archipelago resources plc - rns · pdf fileassessment of the company’s revised amdal...

Annual Report and Financial StatementsFor the period ended 31 December 2006

Archipelago Resources Plc • 22 Melton Street London

Archipelago Resources Plc

View over Toka Tindung Project AreaView over Toka Tindung Project Area

Plant construction site Plant construction site

Peter Brown (General Manager) presenting christmas gifts to

local children

Dave Morrison (Project Development Manager) presenting engines to local fishermen

Terkelin Purba (Government and Community Relations Manager) explaining project plans and activities to locals at a village meeting

1

C O N T E N T S

Directors and Advisers 2

Chief Executive Officer’s Report 3

Asset Summary 8

Summary of Mineral Inventory & Resources 8

Photographs 9

Report of the Directors 10

Statement of Directors’ Responsibilities in Respect of the Financial Statements 15

Consolidated Income Statement 16

Balance Sheets 17

Statements of Changes in Equity 18

Statement of Cash Flows 19

Notes to the Financial Statements 20

Report of the Auditors 40

Notice of Annual General Meeting Separate

Form of Proxy Separate

1.

C O N T E N T S

Directors and Advisers 2

Chief Executive Officer’s Report 3

Asset Summary 13

Summary of Mineral Inventory & Resources 13

Report of the Directors 14

Statement of Directors’ Responsibilities in Respect of the Financial Statements 19

Consolidated Income Statement 20

Balance Sheets 21

Statements of Changes in Equity 22

Statement of Cash Flows 23

Notes to the Financial Statements 24

Report of the Auditors 41

Notice of Annual General Meeting Separate

Form of Proxy Separate

- � -

2.

D I R E C T O R S AND A D V I S E R S

Directors John Colin Loosemore (Managing Director / Chief Executive Officer)

Michael Norman Arnett (Non-Executive) Barry John Casson (Non-Executive)

all of 22 Melton Street, London NW1 2BW

Secretary and Registered Office Cargil Management Services Limited 22 Melton Street, London NW1 2BW

Auditors Chantrey Vellacott DFK LLP

Russell Square House 10-12 Russell Square, London WC1B 5LF

Solicitors Lawrence Graham

4 More London Riverside, London SE1 2AU

Registrars and Transfer Agents Share Registrars Limited

Craven House, West Street, Farnham, Surrey GU9 7EN Telephone: 01252 733683 Fax: 01252 717233

Bankers Investec Australia Limited

Level 21, 140 St George’s Terrace, Perth 6000, Western Australia

Australia and New Zealand Banking Group Limited Level 7, 77 St Georges Terrace, Perth Western Australia 6000

Société Générale Level 21, 400 George Street, Sydney NSW 2000, Australia

WestLB AG Level 29, 60 Margaret Street, Sydney NSW 2000, Australia

RMB Australia Holdings Limited Two London Bridge, London SE1 9RA

Nominated Adviser Grant Thornton UK LLP

Grant Thornton House, Melton Street, Euston Square, London NW1 2EP

Nominated Broker Ambrian Partners Limited

8 Angel Court, London EC2R 7HP

- � -3.

C H I E F E X E C U T I V E O F F I C E R ’S R E P O R T

Overview

2006 has been the Company’s ‘Commencement of Construction Year’, involving the raising of equity capital and start of construction activities. During the year the Company undertook an equity raising to complement the syndicated loan financing arranged by Investec Australia Ltd (Investec) (formerly N.M. Rothschild and Sons (Australia) Limited) for development of the Company’s 85% owned Toka Tindung Gold Project (“Toka Tindung” or the “Project”) in North Sulawesi, Indonesia. Drawdown of the syndicated project finance facility (“Project Finance Facility”) is subject to a number of pre-conditions with currently the only remaining one of substance being approval of the Company’s environmental operating documents (AMDAL).

The equity raising involved the placing of 37.78m shares at a price of 42 pence per share to raise approximately £15.9m gross (approx US$26.6m net). These funds were primarily used for partial completion of construction related activities at Toka Tindung, together with lesser amounts for exploration at Toka Tindung and advancing exploration projects in Vietnam.

Construction related activities undertaken to date at Toka Tindung include the construction of three water storage and sediment control dams, roads, drains and a jetty for delivery of machinery and bulk commodities during the life of the Project. At the plant site, concrete foundation work is near complete and the erection of structural steel, thickeners and leach tanks has commenced. However as a result of the delay to AMDAL approval and release of the Project Finance Facility, construction activities have been wound back to essential works only pending AMDAL approval.

Environmental (AMDAL) Approval

The Company spent much of the year working with Government authorities undertaking an assessment of the Company’s revised AMDAL documents necessary for operation of the Project. The final revised documents were lodged in November 2006 and the Environment Dept. has advised that after extensive review by both Central and Provincial Government technical teams, the documents have been declared acceptable. Until February 2007, the process leading to anticipated formal approval by the State Minister for the Environment had enjoyed the support of the Governor of the Province of North Sulawesi. However, that support has unfortunately been withdrawn in recent months on the basis of a number of purported issues, all of which have been thoroughly reviewed and accepted as satisfactory by the AMDAL Assessment Commission as part of due process and prior advice to that effect had been sent to the Governor. The issues claimed are ‘community rejection’, ‘appropriate process technology’ and ‘Provincial spatial planning’ (permitted activities).

All of these matters are routinely considered as part of the AMDAL assessment process. Specifically the Company has satisfied the authorities that the Project:-

1) enjoys 80% local community support as demonstrated by way of a survey undertaken by the University of Sam Ratulangi (UNSRAT) in Manado, North Sulawesi;

3.

C H I E F E X E C U T I V E O F F I C E R ’S R E P O R T

Overview

2006 has been the Company’s ‘Commencement of Construction Year’, involving the raising of equity capital and start of construction activities. During the year the Company undertook an equity raising to complement the syndicated loan financing arranged by Investec Australia Ltd (Investec) (formerly N.M. Rothschild and Sons (Australia) Limited) for development of the Company’s 85% owned Toka Tindung Gold Project (“Toka Tindung” or the “Project”) in North Sulawesi, Indonesia. Drawdown of the syndicated project finance facility (“Project Finance Facility”) is subject to a number of pre-conditions with currently the only remaining one of substance being approval of the Company’s environmental operating documents (AMDAL).

The equity raising involved the placing of 37.78m shares at a price of 42 pence per share to raise approximately £15.9m gross (approx US$26.6m net). These funds were primarily used for partial completion of construction related activities at Toka Tindung, together with lesser amounts for exploration at Toka Tindung and advancing exploration projects in Vietnam.

Construction related activities undertaken to date at Toka Tindung include the construction of three water storage and sediment control dams, roads, drains and a jetty for delivery of machinery and bulk commodities during the life of the Project. At the plant site, concrete foundation work is near complete and the erection of structural steel, thickeners and leach tanks has commenced. However as a result of the delay to AMDAL approval and release of the Project Finance Facility, construction activities have been wound back to essential works only pending AMDAL approval.

Environmental (AMDAL) Approval

The Company spent much of the year working with Government authorities undertaking an assessment of the Company’s revised AMDAL documents necessary for operation of the Project. The final revised documents were lodged in November 2006 and the Environment Dept. has advised that after extensive review by both Central and Provincial Government technical teams, the documents have been declared acceptable. Until February 2007, the process leading to anticipated formal approval by the State Minister for the Environment had enjoyed the support of the Governor of the Province of North Sulawesi. However, that support has unfortunately been withdrawn in recent months on the basis of a number of purported issues, all of which have been thoroughly reviewed and accepted as satisfactory by the AMDAL Assessment Commission as part of due process and prior advice to that effect had been sent to the Governor. The issues claimed are ‘community rejection’, ‘appropriate process technology’ and ‘Provincial spatial planning’ (permitted activities).

All of these matters are routinely considered as part of the AMDAL assessment process. Specifically the Company has satisfied the authorities that the Project:-

1) enjoys 80% local community support as demonstrated by way of a survey undertaken by the University of Sam Ratulangi (UNSRAT) in Manado, North Sulawesi;

- � -

4.

C H I E F E X E C U T I V E O F F I C E R ’S R E P O R TCONTINUED

2) can achieve World Bank and even Australian National Park standards for the release of surplus water, both far more stringent than the Indonesian National standards required for AMDAL and;

3) is fully compliant with all permitted activity regulations;

Accordingly, there is no basis in fact for the concerns raised.

However, the Company will continue with its efforts to fully inform relevant and interested parties and thereby seek to re-establish full support for the Project and assistance with AMDAL approval.

While the delay arising from this action is very disappointing and costly to the Company, the interests of other stakeholders has also been adversely affected. Firstly, the Nation to whom the Company’s operating subsidiaries are engaged under Contracts of Work as contractors to the Government to develop national mineral resources. Secondly the Province who’s economy is heavily reliant on agriculture, fishing and central government assistance and lastly the local community who will be the major beneficiaries of royalties and jobs in an area of low income, high unemployment and limited opportunity.

Furthermore, it should be noted that the Province hosts at least three other exploration stage projects as well as other established mines.

The Company takes professional pride in achieving world’s best practice in all aspects of its work and in playing a major role in the economy of local communities and the Province. It particularly looks forward to expanding its efforts to improve the welfare of local people and the environment. In recent years the Company has complied with this objective at the local level by contributing to: -

• Sustainable business development projects within the local community • The supply of clean water to local villages • Repairs to roofs of local primary schools • The provision of school uniforms for local primary school children • The provision of secondary school scholarships to local children • The provision of school books to local primary schools

In addition, the Company actively supports local business by purchasing fish and other produce from local suppliers.

The Project continues to receive strong support from the Department of Energy and Minerals which is particularly frustrated at the delay to investment, project development and mineral production. Specifically the Minister of Energy and Minerals has stated that the Project should proceed.

While the Company has legal advice that AMDAL is already approved under relevant Indonesian laws relating to the time within which an application for approval can be considered, it will continue to work with relevant authorities to achieve the approval sought by consensus and common sense approach as soon as possible for the benefit of all legitimately interested parties.

4.


2) can achieve World Bank and even Australian National Park standards for the release of surplus water, both far more stringent than the Indonesian National standards required for AMDAL and;

3) is fully compliant with all permitted activity regulations;

Accordingly, there is no basis in fact for the concerns raised.

However, the Company will continue with its efforts to fully inform relevant and interested parties and thereby seek to re-establish full support for the Project and assistance with the of AMDAL approval.

While the delay arising from this action is very disappointing and costly to the Company, the interests of other stakeholders has also been adversely affected. Firstly, the Nation to whom the Company’s operating subsidiaries are engaged under Contracts of Work as contractors to the Government to develop national mineral resources. Secondly the Province who’s economy is heavily reliant on agriculture, fishing and central government assistance and lastly the local community who will be the major beneficiaries of royalties and jobs in an area of low income, high unemployment and limited opportunity.

Furthermore, it should be noted that the Province hosts at least three other exploration stage projects as well as other established mines.

The Company takes a professional pride in achieving world’s best practice in all aspects of its work and playing a major role in the economy of local communities and the Province. It particularly looks forward to expanding its efforts for the welfare of local people and the environment. In recent years the Company has complied with this objective at the local level by contributing to: -

• Sustainable business development projects within the local community • The supply of clean water to local villages • Repairs to roofs of local primary schools • The provision of school uniforms for local primary school children • The provision of secondary school scholarships to local children • The provision of school books to local primary schools

In addition, the Company actively supports local business by purchasing fish and other produce from local suppliers.

The Project continues to receive strong support from the Department of Energy and Minerals which is particularly frustrated at the delay to investment, project development and mineral production. Specifically the Minister of Energy and Minerals has stated that the Project should proceed.

While the Company has legal advice that AMDAL is already approved under relevant Indonesian laws relating to the time within which an application for approval can be considered, it will continue to work with relevant authorities to achieve the approval sought by consensus and common sense approach as soon as possible for the benefit of all legitimately interested parties.

- � -

5.


The Company acknowledges that the current delay to AMDAL approval and commencement of operations will add significantly to project costs. However, such costs can if required be funded from the recently announced RMB facilities referred to below. While such delay and additional costs are disappointing, they need to be viewed within the context of the strong rise in the gold price in the early part of this year and the Company’s obligation, as a condition of bank finance, to hedge a portion of the Project’s production. The benefits arising from this unplanned delay and the strong gold price have been two-fold. Firstly, an increase in projected revenue eventually far outweighing costs arising from the delay and secondly, a recent willingness by the Project Finance providers to consider put options as a partial and temporary alternative to forward sales.

Project and Corporate Financing

Since the end of the year the Company has announced that RMB Resources has offered to provide additional subordinated loan facilities to the Company. Specifically the loans and their intended purpose are:-

US$10m Bridging Facility - to provide up to 6 months working capital until AMDAL approval and drawdown of the Project Finance Facility. Loan funds drawn under this facility will be repaid by way of first drawdown of the Project Finance Facility.

Following AMDAL approval, RMB Investment Committee approval and an election by the Company to draw the facilities: -

US$5m Corporate Facility – providing working capital primarily intended to fund exploration programs in Vietnam and China; and

US$10m Standby Facility - primarily intended to provide additional pre-production funding for the Toka Tindung Gold Project in the event of breakdowns, acts of God and other unforseen events, particularly during commissioning.

Furthermore, as a result of improved project economics resulting from higher gold prices, the Project Finance Facility providers agreed early in 2007 to increase the Project Finance Facility from US$42.5m to US$46.7m.

Both Project Finance providers and RMB Resources have worked closely to dovetail their respective facilities, which will share common security over the Company and Project assets in first and subordinated ranking respectively, apart from the Bridging Facility which will hold first ranking security until repayment.

The RMB Resources facilities are subject to industry standard establishment fees and if drawn, will also attract commercial rates of interest, together with, in the case of the: -

5.


The Company acknowledges that the current delay to AMDAL approval and commencement of operations will add significantly to project costs. However, such costs can if required be funded from the recently announced RMB facilities referred to below. While such delay and additional costs are disappointing, they need to be viewed within the context of the strong rise in the gold price in the early part of this year and the Company’s obligation, as a condition of bank finance, to hedge a portion of the Project’s production. The benefits arising from this delay and the strong gold price have been two-fold. Firstly, an increase in projected revenue eventually far outweighing costs arising from the delay and secondly, a recent willingness by the syndicate banks to consider put options as a partial and temporary alternative to forward sales.

Project and Corporate Financing

Since the end of the year, the Company has announced that RMB Resources has offered to provide additional subordinated loan facilities to the Company. Specifically the loans and their intended purpose are:-

US$10m Bridging Facility - to provide up to 6 months working capital until AMDAL approval and drawdown of the Project Finance Facility. Loan funds drawn under this facility will be repaid by way of first drawdown of the Project Finance Facility.




Furthermore, as a result of improved project economics resulting from higher gold prices, the Project Finance Facility providers agreed early in 2007 to increase the Project Finance Facility from US$42.5m to US$46.7m.

Both Investec and RMB Resources have worked closely to dovetail their respective facilities, which will share common security over the Company and Project assets in first and subordinated ranking respectively, apart from the Bridging Facility which will hold first ranking security until repayment.

The RMB Resources facilities are subject to industry normal establishment fees and if drawn, will also attract commercial rates of interest, together with, in the case of the: -

- � -6.


Bridging Facility – the issue of 2,500,000 options exercisable at 42p/share together with the right to convert up to half of the facility into Archipelago shares at the lower of the market price at the time of conversion and 42p, with conversion only exercisable in the event that the Bridging Facility is not repaid on its due date being six months after the date of first drawdown.

Corporate Facility – the issue of 3,450,000 options exercisable at the market price of Archipelago shares at the time of execution of the RMB facility agreement plus 20%, namely 45.6p.

Standby Facility – a right of conversion to Archipelago shares at a price of 45p/share or the current market price at the time of conversion divided by 1.8 where the share price is greater than 85p/share, or in the event of repayment of funds drawn under the facility, entitlement to a number of options exercisable at a price (both the number and price of the options being determined by the price of the shares at the time of conversion) sufficient to effect a financial return to RMB approximately half that which would have been gained by conversion of the loan to shares.

The Company is delighted with these facilities and support from both RMB Resources and the Project Finance Facility providers, for the Toka Tindung Gold Project and Archipelago and its future prospects. The RMB Standby Facility will bring added financial certainty and insurance against delays, breakdowns, acts of God and other unforseen events, particularly at commissioning when projects are most at risk of events which can have serious consequences for shareholder value without adequate prior financial arrangements of this sort. In addition, the Corporate Facility could provide funding for Archipelago to pursue its other advanced projects in Vietnam and China.

The Bridging Facility, drawn down in March 2007 is repayable in September 2007 and the Company now needs to put in place longer term interim funding arrangements to ensure that sufficient time and funding is available to allow the Company to effect its AMDAL approval.

Additional Loan Facility

The Company is currently finalising a proposal of additional finance from a finance group involving the offer of a US$20m long term loan facility with options exercisable at a 20% premium to the share price in May when the offer was made, namely 36.6p. In addition, a further US$5m standby facility will also be made available to the Company. This will ensure that the Company can repay the Bridging Facility, meet all of its current obligations, continue its other projects particularly in Vietnam and China and have time during which to achieve AMDAL approval.

Exploration

On the exploration front the Company has enjoyed early success at the Toka Tindung Gold Project and is particularly encouraged by progress in Vietnam, a country in a very geologically prospective part of South East Asia that to date has received little attention from western exploration companies and modern exploration technology. At the Pac Lang gold project the Provincial Government has recently instructed the local mining company to withdraw from the area so that Archipelago can establish itself at the site. It is hoped that exploration title to the ground will be granted in coming months, thereby allowing the Company to commence its exploration activities on this very prospective old gold mine.

6.


Bridging Facility – the issue of 2,500,000 options exercisable at 42p/share. Furthermore, in the event that the Bridging Facility is not repaid on its due date being six months after the date of first drawdown, RMB also has the right to convert up to half of the facility into Archipelago shares at the lower of the market price at the time of conversion and 42p.

Corporate Facility – the issue of 3,450,000 options exercisable at the market price of Archipelago shares at the time of execution of the RMB facility agreement plus 20%, namely 45.6p.

Standby Facility – a right of conversion to Archipelago shares at a price of 45p/share or the current market price at the time of conversion divided by 1.8 where the share price is greater than 85p/share, or in the event of repayment of funds drawn under the facility, entitlement to a number of options exercisable at a price (both the number and price of the options being determined by the price of the shares at the time of conversion) sufficient to effect a financial return to RMB approximately half that which would have been gained by conversion of the loan to shares.

The Company is delighted with these facilities and continuing support from both RMB Resources and the Project Finance providers, for the Toka Tindung Gold Project, Archipelago and its future prospects. The RMB Standby Facility will bring added financial certainty and insurance against delays, breakdowns, acts of God and other unforseen events, particularly at commissioning when projects are most at risk of events which can have serious consequences for shareholder value without adequate prior financial arrangements of this sort. In addition, the Corporate Facility could provide funding for Archipelago to pursue its other advanced projects in Vietnam and China.

The Bridging Facility, drawn down in March 2007 is repayable in September 2007 and the Company now needs to put in place longer term interim funding arrangements to ensure that sufficient time and funding is available to carry the Company until AMDAL approval.

Additional Loan Facility

The Company is currently finalising a proposal of additional finance from a finance group involving the offer of a US$20m long term loan facility with options exercisable at a 20% premium to the share price in May when the offer was made, namely 36.6p. In addition, a further US$5m standby facility will also be made available to the Company. This will ensure that the Company can repay the Bridging Facility, meet all of its current obligations, continue its other projects particularly in Vietnam and China and have time during which to achieve AMDAL approval.

Exploration

On the exploration front the Company has enjoyed early success at the Toka Tindung Gold Project and is particularly encouraged by progress in Vietnam, a country in a very geologically prospective part of South East Asia that to date has received little attention from western exploration companies and modern exploration technology. At the Pac Lang gold project the Provincial Government has recently instructed the local mining company to withdraw from the area so that Archipelago can establish itself at the site. It is hoped that exploration title to the ground will be granted in coming months, thereby allowing the Company to commence its exploration activities on this very prospective old gold mine.

- � -

7.


Toka Tindung Gold Project

The Project has a defined resource of 1.7m oz gold equivalent of which 0.9m oz will initially be mineable by means of five open pits. Over US$100m has been expended on the Project to date by Archipelago and previous owners. The Project was acquired in February 2002 when the gold price was US$280/oz and the feasibility study subsequently updated to reflect current costs and the purchase of a processing plant from Barrick Gold’s El Tambo project in Chile. The Project, including resources, process flow-sheet and legal status, has been extensively reviewed by consultants for Investec as a pre-requisite for the Project Finance Facility.

The processing plant is now at Toka Tindung where it will undergo refurbishment prior to installation with new structural steelwork, piping and cabling. The crushing and grinding circuits are particularly well engineered and more than adequate for the scale of operation proposed for the Project.

Considerable civil works have been completed at Toka Tindung including preparation of the process plant construction site and construction of three dams for water supply and sediment control. In addition a jetty has been constructed together with a 7km road linking it to the plant site.

Mining at Toka Tindung will be by way of five open pits with ore processed through a centralised carbon in leach (CIL) plant. The mineralogy of the Toka Tindung deposits is simple with indicated gold recoveries of approximately 94%. Subject to AMDAL approval, production is now targeted to commence in 2nd qtr 2008 at an initial rate of 140,000 oz per annum gold equivalent rising to 160,000 oz in the second year of production.

Construction related activities are already well advanced and the mine currently has an initial planned life of 6 years. However given the current high gold price and excellent exploration potential already demonstrated to exist at Toka Tindung, the Company is very confident of substantially extending the operational life. However as previously mentioned, construction activities are currently suspended pending AMDAL approval.

Prior to drawdown of the Project Finance Facility, currently estimated to be second half 2007, the Project Finance Facility agreement obliges the Company to forward sell 415,000 oz of gold, representing approximately 46% of initial planned gold production. This forward sale, or any alternative long term hedging strategy approved by the syndicate banks, is intended to lock in a gold price sufficient to ensure that the Company can repay the loan facility in a timely manner for the benefit of the Company and its shareholders. However, until such long term forward sale or alternative hedging strategy is put in place, the Project and the Company retain full exposure to the spot gold price.

Late last year the Company undertook a small drilling program beneath what will be the Toka starter pit where the first ore will be mined. These were the first exploration holes drilled at Toka Tindung for 8 years and confirmed the Company’s view that there is great potential for discovery of much more gold at Toka Tindung. Of the first 5 holes drilled, two intersected ore grade gold mineralisation, namely 12m @ 9.7g/t and 20m @ 3g/t, the former offering the potential for underground mining.

7.


Toka Tindung Gold Project

The Project has a defined resource of 1.75m oz gold equivalent of which 0.9m oz will initially be mineable by means of five open pits. Over US$100m has been expended on the Project to date by Archipelago and previous owners. The Project was acquired in February 2002 when the gold price was US$280/oz and the feasibility study subsequently updated to reflect current costs and the purchase of a processing plant from Barrick Gold’s El Tambo project in Chile. The Project, including resources, process flow-sheet and legal status, has been extensively reviewed by consultants for the Project Finance providers as a pre-requisite for the Project Finance Facility.

The processing plant is now at Toka Tindung where it will undergo refurbishment prior to installation with new structural steelwork, piping and cabling. The crushing and grinding circuits are particularly well engineered and more than adequate for the scale of operation proposed for the Project.

Considerable civil works have been completed at Toka Tindung including preparation of the process plant construction site and construction of three dams for water supply and sediment control. In addition a jetty has been constructed together with a 7km road linking it to the plant site.

Mining at Toka Tindung will be by way of five open pits with ore processed through a centralised carbon in leach (CIL) plant. The mineralogy of the Toka Tindung deposits is simple with indicated gold recoveries of approximately 94%. Subject to AMDAL approval, production is now targeted to commence in 2nd qtr 2008 at an annual average production rate of 160,000 oz per annum gold equivalent.

The mine currently has an initial planned life of 6 years, however given the current high gold price and excellent exploration potential at Toka Tindung, the Company is very confident of substantially extending the operational life.

Late last year the Company undertook a small drilling program beneath what will be the Toka starter pit where the first ore will be mined. These were the first exploration holes drilled at Toka Tindung for 8 years and confirmed the Company’s view that there is great potential for discovery of much more gold at Toka Tindung. Of the first 5 holes drilled, two intersected ore grade gold mineralisation, namely 12m @ 9.7g/t and 20m @ 3g/t, the former offering the potential for underground mining.

Construction related activities at Toka Tindung are already well advanced, however, as previously mentioned, are currently wound back, pending AMDAL approval.

Prior to drawdown of the Project Finance Facility, currently estimated to be second half 2007, the Project Finance Facility agreement obliges the Company to certain hedging commitments being:-

a) 50,000 ozs of 12 month put options: and b) 365,000 ozs of forward sales (representing approximately 40% of forecast

production).

This, or any alternative long term hedging strategy approved by the Project Finance providers, is intended to lock in a gold price sufficient to ensure that the Company can repay the loan facility in a timely manner for the benefit of the Company and its shareholders. However, until such long term forward sale or alternative hedging strategy is put in place, the Project and the Company retain full exposure to the spot gold price.

,

- � -

8.


The Company’s indicative base case financial model for the Toka Tindung Gold Project is as follows:-

Resource * 1.7m oz AuMineral Inventory * 0.9m oz Au Initial Mine Life 6 yearsThroughput (year 1) 1.4m t/yrProduction (year 1) 140,000 oz AuEq/yr Production (year 2) 160,000 oz AuEq/yrTotal ounces recovered 900,000 oz AuEqNet Present Value (7.5% discount before tax) US$103mInternal Rate of Return (before tax) 48%Cash Operating Cost US$305/ozAnnual Operating Surplus (before tax average over first 5 years)

US$38m

at a Gold Price of US$550/oz and an Oil Price of US$70/barrel

* (Refer Summary of Mineral Inventory and Resources Table p.13)

This base case financial model assumes: -

1. An initial processing rate of 1.4m tonnes per annum increasing to 1.7m tonnes per annum in year 2 onwards.

2. Electricity is sourced from an on-site diesel fired power station. However the Company’s objective is to utilise electricity from a combination of diesel, hydro and geothermal sources via the Provincial power grid which passes within a few kilometres of the mine site, if such is available and can be negotiated.

Development

The Company has a small team of qualified and highly experienced professionals with a track record of developing gold projects similar to Toka Tindung in South East Asia. Currently the team includes: -

Mr Peter Brown - General Manager, Mr David Morrison - Project Development Manager, Mr Larry McGeechan– Construction Manager, Mr Chris Stevenson – Commercial Manager, Mr Terkelin Purba – Government Relations Manager, Mr Dean Pontin – Mining Manager, Mr Alistair Frowde – Geology Manager, Mr Mark Warman – Security Manager, Mr Paul Arbon – Community Manager, Mr Steven Kusnadi – Project Engineer, Mr James Ranson – SMP Engineer, Mr Alan McLare –Supply Superintendent, Mr Michael Lewis – Electrical Superintendent, Mr Lance Henderson – SMP Superintendent,

8.



Resource * 1.7m oz AuMineral Inventory * 0.9m oz Au Initial Mine Life 6 yearsThroughput (year 1) 1.4m t/yrProduction (year 1) 140,000 oz AuEq/yr Production (year 2) 160,000 oz AuEq/yrTotal ounces recovered 900,000 oz AuEqNet Present Value (7.5% discount before tax) US$103mInternal Rate of Return (before tax) 48%Cash Operating Cost US$305/ozAnnual Operating Surplus (before tax average over first 5 years)

US$38m

at a Gold Price of US$550/oz and an Oil Price of US$70/barrel





Development

The Company has a small team of qualified and highly experienced professionals with a track record of developing gold projects similar to Toka Tindung in South East Asia. Currently the team includes: -

Mr Peter Brown - General Manager, Mr David Morrison - Project Development Manager, Mr Larry McGeechan– Construction Manager, Mr Chris Stevenson – Commercial Manager, Mr Terkelin Purba – Government Relations Manager, Mr Dean Pontin – Mining Manager, Mr Alistair Frowde – Geology Manager, Mr Mark Warman – Security Manager, Mr Paul Arbon – Community Manager, Mr Steven Kusnadi – Project Engineer, Mr James Ranson – SMP Engineer, Mr Alan McLare –Supply Superintendent, Mr Michael Lewis – Electrical Superintendent, Mr Lance Henderson – SMP Superintendent,


Resource * 1.7m oz AuMineral Inventory * 0.9m oz Au Initial Mine Life 6 yearsThroughput 1.4m – 1.7m t/yrProduction (average over first 5 years) 160,000 oz AuEq/yr Total ounces recovered 900,000 oz AuEqNet Present Value (7.5% discount before tax) US$160mInternal Rate of Return (before tax) 107%Cash Operating Cost (life of mine) US$291/oz AuEBITDA (before tax average over first 5 years) US$51mat a Gold Price of US$600/oz and an Oil Price of US$70/barrel





- � -9.


Mr Russell Guignion – Mechanical Superintendent, Mr Roland Hodgson – Civil Supervisor, Mr Alan Parker – Earthworks Superintendent, Mr Andrew Gosling – Electrical Supervisor,

Mr Brown, Mr McGeechan and Mr Morrison will lead Archipelago’s small but experienced construction and operations development teams.

9.


Mr Russell Guignion – Mechanical Superintendent, Mr Roland Hodgson – Civil Supervisor, Mr Alan Parker – Earthworks Superintendent, Mr Andrew Gosling – Electrical Supervisor,

Mr Brown, Mr McGeechan and Mr Morrison will lead Archipelago’s small but experienced construction and operations development teams.

Socialisation PT MSM at Ritzy Hotel Manado

Religious offering from the company celebrating Idul Adha

- 10 -

10.


Vietnam

Pac Lang Gold Project

In June 06 the Company announced that following endorsement by the Prime Minister of Vietnam, it had entered into a joint venture heads of agreement with Minerals Corporation (“VIMICO”) – an affiliate member of national minerals company Vietnam National Coal – Minerals Industries Group (“VINACOMIN”) and provincial mining company Bac Kan Mineral Joint – Stock Company (“Bac Kan”) to explore for gold and associated minerals at the Pac Lang Gold Project. The parties have lodged an exploration licence application (“ELA”) covering the project area and are progressing with the relevant ministries to secure approval in coming months.

The Pac Lang mineralised system is located approximately 160kms north north east of Hanoi in the Ngan Son district of Bac Kan province. It comprises a group of gold mineralised quartz veins initially exploited by the French early in the last century which became the site of a major gold rush in 1990-1991 following the discovery of a large quartz vein containing high grade gold mineralisation. Mining activities were subsequently suspended by Government authorities and apart from soil geochemistry by the French government organisation BRGM and some small scale mining by Bac Kan, the project remains unevaluated by modern exploration methods.

At least 15 gold mineralised mesothermal quartz veins generally less than 2m wide have been identified with a combined outcropping and inferred strike length of 3,300m. The veins are sediment hosted and generally steeply dipping. Many of the veins are clustered and based on previous preliminary sampling (1999) reportedly assay between 0.4g/t and 49g/t gold.

Subject to the rights of the Government of Vietnam and the Company’s right to withdraw, Archipelago will be entitled to an interest of 65% in the joint venture and has undertaken to expend US$1.24m within two years from the date of grant of the ELA. Exploration will commence as soon as possible following ELA approval and be focused on defining a mineral resource within the known areas of gold mineralisation.

Archipelago considers that the experience and multi faceted skills of its employees and their success in progressing the Toka Tindung Gold Project to development, have been influential in the Vietnamese authorities’ decision to select the Company as a partner for the Pac Lang Gold Project.

Pac Lang will likely be the first approved ELA for the Company in Vietnam and is considered to have the potential to support a mining operation.

10.


Vietnam

Pac Lang Gold Project

In June 06 the Company announced that following endorsement by the Prime Minister of Vietnam, it had entered into a joint venture heads of agreement with Minerals Corporation (“VIMICO”) – an affiliate member of national minerals company Vietnam National Coal – Minerals Industries Group (“VINACOMIN”) and provincial mining company Bac Kan Mineral Joint – Stock Company (“Bac Kan”) to explore for gold and associated minerals at the Pac Lang Gold Project. The parties have lodged an exploration licence application (“ELA”) covering the project area and are progressing with the relevant ministries to secure approval in coming months.

The Pac Lang mineralised system is located approximately 160kms north north east of Hanoi in the Ngan Son district of Bac Kan province. It comprises a group of gold mineralised quartz veins initially exploited by the French early in the last century which became the site of a major gold rush in 1990-1991 following the discovery of a large quartz vein containing high grade gold mineralisation. Mining activities were subsequently suspended by Government authorities and apart from soil geochemistry by the French government organisation BRGM and some small scale mining by Bac Kan, the project remains unevaluated by modern exploration methods.

At least 15 gold mineralised mesothermal quartz veins generally less than 2m wide have been identified with a combined outcropping and inferred strike length of 3,300m. The veins are sediment hosted and generally steeply dipping. Many of the veins are clustered and based on previous preliminary sampling (1999) reportedly assay between 0.4g/t and 49g/t gold.

Subject to the rights of the Government of Vietnam and the Company’s right to withdraw, Archipelago will be entitled to an interest of 65% in the joint venture and has undertaken to expend US$1.24m within two years from the date of grant of the ELA. Exploration will commence as soon as possible following ELA approval and be focused on defining a mineral resource within the known areas of gold mineralisation.

Archipelago considers that the experience and multi faceted skills of its employees and their success in progressing the Toka Tindung Gold Project to development, have been influential in the Vietnamese authorities’ decision to select the Company as a partner for the Pac Lang Gold Project.

Pac Lang will likely be the first approved ELA for the Company in Vietnam and is considered to have the potential to support a mining operation.

- 11 -

11.


Cam Thuy – Ba Thuoc Gold Project

The Company has lodged applications for two Exploration Licences in the Cam Thuy – Ba Thuoc gold district in northern Vietnam located on the Ma River fault system, a structure parallel to the major Red River suture (fault) structure which hosts several known areas of gold-copper mineralisation in Vietnam and southern China.

The main targets covered by the licence applications are two large fold structures within clastic and calcareous sediments which are considered prospective for large structurally controlled refractory replacement (‘Carlin style’) gold deposits and also possibly ‘Telfer’ style gold mineralisation. Outcropping gold mineralisation and substantial unsourced occurrences of alluvial gold occur within the Company’s application areas.

The licence applications have been lodged in the name of Archipelago Resources Plc and VIMICO. In the event that exploration within the licence areas leads to preliminary feasibility work, a joint venture will be formed in which the Company will hold the majority interest.

China

The Heads of Agreement with China Guangxi Gold Company announced on 6 December 2006 failed to get final approval from the authorities in Beijing. This was a disappointment considering the effort expended in negotiations. However, as frequently happens in exploration, one opportunity leads to another and the Company, together with its Australian JV partner Austpac, is now in advanced discussions with a private Chinese Company regarding a very prospective mining operation where initial high grades of gold have been obtained from near surface sulphide mineralisation. It is hoped to conclude a joint venture Heads of Agreement in July subject to agreement of commercial terms.

Philippines

The Company has the right to acquire a 100% interest in Corplex Resources Inc (“Corplex”), a Philippine registered company. Corplex holds a number of applications for Exploration Permits (EP) and Mineral Production and Sharing Agreements (MPSA) within the northwest portion of the copper and gold rich Surigao peninsular close to the high grade Boyongan copper gold porphyry project owned by Anglo American Inc. and Philex Gold Inc. and Red 5’s Sienna gold deposit. The tenements include a number of areas of historic gold workings and copper mineralisation.

Corporate

Since admission to AIM at a price of 20p/share in September 2003, the Company’s shares have traded as high as 50.5p/share. The Company has 136,419,284 shares in issue at the date of this Report.

While much good progress was achieved during the Company’s “Commencement of Construction Year”, the delay to AMDAL approval and recent winding back of construction activities has been very disappointing. We look forward to AMDAL approval and resumption of construction activities at Toka Tindung as soon as possible. However, commissioning and production will not now occur until second quarter 2008.

11.


Cam Thuy – Ba Thuoc Gold Project

The Company has lodged applications for two Exploration Licences in the Cam Thuy – Ba Thuoc gold district in northern Vietnam located on the Ma River fault system, a structure parallel to the major Red River suture (fault) structure which hosts several known areas of gold-copper mineralisation in Vietnam and southern China.

The main targets covered by the licence applications are two large fold structures within clastic and calcareous sediments which are considered prospective for large structurally controlled refractory replacement (‘Carlin style’) gold deposits and also possibly ‘Telfer’ style gold mineralisation. Outcropping gold mineralisation and substantial unsourced occurrences of alluvial gold occur within the Company’s application areas.

The licence applications have been lodged in the name of Archipelago Resources Plc and VIMICO. In the event that exploration within the licence areas leads to preliminary feasibility work, a joint venture will be formed in which the Company will hold the majority interest.

China

The Heads of Agreement with China Guangxi Gold Company announced on 6 December 2006 failed to get final approval from the authorities in Beijing. This was a disappointment considering the effort expended in negotiations. However, as frequently happens in exploration, one opportunity leads to another and the Company, together with its Australian JV partner Austpac, is now in advanced discussions with a private Chinese Company regarding a very prospective mining operation where initial high grades of gold have been obtained from near surface sulphide mineralisation. It is hoped to conclude a joint venture Heads of Agreement in July subject to agreement of commercial terms.

Philippines

The Company has the right to acquire a 100% interest in Corplex Resources Inc (“Corplex”), a Philippine registered company. Corplex holds a number of applications for Exploration Permits (EP) and Mineral Production and Sharing Agreements (MPSA) within the northwest portion of the copper and gold rich Surigao peninsular close to the high grade Boyongan copper gold porphyry project owned by Anglo American Inc. and Philex Gold Inc. and Red 5’s Sienna gold deposit. The tenements include a number of areas of historic gold workings and copper mineralisation.

Corporate

Since admission to AIM at a price of 20p/share in September 2003, the Company’s shares have traded as high as 50.5p/share. The Company has 136,419,284 shares in issue at the date of this Report.

While much good progress was achieved during the Company’s “Commencement of Construction Year”, the delay to AMDAL approval and recent winding back of construction activities has been very disappointing. We look forward to AMDAL approval and resumption of construction activities at Toka Tindung as soon as possible. However, commissioning and production will not now occur until second quarter 2008.

- 1� -12.


The Board acknowledges the hard work of our small group of dedicated staff, their persistence in achieving the goals set during the year and frustration at the Government’s failure to deliver approval in accordance with its obligations and the Company’s entitlement under the Contracts of Work.

Lastly, we wish to thank all Shareholders for their support and ongoing participation as the Company strives to develop the Toka Tindung Gold Project and achieve its objective of gold producer status and apologise for the unwarranted delay and unnecessary frustration of the AMDAL approval process.

J.C. Loosemore Managing Director 18 June 2007

12.


The Board acknowledges the hard work of our small group of dedicated staff, their persistence in achieving the goals set during the year and frustration at the Government’s failure to deliver approval in accordance with its obligations and the Company’s entitlement under the Contracts of Work.

Lastly, we wish to thank all Shareholders for their support and ongoing participation as the Company strives to develop the Toka Tindung Gold Project and achieve its objective of gold producer status and apologise for the unwarranted delay and unnecessary frustration of the AMDAL approval process.

J.C. Loosemore Managing Director 18 June 2007

Scholarships for students of local schools

- 1� -13.

ASSET SUMMARY

Minerals & Ore

Project Contract OfWork

Holder Interest(%)

Status Licence Expiry Date

Licence Area(ha)

Comments

PT. Meares Soputan Mining

Archipelago Resources Plc (indirect)

Mr Julius Tahija

85%

15%

Construction 30 years from commencement of production.

8,959 Production scheduled to commence first half 2008

Toka Tindung Gold Project, Indonesia

PT. Tambang Tondano Nusajaya


PT Austindo Nusantara Jaya

85%

15%

Feasibility and Exploration

30 years from commencement of production.


SUMMARY OF MINERAL INVENTORY AND RESOURCES TOKA TINDUNG GOLD PROJECT

Minerals & Ore CCaatteeggoorryy GGrroossss NNeett AAttttrriibbuuttaabbllee ((8855%%)) OOppeerraattoorr

Tonnes Grade Au

(g/t)

Grade Ag

(g/t)

Contained Metal (Gold) (ozs)

Contained Metal

(Silver) (ozs)

Tonnes Grade Au

(g/t)

Grade Ag

(g/t)


Contained Metal

(Silver) (ozs)

Mineral Inventory Run of Mine Grade

7,200,000 3.9 9 900,000 2,100,000 6,200,000 3.9 9 770,000 1,800,000

Low Grade 380,000 1.2 3 15,000 36,000 320,000 1.2 3 12,000 31,000

Total 7,600,000 3.7 9 920,000 2,100,000 6,500,000 3.7 9 780,000 1,800,000

MSM &

TTN

Mineral Resources Measured 2,200,000 3.6 8 250,000 560,000 1,900,000 3.6 8 220,000 480,000

Indicated 11,000,000 3.2 8 1,100,000 2,800,000 9,400,000 3.2 8 970,000 2,400,000

Inferred 2,200,000 4.3 8 310,000 570,000 1,900,000 4.3 8 260,000 490,000

Total 15,000,000 3.4 8 1,700,000 4,000,000 13,000,000 3.4 8 1,400,000 3,400,000

MSM &

TTN

Mineral Inventory: MRT (Ref. Competent Persons Report p.47) Run of Mine Grade cut-off 1.37 – 1.45g/t Au Low Grade cut-off 1.12 – 1.16g/t Au Resources: Aurora et.al. & Snowden (Ref. Competent Persons Report p.38) (Determined in accordance with JORC)

Notes: "Operator" is the name of the company that operates the asset. "Gross" are 100% of the mineral inventory and/or resources attributable to the licence while "Net attributable" are those attributable to the Company.

"Reserves" will be determined by the Company following AMDAL approval, updated cost inputs and a gold price cconsistent with gold hedging to be put in place by the Company prior to Project Finance Facility drawdown.

The information in the Annual Report that relates to mineral reserves and resources has been approved for release by Mr John Colin Loosemore, B.Sc. (Hons). M.SC., D.I.C., FAusAIMM, who has consented to the inclusion of the material in the form and context inwhich it appears. Mr Loosemore is the Managing Director of Archipelago Resources Plc and has over 30 years experience in the mineral industry including the evaluation of exploration data, mineral resources and ore reserves. The resource information has been compiled by MRT, Aurora et al and Snowden with reference to the JORC Code and is reported in the Competent Persons Report prepared by Snowden for inclusion in the Company’s Admission Document dated September 2003.

13.

ASSET SUMMARY

Minerals & Ore

Project Contract OfWork

Holder Interest(%)

Status Licence Expiry Date

Licence Area(ha)

Comments

PT. Meares Soputan Mining


Mr Julius Tahija

85%

15%

Construction 30 years from commencement of production.


Toka Tindung Gold Project, Indonesia

PT. Tambang Tondano Nusajaya


PT Austindo Nusantara Jaya

85%

15%

Feasibility and Exploration

30 years from commencement of production.


SUMMARY OF MINERAL INVENTORY AND RESOURCES TOKA TINDUNG GOLD PROJECT

Minerals & Ore CCaatteeggoorryy GGrroossss NNeett AAttttrriibbuuttaabbllee ((8855%%)) OOppeerraattoorr

Tonnes Grade Au

(g/t)

Grade Ag

(g/t)


Contained Metal

(Silver) (ozs)

Tonnes Grade Au

(g/t)

Grade Ag

(g/t)


Contained Metal

(Silver) (ozs)

Mineral Inventory Run of Mine Grade

7,200,000 3.9 9 900,000 2,100,000 6,200,000 3.9 9 770,000 1,800,000

Low Grade 380,000 1.2 3 15,000 36,000 320,000 1.2 3 12,000 31,000

Total 7,600,000 3.7 9 920,000 2,100,000 6,500,000 3.7 9 780,000 1,800,000

MSM &

TTN

Mineral Resources Measured 2,200,000 3.6 8 250,000 560,000 1,900,000 3.6 8 220,000 480,000

Indicated 11,000,000 3.2 8 1,100,000 2,800,000 9,400,000 3.2 8 970,000 2,400,000

Inferred 2,200,000 4.3 8 310,000 570,000 1,900,000 4.3 8 260,000 490,000

Total 15,000,000 3.4 8 1,700,000 4,000,000 13,000,000 3.4 8 1,400,000 3,400,000

MSM &

TTN

Mineral Inventory: MRT (Ref. Competent Persons Report p.47) \Run of Mine Grade cut-off 1.37 – 1.45g/t Au Low Grade cut-off 1.12 – 1.16g/t Au Resources: Aurora et.al. & Snowden (Ref. Competent Persons Report p.38) (Determined in accordance with JORC)

Notes: "Operator" is the name of the company that operates the asset. "Gross" are 100% of the mineral inventory and/or resources attributable to the licence while "Net attributable" are those attributable to the Company.

"Reserves" will be determined by the Company following AMDAL approval, updated cost inputs and a gold price cconsistent with gold hedging to be put in place by the Company prior to Project Finance Facility drawdown.

The information in the Annual Report that relates to mineral reserves and resources has been approved for release by Mr John Colin Loosemore, B.Sc. (Hons). M.SC., D.I.C., FAusAIMM, who has consented to the inclusion of the material in the form and context inwhich it appears. Mr Loosemore is the Managing Director of Archipelago Resources Plc and has over 30 years experience in the mineral industry including the evaluation of exploration data, mineral resources and ore reserves. The resource information has been compiled by MRT, Aurora et al and Snowden with reference to the JORC Code and is reported in the Competent Persons Report prepared by Snowden for inclusion in the Company’s Admission Document dated September 2003.

- 1� - 14.

R E P O R T OF THE D I R E C T O R S

The directors present their report and the audited financial statements for the year ended 31 December 2006.

RESULTS AND DIVIDEND

The consolidated loss for the year after taxation and minority interests amounted to US$2,803,037 (2005: US$1,017,363). The 2006 consolidated loss includes a loss on the revaluation of gold put options which was partially offset by foreign exchange gains. No dividends have been paid or are proposed.

PRINCIPAL ACTIVITY AND REVIEW OF THE BUSINESS

The Group’s principal activity is to acquire, explore, develop and subject to economic viability, mine gold and other metal deposits in South East Asia. The Company’s principal asset is its 85% interest in the Toka Tindung Gold Project in Indonesia.

The Company also holds applications for Exploration Licences in Vietnam and has the right to acquire a 100% interest in Corplex Resources Inc (“Corplex”), a Philippine registered company with exploration applications in north east Mindanao.

The group is currently involved in development and exploration and is yet to commence mining operations. Therefore the directors believe there are no key performance indicators that can be used to assess the performance of the business in the last financial year.

EVENTS SINCE THE BALANCE SHEET DATE

On 27 March 2007, the Company announced that RMB Resources had made available additional subordinated facilities to the Company. Specifically the funds and their intended purpose are:-

US$10m Bridging Facility - to provide up to 6 months working capital until AMDAL approval and drawdown of the Project Finance Facility. This facility was drawn in March 2007 and will be repaid by way of first drawdown of the Project Finance Facility.




Furthermore, as a result of improved project economics resulting from recent higher gold prices, the Project Finance Facility providers agreed early in 2007 to increase the Project Finance Facility from US$42.5m to US$46.7m.

SHARE CAPITAL AND SHARE OPTIONS

Details of changes in share capital and details of share options are given in Notes 16 and 17 to the financial statements.

14.

R E P O R T OF THE D I R E C T O R S

The directors present their report and the audited financial statements for the year ended 31 December 2006.

RESULTS AND DIVIDEND

The consolidated loss for the year after taxation and minority interests amounted to US$2,803,037 (2005: US$1,017,363). The 2006 consolidated loss includes a loss on the revaluation of gold put options which was partially offset by foreign exchange gains. No dividends have been paid or are proposed.

PRINCIPAL ACTIVITY AND REVIEW OF THE BUSINESS

The Group’s principal activity is to acquire, explore, develop and subject to economic viability, mine gold and other metal deposits in South East Asia. The Company’s principal asset is its 85% interest in the Toka Tindung Gold Project in Indonesia.

The Company also holds applications for Exploration Licences in Vietnam and has the right to acquire a 100% interest in Corplex Resources Inc (“Corplex”), a Philippine registered company with exploration applications in north east Mindanao.

EVENTS SINCE THE BALANCE SHEET DATE

On 27 March 2007, the Company announced that RMB Resources had made available additional subordinated facilities to the Company. Specifically the funds and their intended purpose are:-

US$10m Bridging Facility - to provide up to 6 months working capital until AMDAL approval and drawdown of the Project Finance Facility. This facility was drawn in March 2007 and will be repaid by way of first drawdown of the Project Finance Facility.




Furthermore, as a result of improved project economics resulting from recent higher gold prices, the Project Finance Facility providers agreed early in 2007 to increase the Project Finance Facility from US$42.5m to US$46.7m.

SHARE CAPITAL AND SHARE OPTIONS

Details of changes in share capital and details of share options are given in Notes 16 and 17 to the financial statements.

- 1� -

15.

R E P O R T OF THE D I R E C T O R S CONTINUED

DIRECTORS AND THEIR INTERESTS

As at 31 December 2006 and the date of this report, the directors held the following interests:

Ordinary shares 2006 2005

J C Loosemore 11,407,600 11,407,600 M N Arnett 10,888,225 10,888,225 B J Casson - -

Details of options held by directors are set out in note 4.

POLITICAL AND CHARITABLE CONTRIBUTIONS

During the year, the Company made no political or charitable donations.

CREDITOR PAYMENT POLICY

It is the Company’s normal practice to agree terms of transactions, including payment terms, with suppliers and provided suppliers perform in accordance with the agreed terms it is the Company’s policy that payment is made accordingly.

SUBSTANTIAL SHAREHOLDINGS

The Company had been notified as at 13 June 2007, the latest practicable date prior to the publication of these accounts, of the following interests of 3% or more in its issued share capital.

Ordinary shares of 1p each Number Percentage

Ocean Resources Capital Holdings Plc 33,092,085 24.26% The Bank of New York (Nominees) 8,801,850 6.45% Credit Suisse First Boston Client Nominees (UK) Limited

7,050,000 5.17%

Mellon Nominees (UK) Limited 6,822,400 5.00% Lando Pty Ltd 6,207,500 4.55% HSBC Global Custody Nominee (UK) Limited 6,000,000 4.40% Michael Norman Arnett 5,488,225 4.02% John Colin Loosemore 5,200,100 3.81% Goldman Sachs Securities (Nominees) Limited 4,926,000 3.61% Vidacos Nominees Limited 4,462,633 3.27%

CORPORATE GOVERNANCE

The Company joined the Alternative Investment Market (AIM) in September 2003. Companies listed on AIM are not required to make an annual statement to shareholders regarding compliance with The Combined Code – Principles of Good Governance and Code of Best Practice (“The Combined Code”). However, the Board’s objective is to endeavour to comply with The Combined Code principles and code, in so far as it is appropriate and practical for a company the size of Archipelago Resources Plc, to do so.

15.


DIRECTORS AND THEIR INTERESTS

As at 31 December 2006 and the date of this report, the directors held the following interests:

Ordinary shares 2006 2005

J C Loosemore 11,407,600 11,407,600 M N Arnett 10,888,225 10,888,225 B J Casson - -

Details of options held by directors are set out in note 4.

POLITICAL AND CHARITABLE CONTRIBUTIONS

During the year, the Company made no political or charitable donations.

CREDITOR PAYMENT POLICY

It is the Company’s normal practice to agree terms of transactions, including payment terms, with suppliers and provided suppliers perform in accordance with the agreed terms it is the Company’s policy that payment is made accordingly.

SUBSTANTIAL SHAREHOLDINGS

The Company had been notified as at 13 June 2007, the latest practicable date prior to the publication of these accounts, of the following interests of 3% or more in its issued share capital.

Ordinary shares of 1p each Number Percentage

Ocean Resources Capital Holdings Plc 33,092,085 24.26% The Bank of New York (Nominees) 8,801,850 6.45% Credit Suisse First Boston Client Nominees (UK) Limited

7,050,000 5.17%

Mellon Nominees (UK) Limited 6,822,400 5.00% Lando Pty Ltd 6,207,500 4.55% HSBC Global Custody Nominee (UK) Limited 6,000,000 4.40% Michael Norman Arnett 5,488,225 4.02% John Colin Loosemore 5,200,100 3.81% Goldman Sachs Securities (Nominees) Limited 4,926,000 3.61% Vidacos Nominees Limited 4,462,633 3.27%

CORPORATE GOVERNANCE

The Company joined the Alternative Investment Market (AIM) in September 2003. Companies listed on AIM are not required to make an annual statement to shareholders regarding compliance with The Combined Code – Principles of Good Governance and Code of Best Practice (“The Combined Code”). However, the Board’s objective is to endeavour to comply with The Combined Code principles and code, in so far as it is appropriate and practical for a company the size of Archipelago Resources Plc, to do so.

- 1� -

16.


DIRECTORS

The Board consists of:

John Colin Loosemore (Managing Director/ Chief Executive Officer) B.Sc.Hons (Geology), M.Sc., DIC. (Mineral Exploration)

Mr Loosemore (Age 58) is a geologist with over 30 years experience in multi-commodity exploration within Australia and overseas, having graduated from London University in 1970 and the Royal School of Mines in 1977. Mr Loosemore is a Fellow of the Australasian Institute of Mining and Metallurgy.

Michael N. Arnett (Non-Executive Director) LLB. B.Comm

Mr Arnett (Age 45) holds Bachelor of Commerce and Bachelor of Law degrees from the University of New South Wales, Sydney, Australia.

Mr Arnett was formerly Chief Operating Officer of international law firm Deacons with over 500 lawyers and has in the past 17 years practised as a lawyer in the areas of corporate, mining and commercial law.

Mr Arnett has advised a number of companies in relation to their corporate and mining activities and has assisted in the listing of a number of exploration companies.

Barry J. Casson (Non-Executive Director)

Mr Casson (Age 56) is a Chartered Accountant and has been involved in the corporate finance area for approximately 30 years. For the last 20 years he has been employed within the resource industry with respect to gold and nickel. Mr Casson has held senior positions in Australia and overseas (including New York and London) with various resource companies.

The Board recognises that it may be beneficial to appoint additional independent non-executive directors. In view of the size of the Company no nomination committee has been appointed and any new appointments to the Board would be considered by the whole Board. All directors are subject to re-election by shareholders at intervals of no more than three years. The Board meets regularly during the course of each year and considers all matters that are material for the progress of the Group.

CHIEF FINANCIAL OFFICER

During the year the Company appointed Mr Jeff Dawkins as Chief Financial Officer for the Archipelago Group. Mr Dawkins has over 15 years experience in financial management and has worked for Deloitte and for listed resource companies including Lynas Corporation, Schlumberger and Weatherford.

He is a Chartered Accountant as well as a member of The Financial Services Institute of Australasia.

Jeff replaced Mr. Bryan Dixon who resigned for personal and corporate reasons but continues to consult to the Company.

16.


DIRECTORS

The Board consists of:

John Colin Loosemore (Managing Director/ Chief Executive Officer) B.Sc.Hons (Geology), M.Sc., DIC. (Mineral Exploration)

Mr Loosemore (Age 58) is a geologist with over 30 years experience in multi-commodity exploration within Australia and overseas, having graduated from London University in 1970 and the Royal School of Mines in 1977. Mr Loosemore is a Fellow of the Australasian Institute of Mining and Metallurgy.

Michael N. Arnett (Non-Executive Director) LLB. B.Comm

Mr Arnett (Age 45) holds Bachelor of Commerce and Bachelor of Law degrees from the University of New South Wales, Sydney, Australia.

Mr Arnett was formerly Chief Operating Officer of international law firm Deacons with over 500 lawyers and has in the past 17 years practised as a lawyer in the areas of corporate, mining and commercial law.

Mr Arnett has advised a number of companies in relation to their corporate and mining activities and has assisted in the listing of a number of exploration companies.

Barry J. Casson (Non-Executive Director)

Mr Casson (Age 56) is a Chartered Accountant and has been involved in the corporate finance area for approximately 30 years. For the last 20 years he has been employed within the resource industry with respect to gold and nickel. Mr Casson has held senior positions in Australia and overseas (including New York and London) with various resource companies.

The Board recognises that it may be beneficial to appoint additional independent non-executive directors. In view of the size of the Company no nomination committee has been appointed and any new appointments to the Board would be considered by the whole Board. All directors are subject to re-election by shareholders at intervals of no more than three years. The Board meets regularly during the course of each year and considers all matters that are material for the progress of the Group.

CHIEF FINANCIAL OFFICER

During the year the Company appointed Mr Jeff Dawkins as Chief Financial Officer for the Archipelago Group. Mr Dawkins has over 15 years experience in financial management and has worked for Deloitte and for listed resource companies including Lynas Corporation, Schlumberger and Weatherford.

He is a Chartered Accountant as well as a member of The Financial Services Institute of Australasia.

Jeff replaced Mr. Bryan Dixon who resigned for personal and corporate reasons but continues to consult to the Company.

- 1� -17.


DIRECTORS’ REMUNERATION

All matters concerning the remuneration of executive directors are considered by the remuneration committee, chaired by Mr Casson. Directors do not participate when their own individual salary is discussed.

REMUNERATION POLICY

It is the Committee’s policy that directors’ remuneration should be commensurate with services provided by them to the Company. The remuneration of all directors is determined by the Committee and comprises basic salary only. There are no formal bonus arrangements in place or other long-term incentive schemes. However all directors continue to hold share options previously issued at the time of admission of the Company’s shares to trading on AIM. The share options were awarded to provide an incentive, which is directly related to the rewards experienced by the Company’s shareholders.

The directors have service agreements but no pension contributions are paid by the Company. The directors’ service agreements require the Company to give Mr Loosemore 12 months notice, Mr Arnett 6 months’ notice and Mr Casson 3 months’ notice, while each director must give the Company corresponding periods of notice of termination.

RELATIONS WITH SHAREHOLDERS

It is the intention of the Board that the Chief Executive Officer meets institutional investors on an annual basis.

At the Annual General Meeting, the proxy votes lodged on each resolution are indicated after a show of hands. Shareholders are encouraged to attend the Annual General Meeting, at which time there is an opportunity for discussion with members of the Board.

ACCOUNTABILITY AND AUDIT

Financial reporting

A statement about the directors’ responsibilities for the Group’s financial statements appears on page 19.

Internal control

The Board is ultimately responsible for the Group’s system of internal control and for reviewing its effectiveness. However, such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss.

17.


DIRECTORS’ REMUNERATION

All matters concerning the remuneration of executive directors are considered by the remuneration committee, chaired by Mr Casson. Directors do not participate when their own individual salary is discussed.

REMUNERATION POLICY

It is the Committee’s policy that directors’ remuneration should be commensurate with services provided by them to the Company. The remuneration of all directors is determined by the Committee and comprises basic salary only. There are no formal bonus arrangements in place or other long-term incentive schemes. However all directors continue to hold share options previously issued at the time of admission of the Company’s shares to trading on AIM. The share options were awarded to provide an incentive, which is directly related to the rewards experienced by the Company’s shareholders.

The directors have service agreements but no pension contributions are paid by the Company. The directors’ service agreements require the Company to give Mr Loosemore 12 months notice, Mr Arnett 6 months’ notice and Mr Casson 3 months’ notice, while each director must give the Company corresponding periods of notice of termination.

RELATIONS WITH SHAREHOLDERS

It is the intention of the Board that the Chief Executive Officer meets institutional investors on an annual basis.

At the Annual General Meeting, the proxy votes lodged on each resolution are indicated after a show of hands. Shareholders are encouraged to attend the Annual General Meeting, at which time there is an opportunity for discussion with members of the Board.

ACCOUNTABILITY AND AUDIT

Financial reporting

A statement about the directors’ responsibilities for the Group’s financial statements appears on page 19.

Internal control

The Board is ultimately responsible for the Group’s system of internal control and for reviewing its effectiveness. However, such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss.

- 1� -

18.


AUDIT COMMITTEE AND AUDITOR

The Audit Committee comprises Mr Casson (Chairman) and Mr Arnett. The Audit Committee has not met during the year but post first gold production propose meeting twice a year, or more often if required. Because of the size of the Board, it is not possible to comply with the Combined Code requirement that the Audit Committee should be composed of at least three non-executive directors. The Board considers that the present size of the Group does not justify a separate internal audit function.

The responsibilities of the Company’s auditor appear in the auditor’s report on page 41.

ANNUAL GENERAL MEETING

Notice of this year’s Annual General Meeting of the Company, convened for 17 July 2007, is set out in a separate document. The following resolutions are to be proposed at the meeting:

1. To receive and adopt the financial statements for the financial period ended 31 December 2006 together with the reports of the directors and auditor thereon.

2. To re-elect Mr Arnett who is retiring by rotation as a director of the Company.

3. To re-appoint Chantrey Vellacott DFK LLP as auditor until the conclusion of the next annual general meeting and to empower the directors to agree their remuneration.

BY ORDER OF THE BOARD

J.C. LOOSEMORE Managing Director

18 June 2007

18.


AUDIT COMMITTEE AND AUDITOR

The Audit Committee comprises Mr Casson (Chairman) and Mr Arnett. The Audit Committee has not met during the year but post first gold production propose meeting twice a year, or more often if required. Because of the size of the Board, it is not possible to comply with the Combined Code requirement that the Audit Committee should be composed of at least three non-executive directors. The Board considers that the present size of the Group does not justify a separate internal audit function.

The responsibilities of the Company’s auditor appear in the auditor’s report on page 41.

ANNUAL GENERAL MEETING

Notice of this year’s Annual General Meeting of the Company, convened for 17 July 2007, is set out in a separate document. The following resolutions are to be proposed at the meeting:

1. To receive and adopt the financial statements for the financial period ended 31 December 2006 together with the reports of the directors and auditor thereon.

2. To re-elect Mr Arnett who is retiring by rotation as a director of the Company.

3. To re-appoint Chantrey Vellacott DFK LLP as auditor until the conclusion of the next annual general meeting and to empower the directors to agree their remuneration.

BY ORDER OF THE BOARD

J.C. LOOSEMORE Managing Director

18 June 2007

- 1� -

19

ARCHIPELAGO RESOURCES PLC

Statement of directors’ responsibilities in respect of the financial statements

The directors are required by company law to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the company and the group as at the end of the financial year and of the profit or loss, changes in equity and cash flows of the group for that financial year.

In preparing those financial statements, the directors are required to:

select suitable accounting policies and then apply them consistently;

make judgements and estimates that are reasonable and prudent;

state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group will continue in business.

The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the group and the company to enable them to ensure that the financial statements comply with the Companies Act 1985 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the group and for taking reasonable steps to prevent and detect fraud and other irregularities.

Insofar as the directors are aware:

there is no relevant audit information of which the company's auditor is unaware; and

the directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

•

•

•

•

•

•

- �0 -

20

ARCHIPELAGO RESOURCES PLC CONSOLIDATED INCOME STATEMENT

Year ended Year ended 31 December

2006US$

31 December 2005US$

Notes

REVENUE - -

Cost of sales - -

GROSS PROFIT - -

Administrative expenses (2,802,306) (982,038)

OPERATING LOSS 2 (2,802,306) (982,038)

Gain on sale of assets - 7,550 Finance costs (731) (40,336)

LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION (2,803,037) (1,014,824)

Taxation - -

LOSS ON ORDINARY ACTIVITIES AFTER TAXATION (2,803,037) (1,014,824)

Minority interests 21 - 2,539

LOSS FOR THE FINANCIAL YEAR ATTRIBUTABLE TO MEMBERS OF THE PARENT COMPANY (2,803,037) (1,017,363)

RETAINED LOSS FOR THE YEAR 19 (2,803,037) (1,017,363)

Loss per share - basic 7 (0.023) (0.012) Loss per share - diluted 7 (0.022) (0.011)

There were no recognised gains or losses other than those shown above. All the Group’s activities consist of continuing operations.

- �1 -

21

ARCHIPELAGO RESOURCES PLC BALANCE SHEETS

Group Company

Notes

31 December 2006US$

31 December 2005US$

31 December 2006US$

31 December 2005US$

NON- CURRENT ASSETS Property, plant and equipment 11 34,684,996 17,736,295 - 11,728,438 Development, exploration and evaluation 12 11,750,567 4,807,881 - - Investments 13 913,214 337,950 1,210,607 617,883

47,348,777 22,882,126 1,210,607 12,346,321

CURRENT ASSETS Inventories 14 893,837 40,620 - - Trade and other receivables 9 1,725,855 308,310 7,208 877 Derivative financial instruments 6,273 1,000,038 - - Cash and cash equivalents 8 9,916,955 8,874,752 7,910,942 7,880,935

12,542,920 10,223,720 7,918,150 7,881,812

TOTAL ASSETS 59,891,697 33,105,846 9,128,757 20,228,133

EQUITY AND LIABILITIES Share capital 16 2,415,077 1,757,266 2,415,077 1,757,266 Share premium account 19 63,285,911 37,462,467 63,285,911 37,462,467 Reserves 18 1,406,970 (243,532) 1,934,246 290,976 Profit and loss account 19 (10,701,290) (7,898,253) (58,628,329) (19,632,748)

TOTAL EQUITY 56,406,668 31,077,948 9,006,905 19,877,961

CURRENT LIABILITIES

Trade and other payables 15 3,351,825 1,979,350 121,852 350,172 Provisions 133,204 48,548 - -

TOTAL LIABILITIES 3,485,029 2,027,898 121,852 350,172

TOTAL EQUITY AND LIABILITIES 59,891,697 33,105,846 9,128,757 20,228,133

These financial statements on pages 20 to 40 were authorised for issue and approved by the Board of Directors on 18 June 2007, and signed on its behalf by:

J.C. LOOSEMORE M.N. ARNETT Managing Director Non-Executive Director

21


Group Company

Notes

31 December 2006US$

31 December 2005US$

31 December 2006US$

31 December 2005US$


47,348,777 22,882,126 1,210,607 12,346,321


12,542,920 10,223,720 7,918,150 7,881,812

TOTAL ASSETS 59,891,697 33,105,846 9,128,757 20,228,133


TOTAL EQUITY 56,406,668 31,077,948 9,006,905 19,877,961

CURRENT LIABILITIES






21


Group Company

Notes

31 December 2006US$

31 December 2005US$

31 December 2006US$

31 December 2005US$


47,348,777 22,882,126 1,210,607 12,346,321


12,542,920 10,223,720 7,918,150 7,881,812

TOTAL ASSETS 59,891,697 33,105,846 9,128,757 20,228,133


TOTAL EQUITY 56,406,668 31,077,948 9,006,905 19,877,961

CURRENT LIABILITIES






- �� -

22

ARCHIPELAGO RESOURCES PLC STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2006

GROUP Share Share Other Profit and capital premium reserves Loss account Total US$ US$ US$ US$ US$

Balance at 31 December 2004 1,176,279 19,416,046 853,120 (6,880,890) 14,564,555 Changes in equity for 2005 Loss for the year - - - (1,017,363) (1,017,362) Shares issued 580,987 18,981,004 - - 19,561,991 Share issue costs - (934,583) - - (934,583) Employee options issued - - 95,140 - 95,140 Application of IAS 21 - - (1,191,792) - (1,191,793)

Balance at 31 December 2005 1,757,266 37,462,467 (243,532) (7,898,253) 31,077,948 Changes in equity for 2006 Loss for the year - - - (2,803,037) (2,803,037) Shares issued 657,811 27,173,997 - - 27,831,808 Share issue costs - (1,350,553) - - (1,350,553) Employee options issued - - 108,982 - 108,982 Application of IAS 21 - - 1,541,520 - 1,541,520

Balance at 31 December 2006 2,415,077 63,285,911 1,406,970 (10,701,290) 56,406,668

COMPANY Share Share Other Profit and capital premium reserves Loss account Total US$ US$ US$ US$ US$

Balance at 31 December 2004 1,176,279 19,416,046 603,232 (9,231,198) 11,964,359 Changes in equity for 2005 Loss for the year - - - (10,401,550) (10,401,550) Shares issued 580,987 18,981,004 - - 19,561,991 Share issue costs - (934,583) - - (934,583) Employee options issued - - 95,140 - 95,140 Application of IAS 21 - - (407,396) - (407,396)

Balance at 31 December 2005 1,757,266 37,462,467 290,976 (19,632,748) 19,877,961 Changes in equity for 2006 Loss for the year - - - (38,995,581) (38,995,581) Shares issued 657,811 27,173,997 - - 27,831,808 Share issue costs - (1,350,553) - - (1,350,553) Employee options issued - - 108,982 - 108,982 Application of IAS 21 - - 1,534,288 - 1,534,288

Balance at 31 December 2006 2,415,077 63,285,911 1,934,246 (58,628,329) 9,006,905

- �� -

23

ARCHIPELAGO RESOURCES PLC STATEMENT OF CASH FLOWS

Group Company

Notes

31 December 2006US$

31 December 2005US$

31 December 2006US$

31 December 2005US$

NET CASH OUTFLOW FROM OPERATING ACTIVITIES

22(a) (1,318,242) (609,173) 241,764 (237,521)

CASH FLOWS FROM INVESTING ACTIVITIES Payments to acquire property, plant and equipment

(15,229,198) (6,218,795) (982,950) (1,946,086)

Payments for development, exploration and evaluation expenditure (7,539,234) (1,500,082) (771,898)

Payments to acquire other financial assets (1,367,480) (1,971,719) (514,980) - Consideration on sale of other financial assets

595,000 - - -

Consideration on sale of property, plant and equipment

- 7,550 - -

Loans to related parties - - (24,795,873) (10,045,142) Interest paid (731) (40,336) (731) (32,774)

NET CASH USED IN INVESTING ACTIVITIES (23,541,643) (9,723,382) (27,066,432) (12,024,002)

CASH FLOWS FROM FINANCING ACTIVITIES Issue of ordinary share capital 27,831,808 19,561,991 27,831,808 19,561,991 Capital raising costs (1,350,553) (934,583) (1,350,553) (934,583) Repayment of loans - (1,430,166) - (1,430,166) Prepaid borrowing costs (1,013,644) (618,923) - -

NET CASH FROM FINANCING ACTVITIES 25,467,611 16,578,319 26,481,255 17,197,242

Effect of change in exchange rates on cash and cash equivalents

434,477 (291,486) 373,420 266,660

NET INCREASE IN CASH AND CASH EQUIVALENTS 1,042,203 5,954,278 30,007 5,202,379

CASH AND CASH EQUIVALENTS AT START OF PERIOD 8,874,752 2,920,474 7,880,935 2,678,556

CASH AND CASH EQUIVALENTS AT END OF PERIOD

9,916,955 8,874,752 7,910,942 7,880,935

- �� -

ARCHIPELAGO RESOURCES PLC NOTES TO THE FINANCIAL STATEMENTS

24

1. ACCOUNTING POLICIES

Basis of preparation The financial statements have been prepared in accordance with International Financial Reporting and Accounting Standards adopted by the European Union and comply with the Companies Act 1985 and Article 4 of the IAS Regulation.

At the date of authorisation of these financial statements, there were Standards and Interpretations that were in issue but are not yet effective and have not been applied in these financial statements. The Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statement of the Group or Company, except for additional disclosures when the relevant Standards come into effect.

The preparation of financial statements in conformity with general accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amounts, events or actions, actual results ultimately may differ from those estimates.

The financial statements have been prepared on the historical cost basis. The principal accounting policies adopted are set out below.

The financial statements have been prepared on the going concern basis, assuming the group and the company to continue as going concerns, and therefore realise their assets and extinguish their liabilities in the normal course of business at the amounts stated in the financial statements.

Basis of consolidation The consolidated financial statements incorporate the financial statements of the company and enterprises controlled by the company (its subsidiaries) made up to 31 December each year. Control is achieved where the company has the power to govern the financial and operating policies of a subsidiary.

Minority interests in the net assets of consolidated subsidiaries are identified separately from the group’s equity therein. Minority interests consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the group except to the extent that the minority has a binding obligation and is able to make additional investment to cover the losses.

All intercompany transactions and balances between group enterprises are eliminated on consolidation.

Depreciation Depreciation is provided on all tangible fixed assets, at rates calculated to write off the cost, less estimated residual value based on prices prevailing at the date of acquisition of each asset evenly over its expected useful life as follows: Plant and equipment — over 3 to 7 years

Exploration expenditure will be amortised over expected production volumes from the date production commences.

- �� -25

Derivatives Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The group designates certain derivatives as either; (1) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); or (2) hedges of highly probable forecast transactions (cash flow hedges).

The group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items.

(i) Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges

are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.

(ii) Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify

as cash flow hedges is recognised directly in equity, while the gain or loss relating to the ineffective portion is recognised immediately in the income statement.

Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit or loss (for instance when the forecast sale that is hedged takes place). However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the measurement of the initial cost or carrying amount of the asset or liability.

When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.

(iii) Derivatives that do not qualify for hedge accounting

Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the income statement.

Deferred taxation Deferred tax assets and liabilities are recognised for temporary timing differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted for each jurisdiction.

The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary timing differences to measure the deferred tax asset or liability. An exception is made for certain temporary timing differences arising from the initial recognition of an asset or a liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss.

Deferred tax assets are recognised for deductible temporary timing differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary timing differences and losses.

Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary timing differences and it is probable that the differences will not reverse in the foreseeable future.

Current and deferred tax attributable to amounts recognised directly in equity are also recognised directly in equity.

- �� -

26

Foreign currencies Translation of foreign currency transactions

Transactions in foreign currencies of entities are converted to local currency at the rate of exchange ruling at the date of the transaction.

Amounts payable to and by related entities that are outstanding at the reporting date and are denominated in foreign currencies have been converted to local currency using rates of exchange ruling at the end of the financial period.

Translation of foreign currency financial statements

Items included in the financial statements of each of the entities within the group are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The functional currency of the group is US dollars. The consolidated financial statements are presented in US dollars, which is Archipelago Resources Plc presentation currency.

As at the reporting date the assets and liabilities of the subsidiaries are translated into the presentation currency of Archipelago Resources Plc at the rate of exchange ruling at the balance sheet date and their income statements are translated at the weighted average exchange rate for the year. The exchange differences arising on the translation are taken directly to a separate component of equity.

On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in profit or loss.

Development, exploration and evaluation expenditure

Exploration and evaluation costs (including the acquisition cost of exploration properties) which relate to “an area of interest” are carried forward on the balance sheet where the rights to tenure are current and:• the area of interest has commercially recoverable reserves; or • the exploration and/or evaluation activities of the area of interest have not yet reached a stage

that permits a reasonable assessment of the existence or otherwise of commercially recoverable reserves.

The group performs impairment testing when facts and circumstances suggest the carrying amount has been impaired. If it is determined that the asset has been impaired it is immediately written off in the income statement.

- �� -

27


2006US$

31 December 2005US$

2. OPERATING LOSS

This is stated after charging:

Exploration expenditure written off 825,907 132,807 Directors’ remuneration 285,557 228,900 Other staff costs 158,887 135,711 Rent 26,690 26,341 Depreciation 22,689 9,230 Net foreign exchange differences (53,719) (704,570) Fair value change on derivatives 1,177,797 971,681 Other expenses 381,187 181,938

Total administrative expenses 2,802,306 982,038

Auditors’ remuneration

Chantrey Vellacott DFK LLP – Audit 31,314 20,575 Chantrey Vellacott DFK LLP– Other services 4,644 1,457

35,958 22,032

Ernst & Young Australia - Audit 17,683 27,813 Ernst & Young Australia - Other services - 31,601

17,683 59,414

Ernst & Young Jakarta – Audit 35,307 35,647

The Company is audited by Chantrey Vellacott DFK LLP. The Group’s subsidiaries are audited by Ernst & Young.

- �� -

28

3. SEGMENT INFORMATION

Turnover represents the amounts derived from the provision of goods and services which fall within the group’s ordinary activities, stated net of value added tax. The group operates in one principal area of activity, that of exploration and development of gold tenements. It also operates within four geographical markets: United Kingdom, Australia, Indonesia and South East Asia.

Revenue, group loss on ordinary activities before tax and net assets are all within one activity, that of gold exploration and development.

Segment information on a geographical basis is set out below. Group revenue for the year to 31 December 2006 was nil (2005: nil). Accordingly no segment turnover information has been provided.

UK US$

Australia US$

Indonesia US$

South East Asia

US$

Total US$

2006 Segment profit / (loss): 123,273 (1,768,752) (331,651) (825,907) (2,803,037) Profit / (loss) on ordinary activities before taxation 123,273 (1,768,752) (331,651) (825,907) (2,803,037)

Operating loss of Archipelago Resources Pty Limited included in the above

- (1,768,752) (331,651) (54,009) (2,154,412)

Segment assets 8,472,335 3,359,053 47,701,280 359,029 59,891,697 Segment liabilities 121,852 213,457 3,149,720 - 3,485,029

Acquisitions of property, plant and equipment, intangibles and other non-current segment assets

- 1,942 21,994,592 771,898 22,768,432

Depreciation and amortisation expense - 22,689 - - 22,689 Other non-cash expenses 771,898 54,009 - - 825,907

- �� -

29

3. SEGMENT INFORMATION (CONT’D)

UK US$

Australia US$

Indonesia US$

South East Asia

US$

Total US$

2005 Segment profit / (loss): 355,372 (1,210,328) (27,061) (132,807) (1,014,824) Profit / (loss) on ordinary activities before taxation 355,372 (1,210,328) (27,061) (132,807) (1,014,824)

Operating loss of Archipelago Resources Pty Limited included in the above (1,210,328) (27,061) (132,807) (1,370,196) Segment assets 7,881,812 1,633,540 23,252,545 337,949 33,105,846 Segment liabilities 350,183 89,313 1,588,402 - 2,027,898

Acquisitions of property, plant and equipment, intangibles and other non-current segment assets

- - (9,690,596) - (9,690,596)

Depreciation and amortisation expense - 9,230 - - 9,230 Other non-cash expenses 132,807 - - - 132,807

- �0 -

30

4. DIRECTORS’ EMOLUMENTS

Directors’ remuneration Year ended Year ended

Director

31 December 2006US$

31 December 2005US$

J C Loosemore (highest paid director) 192,590 150,607 M N Arnett 55,542 49,161 B J Casson 37,425 29,132

Total emoluments 285,557 228,900

Directors’ options The company has a share option scheme by which directors and other senior executives are able to subscribe for ordinary shares in the company. The interests of the directors were as follows:

At Granted Exercised Lapsed At Exercise 31 December during during during 31 December price 2005 the period the period the period 2006 No. No. No. No. No.

C Loosemore £0.20 400,000 - - - 400,000 M Arnett £0.20 400,000 - - - 400,000 B Casson £0.20 400,000 - - - 400,000 ––––––––––––––––––––––––––––––––––––––––––––––––––––––– 1,200,000 - - - 1,200,000 –––––––––––––––––––––––––––––––––––––––––––––––––––––––

The directors’ options were issued on 23 September 2002. The options are exercisable up to 31 December 2007. The interests of the directors to subscribe for or acquire ordinary shares have not changed since 31 December 2006.


2006US$

31 December 2005US$

5. STAFF EXPENSES

Wages and salaries (includes directors’ remuneration at Note 4) 432,810 361,777 Other pension costs 11,634 2,834 444,444 364,611

The group had the following employees: 2006

Average No.

2005Average

No.

Development 295 93 Administration 16 6 Total 311 99

- �1 -

31

6a TAX ON LOSS ON ORDINARY ACTIVITIES Current tax - - Deferred tax - -

- -

6b RECONCILIATION OF CURRENT TAX CHARGE Loss on ordinary activities (2,803,037) (1,014,824) Loss on ordinary activities multiplied by the standard rate of corporation tax in Australia (30%) (840,911) (304,447) Effect of: Disallowable expenditure 14,002 7,966 Losses carried forward 826,909 296,481 - -

6c FACTORS AFFECTING FUTURE TAX CHARGE AND DEFERRED TAXATION

The group has taxable losses to carry forward and offset against future profits of approximately US$6,457,696 (2005: US$3,697,696). The deferred tax asset of US$1,938,000 (2005: US$1,110,000) relating to those losses, has not been recognised since recovery cannot be reasonably foreseen based on the group’s current activities.

7. LOSS PER SHARE

The calculation of basic loss per share is based on a loss for the period of US$2,803,037 (2005: US$1,014,824), and on 122,533,976 (2005: 84,179,211) ordinary shares, being the weighted average number of ordinary shares in issue during the year.

The calculation of diluted loss per share is based on a diluted loss for the period of US$2,750,991 (2005: US$972,480), and on 125,078,976 (2005: 86,799,211) potential ordinary shares.

8. CASH AND CASH EQUIVALENTS Group Company 31 December

2006US$

31 December 2005US$

31 December 2006US$

31 December 2005US$

Cash at bank and in hand 2,232,046 1,183,465 226,033 189,648 Deposits at call 7,684,909 7,691,287 7,684,909 7,691,287

9,916,955 8,874,752 7,910,942 7,880,935

Bank balances and cash comprise cash held by the group and company and short-term bank deposits with an original maturity of three months or less. The carrying value of these assets approximates to their fair value.

The average interest rate receivable was 5.0% (2005: 4.25%).

The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies.

- �� -32

9. TRADE AND OTHER RECEIVABLES Group Company 31 December

2006US$

31 December 2005US$

31 December 2006US$

31 December 2005US$

Trade receivables 45,702 24,269 - - Interest receivables 3,385 - 3,385 - Other receivables 1,676,768 284,041 3,823 877

1,725,855 308,310 7,208 877

The average credit period taken on trade receivables is 30 days (2005: 30 days). The amounts presented in the financial statements are net of allowances for doubtful receivables, estimated by the group's management based on prior experience and their assessment of the current economic environment. The directors consider that the carrying amount of trade and other receivables approximates to their fair value.

10. NON-CURRENT RECEIVABLES Group Company 31 December

2006US$

31 December 2005US$

31 December 2006US$

31 December 2005US$

Amounts receivable from subsidiaries - - 53,029,938 14,514,702 Provisions - - (53,029,938) (14,514,702)

- - - -

The receivables from subsidiaries are interest free, unsecured and repayable on demand.

11. PROPERTY, PLANT AND EQUIPMENT

Group Company

31 December 2006US$

31 December 2005US$

31 December 2006US$

31 December 2005US$

Cost At beginning of year 17,780,730 10,907,807 11,728,438 10,881,621 Additions 16,837,142 6,872,923 676,127 846,817 Disposals - - (12,404,565) - At end of year 34,617,872 17,780,730 - 11,728,438 Depreciation At beginning of year (44,435) - - - Depreciation (22,689) (44,435) - - At end of year (67,124) (44,435) - - Net book value 34,684,996 17,736,295 - 11,728,438

12. DEVELOPMENT, EXPLORATION AND EVALUATION

Group Company

31 December 2006US$

31 December 2005US$

31 December 2006US$

31 December 2005US$

Cost At beginning of year 4,807,881 2,739,998 - - Additions 6,942,686 2,067,883 - - At end of year 11,750,567 4,807,881 - - Depreciation At beginning and end of year - - - - Net book value 11,750,567 4,807,881 - -

- �� -33

The recoverability of the Group’s interests in development, exploration and evaluation is dependent upon successful development, exploitation or sale of the interests for an amount at least equal to net book value.

Group 31 December

2006US$

Group 31 December

2005US$

Company 31 December

2006US$

Company 31 December

2005US$

13. INVESTMENTS Shares in subsidiary undertakings - - 297,393 279,933 Shares in listed companies 554,185 - 554,185 - Other fixed asset investments 359,029 337,950 359,029 337,950 913,214 337,950 1,210,607 617,883

Pursuant to an option agreement dated 22 June 2002, Lando Pty Ltd, a company controlled by Colin Loosemore, granted the company the option to acquire all of its interest in Corplex. The option can be exercised at any time prior to 31 December 2012. Upon exercise of the option the company must pay US$10 to Lando Pty Ltd. This option has not been exercised as at 31 December 2006.

On 26 August 2002, the company entered into option agreements with a number of third parties which provided the company with the option to acquire all of the third parties’ interests in Corplex. These options can be exercised at any time prior to 31 December 2012. Upon exercise of each option the company must pay US$10. These options had not been exercised as at 31 December 2006.

On 26 August 2002, Emmanual Deloso and Rosalinda Deloso (“the grantees”) granted Corplex the option to acquire the whole of the beneficial interest in certain mineral interests held by Corplex. The option can be exercised at any time prior to 31 December 2012. Upon exercise of the option the company must pay US$10. These options had not been exercised as at 31 December 2006.

The above agreements provide the Company with the option to acquire 100% of Corplex and certain tenements held by Corplex.

Subsidiary undertakings

Name of Subsidiary % Voting rights

Country of incorporation

Nature of holding

Business

Archipelago Resources Pty Limited 100% Australia Ordinary shares Gold exploration & development

Archipelago Resources Pty Limited had the following subsidiary undertakings as at 31 December 2006:

Name of Subsidiary % Voting rights

Country of incorporation

Nature of holding

Business

Meares Soputan Offshore Pty Ltd 100% Australia Ordinary shares Gold exploration & development

Tondano Offshore Pty Ltd 100% Australia Ordinary shares Gold exploration & development

Muro Baru Pty Ltd 100% Australia Ordinary shares Dormant PT Meares Soputan Mining 85% Indonesia Ordinary shares Gold exploration

& development PT Tambang Tondano Nusajaya 85% Indonesia Ordinary shares Gold exploration

& development

- �� -

34

Group Company 31 December

2006US$

31 December2005US$

31 December 2006US$

31 December 2005US$

14. INVENTORIES

Materials and supplies 893,837 40,620 - -

15. TRADE AND OTHER PAYABLES

Trade payables 1,811,509 1,391,836 57,672 35,248 Accruals 1,284,005 460,420 64,180 314,924 Transaction taxes payable 256,311 127,094 - - 3,351,825 1,979,350 121,852 350,172

Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade payables is 30 days (2005: 30 days).

The directors consider that the carrying amount of trade and other payables approximates to their fair value.

16. SHARE CAPITAL 2006 2005 2006 2005 Authorised Shares Shares US$ US$ Ordinary shares of 1 pence each 150,000,000 150,000,000 1,500,000 1,500,000 Allotted, called up and fully paid Opening balance 98,639,284 66,838,097 1,757,266 1,176,279 Issued during the year 37,780,050 31,801,187 657,811 580,987 Closing balance 136,419,334 98,639,284 2,415,077 1,757,266

During the year the following shares were issued:

(i) On 26 April 2006, 15,915,425 ordinary shares were issued at an issue price of 73.7 cents (42.0 pence) per share to raise US$11,724,575

(ii) On 18 May 2006, 11,093,664 ordinary shares were issued at an issue price of 73.7 cents (42.0 pence) per share to raise US$8,172,480

(iii) On 6 June 2006, 10,770,961 ordinary shares were issued at an issue price of 73.7 cents (42.0 pence) per share to raise US$7,934,752

- �� -35

17. OPTIONS 2006

Number 2005

Number Options exercisable at 20 pence expiring 31 December 2007

Beginning of the year 1,200,000 1,200,000 Granted during the year - - End of the year 1,200,000 1,200,000

Options exercisable at 20 pence expiring 9 September 2008

Beginning of the year 500,000 500,000 Granted during the year - - End of the year 500,000 500,000

Options exercisable at 33.2 pence expiring 31 August 2009(i)

Beginning of the year 745,000 - Granted during the year - 820,000 Expired during the year - (75,000) End of the year 745,000 745,000 (i) These options may not be exercised until the Toka Tindung Gold Project has been commissioned.

Options exercisable at 34 pence expiring 31 January 2010

Beginning of the year 100,000 - Granted during the year - 100,000 End of the year 100,000 100,000

The fair value of the equity-settled share options granted under the 'Stock Appreciation Rights Plan' is estimated as at the date of grant using the Black-Scholes Model taking into account the terms and conditions upon which the options were granted.

The following table lists the inputs to the models used for the options granted:

Options Expiring

31-Jan-2010

Options Expiring

31-Aug-2009

Options Expiring

9-Sept-2008

Options Expiring

31-Dec-2007

Dividend yield (%) 0.00 0.00 0.00 0.00 Expected volatility (%) 60.00 60.00 60.00 60.00 Risk-free interest rate (%) 5.00 5.00 4.50 4.50 Expected life of options (years) 5.90 3.80 5.00 5.27 Option exercise price ($) 0.34 0.332 0.20 0.20 Weighted average share price at 0.335 0.335 0.20 0.20 measurement date ($) Model Used Black-

Scholes Black-

Scholes Black-

Scholes Black-

Scholes

The effects of early exercise have not been incorporated into the calculations. The expected volatility was determined using an industry average for small capitalisation mining companies.

- �� -36

18. RESERVES

Group Company31 December

2006US$

31 December2005US$

31 December2006US$

31 December 2005US$

Option reserve 257,799 148,817 257,799 148,817 Foreign currency translation reserve 1,149,171 (392,349) 1,676,447 142,159

1,406,970 (243,532) 1,934,246 290,976

19. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS AND STATEMENT OF MOVEMENTS IN RESERVES

Share capital

Share premium account

Other Reserves

Profit and loss account

Total

US$ US$ US$ US$ US$ Group At beginning of the year 1,757,266 37,462,467 (243,532) (7,898,253) 31,077,948 Retained loss for the year - - - (2,803,037) (2,803,037) Shares issued 657,811 27,173,997 - - 27,831,808 Share issue costs - (1,350,553) - - (1,350,553) Foreign currency translation - - 1,541,520 - 1,541,520 Employee options issued - 108,982 - 108,982 At end of year 2,415,077 63,285,911 1,406,970 (10,701,290) 56,406,668 Company At beginning of the year 1,757,266 37,462,467 290,976 (19,632,748) 19,877,961 Retained loss for the year - - - (38,995,581) (38,995,581) Shares issued 657,811 27,173,997 - - 27,831,808 Share issue costs - (1,350,553) - - (1,350,553) Foreign currency translation - - 1,534,288 - 1,534,288 Employee options issued - 108,982 - 108,982 At end of year 2,415,077 63,285,911 1,934,246 (58,628,329) 9,006,905

20. LOSS ATTRIBUTABLE TO MEMBERS OF PARENT COMPANY

The loss dealt with in the financial statements of the parent company was US$38,995,581 (2005: US$10,401,550). No income statement is presented for Archipelago Resources Plc as permitted by S230 of the Companies Act 1985.

21. MINORITY INTERESTS Group

31 December 2006US$

Group 31 December

2005US$

Balance at the beginning of the year - 2,539 Net loss attributable to outside equity interests - (2,539) Balance at the end of the year - -

The outside equity interests relate to PT Meares Soputan Mining and PT Tambang Tondano Nusajaya, subsidiary undertakings of Archipelago Resources Pty Limited.

- �� -

37

22. NOTES TO THE STATEMENT OF CASH FLOWS Group Company

31 December 2006

31 December 2005

31 December 2006

31 December 2005

US$ US$ US$ US$ (a) Reconciliation of operating

loss to net cash outflow from operating activities

Operating loss (2,802,306) (982,038) (38,994,850) (10,562,134) Add non-cash items

Depreciation 22,689 9,230 - - Exploration and evaluation expenditure written off 825,907 132,807 771,898 132,807 Foreign exchange (gain)/loss (53,719) (704,569) 8,725 (535,303) Share options expensed 101,220 98,432 101,220 98,432 Provision for diminution of loans - - 38,346,956 10,773,803 Net fair value change of derivatives - 971,681 - - Gain on financial instruments 1,177,796 - (64,357) -

Changes in net assets and liabilities (Increase) in debtors (1,501,178) 20,071 (6,332) (160,442) (Increase) in inventory (853,217) (35,753) - - Increase in trade and other payables 1,679,910 (167,582) 78,504 15,316 Increase in provisions 84,656 48,548 - -

Net cash outflow from operating activities (1,318,242) (609,173) 241,764 (237,521)

(b) Analysis of net fundsAt 31

December 2005 Cash flows

Exchange differences

Other non-cash

movements

At 31 December

2006US$ US$ US$ US$

Cash 1,183,465 848,577 200,004 - 2,232,046 Short term deposits 7,691,287 (240,851) 234,473 - 7,684,909

8,874,752 607,726 434,477 - 9,916,955

(c) Major non-cash transactions

During the financial year Archipelago Resources Plc, the ultimate holding company, sold to the consolidated entity $13,490,748 (2005: $Nil) of property, plant & equipment for the construction of the gold mining plant at the Toka Tindung project. The consolidated entity has not paid for these assets.

- �� -

38

23. COMMITMENTS

As at 31 December 2006 the company had the following commitments:

Operating lease commitments The group has entered into commercial leases on certain motor vehicles and items of machinery. Future minimum rentals payable under non-cancellable operating leases as at 31 December 2006 are as follows:

Group Company 2006

US $ 2005

US $ 2006

US $ 2005

US $

Within one year 146,988 146,988 -

After one year but not more than five years 109,760 256,748 - 256,748 403,736 -

Capital commitments At December 31, 2006 the group had a commitment of $9,542,910 (2005: $255,863) principally relating to the construction of the gold mining plant at the Toka Tindung site, which is payable within one year.

24. CONTINGENT LIABILITIES

As part of the acquisition by Archipelago Resources Pty Limited (“ARPL”), a subsidiary undertaking of the company, of PT Meares Soputan Mining (“PT MSM”) and PT Tambang Tondano Nusajaya (“PT TTN”) from Aurora Gold Limited (“Aurora”), ARPL entered into a royalty agreement dated 27 March 2002. The agreement requires the group to pay Aurora a 0.31875% gross royalty in respect of all gold and silver subsequently derived by PT MSM and PT TTN from the Toka Tindung Gold Project.

As a result of the current nature of the group’s activities, it is not possible to reliably quantify the potential amount payable under the royalty agreement.

25. POST BALANCE SHEET EVENTS

On 16 March 2007, ARPL signed a syndicated loan facility for the development of the company’s 85% owned Toka Tindung Gold Project in Sulawesi, Indonesia (the “Project”). The syndication was arranged by Investec Bank (Australia) Ltd (“Investec”) following the granting to Investec (previously N.M. Rothschild & Sons (Australia) Limited), of an exclusive financing mandate to provide debt finance and hedging facilities for the Project.

Four banks, Investec, Australia and New Zealand Banking Group, Société Générale and WestLB AG, together will provide a US$42.7M debt and a US$4.0M cost overrun facility.

The company has also reached agreement with RMB Resources to make available additional subordinated loan facilities to the company if required for the Toka Tindung Gold Project and corporate purposes.

Pursuant to this agreement, on 23 March 2007, the company received debt funding for US$10M under a bridging facility.

Other RMB facilities include a corporate facility and a standby facility for US$5M and US$10M respectively. These facilities have been agreed and subject to investment committee approval will be drawn if required in due course.

- �� -39

26. FINANCIAL INSTRUMENTS

The group’s financial instruments, other than derivatives, comprise trade debtors, trade creditors, cash and loans.

Interest rate risk profile of financial assets and liabilities

Cash balances attract a floating rate of interest. The group’s term deposits have weekly maturities and the interest rate is fixed with the bank on rollover of the deposits. The group’s investment in Corplex through the options to acquire Corplex as set out in note 13, is interest free. The option is sterling denominated and expires on 31 December 2012.

The group’s liquidity, interest rate and foreign exchange risks are managed centrally following guidelines laid down by the Board. All non-routine transactions require Board approval.

The group’s objective is to maintain a balance between continuity of funding and flexibility through the use of borrowings with a range of maturities.

Liquidity risk The group’s policy has been to finance its operations and expansions through the issue of equity share capital. In the future, the directors plan to utilise debt finance secured on the group’s mineral properties. The group did not have any overdraft facilities during the year.

Currency risk

The group has operations in Australia and Indonesia and any gains and losses from these currency differences are taken to the income statement.

Fair values of financial assets and liabilities The directors have performed a review of the financial assets and liabilities as at 31 December 2006 and have concluded that the fair value of those assets and liabilities is not materially different from book value.

Hedging activities As at 31 December 2006, the group held US$ gold put options, none of which was designated as a hedge for accounting purposes but which reduce the group’s exposure to decreases in gold price. These gold put options are summarised as follows:

Expiry during Put

strike Ounces

2007 $440 29,500

2008 $440 16,500

2009 $440 4,000

Total 50,000

- �0 -

40

27. RELATED PARTY TRANSACTIONS

Group undertakings As at 31 December 2006, there was a loan agreement between the Company and Archipelago Resources Pty Ltd to provide funding for exploration activities in South East Asia. The loan is interest free. As at 31 December 2006, the balance of the loan was US$53,029,938 (2005: US$13,577,970). This amount has been fully provided as at that date.

Director related entitiesDuring the year, Archipelago Resources Pty Ltd paid rent for office space provided by Lando Pty Ltd, a company controlled by Colin Loosemore. The rent is commercially competitive and payments totalling US$20,171 (2005: US$18,288) were paid to Lando Pty Ltd during the year.

During the year, the Group paid Deacons, a firm which Michael Arnett is a partner, for legal services totalling US$218,508 (2005: US$106,488). These services were provided on arm’s length terms.

There were no related party transactions other than those disclosed in this report.

- �1 -

41

Independent auditor’s report to the shareholders of Archipelago Resources Plc

We have audited the group and parent company financial statements (the “financial statements”) of Archipelago Resources Plc for the year ended 31 December 2006 which comprise the Consolidated Income Statement, Consolidated and Parent Company Balance Sheets, the Consolidated and Parent Company Cash Flow Statements, the Consolidated and Parent Company Statement’s of Changes in Equity, and the related notes. These financial statements have been prepared under the accounting policies set out therein.

This report is made solely to the parent company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditor

The directors’ responsibilities for preparing the Annual Report and the financial statements in accordance with applicable law and International Financial Reporting Standards as adopted by the European Union are set out in the Statement of Directors’ Responsibilities.

Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation.

We also report to you whether in our opinion the information given in the Directors’ Report and the Chief Executive Officer’s statement are consistent with the financial statements. The information in the Directors’ Report includes that specific information presented in the Business Review section of the Directors’ Report.

In addition we report to you if, in our opinion, the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed.

We read other information contained in the Annual Report, and consider whether it is consistent with the audited financial statements. This other information comprises only the Directors’ Report and the Chief Executive Officer’s statement. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

Basis of audit opinion

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group’s and company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

- �� -42

Independent auditor’s report to the shareholders of Archipelago Resources Plc

Opinion

In our opinion

• the group financial statements give a true and fair view, in accordance with International Financial Reporting Standards as adopted by the European Union, of the state of the group’s affairs as at 31 December 2006 and of its results for the year then ended;

• the parent company financial statements give a true and fair view, in accordance with International Financial Reporting Standards as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the company’s affairs as at 31 December 2006;

• the financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and

• the information given in the Directors’ Report is consistent with the financial statements.

CHANTREY VELLACOTT DFK LLP

Chartered Accountants Registered Auditor London

Jetty

Toka sediment dam

Ore reclaim tunnel

Jetty

Plant construction site Plant construction site

Annual Report and Financial StatementsFor the period ended 31 December 2006

Archipelago Resources Plc • 22 Melton Street London

Archipelago Resources Plc

View over Toka Tindung Project AreaView over Toka Tindung Project Area

archipelago resources plc - rns · pdf fileassessment of the company’s revised amdal...

Documents