Independent Audit Report

To the members of Pasminco Limited

Scope
We have audited the financial report of Pasminco Limited (Subject to Deed of Company Arrangement) for the financial year ended 30 June 2002, as set out on pages 8 to 39, including the Deed Administrators’ Declaration. The financial report includes the financial statements of Pasminco Limited (Subject to Deed of Company Arrangement), and the consolidated financial statements of the consolidated entity comprising the Company and the entities it controlled at year’s end or from time to time during the financial year. The Deed Administrators are responsible for the financial report. We have conducted an independent audit of the financial report in order to express an opinion on it to the members of the Company.

Our audit has been conducted in accordance with Australian Auditing Standards to provide reasonable assurance whether the financial report is free of material misstatement. Our procedures included examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial report, and the evaluation of accounting policies and significant accounting estimates. These procedures have been undertaken to form an opinion whether, in all material respects, the financial report is presented fairly in accordance with Accounting Standards, other mandatory professional reporting requirements and statutory requirements in Australia, so as to present a view which is consistent with our understanding of the Company’s and the consolidated entity’s financial position and performance as represented by the results of their operations and their cash flows. The audit opinion expressed in this report has been formed on the above basis.

Qualifications
As referred to in Note 1 (a) the Company and the consolidated entity incurred a loss of $405.1 million and $411.0 million respectively for the financial year ended 30 June 2002 and subsequent to balance date, have continued to generate a loss. At 30 June 2002, both the Company and the consolidated entity were also in a net asset and net current asset deficiency and have had an event of default under the terms of the certain finance agreements.

During July 2001, the Company held discussions with its financiers and proposed a restructuring plan to maintain continued financial support from the financier group. On 19 September 2001, the Company and all wholly owned Australian subsidiaries, except Pasminco Superannuation Pty Limited, were placed into Voluntary Administration.

A proposal to restructure the Pasminco Group (comprising Pasminco Limited and its controlled entities) was approved at a meeting of creditors on 30 August 2002, which will allow the Pasminco Group to continue to trade, albeit in a reconstructed form. A number of Deeds of Company Arrangement were required to be executed to implement the restructure proposal. On 4 October 2002 all Deeds of Company Arrangement were executed, with effect from 5 October 2002 and Pasminco Limited and most of its controlled entities previously subject to voluntary administration became subject to Deeds of Company Arrangement.

The currently preferred restructuring plan for the Pasminco Group approved at the creditors meeting on 30 August 2002 involves the following:
(a) A restructure of the Pasminco Group, achieved principally by splitting the Pasminco Group into two parts. The two distinct parts would comprise entities required for the ongoing operations ("Ongoing Group") and entities that will not be included in the restructured Pasminco ("Residual Group"). It is currently envisaged that all of the operating sites will form part of the Ongoing Group. Pasminco Limited will form part of the Residual Group.

(b) The Ongoing Group will be formed by a new holding company, to be referred to as Pasminco Resources Limited, acquiring the shares in the entities that own the operating assets.

(c) The rationalisation of certain intercompany liabilities payable by the Ongoing Group to the Residual Group such that those liabilities reflect the fair value of the assets of the Ongoing Group entities to be acquired by Pasminco Resources Limited.

(d) The acquisition by Pasminco Resources Limited of existing intercompany liabilities payable by the Ongoing Group in consideration for the issue of new equity by Pasminco Resources Limited to the Residual Group, with the subsequent sale of 50% (or some other portion) of the equity to investors in a float of the Ongoing Group.

(e) The distribution of equity in Pasminco Resources Limited, and proceeds from the sale of 50% (or some other portion) of the equity, to 19 September 2001 creditors of the Residual Group after payment of secured and priority creditors. The remaining debt of the Residual Group will ultimately be released by the financial creditors after all distribution property has finally been distributed (which is not currently expected for a number of years).

The preferred restructuring plan is dependent on the sale of equity in Pasminco Resources Limited to investors in a float achieving a minimum application level. In the event that the preferred restructuring plan is successfully implemented, the Residual Group, including Pasminco Limited, will cease to operate and its affairs will be dealt with under Deeds of Company Arrangement.

In the event that the currently preferred restructuring plan is not successfully implemented, the Deed Administrators will convene a meeting of creditors to decide on the way forward. The other restructure options may include, but are not limited to, continue trading in the current state and consider a float at a later date, realisation of the assets in a Deed of Company Arrangement, sale of equity to one or more private investors, a debt for equity swap using equity in Pasminco Limited or if these options are not acceptable to liquidate the assets in a formal winding up.

Under the majority of these scenarios, including the currently preferred option, Pasminco Limited is no longer considered a going concern and therefore, on this basis, the operating assets have been recognised in the financial report at the lower of cost and estimated net realisable value under the terms of the restructure. Liabilities have been recognised in the financial report at full value without allowance being made for any proposed debt forgiveness.

As a result of the above:
1. The process and timing of the divestment of assets by the Pasminco Group is dependent on the timing and success of the float, which is the currently preferred restructure option. Due to this uncertainty, we are unable to obtain sufficient audit evidence to satisfy ourselves as to the carrying value of the consolidated entity’s assets included in property, plant and equipment as disclosed in note 9, and in particular whether the basis for determining the lower of cost and estimated net realisable value is appropriate.

2. The restructuring of the group will also require a change to the terms and conditions of liabilities existing as at 19 September 2001 (the date of appointment of the Voluntary Administrators), including the amount to be repaid and the repayment dates. The amount of the liabilities to be settled, by the exchange of debt for equity, and therefore the amount of the liabilities to be released by creditors, is dependent on the implementation of a particular restructure option. The quantification of provisions for rehabilitation, closure costs and other liabilities may also be dependent on the timing and method of divesture of assets. Therefore, we are unable to obtain sufficient audit evidence to satisfy ourselves as to the amount of liabilities as disclosed in notes 15 to 18.

3. The preferred restructure of the Pasminco Group, if implemented, is expected to lead to the sale of entities in the group that hold the operating assets and liabilities before 30 June 2003. Therefore these assets and liabilities have been classified as current assets and liabilities. The sale of entities is dependent on the timing and success of the float of Pasminco Resources Limited. Due to this uncertainty, we are unable to obtain sufficient audit evidence to satisfy ourselves as to the appropriateness of classification as current of the assets and liabilities disclosed in notes 6 to 10 and 15 to 18 respectively.

4. The financiers initially waived the default under the terms of the Company’s and consolidated entity’s financing arrangements, and now as a condition of the Deed of Company Arrangement, repayments of financial creditors as at 19 September 2001 have been deferred pending implementation of the restructuring. Without the ongoing financial support from financiers, and the successful restructuring of the current debt facilities, the Company and the consolidated entity will be unable to pay its debts as and when they become due and payable.

5. If the currently preferred restructure option is implemented, the Residual Group, including Pasminco Limited, will cease to operate and their affairs will be dealt with pursuant to Deeds of Company Arrangement.

6. In addition to, and as a result of, the uncertainties detailed in qualification paragraphs (1) to (5) above, we are unable to satisfy ourselves as to whether the Company and the consolidated entity will be able to pay their debts as and when they become due and payable. The financial report may not include all adjustments relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that might be necessary. These constitute limitations on the scope of our audit.

Qualified Audit Opinion
Due to the significance of the uncertainties referred to in the qualification paragraphs (1) to (6) above, we are unable to, and do not, express an opinion as to whether the financial report of Pasminco Limited (Subject to Deed of Company Arrangement) and the economic entity is in accordance with:
(a) the Corporations Act 2001 including:
(i) giving a true and fair view of the Company’s and consolidated entity’s financial position as at 30 June 2002 and of their performance for the year ended on that date; and
(ii) complying with Accounting Standards and the Corporations Regulations 2001 in Australia; and

(b) other mandatory professional reporting requirements in Australia.

Ernst & Young

Alan I Beckett
Partner
Melbourne
Date: 30 October 2002

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