthur Coal (C&M Management) Pty Ltd (MCCM), as manager and agent for the Coppabella and Moorvale Joint Venture participants, lodged a Notice of Dispute with its mining contractor Roche Mining Pty Ltd in relation to a mining contract at the Coppabella mine. The claim included recovery of loss and damages for higher production costs and demurrage resulting from a failure of the contractor to deliver coal in accordance with the contract provisions. On 9 June 2004, following rejection by the Superintendent of claims from the contractor, the contractor lodged a Notice of Dispute on MCCM under the mining contract. The rejected claim, consisting of 9 heads of claim, included higher costs of mining in the 2004 fi nancial year due to alleged delay in access to particular mining areas and alleged adverse mining conditions. By letter dated 28 June 2004, the contractor referred the Dispute to arbitration. On 28 February 2005, the arbitrator determined that 7 of the 9 points of claim could proceed to arbitration. MCCM received the detailed Points of Claim (referred to as the 2004 fi nancial year claim) from the contractor on 21 March 2005 and detailed Further Particulars on 5 September On 7 April 2006, MCCM lodged its defence in relation to the Points of Claim and lodged a counter claim against the contractor. On 5 July 2005, the contractor lodged a further Notice of Dispute in relation to alleged additional costs resulting from the Superintendent s approval of the 2005 fi nancial year Mine Plan (referred to as the 2005 fi nancial year claim). The claims were rejected by the Superintendent and the subsequent dispute was referred to arbitration in August On 10 April 2006, the contractor lodged a Consolidated and Further Amended Points of Claim in relation to both the 2004 fi nancial year claim and the 2005 fi nancial year claim. At the date of this report, MCCM has not submitted a defence to the consolidated claim. On 13 January 2006, the contractor lodged a further Notice of Claim in relation to alleged additional costs resulting from the Superintendent s approval of the 2006 fi nancial year Mine Plan. As at the date of the report, the contractor has not provided to the Superintendent requested details of the nature and quantum of this claim. The total value of the three claims noted above for fi nancial years 2004, 2005 and 2006 is in the order of $100,000,000 for the Coppabella and Moorvale Joint Venture, of which the consolidated entity holds a 73.3% interest. Areas of duplication have been identifi ed across these three claims and Roche is yet to provide particulars regarding basis and quantum of the third claim. The Directors of the consolidated entity (and the Manager) dispute the above claims and will vigorously defend their position in arbitration. The Arbitrator has set a date to hear the consolidated 2004 and 2005 fi nancial year claims in June In the Director s opinion, disclosure of any further information about the above matter would be prejudicial to the interests of the consolidated entity.

119 Notes to the consolidated financial statements For the year ended 30 June 2006 pp 115 Ownership interest % % 29. CONSOLIDATED ENTITIES Parent entity Macarthur Coal Limited Subsidiaries Coppabella Coal Pty Ltd Macarthur Coal Management Pty Ltd Macarthur Coal Mine Management Pty Ltd Moorvale Coal Pty Ltd Moorvale Interest Pty Ltd Monto Coal Pty Ltd Monto Coal 2 Pty Ltd Macarthur Exploration Pty Ltd Olive Downs Coal Pty Ltd Queensland Coke & Energy Pty Ltd Capricorn Coal Pty Ltd West Burton Coal Pty Ltd West Rolleston Coal Pty Ltd West Walker Coal Pty Ltd Moorvale West Coal Pty Ltd BB Interests Pty Ltd All subsidiaries were incorporated and carry on business in Australia. In the fi nancial statements of the Company, investments in controlled entities are measured at cost and included with other fi nancial assets. Refer to Note 14. The Company has no jointly controlled entities. 30. INVESTMENTS IN ASSOCIATED ENTITIES Interest held Principal activities Reporting date % % Macarthur Coal (C&M Management) Pty Ltd Manager of the Coppabella and 30 June Moorvale Joint Venture Bistrotel Pty Ltd Property Owner 30 June Investments in these entities are held in connection with joint venture arrangements. Under these arrangements, the consolidated entity does not have control over these associated entities, and accordingly have not been consolidated. The impact of the results and operations of the associated entities are not material to the consolidated entity and accordingly have not been equity accounted. Consolidated $ 000 $ 000 Commitments Share of associates operating lease commitments payable: Not later than one year Later than one year but not later than fi ve years

120 Financial performance pp 116 Notes to the consolidated financial statements For the year ended 30 June ACQUISITIONS OF SUBSIDIARIES AND JOINT VENTURE INTERESTS Consolidated Contribution to entity s consolidated Date acquired interest Consideration net profit % $ 000 $ 000 The following controlled entities were acquired during the year: 2006 Moorvale West Coal Pty Ltd (1) 28 November West Walker Coal Pty Ltd (1) 28 November West Burton Coal Pty Ltd (1) 28 November West Rolleston Coal Pty Ltd (1) 28 November Capricorn Coal Pty Ltd (1) 28 November BB Interests Pty Ltd 15 December , Queensland Coke & Energy Pty Ltd (1) 14 December Macarthur Coal Mine Management Pty Ltd (1) 15 June (1) The companies were acquired as a shelf company for nominal cost. The shelf companies had no assets nor had they operated at the date of acquisition. Acquisition of BB Interests Pty Ltd On 15 December 2005, the consolidated entity acquired all of the shares in BB Interests Pty Ltd. Consideration for the acquisition was the issue of Macarthur Coal shares to the value of $16,420,000. BB Interests Pty Ltd was acquired from CITIC Australia Coal Exploration Pty Ltd as part of the acquisition of interests in Bowen Basin exploration tenements from the consolidated entity s joint venture partners Bowen Basin Exploration Pty Ltd and CITIC Australia Coal Exploration Pty Ltd. The company did not contribute to the consolidated entity s net profi t for the period. Effect of acquisition The acquisition had the following effect on the consolidated entity s assets and liabilities: Carrying amounts $ 000 Acquiree s net assets at acquisition date Exploration and evaluation assets 16,958 Repayment of loan from Macarthur Exploration Pty Ltd, a controlled entity of the Company (538) Consideration paid, satisfi ed in shares 16,420 Acquisition of joint venture interest from Bowen Basin Exploration Pty Ltd The consolidated entity acquired interests from its joint venture partner, Bowen Basin Exploration Pty Ltd. Bowen Basin Exploration Pty Ltd is an entity controlled by Mr Ken Talbot, Chief Executive Offi cer of the consolidated entity. Consideration for the acquisition was the issue of Macarthur Coal shares to the value of $31,658,000. Effect of acquisition The acquisition had the following effect on the consolidated entity s assets and liabilities. Carrying amounts $ 000 Net assets acquired at acquisition date Exploration and evaluation assets 31,695 Repayment of loan from Macarthur Exploration Pty Ltd, a controlled entity of the Company (37) Consideration paid, satisfi ed in shares 31,658

121 Notes to the consolidated financial statements For the year ended 30 June 2006 pp ACQUISITIONS OF SUBSIDIARIES AND JOINT VENTURE INTERESTS (continued) Following the acquisition of BB Interests Pty Ltd and joint venture interests from Bowen Basin Exploration Pty Ltd, the joint venture participants agreed to restructure the Bowen Basin Coal Exploration Joint Venture into seven new joint ventures as detailed below: Interest held 30 June 2006 CITIC Consolidated Australia Coal Bowen Basin Entity Exploration Pty Ltd Exploration Pty Ltd % % % Olive Downs Joint Venture Moorvale West Joint Venture West/North Burton Joint Venture West Walker Joint Venture West Rolleston Joint Venture Bowen Basin Coal Joint Venture Capricorn Joint Venture RECONCILIATION OF CASH FLOWS FROM OPERATING ACTIVITIES Consolidated The Company $ 000 $ 000 $ 000 $ 000 Cash flows from operating activities Profi t for the period 149,589 64,147 61,225 21,464 Adjustments for: Depreciation 16,011 15, Amortisation of fi nancing costs Impairment losses 91 1, Amounts set aside to provisions 6,440 2, Exploration and evaluation expenses Foreign exchange (gains)/losses (2,682) Overburden in advance written off - 3, Interest on convertible notes 250 2, ,012 Interest on interest-bearing liabilities 1,195 2, Interest on unwinding of discount Borrowing costs 1, (Gain)/loss on sale of property, plant and equipment Equity-settled share based payment expenses Operating profit before changes in working capital and provisions 174,605 93,360 62,579 24,194 Increase/(decrease) in income tax payable 27,890 16,505 27,890 16,505 Increase/(decrease) in net deferred tax liabilities/assets 8,679 4, (Increase)/decrease in tax related receivables - - (62,729) (19,745) (Increase)/decrease in income tax receivable - 7,000-7,000 (Increase)/decrease in trade and other receivables (11,657) (7,649) (863) (172) (Increase)/decrease in inventories 8,663 (12,763) - - (Increase)/decrease in overburden in advance (23,831) (17,598) - - (Increase)/decrease in deferred expenditure 257 1, Increase/(decrease) in trade and other payables 16,885 22,958 (39) 598 Net cash from operating activities 201, ,984 27,212 28,552

122 Financial performance pp 118 Notes to the consolidated financial statements For the year ended 30 June RELATED PARTIES The following were key management personnel of the consolidated entity at any time during the reporting period and unless otherwise indicated were key management personnel for the entire period: Non-executive directors Keith De Lacy Chairperson Don Nissen Roger Marshall Peter Forbes Executive directors Ken Talbot Chief Executive Offi cer Executives Nicole Hollows Chief Financial Offi cer, Macarthur Coal Limited Brett Garland Vice President Underground Mine Development, Macarthur Coal Limited Robert Adams Company Secretary, Macarthur Coal Limited Ian Neill Vice President Open-cut Development and Business Improvement, Macarthur Coal Limited Gary Lee Vice President Marketing, Macarthur Coal Limited Shane Stephan Vice President Open-cut Production, Macarthur Coal Limited Ian McAleese Vice President Corporate Development, Macarthur Coal Limited, appointed 16 January 2006 Denis Wood Chief Executive Offi cer, Queensland Coke & Energy Pty Ltd Ken Carnes Director of Marketing, Macarthur Coal Limited Mark Turner Vice President Open-cut Northern District, Macarthur Coal Mine Management Pty Ltd, appointed 16 January 2006, resigned 10 May 2006 Consolidated The Company $ $ $ $ Key management compensation The key management personnel compensation included in personnel expenses (see Note 5) are as follows: Short-term employee benefi ts 3,744,128 2,745,149 3,279,603 2,378,173 Other long-term benefi ts 75,611-75,611 - Post-employment benefi ts 417, , , ,223 Termination benefi ts - 75,000-75,000 Share based payments 86,122 39,984 86,122 39,984 4,323,255 3,139,228 3,741,733 2,740,380 Loans to key management personnel Details regarding the aggregate of loans made, guaranteed or secured by any entity in the consolidated entity to key management personnel and their related parties are as follows: Loans to key management personnel unsecured 87,735-87,735 - Loans totalling $115,990 (2005: $Nil) were made to key management personnel during the year in respect of the employee share loan plan. During the year, repayments of $28,255 (2005: $Nil) were made on the loans. All loans to key management personnel in relation to the employee share loan plan are interest free and any dividends received on the allocated shares are applied to repay the loan balance. Fixed regular loan repayments are also made to repay the loan balance. No amounts have been written down or recorded as allowances, as the balances are considered fully collectable.

123 Notes to the consolidated financial statements For the year ended 30 June 2006 pp RELATED PARTIES (continued) Individual directors and executives compensation disclosures Information regarding individual directors and executives compensation and some equity instruments disclosures as permitted by Corporations Regulations 2M.3.03 and 2M.6.04 is provided in the Remuneration report section of the Directors report. The Chief Executive Offi cer, Ken Talbot, has a 3 year contract which only provides for a fi xed salary. The annual payment has been recognised as a commitment in Note 27(f). Denis Wood, a director of Queensland Coke & Energy Pty Ltd (QCE) a controlled entity of the Company has a services agreement with the consolidated entity. Refer Note 27(f) for particulars. Apart from the details disclosed in this note, no director has entered into a material contract with the Company or the consolidated entity since the end of the previous fi nancial year and there were no material contracts involving directors interests existing at year-end. Equity instruments All options refer to options over ordinary shares of the Company, which are exercisable on a one-for-one basis under the Directors option plan and Executive option plan. Options granted to directors are on the same terms and conditions as those granted to other employees. There were no options granted during the year. Options and rights over equity instruments The movement during the reporting period in the number of options over ordinary shares in Macarthur Coal Limited held, directly, indirectly or benefi cially, by each key management person, including their related parties, is as follows: Held at Exercised Held at 1 July June 2006 Executives Shane Stephan 110, ,000 - No options held by key management personnel are vested but not exercisable. Refer to Note 20 Share based payments Executive Option Plan for further details. Movements in shares The movement during the reporting period in the number of ordinary shares in Macarthur Coal Limited held, directly, indirectly or benefi cially, by each key management person, including their related parties, is as follows: Received on Held at exercise of Held at 1 July 2005 Acquisitions options Disposals 30 June 2006 Directors Keith De Lacy 308,880 1,860-30, ,740 Roger Marshall 142,380 1,860-20, ,240 Don Nissen 306,580 7, ,840 Peter Forbes 20,380 1, ,240 Ken Talbot 67,453,748 5,204,285-6,000,000 66,658,033 Executives Nicole Hollows 15, ,000 10,000 Brett Garland - 3, ,682 Robert Adams 170,000 3, ,000 3,682 Ian Neill - 3, ,682 Gary Lee - 3, ,682 Shane Stephan 55,707 3, , ,707 3,682 Ian McAleese - 5, ,000 Denis Wood Ken Carnes Mark Turner - 2,945-2,945 -

124 Financial performance pp 120 Notes to the consolidated financial statements For the year ended 30 June RELATED PARTIES (continued) Movements in shares (continued) No shares were granted to key management personnel during the reporting period as compensation, other than 1,860 shares acquired each by Keith De Lacy, Roger Marshall, Don Nissen and Peter Forbes as application of past directors fees received, as detailed in Note 1(r). The movement during the previous reporting period in the number of ordinary shares in Macarthur Coal Limited held, directly, indirectly or benefi cially, by each key management person, including their related parties, is as follows: Received on Held at exercise of Held at 1 July 2004 Acquisitions options Disposals 30 June 2005 Directors Keith De Lacy 118,600 2, , , ,880 Roger Marshall 120,000 2, , , ,380 Don Nissen 124,200 2, ,000 20, ,580 Peter Forbes 18,000 2, ,380 Ken Talbot 67,453, ,453,748 Executives Nicole Hollows 74, , ,600 15,000 Robert Adams 25, ,000 55, ,000 Ian Neill - 4,000-4,000 - Gary Lee Shane Stephan 72,000-43,707 60,000 55,707 Bruce Denney Denis Wood Ken Carnes No shares were granted to key management personnel during the previous reporting period as compensation, other than 2,380 shares acquired each by Keith De Lacy, Roger Marshall, Don Nissen and Peter Forbes as application of past directors fees received, as detailed in Note 1(r). Other key management personnel transactions with the Company or its controlled entities A number of specifi ed directors, or their personally-related entities, hold positions in other entities that result in them having control or signifi cant infl uence over the fi nancial or operating policies of these entities. The terms and conditions of the transactions with directors and personally related entities were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to unrelated entities on an arm s length basis. Amounts payable to specifi ed directors and their personally-related entities at reporting date arising from related party transactions were as follows: Consolidated The Company $ $ $ $ Current liabilities Trade and other payables 9,570 9, The consolidated entity acquired certain joint venture interests in the Bowen Basin Coal Exploration Joint Venture and interests in other tenements from its joint venture partners Bowen Basin Exploration Pty Ltd (BBE) (a related entity of Ken Talbot, Chief Executive Offi cer) and CITIC Australia Coal Exploration Pty Ltd (CITIC Exploration) (of which Roger Marshall, director of the Company, is a director) for a total acquisition price of $48,653,000. The acquisition price was based on an independent valuation of the percentage of tenement interests to be acquired by the consolidated entity and was approved at a shareholders general meeting held on 15 December 2005.

125 Notes to the consolidated financial statements For the year ended 30 June 2006 pp RELATED PARTIES (continued) Other key management personnel transactions with the Company or its controlled entities (continued) The interests acquired by the consolidated entity were: Interests acquired from CITIC Exploration (by acquiring all the shares Interests acquired from BBE in BB Interests Pty Ltd) % % Prospect Olive Downs Moorvale West West/North Burton - 15 West Walker West Rolleston Capricorn - 10 Bowen Basin Coal The interests retained by BBE and CITIC Exploration following completion of the acquisition by Macarthur Coal are: Interests retained by Interests retained by BBE CITIC Exploration % % Prospect Olive Downs - 10 Moorvale West - 10 West/North Burton West Walker - 15 West Rolleston - 10 Capricorn - 15 Bowen Basin Coal - 15 Acquisition from CITIC Exploration The interests acquired from CITIC Exploration were held by BB Interests Pty Ltd, a wholly owned subsidiary of CITIC Exploration. the Company purchased all of the shares in BB Interests from CITIC Exploration for $16,958,000 with the payment comprising: u An amount equal to CITIC Exploration s share of the exploration expenditure incurred by the consolidated entity on all tenements since 20 October 2004 based on interests held after the acquisition was completed which was paid by the consolidated entity in cash. The amount was set off against CITIC Exploration s obligation to pay that amount to consolidated entity. u The remainder by the issue of 2,590,392 shares in the Company to CITIC Australia Coal Pty Ltd ABN The price at which the shares were issued was $ which was determined by calculating the arithmetic average of the daily volume weighted average sale price of Macarthur Coal shares sold in the ordinary course of trading on ASX during the fi ve trading days commencing on 11 October Acquisition from BBE The purchase price of $31,695,000 comprised: u An amount equal to BBE s share of the exploration expenditure incurred by the consolidated entity on all tenements since 20 October 2004 based on interests held after the acquisition is completed in cash. The amount was set off against BBE s obligation pay that amount to the consolidated entity. u The remainder by the issue of 4,994,285 shares in the Company to MDA Investments Pty Ltd ACN , a related entity of Ken Talbot, Chief Executive Offi cer. The price at which the shares were issued was $ which was determined by calculating the arithmetic average of the daily volume weighted average sale price of Macarthur Coal shares sold in the ordinary course of trading on the ASX during the fi ve trading days commencing on 11 October 2005.

126 Financial performance pp 122 Notes to the consolidated financial statements For the year ended 30 June RELATED PARTIES (continued) Other key management personnel transactions with the Company or its controlled entities (continued) Funding of BBE s Called Sums The consolidated entity has an agreement with BBE to lend funds to BBE from time to time equal to the amount of any calls under the West/North Burton Joint Venture Agreement. The loans may only be used for paying the relevant calls. BBE must pay interest on the loan amounts at the rate of the Indicator Lending Rates Bank variable housing loans interest rate last published by the Reserve Bank of Australia before the commencement of each fi nancial year. Interest accrues daily and is capitalised monthly. BBE s obligation to lend these funds continues from 15 December 2005 until the earliest of: (a) the date that BBE no longer has an interest under the West/ North Burton Joint Venture (b) the date which is three years from 15 December 2005 (c) the date the parties to the West/North Burton Joint Venture decide not to expend further funds on exploration of the relevant tenements (d) the date of termination of the deed. BBE must repay all monies plus interest: (a) on completion of a sale of all or part of BBE s interest (b) three years from 15 December 2005 (c) 60 days after the date the parties to the West/North Burton Joint Venture decide to not to expend further funds on exploration of the relevant tenements (d) two business days after termination of the deed. The consolidated entity may set-off any amount due for repayment against any sale proceeds from the sale of all or part of BBE s interest. Non-key management personnel disclosures Identity of related parties The consolidated entity has a related party relationship with its subsidiaries (see Note 29), joint ventures (see Note 26) and with its key management personnel (refer to disclosures with key management personnel on preceding pages). Subsidiaries (a) The Company charges interest at normal commercial rates on loans to its wholly-owned controlled entities. The loans to the wholly-owned controlled entities are unsecured and have no fi xed repayment terms. Interest is charged quarterly at 7.620% (2005: 8.405%) per annum on the outstanding balance. Interest totalling $6,118,000 (2005: $9,368,000) was charged to the wholly-owned controlled entities during the year. (b) The Company also charges management fees to its whollyowned controlled entities based on the total corporate offi ce expenses. Management fees totalling $3,358,000 (2005: $1,994,000) were charged to the wholly-owned controlled entities during the year. (c) A wholly-owned controlled entity, Coppabella Coal Pty Ltd, paid a dividend of $61,412,000 (2005: $19,034,000) to the Company. (d) A wholly-owned controlled entity, Moorvale Interest Pty Ltd, paid a dividend of $76,000 (2005: $Nil) to the Company. The aggregate amounts receivable and payable by the consolidated entity and the Company from non-director related parties are shown in Notes 12 and 18. Included in these amounts is the aggregate tax related receivable from wholly-owned controlled entities under the Tax Consolidation legislation. Macarthur Coal Management Pty Ltd, a controlled entity, charges management fees to Macarthur Coal (C&M Management) Pty Ltd, an associated entity, pursuant to the Management Fee Deed dated 31 August The management fee paid is equal to 0.5% of the aggregate FOB revenue paid to the Coppabella and Moorvale Joint Venture participants from the sale in aggregate of the fi rst 2 million tonnes of coal from the Coppabella Mine in each fi nancial year for the life of the Deed. The Company recharges employee and administration expenses at cost to Macarthur Coal (C&M Management) Pty Ltd, an associated entity, and the Coppabella and Moorvale Joint Venture. The expenses are for administration costs and work performed by Company staff in relation to Coppabella and Moorvale mine activities. Expenses totalling $3,882,000 (2005: $2,320,000) were charged to Macarthur Coal (C&M Management) Pty Ltd and Coppabella and Moorvale Joint Venture during the year. 34. EXPLANATION OF TRANSITION TO AIFRS As stated in Note 1(a), these are the consolidated entity s and the Company s fi rst consolidated fi nancial statements prepared in accordance with AIFRS. The policies set out in Note 1 have been applied in preparing the fi nancial statements for the year ended 30 June 2006, the comparative information presented in these fi nancial statements for the year ended 30 June 2005 and in the preparation of an opening AIFRS balance sheet at 1 July 2004 (the consolidated entity s and the Company s date of transition), except for the adoption of AASB 132 and AASB 139 to the comparative period and opening AIFRS balance sheet. In preparing its opening AIFRS balance sheet, the consolidated entity and the Company have adjusted amounts reported previously in fi nancial statements prepared in accordance with its old basis of accounting (previous AGAAP). An explanation of how the transition from previous AGAAP to AIFRS has affected the consolidated entity s and the Company s fi nancial position, fi nancial performance and cash fl ows is set out in the following tables and the notes that accompany the tables.

127 Notes to the consolidated financial statements For the year ended 30 June 2006 pp EXPLANATION OF TRANSITION TO AIFRS (continued) Reconciliation of equity 1 July June 2005 Effect of Effect of Previous transition Previous transition AGAAP to AIFRS AIFRS AGAAP to AIFRS AIFRS Note $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Consolidated Assets Current assets Cash and cash equivalents 11,775-11,775 18,138-18,138 Trade and other receivables (e),(j) 29, ,282 30,744 1,814 32,558 Inventories 11,312-11,312 24,075-24,075 Income tax receivable 7,000-7, Other fi nancial assets 33,863-33,863 78,273-78,273 Other assets (j) 37,028 (494) 36,534 48,020 (1,814) 46,206 Total current assets 130, , , ,250 Non-current assets Trade and other receivables (j) 2,768-2,768 7,624 5,392 13,016 Other fi nancial assets 8,906-8,906 2,783-2,783 Deferred tax assets (d) 6,601 (6,601) - 5,565 (5,565) - Property, plant and equipment (a),(b) 186,094 3, , ,603 3, ,893 Exploration and evaluation assets (c) 37,126 (39) 37,087 40,555 (165) 40,390 Other assets (j) 3,497-3,497 12,722 (5,392) 7,330 Total non-current assets 244,992 (3,027) 241, ,852 (2,440) 241,412 Total assets 375,758 (3,027) 372, ,102 (2,440) 440,662 Liabilities Current liabilities Trade and other payables (e) 28,409-28,409 61,346-61,346 Interest-bearing loans and borrowings 14,816-14,816 26,662-26,662 Income tax payable ,505-16,505 Employee benefi ts Provisions (b) 1,613 (716) 897 1,258 (44) 1,214 Other fi nancial liabilities 9,404-9,404 4,807-4,807 Other liabilities 10,452-10,452 20,221-20,221 Total current liabilities 64,759 (716) 64, ,997 (44) 130,953 Non-current liabilities Trade and other payables 10,000-10, Interest-bearing loans and borrowings 67,370-67,370 9,790-9,790 Deferred tax liabilities (d) 17,885 10,995 28,880 25,011 8,645 33,656 Employee benefi ts Provisions (a),(b) 8,349 2,486 10,835 10,691 2,024 12,715 Other fi nancial liabilities 18,501-18,501 12,698-12,698 Other liabilities 9,395-9,395 4,723-4,723 Total non-current liabilities 131,548 13, ,029 62,952 10,669 73,621 Total liabilities 196,307 12, , ,949 10, ,574 Net assets 179,451 (15,792) 163, ,153 (13,065) 236,088 Equity Issued capital (i) 155,053 1, , ,086 1, ,563 Retained earnings (a)-(d),(f) 24,398 (17,269) 7,129 68,067 (14,542) 53,525 Total equity 179,451 (15,792) 163, ,153 (13,065) 236,088

128 Financial performance pp 124 Notes to the consolidated financial statements For the year ended 30 June EXPLANATION OF TRANSITION TO AIFRS (continued) Reconciliation of equity (continued) 1 July June 2005 Effect of Effect of Previous transition Previous transition AGAAP to AIFRS AIFRS AGAAP to AIFRS AIFRS Note $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 The Company Assets Current assets Cash and cash equivalents 11,686-11,686 17,685-17,685 Trade and other receivables (e),(j) 8,587 (8,200) ,827 (19,418) 8,409 Income tax receivable 7,000-7, Other assets (j) 642 (73) (75) 257 Total current assets 27,915 (8,273) 19,642 45,844 (19,493) 26,351 Non-current assets Trade and other receivables (j) 113, , , ,754 Other fi nancial assets 57,871-57,871 56,385-56,385 Deferred tax assets (d) 6,601 (5,796) 805 5,565 (4,901) 664 Property, plant and equipment (a),(b) Other assets (j) Total non-current assets 178,319 (5,796) 172, ,842 (4,901) 183,941 Total assets 206,234 (14,069) 192, ,686 (24,394) 210,292 Liabilities Current liabilities Trade and other payables (e) 548 3,069 3,617 1,176-1,176 Interest-bearing loans and borrowings ,627-5,627 Income tax payable ,505-16,505 Employee benefi ts Total current liabilities 613 3,069 3,682 23,506-23,506 Non-current liabilities Trade and other payables 1,563-1, Interest-bearing loans and borrowings 29,871-29, Deferred tax liabilities (d) 17,885 (17,885) - 25,011 (25,011) - Employee benefi ts Total non-current liabilities 49,367 (17,885) 31,482 25,050 (25,011) 39 Total liabilities 49,980 (14,816) 35,164 48,556 (25,011) 23,545 Net assets 156, , , ,747 Equity Issued capital (i) 155,053 1, , ,086 1, ,563 Retained earnings (a)-(d),(f) 1,201 (730) 471 5,044 (860) 4,184 Total equity 156, , , ,747

129 Notes to the consolidated financial statements For the year ended 30 June 2006 pp EXPLANATION OF TRANSITION TO AIFRS (continued) (a) Dismantling assets and provisions An obligation exists to dismantle and remove certain items of property, plant and equipment and to restore sites on which they are located. Under previous AGAAP, the cost of dismantling was recognised as an expense when incurred. In accordance with AIFRS, dismantling costs should be recognised as part of the cost of assets and as a provision at the time of the obligating event. The effect of accounting for dismantling costs is to: u increase Property, plant and equipment by $2,760,000 at 1 July 2004 and 30 June 2005; u increase Provisions by $3,037,000 at 1 July 2004 and $3,249,000 at 30 June 2005; u increase Accumulated depreciation by $267,000 at 1 July 2004 and $539,000 at 30 June 2005; u increase Depreciation charge by $272,000 for the year ended 30 June 2005; and u increase Interest expense by $212,000 for the year ended 30 June Consolidated The Company 1 July June July June 2005 $ 000 $ 000 $ 000 $ 000 Property, plant and equipment 2,760 2, Accumulated depreciation (267) (539) - - Dismantling provisions (3,037) (3,249) - - Retained earnings (increase)/decrease 544 1, (b) Rehabilitation provisions Under previous AGAAP, some rehabilitation provisions recognised in relation to infrastructure were expensed. In accordance with AIFRS, the present value of these costs should be recognised as part of the cost of assets. Also under AIFRS, all rehabilitation obligations (both infrastructure and non-infrastructure areas) are recognised at present value. Under previous AGAAP, rehabilitation provisions were recognised at current costs. The effect is to: u increase Property, plant and equipment by $1,267,000 at 1 July 2004 and $1,325,000 at 30 June 2005; u increase Accumulated depreciation by $147,000 at 1 July 2004 and $256,000 at 30 June 2005; u decrease Provisions by $1,267,000 at 1 July 2004 and $1,269,000 at 30 June 2005; u increase Depreciation charge by $109,000 for the year ended 30 June 2005; u increase Interest expense by $618,000 for the year ended 30 June 2005; and u decrease Rehabilitation expense by $678,000 for the year ended 30 June Consolidated The Company 1 July June July June 2005 $ 000 $ 000 $ 000 $ 000 Property, plant and equipment 1,267 1, Accumulated depreciation (147) (256) - - Rehabilitation provisions 1,267 1, Retained earnings (increase)/decrease (2,387) (2,338) - - (c) Exploration and evaluation assets Costs incurred before an entity has legal right of access to an exploration area must be expensed. Under previous AGAAP, these exploration costs were capitalised as incurred. The effect in the consolidated entity is to decrease Exploration and evaluation assets and Retained earnings by $39,000 at 1 July 2004 and $165,000 at 30 June Consolidated The Company 1 July June July June 2005 $ 000 $ 000 $ 000 $ 000 Exploration and evaluation assets (39) (165) - - Retained earnings (increase)/decrease

130 Financial performance pp 126 Notes to the consolidated financial statements For the year ended 30 June EXPLANATION OF TRANSITION TO AIFRS (continued) (d) Deferred tax balances On transition to AIFRS, the balance sheet method of tax effect accounting was adopted, rather than the liability method adopted under previous AGAAP. In addition, in accordance with AIFRS, deferred tax assets and deferred tax liabilities previously disclosed under previous AGAAP have been offset to show a net deferred tax asset/liability. The impacts on the net deferred tax asset/liability on transition to AIFRS relating to the items noted are as follows: Consolidated The Company 1 July June July June 2005 $ 000 $ 000 $ 000 $ 000 Rehabilitation and dismantling provisions Capital raising costs Property, plant and equipment (18,874) (15,261) - - Other Tax funding arrangement ,342 19,493 Net movement in deferred tax asset/liability (17,596) (14,210) 12,089 20,110 Disclosed as follows: Decrease in deferred tax asset (6,601) (5,565) (5,796) (4,901) Decrease/(increase) in deferred tax liability (10,995) (8,645) 17,885 25,011 The effect on the income statement for the year ended 30 June 2005 was to decrease the previously reported tax charge for the period by $3,260,000 for the consolidated entity and $130,000 for the Company. (e) Tax consolidation The consolidated entity had applied UIG 52 for tax consolidation purposes under previous AGAAP, resulting in the Company as the head entity of the tax-consolidated group recognising both current and deferred tax in relation to the wholly-owned subsidiaries in the tax consolidated group. Under AIFRS, the consolidated entity has adopted UIG 1052 which requires the subsidiaries to initially recognise both current and deferred taxes before recognising the head entity s assumption of the current tax liability (asset) and deferred tax asset from tax losses. Under AIFRS the subsidiaries are now required to recognise deferred tax assets relating to temporary differences, other than for tax losses. Under previous AGAAP, the tax funding arrangements assets and liabilities were recognised as inter-entity tax-related balances whereas tax funding arrangements expenses and revenues were recognised as a component of income tax expense or revenue. Upon adoption of UIG 1052 under AIFRS, all tax funding arrangements amounts are recognised as inter-entity amounts, giving rise to a contribution by or distribution to equity participants to the extent they differ from the amounts assumed by the head entity from subsidiaries. The entities in the Australian tax-consolidated group have revised the tax funding arrangements to address only current tax amounts and deferred tax assets from tax losses so that no contributions or distributions to equity participants are expected to arise in the future. The effect of the above in the Company at 1 July 2004 is to decrease tax related receivables by $8,273,000, increase tax related payables by $3,069,000 and decrease net deferred tax by $11,342,000. The effect in the Company at 30 June 2005 is to decrease tax related receivables and net deferred tax by $19,493,000. For the consolidated entity, the impact of moving from UIG 52 to UIG 1052 is the same as the impact of moving to AASB 112. There is nil impact on the consolidated entity from the tax funding arrangement changes as upon consolidation the inter-company balances are eliminated.

131 Notes to the consolidated financial statements For the year ended 30 June 2006 pp EXPLANATION OF TRANSITION TO AIFRS (continued) (f) Equity The effect of the above adjustments on equity is as follows: Consolidated The Company 1 July June July June 2005 $ 000 $ 000 $ 000 $ 000 Property, plant and equipment (a),(b) 3,613 3, Exploration and evaluation assets (c) (39) (165) - - Rehabilitation provisions (b) 1,267 1, Dismantling provisions (a) (3,037) (3,249) - - Trade and other receivables (e) - - (8,273) (19,493) Trade and other payables (e) - - (3,069) - Deferred tax (d) (17,596) (14,210) 12,089 20,110 Total adjustment to equity increase/(decrease) (15,792) (13,065) (g) Business Combinations As permitted by the election available under AASB1, the classifi cation and accounting treatment of business combinations that occurred prior to transition date have not been restated in preparing the opening AIFRS balance sheet. The assets and liabilities are therefore subject to the other requirements of AASB 1. (h) Financial income In accordance with AIFRS, fi nancial income has been reclassifi ed from other operating income for disclosure purposes. (i) (j) Capital raising costs Share capital in the Company has been increased by the amount of the deferred tax asset of $1,477,000 at 1 July 2004 and 30 June 2005, relating to capital raising costs recognised in share capital. Prepayments In accordance with AIFRS, prepayments have been reclassifi ed from other assets to receivables for disclosure purposes.

132 Financial performance pp 128 Notes to the consolidated financial statements For the year ended 30 June EXPLANATION OF TRANSITION TO AIFRS (continued) Reconciliation of profit for 2005 Consolidated The Company Effect of Effect of Previous transition Previous transition AGAAP to AIFRS AIFRS AGAAP to AIFRS AIFRS Note $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Revenue from coal sales 370, , Cost of coal sold (a),(b) (232,806) 297 (232,509) Gross profit 137, , Other income (h) 2,546 (2,385) ,549 (10,518) 21,031 Distribution expenses (29,765) - (29,765) Administration expenses (8,584) - (8,584) (6,496) - (6,496) Other expenses (4,787) - (4,787) (25) - (25) Results from operating activities 96,761 (2,088) 94,673 25,028 (10,518) 14,510 Financial income (h) - 2,385 2,385-10,518 10,518 Financial expenses (a),(b) (6,588) (830) (7,418) (2,647) - (2,647) Net financing income/(costs) (6,588) 1,555 (5,033) (2,647) 10,518 7,871 Profit before tax 90,173 (533) 89,640 22,381-22,381 Income tax (expense)/benefi t (d) (28,753) 3,260 (25,493) (787) (130) (917) Profit for the period attributable to equity holders of the parent 61,420 2,727 64,147 21,594 (130) 21,464 Earnings per share for profit attributable to ordinary equity holders of the Company: Basic earnings per share from continuing operations $0.38 $0.02 $0.40 Diluted earnings per share from continuing operations $0.37 $0.02 $0.39 Explanation of adjustments to the cash flow statement There are no material differences between the cash fl ow statement presented under AIFRS and the cash fl ow statement presented under previous AGAAP.

133 Notes to the consolidated financial statements For the year ended 30 June 2006 pp CHANGE IN ACCOUNTING POLICY In the current fi nancial year the consolidated entity adopted AASB 132 Financial Instruments: Disclosure and Presentation and AASB 139 Financial Instruments: Recognition and Measurement. This change in accounting policy has been adopted in accordance with the transition rules contained in AASB 1, which does not require the restatement of comparative information for fi nancial instruments within the scope of AASB 132 and AASB 139. The adoption of AASB 139 has resulted in the consolidated entity recognising all derivative fi nancial instruments as assets or liabilities at fair value. This change has been accounted for by adjusting the opening balance of the hedging reserve at 1 July The impact on the balance sheet in the comparative period is set out below as an adjustment to the opening balance sheet at 1 July The transitional provisions will not have any effect in future reporting periods. Reconciliation of opening balances affected by AASB 132 and 139 at 1 July 2005 Consolidated The Company Effect of Effect of Previous transition Previous transition AGAAP to AIFRS AIFRS AGAAP to AIFRS AIFRS Note $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Derivative contracts (a) 20,520 (4,691) 15, Deferred gains on foreign currency contracts (a) (20,520) 20, Deferred gains on United States dollar bank loans (b) (4,423) 4, Deferred tax liability (c) - (4,748) (4,748) Hedging reserve (a),(b) - (15,504) (15,504) Notes to the reconciliation of fi nancial instruments as if AASB 139 was applied at 1 July 2005: (a) Under previous AGAAP, the consolidated entity did not recognise derivatives at fair value on the balance sheet. In accordance with AIFRS derivatives are now recognised at fair value. The effect in the consolidated entity is to decrease fair value of derivatives and hedging reserve by $4,691,000, comprising decrease in assets of $3,464,000 and increase in liabilities of $1,227,000 at 1 July In addition, in accordance with AASB 1, gains deferred under previous AGAAP of $20,520,000 have been transferred to the hedging reserve on 1 July (b) Under AIFRS, deferred gains on the United States dollar bank loans continue to be deferred and are included in the measurement of the anticipated transaction, when the transaction has occurred as originally designated. Therefore, the deferred gains under previous AGAAP of $4,423,000 have been transferred to the hedging reserve on 1 July (c) The above adjustments increased deferred tax liability by $4,748,000 and decreased the hedging reserve on 1 July 2005.

134 Financial performance pp 130 Directors declaration 1. In the opinion of the directors of Macarthur Coal Limited ( the Company ): (a) the fi nancial statements and notes set out on pages 72 to 129, and the remuneration disclosures that are contained in the Remuneration report in the Directors report set out on pages 49 to 54, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the fi nancial position of the Company and the consolidated entity as at 30 June 2006 and of their performance, as represented by the results of their operations and their cash fl ows, for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; (b) the remuneration disclosures that are contained in the Remuneration report in the Directors report comply with Australian Accounting Standard AASB 124 Related Party Disclosures; and (c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Chief Executive Offi cer and Chief Financial Offi cer for the fi nancial year ended 30 June Dated at Brisbane this 12th day of September Signed in accordance with a resolution of the directors: Keith De Lacy Chairman

135 Independent audit report to the members of Macarthur Coal Limited pp 131 SCOPE The financial report, remuneration disclosures and directors responsibility The fi nancial report comprises the income statements, statements of recognised income and expense, balance sheets, statements of cash fl ows, accompanying notes to the fi nancial statements Notes 1 to 35, and the directors declaration set out on pages 72 to 130 for both Macarthur Coal Limited (the Company ) and Macarthur Coal Limited and its controlled entities (the consolidated entity ), for the year ended 30 June The consolidated entity comprises both the Company and the entities it controlled during that fi nancial year. As permitted by the Corporations Regulations 2001, the Company has disclosed information about the remuneration of directors and executives ( remuneration disclosures ), required by Australian Accounting Standard AASB 124 Related Party Disclosures, under the heading Remuneration report in the Directors report, set out on pages 49 to 54, and not in the fi nancial report. The Remuneration report also contains information in sections marked as unaudited not required by Australian Accounting Standard AASB 124 which is not subject to our audit. The directors of the Company are responsible for the preparation and true and fair presentation of the fi nancial 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 fi nancial report. The directors are responsible for preparing the relevant reconciling information regarding the adjustments required under the Australian Accounting Standard AASB 1 First-Time Adoption of Australian Equivalents to International Financial Reporting Standards. The directors are also responsible for the remuneration disclosures contained in the Directors 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 fi nancial report is free of material misstatement and that the remuneration disclosures comply with AASB 124. The nature of an audit is infl uenced 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. We performed procedures to assess whether in all material respects the fi nancial report presents fairly, in accordance with the Corporations Act 2001, Australian Accounting Standards and other mandatory fi nancial reporting requirements in Australia, a view which is consistent with our understanding of the Company s and the consolidated entity s fi nancial position, of their performance as represented by the results of their operations and cash fl ows and whether the remuneration disclosures comply with Australian Accounting Standard AASB 124. We formed our audit opinion on the basis of these procedures, which included: u examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the fi nancial report, and u assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of signifi cant accounting estimates made by the directors. While we considered the effectiveness of management s internal controls over fi nancial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls. AUDIT OPINION 1. In our opinion, the fi nancial report of Macarthur Coal Limited is in accordance with: (a) the Corporations Act 2001, including: (i) giving a true and fair view of the Company s and consolidated entity s fi nancial position as at 30 June 2006 and of their performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) other mandatory fi nancial reporting requirements in Australia. 2. The remuneration disclosures that are contained in the Remuneration report in the Directors report comply with Australian Accounting Standard AASB 124 Related Party Disclosures. KPMG Robert S Jones Partner Brisbane 12 September 2006 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.

136 pp 132 Investor quick reference guide Additional copies of this report can be obtained by contacting the Communications Offi cer (see details below). A copy is also accessible on the Macarthur Coal Website: CALENDAR OF EVENTS Event Annual General Meeting September 2006 Quarterly Report lodged with the ASX December 2006 Quarterly Report lodged with the ASX March 2007 Quarterly Report lodged with the ASX June 2007 Quarterly Report lodged with the ASX Full Year Results lodged with the ASX Annual Report lodged with the ASX Date 11.30am Thursday 16 November 2006 Long Room at Customs House 399 Queen Street, Brisbane By 31 October 2006 By 31 January 2006 By 30 April 2007 By 31 July 2007 By 31 August 2007 By 31 October 2007 Please note that all documents lodged with the ASX are also provided on the Macarthur Coal website under Investor relations: DIVIDEND POLICY The Macarthur Coal dividend policy is to pay approximately 50% of net profi t after tax as a dividend. Shareholder Communication Policy Macarthur Coal is dedicated to providing current and potential shareholders with timely, balanced communication using plain language. The Shareholder Communication Policy is available on the website: CONTINUOUS DISCLOSURE Copies of Macarthur Coal s announcements since the Company listed as a public company (including all quarterly, half yearly and annual reports) are available on the Macarthur Coal website: You may register to receive ASX announcements via by visiting the Investor Relations section of the website. WEBSITE Macarthur Coal s website ( enables stakeholders to access company information at their convenience. The website contains the following: u Macarthur Coal s mining interests u Macarthur Coal s project pipeline u Management team and Board of Directors details u Share price u Share registry details u All announcements made to the ASX u General Meeting information Notices of meeting Chairman s and CEO s addresses Resolution results u Corporate governance policies. SHARE REGISTRY Computershare Limited maintains Macarthur Coal s share registry. COMPUTERSHARE Level 19, 307 Queen Street Brisbane QLD 4000 GPO Box 523 Brisbane QLD 4001 Phone: (within Australia) (outside Australia) Fax: Website: The following shareholder forms are available from Computershare and are on the Computershare website u Change of address notifi cation u Change of account designation u Direct Credit instruction u Minor(s) statement and indemnity u Name change-statutory declaration u Name correction request and indemnity u Request to consolidate holdings u Standard transfer u Annual report election u TFN, ABN or exemptions notifi cation. All forms should be submitted directly to Computershare SHAREHOLDER FEEDBACK Feedback or comments with respect to shareholder communications are welcome. Please direct any comments to the Communications Offi cer (see details below). Communications Offi cer Details Write to: Communications Offi cer Macarthur Coal Ltd PO Box 7146 Riverside Centre Brisbane QLD info@macarthurcoal.com.au Phone: Fax:

137 Additional shareholder information pp 133 Additional information required by the Australian Stock Exchange Limited Listing Rules and not disclosed elsewhere in this report is set out below. SUBSTANTIAL SHAREHOLDERS AS AT 13 SEPTEMBER 2006 The number of substantial shareholders and their associates are set out below: Number of ordinary shares held % Shareholder Ken Talbot and related entities 66,658, CITIC Australia Coal Pty Ltd 21,780, Sprott Asset Management Inc 11,201, Asset Value Investors 10,597, VOTING RIGHTS Ordinary shares Refer to Note 24 to the fi nancial statements 20 LARGEST SHAREHOLDERS AS AT 13 SEPTEMBER 2006 Number of ordinary shares held % Shareholder Ken Talbot and related entities 66,658, CITIC Australia Coal Pty Ltd 21,780, JP Morgan Nominees Australia Ltd 15,108, ANZ Nominees Ltd 14,182, National Nominees Ltd 8,892, Westpac Custodian Nominees Ltd 7,536, Citcorp Nominees Pty Ltd 3,919, G Santalucia Investment Pty Ltd 2,210, Burnett Coal Pty Ltd 1,344, Clem Jones Pty Ltd 1,275, Dervat Nominees Pty Ltd 848, Cogent Nominees Pty Ltd 615, Diversifi ed United Investment Ltd 500, UBS Nominees Pty Ltd 487, Le Grand Pty Ltd 370, HSBC Custody Nominees (Australia) Ltd 349, ECSA 332, Fleet Nominees Pty Ltd 332, Merrill Lynch (Australia) Nominees Pty Ltd 323, Wayne Wilson and Patricia Wilson AFT Wilson Family A/C 302,

138 pp 134 Additional shareholder information DISTRIBUTION OF SHAREHOLDERS AND THEIR HOLDING AS AT 13 SEPTEMBER 2006 Number of Number of shareholders shares Shareholder 1 1,000 2,774 1,834,243 1,001 5,000 4,361 12,020,359 5,001 10,000 1,055 8,162,183 10, , ,577, ,001 and over ,785,819 Total 8, ,380,346 The number of shareholders holding less than a marketable parcel of ordinary shares is 0. There is no current on-market buyback.

139 Glossary/Abbreviations pp 135 $M Million dollars AAICD Associate of the Australian Institute of Company Directors ACIS Associate of Institute of Chartered Secretaries and Administrators and Chartered Secretaries Australia AGM Annual General Meeting ASIA Associate of the Securities Institute of Australia ASIC Australian Securities and Investments Commission ASX Australian Stock Exchange BAppSc Bachelor of Applied Science BA Bachelor of Arts BBus Bachelor of Business BCM Bank cubic metres BE Bachelor of Engineering Bowen Basin The principal coal mining area in Queensland CA Chartered Accountant Coking coal Coal which is suitable for making coke Corporate governance The system by which companies are directed and managed Crude steel Unrefi ned steel Cultural heritage The requirements set out in the Aboriginal Cultural Heritage Act 2003 regarding signifi cant Aboriginal areas or objects or evidence of archaeological or historical signifi cance of Aboriginal occupation of an area of Queensland DipAICD Diploma from the Australian Institute of Company Directors Dividend Payment from the Company s profi ts to its shareholders Dragline A large earthmoving machine with a bucket suspended by cables from a crane-like boom DUniv Doctorate of University EBIT Earnings before interest and tax EBITDA Earnings before interest, tax, depreciation and amortisation EPA Environmental Protection Agency EPC Exploration permit for coal FAICD Fellow of the Australian Institute of Company Directors FAIM Fellow of the Australian Institute of Management FAusIMM Fellow of the Australian Institute of Mining and Metallurgy FCIS Fellow of Institute of Chartered Secretaries and Administrators and Chartered Secretaries Australia FCPA Fellow of the Certifi ed Practicing Accountants GAICD Graduate of the Australian Institute of Company Directors Geological modelling The recording of physical characteristics of different rock types from boreholes Grad Dip Adv Acctg Graduate Diploma in Advanced Accounting Grad Dip CSP Graduate Diploma in Company Secretarial Practice Hedging A process to protect against or reduce a risk HonDLitt Honorary Doctorate of Literature Indicated Resource That part of a Mineral Resource for which tonnage, densities, shape, physical characteristics, grade, and mineral content can be estimated with a high level of confi dence. It is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques such as outcrops, trenches, pits, workings, and drill holes. The locations are too widely spaced or inappropriately spaced to confi rm geological and/or grade continuity but are spaced closely enough for continuity to be assumed Inferred Resource That part of a Mineral Resource for which tonnage, grade and mineral content can be estimated with a reasonable level of confi dence. It is inferred from geological evidence and assumed but not verifi ed geological and/or grade continuity. It is based on information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings, and drill holes which may be limited or of uncertain quality and reliability JORC Code A code prepared by the Joint Ore Reserve Committee which defi nes criteria for publicly reporting resources and reserves KPIs Key performance indicators Low volatile coal Coal with less than 17% volatile matter MAppSc Master of Applied Science MAusIMM Member of the Australasian Institute of Mining and Metallurgy MBA (AGSM) Master of Business Administration from the Australian Graduate School of Management

140 pp 136 Glossary/Abbreviations/Index ME Master of Engineering Measured Resource That part of a Mineral Resource for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a high level of confi dence. It is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings, and drill holes. The locations are spaced closely enough to confi rm geological and/or grade continuity Metallurgical coal Coal used in the production of steel MLA Mining lease application NPAT Net profi t after tax OBE Order of the British Empire Open-cut mine A mine worked at and from the surface Overburden Material which overlies a deposit of useful material PCI Pulverised coal injection Pig iron Unrefi ned iron produced from blast furnaces ROM Run of mine QDA Queensland Diploma of Agriculture Reserves The economically mineable part of Measured or Indicated Coal Resource at the time of reporting as defi ned in the JORC Code Resources The part of the coal deposit for which there is a reasonable prospect for eventual economic extraction as defi ned in the JORC Code Royalties State government charges for the mining of coal Slimcore A borecore less than 90 millimetres in diameter Strike length The length of a deposit able to be accessed for mining Tenement A mining lease, exploration permit, or mineral development licence Thermal coal Coal which is combusted to provide heat for steam generation and subsequent power generation Unincorporated Joint Venture A business structure in which participants have several liability, fund operating and capital costs and receive the production in proportion to their level of ownership INDEX Annual General Meeting 34, 50, 53-54,57, 132 ASX 3, 4, 45, 49-54, 57-63, 132 Audit and Risk Management Committee 44, 46, 48, 50-51, 55, 57, 62 Auditors 50, 53-54, Board Charter 48 Board of Directors 44, 46, 48-49, 51 Bowen Basin 3, 5, 7, 11-12, 41, 52-53, 62 Capricorn 3, Clean Coal Technology 7, Code of Conduct 48, 51-52, 54 Codrilla 3, 7, 20-21, 27 Coke plant 13, 26, 68 Computershare 132 Contractors 3, 7, 14, 16, 30-31, 38-40, 51, 52, 57 Convertible Notes 1, 69 Coppabella and Moorvale Joint Venture 3, 14, 16, 41, 68 Coppabella Mine 3, 6-7, 10-11, 14-15, 20-21, 23-24, 27, 30, 32, Customers 5, 12-13, 49, 55 Dalrymple Bay Coal Terminal 1, 6, 10, Dividends 1, 34, 66-67, Dragline 11, 14-15, 41 Environment 7, 13, 30, 38, 41, 53 Employees 30-32, 39, 49, 50, 52, 54, 56-58, 60-61, 63 Exploration 1, 3-4, 6-7, 11, 13, 20, 25, 39, 48-49, 52, 53, 55, 57, 62, 66 Health and safety 7, 30-31, 41, 51 Macarthur Coal (C&M Management) Pty Ltd 32, 38, 41 Management structure 4, 7, 46 Marketing 41, 46-49, 53 Monto 3, 20, 25, 27, Moorvale Mine 1, 3-7, 11-14, 16, 17, 21-24, 27, 30-32, 38-41, 69 Moorvale West 3, 7, 11, 13, 20, 22, 25, 27 Moorvale Underground 7, 11, 20, 26 Nomination and Remuneration Committee 44, 46, 48-50, 55, 57 Olive Downs 3, 7, 10, 13, 20, 23, 25, 27 PCI coal 3, 6-7, 10-14, 16-17, 20, 24 Queensland Coke & Energy Pty Ltd 13, 26, 30, 58 Rainfall 1, 10, Rehabilitation 24, 35, 38, 39, 41 Remuneration 31, 48, 50, Resources 1, 5, 6, 7, 11, 13, 20-25, 27 Risk management 48-51, 54 Royalties 7, 33, 68 Sales 1, 3, 4, 6, 7, 10-13, 66, Shares for Schools Program 5, 34 Shipping 13 Sponsorship 5, 33, 35 Vermont East 3, 7, 20, 23, 24 Water 1, 5, 10, 12, 26, West/North Burton 7, 11, 13, 20, 23 West Rolleston 3, 20, 24, 27 West Walker 3, 7, 11, 20, 24 Wilunga 3, 7, 20, 23, 24, 27

141

142 ABN ANNUAL REPORT 2006