BOUGAINVILLE COPPER LIMITED - BCL

1 BOUGAINVILLE COPPER LIMITED (INCORPORATED IN PAPUA NEW GUINEA) 007 497 869 ANNUAL REPORT2007 BCL_AR07 31/3/08 2:51 PM Page iFor personal use onlyBCL_AR07 31/3/08 2:51 PM Page iiFor personal use onlyBOUGAINVILLE COPPER LIMITED ANNUAL REPORTThe CompanyFrom 1972 until 1989 when operations were suspendedBougainville COPPER LIMITED operated a large open pitmine and processing facility at Panguna on BougainvilleIsland in the North Solomons Province of Papua NewGuinea producing COPPER concentrate containingsignificant quantities of gold and silver. On 15 May, 1989production was brought to a halt by militant the eighteen years prior to 1989, the mine hadproduced concentrate containing 3 million tonnes ofcopper, 306 tonnes of gold and 784 tonnes of silver. Theproduction had a value of billion, which representedapproximately 44 per cent of Papua New Guinea'sexports over that period.

2 Contributions to the NationalGovernment in the form of taxes, duties and dividendswere approximately 17 per cent of internally generatedPapua New Guinea Government revenue during total of K1,088 million was contributed to the NationalGovernment, which represented 62 per cent of the netcash generated by the project between 1972-1989. Inaddition, payments to the North Solomons ProvincialGovernment and Panguna landowners, together withprovisions made since 1990, amounted to K114 , the company's presence in the North SolomonsProvince had promoted the development of significantlocal business enterprises to provide goods and servicesrequired for the mining operation and for the residentsof the training programs for some 12,000 employees,including approximately 1,000 completing full tradeapprenticeships and some 400 completing graduate andpost graduate studies, had previously resulted inconsiderable progress in the localisation of the company'semployees and also added significantly to the number ofskilled workers elsewhere in the country's work-force.

3 At the end of 2007, the company had no activities of the company are managed on acontracted services basis by a small team of Rio TintoMinerals (PNG) LIMITED staff based in Port the suspension of mining operations the companyhas retained, in good standing, its mine lease and otherleases on BOUGAINVILLE . BOUGAINVILLE COPPER LIMITED is owned per cent byRio Tinto LIMITED . The Papua New Guinea governmentowns per cent, while public shareholders hold theremaining per cent of the share COPPER on the WebInformation about BOUGAINVILLE COPPER is available onour website andthe Annual Report and other information may bedownloaded from the of MeetingThe Annual General Meeting of BOUGAINVILLE CopperLimited will be held at pm on the 8th day of May,2008 at the Crowne Plaza Hotel, Hunter Street, Port Moresby, Papua New separate Notice of Meeting is shareholders are cordially invited to R Taylor (Chairman)

4 B R AlexanderR S BurnsJ E LeahyMr J Leahy was appointed as a director on 6 February2007 and continues in office at the date of this D McLellan was a director from the beginning of thefinancial year until his retirement on 9 May D ColemanContentsIntroduction1 The Year in Brief2 Chairman s Statement and Year in Review3 Directors Report6 Corporate Governance Statement9 Financial Statements13 Independent Audit Report23 Directors Declaration24 Corporate Information25 Distribution of the Benefits27 Statistical Summary281 Incorporated in Papua New Guinea 007 497 869 BCL_AR07 31/3/08 2:51 PM Page 1 For personal use onlyBOUGAINVILLE COPPER LIMITED ANNUAL REPORTThe Year in Brief Mining operations remain suspended. Access to Panguna mine by thecompany still not possible. A per cent growth in investmentportfolio to K219 million.

5 Preparation for a return to activeExploration and Mining. Increased shareholders fundsby 7 per cent to K404 income(K 000)8,9668,203 Operating profit(K 000)3,5893,657 Earnings per share(toea) funds(K 000)404,034378,240 Return on shareholders funds(per cent) 31/3/08 2:51 PM Page 2 For personal use onlyBOUGAINVILLE COPPER LIMITED ANNUAL REPORTC hairman s Statement & Year in Review 2007 ResultsFor the year ended 31 December 2007 the net profitwas million (AUD$ million) compared with (AUD$ million) the previous year. In additionthere was a K22 million capital growth which togetherwith the net profit equates to a 7 per cent increase inshareholder funds. Although the profit for the twoperiods is similar, operating expenses rose in thisreporting period, but the increased costs were offset byincreased investment income.

6 Revenue increased by 9 per cent during the year dueprimarily to growth in dividends (+16 per cent) derivedfrom the Investment Portfolio. General andadministrative expenses grew by 10 per cent, reflectingnominal real growth in expenses, upward movements inPNG inflation rate, and AUD/PGK exchange StrategyOver the past several years BCL has maintained astrategy of investing its surplus cash in Australianequities. The move into equities was prompted by asharp fall in PNG domestic interest rates and a lack ofsuitable alternative investments in PNG vis-a-vis theinvestment criteria established. The strong Australianequity market in the reporting year has again resulted ina positive return in Australian dollar terms, much of theunrealised gain being of a capital nature. Capital gainsare not currently taxable in PNG.

7 This is important forBCL given the Internal Revenue Commission (IRC) viewthat BCL cannot claim depreciation on its remainingBougainville assets. It is intended to continue with thisinvestment strategy in 2008. The IRC is taking aparticularly aggressive approach to its tax claim andBCL s liquid funds may be considerably reduced if theIRC succeeds in requiring BCL to pay claimed additionaltax and penalties pending the outcome of BCL sobjection currently before the court. It requires that BCLsells equities to fund the claimed tax and penalties. Tax DisputeThe World Bank provided a loan to PNG to allowcapacity building for the Government s mining of those funds were used to carry out tax auditsin the mining sector. Although BCL has been unable tomine at Panguna for over a decade it was selected asthe first resources company to be audited.

8 The auditprocess took many months to complete and thecompany was required to spend considerable moneyand management time complying with the auditprocess. It is understood the World Bank is proposing toprovide further funding to the IRC for this purpose sothe resources industry can expect further audits. Suspension of the mining operations in 1989 resulted inconsiderable losses to the company. In line with normalpractice the company offset those losses againstrevenue as well as claiming depreciation of itsremaining mine assets. Despite this approach beingaccepted by the IRC every year since the suspension ofmining operations, the audit resulted in reassessmentsbeing issued for the period 1990 2000. The basis forthe claim is the company has no assets that can bedepreciated. (See Note 13 to the financial statements).

9 BCL has taken expert advice and on the basis of thatadvice lodged formal objections to the amendedassessments. The company has already paidapproximately K13 million into the National Court inrespect to the pay now litigate later approach of theIRC. Late in 2007 the IRC issued additional courtproceedings against BCL aimed at requiring thecompany to pay further monies in advance of BCL schallenge to the new assessments and PolicyThe profit is insufficient to warrant a dividend beingpaid particularly given the uncertain impact the IRCclaim will have on the company s cash position. Review and Renegotiation of theBougainville COPPER Agreement (BCA) The company has proposed to the Government thatlitigation over claims arising from the suspension ofmining operations will not expedite a return to miningor resolution of the outstanding issues, including claimsby the company against the Government.

10 BCL has longadvocated negotiation as the best means of addressingall claims. The Autonomous BOUGAINVILLE Government(ABG) agreed with this approach shortly after beingformed and formally requested that the NationalGovernment expedite a renegotiation of theBougainville COPPER Agreement (BCA) as a formalprocess that would allow the main stakeholders toaddress a range of issues. The National Governmentagreed to a formal review and renegotiation of the BCAand that the ABG and mine lease landowners be invitedto join the discussions. 3 BCL_AR07 31/3/08 2:51 PM Page 3 For personal use onlyBOUGAINVILLE COPPER LIMITED ANNUAL REPORTC hairman s Statement & Year in Review 2007 The processes stalled for various reasons during 2007but there is now optimism that the new MineralResources Authority (MRA) will help facilitate thenegotiations.