DARWIN OFFICE. Level 2, 43 Mitchell Street Tourism House Darwin NT 0801 Tel Fax SHARE DIRECTORY

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2 CORPORATE DIRECTORY DIRECTORS Irvin G (Mick) Muir Non-Executive Chairman Alistair J Stephens Managing Director Ian J Kowalick Non-Executive Director Terry R Jackson Non-Executive Director Stephen Ward Non-Executive Director Gavin J Lockyer Company Secretary REGISTERED OFFICE Level 4, 16 St Georges Terrace Perth WA 6000 Tel Fax arafura@arafuraresources.com.au DARWIN OFFICE Level 2, 43 Mitchell Street Tourism House Darwin NT 0801 Tel Fax SHARE DIRECTORY Security Transfer Registrars Pty Ltd 770 Canning Highway Applecross WA 6153 Tel Fax BANKERS Westpac Bank 109 St Georges Terrace Perth WA 6000 STOCK EXCHANGE LISTING Shares and options listed on the Australian Stock Exchange Limited Stock Codes: ARU/ARUO ARUO expiry date 30 June 2008 AUDITORS BDO Kendalls Audit and Assurance (WA) Pty Ltd 128 Hay Street Subiaco WA 6008 Tel Fax SOLICITORS Freehills 250 St Georges Terrace Perth WA 6000 Tel Fax

3 CONTENTS Company Profile 03 Chairman s Letter to Shareholders 04 Managing Director s Review 06 NuPower Resources - Sustainable Energy Resources for the Future 0 Nolans Project Exploration 20 Community 24 Resource Statement 27 Board of Directors 28 FINANCIAL STATEMENTS 29 Directors Report 31 Auditor s Independence Declaration 48 Corporate Governance Statement 49 Income Statement 50 Balance Sheet 51 Statement of Changes in Equity 52 Cash Flow Statement 53 Notes to the Financial Statements 54 Directors Declaration 88 Auditor s Report 89 Additional ASX Information 91

4 Focused on quality, environmental excellence, building relationships and long term results. 2

5 01 ARAFURA RESOURCES LIMITED COMPANY PROFILE Arafura Resources is an Australian mineral exploration and development company with extensive tenement holdings in the Northern Territory covering a range of minerals. While the corporate office is located in Perth, Western Australia, Arafura now has an exploration and development office located in Darwin, to build on our operational and strategic focus on the Territory. 130º E DARWIN JABIRU MT PORTER / FRANCES CK 135º E NHULUNBUY The Company listed on the ASX in 2003 and since then has grown and diversified its asset portfolio base, targeting projects that will deliver long term and sustainable value and growth. KATHERINE ALYANGULA N BORROLOOLA 15º S The past twelve months have seen a number of changes to the Company s structure and focus. With the successful demerger of Arafura s uranium assets into NuPower Resources Limited, Arafura is now focused on developing the Nolans rare earthsphosphate-uranium project. To complement this strategy the Company has continued to add to its talented management team of mining industry professionals, making a number of strategic operational appointments. TENNANT CREEK DAVENPORT WEST KURINELLI 20º S The Company s plans for the next three years are focused on the Nolans project coming into production by Arafura is well placed to become an Australian specialty metals producer and is advancing projects in gold, nickel and vanadium. AILERON / REYNOLDS RA JERVOIS NOLANS HAMMER HILL ALICE SPRINGS YULARA 25º S 0 200km Arafura Title - Arafura All Commodities Arafura Title - NuPower U Rights NuPower Title - Arafura Non-U Rights 3

6 02 ARAFURA RESOURCES LIMITED CHAIRMAN S LETTER TO SHAREHOLDERS DEAR SHAREHOLDER The period covered by this report has been one of outstanding achievement by your Company. Of major significance has been the progress toward the development of our Nolans rare earth-phosphate-uranium project. It is the Directors belief that Nolans will deliver superior earnings from its multiple revenue streams and geological exploration has demonstrated that the resource is of sufficient magnitude to sustain a long life operation. Our operations staff have successfully completed many of the steps necessary for the project to achieve commercial reality and technical closure. We have also received encouragement and assistance from both the Commonwealth and Northern Territory governments who recognise the long term benefits which will follow from the successful development of Nolans. In addition the project has Commonwealth Government recognition through an AusIndustry Commercial Ready Grant. Of particular significance is the strengthening demand for the products from Nolans: Rare earth demand is growing at levels well in advance of the historical 10% per annum Phosphate requirements are being driven by a boom in agricultural demand Uranium has re-emerged as a preferred energy source. Your Board s confidence in the project has improved dramatically by the interest shown from a number of major international groups who have indicated a genuine interest to enter joint ventures or negotiate off-take agreements. Some of these groups have suggested Arafura accelerate the development process to take advantage of the surge in interest in rare earths and uranium. However, your Board and management are strongly of the view that best practice will apply as we progress our environmental, community, technical and commercial work programs. Your Company also has had major success in exploration and corporate areas. The initial assay results from the Jervois ferro-vanadium project are very encouraging and the demerger of Arafura s uranium assets created increased wealth for shareholders. Your Directors decided that the royalty stream from the Frances Creek iron ore project no longer constituted core business and a sale was arranged on satisfactory commercial terms. The Company has also progressed the Mt Porter gold project to the stage prior to mining approval. I am pleased to see your Company s success in exploration and development recognised by investors within Australia and overseas. This has lead to a significant increase in Arafura s share price. Of particular significance has been German investor interest in Arafura and our rare earths project, with more than 30% of our shares now ultimately owned in that country. During the year our foundation Board Chairman Peter Walker resigned for health reasons. He has had an outstanding record of achievement in the mining and corporate arena and his guidance has been invaluable to Arafura. 4

7 I also take this opportunity to recognise the input of John Goulevitch who left Darwin during the year and now plays a less significant role in Arafura s exploration programs. John was the first to recognise the enormous potential of Nolans. Your Board has recently expanded and I welcome new members Terry Jackson and Steve Ward. Both Terry and Steve bring special expertise and we will value their input as your Company grows. In closing I wish to pay tribute to the excellence of our employees under the direction of our Managing Director Alistair Stephens. Arafura is fortunate to have such an exceptionally talented and dedicated group of technical and corporate experts to carry us forward. Mick Muir 5

8 03 ARAFURA RESOURCES LIMITED MANAGING DIRECTOR S REVIEW The past year was a watershed year for Arafura Resources as the Company finalised its restructure, and moved towards its stated intention of becoming an Australian specialty metals producer focusing primarily on our flagship Nolans rare earths-phosphateuranium project. In my report to shareholders last year I set a series of objectives for the Company. These included: The flow sheet design for Nolans Finalising the demerger of the Company s uranium assets into NuPower Resources Pursuing the development of the Mt Porter gold project Undertaking a drilling program at the Jervois vanadium project. I am pleased to report that these objectives were achieved and Arafura made a number of major steps forward on all projects. Specifically the Company made significant progress with extensive drilling and test work at Nolans and the Jervois vanadium project, and made further progress on our Kurinelli gold project. The results from Nolans have been outstanding and the first test of the Jervois project has been remarkably successful. The Nolans project continues to deliver outstanding results in both the tenor and extent of mineralisation. We have not yet defined the limits of the resource, and will undertake further drilling this coming year. DELIVERING VALUE The key driver for Arafura is to deliver value to our shareholders and this year was particularly successful. The Company s value is underpinned by high quality projects. By developing these projects we aim to capitalise on the diversity of our assets and their niche market margins. Arafura s share price grew significantly throughout the year, from $0.328 on 30 June 2006 to $1.685 on 29 June 2007, representing 413% growth over this period. This reflects the Company s strong portfolio of assets and an understanding of the potential of, in particular, the Nolans and Jervois projects. With the demerger, Arafura s shareholders became shareholders in NuPower Resources, through the issue of shares based on Arafura shareholdings. NuPower successfully listed on the ASX and instant value was returned. Arafura s objectives are: The development of Nolans Assess the potential of the Jervois vanadium project Expand our exploration pipeline and pursue growth opportunities Develop strategic partnerships. At Jervois we had 14 successful drill intersections out of an initial regional drill campaign of 15 holes. This great result was backed up by initial metallurgical testing that determined the recovery of vanadium is technically viable using existing technology. This may prove to be Arafura s next development beyond Nolans. 6

9 Consistently delivering value, focusing on sustainable growth. 7

10 03 ARAFURA RESOURCES LIMITED MANAGING DIRECTOR S REVIEW (CONTINUED) PEOPLE People bring experience, energy and fresh ideas to Arafura, so we select them carefully. Arafura has grown considerably over the past three years and has brought together a motivated and talented team of professionals to take the Company forward. During the year we appointed Richard Brescianini as General Manager Strategic Development and Exploration, and Gavin Lockyer as Company Secretary respectively. They join Steve Mackowski who is managing the Nolans project as part of our management team. Arafura s management group is a complementary strong team. Arafura also opened an office in Darwin which has become the base for our Northern Territory operations. SUCCESSES During the year we made a number of significant achievements including: Rare earths recovery of 83% Phosphate recovery of 80% Developing strong relationships in the rare earths industry Major progress finalising the flow sheet for the recovery process of rare earths, phosphoric acid and calcium chloride Identification of recoverable vanadium at Jervois. These achievements provide an excellent foundation for Arafura s progress throughout the next and future years. LOOKING FORWARD The pilot plant is due to commence in 2008 and will operate for three to six months. There are contingency plans to run this longer should we need to produce additional samples to satisfy potential customers with product to trial through their own laboratories and operations. On successful completion of the pilot plant we will undertake a full feasibility and engineering design program. We also will continue our exploration activities to diversify our asset base while divesting non-core tenements to ensure sufficient capitalisation to give us flexibility well into the future. I would also like to thank our inaugural Chairman Peter Walker, who retired during the year, for his support and guidance throughout the time we worked together. Peter s foresight and corporate knowledge, in conjunction with his ability to recognise the strategic importance of rare earths minerals, have been instrumental in Arafura s growth. Alistair Stephens 8

11 AUSINDUSTRY COMMERCIAL READY GRANT In November 2006 Arafura Resources was offered a $3.3 million Commonwealth Government Commercial Ready Program grant for the Nolans project. Commercial Ready is a highly competitive merit-based grant program supporting commercial innovation. The program offers industry a single entry point to competitive grants for early-stage commercialisation activities with high potential and proof-of-concept activities. The grant covers metallurgical and pilot plant test work to the value of $1.2 million and the potential for an extended pilot plant phase to the value of $2.1 million. Under the terms of the offer, the grant will help Arafura continue to develop a unique rare earths, uranium and phosphate recovery process. The grant covers all technical and process related expenditure including flow sheet development, test work, pilot plant and demonstration plant costs. NUPOWER RESOURCES During the year we successfully completed the demerger of Arafura s uranium assets into NuPower Resources Limited, which is dedicated to greenfields exploration and developing the Company s highly prospective uranium projects in the Northern Territory. This process was not without its challenges due to a range of regulatory hurdles which were successfully negotiated. While this caused significant delays to NuPower s listing on the ASX the company has now established itself in the market place, creating significant value for our shareholders. Nolans drill core OUTLOOK At an operational level Arafura Resources is well placed to move forward in all the Company s projects. Adding to this the potential of the rare earths market and demands for environmentally friendly and high tech goods provides a confluence of opportunity for Arafura. This is an ideal position to be in: a market with high entry barriers, assured prices, and rapid growth potential. In addition we are looking at potential partnerships to strengthen our business model and build strategic alliances. This will be underpinned by the strong relationships we are building with the Northern Territory Government and the rare earths industry in Asia and China. In addition to their individual shareholdings, by retaining a 10% holding in NuPower, Arafura s shareholders will continue to benefit from the company s success well into the future. 9

12 04 NUPOWER RESOURCES Sustainable Energy Resources for the Future The restructure of Arafura Resources during the year saw the creation of a new uranium focused exploration company NuPower Resources Limited. As a result of the restructure Arafura s uranium assets were demerged to NuPower by way of a compliance listing. This enabled Arafura shareholders and option holders to participate in the demerger process and become shareholders in both Arafura and NuPower without having to provide additional funds. Arafura s shareholders were able to maintain their equity position and share in the benefits accruing from two companies dedicated to pursuing the different opportunities provided by different markets. Arafura retains a 10% ownership in NuPower. 10

13 05 ARAFURA RESOURCES LIMITED NOLANS PROJECT OVERVIEW Arafura is continuing with the assessment and development of the Company s flagship Nolans project, a very large, phosphate-hosted rare earths-uranium deposit. The Nolans project is located 135 kilometres north-west of Alice Springs and is well placed to access road, rail and energy infrastructure. During the year Arafura s activities with the Nolans project were directed towards a number of milestones. Programs conducted throughout 2006/07 have continued to reduce technical risk. The extensive drilling program during the year delivered some outstanding results. This demonstrates that Nolans has the potential to be a long life supplier of high value rare earths. It will be cost competitive through additional revenue streams from phosphoric acid, uranium and calcium chloride. EXPLORATION AND RESOURCE DEFINITION In 2005, Arafura completed a 10,000 metre drilling program at Nolans to test the extension to mineralisation. As a consequence the resource increased from 5.6 million tonnes to 18.6 million tonnes at an average grade of 3.1% REO (rare earth oxides). JORC Standard Classification tonnes (million) REO % P 2 O 5 % U 3 O 8 lb/t TOTAL INDICATED TOTAL INFERRED Total Resources These resources would support a processing operation of 10,000 to 20,000 tonnes of rare earths metal per annum for at least 20 years. The drilling program also indicated that a larger resource is highly likely as additional mineralisation had been detected that had not been factored into the resource estimation. Arafura is continuing with assessment and development of the Company s Nolans project, a large, long life phosphate-hosted rare earths-uranium deposit. 11

14 05 ARAFURA RESOURCES LIMITED NOLANS PROJECT (CONTINUED) In early 2006/07, a program of RC drilling was undertaken to further explore mineralisation in the South Zone of the Nolans deposit, and to test several apparently isolated mineral occurrences. It resulted in several intervals of high grade mineralisation in the south-west and central sections of the South Zone. Future infill drilling in this area is likely to result in an increase in mineral resources. Nolans South Zone drilling - Assay intervals for intercepts greater than 5 metres thickness at 4.5% REO Hole Number Interval (metres) From (metres) REO % P 2 O 5 % U 3 O 8 lb/t NBRC NBRC NBRC NBRC In the latter part of 2006/07 Arafura completed the first phase of an infill drilling campaign in the central portion of the North Zone. The program was aimed at developing a reliable geological model which could be used as a basis for upgrading resources in the initial mining area to a Measured Resource status to a depth of 100 metres below the surface. It delivered a number of thick intervals of high-grade mineralisation. 12

15 Nolans North Zone infill drilling - Assay intervals for intercepts greater than 4 metres thickness at 5.0% REO Hole Number Interval (metres) From (metres) REO % P 2 O 5 % U 3 O 8 lb/t NBDH NBDH NBDH NBDH surface NBDH NBDH NBDH NBDH NBDH NBDH NBDH NBDH NBDH NBDH NBDH NBDH NBDH A second phase of infill drilling will commence in September 2007, leading to an estimation of Mineral Resources as a basis for a feasibility study towards the end of 2008/09. 13

16 Nolans Project Exploration, Resources and Geology 14

17 Rare Earths Metallurgical Test Work Beneficiation During the year test work for the removal of waste material from Nolans mineralisation was completed. The test work identified a heavy media separation technique that removes 30% of the feed material as waste, resulting in a recovery of 95% of all rare earth and phosphate minerals. This work has significant implications in the reduction of costs downstream, including the reduction in the operating costs of road and rail transportation. It will also reduce capital costs associated with parts of the processing plant. Recovery Arafura engaged the services of the Australian Nuclear Science and Technology Organisation (ANSTO) based at Lucas Heights, NSW to investigate the processing routes that would enable the commercialisation of the Nolans deposit. The hydrometallurgical test work at ANSTO has defined a process flow sheet for: Pre-leach Process The process separates phosphate-rich minerals from rare earth-rich minerals in a leaching condition that delivers the phosphate in a form that achieves commercial extraction of high quality (low impurity) phosphoric acid. Rare Earths in the Phosphoric Circuit The neutralisation stage in the phosphoric acid circuit returns rare earths dissolved with the phosphate-rich mineral into the rare earth circuit. The recovery from this process is about 90% of rare earths (and other metals). Rare Earths Circuit The process then concentrates rare earth minerals into a single circuit (at a grade of greater than 10%) that allows a selective chemical process for the optimum extraction of rare earths. Rare Earths Acid Bake Recovery A sulphuric acid baking process delivers a rare earths recovery of about 90%. Total Rare Earths Recovery The overall recovery of rare earths from the resource to a rare earths concentrate averages 83%. Based on the information that Arafura has across the rare earths industry, these are the best recovery results for any rare earths deposits, reflecting the high quality and amenability of the Nolans mineralogy for selective and optimal metallurgical processing. The next phase of test work will assess the solvent extraction of uranium and the removal of thorium. Preliminary and indicative tests show uranium extraction of about 80% is achievable and 99.9% thorium rejection. Market Rare Earths Global sales of rare earths in 2006, expressed as rare earth oxides (REO), were estimated to have totalled 108,000 tonnes REO in 2006 with a market sales value of US$1 billion. Sales continued to grow at 10% pa, with prices rising by 20-40% for the year. At the time of writing this report many prices have risen an additional 10% over the past two months. China remains the dominant supplier of rare earths with a market share of 98% and became the largest user of rare earths in 2006 with an estimated consumption of 59,000 tonnes REO or 55% of total sales by volume. A growing awareness of the need for and commitment to minimising greenhouse gas emissions is driving the growth in demand for neodymium used in energy efficient compact electric motors and lanthanum used in the rechargeable batteries, both essential for hybrid vehicles. At the same time there has been a rapid increase in demand for europium and terbium, which are used as phosphors in modern flat panel displays. Plasma screens are rapidly replacing the old cathode ray tubes, used for televisions and computer monitors. In the petroleum sector, the strong demand for petroleum products by Brazil, Russia, India and China are increasing the demand for petroleum catalysts. As a result, this is putting additional pressure on the supply of lanthanum. Concurrent with this rising demand there has been a further tightening in supply from China, due to a range of policy issues including the enforcement of environmental protection legislation. Chinese Government policy has resulted in many rare earths operations being closed down for various periods of time, while the necessary environmental management systems are implemented. 15

18 05 ARAFURA RESOURCES LIMITED NOLANS PROJECT (CONTINUED) As part of a policy of preserving China s mineral resources for the benefit of China s manufacturing industries, the following measures have been put in place: The issue of new mining licences has been suspended to conserve resources The production of rare earths mineral concentrates is now controlled by a quota system The 17% VAT on rare earths exports is no longer refunded An export tax policy of 10 to 15% Fees for export licences The limitation of foreign investment to selected downstream parts of the rare earths industry. Arafura is fortunate that the distribution of rare earths in the Nolans resource will enable the Company to take full advantage of the rising demands. Rare Earth Oxide Nolans Content 2nd Qtr 2004 US$/kg 2nd Qtr 2005 US$/kg 2nd Qtr 2006 US$/kg 2nd Qtr 2007 US$/kg Cerium Oxide 48.3% Lanthanum Oxide 20.4% Neodymium Oxide 21.1% Praseodymium Oxide 5.9% Samarium Oxide 2.4% Europium Oxide 0.37% Dysprosium Oxide 0.34% Terbium Oxide 0.08% Weighted average Nolans value (Q2 2007) US$10.85/kg Note: 1 Sources: Metal Pages 2 Prices are for 99% Rare Earth Oxide (REO) and rounded 3 Prices FOB in China, including 10-15% export tax but excludes export licence fee. Over the next 5 to 10 years, the global demand for rare earths is expected to grow at 8 to 12% per annum, with projected demand of 180,000 to 190,000 tonnes REO in Consumption in China is expected to grow at 15% per annum. Current guidelines issued by the Chinese Government with respect to production indicate that exports of rare earths would be minimal in

19 Phosphates Phosphoric acid is a fundamental building block for the production of phosphate fertilisers, detergents, food stuffs and several other chemicals that contribute to today s improving standard of living. The growth in population and living standards in Brazil, Russia, India and China indicates that recent growth in global GDP of 2 to 4 percent per annum could be exceeded. The potential high growth for ethanol, much of which is extracted from corn, which is a major end-market for phosphate fertilisers, could boost growth even further. Recent test work indicates that the phosphoric acid from Nolans is of such a quality that it will be possible to produce technical grade product, suitable for the chemicals industry, at little or no extra cost. This development means that Arafura will have the opportunity to market phosphoric acid across the full spectrum of its uses and maximise revenue. During the second quarter of 2007 there was a strengthening in demand for phosphates leading to price rises in excess of 15%. However, while this has been offset by rising raw material costs, it is apparent that new capacity is being commissioned at a slower pace than previously anticipated, strengthening the case for the Nolans project to come on-stream in 2010/11. Calcium Chloride Calcium chloride s main uses are as an anti-freeze agent (deicing aircraft), as a binding agent for road construction, as a sealant/dust suppressant agent for unsealed roads and as an additive to drilling fluids. World consumption is approaching 3 million tpa, with growth rates in the range of 4 to 5% pa. Capacity utilisation at 90% is relatively high. Arafura believes the current drive by the Australian mining industry to cut water consumption, the major portion of which is for dust suppression on mine haul roads, provides the Company with a unique opportunity to pioneer the use of calcium chloride on the roads. Uranium The market for uranium for energy continues to grow very strongly and prices of US$95 per pound long term and US$120 for spot prices are likely to continue. The world faces an energy shortage and major developing countries will continually look for risk mitigation on power generation for economic development. Uranium power generation is part of this strategy and has additional benefit in minimising greenhouse gas emissions. Phosphoric acid prices (using the India CFR price as a benchmark) have been rising steadily since 2005 and are now in excess of US$500 per tonne indicating that the price of US$400 per tonne (of contained P ) that Arafura is using in the current scoping study is conservative. 17

20 Project development Arafura has worked closely with the Northern Territory Government and Aboriginal land councils during the exploration phase of the Nolans project. As the metallurgical test work clarifies the process flow sheet and the implications for processing in the Darwin region, the Company has now entered into discussions with a range of stakeholders including the Northern Territory Government to identify an appropriate location for the Darwin processing facility. The Government has set aside land for a large industrial park in Darwin for gas and chemicals-based industries. Major chemical companies have shown an interest in locating major chemical plants in Darwin. Arafura is preparing to submit a Notice of Intent (NOI) to the Northern Territory Government. The Company has identified a number of possible sites for the Nolans processing plant and these will be ranked within the NOI in the context of economic, environmental and community impact. The Company has also continued to consult with the Territory Government and the local Anmatjere land owners. Over the past few years, Arafura has worked closely with the Anmatjere Community Government Council to provide jobs and training for local Indigenous people during drilling activities. As Arafura moves to the construction phase, there should be more jobs and business opportunities, particularly in civil and plant operations. Arafura will work with the Anmatjere people, land councils and the Northern Territory Government to maximise the social and economic benefits flowing from mining activities in the region. Arafura anticipates that the NOI will require referral to the Commonwealth Government under the Environment Protection and Biodiversity Conservation Act. Many baseline environmental and archaeological studies have begun in anticipation of the environment approvals process. Good relations with both the Northern and Central land councils will be important in delivering good outcomes for the Territory s Indigenous people. Arafura has begun the consultation process with both land councils. 18

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22 06 ARAFURA RESOURCES LIMITED EXPLORATION Overview Arafura carefully balances its commitment to effectively explore its current interests with the need to assess new opportunities to maintain an active portfolio of quality exploration projects far into the future. This is consistent with the Company s strategic approach looking to projects which will deliver long term growth. The primary emphasis of the Company s exploration activities remains on acquiring opportunities in under-explored parts of prospective geological regions. By making the Northern Territory the main focus of its exploration business, Arafura seeks to capitalise on the Company s competitive advantages: its understanding of the Territory s geology, and its experience in the Territory s unique operating environment. During the year the Company invested in its emerging Jervois vanadium project as well pursuing opportunities in gold and nickel. Vanadium Jervois (100% ARU) Arafura s Jervois vanadium project is located 300 kilometres north east of Alice Springs. Surface prospecting, airborne geophysics and subsequent RC drilling has identified an area of approximately 30km 2 with potential to host magnetite deposits containing significant vanadium mineralisation. A drilling program completed in late 2006 encountered several broad zones of strong primary magnetite mineralisation, with assay grades of up to 0.83% vanadium. The weight recovery of magnetite to concentrate for all drill samples averaged 28%. Subsequent recovery test work returned grades of up to 1.98% vanadium and 67.9% iron in concentrate, with an average recovery of vanadium to concentrate of 76%. Jervois drilling - Vanadium assay and recovery highlights Hole Number Interval (metres) From (metres) Primary Assay V 2 O 5 % Magnetite Weight Recovery % Concentrate Assay V 2 O 5 % Metal Recovery In Concentrate V 2 O 5 % UNRC UNRC UNRC surface UNRC surface UNRC UNRC UNRC Weighted average for all holes

23 Jervois Magnetic image 21

24 06 ARAFURA RESOURCES LIMITED EXPLORATION (CONTINUED) Arafura s research on other vanadium projects in Australia indicates that Jervois compares very favourably in terms of concentrate grades. An independent metallurgical review of the recovery data and analytical results concluded that Jervois concentrate is comparatively low in silica and phosphorus allowing potential for leach oxidation processing and recovery of a good quality vanadium-only product. These results are very encouraging and represent a significant new style of mineralisation in the Northern Territory. As a result the Company has scheduled a comprehensive drilling program for the early part of 2008 to define the extent of known mineralisation, and to test several new target areas. Gold Arafura s gold assets are located in geological regions with a proven track record in gold production. Kurinelli (100% ARU) At the Kurinelli project, located 140 kilometres south east of Tennant Creek, Arafura has confirmed the presence of gold mineralisation through drill testing an extensive gold-in-soil anomaly. Several intervals of >0.2 g/t gold were returned by the 2006 drilling program, with the best result 6.77 g/t gold over 2 metres. These results are encouraging for the discovery of additional gold mineralisation in the region. Consequently, a program of infill soil sampling commenced in mid-2007 to define drill targets within the previously untested northern extent of the gold-in-soil anomaly. As the region has not previously been subjected to modern exploration technology the Company believes there is considerable scope to identify a new gold field in this historically mineral rich province. Mt Porter (100% ARU less royalty interests) At Arafura s Mt Porter project, a 34,200 ounce near-surface gold resource is located 12 kilometres from the GBS Gold Union Reefs gold processing facility near Pine Creek. Drilling at the project during the latter part of 2006 discovered a new zone of gold mineralisation beneath and to the west of the resource, represented by a 13 metre intercept grading 2.28 g/t gold. The Commonwealth Government s Department of the Environment and Water Resources has granted approval for the Mt Porter project to proceed with developing a Mining Management Plan for the Northern Territory Department of Primary Industry, Fisheries and Mines. This approval represents a significant milestone that allows Arafura to assess opportunities to develop the Mt Porter mine. 22

25 Nickel Hammer Hill joint venture with Mithril Resources Limited (100% ARU, Mithril farm-in) The Hammer Hill nickel project is located 190 kilometres north east of Alice Springs. Current exploration activities on Arafura s titles are focused on identifying sulphide nickel deposits. In 2005 Mithril Resources Ltd entered into a joint venture arrangement with Arafura Resources Ltd to earn up to a 70% interest in the Hammer Hill project currently held 100% by Arafura. Iron Frances Creek Arafura has reached agreement with Territory Resources to terminate the iron ore royalty payment scheme for two payments of $1.25 million (total payment $2.5 million). The first payment will be due on the finalisation of the termination agreement and the second on 31 December Under this agreement, Territory Resources acquires the rights for all minerals except gold on tenements AN 389, EL 22270, EL and EL The results of ground geophysical work undertaken by Mithril during the year around the Hammer Hill nickel prospect have encouraged the company to fly an extensive electromagnetic geophysical survey in the region. It is anticipated that drill testing of target conductive zones will follow. Arafura s gold assets are located in geological regions with a proven track record in gold production. 23

26 07 ARAFURA RESOURCES LIMITED COMMUNITY Arafura s relationship with the community is an important component of the Company s business strategy. The Company has worked closely with neighbours and supports the local community. The Company has established partnerships based on key priorities: Open and meaningful communication Participation in community activities Support for community initiatives Effective response to community concerns Respect for indigenous culture and aspirations. During the year Arafura supported a number of community activities crossing a range of areas including education, cultural and sporting. Some of the Company s initiatives included: Sponsoring an Honours student through the University of Tasmania to investigate the geometry of the magnetite bodies at the Company s Jervois vanadium project Supporting the Gray Primary School to purchase educational computer software A donation of $2,500 to the Aileron Bush Club, a popular social and sporting event attracting crowds in excess of 1,200 which gives the local community a chance to participate in a rodeo and bush sports A community donation undertaken in collaboration with our German shareholders. The total amount raised was $12,500. These funds were directed towards sponsoring children from several Anmatjere communities in central Australia to participate in the National Aboriginal Basketball Championships, to be held in Perth on 12 to 15 November 2007 A $5,000 donation to the Royal Flying Doctor Service. Arafura is also committed to collaborating with all indigenous communities to identify and protect areas of cultural significance, and consulting with traditional landowners and land councils about the Company s operational intentions. This ensures Arafura respects the connections of Aboriginal people with their land and any sites of significance. To achieve this the Company has committed to: Establish and maintain positive, effective and meaningful communication Consult with the people whose country may be impacted by Arafura s activities Engage with relevant indigenous groups on sustainable community projects Carry out surveys at proposed exploration and operational areas to assess cultural heritage and develop strategies to avoid impact on significant indigenous sites and cultural places Develop and implement indigenous awareness programmes for staff that are appropriate for local situations. Arafura is also an active participant in the Northern Territory s mining community and is represented on the NT Minerals Council Executive Committee. Arafura Chairman Mick Muir presenting Anmatjere Council CEO Philippa Major with a certificate honouring $12,

27 Arafura employees Leanne Morley and Kelvin Hussey with a class of children at Gray Primary School in the Northern Territory. Kelvin Hussey with a class of children at Gray Primary School in the Northern Territory. During the year Arafura supported a number of community activites crossing a range of areas. 25

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29 08 ARAFURA RESOURCES LIMITED RESOURCE STATEMENT Nolans REE-P-U Statement of identified mineral resources (21 November 2005) Status Tonnes (million) REO % P 2 O 5 % U 3 O 8 lb/t REE % P % U 3 O 8 % Total Indicated Total Inferred Total resources Computerised sectional polygon method employed. - 1% total REE sample cut-off grade (approximately 1.2% REO). Minimal internal waste. - High grade - SG = 2.7 for fluorapatite mineralisation (P/REE = ). SG = 2.1 for cheralite mineralisation (P/REE <1). - Intermediate/Low grade - SG = 2.5 for fluorapatite mineralisation (P/REE = ). SG = 2.1 for cheralite mineralisation (P/REE <1). - Indicated resources are within 25 metres of drill hole on-section and in plan. - Inferred resources are within 50 metres of drill hole on-section and in plan. - High grade = Blocks >3.0% REE. Intermediate/Low grade = Blocks <3.0% REE. - Numbers may not compute exactly due to rounding. Mt Porter Gold Status Tonnes Au g/t Au oz Indicated Inferred Total indicated and referred Resource statement released April 2004 to ASX. 27

30 09 ARAFURA RESOURCES LIMITED BOARD OF DIRECTORS Irvin (Mick) Muir BA (Econ) Chairman Irvin (Mick) Muir is a Western Australian businessman with 30 years experience in the mining industry. He is an economics graduate and has worked in the securities industry and for the Western Australian Chamber of Mines in Kalgoorlie. Mr Muir is also Non-executive director and chairman of NuPower Resources Limited. Alistair James Stephens BSc, MBA, GAICD Managing Director Alistair Stephens is a graduate in geology and business. He has 20 years experience in the mineral resource industry with companies including Newmont, Normandy, KCGM, WMC and Orica. He has extensive career experience in resource and mine geology, mining, mineral processing and marketing. Ian John Kowalick BSc (Hons), BEc Non-executive director Ian Kowalick has qualifications in science, engineering, economics and finance. In the private sector, he has worked in technical and project consulting, economic and business analysis for resource companies, banking and investment. From 1995 to 2000, he held the most senior management position in the South Australian public sector, providing him with an extensive understanding of government relations and the management of their regulatory and planning requirements. Mr Kowalick is Non-executive chairman of Playford Capital Limited and a Non-executive director of NuPower Resources Limited. Terry Jackson AM, KLJ, FAICD Non-executive director Terry Jackson is a Western Australian Industrialist with a private group of companies that has interests in innovative manufacturing, intellectual property development and vineyards. Mr Jackson has an electronic engineering background, working in the communications industry and in management sales and service of industrial and scientific research equipment. He has had business relationships with many major international corporations including research partnerships with Exxon, Toyota, Johnson Controls and Austria Steel. He is a Foundation Fellow of The Australian Institute of Company Directors, a Knight in the Order of Saint Lazarus of Jerusalem, a recipient of the Australian Centenary Medal and a Member of the Order of Australia for his contribution to the arts, church, industry and international trade. Stephen Ward BSc (Hons), PhD, GAICD Non-executive director (Appointed 15 August, 2007) Stephen Ward has over 30 years experience in the chemical, mining and minerals processing industries. Dr Ward gained 20 years broad experience with titanium pigment producer Tioxide Group Ltd (now Huntsman Pigments). Another seven years of experience was with a publicly listed mineral sands producer. He has also been president of a US mining and processing operation. He is a graduate of the Australian Institute of Company Directors. 28

31 Directors Report and Financial Statements for the year ended 30 June

32 CONTENTS TO THE FINANCIAL STATEMENTS Directors Report 31 Auditor s Independence Declaration 48 Corporate Governance Statement 49 Income Statement 50 Balance Sheet 51 Statement of Changes in Equity 52 Cash Flow Statement 53 Notes to the Financial Statements 54 Directors Declaration 88 Auditor s Report 89 Additional ASX Information 91 30

33 10 ARAFURA RESOURCES LIMITED DIRECTORS REPORT Your directors present their report on the consolidated entity (referred to hereafter as the Group) consisting of Arafura Resources Limited and the entities it controlled at the end of, or during, the year ended 30 June DIRECTORS The following persons were directors of Arafura Resources Limited during the whole of the financial year and up to the date of this report: IG Muir AJ Stephens IJ Kowalick TR Jackson S Ward Non-Executive Chairman Managing Director Non-Executive Director Non-Executive Director Non-Executive Director PN Walker resigned as Chairman on 31 January 2007 and IG Muir was appointed. On 19 February, 2007 PN Walker resigned from the board. TR Jackson was appointed on 27 April 2007 as a non-executive director. S Ward was appointed on 15 August 2007 as a non-executive director. PRINCIPAL ACTIVITIES During the year, the principal continuing activities of the Group were mineral exploration. DIVIDENDS No dividends were paid during the period and the directors do not recommend the payment of a dividend. OPERATING AND FINANCIAL REVIEW The loss of the consolidated entity for the year after income tax of NIL was $5,048,367 (2006: $1,648,819). 31

34 SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS Significant changes in the state of affairs of the Group during the financial year were as follows: a) an increase in contributed equity of $4,897,698 (from $12,381,827 to $17,279,525 )a result of: Date Details Number of shares Issue price $ 20 Jul 2006 Options exercised 500, cents 150, Sep 2006 Options exercised 60, cents 12, Nov 2006 Options exercised 8,346, cents 1,669, Dec 2006 Options exercised 12, cents 2, Dec 2006 Options exercised 50, cents 17, Dec 2006 Rights issue 33,736, cents 12,145, Feb 2007 Options exercised 7, cents 1, Feb 2007 Options exercised 5, cents 1, Feb 2007 Options exercised 5, cents 1, Feb 2007 Options exercised 7, cents 1, Feb 2007 Options exercised 24, cents 4, Feb 2007 Options exercised 5, cents 1, Mar 2007 Options exercised 1,670, cents 217, Mar 2007 Options exercised 8, cents 1, Mar 2007 Inspecie Dist. to shareholders (8,326,061) 05 Apr 2007 Options exercised 5, cents Apr 2007 Options exercised 6, cents Apr 2007 Options exercised 1,025, cents 133, Apr 2007 Options exercised 5, cents Apr 2007 Options exercised 200, cents 26, May 2007 Options exercised 5, cents May 2007 Options exercised 223, cents 29, May 2007 Options exercised 30, cents 3, May 2007 Options exercised 9, cents 1, May 2007 Options exercised 58, cents 7, Jun 2007 Options exercised 41, cents 5, Jun 2007 Options exercised 108, cents 14,066 Option equity reserve movement 116,455 Less: Capital raising expenses to 30 June 2007 (1,340,794) 30 Jun 2007 Total 46,154,309 4,897,698 b) the proceeds of the equity raisings were used principally in providing funds to the de-merged entity of $8,800,000 (2006: nil); exploration expenditure of $2,199,900 (2006: $1,697,306); feasibility expenditure $1,221,662 (2006: $143,261) and corporate activities including the rights issue and demerger costs of $2,805,084(2006: $1,935,540). 32

35 c) following shareholder approval on 26 February 2007 on the demerger of company s uranium assets there was a 90% Inspecie distribution to NuPower Resources Limited. Arafura transferred assets comprising cash ($8,800,000) and the fair value ($451,179) of capitalised exploration expenditure on the tenements transferred. Under the demerger Arafura allocated 90% to eligible shareholders, while retaining 10% of the ordinary shares in NuPower Resources Limited. Ordinary shares in the demerged entity were issued to existing Arafura shareholders on a three to one basis. d) in compliance with AASB2 (share-based payment), options issued to employees are to be recorded at their fair value using an option pricing model. Normally this is completed in the year the options were issued, however, owing to the resetting of the option strikes pursuant to the demerger approved by shareholders at a general meeting on 16 February 2007and in accordance with the listing rules, all options are required to be re-valued in the current year. An expense of $2,002,000 in relation to employee options has been recorded under employee benefits expense (2006: 369,918). e) the receipt of $380,000 as re-imbursement of expenditure under the Ausindustry s Commercial Ready Grant. f) the sale of half (250,000) shares owned in Segue Resources Limited (prior to a 3:1 share split) realising a profit of $169,000. SIGNIFICANT POST BALANCE DAY EVENTS In July 2007, Arafura agreed for Territory Resources Limited to acquire some of its non-core tenements and residual royalty rights in the Frances Creek area south of Darwin. Arafura will receive $1,250,000 on acceptance of the agreement and $1,250,000 by the 31st December The appointment of Dr. Stephen Ward as non-executive director on 15th August In August 2007 the company disposed of 407,000 shares in Segue Resources Limited for a total consideration of $60,950 (net of transaction costs). On the 3rd September 2007 Arafura received $376,428 from NuPower Resources Limited being the repayment in full of a non-interest bearing loan from the former related entity. LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS The Group will continue its exploration and development activities with particular focus on its Nolans project containing rare earths, phosphate and uranium. Further exploration and development of the Company s gold and vanadium projects. The Company is likely to further expand it s exploration activities in the Northern Territory. Further information on the likely developments in the operations of the consolidated entity and the expected results of those operations have not been included in this report because the directors believe it would be likely to result in unreasonable prejudice to the consolidated entity. ENVIRONMENTAL REGULATIONS The Group is subject to environmental regulations and is compliant with all aspects of environmental regulation of its exploration activities. The directors are not aware of any environmental law that is not being complied with. 33

36 Information on Directors Irvin (Mick) Graham Muir BA (Econ). Chairman non-executive. Age 71. Experience and expertise Irvin Muir is a Western Australian businessman with 30 years experience in the mining industry. He is an economics graduate and has worked in the securities industry and for the Western Australian Chamber of Mines in Kalgoorlie. Other current directorships Non-executive director and chairman of NuPower Resources Limited. Former directorships in the last 3 years Previously managing director of Mt Martin Goldmines NL and Noble Resources NL. Special responsibilities Chairman of the Board. Member of the audit committee. Interests in share and options 3,085,001 ordinary shares (direct) 165,000 ordinary shares (indirect) Alistair James Stephens BSc, MBA, GAICD. Managing Director. Age 43. Experience and expertise Alistair Stephens is a graduate in geology and business. He has 20 years experience in the mineral resource industry with companies including Newmont, Normandy, KCGM, WMC and Orica. He has extensive career experience in resource and mine geology, mining, mineral processing and marketing. Other current directorships None. Former directorships in the last 3 years None. Special responsibilities Managing Director. Interests in share and options 3,000,000 options over ordinary shares (indirect) 34