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									                                      ARAFURA RESOURCES LIMITED
                                                           ABN 22 080 933 455



                                          Annual report – 30 June 2008




CORPORATE OFFICE
Level 4 & 11, 16 St Georges Terrace
Perth, Western Australia 6000
Australia

T: + 61 8 6210 7666
F: + 61 8 9221 7966
E: arafura@arafuraresources.com.au


PROJECT & EXPLORATION OFFICE
Level 2, 43 Mitchell Street
Tourism House
Darwin, Northern Territory 0801
Australia
CONTENTS




                                                                    Page

Corporate directory                                                   1

Directors’ report                                                     3

Provision of non-audit services statement                             28

Auditor’s independence declaration                                    30

Corporate governance statement                                        31

Income statements                                                     35

Balance sheets                                                        36

Consolidated statements of changes in equity                          37

Cash flow statements                                                  38

Index to the notes to the financial statements                        39

Notes to the financial statements                                     40

Directors’ declaration                                                98

Independent audit report to the members                               99

Shareholder information                                              101




                                                 Arafura Resources Limited – 2008 Annual Report
CORPORATE DIRECTORY


Directors                                  Irvin G (Mick) Muir
                                           Chairman

                                           Alistair J Stephens
                                           Managing Director

                                           Ian J Kowalick

                                           Terry R Jackson

                                           Stephen Ward

                                           Ian J Laurance

Secretary                                  Gavin J Lockyer


Notice of annual general meeting           The annual general meeting of Arafura
                                           Resources Limited

Will be held at                            Hyatt Regency, 99 Adelaide Terrace
                                           Perth WA

Time                                       12 noon (WST)

Date                                       Friday 28 November 2008



Principal registered office in Australia   Level 4, 16 St Georges Terrace
                                           Perth
                                           Western Australia 6000

Share registry                             Security Transfer Registrars Pty Ltd
                                           770 Canning Highway
                                           Applecross
                                           Western Australia 6153

Auditor                                    BDO Kendalls Audit & Assurance (WA)
                                           Pty Ltd
                                           128 Hay Street
                                           Subiaco
                                           Western Australia 6008



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                                                        Arafura Resources Limited – 2008 Annual Report
CORPORATE DIRECTORY



Solicitors               Johnson Winter & Slattery
                         216 St Georges Terrace
                         Perth
                         Western Australia 6000

                         Blakiston & Crabb
                         1202 Hay Street
                         West Perth
                         Western Australia 6005


Bankers                  Westpac Banking Corporation
                         109 St Georges Terrace
                         Perth
                         Western Australia 6000

Stock exchange listing   Arafura Resources Limited shares are
                         listed on the Australian Stock Exchange
                         under the code ARU

Website address          www.arafuraresources.com.au




                                                                                 2
                                     Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Your directors present their report on the consolidated entity (referred to hereafter as the
Group) consisting of Arafura Resources Limited and the entities it controlled at the end of,
or during, the year ended 30 June 2008.

Directors

The following persons were directors of Arafura Resources Limited during the whole of the
financial year and up to the date of this report:

I G Muir
A J Stephens
I J Kowalick
T R Jackson
S Ward
I J Laurance

S Ward and I J Laurance were appointed as directors on 15 August 2007 and 20 February
2008 respectively and continue in office at the date of this report.

Principal activities

During the year the principal continuing activities of the Group consisted of:

(a)   Mineral exploration;
(b)   Mining and associated infrastructure feasibility evaluations; and
(c)   Mineral processing technological feasibility evaluations.

Dividends – Arafura Resources Limited

No dividends were paid during the year and the directors do not recommend the payment of
a dividend.

Operating and financial review

The loss of the Group for the year after income tax was $6,373,529 (2007: $5,048,367).

Significant changes in the state of affairs

Significant changes in the state of affairs during the financial year were as follows:

(a)   An increase in contributed equity of $19,754,143 (from $17,279,525 to $37,033,668 as
      a result of:


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                                                                 Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Details                                Number of shares      Issue Price                          $
Opening balance 01/07/07                    121,933,670                                17,279,525
Listed options exercised                     13,469,330           $0.13                  1,751,013
Employee options exercised                      100,000           $0.22                     22,000
Employee options exercised                    3,000,000           $0.13                    390,000
Private placement                            18,691,500           $1.00                18,691,500
Share issue transaction costs                         -                -               (1,100,370)
Closing balance 30/06/08                    157,194,500                                37,033,668



(b)   Net cash received from the increase in contributed equity amounting to $19,688,626
      was used principally on exploration expenditure of $4,003,879 (2007: $2,085,163),
      feasibility expenditure of $2,166,908 (2007: $1,221,662), definitive feasibility studies
      expenditure of $2,176,319 (2007: nil), pilot plant expenditure of $2,729,578 (2007:
      nil), pre-development expenditure of $244,361 (2007: nil), purchases of property, plant
      & equipment of $517,037 (2007: $109,326) and corporate activities of $4,167,834
      (2007: $2,409,476).

(c)   A receipt of $2,500,000 being from the sale of a wholly owned subsidiary and non-
      core tenements held in the parent entity while retaining the gold rights.

(d)   The receipt of $1,967,881 as re-imbursement of expenditure under AusIndustry’s
      Commercial Ready Grant.

(e)   The receipt of $374,752 for eligible research and development expenditure from the
      Australian Taxation Office.

(f)   An expense of $1,667,304 in relation to employee options has been recorded under
      employee benefits expense.

Matters subsequent to the end of the financial year

(a)   Issue of options to new and existing employees

Since 30 June 2008, Arafura Resources Limited has issued under the Employee Share
Option Plan 3,050,000 options to current and new employees. These options issued have
an exercise price of $1.19, vest on 31 December 2009 and expire on 31 December 2012.




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                                                                Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




The fair value of the options issued at grant date over the expected life of the options is as
set out below:

Grant Date              Amount to be expensed     Amount to be expensed             Total amount to be
                                    in 2008/09                in 2009/10       expensed as per AASB 2
                                             $                         $                             $
01 Jul 08                              802,874                      406,426                    1,209,300



(b)     General meeting of shareholders

On 2 September 2008, a general meeting of shareholders was held. The agenda of the
meeting was to approve the previous share placement in November 2008 (18,691,000 fully
paid ordinary shares at $1 per share) and the issue of options to directors as below:


                          Number of options
Name                                              Exercise price         Vesting date         Expiry date
                                   granted
I J Laurance                     2,000,000                $1.19           31 Dec 09           31 Dec 12
I J Kowalick                     1,500,000                $1.19           31 Dec 09           31 Dec 12
S Ward                           1,500,000                $1.19           31 Dec 09           31 Dec 12
T R Jackson                      1,500,000                $1.19           31 Dec 09           31 Dec 12
A J Stephens                     2,500,000                $1.19           31 Dec 09           31 Dec 12
Total                            9,000,000


The fair value of the options issued to the directors at grant date over the expected life of
the options is as set out below:


Grant Date              Amount to be expensed     Amount to be expensed             Total amount to be
                                    in 2008/09                in 2009/10       expensed as per AASB 2

                                              $                           $                             $


02 Sep 2008                          1,209,843                     2,156,302                   3,366,145


The resolutions approving the previous share placement and the above granting of options
to directors were carried.




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                                                                      Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




(c)    Heads of agreement

On 25 August, 2008 the Group announced a Heads of Agreement signing with Incitec Pivot
Limited (ASX: IPLDA) under which Arafura and Incitec Pivot will evaluate the feasibility of
constructing integrated chemical facilities to supply relevant chemicals to the Group’s
proposed rare-earth-phosphate recovery facility.

The study will incorporate a review of potential plant sites in South Australia and the
Northern Territory for both the chemical plant and the rare-earth-phosphate processing
facility and is expected to take approximately 6 months to complete.

The parties will consider the feasibility of the chemical facility supplying the majority of the
Group’s chemical needs for its rare earths phosphate facility, including hydrochloric acid,
sulphuric acid and caustic soda.

In addition, the parties will also consider the marketing opportunities for the chemical
outputs of phosphoric acid and calcium chloride from the Group’s rare earth processing
facility creating a specialist chemical supply, logistic and marketing opportunity.


Likely developments and expected results of operations

The Group will continue its exploration and development programme to grow its position in
rare earth projects that are consistent with additional growth beyond the Nolans project. The
Group will focus on the identification and development of rare earth projects and specialise
in rare earth products and their markets.

The Group’s primary focus is the development of the Nolans rare earths-phosphate-
uranium project. The deposit has a resource to sustain a mine life of over twenty years and
Arafura has developed a processing flow sheet that optimises the extraction of rare earths,
phosphoric acid and uranium.

Environmental regulation

The Group is subject to environmental regulations and is compliant with all aspects of
environmental regulation on its exploration activities. The directors are not aware of any
environmental law that is not being complied with.




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                                                                 Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Information on directors


Irvin (Mick) Graham Muir BA (Econ). Chairman – Non-executive. Age 72

Experience and expertise
Irvin Muir is a Western Australian business man with over 30 years experience in the mining
industry. He is an economics graduate and has worked in the securities industry and for the
Western Australian Chamber of Mines in Kalgoorlie.

Other current directorships
Non-executive director and Chairman of NuPower Resources Limited.

Former directorships in the last 3 years
None.

Special responsibilities
Chairman of the Board.
Member of the audit committee.

Interests in share and options
3,018,501 ordinary shares (direct)




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                                                              Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Alistair James Stephens BSc (Hons), MBA, GAICD. Managing Director – Executive. Age 44

Experience and expertise
Alistair Stephens is a graduate in geology and business. He has 20 years experience in the
mineral resources industry with companies including Newmont, Normandy, Kalgoorlie
Consolidated Gold Mines, Western Mining Corporation and Orica. He has extensive career
in resource and mine geology, mining, mineral processing and marketing.

Other current directorships
None.

Former directorships in the last 3 years
None.

Special responsibilities
Managing Director.

Interests in share and options
2,659,827 ordinary shares (indirect)

Ian John Kowalick Bsc(Hons), BEc. Non-executive director. Age 63

Experience and expertise
Ian Kowalick has qualifications in science, engineering, economics and finance. In the
private sector, he has worked in technical and project consulting, economic and business
analysis for resources companies, banking and investment. From 1995 to 2000, he held the
most senior management position in the South Australian public sector, providing him with
an extensive understanding of government relations and the management of their
regulatory and planning requirements.

Other current directorships
Non-executive director of NuPower Resources Limited.

Former directorships in the last 3 years
None.

Special responsibilities
Chairman of the audit committee.
Member of remuneration and nomination committee.

Interests in share and options
550,000 ordinary shares (indirect)


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                                                               Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Terry Roy Jackson AM, KLJ, FAICD. Non-executive director. Age 69

Experience and expertise
Terry Jackson is a Western Australian industrialist with a substantial, diverse share
portfolio. His private group of companies has interests in innovative manufacturing,
intellectual property, import-export, commercial and residential property, property
development and wine making. With an electronic engineering background, he worked for
seven years in the communications industry and thereafter for seven years in management,
sales and service of industrial and scientific research equipment. Self employed for thirty-
eight years, he has travelled and traded with many overseas corporations including a
research partnership with Exxon, Toyota, Johnson Controls and Austrian Steel. He is a
foundation Fellow of the Australian Institute of Company Directors, a Knight in the Order of
Saint Lazarus of Jerusalem, a recipient of the Australian Centenary Medal and a Member of
The Order of Australia for his contributions to the arts, the church, industry and international
trade.

Other current directorships
None.

Former directorships in the last 3 years
None.

Special responsibilities
Member of the audit committee.

Interests in share and options
4,778,668 ordinary shares (indirect)




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                                                                 Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Stephen Ward, BSc(Hons), Chemistry, PhD Physical Chemistry.
Non-executive director. Age 53

Experience and expertise
Steve Ward has over 30 years experience in the chemical, mining and minerals processing
industries. Steve gained 20 years broad experience with titanium pigment producer Tioxide
Group Ltd (now Huntsman Pigments). Another seven years of experience was with a
publicly listed mineral sands producer. Steve has also been president of a US mining and
processing operation. He is a graduate of the Australian Institute of Company Directors.

Other current directorships
None.

Former directorships in the last 3 years
Non-executive director of Consolidated Rutile Limited and non-executive director of Bemax
Resources Limited.

Special responsibilities
Chairman of remuneration and nomination committee.

Interests in share and options
25,000 ordinary shares (direct)




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                                                            Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Ian James Laurance, AM. Non-executive director. Age 68

Experience and expertise
Ian Laurance was elected as member for Gascoyne in the Western Australian Parliament in
1974. Following a fourteen year parliamentary career where he held various ministerial
positions, Ian spent several years as director of a publically listed property trust. In recent
years, he has gained extensive experience in chairing various semi-government and
statutory bodies. Recently, Ian was made a Member of the Order of Australia for his
services to the tourism industry in Western Australia, the community as a member of the
Western Australian Parliament and to sporting, environmental and charitable organisations.

Other current directorships
Non-executive director and Chairman of Axiom Properties Limited.

Former directorships in the last 3 years
None.

Special responsibilities
Member of remuneration and nomination committee.

Interests in share and options
10,000 ordinary shares (direct)
30,000 ordinary shares (indirect)


Company Secretary

Gavin John Lockyer BBus, CA. Age 40

Gavin Lockyer is a member of the Institute of Chartered Accountants and a member of the
Finance & Treasury Association of Australia. He has 15 years experience in the banking
and mining industries, having held previous treasury, finance and accounting roles with
Newmont, Newcrest, Tethyan Copper Company, Bankwest, The ANZ Group, Bankers Trust
and Deutsche Bank London.




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                                                                Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Meeting of directors

The number of meetings of the Company’s Board of directors, the number of meetings of
each Board committee held during the year ended 30 June 2008 and the number of
meetings attended by each director were:


                    Board meetings                       Meetings of committees
Director           Full          Full        Audit        Audit      Remuneration      Remuneration
               meetings of   meetings if   committee   committee     & nomination      & nomination
                directors     directors     meetings    meetings      committee         committee
                   held       attended       held       attended         held            attended
I G Muir           10            10           1           1                n/a               n/a
A J Stephens       10            10           n/a         n/a              n/a               n/a
I J Kowalick       10            10           1           1                 1                 1
T R Jackson        10            10           1           1                n/a               n/a
S Ward             9             9            n/a         n/a               1                 1
I J Laurance       5             5            n/a         n/a               1                 1



A J Stephens, S Ward and I J Laurance are not members of the audit committee.

I G Muir, A J Stephens and T R Jackson are not members of the remuneration and
nomination committee.

S Ward was appointed as a director on 15 August 2007.

I J Laurance was appointed as a director on 20 February 2008.




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                                                                   Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Remuneration report

The remuneration report is set out under the following main headings:

A      Principles used to determine the nature and amount of remuneration
B      Details of remuneration
C      Service agreements
D      Share-based compensation
E      Additional information

The information provided in this remuneration report has been audited as required by
section 308(3C) of the Corporations Act 2001.


A      Principles used to determine the nature and amount of remuneration

All compensation arrangements for directors and the Group’s executives are determined at
Board level after taking into account the competitive rates prevailing in the market place.

Remuneration level of the directors and the Group’s executives are set by reference to
other similar mining and exploration companies with similar risk profiles. They are set to
attract and retain executives capable of managing the Group’s operations. Remuneration of
non-executive directors is determined by the Board within the maximum approved by
shareholders from time to time. The Board undertakes an annual review of its performance
against goals set out at the start of the year. No bonuses are paid to non-executive
directors.

The Group’s executive remuneration framework aligns executive remuneration with the
achievement of strategic objectives and the creation of value to shareholders, and conforms
to market best practice for delivery of reward. The Board ensures that the executive
remuneration is competitive, reasonable and acceptable to shareholders and aligned with
performance.

Non-executive directors

Fees and payments to non-executive directors reflect the demands which are made on, and
the responsibilities of, the directors. Non-executive directors’ fees and payments are
reviewed annually by the Board. The Board has received advice of independent
remuneration consultants to ensure non-executive directors’ fees and payments are
appropriate and in line with the market. The Chairman’s fee is determined independently to
the fees of non-executive directors based on comparative roles in the external market.




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                                                              Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Remuneration report (cont)

The Chairman is not present at any discussion relating to the determination of his own
remuneration.

Non-executive directors’ fees are determined within an aggregate directors’ fee pool limit,
which is periodically recommended for approval by shareholders. The maximum currently
stands at $750,000 per annum.

Non-executive directors currently receive $48,000 per annum plus 12% superannuation.
The Chairman receives $96,000 per annum plus 12% superannuation.

There is no direct link between remuneration paid to any non-executive directors and
corporate performance. There are no termination or retirement benefits for non-executive
directors.

The current base remuneration was last reviewed with effect from 1 January 2008. The
Chairman’s and non-executive directors’ remuneration is inclusive of committee fees.

Executive pay

The executive pay and reward framework has four components:

•   base pay and benefits;
•   short-term performance incentives;
•   long-term incentives through participation in the Employee Share Option Plan; and
•   other remuneration.

The combinations of these comprise the executive’s total remuneration.

Base pay and benefits

The base pay is inclusive of statutory superannuation and is structured as a total
employment cost package, which may be delivered as a mix of cash and prescribed non-
financial benefits at an executive’s discretion.

Executives are offered a competitive base pay that comprises the fixed component of pay
and rewards. External remuneration consultants provide analysis and advice to ensure the
base pay is set to reflect the market’s for a comparable role. Base pay for senior executives
is reviewed annually to ensure the executive’s pay is competitive with the market. An
executive’s pay is also reviewed upon promotion. There are no guaranteed base pay
increases fixed in any senior executive’s contract. Executive benefits received are a motor
vehicle allowance.



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                                                               Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Remuneration report (cont)

Short-term incentives

Short-term bonuses may be paid to encourage and reward superior performance. The
bonuses are at the discretion of the Board and there is no guarantee that bonus payments
will be made. No bonus payments were made for the year ended 30 June 2008.

Other performance-linked remuneration is designed for rewarding executive directors,
officers and senior management for their role in achieving corporate objectives and is
directly linked to the creation of shareholder value.

Performance incentives

Key management personnel participate in incentive schemes. Two members of the key
management personnel receive a minimum 30% bonus of current base salary linked to
Board approval for the construction of the Nolans rare earths phosphate project. One
member of the key management personnel receives a 100% bonus of current base salary
linked to the successful discovery and/or acquisition of a mineral deposit having a net
present value of greater than 25% of the Parent company’s market capitalisation at the time
of the scoping study.

Long-term performance-linked remuneration is designed for rewarding executive directors,
officers and senior management for their role in achieving corporate objectives and is
directly linked to the creation of shareholder value.

These incentives are provided as options issued either under the terms and conditions of
the Group’s Employee Share Option Plan or otherwise under the terms and conditions
determined at the time of issue by the Board.

For the year ended 30 June 2008 actual results achieved by the Group, key strategic
business units and individuals is measured against key performance indicators (KPI). The
KPIs required specific development and evaluation milestones to by achieved, including on
time and within budget. The remuneration committee following its formation in May 2008 is
responsible for assessing whether the KPIs are met. Prior to the remuneration committee
being formed it was the board who assessed whether KPIs were being achieved. To help
make these assessments, both the board and the committee receives detailed reports on
performance from management and also consults with external remuneration consultants.

For the year ended 30 June 2008 there were no performance based payments paid to
executives.

The only options granted for the year ended 30 June 2008 were to a single member of the
executive team upon his commencement of employment with the Group in November 2008.



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                                                             Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Remuneration report (cont)

Under the Group’s Employee Share Option Plan approved by shareholders at the general
meeting held on 15 July 2005, the Board has absolute discretion to:

•   invite eligible persons to apply for a specified number of options;
•   set performance criteria; and
•   set option exercise process and expiry dates.

Under the terms and conditions of the plan, options lapse in a number of circumstances
including cessation as an employee or for fraudulent or dishonest actions.


B      Details of remuneration

Details on the remuneration of the directors, the key management personnel of the Group
(as defined in AASB 124: Related Party Disclosures) and specified executives of Arafura
Resources Limited are set out in the following tables.

The key management personnel of the Group are the directors of Arafura Resources
Limited and those executives that report directly to the Managing Director being:

•   S J Mackowski – General Manager Project Development
•   R Brescianini – General Manager Strategic Development and Exploration
•   B W Fowler – Manager Sustainability
•   G J Lockyer – Chief Financial Officer and Company Secretary




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                                                                Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Remuneration report (cont)



                          Short–term benefits                    Post –         Long-term                        Share-
                                                              employment         benefits                        based
                                                                benefits                                        payments

2008               Cash        Bonus            Non-         Superannuation       Long          Termination     Options         Total
                 salary and                monetary                              service         benefits
                   fees                    benefits                               leave

Name                 $            $              $                 $                $               $              $             $

Non-executive
directors

I G Muir             96,000           -                  -             11,520               -               -             -    107,520

I J Kowalick         48,000           -                  -              5,760               -               -             -     53,760

T R Jackson          48,000           -                  -              5,760               -               -             -     53,760

S Ward               42,240           -                  -              5,024               -               -             -     47,264

I J Laurance         17,664           -                  -              2,120               -               -             -     19,784

Executive
director

A J Stephens        250,000           -          47,192                30,000               -               -    198,403       525,595

Other key
management
personnel
(Group)

S J Mackowski       205,000           -          16,397                24,600               -               -    232,528       478,525

R Brescianini       205,000           -              1,527             24,600               -               -    291,384       522,511

B W Fowler          110,176           -                703             12,119               -               -     54,512       177,510

G J Lockyer         205,000           -                  -             24,600               -               -    351,987       581,587

Total             1,227,080           -          65,819             146,103                 -               -   1,128,814     2,567,816




•       S Ward was appointed as a non-executive director on 15 August 2007.
•       I J Laurance was appointed as a non-executive director on 20 February 2008.
•       B W Fowler commenced on 15 November 2007.




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                                                                                            Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Remuneration report (cont)



                         Short–term benefits                   Post –           Long-                          Share-
                                                            employment          term                           based
                                                              benefits         benefits                       payments

2007              Cash        Bonus        Non-            Superannuation       Long          Termination     Options         Total
                salary and               monetary                              service         benefits
                  fees                    benefits                              leave

Name                $            $             $                 $                $               $              $             $

Non-executive
directors

I G Muir            58,000           -                 -              5,220               -               -             -     63,220

I J Kowalick        42,000           -                 -              3,780               -               -             -     45,780

T R Jackson          8,000           -                 -                 720              -               -             -      8,720

P N Walker          52,000           -                 -              4,680               -               -             -     56,680

Executive
director

A J Stephens       243,333           -         23,899                21,900               -               -   1,566,350     1,855,482

Other key
management
personnel
(Group)

S J Mackowski      182,500           -         11,236                16,425               -               -    227,719       437,880

R Brescianini       55,494           -                 -              4,994               -               -     54,648       115,136

G J Lockyer        185,000           -             1,243             16,650               -               -    328,276       531,169

Total              826,327           -         36,378                74,369               -               -   2,176,993     3,114,067




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                                                                                          Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Remuneration report (cont)

The relative proportions of remuneration that are linked to performance and those that are
fixed are as follows:


                          Fixed remuneration      At risk - STI                  At risk - LTI
                          2008         2007    2008           2007            2008           2007
Non-executive directors
I G Muir                  100%         100%      -             -                -               -
I J Kowalick              100%         100%      -             -                -               -
T R Jackson               100%         100%      -             -                -               -
S Ward                    100%         100%      -             -                -               -
I J Laurance              100%           -       -             -                -               -
P N Walker                 -           100%      -             -                -               -
Executive director
A J Stephens              100%         100%      -             -                -               -
Other key management personnel (Group)
S J Mackowski             70%          70%       -             -              30%             30%
R Brescianini             80%          70%       -             -              20%             30%
B W Fowler                69%            -       -             -              31%               -
G J Lockyer               70%          70%       -             -              30%             30%




C          Service agreements

On appointment to the Board, all non-executive directors enter into a service agreement
with the Company in the form of a letter of appointment. The letter summarises the Board
policies and terms, including compensation, relevant to the office or director.

Remuneration and other terms of employment for the Managing Director and other key
management personnel are also formalised in service agreements. The major provisions of
the agreements relating to remuneration are set out below.

The consolidated entity has entered into service agreements with the Managing Director
and other key management personnel.




                                                                                                              19
                                                                   Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Remuneration report (cont)

A J Stephens, Managing Director
•      Term of agreement (unlimited term from 21 July 2006).
•      Base salary inclusive of superannuation for the year ended 30 June 2008 of
       $280,000.
•      Base salary, inclusive of superannuation, from 1 July 2008 of $337,500.
•      Costs associated with a private vehicle paid by the employer.
•      Payment of termination benefit on early termination by the employer, other than for
       gross misconduct, equal to one month of the base salary.

G J Lockyer, Chief Financial Officer
•     No term of agreement.
•     Base salary, inclusive of superannuation, for the year ended 30 June 2008 of
      $229,600.
•     Base salary inclusive of superannuation from 1 July 2008 of $253,125.
•     Payment of termination benefit on early termination by the employer, other than for
      gross misconduct, equal to one month of the base salary.
•     Payment of termination benefit on the position becoming redundant, equal to three
      months of the base salary.
•     Minimum 30% bonus of base salary linked to the Board approval for the construction
      of the Nolans rare earths phosphate project.

S J Mackowski, General Manager Project Development
•     No term of agreement.
•     Base salary, inclusive of superannuation, for the year ended 30 June 2008 of
      $229,600.
•     Base salary inclusive of superannuation from 1 July 2008 of $253,125.
•     Payment of termination benefit on early termination by the employer, other than for
      gross misconduct, equal to one month of the base salary.
•     Minimum 30% bonus of base salary linked to the Board approval for the construction
      of the Nolans rare earths phosphate project.

R Brescianini, General Manager Strategic Development and Exploration
•     No term of agreement.
•     Base salary inclusive of superannuation, for the year ended 30 June 2008 of
      $229,600.
•     Base salary, inclusive of superannuation from 1 July 2008 of $253,125.
•     Payment of termination benefit on early termination by the employer, other than for
      gross misconduct, equal to one month of the base salary.
•     A 100% bonus of base salary linked to the successful discovery and/or acquisition of
      a mineral deposit having a net present value of greater than 25% of the Parent
      company’s market capitalisation at the time of the scoping study.



                                                                                                        20
                                                             Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Remuneration report (cont)

B W Fowler, Manager Sustainability
•     No term of agreement.
•     Base salary inclusive of superannuation, for the year ended 30 June 2008 of
      $194,250.
•     Base salary, inclusive of superannuation from 1 July 2008 of $202,575.
•     Payment of termination benefit on early termination by the employer, other than for
      gross misconduct, equal to one month of the base salary.

D        Share-based compensation

Options over shares in Arafura Resources Limited are granted by the Board under the
Arafura Resources Limited Employee Share Option Plan which was approved by
shareholders at the 2005 annual general meeting.

Options are granted for no consideration and have a term of three years. 100% of each
tranche vests and is exercisable in accordance with the tables below.

The terms and conditions of each grant of options affecting remuneration in the previous,
present or future reporting periods are as follows:

    Grant date   Post demerger    Date vested   Expiry date   Exercise price      Model option
                  re-issue date      and                                             value
                                  exercisable

     29 Jul 05     26 Feb 07      01 Sep 05     30 Jun 08        $0.13*               $0.59
     29 Jul 05     26 Feb 07      01 Sep 06     30 Jun 08        $0.13*               $0.59
     29 Jul 05     26 Feb 07      01 Sep 07     30 Jun 08        $0.13*               $0.59
    28 Jun 06      26 Feb 07       15 Jun 07    30 Jun 09        $0.22*               $0.51
     03 Jul 06     26 Feb 07       20 Jun 07    30 Jun 09        $0.26*               $0.47
     03 Jul 06     26 Feb 07       20 Jun 07    30 Jun 09        $0.26*               $0.50
     03 Jul 06     26 Feb 07       20 Jun 08    30 Jun 09        $0.30*               $0.46
     03 Jul 06     26 Feb 07       20 Jun 08    30 Jun 09        $0.30*               $0.48
     16 Jul 07         -           20 Jun 08    30 Jun 10        $0.75                $0.42
     16 Jul 07         -          20 June 08    30 Jun 10        $0.75                $0.46
    25 May 07          -          30 June 08    30 Jun 11        $1.72                $0.87
    25 May 07          -          30 June 08    30 Jun 11        $1.72                $0.96
    02 Oct 07          -           02 Oct 08    30 Jun 11        $1.31                $1.13
    17 Oct 07          -           17 Oct 08    30 Jun 11        $1.31                $0.57
    12 Nov 07          -          12 Nov 08     30 Jun 11        $1.70                $0.43

*denotes post demerger exercise price equal to two-thirds pre-demerger exercise price.

Options granted under the plan carry no dividend or voting rights.



                                                                                                          21
                                                               Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Remuneration report (cont)

When exercisable, each option is convertible into one ordinary share.

Details of options over ordinary shares in the Group provided as remuneration to each
director of the Group and each of the key management personnel of the Group are set out
below. When exercisable, each option is convertible into one ordinary share of Arafura
Resources Limited. Further information on the options is set out in note 24 to the financial
statements.


                   Number of options granted during the year   Number of options vested during the year
Name                    2008                   2007                 2008                   2007
Directors
A J Stephens              -                    -                   1,000,000              1,000,000
Other key management personnel of the Group
G J Lockyer               -                1,200,000                700,000                500,000
S J Mackowski             -                 200,000                 450,000                350,000
R Brescianini             -                 700,000                 450,000                   -
B W Fowler             200,000                 -                       -                      -



The options expire on the earlier of their expiry date or upon resignation of the employee
(whether vested or not) or upon termination of their employment (unless the Board decides
otherwise). Further details are included in the Directors’ Report under ‘Remuneration
Report’ and ‘Significant Post Balance Day Events’.

The terms and conditions of each grant of options affecting remuneration in the previous,
this or future reporting periods are as follows:

The assessed fair value at grant date of the options granted to individuals is allocated
equally over the period from grant date to vesting date, and the amount is included in the
remuneration tables above. Fair values at grant date are independently determined using
the Binomial option pricing model that take into account the exercise price, the term of the
option, the impact of dilution, the share price at grant date and the expected price volatility
of the underlying share and the risk free interest rate of the term of the option.

The model inputs in determining the value for options granted during the year ended 30
June 2008 are contained in note 33 of the notes to the financial statements.




                                                                                                                 22
                                                                      Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Remuneration report (cont)

Shares provided on exercise of remuneration options

Details of ordinary shares in the company provided as a result of the exercise of
remuneration options to each director of Arafura Resources Limited and other key
management personnel of the Group are set out below:


Name                         Date of exercise of     Number of ordinary shares issued on exercise of
                                  options                                options
                                                           2008                        2007
Directors
I G Muir                 Previous financial year              -                         220,000
P N Walker               Previous financial year              -                         500,000
A J Stephens                   26 May 08                   600,000                         -
A J Stephens                   04 Jun 08                  2,400,000                        -
I J Kowalick                   20 Jun 08                   550,000                      250,000
T R Jackson                         -                         -                            -
S Ward                              -                         -                            -
I J Laurance                        -                         -                            -
Other key management personnel of the Group
G J Lockyer                         -                         -                             -
S J Mackowski                  03 Sep 07                   100,000                          -
R Brescianini                       -                         -                             -
B W Fowler                          -                         -                             -
                                                          3,650,000



The amounts paid per ordinary share by each director and other key management
personnel on the exercise of the options on the date of exercise were as follows:


Exercise date                                      Amount paid per share
03 Sep 07                                          $0.22
26 May 08                                          $0.13
04 Jun 08                                          $0.13
20 Jun 08                                          $0.13

No amounts are unpaid on any shares issued on the exercise of options.

Employee share scheme

None of the directors of Arafura Resources Limited, other than key management personnel
of the Group or the Company Secretary, are eligible to participate in the Company’s
employee share option scheme.



                                                                                                                 23
                                                                      Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Remuneration report (cont)

E      Additional information

Share-based compensation: Options

Further details relating to options are set out below:



                           A                   B                 C                      D

Name                 Remuneration        Value at grant   Value at exercise      Value at lapse
                     consisting of           date               date                 date
                       options                 $                  $                    $

I G Muir                   -                    -                -                       -
A J Stephens             37.7%                  -            1,764,752                   -
I J Kowalick               -                    -                -                       -
T R Jackson                -                    -                -                       -
S Ward                     -                    -                -                       -
I J Laurance               -                    -                -                       -
G J Lockyer              60.5%                  -                -                       -
S J Mackowski            48.6%                  -             51,103                     -
R Brescianini            55.8%                  -                -                       -
B W Fowler               30.7%               86,369              -                       -



A =    The percentage of the value of remuneration consisting of options, based on the
       value of options expensed during the current year.


B =    The value at grant date calculated in accordance with AASB 2: Share-based
       Payment of options granted during the year as part of remuneration.


C =    The value at exercise date of options that were granted as part of remuneration and
       were exercised during the year, being the intrinsic value of the options at that date.


D =    The value at lapse date of options that were granted as part of remuneration and
       that lapsed during the year because a vesting condition was not satisfied. The
       values determined at the time of lapsing, but assuming the condition was satisfied.




                                                                                                           24
                                                                Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Remuneration report (cont)


Information in relation to the maximum value of options yet to vest as has been determined
to be the fair value at the grant dates is shown in the table below:


                                                     Options
Name              Year      Vested       Forfeited       Financial     Minimum total      Maximum
                 granted                              years in which   value of grant   total value of
                                                       options may      yet to vest      grant yet to
                                                           vest                              vest

                               %            %             Year               $               $
                  2008         -            -               -                -               -
I G Muir          2007         -            -               -                -               -
                  2006         -            -               -                -               -
                  2008         -            -               -                -               -
I J Kowalick      2007         -            -               -                -               -
                  2006         -            -               -                -               -
                  2008         -            -               -                -               -
T R Jackson       2007         -            -               -                -               -
                  2006         -            -               -                -               -
                  2008         -            -               -                -               -
S Ward            2007         -            -               -                -               -
                  2006         -            -               -                -               -
                  2008         -            -               -                -               -
I J Laurance      2007         -            -               -                -               -
                  2006         -            -               -                -               -
                  2008         -            -               -                -               -
A J Stephens      2007        100           -               -                -               -
                  2006         -            -               -                -               -
                  2008         -            -               -                -               -
S J Mackowski     2007        100           -               -                -               -
                  2006         -            -               -                -               -
                  2008         -            -               -                -               -
R Brescianini     2007        64            -             2009               -            114,493
                  2006         -            -               -                -               -
                  2008         -            -               -                -               -
B W Fowler        2007         -            -             2008               -            86,369
                  2006         -            -               -                -               -
                  2008         -            -               -                -               -
G J Lockyer       2007        100           -               -                -               -
                  2006         -            -               -                -               -




Loans to directors and executives

There were no loans to directors and executives during the reporting period or at 30 June
2008.


                                                                                                             25
                                                                  Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Remuneration report (cont)

Shares under option

Unissued ordinary shares of Arafura Resources Limited under option at the date of this
report are as follows:

 Date options granted       Expiry date          Issue price of shares     Number under option
      26 Feb 07              30Jun 09                    $0.26                  750,000
      26 Feb 07              30Jun 09                    $0.30                  750,000
      26 Feb 07              30Jun 09                    $0.22                  100,000
      16 Mar 07              30 Jun 10                   $0.75                  500,000
      25 May 07              30 Jun 11                   $1.72                 1,050,000
       02 Oct 07             30 Jun 11                   $1.31                  150,000
       17 Oct 07             30 Jun 11                   $1.31                  150,000
      12 Nov 07              30 Jun 11                   $1.70                  200,000
                                                                               3,650,000



No option holder has any right under the options granted to them to participate in any other
share issue of the company or any other entity within the Group.

Shares issued on the exercise of options

The following ordinary shares in Arafura Resources Limited were issued during the year
ended 30 June 2008 on the exercise of options granted under the Arafura Resources
Employee Share Option Plan. No further shares have been issued since that date. No
amounts are unpaid on any of the shares.


     Date options granted           Issue price of shares           Number of shares issued
          11 Nov 03                        $0.13*                          550,000
          26 Feb 07                        $0.13*                         3,000,000
          26 Feb 07                        $0.22*                          100,000
                                                                          3,650,000



*denotes post demerger exercise price equal to two-thirds pre-demerger exercise price




                                                                                                            26
                                                                 Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Insurance of officers

During the financial year, the Group has paid an insurance premium in respect of a
Directors’ and Officers’ Liability Insurance Contract. The insurance premium relates to
liabilities that may arise from an officer’s position, with the exception of conduct involving a
wilful breach of duty or improper use of information or position to gain personal advantage.

The officers covered by the insurance policies are directors and officers of the Group.

The contract of insurance prohibits the disclosure of the nature of the liabilities and the
amount of premium.




                                                                                                            27
                                                                 Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Non-audit services

During the year, the Group’s auditor, BDO Kendalls Audit & Assurance (WA) Pty Ltd
(previously Horwath Audit (WA) Pty Ltd), has performed certain other services in addition to
their statutory duties.

The Board has considered the non-audit services provided during the year and is satisfied
that the provision of those non-audit services during the year by the auditor is compatible
with, and did not compromise, the auditor’s independence requirements of the Corporations
Act 2001 for the following reasons:

•       all non-audit services were subject to the corporate governance procedures adopted
        by the Group and have been reviewed by the audit committee to ensure they do not
        impact with the integrity and objectivity of the auditor; and
•       the non-audit services provided do not undermine the general principles relating to
        auditor independence as set out in AES 110: Code of Ethics for Professional
        Accountants, as they did not involve reviewing or auditing the auditor’s own work,
        acting in a management or decision making capacity for the Group, acting as an
        advocate of the Group or jointly sharing risks and rewards.

Details of the amounts paid to the auditor of the Group, BDO Kendalls Audit & Assurance
(WA) Pty Ltd (previously Horwath Audit (WA) Pty Ltd), and its related practices for audit and
non-audit services provided during the year are set out below:

                                                                        Consolidated
                                                                        2008                 2007
                                                                           $                    $
1. Audit services
BDO Kendalls Audit & Assurance (WA) Pty Ltd
Audit and review of financial reports                               29,358                 34,711
Total remuneration for audit services                               29,358                 34,711

2. Taxation services
BDO Kendalls Corporate Tax (WA) Pty Ltd
Taxation services                                                     1,650                  8,500
Horwath WA Pty Ltd
Taxation services                                                         -                34,150
Total remuneration for taxation services                              1,650                42,650

3. Other services
Horwath WA Pty Ltd
General accounting services                                                -                  150
Corporate governance advisory services                                     -                  500
Horwath Securities (WA) Pty Ltd
Demerger advisory service                                                  -               22,096
Due diligence services                                                     -                6,188
Total remuneration for other services                                      -               28,934

Total remuneration for non-audit services                             1,650                71,584



                                                                                                          28
                                                               Arafura Resources Limited – 2008 Annual Report
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2008




Audit independence declaration

A copy of the auditors’ independence declaration as required under section 307C of the
Corporations Act 2001 is set out on page 30.

Signed in accordance with a resolution of the Directors.




AJ Stephens                                                IG Muir
Managing Director                                          Chairman

Perth, Western Australia
30 September 2008




                                                                                                          29
                                                               Arafura Resources Limited – 2008 Annual Report
                                                                       BDO Kendalls Audit & Assurance (WA) Pty Ltd
                                                                       128 Hay Street
                                                                       SUBIACO WA 6008
                                                                       PO Box 700
                                                                       SUBIACO WA 6872
                                                                       Phone 61 8 9380 8400
                                                                       Fax 61 8 9380 8499
                                                                       aa.perth@bdo.com.au
                                                                       www.bdo.com.au

                                                                       ABN 79 112 284 787




30 September 2008



The Directors
Arafura Resources Limited
Level 11, 16 St Georges Terrace
Perth WA 6000



Dear Sirs

DECLARATION OF INDEPENDENCE BY PETER TOLL TO THE DIRECTORS OF
ARAFURA RESOURCES LIMITED

As lead auditor of Arafura Resources Limited for the year ended 30 June 2008, I declare
that, to the best of my knowledge and belief, there have been no contraventions of:

•   the auditor independence requirements of the Corporations Act 2001 in relation to the
    audit; and

•   any applicable code of professional conduct in relation to the audit.

This declaration is in respect of Arafura Resources Limited and the entities it controlled
during the period.




Peter Toll
Director




BDO Kendalls Audit & Assurance (WA) Pty Ltd
Perth, Western Australia.


                                                                                               30
CORPORATE GOVERNANCE STATEMENT
FOR THE YEAR ENDED 30 JUNE 2008




In accordance with the ASX Corporate Governance Council's Principles of Good Corporate
Governance and Best Practice Recommendations ("ASX Principles and
Recommendations"), Arafura Resources Limited ("Company") has made it a priority to
adopt systems of control and accountability as the basis for the administration of corporate
governance. Some of these policies and procedures are summarised in this statement. To
commensurate with the spirit of the ASX Principles and Recommendations, the Company
has followed each recommendation where the Board has considered the recommendation
to be an appropriate benchmark for corporate governance practices, taking into account
factors such as the size of the Company and the Board, resources available and activities
of the Company. Where, after due consideration, the Company's corporate governance
practices depart from the ASX Principles and Recommendations, the Board has offered full
disclosure of the nature of, and reason for, the adoption of its own practice.

The Company has undertaken a review of its governance documentation as a consequence
of the revision to the ASX Principles and Recommendations. The Company will be reporting
against the revised ASX Principles and Recommendations in its next annual report.

Further information about the Company's corporate governance practices is set out on the
Company's website at www.arafuraresources.com.au. In accordance with the ASX
Principles and Recommendations, information published on the Company's website
includes charters (for the Board and its committees), the Company's code of conduct and
other policies and procedures relating to the Board and its responsibilities.



EXPLANATIONS FOR DEPARTURES FROM BEST PRACTICE RECOMMENDATIONS

During the Company's 2007/2008 financial year ("Reporting Period"), the Company has
complied with each of the ASX Principles and Recommendations, other than in relation to
the matters specified below.

Principle 1
Recommendation 1.1: Formalise directors’ appointments in writing.

Notification of departure: Formal letters of appointment for the non-executive directors
were not put in place until after the Reporting Period.

Explanation for departure: While the directors’ appointments were formalised through the
regulatory body and their appointments approved by shareholders, the non-executive
directors did not have formalised letters of appointment in place. However, as part of a
governance review shortly after the Reporting Period, these letters were provided.
Therefore, the Company presently follows the recommendation as set out in the ASX
Principles and Recommendations.



                                                                                                        31
                                                             Arafura Resources Limited – 2008 Annual Report
CORPORATE GOVERNANCE STATEMENT
FOR THE YEAR ENDED 30 JUNE 2008




Principle 2
Recommendation 2.1: A majority of the Board should be independent directors.

Notification of departure: For a small portion of the Reporting Period, the Board was not
comprised of a majority of independent directors.

Explanation for departure: From the beginning of the Reporting Period until 15 August
2007, the Board did not have a majority of independent directors. This was primarily as a
result of previous movement on the Board. However, with further independent
appointments, the Board became a majority of independent directors on 15 August 2007.
Independence was further strengthened with the appointment of independent director, Mr
Laurance, on 15 February 2008. Therefore, the Board now is comprised of a majority of
independent directors in accordance with the ASX Principles and Recommendations.

Principle 2
Recommendation 2.2: The Chairperson should be an independent director.

Notification of departure: The Chairperson, Mr Mick Muir, was not an independent
director for a portion of the Reporting Period.

Explanation for departure: The Board believes that Mr Mick Muir is the most appropriate
person for the position of chair because of his industry knowledge and experience. Mr
Muir's previous executive position is the only factor that precluded him from being
considered independent. However, in accordance with the ASX Principles and
Recommendations, from February 2008, sufficient time had passed for Mr Muir's previous
executive position not to be taken into account in determining his independence. Therefore,
from February 2008 Mr Muir became an independent director and the Company now
follows the recommendation.

Principle 2
Recommendation 2.4: The Board should establish a Nomination Committee.

Notification of departure: The full Board performs the function of a Nomination
Committee.

Explanation of departure: The role of the Nomination Committee is carried out by the full
Board. The Board considers that at this stage, no efficiencies or other benefits would be
gained by establishing a separate Nomination Committee. To assist the Board to carry out
nomination related matters, the Board has adopted a Nomination Committee Charter.

Principle 4
Recommendations 4.2 and 4.3: The Board should establish an Audit Committee and
structure it in accordance with the recommendations.



                                                                                                       32
                                                            Arafura Resources Limited – 2008 Annual Report
CORPORATE GOVERNANCE STATEMENT
FOR THE YEAR ENDED 30 JUNE 2008




Notification of departure: For a portion of the Reporting Period, the Company did not
follow the recommendations as the full Board performed the function of an Audit
Committee.

Explanation for departure: The role of an Audit Committee was carried out by the full
Board. The Board had considered that at the time, no efficiencies or other benefits would
be gained by establishing a separate Audit Committee. However, as part of a governance
review, the Board formed an Audit Committee during the Reporting Period. The Audit
Committee is also structured in accordance with the recommendations and therefore the
Company no longer departs from recommendations 4.2 and 4.3 of the ASX Principles and
Recommendations.

Principle 9
Recommendation 9.2: The Board should establish a Remuneration Committee.

Notification of Departure: For a portion of the Reporting Period, the full Board performed
the function of a Remuneration Committee.

Explanation for Departure: The role of the Remuneration Committee was carried out by
the full Board. However, as part of a governance review, the Board formed a Remuneration
Committee during the Reporting Period. The Remuneration Committee is also structured in
accordance with the recommendations and therefore the Company no longer departs from
recommendations 4.2 and 4.3 of the ASX Principles and Recommendations.


NOMINATION AND REMUNERATION COMMITTEE

The remuneration and nomination committee comprises Stephen Ward (Chair), Ian
Laurance (independent) and Ian Kowalick (independent). The committee was formed in
May 2008 with its members holding one meeting during the reporting period. For the
attendance of Nomination and Remuneration Committee meeting, refer to the meeting of
directors table contained in the directors’ report on page 12.

Prior to the formation of the Nomination and the Remuneration Committee, the full Board, in
its capacity as the Remuneration Committee, held no meetings during the Reporting Period.

AUDIT COMMITTEE

The Audit Committee comprises Ian Kowalick (independent Chair), Mick Muir (independent)
and Terry Jackson (independent). The committee was formed in May 2008.

Prior to the formation of the Audit Committee, the full Board, in its capacity as the Audit
Committee, held one meeting during the Reporting Period. For attendance of Audit
Committee meetings refer to the meeting of directors table contained in the directors’ report
on page 12.

                                                                                                         33
                                                              Arafura Resources Limited – 2008 Annual Report
CORPORATE GOVERNANCE STATEMENT
FOR THE YEAR ENDED 30 JUNE 2008




Details of each of the director's qualifications are set out in the Directors’ Report. Mr Muir
has a Bachelor of Economics and has worked in the securities industry. Ian Kowalick has
qualifications in economics and finance. Both Messrs Muir and Kowalick therefore bring
financial expertise to the Audit Committee.

OTHER

Skills, experience, expertise and term of office of each director

A profile of each director containing the applicable information is set out in the Directors'
Report.

Identification of independent directors

In considering the independence of directors, the Board refers to the criteria for
independence as set out in Box 2.1 of the ASX Principles and Recommendations
("Independence Criteria"). To the extent that it is necessary for the Board to consider
issues of materiality, the Board refers to the thresholds for qualitative and quantitative
materiality as adopted by the Board and contained in the Board Charter, which is disclosed
in full on the Company’s website.

Applying the Independence Criteria, the current independent directors of the Company are
Mick Muir (independent from 28 February 2008), Terry Jackson, Ian Kowalick, Steve Ward
and Ian Laurance.

Statement concerning availability of independent professional advice

If a director considers it necessary to obtain independent professional advice to properly
discharge the responsibility of his/her office as a director, then, provided the director first
obtains approval for incurring such expense from the Chairperson, the Company will pay
the reasonable expenses associated with obtaining such advice.

Confirmation whether performance evaluation of the Board and its members have
taken place and how conducted

During the Reporting Period, a formal evaluation of the Board and its members was not
carried out. This was largely due to the movement on the Board that occurred during the
Reporting Period. However, when appointments were made to the Board during the
Reporting Period, consideration was given to the Board's composition and its suitability to
carry out its function effectively.

Existence and terms of any schemes for retirement benefits for non-executive
directors

There   are   no   termination   or   retirement   benefits   for   non-executive       directors.


                                                                                                          34
                                                               Arafura Resources Limited – 2008 Annual Report
INCOME STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




                                                           Consolidated                Parent entity
                                                            2008          2007          2008           2006
                                              Notes            $             $             $              $



 Revenue from continuing operations             5        884,750       431,394       884,750       431,394

 Other income                                   5      4,121,305       548,984     4,121,305       548,984


 Employee benefits expense                      6     (3,551,133)   (2,948,819)   (3,551,133)   (2,948,819)
 Project feasibility and evaluation             6     (5,748,229)   (1,221,662)   (5,748,229)   (1,221,662)
 Other expenses                                 6     (2,285,105)   (1,804,911)   (2,285,105)   (1,804,911)
 Depreciation and amortisation                  6      (151,947)       (44,961)    (151,947)      (44,961)
 Finance costs                                  6        (17,922)       (8,392)     (17,922)        (8,392)

 Loss before income tax                               (6,748,281)   (5,048,367)   (6,748,281)   (5,048,367)


 Income tax benefit                             7        374,752              -      374,752              -


 Loss attributable to members of Arafura
 Resources Limited                                    (6,373,529)   (5,048,367)   (6,373,529)   (5,048,367)


                                                           Cents         Cents
 Earnings per share:
 Basic loss per share                          28           (4.6)         (5.1)
 Diluted loss per share                        28           (4.6)         (5.1)




The above income statements should be read in conjunction with the accompanying notes.




                                                                                                                  35
                                                                       Arafura Resources Limited – 2008 Annual Report
BALANCE SHEETS
AS AT 30 JUNE 2008



                                                          Consolidated                     Parent entity
                                                          2008            2007             2008              2007

                                         Notes                $               $                $                $

ASSETS
Current Assets
Cash and cash equivalents                  9        14,829,511       4,746,460        14,829,471      4,746,417
Trade and other receivables               10           173,274         535,701          173,274            535,701
Prepayments                               11             20,000           3,116          20,000              3,116
Total current assets                                15,022,785       5,285,277        15,022,745      5,285,234


Non-current assets
Available-for-sale financial assets       12           834,161       2,794,347          834,161       2,794,347
Other financial assets                    13                  -               -              40                43
Property, plant and equipment             14           655,793         344,048          655,793            344,048
Deferred exploration, evaluation and
development costs                         15        14,657,744       5,528,916        14,657,744      5,528,916
Total non-current assets                            16,147,698       8,667,311        16,147,738      8,667,354


Total assets                                        31,170,483      13,952,588        31,170,483     13,952,588

LIABILITIES
Current liabilities
Borrowings                                16             83,656          69,911          83,656             69,911
Trade and other payables                  17          4,487,239        462,999         4,487,239           462,999
Provisions                                18             32,177               -          32,177                  -
Total current liabilities                             4,603,072        532,910         4,603,072           532,910


Non-current liabilities
Borrowings                                19             41,446        128,945           41,446            128,945
Total non-current liabilities                            41,446        128,945           41,446            128,945


Total liabilities                                     4,644,518        661,855         4,644,518           661,855
Net assets                                          26,525,965      13,290,733        26,525,965     13,290,733


EQUITY
Contributed equity                        20        37,033,668      17,279,525        37,033,668     17,279,525
Reserves                                  21          2,007,686      3,968,924         2,007,686      3,968,924
Accumulated losses                        22       (12,515,389)     (7,957,716)   (12,515,389)      (7,957,716)
Total equity                                        26,525,965      13,290,733        26,525,965     13,290,733


The above balance sheets should be read in conjunction with the accompanying notes.




                                                                                                                       36
                                                                            Arafura Resources Limited – 2008 Annual Report
CONSOLIDATED STATEMENTS OF CHANGES IN
EQUITY
FOR THE YEAR ENDED 30 JUNE 2008


 Consolidated and parent
                                                        Share
                                                       capital       Equity    Revaluation    Accumulated
                                                     ordinary       reserve        reserve         losses           Total
 2008                                    Notes              $             $              $                $              $


 Equity at the beginning of the
 financial year                         20,21,22   17,279,525     2,255,463      1,713,461      (7,957,716)    13,290,733
 Exercise of options                      20        2,163,013    (1,815,856)              -       1,815,856     2,163,013
 Cost of share based options              20                 -    1,677,304               -                -    1,677,304
 Allotment of new shares                  20       18,691,500              -              -                -   18,691,500
 Cost of equity raising                   20       (1,100,370)             -              -                -   (1,100,370)
 Sub-total                                         37,033,668     2,116,911      1,713,461      (6,141,860)    34,722,180
 Fair value movement of available-
 for-sale financial assets                21                 -             -    (1,843,936)                -   (1,843,936)
 Sale of available-for-sale financial
 assets                                   21                 -             -        21,250                 -       21,250
 Net income recognised directly
 in equity                                                   -             -    (1,822,686)                -   (1,822,686)
 Loss attributable to members of
 the parent entity                        22                 -             -              -     (6,373,529)    (6,373,529)
 Equity at the end of the
 financial year                                    37,033,668     2,116,911      (109,225)     (12,515,389)    26,525,965

 2007                                    Notes              $             $              $                $              $


 Equity at the beginning of the
 financial year                         20,21,22   12,381,827       369,918        125,000      (2,909,349)     9,967,395
 Exercise of options                      20        3,075,604     (116,445)               -                -    2,959,159
 Cost of share-based options              20          116,445     2,001,990               -                -    2,118,435
 Allotment of new shares                  20       12,145,221              -              -                -   12,145,221
 Cost of equity raising                   20       (2,113,510)             -              -                -   (2,113,510)
 Demerger distribution                             (8,326,061)             -              -                -   (8,326,061)
 Sub-total                                21       17,279,525     2,255,463        125,000      (2,909,349)    16,750,639
 Fair value movement of available-
 for-sale financial assets                21                 -             -     1,588,461                 -    1,588,461
 Net income recognised directly
 in equity                                                   -             -     1,588,461                 -    1,588,461
 Loss attributable to members of
 the parent entity                        22                 -             -              -     (5,048,367)    (5,048,367)
 Equity at the end of the
 financial year                                    17,279,525     2,255,463      1,713,461      (7,957,716)    13,290,733



The above statements of changes in equity should be read in conjunction with the accompanying notes.




                                                                                                                             37
                                                                               Arafura Resources Limited – 2008 Annual Report
CASH FLOW STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




                                                                     Consolidated                 Parent entity
                                                                      2008        2007            2008          2007
                                                       Notes             $           $                $            $


 Cash flows from operating activities
 Payments to suppliers and employees                           (4,167,834)   (2,409,476)    (4,167,834)   (2,409,476)
 Interest received                                                809,750       378,894        809,750        378,894
 Payments for feasibility study                                (4,896,487)   (1,167,729)    (4,896,487)   (1,167,729)
 Government grant received                                       2,085,788      380,361      2,085,788        380,361
 Other revenue                                                     140,250            -        140,250              -
 Income tax rebates                                               374,752               -      374,752                  -
 Net cash (outflow) from operating activities           23     (5,653,781)   (2,817,950)    (5,653,781)   (2,817,950)



 Cash flows from investing activities
 Payment for property, plant and equipment                       (514,037)     (109,326)     (514,037)      (109,326)
 Proceeds from sale of available-for-sale financial
 assets                                                            110,373      278,650        110,373        278,650
 Proceeds from sale of subsidiary                        8       2,500,000            -      2,500,003              -
 Payment for available-for-sale financial assets                         -   (1,180,849)              -   (1,180,849)
 Payments for exploration and development                      (6,424,558)   (2,085,163)    (6,424,558)   (2,085,163)
 Net cash (outflow) from investing activities                  (4,328,222)   (3,096,688)    (4,328,219)   (3,096,688)



 Cash flows from financing activities
 Proceeds from issue of shares                          20     19,688,626    13,183,239     19,688,626    13,183,239
 Repayment of borrowings received                                 376,428              -       376,428              -
 Distribution on demerger                                               -    (8,800,000)             -    (8,800,000)
 Net cash inflow from financing activities                     20,065,054     4,383,239     20,065,054      4,383,239


 Net increase/(decrease) in cash and cash
 equivalents                                                   10,083,051    (1,531,399)    10,083,054    (1,531,399)


 Cash at the beginning of the financial year                     4,746,460    6,277,859      4,746,417      6,277,816
 Cash and cash equivalents at the end of the
 financial year                                          9     14,829,511     4,746,460     14,829,471      4,746,417




The above cash flow statements should be read in conjunction with the accompanying notes.




                                                                                                                  38
                                                                       Arafura Resources Limited – 2008 Annual Report
CONTENTS TO THE NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note                                                                                           Page

 1        Summary of significant accounting policies                                              40
 2        Financial risk management                                                               57
 3        Critical accounting estimates and judgements                                            62
 4        Segment information                                                                     63
 5        Revenue                                                                                 64
 6        Expenses                                                                                65
 7        Income tax                                                                              66
 8        Discontinued operation                                                                  67
 9        Current assets - Cash and cash equivalents                                              68
 10       Current assets - Trade and other receivables                                            69
 11       Current assets – Prepayments                                                            70
 12       Non-current assets – Available-for-sale financial assets                                70
 13       Non-current assets – Other financial assets                                             71
 14       Non-current assets – Property, plant and equipment                                      72
 15       Non-current assets – Deferred exploration, evaluation and development                   74
 16       Current liabilities – Borrowings                                                        75
 17       Current liabilities – Trade and other payables                                          76
 18       Current liabilities – Provisions                                                        77
 19       Non-current liabilities – Borrowings                                                    77
 20       Equity – Contributed equity                                                             77
 21       Equity – Reserves                                                                       80
 22       Equity - Accumulated losses                                                             81
 23       Statement of cash flows                                                                 81
 24       Key management personnel disclosures                                                    82
 25       Remuneration of auditors                                                                86
 26       Commitments                                                                             87
 27       Contingent liabilities                                                                  88
 28       Earnings per share                                                                      89
 29       Related party transactions                                                              90
 30       Subsidiaries                                                                            90
 31       Interest in joint ventures                                                              91
 32       Events occurring after the balance sheet date                                           92
 33       Share-based payments                                                                    94




                                                                                                    39
                                                         Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 1: Summary of significant accounting policies


The principal accounting policies adopted in the preparation of the financial report are set
out below. These policies have been consistently applied to all the years presented, unless
otherwise stated. The financial report includes separate financial statements for Arafura
Resources Limited as an individual entity and the consolidated entity consisting of Arafura
Resources Limited and its subsidiaries.

(a)    Basis of preparation

This general purpose financial report has been prepared in accordance with Australian
Accounting Standards, other authoritative pronouncements of the Australian Accounting
Standards Board, Australian Advisory Interpretations and the Corporations Act 2001.

Compliance with IFRS
Australian Accounting Standards include Australian equivalents to International Financial
Reporting Standards (AIFRS). Compliance with AIFRS ensures that the financial report of
Arafura Resources Limited complied with International Financial Reporting Standards
(IFRS).

Early adoption of standards
The Group has not adopted any pronouncements to the annual reporting period beginning 1
July 2007.

Historical cost convention
These financial statements have been prepared under the historical cost convention, as
modified by the revaluation of available-for-sale financial assets at fair value through the
profit & loss upon sale and realisation on part of all of those assets.

(b)    Going Concern

The Group incurred a loss for the year after tax of $6,373,529 (2007: $5,048,367) and a net
cash out flow from operating activities of $5,653,781 (2007: $2,817,950).

At 30 June 2008, the Group had cash assets of $14,829,511 (2007: $4,746,460) and
working capital of $11,460,043 (2007: $7,662,481).

Whilst the Group has sufficient cash and assets to meet its ongoing exploration
commitments and administration expenditure through to the end of the current financial
year, the directors recognise the need to raise additional funds to meet working capital
requirements into the future. Based on known potential to raise the additional working
capital, the directors consider it appropriate that the finance report be prepared on a going
concern basis.

                                                                                                         40
                                                              Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 1: Summary of significant accounting policies (cont)


(c)    Principles of consolidation

(i) Subsidiaries
The consolidated financial statements incorporate the assets and liabilities of all entities
controlled by Arafura Resources Limited (‘parent entity’) as at 30 June 2008 and the results
of all controlled entities for the year then ended. Arafura Resources Limited and its
subsidiaries together are referred to in this financial report as the Group or the consolidated
entity.

Subsidiaries are all those entities over which the Group has the power to govern the
financial and operating policies, generally accompanying a shareholding of more than one-
half of the voting rights. The existence and effect of potential voting rights which are
currently exercisable or convertible are considered when assessing whether the Group
controls another entity.

All inter-company balances and transactions between entities in the economic entity have
been eliminated on consolidation. Accounting policies of subsidiaries have been changed
where necessary to ensure consistencies with those policies applied by the parent entity.

(ii) Joint Ventures
The proportionate interests in the assets, liabilities and expense of a joint venture activity
have been incorporated in the financial statements under the appropriate headings. Details
of the joint venture are set out in note 31.

(d)    Government grants

Government grants relating to costs are deferred and recognised in the income statement
over the period necessary to match them with the costs that they are intended to
compensate.

(e)    Income tax

The economic entity adopts the liability method of tax-effect accounting whereby the income
tax expense is based on the profit from ordinary activities adjusted for any non-assessable
or disallowed items.

Deferred tax is accounted for by using the balance sheet liability method in respect of
temporary differences arising between the tax bases of assets and liabilities and their
carrying amounts in the financial statements. No deferred income tax will be recognised
from the initial recognition of an asset or liability, excluding a business combination, where
there is no effect on accounting or taxable profit or loss.


                                                                                                          41
                                                               Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 1: Summary of significant accounting policies (cont)

The economic entity adopts the liability method of tax-effect accounting whereby the income
tax expense is based on the profit from ordinary activities adjusted for any non-assessable
or disallowed items.

Deferred tax is accounted for using the balance sheet liability method in respect of
temporary differences arising between the tax bases of assets and liabilities and their
carrying amounts in the financial statements. No deferred income tax will be recognised
from the initial recognition of an asset or liability, excluding a business combination, where
there is no effect on accounting or taxable profit or loss.

Deferred tax is calculated at the tax rates that are expected to apply to the period when the
asset is realised or liability is settled. Deferred tax is credited in the income statement
except where it relates to items that may be credited directly to equity, in which case the
deferred tax is adjusted directly against equity.

Deferred income tax assets are recognised to the extent that it is probable that future tax
profits will be available against which any deductible temporary differences can be utilised.

The amount of benefit brought to account or which may be realised in the future is based on
the assumption that no adverse change will occur in income taxation legislation and the
anticipation that the economic entity will derive sufficient future assessable income to
enable the benefit to be realised and comply with the conditions of deductibility imposed by
the law.

Arafura Resources Limited and its wholly-owned Australian subsidiaries have formed an
income tax consolidated group under the Tax Consolidation Regime. Arafura Resources
Limited is responsible for recognising the current and deferred tax assets and liabilities for
the tax consolidated group. The entities in the tax consolidation group have not yet entered
into a tax sharing agreement or a tax funding arrangement but may enter into these types of
agreements in the future if it is considered beneficial to the group to do so.

(f)    Cash and cash equivalents

For cash flow statement presentation purposes, cash and cash equivalents include cash on
hand, deposits held at call with financial institutions, other short-term, highly liquid
investments with original maturities of three months or less that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of changes in value,
and bank overdrafts.




                                                                                                          42
                                                               Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 1: Summary of significant accounting policies (cont)

(g)    Trade receivables

Trade receivables are recognised initially at fair value and subsequently measured at
amortised cost, less provision for doubtful debts. Trade receivables are due for settlement
no more than 120 days from the date of recognition for land development and resale
debtors, and no more than 30 days for other debtors.

Collection of trade receivables is reviewed on an ongoing basis. Debts, which are known to
be uncollectible, are written off. A provision for doubtful receivables is established when
there is objective evidence that the Group will not be able to collect all amounts due
according to the original terms of receivables. The amount of the provision is the difference
between the asset’s carrying amount and the present value of estimated future cash flows,
discounted at the original effective interest rate. Cash flows relating to short-term
receivables are not discounted if the effect of discounting is immaterial. The amount for the
provision is recognised in the income statement.

(h)    Trade and other payables

These amounts represent liabilities for goods and services provided to the Group prior to
the end of the financial year, which are unpaid. The amounts are unsecured and are usually
paid within 30 days of recognition.

(i)    Investments and other financial assets

The Group classifies its investments in the following categories: financial assets at fair value
through the profit or loss, loans and receivables, held-to-maturity investments and available
-for-sale financial assets. The classification depends on the purpose for which the
investments were acquired.

(i) Financial assets at fair value through profit and loss
A financial asset is classified in this category if acquired principally for the purpose of selling
in the short-term or if so designated by management. Gains and losses arising from
changes in the fair value of these assets are included in the income statement in the period
in which they arise.

(ii) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. They arise when the Group provides
money, goods, and/or services directly to a debtor with no intention of selling the receivable.
They are included in current assets, except for those with maturities greater than twelve
months after the balance sheet date which are classified as non-current assets.



                                                                                                             43
                                                                  Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 1: Summary of significant accounting policies (cont)

(iii) Held-to-maturity investments
These are non-derivative financial assets with fixed or determinable payments and fixed
maturities that the Group’s management has the positive intention and ability to hold to
maturity.

(iv) Available-for-sale financial assets
Available-for-sale financial assets comprising marketable equitable securities are non-
derivatives that are either designated in this category or not classified in any other of the
categories. They are included in non-current assets unless management intends to dispose
of the investment within 12 months of the balance sheet date.

Purchases and sales of available-for–sale financial assets are recognised on trade date, the
date on which the Group commits to purchase or sell the asset. Investments are initially
recognised at fair value plus transactions costs for all financial assets not carried at fair
value through the profit or loss.

Financial assets are derecognised when the rights to receive cash flows from the financial
assets have expired or have been transferred and the Group has transferred substantially
all the risks and rewards of ownership.

When securities classified as available-for-sale are sold, the accumulated fair value
adjustments are recognised in equity and are included in the income statement as gains or
losses from investment securities.

The fair values of quoted investments are based on current bid prices.

The Group assesses at each balance date whether there is objective evidence that a
financial asset or group of financial assets is impaired. In the case of equity securities
classified as available-for-sale, a significant or prolonged decline in the fair value of a
security below its cost is considered as an indicator that the securities are impaired. If any
such evidence exists for available-for-sale financial assets, the cumulative loss, measured
as the difference between the acquisition cost and the current fair value, less any
impairment loss on the financial assets previously recognised in the profit and loss, is
removed from equity and recognised in the income statement.


(j)    Property, plant and equipment

(i) Cost
All classes of property, plant and equipment are initially measured at historical cost less,
where applicable, any accumulated depreciation and impairment losses.



                                                                                                          44
                                                               Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 1: Summary of significant accounting policies (cont)

The carrying amount of plant and equipment is reviewed annually to ensure it is not in
excess of the recoverable amount from these assets. The recoverable amount is assessed
on the basis of the expected net cash flows that will be received from the asset’s
employment and subsequent disposal. The expected net cash flows have been discounted
to their present values in determining recoverable amounts.

Subsequent costs are included in the asset’s carrying amount or capitalised as a separate
asset, as appropriate, only when it is probable that future economic benefits associated with
the item will flow to the Group and the cost of the item can be measured reliably. All other
repairs and maintenance are charged to the income statement during the financial period in
which they are incurred.

(ii) Depreciation
The depreciable amount of all fixed assets including capitalised lease assets, but excluding
freehold land, is depreciated on a straight line basis over their useful lives to the economic
entity commencing from the time the asset is held ready for use.

Leasehold improvements are depreciated over the shorter of either the unexpired period of
the lease or the estimated useful lives of the improvements. All fixed assets depreciated
previously on a diminishing value method were changed to a straight line basis of
depreciation from 1 October 2007.

Depreciation on assets is calculated over their estimated useful life as follows:

Class of fixed asset                            Estimated useful life
Office furniture and fittings                   10 years
Office and computer equipment                   3 years
Plant and equipment                             5 years
Motor vehicles                                  3 years
Leasehold improvements                          10 years

The asset’s residual value and useful life are reviewed, and adjusted if appropriate, at each
balance sheet date.

An asset’s carrying amount is written down immediately to its recoverable amount if the
asset’s carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing proceeds with the carrying
amount. These gains and losses are included in the income statement. When re-valued
assets are sold, amounts included in the revaluation reserve relating to that asset are
transferred to retained earnings.


                                                                                                           45
                                                                Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 1: Summary of significant accounting policies (cont)

(k)    Exploration, evaluation and development costs

(i) Exploration
Exploration expenditure incurred is accumulated in respect of each identifiable area of
interest. The expenditure comprises net direct costs and an appropriate portion of related
overhead expenditure directly related to activities in the area of interest. These costs are
only carried forward to the extent that they are expected to be recouped through the
successful development of the area or where activities in the area have not yet reached a
stage that permits reasonable assessment of the existence of economically recoverable
reserves.

Accumulated capitalised exploration expenditure in relation to an abandoned area of
interest and/or an area where no mineable ore body is discovered are expensed in the
period in which it is determined the area of interest has no future economic benefit.

(ii) Evaluation
Evaluation expenditure incurred is accumulated in respect of each identifiable area of
interest. The expenditure comprises net direct costs and an appropriate portion of related
overhead expenditure directly related to activities in the area of interest. These costs are
only carried forward to the extent that they are expected to be recouped through the
successful development of the area or where activities in the area have not yet reached a
stage that permits reasonable assessment of the existence of economically recoverable
reserves.

When the technical feasibility and commercial viability of extracting and processing mineral
resources have been demonstrated, then any capitalised evaluation expenditure will be
classified to mine development and mineral processing development expenditure. Prior to
reclassification, capitalised evaluation expenditures is assessed for impairment.

Accumulated capitalised evaluation expenditure in relation to an abandoned area of interest
and/or an area where no mineable ore body is discovered are expensed in the period in
which it is determined the area of interest has no future economic benefit.

When production commences, the accumulated costs for the relevant area of interest are
amortised over the life of the area according to the rate of depletion of the economically
recoverable reserves.

(iii) Development
Development expenditure represents the costs incurred in preparing the mine site and mine
for production. These costs are capitalised to the extent that they are expected to be
recouped through successful exploitation of the related mining leases.



                                                                                                        46
                                                             Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 1: Summary of significant accounting policies (cont)

(l)    Intangible assets

(i) Research & Development
Research expenditure is recognised as an expense as incurred. Costs incurred in
development projects (relating to the design and testing of new or improved products) are
recognised as intangible assets when it is probable that the project will, after considering its
commercial and technical feasibility, be completed and generate future economic benefits
and its costs can be measured reliably. The expenditure capitalised comprises directly
attributable costs, and an appropriate portion of overheads. Other development
expenditures that do not meet these criteria are recognised as an expense as incurred.
Development costs previously recognised as an expense are not recognised as an asset in
subsequent periods. Capitalised development costs are recorded as an intangible asset
and amortised from the point at which the asset is ready for use.

(m)    Interest bearing loans and borrowings

All loans and borrowings are initially recognised at the fair value of the consideration
received less directly attributable transactions costs.

After initial recognition, interest bearing loans and borrowings are subsequently measured
at amortised cost using the effective interest method.

(n)    Leased assets

The determination of whether an arrangement is or contains a lease is based on the
substance of the arrangement and requires an assessment of whether the fulfilment of the
arrangement is dependent on the use of a specific asset or assets and the arrangement
conveys a right to use the asset.

Leases of property, plant and equipment where the Group has substantially all the risks and
rewards of ownership are classified as finance leases. Finance leases are capitalised at the
lease’s inception at the lower of the fair value of the leased property and the present value
of the minimum lease payments. The corresponding rental obligations, net of finance
charges, are included in current liabilities. Each lease payment is allocated between the
liability and finance cost. The finance cost is charged to the income statement over the
lease period so as to produce a constant periodic rate of interest on the remaining balance
of the liability for each period. The property, plant and equipment acquired under the
finance leases are depreciated over the shorter of the asset’s useful life and the lease term.

Leases in which a significant portion of the risks and rewards of ownership are retained by
the lessor are classified as operating leases. Payments made under operating leases are
charged to the income statement on a straight line basis over the period of the lease.

                                                                                                           47
                                                                Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 1: Summary of significant accounting policies (cont)

(o)    Fair value estimation

The fair value of financial assets and financial liabilities must be estimated for recognition
and measurement or for disclosure purposes.

The fair value of financial instruments traded in active markets (such as publicly traded
derivatives, trading and available-for-sale securities) is based on quoted market prices at
the balance sheet date. The quoted market price used for financial asset held by the Group
is the current bid price; the appropriate quoted market price for financial liabilities is the
current ask price.

The nominal value less estimated credit adjustments of trade receivables and payables are
assumed to approximate their fair value. The fair value of financial liabilities for disclosure
purposes is estimated by discounting the future contractual cash flows at the current market
interest rate that is available to the Group for similar financial instruments.

(p)    Impairment of assets

Goodwill and intangible assets that have an indefinite useful life are not subject to
amortisation. They are tested annually for impairment or more frequently if events or
changes in circumstances indicate that they might be impaired. Other assets are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable.


An impairment loss is recognised for the amount by which the asset’s carrying amount
exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair
value less costs to sell and value in use. For the purpose of assessing impairment, assets
are grouped at the lowest levels for which there are separately identifiable cash inflows
which are largely independent of the cash inflows from other assets or groups of assets
(cash-generating units). Non-financial assets other than goodwill that suffered impairment
are reviewed for possible reversal of the impairment at each reporting date.

(q)    Employee benefits

Provision is made for the Group’s liability for employee benefits arising from services
rendered by employees to balance date. Employee benefits that are expected to be settled
within one year have been measured at the amounts expected to be paid when the liability
is settled, plus related on-costs. Employee benefits payable later than flows relating to
short-term receivables are not discounted if the effect of discounting is immaterial. The
amount for the provision is recognised in the income statement.



                                                                                                          48
                                                               Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 1: Summary of significant accounting policies (cont)

Share-based compensation benefits are provided to employees via the Arafura Resources
Limited Employee Share Option Plan. Employee benefits received under this plan are
accounted for as an option under AASB2: Share-based Payments. Information in relation to
the scheme is set out in note 33.

The fair value of options granted is recognised as an employee benefit expense with a
corresponding increase in equity. The fair value is measured at grant date using the
Binomial option pricing model.

Upon exercise of options, the balance of the share-based payments reserve in relation to
those options is transferred to retained earnings.

The dilutive effect of outstanding vested options with an exercise price less than the market
weighted average share price is reflected as additional share dilution on the computation of
earnings per share.

(r)    Provisions

Provisions are recognised when the Group has a legal or constructive obligation, as a result
of past events, for which it is probable that an outflow of economic benefits will result and
that outflow can be reliably measured.

(s)    Revenue recognition

Revenue is recognised and measured at fair value of the consideration received or
receivable to the extent it is probable that the economic benefits will flow to the Group and
the revenue can easily be measured.

Interest revenue is recognised as received.

Revenue from the rendering of a service is recognised upon the delivery of the service to
the customers.

All revenue is stated net of the amount of goods and services tax (GST).

(t)    Goods and services tax (GST)

Revenues, expenses and assets are recognised net of the amount of GST, except where
the amount of GST incurred is not recoverable from the Australian Tax Office. In these
circumstances, the GST is recognised as part of the cost of acquisition of the asset or as
part of an item of the expense. Receivables and payables in the balance sheet are shown
inclusive of GST.

                                                                                                         49
                                                              Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 1: Summary of significant accounting policies (cont)

Cash flows are presented in the cash flow statement on a gross basis, except for the GST
component of investing and financing activities, which are disclosed as operating cash
flows.

(u)    Contributed equity

Ordinary shares are classified as equity.

Incremental costs directly attributable to the issue of new shares or options are shown in
equity as a deduction from the proceeds. Incremental costs directly attributable to the issue
of new shares or options for the acquisition of a business are not included in the cost of the
acquisition as part of the purchase consideration.

If the entity reacquires its own equity instruments, e.g. as the result of a share buy-back,
those instruments are deducted from equity and the associated shares are cancelled.

No gain or loss is recognised in the profit or loss and the consideration paid including any
directly attributable incremental costs (net of income taxes) is recognised directly in equity.

(v)    Business combinations

The purchase method of accounting is used to account for all business combinations,
including business combinations involving entities or businesses under common control,
regardless of whether equity instruments or other assets are acquired. Cost is measured at
fair value of the assets given, equity instruments issued or liabilities incurred or assumed at
the date of exchange plus cost directly attributable to the acquisition. Where equity
instruments are issued in the acquisition, the fair value of the instruments is their published
market price at the date of exchange unless, in rare circumstances, it can be demonstrated
that the published price at the date of exchange is an unreliable indicator of the fair value
and that other evidence and valuation methods provide a more reliable measure of fair
value. Transaction costs arising on the issue of equity instruments are recognised directly in
equity.

(w)    Foreign currency translation

The consolidated financial statements are presented in Australian dollars, which is Arafura
Resources Limited’s functional and presentational currency.

Foreign currency transactions are translated into the foreign currency using the exchange
rates prevailing at the date of transactions are paid.




                                                                                                          50
                                                               Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 1: Summary of significant accounting policies (cont)

(x)    Earnings per share

(i) Basic earnings per share
Basic earnings per share is calculated by dividing the profit attributable to equity holders of
the Group, excluding any costs of servicing equity other than ordinary shares, by the
weighted average number of ordinary shares outstanding during the financial year, adjusted
for bonus elements in ordinary shares issued during the year.

(ii) Diluted earnings per share
Diluted earnings per share adjusts the figures used in the determination of basic earnings
per share to take into account the after income tax effect of interest and other financing
costs associated with dilutive potential ordinary shares and the weighted average number of
shares assumed to have been issued for no consideration in relation to dilutive potential
ordinary shares.


(y)    New accounting standards interpretations

Certain Australian Accounting Standards and interpretations have been published that are
not mandatory for 30 June 2008 reporting period. They have not been adopted in preparing
the financial report for the year ended 30 June 2008 and are expected to impact the Group
in the period of initial application. In all cases, the Group intends to apply these standards
from the application date as indicated below.

(i) AASB 123 (revised June 2007) – Borrowing costs

Application date:
Periods on or after 1 January 2009.

Nature of change:
To the extent that borrowing costs are directly attributable to the acquisition, construction or
production of a qualifying asset, the option of recognising borrowing costs immediately as
an expense has been removed. Consequently, all borrowing costs for qualifying assets will
have to be capitalised.




                                                                                                           51
                                                                Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 1: Summary of significant accounting policies (cont) – New accounting
standards interpretation

Impact on initial application:
The transitional provisions of this standard only require capitalisation of borrowing costs on
qualifying assets where commencement date for capitalisation is on or after 1 January
2009. As such, there will be no impact on prior period financial statements when this
standard is adopted.

(ii) AASB 3 (reissued March 2008) - Business combinations

Application date:
Business combinations where the acquisition date is on or after the beginning of the first
reporting period that commences 1 July 2009 or later.

Nature of change:
Released as part of long term international convergence project between IASB and FASB.
The revised standard introduces more detailed guidance on accounting for step
acquisitions, adjustments to contingent consideration, assets acquired that the purchaser
does not intend to use, reacquired rights and share-based payments as part of purchase
consideration. Also, all acquisition costs will have to be expensed instead of being
recognised as part of goodwill.

Impact on initial application:
As there is no requirement to retrospectively restate comparative amounts for business
combinations undertaken before this date, there is unlikely to be any impact on the financial
statements when this revised standard is first adopted.

However, due to the nature of some of the changes in the revised standard, business
combinations that the entity undertakes after this date may in future impact negatively on
the results of the entity. For example, acquisition costs will have to be expensed instead of
being recognised as part of goodwill.

Specific changes in respect of step acquisitions and sell downs may introduce situations
whereby adopting the revised standard may improve profitability.

Also, deferred tax assets that do not satisfy recognition criteria when a business
combination is initially accounted for, but do subsequently qualify for recognition post
acquisition date, will be recognised as a credit to the income statement and there will be no
consequential write-down of goodwill for a similar amount, provided that the deferred tax
assets are recognised outside the initial measurement period of 12 months from acquisition
date.




                                                                                                          52
                                                               Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 1: Summary of significant accounting policies (cont) – New accounting
standards interpretation

(iii) AASB 127 (reissued March 2008) – Consolidated and Separate Financial Statements

Application date:
Periods commencing on or after 1 July 2009.

Nature of change:
The revised standard clarifies that changes in ownership interest which result in control
being retained are accounted for within equity as transactions with owners. Losses will be
attributed to the non-controlling interest even if this results in a debit balance for the non-
controlling interest. Investments retained where there has been a loss of control will be
recognised at fair value at date of sale.

Impact on initial application:
As there is no requirement to retrospectively restate the effect of these revisions, there is
unlikely to be any impact on the financial statements when this revised standard is first
adopted.


(iv) AASB 2008-3 (issued March 2008) - Amendments to Australian Accounting Standards
     arising from AASB 3 and AASB 127 [AASB 1, AASB 2, AASB 4, AASB 5, AASB 7,
     AASB 101, AASB 107, AASB 112, AASB 114, AASB 116, AASB 121, AASB 128,
     AASB 131, AASB 132, AASB 133, AASB 134, AASB 136, AASB 137, AASB 138,
     AASB 139, Interpretation 9 and Interpretation 107.

Application date:
Periods commencing on or after 1 July 2009.

Nature of change:
Makes consequential amendments to 20 standards and 2 interpretations arising from the
reissue of AASB 3 and AASB 127, including to AASB 128: Investments in Associates and
AASB 131: Interests in Joint Ventures.

When an investment ceases to be an associate or jointly controlled entity and is
subsequently accounted for under AASB 139, the fair value of the investment at the date
when it ceases to be an associate or jointly controlled entity is its fair value.

Impact on initial application:
As there is no requirement to retrospectively restate the effect of these revisions, there is
unlikely to be any impact on the financial statements when this revised standard is first
adopted.



                                                                                                          53
                                                               Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 1: Summary of significant accounting policies (cont) – New accounting
standards interpretation

(v) AASB 2008-1 (issued February 2008) - Amendments to AASB 2 – Share-based
    Payments – Vesting Conditions and Cancellations

Application date:
Periods commencing on or after 1 July 2009.

Nature of change:
The definition of vesting conditions has changed and the accounting treatment clarified for
cancellations to share-based payment arrangements by the counterparty. This is to ensure
that conditions other than performance conditions do not result in a ‘true up’ of the share-
based payment expense and are treated in a manner similar to market conditions.

Impact on initial application:
To date, the entity has not issued any options to employees that include non-vesting
conditions and as such, there will be no impact on the financial statements when this
revised standard is adopted for the first time.


(vi) AASB Interpretation 11 (issued February 2007) – AASB 2 Group and Treasury Share
     Transactions

Application date:
Periods commencing on or after 1 March 2008.

Nature of change:
Clarifies the accounting treatment under AASB 2: Share-Based Payments where the parent
entity grants rights to its equity instruments to employees of its subsidiaries, or where a
subsidiary grants to its employees rights to equity instruments of its parent.

Impact on initial application:
There will be no impact because at the reporting date neither the entity nor its parent entity
has granted any rights to equity instruments for employee services.




                                                                                                          54
                                                               Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 1: Summary of significant accounting policies (cont) – New accounting
standards interpretation

(vii) IAS 27, IAS 18 and IAS 36 (issued May 2008) - Consolidated and Separate Financial
      Statements, revenue and Impairment of Assets.

Application date:
Periods commencing on or after 1 January 2009.

Nature of change:
Removal of the definition of the “cost method” in IAS 27, meaning that pre and post-
acquisition dividends no longer need to be differentiated and all dividends are to be
recognised as revenue. However, whenever a dividend is received from a subsidiary,
associate or jointly controlled entity, an impairment test will be required under IAS 36 where
there is an indicator for impairment, i.e. where:

the carrying amount of the investment in the separate financial statements exceeds the
carrying amount of the net assets (including goodwill) of the investee in the consolidated
financial statements; or
the dividend exceeds the total comprehensive income of the subsidiary, associate or jointly
controlled entity in the period that the dividend is declared.

Impact on initial application:
There will be no impact as these requirements are only required to be applied prospectively
for periods commencing on or after 1 January 2009. However, any pre-acquisition dividends
received after this date may result in additional impairment charges on investments in
subsidiaries, associates and jointly controlled entities.

This is because such amounts would previously have been written off directly against the
cost of the investment, whereas in future they will be recognised as revenue which may
result in the investment being stated at an amount exceeding recoverable amount.

(viii) IAS 27 paragraphs 38B and 38C (issued May 2008) - Consolidated and Separate
       Financial Statements

Application date:
Periods commencing on or after 1 January 2009.

Nature of change:
The change relates to situations where a parent entity reorganises a group such that a new
entity is created as the parent entity, or a new entity is interposed in a group between a
subsidiary and its parent, and the consideration for the transaction is equity instruments of
the new entity.



                                                                                                          55
                                                               Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 1: Summary of significant accounting policies (cont) – New accounting
standards interpretation

In such cases, the new parent measures the cost of its investment at the carrying amount of
its share of the net assets (equity) of the original parent (in its separate financial
statements) at the date of reorganisation.

Impact on initial application:
There will be no impact as these requirements are only required to be applied prospectively
to reorganisations occurring in annual periods commencing on or after 1 January 2009.

(ix) AASB 8 (issued February 2007) – Operating Segments

Application date:
Periods commencing on or after 1 January 2009.

Nature of change:
Replaces the disclosure requirements of AASB 114: Segment Reporting.

Impact on initial application:
As this is a disclosure standard only, there will be no impact on amounts recognised in the
financial statements. However, disclosures required for the operating segments will be
significantly different to what is currently reported (business and geographical segment).


(x) AASB 101 (revised September 2007) – Presentation of Financial Statements

Application date:
Periods commencing on or after 1 January 2009.

Nature of change:
Amendments to presentation and naming of the financial statements.

Impact on initial application:
As this is a disclosure standard only, there will be no impact on amounts recognised in the
financial statements. However, there will be various changes to the way financial
statements are presented and various changes to names of individual financial statements.




                                                                                                        56
                                                             Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 2: Financial risk management


The Group’s activities expose it to a variety of financial risks: market risk (which can include
currency risk, fair value interest rate risk and price risk), credit risk and liquidity risk. The
Group’s overall risk management programme focuses on the unpredictability of financial
markets and seeks to minimise potential adverse effects on the financial performance of the
Group.

The Board provides written principles for overall risk management, as well as policies
covering specific areas, such as foreign exchange risk, interest rate risk, credit risk and
investment of excess liquidity.

The Group and the parent entity hold the following financial instruments:



                                           Consolidated                         Parent Entity

                                           2008             2007                 2008              2007
                                              $                $                    $                 $
Financial assets
Cash and cash equivalents             14,829,511       4,746,460          14,829,471         4,746,457
Trade and other receivables              173,274         535,701             173,274           535,701
Available-for-sale financial assets      834,161       2,794,347             834,161         2,794,347
                                      15,836,946       8,076,508          15,836,906         8,076,505

Financial liabilities
Trade and other payables               4,376,903          414,027           4,376,903           414,027
                                       4,376,903          414,027           4,376,903           414,027

(a)   Market risk

(i) Foreign exchange risk
The Group and the parent entity are exposed to foreign exchange risk arising from contract
exposure in relation to the provisions of goods and services by outside organisations. The
exposure is entirely in US dollars.

Foreign exchange risk arises from the future commercial transactions recognised as assets
and liabilities denominated in a currency that is not the entity’s functional currency. The risk
is measured using sensitivity analysis and cash flow forecasting.




                                                                                                               57
                                                                    Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 2: Financial risk management (cont)

At the reporting date, the Group has no currency hedging in place in relation to foreign
exchange risk exposure.

The Group’s and parent entity’s exposure to foreign currency risk at reporting date was as
follows:

                                                           30 June                     30 June
                                                              2008                        2007
                                                              USD                         USD
                                                                 $                           $

Trade payable                                           (2,625,000)                            -



(ii) Group sensitivity
Based on the financial instruments held at 30 June 2008, had the Australian dollar
weakened/strengthened by 10% against the US dollar with all other variables held constant,
there would be a zero effect on the Group’s post tax profit. The amount was capitalised in
deferred development & evaluation expenditure on the balance sheet. The effect on the
balance sheet would have been $272,699 higher/$247,908 lower. The Group’s exposure to
other foreign exchange movements is not material.

(iii) Price risk
The Group and parent entity are exposed to equity securities price risk. This arises from
investments held by the Group and classified on the balance sheet as available-for-sale
financial assets.

The following table summarises the impact of increases/decreases in the listed market
prices from the listed closing price on 30 June 2008 and 30 June 2007 respectively in the
equities held by the Group with all other variables held constant. The equities held are all in
one non-ASX 200 listed entity.




                                                                                                          58
                                                               Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 2: Financial risk management (cont)



                                                     Impact on equity
Listed, non-ASX 200                                    2008                                     2007
                                                          $                                        $
Increase
+10%                                                 83,416                                 267,810
+20%                                                166,832                                 535,619
+50%                                                417,081                               1,339,049
Decrease
-10%                                                (75,833)                              (243,463)
-20%                                               (139,027)                              (446,350)
-50%                                               (278,054)                              (892,699)



(iv) Cash flow and fair value interest rate risk
The Group has no long term borrowings and hence, is not exposed to any interest rate risk.

Group and parent sensitivity
At 30 June 2008, if interest rates has changed by -/+ 100 basis points from year-end rates
with all other variables held constant, post-tax profit for the year would have been ($95,100)
lower/$104,610 higher (2007 – change of 100 bps: ($37,889) lower/$40,125 higher). This
would be the result from higher/lower interest income from cash and cash equivalents.


(b)   Credit risk

The Group has no significant concentrations of credit risk.

The credit quality of financial assets that are neither past due or impaired can be assessed
by reference to external credit ratings:


                                         Consolidated                         Parent Entity
                                         2008             2007                 2008              2007
                                            $                $                    $                 $

Cash at bank and short-term
bank deposits
Standard & Poor’s rating
AA                                 14,828,961         4,746,460         14,828,921         4,746,417
                                   14,828,961         4,746,460         14,828,921         4,746,417


                                                                                                             59
                                                                  Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008



Note 2: Financial risk management (cont)

(c)    Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and marketable
securities for the ability to fund future commitments. Due to the dynamic nature of the
underlying businesses, the finance team aims at maintaining flexibility in funding to achieve
this goal.

Financing arrangements
The Group and parent entity have no financing arrangements as at the reporting date.

Maturities of financial liabilities
The table below illustrates the Group’s and parent entity’s financial liabilities at the reporting
date to the contractual maturity date. The amounts disclosed in the table are the contractual
undiscounted cash flows.




  Group – At 30 June     Less       6 – 12   Between 1   Between 2    Over       Total        Carrying
        2008            than 6      months     and 2       and 5        5     contractual    amounts of
                        months                 years       years      years   cash flows      (assets)/
                                                                                              liabilities

                           $          $          $           $          $          $              $

Non-derivatives

Non-interest bearing    4,487,239     -          -           -          -      4,487,239      4,487,239

Total non-derivatives   4,487,239     -          -           -          -      4,487,239      4,487,239




  Group – At 30 June     Less       6 – 12   Between 1   Between 2    Over       Total        Carrying
        2007            than 6      months     and 2       and 5        5     contractual    amounts of
                        months                 years       years      years   cash flows      (assets)/
                                                                                              liabilities

                           $          $          $           $          $          $              $

Non-derivatives

Non-interest bearing    462,999       -          -           -          -       462,999        462,999

Total non-derivatives   462,999       -          -           -          -       462,999        462,999




                                                                                                                60
                                                                     Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 2: Financial risk management (cont)

 Parent – At 30 June     Less       6 – 12   Between 1   Between 2    Over       Total        Carrying
        2008            than 6      months     and 2       and 5        5     contractual    amounts of
                        months                 years       years      years   cash flows      (assets)/
                                                                                              liabilities

                           $          $          $           $          $          $              $

Non-derivatives

Non-interest bearing    4,487,239     -          -           -          -      4,487,239      4,487,239

Total non-derivatives   4,487,239     -          -           -          -      4,487,239      4,487,239




 Parent – At 30 June     Less       6 – 12   Between 1   Between 2    Over       Total        Carrying
        2007            than 6      months     and 2       and 5        5     contractual    amounts of
                        months                 years       years      years   cash flows      (assets)/
                                                                                              liabilities

                           $          $          $           $          $          $              $

Non-derivatives

Non-interest bearing    462,999       -          -           -          -       462,999        462,999

Total non-derivatives   462,999       -          -           -          -       462,999        462,999




(d)    Fair value estimation

The fair value of financial assets and liabilities must be estimated for recognition and
measurement or for disclosure purposes.

The fair value of financial instruments traded in active markets is based on the quoted
market prices at the reporting date. The quoted market price used for financial assets held
by the Group is the current bid price.

The Group does not have at reporting date any financial instruments not traded in an active
market.




                                                                                                                61
                                                                     Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 3: Critical accounting estimates and judgments



Estimates and judgments are continually evaluated and based on historical experience and
other factors, including expectations of future events that may have a financial impact on
the entity and that are believed to be reasonable under the circumstance.

(a)   Critical accounting estimates and assumptions

The Group makes estimates and assumptions concerning the future. The resulting
accounting estimates will, by definition, seldom equal the related actual results. The
estimates and assumptions that have a significant risk of causing a material adjustment to
the carrying amounts of assets and liabilities within the next financial year are discussed in
the following section.

(i) Continued recognition of mining, evaluation and development expenditure
Details of the Group’s policy regarding the capitalisation of mining, evaluation and
development expenditure are found in note 1(j).

(ii) Employee Share Option Plan
The requirements of AIFRS call for options issued to employees to be recorded at their fair
value using an option pricing model. This requires various assumptions to be made in order
to make the necessary calculations.


(b)   Critical judgements in applying the entity’s accounting policies

(i) Impairment of available-for-sale financial assets
The Group follows the guidance of AASB139 Financial Instruments: Recognition and
Measurement on determining when an available-for-sale financial asset is impaired. This
determination requires significant judgment. In making this judgment, the Group evaluates,
among other factors, the duration and extent to which the fair value of an investment is less
than its cost.

If a decline in fair value below cost was considered significant or prolonged, the Group and
the parent entity would transfer the accumulated fair value adjustments in equity on the
impaired available-for-sale financial asset to the income statement. As the decline in the fair
value of the available-for-sale financial asset is not considered significant or prolonged, the
accumulated fair value adjustments have been recognised in equity.




                                                                                                          62
                                                               Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 4: Segment information



(a)   Description of segments

(i) Business segments
The consolidated entity operates in minerals exploration, extraction and processing
development.

(ii) Geographical segments
The consolidated entity operates within Australia.




                                                                                                  63
                                                       Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 5: Revenue

                                                 Consolidated                  Parent Entity

                                                  2008          2007           2008             2007
                                                     $             $              $                $

Revenue from continuing operations

Fees received                                   75,000       52,500          75,000            52,500

Other revenue
Interest received                              809,750      378,894         809,750          378,894

                                               884,750      431,394         884,750          431,394

Other Income

Profit/(loss) on sale of investments           (27,127)     168,623         (27,127)         168,623
Profit/(loss) on sale of subsidiary (a)      2,180,551            -       2,180,551                -
Government grant (b)                         1,967,881     380,361       1,967,881          380,361

                                             4,121,305      548,984       4,121,305          548,984



(a)    In April 2008, the Group sold the wholly owned subsidiary, Frances Creek Pty Ltd
       which held two tenements in the Northern Territory, Australia. Part of the transaction
       also included the transfer of ownership of two tenements in the same area of interest
       held in the parent entity. It was deemed that due to the current mining operations
       being on one of the leases held in the subsidiary the consideration received was
       apportioned exclusively over the subsidiary, as it was more likely than less that future
       royalty payments would derive from the mining operations on that tenement. The net
       consideration received was $2,500,000. The fair value of the subsidiary at the time of
       the sale was $319,452 representing previously capitalised exploration expenditure in
       relation to the tenements held in the subsidiary.

(b)    AusIndustry Commercial Ready grants of $1,967,881 (2007: $380,361) were
       recognised as other income by the Group during the financial year. There are no
       unfulfilled conditions or other contingencies attaching to these grants.




                                                                                                            64
                                                                 Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 6: Expenses



                                             Consolidated                   Parent Entity

                                             2008           2007            2008             2007
                                                $              $               $                $

(a)   Expenses

Depreciation
Depreciation – plant & equipment            72,842      25,622            72,842            25,622
Depreciation – motor vehicles               63,990      19,339            63,990            19,339
Depreciation – leasehold improvements       15,115           -            15,115                 -
Total depreciation                         151,947      44,961           151,947            44,961

Finance costs
Interest expense                            17,922          8,392         17,922             8,392
Total finance costs                         17,922          8,392         17,922             8,392

Other expenses
Accounting and other professional fees      54,219     160,401           54,219          160,401
Audit fees                                  29,358      25,501           29,358           25,501
Consultants fees                            68,700     256,270           68,700          256,270
Employee benefits expense                1,873,829     946,819        1,873,829          946,819
Insurance                                   65,217      44,961           65,217           44,961
Legal fees                                  96,584     361,868           96,584          361,868
Promotion expenses                         432,971     233,219          432,971          233,219
Share-based employee benefits            1,677,304   2,001,990        1,677,304        2,001,990
Share registry and stock listing fees       78,728     106,226           78,728          106,226
Other expenses                           1,459,328     616,475        1,459,328          616,475
Total other expenses                     5,836,238   4,753,730        5,836,238        4,753,730

Development expenses
Feasibility studies                      2,357,917   1,221,662        2,357,917        1,221,662
Pilot plant                              3,390,312           -        3,390,312                -
Total development expenses               5,748,229   1,221,662        5,748,229        1,221,662




                                                                                                         65
                                                              Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 7: Income tax



                                                      Consolidated                  Parent Entity

                                                       2008          2007           2008             2007
                                                          $             $              $                $

(a) Income tax expense

Current tax                                                -             -              -                 -

(b) Operating profit/(loss) before income
tax expense                                      (6,748,281)   (5,048,367)   (6,748,281)      (5,048,367)

Tax at the Australian tax rate of 30%            (2,024,484)   (1,514,510)   (2,024,484)      (1,514,510)

Tax effect of amounts which are not deductible
(taxable) in calculating taxable income:
    • Entertainment                                   5,916         1,786          5,916            1,786
    • Share-based payments                          503,191       600,600        503,191          600,600
    •  Sundry items                                        -             -              -                 -
    •  Deferred tax assets relating to tax
       losses and temporary differences not
       recognised                                 1,515,377       912,124     1,515,377          912,124
Income tax                                                -             -             -                -
Research & development rebate                       374,752             -       374,752                -
Income tax benefit                                  374,752             -       374,752                -

(c) Deferred tax assets and liabilities not
recognised relate to the following:

Deferred tax assets
Tax losses                                        6,773,797     3,597,523     6,773,797        3,597,523
Other temporary differences                       1,058,882        55,090     1,058,882           55,090
Deferred tax liabilities
Other temporary differences                      (4,404,486)   (2,176,479)   (4,404,486)      (2,176,479)
Net deferred tax assets                            3,428,193     1,476,134     3,428,193        1,476,134



The franking account balance at year end was $nil (2007: $nil)

All unused tax losses were incurred by Australian entities.

Net deferred tax assets have not been brought to account as it is not probable within the
immediate future that tax profits will be available against which deductible temporary
differences and tax losses can be utilised.



                                                                                                                 66
                                                                      Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 8: Discontinued operation


In April 2008, the Group sold a wholly owned subsidiary, Frances Creek Pty Limited. This
was part of a transaction realising future potential iron ore royalties in relation to four
tenements held in the Northern Territory, Australia. By selling the subsidiary and
transferring the ownership of the other two of the four tenements held in the parent entity,
the Group for the consideration below relinquished any future iron ore royalty rights. The
Group has retained gold exploration rights on all four tenements.

Financial information relating to the discontinued operation for the period to the date of
disposal is set out below.


                                               Consolidated                  Parent Entity

                                          April 2008          2007     April 2008             2007
                                                   $             $              $                $

(a)   Carrying amounts of assets

Capitalised exploration expenditure          319,449     306,800          319,449          306,800
Other financial assets                             -           -                3                3
Total assets                                 319,449     306,800          319,452          306,803

(b)   Details of the sale of subsidiary

Consideration received
Cash                                       2,500,000             -      2,500,003                  -
Total disposal consideration               2,500,000             -      2,500,003                  -

Carrying amount of net assets sold         (319,449)             -      (319,452)                  -
Gain on sale before income tax             2,180,551             -     2,180,551                   -

Income tax expense                                 -             -              -                  -
Gain on sale after income tax              2,180,551             -      2,180,551                  -




                                                                                                          67
                                                               Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 9: Current assets – Cash and cash equivalents


                                                    Consolidated                  Parent Entity

                                                     2008          2007           2008             2007
                                                        $             $              $                $


Cash at bank and in hand                        14,701,723   4,746,460     14,701,683         4,746,417
Bank deposits                                      127,788           -        127,788                 -
                                                14,829,511   4,746,460     14,829,471         4,746,417


(a) The above figures are reconciled to cash at the of the financial year as shown in the
statements of cash flow as follows:

Reconciliation to cash at the end of the year

Balances as above                               14,829,511   4,746,460     14,829,471         4,746,417
Balances as per cash flow statement             14,829,511   4,746,460     14,829,471         4,746,417




(b) The Group’s and parent entity’s exposure to interest rate risk in discussed on note 2.




                                                                                                               68
                                                                    Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 10: Current assets – Trade and other receivables


                                                  Consolidated                  Parent Entity

                                                  2008           2007           2008             2007
                                                     $              $              $                $


Other receivables(a)                                  -      376,428               -          376,428
Sundry debtors(b)                                65,514       52,500          65,514           52,500
Security bonds                                   14,000            -          14,000                -
Goods & services tax paid                        93,760      106,773          93,760          106,773
                                                173,274      535,701         173,274          535,701




(a) This receivable was a loan to be repaid from a former related entity – 2007.

(b) This receivable is for money received for the exercise of listed options expiring at 30
    June 2008. The money was banked prior to 30 June 2008 with all of the deposited
    funds cleared on 1 July 2008.

(c) Fair value and credit risk

Due to the short-term nature of the above receivables, their carrying amount is assumed to
approximate their fair value.

The maximum exposure to credit risk at the reporting date is the carrying amount of each
class of receivables mentioned above. The fair value of securities held for certain trade
receivables is insignificant as it is the fair value of any collateral sold or repledged. Refer to
note 2 for more information on the risk management policy of the Group and the credit
quality of the entity’s trade receivables.




                                                                                                             69
                                                                  Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 11: Current assets – Prepayments



                                                 Consolidated                   Parent Entity

                                                  2008          2007            2008             2007
                                                     $             $               $                $


Prepaid insurance                                    -          3,116              -             3,116
Prepaid legal costs                             20,000              -         20,000                 -
                                                20,000          3,116         20,000             3,116




Note 12: Non-current assets – Available-for-sale financial assets



                                                 Consolidated                   Parent Entity

                                                  2008          2007            2008             2007
                                                     $             $               $                $

Listed securities
Opening balance                               2,794,347     375,000        2,794,347          375,000
Additions                                             -     943,385                -          943,385
Disposals (sale & redemption)                 (116,250)   (112,500)        (116,250)        (112,500)
Valuation movement to reserve               (1,843,936)   1,588,462      (1,843,936)        1,588,462
Closing balance                                 834,161   2,794,347          834,161        2,794,347



(a) Listed securities

Shares held in listed securities are fully paid ordinary shares with voting and dividend rights.
4,390,323 ordinary shares in NuPower Resources Limited at fair value on 30 June 2008 of
$834,161 (30 June 2007: $2,678,098) are escrowed until 14 March 2009. The fair value of
the listed securities at 30 June 2008 is below cost. The fair value is deemed to be the
closing price of the equities as quoted on the ASX on 30 June 2008.




                                                                                                             70
                                                                  Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 13: Non-current assets – Other financial assets


                                                  Consolidated                     Parent Entity

                                                   2008             2007           2008             2007
                                                      $                $              $                $

Investments at cost
Investment in subsidiaries                              -               -             40               43
Total investments                                       -               -             40               43




                                Country of    % of equity interest held by           Investment
                              incorporation          parent entity
Name                                                2008             2007           2008            2007
                                                      %                %               $               $

Arafura Group Holdings Ltd     Australia              100             100              10              10
Arafura Rare Earths Pty Ltd    Australia              100             100              10              10
Arafura Uranium Pty Ltd        Australia              100             100              10              10
Arafura Gold Pty Ltd           Australia              100             100              10              10
Frances Creek Pty Ltd          Australia                -             100               -               3
                                                                                       40              43




                                                                                                                71
                                                                     Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 14: Non-current assets – Property, plant and equipment



                                      Office    Office and      Plant &      Motor      Buildings        Total
Consolidated                       furniture     computer    equipment     vehicles             &
                                          and   equipment                              leasehold
                                     fittings                                           additions

                                           $            $            $            $             $            $

At 1 July 2006
Cost or fair value                   74,768              -     26,332      106,692              -     207,792
Accumulated depreciation           (11,803)              -     (1,992)      (6,415)             -     (20,210)
Net book amount                      62,965              -     24,340      100,277              -     187,582

Year ended 30 June 2007
Opening book amount                  62,965              -     24,340      100,277              -     187,582
Additions                            83,657              -     10,229      114,327              -     208,213
Disposals                                 -              -           -            -             -            -
Transfers between classes                 -              -           -            -             -            -
Depreciation charge                (25,622)              -           -     (19,339)             -     (44,961)
Depreciation charge capitalised           -              -     (6,786)            -             -      (6,786)
Closing book amount                121,000               -     27,783      195,265              -     344,048
At 30 June 2007
Cost or fair value                 173,675               -     37,151      221,020              -     431,846
Accumulated depreciation           (52,675)              -     (9,368)     (25,755)             -     (87,798)
Net book amount                    121,000               -     27,783      195,265              -     344,048

Year ended 30 June 2008
Opening book amount                 121,000             -      27,783      195,265             -      344,048
Additions                           122,155        98,688        4,600          430     245,156       471,029
Disposals                                 -             -            -            -            -             -
Transfers between classes         (155,969)      155,969             -            -            -             -
Depreciation charge                (12,359)      (60,483)            -     (63,990)     (15,115)    (151,947)
Depreciation charge capitalised           -             -      (7,337)            -            -       (7,337)
Closing book amount                  74,827      194,174       25,046      131,705      230,041       655,793
At 30 June 2008
Cost or fair value                   95,565      287,358        41,752     221,448      245,156       891,279
Accumulated depreciation           (20,738)      (93,184)     (16,706)     (89,743)     (15,115)    (235,486)
Net book amount                      74,827      194,174        25,046     131,705      230,041       655,793




                                                                                                                     72
                                                                          Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 14: Non-current assets – Property, Plant and equipment (cont)


                                      Office    Office and      Plant &      Motor      Buildings        Total
Parent                             furniture     computer    equipment     vehicles             &
                                          and   equipment                              leasehold
                                     fittings                                           additions

                                           $            $            $            $             $            $

At 1 July 2006
Cost or fair value                   74,768              -     26,332      106,692              -     207,792
Accumulated depreciation           (11,803)              -     (1,992)      (6,415)             -     (20,210)
Net book amount                      62,965              -     24,340      100,277              -     187,582

Year ended 30 June 2007
Opening book amount                  62,965              -     24,340      100,277              -     187,582
Additions                            83,657              -     10,229      114,327              -     208,213
Disposals                                 -              -           -            -             -            -
Transfers between classes                 -              -           -            -             -            -
Depreciation charge                (25,622)              -           -     (19,339)             -     (44,961)
Depreciation charge capitalised           -              -     (6,786)            -             -      (6,786)
Closing book amount                121,000               -     27,783      195,265              -     344,048
At 30 June 2007
Cost or fair value                 173,675               -     37,151      221,020              -     431,846
Accumulated depreciation           (52,675)              -     (9,368)     (25,755)             -     (87,798)
Net book amount                    121,000               -     27,783      195,265              -     344,048

Year ended 30 June 2008
Opening book amount                 121,000             -      27,783      195,265             -      344,048
Additions                           122,155        98,688        4,600          430     245,156       471,029
Disposals                                 -             -            -            -            -             -
Transfers between classes         (155,969)      155,969             -            -            -             -
Depreciation charge                (12,359)      (60,483)            -     (63,990)     (15,115)    (151,947)
Depreciation charge capitalised           -             -      (7,337)            -            -       (7,337)
Closing book amount                  74,827      194,174       25,046      131,705      230,041       655,793
At 30 June 2008
Cost or fair value                   95,565      287,358        41,752     221,448      245,156       891,279
Accumulated depreciation           (20,738)      (93,184)     (16,706)     (89,743)     (15,115)    (235,486)
Net book amount                      74,827      194,174        25,046     131,705      230,041       655,793




                                                                                                                     73
                                                                          Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 15: Non-current assets – Deferred exploration, evaluation and development
         costs



                                                        Consolidated               Parent Entity

                                                         2008          2007         2008           2007
                                                            $             $            $              $

Exploration, evaluation and development costs carried forward

Balance at beginning of year                         5,528,916   3,781,198     5,528,916     3,781,198
Capitalised exploration expenditure                  4,300,608   2,199,900     4,300,608     2,199,900
Capitalised evaluation expenditure (a)               4,903,308           -     4,903,308             -
Capitalised development expenditure (b)                244,361           -       244,361             -
Impairment of exploration expenditure(c)             (319,449)           -     (319,449)             -
Transfer of exploration expenditure upon demerger            -   (452,182)             -     (452,182)
Balance at end of year                              14,657,744   5,528,916    14,657,744     5,528,916



(a) During the year, the definitive feasibility study (DFS) commenced to evaluate, formulate
    and demonstrate the technical feasibility and commercial viability in developing a rare
    earths processing plant to process the ore to be mined from Nolans Bore.
(b) Development expenditure commenced during the year on the mining and associated
    site infrastructure at Nolans Bore.

(c) This amount is all the capitalised exploration expenditure in relation to the tenements held in
    the subsidiary at the date of sale in April 2008 (also refer to note 8).

The ultimate recoverability of capitalised exploration, evaluation and development expenditure is
dependent on the successful development of the area of interest and/or project or subsequent
sale.




                                                                                                              74
                                                                   Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 16: Current liabilities – Borrowings


                                                     Consolidated                  Parent Entity

                                                      2008          2007           2008             2007
                                                         $             $              $                $

Current interest bearing liability
•    Finance leases due within 1 year               95,069      83,648           95,069            83,648
Non-current interest bearing liability
•    Finance leases due later than 1 year but
     within 5 years                                  43,259    138,328           43,259          138,328
Minimum lease payments                             138,328     221,976         138,328           221,976
Future finance charges recognised as a liability   (13,226)    (23,120)        (13,226)          (23,120)
Total lease liability                              125,102     198,856         125,102           198,856

Representing interest bearing liabilities
Current
Interest bearing liabilities                        83,656      69,911           83,656            69,911
Non-current
Interest bearing liabilities                        41,446     128,945           41,446          128,945
                                                   125,102     198,856          125,102          198,856


(a) Guarantees
The security for the above are the assets under the finance leases.
(b) Risk exposures
Details of the Group’s exposure to risk arising from current and non-current borrowings are set
out in note 2.




                                                                                                                75
                                                                     Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 17: Current liabilities – Trade and other payables



                                                  Consolidated                  Parent Entity

                                                   2008          2007           2008             2007
                                                      $             $              $                $

Trade creditors (a)                            1,205,327    274,618        1,205,327          274,618
Other creditors (b)                            3,281,912    188,381        3,281,912          188,381
                                               4,487,239    462,999        4,487,239          462,999




(a) Trade creditors are non-interest bearing and are normally settled on 30 day terms.

(b) Other creditors are per the table below:


                                                  Consolidated                  Parent Entity

                                                   2008          2007           2008             2007
                                                      $             $              $                $

Payroll creditor - superannuation                 43,602          -           43,602                -
Payroll creditor – PAYG                          119,734     35,642          119,734           35,642
Payroll creditor – payroll tax                     9,271          -            9,271                -
Accrual – annual leave                           110,336     48,972          110,336           48,972
Creditor – DFS (i)                             2,726,989          -        2,726,989                -
Creditors – other                                271,980    103,767          271,980          103,767
                                               3,281,912    188,381        3,281,912          188,381



(i) This is the amount payable as per the contract for the definitive feasibility study. It was
    paid on 6 August 2008.

(c) Information about the Group’s and parent entity’s exposure to foreign exchange risk is
    provided in note 2.




                                                                                                             76
                                                                  Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 18: Current liabilities – Provisions


                                              Consolidated                   Parent Entity

                                               2008          2007            2008             2007
                                                  $             $               $                $

Employee benefits(a)                         32,177              -         32,177                  -
                                             32,177              -         32,177                  -



(a) Refers to employees’ days in lieu.




Note 19: Non-current liabilities – Borrowings

Refer to note 16.




Note 20: Equity – Contributed equity


                                         Consolidated and Parent      Consolidated and Parent
                                                 entity                       entity
                                              2008          2007           2008           2007
                                            Shares        Shares               $              $

(a)   Share capital

Ordinary shares
• Fully paid                             157,194,500   121,933,670    37,033,668        17,279,525




                                                                                                          77
                                                               Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008



Note 20: Equity – Contributed equity (cont)

(b) Movements in ordinary share capital

Movements in ordinary share capital over the past two years are as follows:


Date                    Details                           Number of         Issue             $
                                                           shares           Price

01 Jul 06               Opening balance                      75,779,361                   12,381,827
01 Jul 06 – 30Jun 07    Listed options exercised              3,394,848       $0.13           441,330
01 Jul 06 – 30 Jun 07   Listed options exercised              8,472,735       $0.20         1,694,547
01 Jul 06 – 30 Jun 07   Employee options exercised              500,000       $0.30           150,000
01 Jul 06 – 30 Jun 07   Employee options exercised               50,000       $0.34            17,000
22 Dec 06               Rights issue                         33,736,726       $0.36       12,145,221
31 Mar 07               Inspecie distribution                         -         -         (8,326,061)
01 Jul 06 – 30 Jun 07   Share issue transaction costs                 -         -         (1,340,794)
30 Jun 07               Option equity reserve movement                -         -             116,455
30 Jun 07               Balance                             121,933,670                   17,279,525
01 Jul 07 – 30 Jun 08   Listed options exercised             13,469,330       $0.13         1,751,013
01 Jul 07 – 30 Jun 08   Employee options exercised              100,000       $0.22            22,000
01 Jul 07 – 30 Jun 08   Employee options exercised            3,000,000       $0.13           390,000
15 Nov 07               Private placement                    18,691,500       $1.00       18,691,500
01 Jul 07 – 30 Jun 08   Share issue transaction costs                 -         -         (1,100,370)
30 Jun 08               Balance                             157,194,500                   37,033,668



(i) Private placement
On 15 November 2007, the Group issued 18,691,500 fully paid ordinary shares as part of
capital raising. The shares were issued for a purchase price of $1.00 and rank equally with
existing securities with the same ASX code.

(ii) Listed options
During the financial year, the Group received notice to exercise listed options accompanied
by the corresponding cleared funds for 13,469,330 options all at an exercise price of $0.13.
These options expired on 30 June 2008. These shares rank equally and merge with existing
securities with the same ASX code.

(iii) Employee options
Information relating to Arafura Resources Limited Employee Share Option Plan, including
details of options issued, exercised and lapsed during the financial year and options
outstanding at the end of the financial year, is set out in note 33.



                                                                                                            78
                                                                 Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008



Note 20: Equity – Contributed equity (cont)

(iv) Capital risk management
The Group and parent entity’s objectives when managing capital are to safeguard their
ability to continue as a going concern, so that they can continue to provide returns for
shareholders and benefits for other stakeholders and to maintain an optimal capital
structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amounts of
dividends paid to shareholders, return capital to shareholders, issue new shares or sell
assets to reduce debt.

Consistently with others in the industry, the Group and parent entity monitor capital on the
basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net
debt is calculated as total borrowings less cash and cash equivalents. Total capital is
calculated as ‘equity’ as shown in the balance sheet plus net debt.



                                                Consolidated                  Parent Entity

                                                 2008          2007            2008             2007
                                  Notes             $             $               $                $

Total payables                      17       4,487,239       462,999      4,487,239          462,999
Borrowings                        16&19        125,102       198,856        125,102          198,856
Less: cash and cash equivalents      9    (14,829,511)   (4,746,460)   (14,829,471)      (4,746,417)
Net debt                                  (10,217,170)   (4,084,605)   (10,217,130)      (4,084,562)
Total equity                                26,525,965   13,290,733      26,525,965      13,290,733
Total capital                               16,308,795     9,206,128     16,308,835        9,206,171

Gearing ratio                                   (64%)          (48%)          (64%)            (48%)


The increase in the above negative ratio in 2008 resulted primarily from an increase in cash
and cash equivalents as a result of the private placement.




                                                                                                            79
                                                                 Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008



Note 21: Equity – Reserves


                                                        Consolidated                 Parent Entity

                                                          2008         2007           2008           2007
                                                             $            $              $              $

Reserves

Share-based payments reserve                         2,116,910    2,255,463      2,116,910     2,255,463
Available-for-sale financial assets reserve          (109,224)    1,713,461      (109,224)     1,713,461
                                                     2,007,686    3,968,924      2,007,686     3,968,924

Movements

Share-based payments reserve
Balance 1 July 2007                                   2,255,463     369,918      2,255,463       369,918
Option expense                                        1,677,304   2,001,990      1,677,304     2,001,990
Transfer to share capital – options exercised                 -   (116,445)              -     (116,445)
Transfer to retained earnings – options exercised   (1,815,856)           -    (1,815,856)             -
Balance 30 June 2008                                  2,116,911   2,255,463      2,116,911     2,255,463

Available-for-sale financial assets reserve
Balance 1 July 2007                                   1,713,461     125,000      1,713,461       125,000
Sale & redemption movements                              21,250     (12,500)        21,250       (12,500)
Revaluations                                        (1,843,936)   1,600,961    (1,843,936)     1,600,961
Balance 30 June 2008                                  (109,225)   1,713,461      (109,225)     1,713,461




(a) Nature and purpose of reserves
(i) Share-based payments reserve
The share-based payments reserve is used to recognise the fair value of options issued to
employees and directors but not exercised.
(ii) Available-for-sale financial assets reserve
The available-for-sale financial asset reserve is used to recognise the movements in the fair value
of the assets which are all listed securities at the balance date.




                                                                                                                80
                                                                     Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 22: Equity – Accumulated losses


                                                    Consolidated                            Parent Entity

                                                     2008                 2007               2008             2007
                                                        $                    $                  $                $

Balance 1 July 2007                            (7,957,716)          (2,909,350)        (7,957,716)     (2,909,350)
Transfer on options exercised                    1,815,856                    -          1,815,856               -
Net loss for the year                          (6,373,529)          (5,048,367)        (6,373,529)     (5,048,367)
Balance 30 June 2008                          (12,515,389)          (7,957,717)       (12,515,389)     (7,957,717)




Note 23: Statement of cash flows


Reconciliation of the net loss after income tax to the net cash (outflows) from operating activities.


                                                         Consolidated                         Parent Entity

                                                             2008            2007             2008            2007
                                                                $               $                $               $

Net (loss)                                         (6,373,529)         (5,048,367)      (6,373,529)    (5,048,367)

Depreciation and amortisation                          151,947               44,961         151,947          44,961
Loss/(gain) on sale of subsidiary                  (2,180,551)                    -     (2,180,551)               -
Loss/(gain) on sale on available-for-sale assets         27,127          (168,623)            27,127     (168,623)
Demerger costs written off                                    -            309,417                 -       309,417
Share based employee benefits                        1,677,304           2,001,990        1,677,304      2,001,990
(Increase)/decrease in trade & other receivables       180,154             (52,500)         180,154        (52,500)
(Increase)/decrease in other assets                    (16,883)                   -         (16,883)              -
Increase/(decrease) in trade & other payables          806,050               72,317         806,050          72,317
Increase/(decrease) in other provisions                  74,600              22,855           74,600         22,855
Net cash (outflow) from operating activities       (5,653,781)         (2,817,950)      (5,653,781)    (2,817,950)




                                                                                                                        81
                                                                             Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008



Note 24: Key management personnel disclosures


(a) Directors

The following persons were directors of Arafura Resources Limited during the financial year:

(i) Chairman – non-executive
I G Muir

(ii) Executive director
A J Stephens

(iii) Non-executive directors
I J Kowalick
T R Jackson
S Ward
I J Laurance

S Ward and I J Laurance were appointed as directors on 15 August 2007 and 20 February
2008 respectively and continue in office at the date of this report.


(b) Other key management personnel

The following persons also had authority and responsibility for planning, directing and
controlling the activities of the Group, directly or indirectly, during the financial year:

•   S J Mackowski – General Manager Project Development
•   R Brescianini – General Manager Strategic Development and Exploration
•   B W Fowler – Manager Sustainability
•   G J Lockyer – Chief Financial Officer and Company Secretary




                                                                                                            82
                                                                 Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008



Note 24: Key management personnel disclosures (cont)

(c)    Key management personnel compensation



                                                                Consolidated                           Parent Entity

                                                                2008             2007                  2008                 2007
                                                                   $                $                     $                    $

Short-term employee benefits                               975,176         666,327                   975,176             666,327
Post-employment benefits                                    65,819          36,378                    65,819              36,378
Long-term benefits                                         115,919          59,969                   115,919              59,969
Share-based payments                                     1,128,814       2,176,993                 1,128,814           2,176,993
                                                         2,285,728       2,939,667                 2,285,728           2,939,667



(d)    Equity instrument disclosures relating to key management personnel

(i) Options provided as remuneration and shares issued on exercise of such options
Details of options provided as remuneration and shares issued on the exercise of such
options, together with terms and conditions of the options, can be found in section D of the
Remuneration Report.
(ii) Option holdings
The number of options over ordinary shares in the company held during the financial year
by each director of Arafura Resources Limited and other key management personnel of the
Group, including their personally related parties, are set out below.

                     Balance at      Granted as     Exercised       Other        Balance at          Vested and         Unvested
2008                 start of the   compensation                   changes       end of year         exercisable
                        year

Directors of Arafura Resources Limited
I G Muir                      -                -             -               -                 -                   -               -
I J Kowalick            550,000                -     (550,000)               -                 -                   -               -
T R Jackson                   -                -             -               -                 -                   -               -
S Ward                        -                -             -               -                 -                   -               -
I J Laurance                  -                -             -               -                 -                   -               -
A J Stephens          3,000,000                -   (3,000,000)               -                 -                   -               -

Key management personnel of the Group
S J Mackowski        800,000           -            (100,000)                -     700,000             700,000                 -
R Brescianini        700,000           -                    -                -     700,000             450,000           250,000
B W Fowler                 -     200,000                    -                -     200,000                   -           200,000
G J Lockyer        1,200,000           -                    -                -   1,200,000           1,200,000                 -

                     6,250,000         200,000     (3,650,000)               -   2,800,000           2,350,000           450,000


                                                                                                                                       83
                                                                                 Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008



Note 24: Key management personnel disclosures (cont)
All vested options are exercisable at the end of the year.
                  Balance at        Granted as     Exercised       Other changes         Balance at    Vested and         Unvested
2007              start of the     compensation                                          end of year   exercisable
                     year

Directors of Arafura Resources Limited
P N Walker          3,200,000                 -    (500,000)       (2,700,000)*                  -             -                 -
I G Muir              220,000                 -    (220,000)                  -                  -             -                 -
I J Kowalick          800,000                 -    (250,000)                  -           550,000        550,000                 -
T R Jackson                 -                 -            -                  -                  -             -                 -
A J Stephens        3,000,000                 -            -                  -           3,000,00     2,000,000         1,000,000
                                                                                                 0
Key management personnel of the Group
S J Mackowski     600,000       200,000                        -                   -      800,000        350,000             450,000
R Brescianini           -       700,000                        -                   -      700,000        250,000             450,000
G J Lockyer             -     1,200,000                        -                   -      1,200,00       500,000             700,000
                                                                                                 0
                  7,820,000         2,100,000      (970,000)           (2,700,000)        6,250,00     3,650,000         2,600,000

*Options lapsed

(iii) Share holdings
The number of shares in the Group held during the financial year by each director of
Arafura Resources Limited and other key management personnel of the Group, including
their personally related parties, are set out as follows:

                                                         Received during                 Other changes
                                 Balance at the start                                                        Balance at the end
2008                                                      the year on the                during the year
                                     of the year                                                                 of the year
                                                        exercise of options            (on market trades)


Directors of Arafura Resources Limited
I G Muir                             3,250,001                    -                        (231,500)                 3,018,501
I J Kowalick                             -                     550,000                          -                     550,000
T R Jackson                          4,778,668                    -                             -                    4,778,668
S Ward                                   -                        -                          25,000                    25,000
I J Laurance                             -                        -                          40,000                    40,000
A J Stephens                              -                    3,000,000                   (340,173)                 2,659,827
Key management personnel of the Group
S J Mackowski                             -                    100,000                          -                     100,000
R Brescianini                             -                       -                             -                        -
B W Fowler                                -                       -                             -                        -
G J Lockyer                               -                        -                            -                        -


                                     8,028,669                 3,650,000                   (506,673)                 11,171,996



                                                                                                                                       84
                                                                                          Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 24: Key management personnel disclosures (cont)

•      S Ward was appointed as a non-executive director on 15 August 2007.
•      I J Laurance was appointed as a non-executive director on 20 February 2008.
•      B W Fowler commenced on 15 November 2007.



                                                    Received during        Other changes
                            Balance at the start                                              Balance at the end
2007                                                 the year on the       during the year
                                of the year                                                       of the year
                                                   exercise of options   (on market trades)


Directors of Arafura Resources Limited
P N Walker                      1,825,000                  -                (1,825,000)               -
I G Muir                        3,190,001                  -                   60,000             3,250,001
I J Kowalick                        -                   250,000              (250,000)                -
T R Jackson                         -                      -                 4,778,668            4,778,668
A J Stephens                        -                      -                      -                   -
Key management personnel of the Group
S J Mackowski                        -                      -                    -                     -
R Brescianini                        -                      -                    -                     -
G J Lockyer                          -                      -                    -                     -


                                5,015,001               250,000              2,763,668            8,028,669



(iv) Loans to key management personnel
In the 2008 financial year, there were no loans to individuals at any time.

(v) Other transactions with key management personnel
In the 2008 financial year, there were no transactions with individuals at any time.




                                                                                                                       85
                                                                            Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 25: Remuneration of auditors




                                              Consolidated                  Parent Entity

                                               2008          2007           2008             2007
                                                  $             $              $                $

1. Audit services
BDO Kendalls Audit & Assurance (WA) Pty Ltd
Audit and review of financial reports         29,358     34,711           29,358            34,711
Total remuneration for audit services         29,358     34,711           29,358            34,711

2. Taxation services
BDO Kendalls Corporate Tax (WA) Pty Ltd
Taxation services                              1,650         8,500          1,650            8,500
Horwath WA Pty Ltd
Taxation services                                  -     34,150                 -           34,150
Total remuneration for taxation services       1,650     42,650             1,650           42,650

3. Other services
Horwath WA Pty Ltd
General accounting services                        -          150                -            150
Corporate governance advisory services             -          500                -            500
Horwath Securities (WA) Pty Ltd
Demerger advisory service                          -     22,096                  -          22,096
Due diligence services                             -      6,188                  -           6,188
Total remuneration for other services              -     28,934                  -          28,934


Total remuneration for non-audit services      1,650     71,584             1,650           71,584




                                                                                                        86
                                                             Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 26: Commitments


(a) Mining tenement commitments

                                                        Consolidated                  Parent Entity

                                                         2008          2007           2008            2007
                                                            $             $              $               $

Within one year                                      3,159,060   1,462,000       3,159,060       1,462,000
Later than one year but not later than five years    9,428,280   4,721,000       9,428,280       4,721,000
Later than five years                                        -           -               -               -
                                                    12,587,340   6,183,000      12,587,340       6,183,000



In order to maintain current rights of tenure to exploration and mining tenements, the
consolidated entity has the following discretionary exploration expenditure requirements up
until expiry of the tenements. These obligations are not provided for in the financial
statements.

If the consolidated entity decides to relinquish certain tenements and/or does not meet
these obligations, assets recognised in the balance sheet may require review to determine
the appropriateness of carrying values. The sale, transfer or farm-out of exploration rights to
third parties will reduce or extinguish these obligations.

(b) Hire purchase commitments


                                                        Consolidated                  Parent Entity

                                                         2008          2007           2008            2007
                                                            $             $              $               $

Within one year                                         95,069      83,648           95,069          83,648
Later than one year but not later than five years       43,259    138,328            43,259        138,328
Later than five years                                        -           -                -               -
                                                      138,328     221,976          138,328         221,976
Less: future finance charges                          (13,226)    (23,120)         (13,226)        (23,120)
Recognised as liability                               125,102     198,856          125,102         198,856

Represented by:
Current (note16)                                       83,656      69,911           83,656          69,911
Non-current (note19)                                   41,446     128,945           41,446         128,945
                                                      125,102     198,856          125,102         198,856




                                                                                                                  87
                                                                       Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 26: Commitments (cont)

Hire purchase loans are entered into as a means of funding the acquisition of items of plant
and equipment. Rental payments are fixed and have no escalation clauses. No hire
purchase arrangements create restrictions on any other financing arrangement


Note 27: Contingent liabilities


Native title claims have been made with respect to areas which include tenements in which
the consolidated entity has interests. The consolidated entity is unable to determine the
prospects for success or otherwise of the claims and, in any event, whether or not and to
what extent the claims may significantly affect the consolidated entity or its projects.




                                                                                                        88
                                                             Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 28: Earnings per share


                                                                                Consolidated
                                                                                 2008                  2007
                                                                                Cents                 Cents

(a)    Basic earnings per share
Basic loss per share (cents per share)                                            (4.6)                 (5.1)
(b)    Diluted earnings per share
Diluted loss per share (cents per share)                                          (4.6)                 (5.1)

                                                                                 Consolidated
                                                                                  2008                 2007
                                                                                     $                    $

Net Earnings/(loss)                                                        (6,373,529)          (5,048,367)
Earnings/(loss) used to calculate basic earnings per share                 (6,373,529)          (5,048,367)
Earnings/(loss) used to calculate diluted earnings per share               (6,373,529)          (5,048,367)



                                                                              Consolidated
                                                                           Number of       Number of
                                                                             shares          shares


Weighted average number of ordinary shares used in calculating
                                                                          137,070,411            99,530,638
basic earnings per share
Weighted average number of ordinary shares used in calculating
                                                                          137,070,411            99,530,638
diluted earnings per share
Weighted average number of ordinary shares from option
conversions which are dilutive and potential ordinary shares that are       7,359,354            21,436,458
not used in calculation of diluted earnings per share




                                                                                                                   89
                                                                        Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 29: Related party transactions


(a)   Parent entities

The parent entity within the Group is Arafura Resources Limited. The ultimate Australian
parent entity is Arafura Resources Limited which at 30 June 2008 owns 100% of the issued
ordinary shares of Arafura Group Holdings Pty Ltd, Arafura Rare Earths Pty Ltd, Arafura
Uranium Pty Ltd and Arafura Gold Pty Ltd. The ultimate parent entity and ultimate
controlling party is Arafura Resources Limited which at 30 June 2008 owns 100% of the
issued ordinary shares of Arafura Group Holdings Pty Ltd, Arafura Rare Earths Pty Ltd,
Arafura Uranium Pty Ltd and Arafura Gold Pty Ltd.

There were no related party transactions for the year.

(b)   Subsidiaries

Interests in subsidiaries are set out in note 30.

(c)   Key management personnel

Disclosures relating to key management personnel are set out in note 24.



Note 30: Subsidiaries


The consolidated financial statements incorporate the assets, liabilities and results of the
following subsidiaries in accordance with the accounting policies described in note 1(b).


Name of entity                    Country of        Class of share              Equity holding
                                incorporation
                                                                                   2008            2007
                                                                                     %               %

Arafura Group Holdings Ltd       Australia           Ordinary                        100            100
Arafura Rare Earths Pty Ltd      Australia           Ordinary                        100            100
Arafura Uranium Pty Ltd          Australia           Ordinary                        100            100
Arafura Gold Pty Ltd             Australia           Ordinary                        100            100
Frances Creek Pty Ltd            Australia           Ordinary                          -            100




                                                                                                                90
                                                                     Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 30: Subsidiaries (cont)

The parent entity sold France Creek Pty Ltd on 24 April 2008 as part of the transaction in
realising in full future iron ore royalties payable from Territory Resources Limited.



Note 31: Interest in joint ventures


In November 2005, the Group entered into an option agreement with Mithril Resources Ltd
(Mithril), which allowed Mithril to conduct preliminary exploration on the Group’s exploration
licences 9725 and 10136 (Project Area). In June 2006, Mithril advised the Group that it had
completed a minimum expenditure of $50,000 on the Project Area and it has consequently
exercised its option to earn equity in the Project Area. Under the terms of the farm-in, Mithril
can earn a 51% interest in the Project Area by spending $2,000,000 on exploration over a
period of four years from execution of a joint venture agreement (Hammer Hill JV). The
Hammer Hill JV was executed in May 2007. Mithril may earn an additional 19% (total 70%)
interest in the Project Area by spending an additional $3,000,000 (total $5,000,000) on
exploration in the two years following the initial four years.

In December 2007, BHP Billiton Minerals Pty Ltd (BHP Billiton) elected to participate in the
Hammer Hill JV under the terms of the Mithril/BHP Billiton Alliance. BHP Billiton will sole
fund all further exploration expenditure during the earn-in stages to earn up to a 51%
interest in the Project Area.

At the date of this report, no expenditure incurred by Mithril or BHP Billiton has been
included in the financial report.




                                                                                                           91
                                                                Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 32: Events occurring after the balance sheet date


Other than noted below, there is no matter or circumstance subsequent to 30 June 2008
which will have a significant impact on the position of the Group:

(a)   Employee options

On 1 July 2008, Arafura Resources Limited issued under the Employee Share Option Plan
3,050,000 options to current and new employees. These options issued have an exercise
price of $1.19, vest on 31 December 2009 and expire on 31 December 2012.

The fair value of the options issued at grant date over the expected life of the options is as
set out below:


Grant Date               Amount to be expensed    Amount to be expensed         Total amount to be
                                     in 2008/09               in 2009/10   expensed as per AASB 2

                                             $                         $                            $


01 Jul 08                              802,874                  406,426                    1,209,300




(b)   Chemical processing facility
On 25 August, 2008 the Group announced a Heads of Agreement signing with Incitec Pivot
Limited (ASX: IPLDA) under which Arafura and Incitec Pivot will evaluate the feasibility of
constructing integrated chemical facilities to supply relevant chemicals to the Group’s
proposed rare earth phosphate recovery facility.

The study will incorporate a review of potential plant sites in South Australia and the
Northern Territory for both the chemical plant and the rare-earth-phosphate processing
facility and is expected to take approximately 6 months to complete.

The parties will consider the feasibility of the chemical facility supplying the majority of the
Group’s chemical needs for its rare earths-phosphate facility, including hydrochloric,
sulphuric acid and caustic soda.

In addition, the parties will also consider the marketing opportunities for the chemical
outputs of phosphoric acid and calcium chloride from the Group’s rare earth processing
facility creating a specialist chemical supply, logistic and marketing opportunity.




                                                                                                            92
                                                                 Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008



Note 32: Events occurring after the balance sheet date (cont)

(c)    General meeting of shareholders
On 2 September 2008, a general meeting of shareholders was held. The agenda of the
meeting was to approve the previous share placement in November 2007 (18,691,000 fully
paid ordinary shares at $1 per share) and the issue of options to directors as below:


                           Number of options
Name                                               Exercise price         Vesting date         Expiry date
                                    granted
I J Laurance                      2,000,000                $1.19           31 Dec 09            31 Dec 12
I J Kowalick                      1,500,000                $1.19           31 Dec 09            31 Dec 12
S Ward                            1,500,000                $1.19           31 Dec 09            31 Dec 12
T R Jackson                       1,500,000                $1.19           31 Dec 09            31 Dec 12
A J Stephens                      2,500,000                $1.19           31 Dec 09            31 Dec 12



These options issued have an exercise price of $1.19, vest on 31 December 2009 and
expire on 31 December 2012.

Grant Date                Amount to be expensed    Amount to be expensed             Total amount to be
                                      in 2008/09               in 2009/10       expensed as per AASB 2

                                               $                            $                            $


02 Sep 2008                           1,209,843                     2,156,302                   3,366,145



All resolutions including shareholder ratification of the previous share placement and the granting
of options to the directors as per the above were carried.




                                                                                                                 93
                                                                      Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008




Note 33: Share-based payments


(a)        Employee option plan
The establishment of the Arafura Resources Limited Employee Share Option Plan (ESOP)
was approved by share holders at the 2005 annual general meeting. The options are issued
for nil consideration, and are granted at the discretion of the Board. The options cannot be
transferred, are not quoted on the ASX and carry no dividend or voting rights. The exercise
price is based on the weighted average price at which the company’s shares are traded on
the Australian Stock Exchange during a specified period immediately before the options are
granted. Unless otherwise indicated, options become exercisable one year after the grant
date and generally expire within 3 to 5 years after the grant date. Once able to be
exercised, options are exercisable at any time whilst the holder is employed by Arafura
Resources Limited. When exercisable, each option is convertible into one ordinary share.

Options may also be issued outside of the ESOP. These options are offered at the
directors’ discretion to prospective employees as an incentive to commence employment
with Arafura Resources Limited.

Set out below are summaries of options granted and still outstanding at the beginning
and/or end of the financial year.




                                                                                                                Vested and
                                             Balance at     Granted     Exercised      Forfeited   Balance at   exercisable
  Grant         Expiry            Exercise
                                                start of   during the   during the    during the       end of     at end of
  date           date                price
                                                   year         year         year          year         year           year
                                               Number       Number       Number        Number        Number        Number


Consolidated and parent entity – 2008

26 Feb 07      30 Jun 09            *$0.26      750,000            -              -            -      750,000       750,000
26 Feb 07      30 Jun 09            *$0.30      750,000            -              -            -      750,000       750,000
26 Feb 07      30 Jun 09            *$0.22      200,000            -      (100,000)            -      100,000       100,000
26 Feb 07      30 Jun 08            *$0.13    3,000,000            -    (3,000,000)            -            -             -
16 Mar 07      30 Jun 10             $0.75      500,000            -              -            -      500,000       500,000
25 May 07      30 Jun 11             $1.72      950,000            -              -            -      950,000       950,000
02 Oct 07      30 Jun 11             $1.31            -      150,000              -            -      150,000             -
17 Oct 07      30 Jun 11             $1.31            -      150,000              -            -      150,000             -
12 Nov 07      30 Jun 11             $1.70            -      200,000              -            -      200,000             -

   Total                                      6,150,000      500,000    (3,100,000)            -    3,550,000     3,050,000

Weighted average exercise price                   $0.47        $1.47         $0.13             -        $0.90         $0.80




                                                                                                                                 94
                                                                                      Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008



Note 33: Share-based payments (cont)



                                                                                                                Vested and
                                             Balance at     Granted     Exercised     Forfeited    Balance at   exercisable
  Grant         Expiry            Exercise
                                                start of   during the   during the   during the        end of     at end of
  date           date                price
                                                   year         year         year         year          year           year
                                               Number       Number       Number       Number         Number        Number


Consolidated and parent entity – 2007

 15 Jul 05    30 Jun 08              $0.20    3,000,000             -            -   (3,000,000)            -             -
31 Jan 06     30 Jun 09              $0.30      500,000             -    (500,000)             -            -             -
23 May 06     30 Jun 09              $0.40      250,000             -            -     (250,000)            -             -
23 May 06     30 Jun 09              $0.45      250,000             -            -     (250,000)            -             -
28 Jun 06     30 Jun 09              $0.34      350,000             -     (50,000)     (300,000)            -             -
 03 Jul 06    30 Jun 09              $0.40            -       500,000            -     (500,000)            -             -
 03 Jul 06    30 Jun 09              $0.45            -       500,000            -     (500,000)            -             -
26 Feb 07     30 Jun 09             *$0.26            -       750,000            -             -      750,000       750,000
26 Feb 07     30 Jun 09             *$0.30            -       750,000            -             -      750,000             -
26 Feb 07     30 Jun 09             *$0.22            -       200,000            -             -      200,000       200,000
26 Feb 07     30 Jun 08             *$0.13            -     3,000,000            -             -    3,000,000     2,000,000
16 Mar 07     30 Jun 10              $0.75            -       500,000            -             -      500,000             -
25 May 07     30 Jun 11              $1.72            -       950,000            -             -      950,000             -

   Total                                      4,350,000    7,150,000    (550,000)    (4,800,000)    6,150,000    2,950,000

Weighted average exercise price                   $0.25        $0.46        $0.30         $0.28        $0.47         $0.17




* Revised exercise price following the demerger of Arafura Resources Limited and NuPower
Resources Limited.

The weighted average share price at the date of exercise of options exercised during the year
ended 30 June 2008 was $1.13 (2007: $0.49).

The weighted average remaining contractual life of the share options outstanding at the end of
the period was 1.96 years (2007: 1.62 years).




                                                                                                                                95
                                                                                     Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008



Note 33: Share-based payments (cont)
Fair value of options granted
The assessed fair value at the grant date of options granted during the year ended 30 June
2008 was $0.68 (2007: $0.59). The fair value at grant date is determined independently
using the Binomial option pricing model that takes into account the exercise price, the term
of the option, the impact of dilution, the share price at grant date, the expected volatility of
the underlying share, and the risk free interest rate for the term of the option.

The model inputs for options granted during the year ended 30 June 2008 are:

(a) Options are issued for no consideration and vest generally for key management
    personnel between one and three years after grant date and for employees one year
    after grant date.


(b)          (c)           (d)           (e)             (f)                (g)              (h)

Exercise     Grant         Expiry        Share price     Expected           Expected         Risk free
price        date          date          at grant date   price              dividend         interest
                                                         volatility         yield            rate

$1.31        02 Oct 07     30 Jun 11     $1.83           87.78%             n/a              6.31%
$1.31        17 Oct 07     30 Jun 11     $1.13           88.20%             n/a              6.38%
$1.70        12 Nov 07     30 Jun 11     $1.02           90.97%             n/a              6.57%




The model inputs for the options granted during the year ended 30 June 2007 are:


(b)          (c)           (d)           (e)             (f)                (g)              (h)

Exercise     Grant         Expiry        Share price     Expected           Expected         Risk free
price        date          date          at grant date   price              dividend         interest
                                                         volatility         yield            rate

$0.26        26 Feb 07     30 Jun 09     $0.71           64.48%             n/a              6.00%
$0.30        26 Feb 07     30 Jun 09     $0.71           68.49%             n/a              5.98%
$0.13        26 Feb 07     30 Jun 08     $0.71           67.78%             n/a              6.01%
$0.13        26 Feb 07     30 Jun 08     $0.71           67.78%             n/a              6.01%
$0.13        26 Feb 07     30 Jun 08     $0.71           65.55%             n/a              6.00%
$0.22        26 Feb 07     30 Jun 09     $0.71           62.48%             n/a              6.00%
$0.26        26 Feb 07     30 Jun 09     $0.71           70.36%             n/a              6.08%
$0.30        26 Feb 07     30 Jun 09     $0.71           69.06%             n/a              5.98%
$0.75        16 Mar 07     30 Jun 10     $0.88           68.71%             n/a              5.96%
$0.75        16 Mar 07     30 Jun 10     $0.88           68.56%             n/a              6.02%
$1.72        25 May 07     30 Jun 11     $1.72           76.99%             n/a              6.10%
$1.72        25 May 07     30 Jun 11     $1.72           77.87%             n/a              6.07%




                                                                                                                 96
                                                                      Arafura Resources Limited – 2008 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2008



Note 33: Share-based payments (cont)

(b) Employee share scheme
There was no employee share scheme during any of the reporting year or at the year end.

(c) Expenses arising from share-based payment transactions
The total expenses arising from share-based payment transactions recognised during the
period as part of employee benefit expense were as follows:


                                                    Consolidated               Parent Entity

                                                     2008          2007         2008           2007
                                                        $             $            $              $
Options issued under the executive & employee
option plan                                      1,677,304   2,001,990    1,677,304      2,001,990
Shares issued under executive & employee share
scheme                                                   -           -            -              -
                                                 1,677,304   2,001,990    1,677,304      2,001,990




                                                                                                          97
                                                               Arafura Resources Limited – 2008 Annual Report
ARAFURA RESOURCES LIMITED AND ITS CONTROLLED
ENTITIES
ACN 080 933 455



DECLARATION BY DIRECTORS


The directors of the company declare that:


(1)    The financial statements comprising the income statement, balance sheet, cash flow
       statement, statement of changes in equity, accompanying notes notes are in
       accordance with the Corporations Act 2001, and:

       (a)    comply with Accounting Standards, Corporations Regulations 2001; and

       (b)    give a true and fair view of the financial position as at 30 June 2008 and of
              the performance for the year ended on that date for the company and the
              consolidated entity.

(2)    In the directors’ opinion, there are reasonable grounds to believe that the company
       will be able to pay its debts as and when they become due and payable.

(3)    The remuneration disclosures set out on pages 13 to 26 of the directors’ report (as
       part of the audited Remuneration Report), for the year ended 30 June 2008 comply
       with section 300A of the Corporations Act, 2001.

(4)    The directors have been given the declarations by the managing director and chief
       financial officer required by section 295A.


This declaration is made in accordance with a resolution of the Board of directors and is
signed on behalf of the directors.




I G Muir
Chairman
30 September 2008




                                                                                                        98
                                                             Arafura Resources Limited – 2008 Annual Report
                                                                              BDO Kendalls Audit & Assurance (WA) Pty Ltd
                                                                              128 Hay Street
                                                                              SUBIACO WA 6008
                                                                              PO Box 700
                                                                              SUBIACO WA 6872
                                                                              Phone 61 8 9380 8400
                                                                              Fax 61 8 9380 8499
                                                                              aa.perth@bdo.com.au
                                                                              www.bdo.com.au

                                                                              ABN 79 112 284 787




                                INDEPENDENT AUDITOR’S REPORT
                        TO THE MEMBERS OF ARAFURA RESOURCES LIMITED

We have audited the accompanying financial report of Arafura Resources Limited, which comprises the
balance sheet as at 30 June 2008, and the income statement, statement of changes in equity and cash
flow statement for the year ended on that date, a summary of significant accounting policies, other
explanatory notes and the directors’ declaration of the consolidated entity comprising the company and the
entities it controlled at the year’s end or from time to time during the financial year.

Directors’ Responsibility for the Financial Report

The directors of the company are responsible for the preparation and fair presentation of the financial
report in accordance with Australian Accounting Standards (including the Australian Accounting
Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining
internal controls relevant to the preparation and fair presentation of the financial report that is free from
material misstatement, whether due to fraud or error; selecting and applying appropriate accounting
policies; and making accounting estimates that are reasonable in the circumstances. In Note 1, the
directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial
Statements, that compliance with the Australian equivalents to International Financial Reporting Standards
ensures that the financial report, comprising the financial statements and notes, complies with International
Financial Reporting Standards.

Auditor’s Responsibility

Our responsibility is to express an opinion on the financial report based on our audit. We conducted our
audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply
with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain
reasonable assurance whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial report. The procedures selected depend on the auditor’s judgement, including the assessment of
the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation
of the financial report in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by the directors, as well as evaluating the overall presentation of the financial report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinions.

Independence

In conducting our audit, we have complied with the independence requirements of the Corporations Act
2001.




                                                                              BDO Kendalls is a national association of
                                                                              separate partnerships and entities
Auditor’s Opinion

(a)   In our opinion the financial report of Arafura Resources Limited is in accordance with 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 2008 and of their performance for the year ended on that date; and

      (ii)   complying with Australian Accounting Standards (including the Australian Accounting
             Interpretations) and the Corporations Regulations 2001; and

(b)   the financial report also complies with International Financial Reporting Standards as disclosed in
      Note 1.

Material Uncertainty Regarding Continuation as a Going Concern

Without qualifying our opinion, we draw attention to the financial report which indicates that the consolidated
entity incurred a net loss of $6,373,529 during the year ended 30 June 2008. This condition, along with other
matters as set forth in Note 1, indicate the existence of a material uncertainty which may cast doubt about
the consolidated entity’s ability to continue as a going concern, therefore, whether it will realise its assets
and extinguish its liabilities in the normal course of business and at the amounts stated in the financial
report.

Report on the Remuneration Report

We have audited the Remuneration Report included in the directors’ report for the year ended 30 June 2008.
The directors of the company are responsible for the preparation and presentation of the Remuneration
Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an
opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing
Standards.

Auditor’s Opinion

In our opinion, the Remuneration Report of Arafura Resources Limited for the year ended 30 June 2008,
complies with section 300A of the Corporations Act 2001.

BDO Kendalls Audit & Assurance (WA) Pty Ltd




Peter Toll
Director

Perth, Western Australia
Dated this 30th day of September 2008
SHAREHOLDER INFORMATION
FOR THE YEAR ENDED 30 JUNE 2008




Additional information included in accordance with the listing rules of the Australian Stock
Exchange Limited.

1. Statement of issued capital at 30 September 2008:

(a)    Distribution of fully paid ordinary shareholders

 Size of holding                                  Number of shareholders          Number of shares

 1 – 1000                                                            429                    247,648
 1,001 – 5,000                                                     1,079                  3,295,540
 5,001 – 10,000                                                      574                  4,704,405
 10,001 – 100,000                                                  1,021                 31,372,847
 100,001 – and over                                                  124                117,579,060
                                                                   3,227                157,199,500


(b)    There are no restrictions on voting rights attached to ordinary shares. On a show of
       hands, every member present in person shall have one vote and upon a poll, every
       member present or by proxy shall have one vote for every share held.

(c)    At the date of this statement, there existed 305 shareholders who held less than a
       marketable parcel of shares.


2.    Substantial shareholders at 30 September 2008 as per their notices:


 Name                                                     Ordinary shares %

 ANZ Nominees Limited                                     44.16%


3.    Quotation

Fully paid ordinary shares are quoted on the Australian Stock Exchange Limited and the
Frankfurt Exchange.




                                                                                                          101
                                                                Arafura Resources Limited – 2008 Annual Report
SHAREHOLDER INFORMATION
FOR THE YEAR ENDED 30 JUNE 2008




As at 30 September 2008, the twenty largest shareholders held 97,719,574 of the total fully
paid ordinary shares in Arafura Resources Limited and they are:


 No.   Name                                                           Shares          % of issued

 1     ANZ Nominees Limited                                      69,426,583               44.16%
 2     Offa Pty Ltd                                               4,778,668                3.04%
 3     Citicorp Nominees Pty Ltd                                  3,839,119                2.44%
 4     Irvin Graham Muir                                          3,018,501                1.92%
 5     Alistair James Stephens                                    2,659,827                1.69%
 6     National Nominees Ltd                                      2,084,953                1.33%
 7     Raymond John Simpson                                       1,819,430                1.16%
 8     Norman Sydney McCleary                                     1,749,500                1.11%
 9     Merrill Lynch Aust Nom PL                                  1,710,251                1.09%
 10    Norquest Mines Pty Ltd                                       700,000                0.45%
 11    Graham John Millard                                          675,000                0.43%
 12    HSBC Custody Nom Aust Ltd                                    661,965                0.42%
 13    Marine Bay Pty Ltd                                           655,000                0.42%
 14    Lai-Sung Lo + J Chou                                         600,000                0.38%
 15    Forbar Custodians Ltd                                        598,377                0.38%
 16    J Aronov Computer Services PL                                571,400                0.36%
 17    Perpetual Trustee Company Ltd                                550,000                0.35%
 18    Peter F Crossland + B S                                      550,000                0.35%
 19    Rare Earth Inv Ltd                                           550,000                0.35%
 20    Chastain Pty Ltd                                             521,000                0.33%
                                                                 97,719,574




All listed options expired on 30 June 2008.




                                                                                                       102
                                                             Arafura Resources Limited – 2008 Annual Report
SHAREHOLDER INFORMATION
FOR THE YEAR ENDED 30 JUNE 2008




The Group holds the following tenements as listed below:


Project          Title                         Holder                         Joint venture partners

Mt Porter        ERL 116, ML 23839             Arafura Resources Ltd          -
Kurinelli        AC74, MCC950-953              Arafura Resources Ltd          -
Davenport West   EL 9710, EL 9745              Arafura Resources Ltd          -
Aileron          SEL 23671, EL 23571           Arafura Resources Ltd          -
Nolans *         ML 26659                      Arafura Rare Earths Pty Ltd    -
Hammer Hill      EL 9725, EL 10136             Arafura Resources Ltd          Mithril Resources Ltd
Hammer Hill *    EL 26520                      Arafura Resources Ltd          Mithril Resources Ltd
Jervois          EL 10125, EL 26231, EL26318   Arafura Resources Ltd          -
Jervois *        EL 26812, EL25754             Arafura Resources Ltd          -
Pamela           EL 25754                      Arafura Resources Ltd          -



*Applications lodged with the Department of Regional Development, Primary Industry,
Fisheries and Resources in the Northern Territory, Australia.

All the above tenement holdings are in the Northern Territory, Australia.




                                                                                                             103
                                                                   Arafura Resources Limited – 2008 Annual Report

								
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