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Magnesium Intl Ltd (MGK)

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Tuesday 13 September, 2005

Magnesium Intl Ltd

2005 Annual Report App 4E

Magnesium International Limited
13 September 2005


                           Magnesium International Limited
                               ABN 23 003 669 163

              Preliminary Final Report in accordance with Appendix 4E


  1            Financial year ended  30 June 2005 ('current period')

  2            Results for announcement to the market                                    $A'000


       2.1 Revenues from ordinary activities            down    30.1%    to                 316

       2.2 Loss from ordinary activities after tax
            attributable to members                     down    70.5%    to              (4,150)

                                                                                            
       2.3 Net loss for the period attributable to
            members                                     down    70.5%    to              (4,150)


       2.4 Dividends                                       Amount per security          Franked amount
                                                                                         per security


           Final dividend                                         Nil c                      Nil c


           Previous corresponding period                          Nil c                      Nil c


       2.5 Record date for determining entitlements to the dividend               Not applicable

       2.6 Brief explanation of any of the figures reported above and             The attached audited Annual
           short details of any bonus or cash issue or other item(s)              Report contains full
           of importance not previously released to the market:                   details of the company's
                                                                                  financial results for the
                                                                                  year ended 30 June 2005




           Net tangible assets per security                                 $1.51

           Previous corresponding period                                    $1.84


    This information is provided in accordance with Listing Rule 4.3A





                                                                   ANNUAL REPORT

                                                                            2005



                                                            A.B.N 23 003 669 163



TABLE OF CONTENTS


CHAIRMAN'S ADDRESS                            3

MANAGING DIRECTOR'S REPORT                    4

FINANCIAL REPORT                              9

TENEMENT SCHEDULE                            10

DIRECTORS' REPORT                            11

CORPORATE GOVERNANCE STATEMENT               20

AUDITOR'S INDEPENDENCE DECLARATION           23

STATEMENTS OF FINANCIAL PERFORMANCE          24

STATEMENTS OF FINANCIAL POSITION             25

STATEMENTS OF CASH FLOWS                     26

NOTES TO THE FINANCIAL STATEMENTS            27

DIRECTORS' DECLARATION                       48

INDEPENDENT AUDITOR'S REPORT                 49

ADDITIONAL INFORMATION                       51






                               CHAIRMAN'S ADDRESS



Dear Shareholder



I am pleased to present the 2005 Annual Report of Magnesium International
Limited (MIL).



As anticipated, the past year has been a critical period for our company and we
have made great progress in our goal to become a major force in the world's
magnesium industry.  The year ahead will be equally critical for both our
cornerstone magnesium smelter project and for our new venture in magnesium sheet
metal manufacturing.  Both these businesses are driven by concerns throughout
the world that the earth's environment needs to be protected and that one proven
way to accomplish this is to utilise light metals in the transportation sector.



Last year we stated that our main goal was to find a new location for our
smelter project.  This task was completed by November 2004 when we announced
that we had settled on the Port of Sokhna on the western side of the Red Sea in
Egypt and that we would complete a Bankable Feasibility Study (BFS) into the
smelter at that location in a joint venture with local private company, Amiral.
In the first quarter of 2005 we completed a major capital raising to fund our
share of the BFS and we commenced the BFS in early March 2005.  The joint
venture has been incorporated as a joint stock special free zone company called
the Egyptian Magnesium Company SAE (EMAG).



Progress on the BFS has been good and work is on schedule for a completion date
of November 2005.  Financing activities can then be completed in time to allow
us to commence construction on the project in the second quarter of calendar
2006.  We completed a listing on the AIM market in the U.K. in May 2005 to
ensure that we will have access to this large capital market when the time comes
for the final smelter equity raising.



As part of the February 2005 financing, Amiral's Chairman, Mr Ossama Al Sharif,
became a substantial shareholder in MIL and we were pleased to appoint him to
our Board as a non-Executive Director at that time.



Towards the end of the financial year we also finalised negotiations with
Australia's CSIRO to commercialise their magnesium alloy sheet metal
manufacturing process based on twin-roll-casting.  Subsequent initial marketing
of product samples has been well received and we expect to be making our first
sales of sheet metal in the current quarter.



In respect of the financial performance of the Company, we are reporting a loss
of $4.15 million this year, down from a loss of $14.05 million last year.  Last
year's loss included a write down of the value of assets we had been carrying on
our previously evaluated South Australian smelter site.  This year we have
expensed all our project expenditure and no further write-offs have been made.
We have been able to keep costs to a minimum, as shown in the financial
statements of this Annual Report.



In closing, I would like to thank my colleagues on the Board, our Managing
Director, Gordon Galt and his staff for their dedication and efforts to progress
the Company and realise its goals during the past year. I would also like to
thank all shareholders - old and new - for their continuing support.


David S Karpin AM
Chairman

                           MANAGING DIRECTOR'S REPORT



Dear Shareholder

This year's report comes from the offices of the Egyptian Magnesium Company SAE
(EMAG) in Cairo, Egypt.  We relocated key staff to Egypt following the decision
to move the smelter project to this country in late 2004, and we will be
building up our activities here progressively as we move toward Financial Close
on the smelter project early in calendar 2006.

Before reviewing the activities of the company in the 2004/05 year in more
detail, I would like to start with a review of the global magnesium market and
the implications of the market for our EMAG smelter project. Overall, current
market demand, supply and price expectations are considered to be excellent
settings for the commencement and future success of the EMAG project.

The Global Magnesium Market

Demand

We estimate that primary magnesium demand in the year to December 2004 grew
strongly across all consumption sectors and was around 490,000 tonnes, up over
40,000 tonnes on the previous year.  In the past ten years, global consumption
of magnesium products has increased by a total of 170,000 tonnes (+ 54%) at a
compound annual rate of 4.5%.  The rate of increase for the last three years has
been well above this trend consistent with good worldwide economic growth and
increasing focus on the environmental and other benefits which light metals,
including magnesium products, can provide.

The demand for primary high quality magnesium alloys (HQMA) for diecasting,
which is the sector of particular interest to MIL, was close to 170,000 tonnes
in 2004, up 9 % year on year.  The vast majority of this usage, some 150,000
tonnes, occurs in the Western World, mainly in the manufacture of auto
components. Norsk Hydro, the current leading global supplier of magnesium
alloys, recently stated that it 'expects the High Pressure Die Casting segment
to become the single largest market for magnesium globally in 2005, exceeding
demand for pure metal in Aluminium Alloying for the first time. Combined, demand
for magnesium automotive and non-automotive die casting applications is expected
to grow 9% annually until the end of the decade.'

On this basis, high quality diecasting alloy demand is expected to be around
250,000 tonnes per year by the end of 2010.  Equally importantly, demand will be
growing at a rate of nearly 25,000 tonnes per year by that time.  In this
context, we are confident that production from our first smelter module, which
should reach its design production rate of 43,000 tonnes per year in 2009, will
be easily absorbed into the market, and that the market will also be ready for
production from our second module when it reaches its full production capacity
three years later.

The buying intentions of some of the major purchasers of diecasting metal
continued to crystallise through the year.  Both BMW and Mercedes were reported
as stating that they would not purchase Chinese sourced metal to produce light
weight parts to improve the environmental performance of their vehicles, because
the method used to produce magnesium metal in China was environmentally
unacceptable.  In another key example, BMW mandated a secondary supplier rather
than a primary supplier for the alloys for their engine blocks, implying that
security and diversity of supply and very high quality assurance were needed for
their products.

These patterns of behaviour are expected to continue and increase in their
significance for suppliers over the coming years. We believe they are
illustrative of our conclusion that future HQMA market share will only be
available to smelters or recyclers who can pass both the environmental and
quality tests of the buyers.  The Dow technology we intend to use at our smelter
has already passed both these tests.


Supply

The primary magnesium supply side anticipated the increase in demand in 2004.
The basic supply capacity was already in place at the start of the 2004 year in
China, which supplied over 35,000 tonnes of the increased primary magnesium
produced during the year.  We estimate that in total China supplied around
320,000 tonnes in 2004, which is well below the figures quoted by the Chinese
but is in accordance with independent analyses commissioned by MIL and with the
opinions of at least one leading smelting company in the West. Very little
additional production came from non-Chinese sources.

A number of very important supply side announcements and restructurings were
made during the year and these affected the market in 2004/05 and will continue
to be relevant in future years.

Firstly, there was a reversal of the pattern of smelter closures and lack of
brownfields expansions in the Western world and the former CIS, which occurred
in the early part of this decade.  The previously announced closure of the
Timminco smelter in Canada was put on hold.  A mothballed smelter in the Ukraine
was put back into production and is ramping up to 10,000 tpa capacity at
present.  US Magnesium announced an increase in capacity to 54,000 tpa and Hydro
Magnesium announced an increase to 58,000 tonnes, with both expansions expected
to be in full production by the end of 2006.  These projected increases,
however, will only supply a maximum of 28,000 tonnes per year, and if all this
metal was converted to high quality alloys (which is highly unlikely), the
increase in production will be fully accounted for by new demand by the time
supply is actually brought on line.

Secondly, the imposition of US antidumping duties against smelters in Russia and
China, which was confirmed in the March quarter of 2005, changed the patterns of
market accessibility which had been operating for the past decade.  Chinese
metal can no longer access the US market in either pure or alloyed form at a
competitive price due to the duties imposed (over 100%) and is now being sent
only to the European and eastern markets.  Russian metal, with a duty level of
20% into the US, is now costing the same as metal from Western World sources.

Thirdly, the capacity of the recycling and remelting furnaces capable of
producing HQMA is being significantly increased, with expansions announced in
China through Quay Magnesium and Norsk Hydro.  The Quay Magnesium plant will not
be able to supply the US, however, and the Norsk plant is targeting the Far East
and China.

Fourthly, the structure of the Chinese supply side is being forced to change due
to cost and environmental pressures.  Small smelters are closing at a high rate
and it is expected that over 80 of these will close in 2005.  Larger,
technically better smelters are being brought on line to fill the production
gap, but fundamentally they are all still using the same environmentally
problematic process. As a result of this and the anti-dumping duties, the
annualised rate of increase in Chinese supply in 2005 to the end of July,
compared to 2004, has been less than 2%.  This compares with a growth rate in
excess of 20% per year over the past five years.

Looking to the future, we consider that further brownfields expansions in the
Western world are unlikely and only limited additional supply is expected from
the former CIS.  As far as Western greenfields capacity is concerned, we now
consider that the EMAG project is the only potential supply source which could
be operational before the end of 2010.  This conclusion is reached because no
other potential operator has yet commenced the preliminary phases of a Bankable
Feasibility Study or raised funding for this task.

Prices

In the pure magnesium market, the US price has been maintained in the $1.45-1.50
/lb range throughout the year following the anti-dumping duty imposition, and
the price is unlikely to reduce in the future unless the duty is removed.
Removal of the duty requires that the US Government changes it view that the
Chinese economy is a proper market economy, which is considered unlikely given
the exchange of views between the two countries on, for example, the Chinese
exchange rate.  In the European market, prices during 2005 have been affected
negatively by Chinese overproduction in the early part of the year and are
currently around $0.90/lb delivered duty paid.  The structure of the Chinese
smelting industry, with many small suppliers who could not anticipate or
appreciate the US duty imposition, meant that production continued when access
to the market stopped and inventories built up which are still being liquidated
below cost.

In the future we expect that the cost structure of the Chinese industry will
again rule Chinese export prices and this cost structure will inevitably rise
due to shortages and higher priority uses for power and other raw materials,
further imposition of environmental restrictions, the probable removal of the
export rebate (currently 13%) and continuing revaluation of the exchange rate.

The price of high quality magnesium alloys in all markets has hardly changed
through the year and is currently in the range $1.40 - $1.50/lb on a spot basis
and higher for contracted supplies.  MIL considers the potential for a major
decrease in the alloy price in either the US or Europe to be low and some rises
can be expected in the future as cost pressures in the West increase, mainly as
a result of energy price increases.  The reduction of the Norsk European price
during the year was driven to some extent by exchange rate fluctuations between
the Euro and the USD.

EMAG Smelter Project Status

The Egyptian Magnesium Company SAE (EMAG) smelter project is MIL's major asset.
The project involves the construction and operation of a major magnesium smelter
for the production of mainly high quality magnesium alloys for the diecasting
industry.  MIL pursued this project from the mid 1990s based on a location near
Port Pirie in South Australia.  In late 2004, after an extensive worldwide
search for the best location in the world for the smelter, MIL decided to
relocate the project from Australia to the port of Sokhna, on the Red Sea coast
in Egypt.  The criteria for the site search were the least expensive combination
of operating cost factors (power, gas, labour, ore and consumables) and capital
cost factors, and the requirement that the project be in a jurisdiction where
project finance is readily available.  Egypt was clearly the best choice when
judged against these criteria.

Immediately the decision to select Egypt was made, MIL commenced the formation
of EMAG in conjunction with Amiral.  EMAG is a special free zone company with a
50 year approved life. This is double the normal life of a free zone company and
recognises that our intention is to increase the capacity of the project above
88,000 tonnes per year in the future and become the first primary magnesium
producer to properly realise the benefits of scale.  EMAG's free zone status
allows it to be free from corporate tax and dividend withholding tax.

The status of the smelter project is outlined below.

EPC Contract

As the critical path to commencement of the smelter is the EPC (fixed price
construction) contract, we completed the selection of the contractor as our
first priority.  MAN Ferrostaal from Germany and their engineers, K. Home
International from the UK, won the contract and will deliver the construction
price at the end of October.

Major subcontractors, all of which have world class experience in their
respective areas, have been appointed as follows:

•  ThyssenKrupp Udhe for the wet plant (leaching and purification).  TKU
   worked on the SAMAG project in Australia for MIL and will use aspects of 
   their Australian design for the plant in Egypt

•  Andritz has been appointed for the fluid bed dryer, which will be
   built in accordance with the Dow design

•  AbiSimon (Australia) has been appointed for the acid plants, again to
   the Dow design

•  Zublin was appointed for civils.  Subsequently, geotechnical drilling
   of the site was completed satisfactorily and foundation engineering is now
   proceeding.

The development of contract documentation with Man Ferrostaal is well advanced
and will be completed later this year.

Environmental Impact Assessment (EIA)

MIL completed a full Environmental Impact Study and received environmental
approval for the smelter project when it was proposed for Australia.  The EIA
for Egypt has now been completed and submitted to the General Authority for
Investment and Free Zones (GAFI) in accordance with Egyptian legal requirements.
The EIA is now being assessed by the Egyptian Environmental Authority on
GAFI's behalf.  We expect that environmental approval for the EMAG project will
be received in November 2005.

Ore Supply

The supply of magnesite to the smelter is a key issue.  MIL has existing mining
tenements in South Australia, which are fully tested and known to be suitable
for smelter feedstock, but remains keen to prove suitable feedstock in the
region of the smelter site to ensure that the smelter operates with the lowest
possible cost structure.  EMAG has decided to base the Bankable Feasibility
Study for the smelter on South Australian magnesite while the search for local
ore continues. The logistics and economics of exporting this magnesite to Egypt
have now been fully defined.

EMAG has been evaluating four local deposits during the past quarter, with two
in Saudi Arabia and two in Egypt.  Most work has been undertaken on the Sul
Hamed deposit in southern Egypt, where a small magnesite mining operation
already exists.  Testing and mapping to date indicates that the magnesite in the
deposit should be suitable for magnesium production and that the resources
should be sufficient to supply the smelter over an extended period.  The deposit
is 14km from the coast of the Red Sea and 40km from the nearest loading port.
Travel distance to Port Sokhna would be approximately 700km. The deposit is held
by El Nasr Mining, which is a wholly owned subsidiary of the Egyptian
Government.  EMAG has commenced the negotiation of a Heads of Agreement with El
Nasr with a view to resource evaluation and potential mining arrangements.
Parallel evaluation of the other deposits, owned by Ma'aden in Saudi Arabia and
El Nasr in Egypt, will continue in the next two quarters.

Project Financing - Debt

German bank KfW was appointed as lead arranger in July and is currently
assessing project information and holding detailed discussions with other debt
providers.  These include the European Investment Bank, Hypoveriensbank and CIB
(Egypt) and European export credit agencies.  The potential for mezzanine debt
is also being explored at present.

As lead arranger, KfW has appointed Metal Bulletin Research and Clark & Marron
in a joint venture to undertake the market study required for the project. It
has called for tenders and will soon appoint the banks Independent Technical
Engineer.  Legal appointments have been made for the principal and the banks.

Our debt schedule is to achieve credit approved term sheets from financiers by
February 2006 and we will move to the equity raising immediately thereafter.

Project Financing - Equity

Under the EMAG structure, the majority of the smelter project's equity will be
held by MIL, which will own at least 60%, and Amiral, which will own just under
30%.  ThyssenKrupp and potentially one other party will have small equity
stakes.

The major shareholders have both been active in raising equity interest for
their respective shares in the project this year.  MIL's decision to list on the
AIM stock exchange in London was driven by the intention of raising MIL's equity
requirement in Europe and efforts have been concentrated in this market.  The
demand for MIL's shares since the February 2005 capital raising demonstrates the
market interest which is emerging. Amiral's efforts have been mainly in the
Middle East region and significant interest is being shown from investors there.


Both MIL and Amiral are confident that the equity for the project will be
available when required early in 2006.

Other Matters

MIL's ordinary shares are now currently tradable on the ASX, the AIM in London
and in Germany.  The company rationalised it ticker during the last quarter and
this is now MGK in both Australia and the UK.  The symbol MIC still applies in
Germany. Trading has been good on all three exchanges.

In accordance with a resolution passed at the February 2005 General Meeting, MIL
has also reduced its total shareholder numbers by selling the holdings of
shareholders who had unmarketable parcels.

MIL's total expenses in the past Financial Year were $4.5 million.  This was
only slightly up on the previous year (2004 was $4.4 million) and reflects the
considerable effort made to contain expenditure plus the fact that we have
completed the major portion of engineering work needed for the smelter project.
We intend to maintain this low cost focus in the coming year and have prepared a
detailed budget for the period.

Magsheet Venture

In mid 2003 MIL negotiated an agreement with the CSIRO to enter a venture to
manufacture magnesium alloy sheet metal using a new twin roll casting technology
developed by CSIRO.   The Agreement was not proceeded with. MIL continued to
discuss the technology with the CSIRO and this year has completed an arrangement
aimed at commercialising the magsheet technology.

Under the agreement, MIL will evaluate CSIRO's method of production of magnesium
sheet metal by twin roll casting with a view to commencing commercial production
in late 2005 from the CSIRO's current plant in Victoria.  A number of samples
have been shipped to manufacturers of electronic equipment, photo engravers and
auto component manufacturers in North America, Europe and Japan for evaluation.

We intend to progress the magsheet venture towards a breakeven level of sales
during the next year.

Conclusion

MIL has been focussed firmly on developing its smelter project during the past
year.  We have made significant progress and the work of the past years is now
ready to bear fruit.  We intend to commence construction on the smelter project
in Egypt as early as possible in 2006.  The next few months will be very busy as
the major elements needed to allow the financing for the project all come
together.  We look forward to continuing to update shareholders as matters
progress.


Gordon Galt
Managing Director






                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES

                              A.B.N 23 003 669 163



                                FINANCIAL REPORT

                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005



                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                      TENEMENT SCHEDULE AS AT 30 JUNE 2005


                                             Area Hectares       Expiry Date        MIL Interest Held %


SOUTH AUSTRALIA
MINING LEASES
Myrtle Springs             ML5000                   18.0         30.03.2022                100%
Myrtle Springs             ML5001                   14.3         30.03.2022                100%
Myrtle Springs             ML6092                   519.7        30.06.2010                100%


MISCELLANEOUS PURPOSE LEASES
Myrtle Springs             MPL 18                   16.0         30.03.2022                100%
Myrtle Springs             MPL 27                    5.4         30.09.2008                100%



NORTHERN TERRITORY
Huandot                    ERL 128                  333.0        05.04.2008                100%
Huandot                    MC 4493                   5.3         31.12.2006                100%
Huandot                    MC 4494                   5.3         31.12.2006                100%
Huandot                    MLA 23992                125.4        31.12.2006                100%






    All Tenement Leases are registered in the name of Magnesium Developments
        Limited, a controlled entity of Magnesium International Limited.


                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                               DIRECTORS' REPORT



Your Directors present their report on the company and its controlled entities
together with the financial report for the year ended 30 June 2005.



Principal Activities



The principal activities of the economic entity during the course of the
financial year consisted of the development of the magnesium smelter project at
Port Sokhna, Egypt and the evaluation and progressing of other magnesium based
opportunities.  The economic entity during the year conducted evaluations of
potential sites for its Dow Technology based magnesium smelter project. This has
resulted in the identification of a site in Egypt which demonstrates better
economics than the previously chosen Port Pirie site and other sites reviewed
during the year.



Review of Operations



During the year the economic entity completed a worldwide search for the best
location for a Dow Technology based magnesium production process.



The economic entity has:



•  Chosen Egypt as the smelter location and commenced a Bankable
   Feasibility Study (BFS) ,

•  Set up a new special free zone company, Egyptian Magnesium Company
   SAE ('EMAG') to develop the smelter and

•  Completed a listing on the AIM market in the United Kingdom.



Further details can be found in the Chairman's Address and Managing Director's
Report at pages 3 to 8.



Results of Operations



The consolidated Statement of Financial Performance shows consolidated revenue
from ordinary activities for the financial year of $316,408 compared with
$452,440 in 2004.



The consolidated Statement of Financial Performance shows a consolidated net
loss from ordinary activities for the financial year of $4,149,870 compared with
$14,046,776 in 2004.



Significant Changes in State of Affairs



During the year:

  • The economic entity announced the selection of Port Sokhna, Egypt, as the
    location for its 88,000 tonne per annum magnesium smelter project,
  • The parent entity arranged the placement of 10,416,667 ordinary shares,
    raising $12,500,000 and shareholders subscribed for 1,250,247 shares through
    a Shareholder Share Purchase Scheme, raising $1,500,000 to fund the Bankable
    Feasibility Stage of the Egyptian smelter project. One option was issued for
    every two shares issued in these capital raisings,
  • The parent entity listed on the Alternative Investment Market (AIM) of the
    London Stock Exchange and
  • The economic entity entered into an Option Agreement with the Commonwealth
    Scientific and Industrial Research Organisation (CSIRO) which, if exercised,
    will give the controlled entity a worldwide exclusive licence to magnesium
    sheet production technology developed by the CSIRO.

There were no other significant changes in the state of affairs of the economic
entity



Subsequent Events



The Egyptian Magnesium Company SAE, the legal entity established with
co-shareholders, Amiral, to progress the magnesium smelter project, was formally
incorporated on 1 August, 2005.



Magnesium International Limited has completed a consolidation of its share
register in September 2005. 284,788 shares, owned by 1,664 shareholders in
less-than-marketable parcels, were sold on their behalf in order to rationalise
the share register and to reduce administration and compliance costs.



There has not been any other matter or circumstance which has arisen since the
end of the financial year that has significantly affected, or may significantly
affect, the operation of the economic entity, the result of those operations, or
the state of affairs of the economic entity in future financial years.



Future Developments



Disclosure of information regarding likely developments in the operations of the
economic entity in future financial years and the expected results of those
operations is likely to result in unreasonable prejudice to the economic entity.
Accordingly, this information has not been provided in this report.



Environmental Regulation



The economic entity's operations are subject to normal environmental regulations
under Australian and overseas legislation in relation to its mining exploration
and other activities.  The Directors believe that the economic entity has
adequate systems in place for the management of its environmental requirements
and are not aware of any significant breaches of those environmental
requirements during the period covered by this report.



Dividends



No dividends have been declared or paid since the start of the financial period
and the directors do not recommend the payment of a final dividend for the year
ended 30 June 2005 (2004: $nil).


Directors



The names of the Directors of the company during or since the end of the
financial year are:



David Karpin - AM, BCom (Hons), MBA, Hon LLD, FCPA, FAICD, FAIM, ACIS, MACS
Chairperson and Non-Executive Director

Mr Karpin, aged 62, has had a career that includes 22 years with RTZ-CRA, which
culminated in his role as Group Executive - Economic Resources with CRA Ltd from
1992 to 1996. His other roles with CRA included Managing Director of Argyle
Diamonds, Commercial Director of Hamersley Iron and Executive Manager -
Commercial with Bougainville Copper Limited.  He is currently Chairman of
Melbourne Health and The Warrnambool Cheese and Butter Factory Company Ltd.  He
is a Director of Placer Dome Inc., Melbourne Business School Limited, and Racing
Victoria Limited. Mr Karpin has been a Director since 2002, is Chairperson of
the Remuneration Committee and a member of the Audit Committee.



Patrick Elliott - BCom, MBA, CPA
Deputy Chairperson and Non-Executive Director

Mr Elliott, aged 53, has over 30 years experience in investment, financial and
industrial management, having previously been with Consolidated Goldfields
Australia Limited, Morgan Grenfell Australia Limited and Natcorp Investments
Limited.  He is also a Director of Argonaut Resources NL, Australia Oriental
Minerals NL, Heritage Gold NZ Limited and Klondike Source Limited. Mr Elliott
has been a Director since 1991 and is a member of the Audit and Remuneration
Committees.



Gordon Galt - BCom, B Eng Mining (Hons), MAICD, MAIMM
Managing Director

Mr Galt, aged 54, has been Managing Director of Magnesium International Limited
since August 2002.   Previously Mr Galt was Head of the Integrated Energy
division at leading investment bank ABN Amro and before that held the position
of CEO at gold mining company, Newcrest Mining Limited from December 1997 to
March 2000, where he was responsible for the development of the Cadia mine at
Orange in NSW and for bringing the Gosowong mine in Indonesia into production,
and was Managing Director of NSW coal producer Cumnock Coal Limited.  He is a
Director of Gloucester Coal Limited and a member of the Kincoppal Rose Bay
School Board.  He is a member of the Australian Institute of Mining and
Metallurgy and the Australian Institute of Company Directors.



Andy Hogendijk - AAUQ, FCPA, FAICD
Non-Executive Director

Mr Hogendijk, aged 63, has extensive senior management and financing experience
having previously been Chief Financial Officer, Suncorp Metway Ltd (1997 -
2000), Commonwealth Bank of Australia Limited (1991 - 1997) and John Fairfax
Group (1989 - 1991).  Mr Hogendijk has also held senior positions with Shell
Company Australia and Australian Paper Manufacturers, was a Director of Hills
Motorway Limited (2004-2005) and is currently Chairperson of Gloucester Coal
Limited. Mr Hogendijk has been a Director since 2001 and is Chairperson of the
Audit Committee.




Malcolm Richmond - BSc (Hons), BCom, FAIMM, ATSE
Non-Executive Director

Professor Richmond, aged 60, is currently visiting Professor of Business and
Professor of Engineering at the University of Western Australia, Adviser
Technology Commercialisation at Curtin University and is a former member of the
Senate at Murdoch University.  He was a non-executive Director of Sons of Gwalia
Limited from 2000 to 2005, is currently Chairperson of Territory Iron Limited
and a Director of SGS (Australia) Pty Ltd and Renergy Pacific Inc. Professor
Richmond is a metallurgist by profession whose career spanned 26 years with CRA
/ Rio Tinto Group.  He worked for the CRA/Rio Tinto Group in a number of
positions including: Vice President - Strategy and Acquisitions; Managing
Director - Research and Technology; Managing Director - Development - Hamersley
Iron Pty Limited.  He was recently Vice Chairman of the Australian Mineral
Industries Research Association. Professor Richmond has been a Director since
2001.



Ossama Al-Sharif
Non-Executive Director

Captain Ossama Al-Sharif, aged 51, is President and Chief Executive Officer of
the Amiral Group. He has significant experience in establishing and growing
start-up ventures, having built up a maritime and logistics conglomerate in
Egypt in the past decade. In 1992, Capt. Al-Sharif teamed up with the global
shipping line APL, a leading global logistics and container transportation
company, and established a strong local presence in both Jordan and Egypt. In
1997 he developed the first private container handling company in Egypt,
transforming the Adabyia military port into a commercial port on the Red Sea
with regular service liners. In 1999, Capt. Al-Sharif founded the Sokhna Port
Development Company (www.spdc.com), the concession holder for Sokhna Port in
Egypt, and developed it into a world-class port and logistics centre. Captain
Al-Sharif has been a Director of Magnesium International since 28th February
2005.



Company Secretary


James Beecher - BCom, MBA, FCPA, FAICD
Company Secretary

Mr Beecher, aged 51, was appointed to the position of Company Secretary in July
2004. Mr Beecher has over 25 years experience in senior finance, accounting and
secretarial positions in resources, financial services and services companies.
Mr Beecher is a member of the Urgent Issues Group of the Australian Accounting
Standards Board and of the Reporting Committee of the Australian Institute of
Company Directors.




Directors Meetings



The following table sets out the number of Directors' meetings (including
meetings of committees of Directors) held during the financial year and the
number of meetings attended by each Director (while they were a Director or
committee member).

                              Board of Directors          Audit Committee            Remuneration &
                                                                                  Nominations Committee

                              Held       Attended       Held        Attended        Held       Attended
DS Karpin                      10           9             2             2            1            1
PJD Elliott                    10           9             2             1            1            1
GT Galt                        10           10            -             -            -            -
AJ Hogendijk                   10           10            2             2            -            -
MR Richmond                    10           10            -             -            1            1
OFR Al-Sharif                   2           2             -             -            -

Directors' interests in shares or options

The relevant interest of each Director in the shares and options issued by the
companies within the consolidated entity, as notified by the Directors to the
Australian Stock Exchange in accordance with S205G(1) of the Corporations Act,
2001, at the date of this report is as follows :

Magnesium International Limited                     Ordinary shares   Unlisted Options  Listed Options

Mr DS Karpin                                                  100,000          150,000                -
Mr PJD Elliott                                                206,998          510,000            4,168
Mr AJ Hogendijk                                                31,581          300,000            4,168
Mr GT Galt                                                     17,561          900,000            2,050
Mr MR Richmond                                                      -          150,000                -
Mr OFR Al-Sharif                                            2,300,000                -        1,150,000
Total Directors and related entities                        2,656,140        2,010,000        1,160,386



Unlisted share options

Unlisted share options granted by Magnesium International Limited to directors
and officers during the financial year ended 30 June 2005 were as follows:


Magnesium International Limited                 Number of options   Exercise price      Expiry date

Directors
Mr DS Karpin                                               150,000              (i)    30 June 2011
Mr PJD Elliott                                             150,000              (i)    30 June 2011
Mr GT Galt                                                 750,000              (i)    30 June 2011
Mr AJ Hogendijk                                            150,000              (i)    30 June 2011
Mr MR Richmond                                             150,000              (i)    30 June 2011
Mr OFR Al-Sharif                                                 -                -          -

Officers
Mr R Eaglesham                                             150,000              (i)    30 June 2011
Mr P Baily                                                 150,000              (i)    30 June 2011

Total Directors and officers                             1,650,000

(i) The terms of the unlisted options granted to directors and officers are
described in Note 21 to the Financial Statements.

No options have been issued since the end of the financial year.

Unissued options over ordinary shares at the date of this report

      Shares              Exercise Price                Expiry Date
           253,340             $7.25                    31 July 2005
           150,000             $3.00                   1 August 2007
           480,000             $8.95                  30 November 2006
           500,000             $4.95                  1 December 2006
           150,000             $4.95                   31 March 2007
           500,000             $2.00                    18 May 2007
           190,200             $1.20                    31 May 2010
         1,350,000         See (i) above                30 June 2011
           300,000         See (i) above                30 June 2011
           100,000             $1.20                    30 June 2011
         3,973,540



Further information on the option terms is given in Note 21 to the Financial
Statements.



Shares issued on exercise of options



Ordinary shares of Magnesium International Limited issued and paid for during or
since the end of the year as a result of the exercise of unlisted options were
as follows:


Magnesium International Limited                      Number of Shares               Exercise Price
                                                          408,000                        $1.50

Listed options over ordinary shares at the date of this report

              Shares                          Exercise Price                        Expiry Date
             5,833,750                             $1.80                           1 March 2007

Auditor's Independence Declaration



The auditor's independence declaration in relation to the audit for the
financial year is provided on page 23 of this report as required under Section
307C of the Corporations Act.



Non-audit Services

During the year KPMG, the Company's auditor, has performed certain other
services in addition to their statutory duties.



The Board has considered the non-audit services provided during the year by the
auditor and in accordance with written advice provided by resolution of the
audit committee, 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 independence requirements of the Corporation Act 2001 for the following
reasons:

•  all non-audit services were subject to the corporate governance
   procedures adopted by the Company and have been reviewed by the audit 
   committee to ensure they do not impact the integrity and objectivity of the 
   auditor.

•  the non-audit services provided do not undermine the general principles
   relating to auditor independence as set out in Professional Statement F1
   Professional independence, as they did not involve reviewing or auditing the
   auditor's own work, acting in a management or decision making capacity for 
   the company, acting as an advocate for the Company or jointly sharing risks 
   and rewards.

Details of the amounts paid to the auditor of the Company, KPMG, and its related
practices for audit and non-audit services provided during the year are set out
below:



                                                                                Consolidated
                                                                            2005            2004
Statutory audit                                                              $                $
Auditors of the Company
- Audit and review of financial reports                                    55,054          40,086
                                                                           55,054          40,086
Services other than statutory audit
Other services
- Taxation compliance and tax consolidation advice                         85,189             -
- AIM listing services                                                     41,818             -
                                                                          127,007             -

Remuneration Report

The parent entity's policy for determining the nature and amount of emoluments
of board members and senior executives of the company is as follows:

The remuneration structure for executive officers and Directors, including
executive Directors, seeks to emphasise payment for results through providing
individual reward arrangements, for example the use of share options as
disclosed in the Directors Report.

The objective of the individual reward arrangements is to both reinforce the
short and long term goals of the company and to provide a common interest
between management and shareholders.

Employment contracts

Details of contracts between executives, Magnesium International Limited and
certain controlled entities are as follows:

Name                       Contract             Duration              Notice             Termination
GT Galt                      Yes                  Open               6 months             12 months

Directors and specified executives remuneration

The directors of the Company during or since the end of the financial year are:

Name                             Position
DS Karpin                        Chairman
PJD Elliott                      Deputy Chairman
AJ Hogendijk                     Non-Executive Director
GT Galt                          Managing Director
MR Richmond                      Non-Executive Director
OFR Al-Sharif                    Non-Executive Director (appointed 28 February 2005)

Remuneration of Directors

Directors                  Salary and  Con-sulting   Super-annuation  Options (i)     FBT       Totals
                              Fees        Fees
                               $            $               $              $           $           $
DS Karpin         2005      100,000      115,000            -              -           -        215,000
                  2004      100,000         -               -              -           -        100,000

PJD Elliott       2005       40,000      30,000             -              -           -        70,000
                  2004       40,000      35,625             -              -           -        75,625

AJ Hogendijk      2005       40,000       3,863          13,125            -           -        56,988
                  2004       40,000      38,225             -              -           -        78,225

GT Galt (iii)     2005      344,478         -            45,000                     35,773      425,251
                  2004      448,650         -            60,000                     15,237      523,887

MR Richmond       2005       40,000         -             7,875            -           -        47,875
                  2004       40,000         -             3,600            -           -        43,600

OFR Al-Sharif     2005       13,556         -               -              -           -        13,556
(ii)              2004         -            -               -              -           -           -

Total               2005    578,034      148,863         66,000            -        35,773      828,670
                    2004    668,650      73,850          63,600            -        15,237      821,337

(i)             No option expense arises for the financial years ended 30 June
2004 and 30 June 2005 as the options, as described in sub-note 2 of Note 21 to
the Financial Statements, do not vest until after the date of Financial Close.
When vesting occurs these options will be valued using the Black Scholes option
pricing model.

(ii)           OFR Al-Sharif was appointed a director on 28 February 2005.

(iii)         GT Galt was seconded to EMAG in March 2005 and EMAG have been
responsible for his remuneration arrangements since that date.

The specified executives in the consolidated group who received the highest
remuneration for the financial year are:

Name                 Position
J Beecher            Company Secretary, Magnesium International Limited
P Baily              General Manager Operations, Magnesium International Limited
R Eaglesham          General Manager Project Delivery, Magnesium International Limited

Remuneration of executives

Executives                   Salary and  Consulting Fees  Super-annuation  Options (i)  Termination    Totals
                                Fees                                                     Benefits
                                 $              $                $              $            $            $

J Beecher (ii)     2005          -           225,403                                                   225,403
                   2004          -           10,000              -              -            -         10,000

P Baily (iii)      2005          -           126,719             -                                     126,719
                   2004          -           230,612             -              -            -         230,612

R Eaglesham (iv)   2005          -           246,109             -              -            -         246,109
                   2004          -           254,464          16,416            -         44,000       314,880

D Smith (v)        2005          -              -                -              -            -            -
                   2004          -           282,500             -              -            -         282,500

Total              2005          -           598,231                                                   598,231
                   2004          -           778,576          16,416            -         44,000       837,992

(i)   Refer to footnote (i) above

(ii)  J Beecher commenced with Magnesium International Limited on 28 May 2004. 
      Mr Beecher has also provided consulting services to EMAG since March 2005.

(iii) P Baily has provided consulting services to EMAG since March 2005.

(iv)  R Eaglesham has provided consulting services to EMAG since March 2005.

(v)   D Smith ceased employment on 15 June 2004.

INDEMNIFICATION OF OFFICERS AND AUDITORS

Indemnification

The parent entity has indemnified or agreed to indemnify each Director and all
officers of the company or of any related body corporate against a liability
incurred when such an officer acts in accordance with section 199A of the
Corporations Act 2001.

The parent entity has not indemnified or agreed to indemnify the auditor of the
company or of any related body corporate against a liability incurred by the
auditor.


Insurance Policies

Since the end of the previous financial year the ultimate parent entity has paid
premiums in respect of Directors' and officers' liability and legal expenses
insurance contracts.  Such insurance contracts insure against certain
liabilities (subject to specific exclusions) persons who are or have been
Directors or officers of the economic entity.

Directors have not included details of the nature of the liabilities covered, or
the amount of the premium paid, as such disclosure is prohibited under the terms
of the contract.

Rounding of Amounts

The Company is of a kind referred to in ASIC Class Order 98/100 and,
accordingly, amounts in the financial report and directors' report have been
rounded off to the nearest thousand dollars, unless otherwise indicated.

Dated at Cairo, Egypt this thirteenth day of September 2005.

Signed in accordance with a resolution of the directors.


GT Galt
Director


MAGNESIUM INTERNATIONAL LIMITED AND CONTROLLED ENTITIES

                              CORPORATE GOVERNANCE

The Board of Directors has implemented the Best Practice Recommendations of the
ASX Corporate Governance Council to the extent appropriate for the size and
nature of its business.

The responses of the Board to the Best Practice Recommendations are outlined
below, with comments where appropriate:

Principle 1: Lay solid foundations for management and oversight

The Company has a Board (5 non-executive Directors plus the Managing Director)
with the Managing Director managing activities; roles and functions are flexible
in order to meet specific requirements.

The Company has adopted a Board Charter, which sets out the Board and
management's responsibilities:

The Board is responsible for identifying obligations and expectations, both
regulatory and ethical, of shareholders, regulators, creditors and others.

The Board is responsible to ensure that these expectations and obligations are
met to the extent the Company's resources allow.  This may include meeting
promised milestones and financial estimates.

The responsibility for the operation and administration of the Company has been
delegated to the Managing Director.

He is assisted by a number of consultants, contractors and employees in the
areas of engineering, financial, management, accounting, modelling and company
secretarial matters.

Apart from the statements on responsibilities the Company has not in detail
formalised the functions reserved to the Board and those delegated to
management.

Principle 2: Structure the board to add value

The Company does not currently comply with the recommendations in Section 2.1
that a majority of Directors should be independent.

Five of the Company's six Directors are non-executives, but three of the
non-executives (DS Karpin, PJD Elliott and AJ Hogendijk) have undertaken 
'material' consultancy work for the Company within the past three years.  These
consultancies have been undertaken on normal commercial terms and payments are
disclosed within the Directors' Report.  The use of non-executive Directors for
consultancy work reflects their expertise and knowledge.  In the absence of
these Directors, the Company would have had to use 'external' consultants, with
a probable increase  in consulting costs.

One of the non-executive directors, OFR Al-Sharif, is the President and CEO of
the Amiral Group which is Magnesium International Limited's partner in the
Egyptian Magnesium Company (EMAG). The board believes that Mr Al-Sharif is able
to contribute to strategic issues at board level on an independent basis.

PJD Elliott has been a Director of the Company since 1991, a period of time,
which in the words of the ASX Best Practice recommendations, 'could be perceived
to materially interfere' with his 'ability to act in the best interests of the
company'.

The Board does not believe that the consultancy work undertaken by Messrs
Karpin, Hogendijk and Elliott, nor Mr Elliott's period of tenure as a Director,
compromise their independence.

Each Director of the Company has the right to seek independent professional
advice at the expense of the Company.  Prior approval of the Chairman is
required, but this will not be unreasonably withheld.

Principle 3: Promote ethical and responsible decision-making

The Company has established a policy concerning trading in its securities by
Directors, management, staff and significant consultants which restricts trading
to defined time periods.

The Company does not have a formal code of conduct, again reflecting the
Company's small size and the close interaction of the small number of
individuals throughout the organisation.

Principle 4: Safeguard integrity in financial reporting

The Chief Executive Officer and the personnel responsible for producing the
financial results have declared in writing to the board that the financial
records of the Company for the financial year have been properly maintained, the
Company's financial reports for the year ended June 2005 comply with accounting
standards and present a true and fair view of the Company's financial condition
and operational results.

The Company has an Audit Committee with a formal charter, approved by the Board.

The Audit Committee consists of the 3 non-executive Directors with the most
applicable expertise and skills for this committee.  Two of these Directors (PJD
Elliott and AJ Hogendijk) do not meet ASX guidelines regarding independence (see
note under Principle 2).

The Company's auditor, KPMG was appointed in 1989 and the current engagement
partner was appointed in 2003.  The previous engagement partner rotated off the
Company's audit at the completion of the 2001/02 annual report and accounts, in
accordance with KPMG's policy regarding partner rotation.

Principle 5: Make timely and balanced disclosure

The Company, its Directors and staff are acutely aware of continuous disclosure
requirements and operate in an environment where strong emphasis is placed on
full and appropriate disclosure.  The Company does not have formal written
policies regarding disclosure, but uses strong informal systems underpinned by
experienced individuals.

Principle 6: Respect the rights of shareholders

The Company does not have a communications strategy to promote effective
communication with shareholders, as it believes this is excessive for small
companies.  The Company communicates regularly with shareholders via its website
and timely announcements to the ASX, AIM and Deutsche Borse including use of
Corporate File interviews.

For many years the Company has requested the external auditor to attend general
meetings and this has been supported by the Company's audit partners at KPMG.

Principle 7: Recognise and manage risk

The Company is a small, non-operating company and does not believe that there is
significant need for formal policies on risk oversight and management.  However
there is in place a formal policy on risk oversight and management of the
magnesium smelter project.

Risk management arrangements are the responsibility of the Board of Directors
and senior management collectively.

Principle 8: Encourage enhanced performance

The Company has a Remuneration and Nomination Committee, which meets as and when
required, to review performance matters.

There has been no formal performance evaluation of the board during the past
financial year.

The Directors work closely with management and have full access to all the
Company's files and records.

Principle 9: Remunerate fairly and responsibly

The Board Nomination and Remuneration Committee determine remuneration levels on
an individual basis.  Directors believe that the size of the Company makes
individual salary negotiation more appropriate than formal remuneration
policies.

The Committee seeks independent external advice and market comparisons as
necessary.

In accordance with Corporations Act requirements, the Company discloses the fees
or salaries paid to all Directors, and executive officers of the company.

The Company has an Employee Share Option Plan, which was introduced in 2001,
following approval from shareholders.

Principal 10: Recognise the legitimate interests of stakeholders

The Company does not have a Code of Conduct to guide compliance with legal and
other obligations.  This reflects the Company's size and lack of operational
activity, which makes legal compliance a less onerous task than with larger
companies.

The Board of Directors continues to review the situation to determine the most
appropriate and effective operational procedures.




                       AUDITOR'S INDEPENDENCE DECLARATION
                UNDER SECTION 307C OF THE CORPORATIONS ACT 2001

To the Directors of Magnesium International Limited

In relation to the independent review for the financial year ended 30 June 2005,
to the best of my knowledge and belief there have been:

(i)   No contraventions of the auditor independence requirements as set out in 
the Corporations Act 2001,

(ii)  No contraventions of any applicable code of professional conduct in 
relation to the audit.


KPMG





Trent van Veen
Partner
Sydney
13th September 2005


                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                      STATEMENTS OF FINANCIAL PERFORMANCE
                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005




                                             Note        Economic Entity           Parent Entity
                                                        2005         2004         2005         2004
                                                       $'000        $'000         $'000       $'000
Revenue from Ordinary Activities                  2          316          452           316        569
Consultants expenses                                     (1,700)        (553)       (1,700)      (553)
Corporate and administration expenses                    (1,006)        (974)       (1,006)      (961)
Depreciation and amortisation expense                       (29)         (27)          (26)       (25)
Employment expense                                       (1,028)      (1,223)       (1,028)    (1,223)
Occupancy expenses                                         (131)        (256)         (131)      (256)
Provision against advances to controlled                                    -             -   (11,366)
entities                                                       -
Write off exploration and evaluation expenditure               -     (11,323)             -          -
Written down value of plant and equipment                      -         (15)             -       (15)
sold
Written down value of investments sold                         -         (27)             -       (26)
Other expenses from ordinary activities                    (572)        (101)         (572)      (190)
Loss from Ordinary Activities
before Income Tax Expense                       3,4      (4,150)     (14,047)       (4,147)   (14,047)

Income tax expense relating to                    5            -            -             -          -
ordinary activities


Net Loss from Ordinary Activities                        (4,150)     (14,047)       (4,147)   (14,047)



Basic and diluted (loss), cents per share         7         (14)         (58)





The Statements of Financial Performance are to be read in conjunction with the
notes set out on pages 27 to 47.


                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
              STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 2005


                                          Note            Economic Entity                Parent Entity
                                                         2005           2004           2005           2004
                                                        $'000          $'000          $'000          $'000
CURRENT ASSETS
Cash assets                                8           11,132          4,124         11,132          4,123
Receivables                                9            2,011            144          1,986            133
Other current assets                       10              71            117             56            101
TOTAL CURRENT ASSETS                                   13,214          4,385         13,174          4,357

NON-CURRENT ASSETS
Receivables                                11               -              -         24,353         24,086
Investments                                12               -              -         19,536         19,536
Property, plant and equipment              14             524                            61             65
                                                                         531
Exploration and evaluation expenditure     15          43,320         43,320              -
                                                                                                       -
Intangibles                                16             255              -              -              -
Other non-current assets                   17           1,293              -          1,293              -
TOTAL NON-CURRENT ASSETS                               45,392         43,851         45,243         43,687

TOTAL ASSETS                                          58,606          48,236         58,417         48,044


CURRENT LIABILITIES
Payables                                   18             836                           836            284
                                                                         284
Provisions                                 19             103                           103             72
                                                                          72
TOTAL CURRENT LIABILITIES                                 939                           939            356
                                                                         356

NON-CURRENT LIABILITIES
Payables                                   20               -                            10             10
                                                                         -
TOTAL NON-CURRENT                                          -                            10              10
                                                                           -
LIABILITIES

TOTAL LIABILITIES                                        939                            949            366
                                                                         356


NET ASSETS                                            57,667          47,880         57,468         47,678


EQUITY
Contributed equity                         23          90,227         76,290         90,227         76,290
Accumulated Losses                         24        (32,560)       (28,410)       (32,759)       (28,612)

TOTAL EQUITY                                          57,667          47,880        57,468          47,678



The Statements of Financial Position are to be read in conjunction with the
notes set out on pages 27 to 47.


                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                            STATEMENTS OF CASH FLOWS
                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005


                                        Note             Economic Entity              Parent Entity
                                                     2005         2004          2005          2004
                                                    $'000         $'000         $'000         $'000
CASH FLOWS FROM OPERATING
ACTIVITIES
Payments to suppliers and employees                   (5,675)       (3,419)       (5,661)       (3,393)
Interest received                                         301           223           301           223
Exploration and evaluation expenditure                      -       (1,252)             -
                                                                                                    -
Sundry receipts                                            15            71            15            70

Net cash used in operating activities   28           (5,359)        (4,377)       (5,345)       (3,100)

CASH FLOWS FROM INVESTING ACTIVITIES
Payments for property, plant and                         (22)           (1)          (22)           (1)
equipment
Deposit with EMAG                                     (1,293)                     (1,293)
                                                                        -                           -
Intangibles - Magsheet Option                           (255)             -             -             -
Proceeds from sale of property, plant and                   -             3             -             3
equipment
Proceeds from sale of investments                          -            156            -            156


Net cash provided by (used in) investing             (1,570)            158      (1,315)            158
activities

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from share issues                             14,612         3,166        14,612         3,166
Share issues costs                                      (675)         (316)         (675)         (316)
Advances to controlled entities                             -             -         (268)       (1,277)
Net cash provided by (used in) financing              13,937          2,850        13,669         1,573
activities


NET INCREASE/(DECREASE) IN CASH HELD                    7,008       (1,369)         7,009       (1,369)

CASH AT THE BEGINNING OF THE FINANCIAL YEAR            4,124          5,493        4,123          5,492

CASH AT THE END OF FINANCIAL YEAR                     11,132          4,124       11,132          4,123






The Statements of Cash Flows are to be read in conjunction with the notes set
out on pages 27 to 47.


                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                       NOTES TO THE FINANCIAL STATEMENTS
                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005



1.  SUMMARY OF ACCOUNTING POLICIES

The financial report is a general purpose financial report which has been drawn
up in accordance with Accounting Standards, Urgent Issues Group Consensus Views,
other authoritative pronouncements of the Australian Accounting Standards Board
and the Corporations Law. The financial report has been prepared on the
historical cost basis.

The financial report covers the economic entity of Magnesium International
Limited and its controlled entities, and Magnesium International Limited as an
individual company.  Magnesium International Limited is a listed public company,
incorporated and domiciled in Australia.

Significant Accounting Policies

Accounting policies are selected and applied in a manner which ensures that the
resultant financial information satisfies the concepts of relevance and
reliability, thereby ensuring that the substance of the underlying transactions
and other events is reported.

The company has adopted relevant new and revised accounting standards and
pronouncements with no material impact.

The following significant accounting policies have been adopted in the
preparation and presentation of the financial report. These accounting policies
have been consistently applied by each entity in the economic entity and are
consistent with those of the prior year.

Principles of Consolidation

The consolidated financial report combines the financial reports of Magnesium
International Limited and all its controlled entities (refer Note 13). The
effects of all transactions between entities in the consolidated entity have
been eliminated.

Recoverable amounts, excluding exploration, evaluation and development
expenditure

The carrying amounts of non-current assets do not exceed the net amounts that
are expected to be recovered through  the cash inflows and outflows flows
arising from continued use and subsequent disposal. The expected net cash flows
included in determining the recoverable amounts have been discounted to their
present value. Where a group of assets work together to generate net cash flows
the recoverable amount test is applied to that group of assets.

Revenue recognition

Interest revenue is recognised as it accrues.

Income tax

Income tax has been brought to account using the income statement liability
method of tax effect accounting whereby income tax expense for the period is
calculated on the accounting profit after adjusting for items which, as a result
of their treatment under income tax legislation, create permanent differences
between that profit and the taxable income.


                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                       NOTES TO THE FINANCIAL STATEMENTS
                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005



Income tax (continued)

The tax effect of timing differences which arises from the recognition in the
accounts of items of revenue and expenses in periods different from those in
which they are assessable or allowable for income tax purposes, are represented
in the Statement of Financial Position as 'future income tax benefits' or 
'provision for deferred income tax', as the  case may be at current tax rates.

Future income tax benefits are only carried forward as an asset where
realisation of the asset is assured beyond reasonable doubt.

Future income tax benefits in relation to tax losses are not brought to account
unless there is virtual certainty of realisation of the benefit.

Investments

Non-current investments are measured on the cost basis. The carrying amount of
non-current investments is reviewed annually by the Directors to ensure that it
is not in excess of the recoverable amount of these investments. The recoverable
amount is assessed from the quoted market value for listed investments or the
underlying net assets for other non-listed investments. The expected net cash
flows from investments have not been discounted to their present value in
determining the recoverable amounts.

Disposal of Investments

On disposal of an investment the difference between net disposal proceeds and
the carrying amount is recognised as a gain or loss.

Property, Plant and Equipment and Intangibles

Freehold land and buildings, plant and equipment and intangibles are stated at
cost of acquisition, being the purchase consideration determined as at the date
of acquisition plus costs incidental to the acquisition.

All items of property, plant and equipment and intangibles, other than freehold
land, are depreciated using the straight line method.

Plant and equipment is depreciated at between 13% and 40%, buildings at 2.50%
and intangibles at 20% per annum.

Leases

A distinction is made between finance leases which effectively transfer from the
lessor to the lessee substantially all the risks and benefits incidental to
ownership of the leased property, without transferring the legal ownership, and
operating leases under which the lessor effectively retains substantially all
the risks and benefits.

Where assets are acquired by means of finance leases, the present value of
minimum lease payments is established as an asset and amortised on a straight
line basis over the expected economic life.  A corresponding liability is
established and each lease payment is allocated between such liability and
interest expense.

Operating lease payments are charged to expense on a basis which is
representative of the pattern of benefits derived from the leased property.

Translation of foreign currency items

Foreign currency transactions during the year are converted to Australian
currency using the spot rate at the date of the transactions. Foreign currency
monetary items outstanding at the reporting date are translated at the spot rate
at the reporting date.



                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                       NOTES TO THE FINANCIAL STATEMENTS
                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005

Translation of foreign currency items (continued)

Exchange differences are recognised as revenues or expenses in net profit or
loss in the period in which exchange rates change.



Receivables

Trade accounts receivable, amounts due from related parties and other
receivables represent the principal amounts due at balance sheet date less any
provisions for doubtful accounts.

Accounts payable

Accounts payable represents the principal amounts outstanding at balance sheet
date plus, where applicable, any accrued interest.

Earnings/(Loss) per share

Basic earnings/(loss) per share ('EPS') is calculated by dividing the net profit
/(loss) attributable to members of the parent entity for the reporting period,
after excluding any costs of servicing equity (other than ordinary shares and
converting preference shares classified as ordinary shares for EPS calculation
purposes), by the weighted average number of ordinary shares of the Company,
adjusted for any bonus issue.

Diluted EPS is calculated by dividing the basic EPS, adjusted by the after tax
effect of financing costs associated with dilutive potential ordinary shares and
the effect on revenues and expenses of conversion to ordinary shares associated
with dilutive potential ordinary shares, by the weighted average number of
ordinary shares and dilutive potential ordinary shares adjusted for any bonus
issue.

Employee Entitlements

Provision is made for the parent entity's liability for employee entitlements,
including on-costs, in respect of wages and salaries, annual leave and long
service leave it expects to pay arising from service rendered by employees to
balance sheet date.

Provisions made in respect of wages and salaries, annual leave, and long service
leave expected to be settled within 12 months, are measured at their nominal
values.

Provisions made in respect of other employee entitlements which are not expected
to be settled within 12 months are measured as the present value of the
estimated future cash outflows to be made by the economic entity in respect of
services provided by employees up to the reporting date.

Contributions are made by the economic entity to employee superannuation funds
and are charged as expenses when incurred.

Exploration, Evaluation and Development Expenditure

Exploration, evaluation and development expenditure incurred is accumulated in
respect of each identifiable area of interest.  These costs are only carried
forward where there is current activity, 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 which permits reasonable assessment of
the existence of economically recoverable reserves.

Accumulated costs in relation to an abandoned area are written off, in full, in
the year in which the decision to abandon the area is made.

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.



                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                       NOTES TO THE FINANCIAL STATEMENTS
                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005

Exploration, Evaluation and Development Expenditure (continued)

A regular review is undertaken of each area of interest to determine the
appropriateness of continuing to carry forward costs in relation to that area of
interest.

Costs of site restoration are provided over the life of the facility from when
production commences and are included in the costs of that stage.  Site
restoration costs include the dismantling and removal of mining plant, equipment
and building structures, waste removal, and rehabilitation of the site in
accordance with clauses of the mining permits.  Any changes in the estimates for
the costs are accounted for on a prospective basis.

The parent entity's loans to controlled entities, whose principal activity is
the exploration and evaluation of mining and tenement interests, have been
utilised by those entities for exploration and evaluation expenditure and have
therefore been accounted for in accordance with the above accounting policy as
this represents the underlying substance of these loans.

The company's ability to recoup exploration and evaluation expenditure is
dependent upon raising the equity and project financing necessary to develop the
magnesium smelter project, or alternatively by its sale or joint venturing. If
the company is unable to commercialise the project, a write down in the carrying
amount may be required.

Goods and Services Tax

Revenues, expenses and assets are recognised net of the amount of goods and
services tax (GST), excepting where the amount of GST incurred is not
recoverable from the taxation authority and it is recognised as part of the cost
of acquisition of an asset or part of an item of expense; or receivables and
payables which are recognised inclusive of GST.

Gross amounts of GST recoverable from, or payable to, the taxation authority are
included as part of receivables or payables.

Use and revision of accounting estimates

The preparation of the financial report requires the making of estimations and
assumptions that affect the recognised amounts of assets, liabilities, revenues
and expenses and the disclosure of contingent liabilities. The estimates and
associated assumptions are based on historical experience and various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis of making the judgements about carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period, or in the period
of the revision and future periods if the revision affects both current and
future periods.


                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                       NOTES TO THE FINANCIAL STATEMENTS
                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005


                                                          Economic Entity          Parent Entity
                                                       2005         2004         2005        2004
                                                       $'000       $'000        $'000        $'000
2. REVENUE FROM ORDINARY ACTIVITIES

Operating Revenue
     Interest - Other Entities                              301          223          301         223
     Management fees:
         - Controlled entity                                  -            -            -         118
         - Other entities                                     -           18            -          18
     Rental income                                            9            8            9           8
     Other income                                             6           44            6          43

Non-Operating Revenue
     Proceeds from sale of:
         - Plant and equipment                                -            3            -           3
         - Investments                                        -          156            -         156

Total Revenue from ordinary activities                      316          452          316         569

3. LOSS FROM ORDINARY ACTVITIES
(a)Loss from ordinary activities before income
tax has been determined after charging
(crediting) the following items:
Depreciation of non-current assets:
         - Plant and equipment                               29             27           26        25
     Transfers to (from) provisions:
         - Employee entitlements                             31           (26)           31      (26)
     Operating lease rental expenses                        131            256          131       256
     Superannuation contributions                            66             42           66        42
(b)   Individually significant items
Write off of exploration and                                  -         11,323            -         -
evaluation expenditure

     Transfers to provisions:
         - Advances to controlled entities                    -              -            -    11,366
                                                                           
4. SALE OF ASSETS
Sale of assets in the ordinary course of business has given
rise to the following profits and losses:

     Net Profits
         Investments                                        -             130             -       130

     Net Losses
         Plant and equipment                                -              12             -        12










                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                       NOTES TO THE FINANCIAL STATEMENTS
                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005


                                                   Economic Entity       Parent Entity
                                                 2005        2004       2005      2004
                                                   $          $          $          $
                                                 $'000       $'000      $'000     $'000
5. INCOME TAX
(a) Loss from ordinary activities                (4,150)     (14,047)  (4,147)    (14,047)
     Prima facie income tax benefit calculated
     at 30%
     of operating profit                         (1,245)      (4,214)  (1,244)     (4,214)
     Permanent differences:
         Non allowable items                           -            7        -           7
     Future income tax benefits not recognised     1,245        4,207    1,244       4,207
     Income tax expense attributable to                -            -        -           -
      operating profit                                 

(b) Franking account balance                           -            -        -           -
                                                                  

(c ) Future income tax benefit not recognised


 The potential future income tax benefit calculated at 30% arising from tax losses and
timing differences has not been recognised as an asset because recoverability is not
considered to be virtually certain.

     Tax Losses
         Revenue losses                           23,019       21,783    4,400       3,165
         Capital losses                            2,829        2,829    2,829       2,829
     Timing Difference (Net)                    (12,656)     (12,665)    1,861       1,852

     Total                                        13,192       11,947    9,090       7,846




The potential future income tax benefit will only be obtained if:



(i)   the company and the economic entity derive further assessable income of 
a nature and of an amount sufficient to enable the benefit from the deductions 
to be realised;

(ii)  the company and the economic entity continue to comply with the 
conditions for deductibility imposed by the law; and

(iii) no changes in tax legislation adversely affect the company's and the 
economic entity's ability in realising the benefit from the deductions.





Tax consolidation legislation

The Tax Consolidation Legislation allows groups, comprising the head entity
(Magnesium International Limited) and its wholly owned Australian subsidiaries,
to elect to consolidate and be treated as a single entity for Australian income
tax purposes.

Magnesium International Limited and its wholly owned subsidiaries have elected
to be taxed as a single entity from 1 July 2003.  The tax-consolidated group is
currently evaluating the substance of and use of tax sharing arrangements with
wholly owned subsidiaries in order to ensure that tax balances generated by
external transactions are reflected in contributions to the head entity. As the
tax sharing agreements have not been finalised the financial impact of forming a
tax-consolidated group has not been reflected in this financial report.





                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                       NOTES TO THE FINANCIAL STATEMENTS
                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005



                                                 Economic Entity          Parent Entity
                                                2005         2004       2005       2004
                                                  $           $           $          $
6. AUDITORS' REMUNERATION

   Remuneration of the auditor of the parent
   entity for:
   Auditing and reviewing financial report     55,054       40,086     55,054     40,086
  Taxation compliance and tax consolidation    85,189         -        85,189        -
  advice
   AIM listing                                 41,818         -        41,818        -
                                               182,061      40,086     182,061    40,086
7. EARNINGS PER SHARE

   Basic and diluted (loss) per share (cents    (14)         (58)
   per share)

   Weighted average number of ordinary       29,919,595   24,228,035
   shares

The 29,060,524 'B' shares converted to ordinary shares in January 2005; with 1.6918
ordinary shares being issued for each 'B' class share.
In March 2005 the Company consolidated the ordinary shares on a 1 for 20 basis.

                                                $'000       $'000       $'000      $'000
8. CASH ASSETS
   Cash at bank and on hand                     2,669        124        2,669       123
   Term deposits                                8,463       4,000       8,463      4,000
                                               11,132       4,124      11,132      4,123
9. CURRENT RECEIVABLES

   GST Receivable                                84           29         59         29
   Other receivables                            1,927        115        1,927       104
                                                2,011        144        1,986       133
Other receivables include $1,852,000
advanced to EMAG, the entity established
with co-shareholder Amiral to develop the
magnesium smelter project.

10. OTHER CURRENT ASSETS
   Security deposits                             15           17          -          2
   Prepayments                                   56          100         56         99
                                                 71          117         56         101
11. NON-CURRENT RECEIVABLES

Amount due from wholly owned controlled           -           -        41,387     41,120
entities
Provision for diminution in value                 -           -       (17,034)   (17,034)
                                                  -           -        24,353     24,086







                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                       NOTES TO THE FINANCIAL STATEMENTS
                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005


12. NON-CURRENT INVESTMENTS                     Economic Entity          Parent Entity
                                                2005       2004        2005         2004
                                               $'000      $'000       $'000         $'000
   Unlisted investments - at cost
         Shares in controlled entities             -          -       19,536        19,536
                                                    



13. CONTROLLED ENTITIES


Magnesium International Limited is the ultimate parent entity in the wholly
owned group

   Name of entity                            Country of            % of shares  % of shares
                                                                   held         held
                                             Incorporation             2005         2004

GAMAS Magnesium Technology Pty Ltd           Australia                 100           100
Magnesium International (No 1) Pty Ltd       Australia                 100           100
Magnesium International (No 2) Pty Ltd       Australia                 100           100
SAMAG Limited                                Australia                 100           100
     Magnesium Holdings Pty Ltd              Australia                 100           100
     Magnesium Developments Ltd              Australia                 100           100


14. PROPERTY, PLANT AND EQUIPMENT               Economic Entity          Parent Entity
                                                2005       2004        2005         2004
                                               $'000      $'000       $'000         $'000
   Land - at cost                               371        371          -             -
   Buildings                                                            -
         at cost                                100        100          -             -
         accumulated depreciation               (8)        (5)          -             -
                                                 92         95          -             -
   Plant and equipment
         at cost                                297        275         297           275
         accumulated depreciation              (236)      (210)       (236)         (210)
                                                 61         65          61           65
   Total property, plant and equipment          524        531          61           65






                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                       NOTES TO THE FINANCIAL STATEMENTS
                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005




14. PROPERTY, PLANT AND EQUIPMENT (CONTD)

MOVEMENTS                                                             Plant and
                 2005                        Land        Buildings    Equipment      Total
                                             $'000         $'000        $'000        $'000
   Economic Entity

   Balance at 30 June 2004                    371            95           65          531
   Additions                                   -             -            22           22
   Depreciation expense                        -            (3)          (26)         (29)
   Disposals                                   -             -            -            -
   Balance at 30 June 2005                    371            92           61          524

   Parent Entity

   Balance at 30 June 2004                      -             -           65           65
   Additions                                    -             -           22           22
   Depreciation expense                         -             -         (26)         (26)
   Disposals                                    -             -            -            -
   Balance at 30 June 2005                      -             -           61           61
                                      

                                                                      Plant and
                 2004                        Land        Buildings    Equipment      Total

   Economic Entity

   Balance at 30 June 2003                    371            97          104          572
   Additions                                   -             -            1            1
   Depreciation expense                        -            (2)          (25)         (27)
   Disposals                                   -             -           (15)         (15)
   Balance at 30 June 2004                    371            95           65          531

   Parent Entity

   Balance at 30 June 2003                      -             -          104          104
   Additions                                    -             -             1            1
   Depreciation expense                         -             -          (25)         (25)
   Disposals                                    -             -          (15)         (15)
   Balance at 30 June 2004                      -             -            65           65
                                  






                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                       NOTES TO THE FINANCIAL STATEMENTS
                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005


15. EXPLORATION AND EVALUATION EXPENDITURE         Economic Entity         Parent Entity
                                                 2005        2004       2005       2004
                                                $'000       $'000      $'000      $'000
Cost carried forward in respect of areas of
interest
in exploration and evaluation phases            43,320      43,320       -          -

At 30 June 2005 this expenditure relates to mining properties associated with
the magnesium smelter project. The recovery of expenditures carried forward in
respect of mining properties depends on the successful development and
commercial exploitation or sale of mineral resources which have been, or may be,
discovered in those properties.

Movement for year:
Balance at beginning of year                   43,320       53,392       -       -
Expenditure during year                           -         1,252        -       -
Exploration and evaluation written off            -        (11,324)      -       -
Balance at end of year                          43,320      43,320       -       -
                                                                                 

16. INTANGIBLES

Magsheet Option                                  255          -          -          -


 An initial payment has been made to the Commonwealth Scientific Industrial and Research
Organisation, Australia (CSIRO) pursuant to an option to acquire magnesium sheet metal alloy
technology ('Magsheet').

Note 29 discloses additional details.

17 OTHER NON-CURRENT ASSETS

 Deposits                                      1,293          -        1,293        -

 $1,293,000 has been deposited with the Egyptian Magnesium Company. This will become an
unlisted equity investment upon this company acquiring legal status in Egypt. This approval
was received by EMAG on 1st August, 2005.


18. CURRENT PAYABLES

     Unsecured:
     Other payables and accruals                 836         272        836        272
     GST Creditors                                -           12         -          12
                                                 836         284        836        284
19. CURRENT PROVISIONS

     Employee entitlements                       103          72        103         72

20. NON-CURRENT PAYABLES

     Amount due to controlled entity              -           -          10         10





                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                       NOTES TO THE FINANCIAL STATEMENTS
                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005



21. SHARE OPTIONS

Expiry Date     Grant Date    Exercise     Number on                 Movements              Number on
                              Price        issue 30 June                                    issue 30
                                           2004                                             June 2005
                                                         Granted     Lapsed      Exercised

Listed
      1/03/2007    14/03/2005    $1.80           -       5,208,334   -           -          5,208,334
      1/03/2007    31/03/2005    $1.80           -         625,236   -           -            625,236
                                                 -       5,833,570                          5,833,570
Unlisted

  27/08/2004       27/08/1999    $3.95         15,000         -       (15,000)       -           -
  25/11/2004       25/11/1999    $5.95        175,000         -       (175,000)      -           -
  19/02/2005       19/05/2004    $1.50        518,466         -       (110,466)  (408,000)       -
  31/07/2005       31/07/2000    $7.25        253,340         -           -          -        253,340
  28/08/2005       28/08/2000    $5.95        158,336         -       (158,336)      -           -
  30/09/2006       30/09/2001    $4.75         10,000         -       (10,000)       -           -
  30/11/2006       30/11/2001    $8.95        480,000         -           -          -        480,000
   1/12/2006        1/12/2001    $4.95        500,000         -           -          -        500,000
  31/03/2007       30/03/2002    $4.95        150,000         -           -          -        150,000
  Managing Director's options Sub-Notes 1,    675,000         -       (525,000)      -        150,000
                                   4
  30/06/2011       01/09/2004 Sub-Notes 2,       -        1,350,000       -          -      1,350,000
                                   4
  30/06/2011       01/09/2004 Sub-Notes 3,       -          300,000       -          -        300,000
                                   4
  18/05/2007       13/09/2004    $2.00           -          500,000       -          -        500,000
  30/06/2011       31/03/2005    $1.20           -          100,000       -          -        100,000
  31/05/2010       31/05/2005    $1.20           -          190,200       -          -        190,200
Options rounding, due to share                       (3)      -           3          -                -
consolidation
                                             2,935,139   2,440,200   (983,799)   408,000    3,973,540

Sub-Note 1:

The Managing Director's options were approved by shareholders at a meeting held on 29 November 2002. The
675,000 options were issued in five (5) separate tranches:

Tranche 1:      150,000 options at an exercise price of $3.00 per option exercisable by 1 August 2007.


Tranche 2:      150,000 options at an exercise price of $4.00 per option, or the average market price of
                the ordinary shares of the Company for the 5 day period immediately preceding Financial
                Close (described in Note 4). These options have lapsed.


Tranche 3:      125,000 options at an exercise price of $6.00 per option, or the average market price of
                the ordinary shares of the Company for the 5 day period immediately preceding
                Commissioning Date. These options have lapsed.


Tranche 4:      125,000 options at an exercise price of $10.00 per option, exercisable on the 5th
                anniversary of achievement of the Dow Process Improvements. These options have lapsed.

Tranche 5:      125,000 options at an exercise price of $14.00 per option, exercisable on the 5th
                anniversary of when the Board approves the Bankable Feasibility Study for Stage 2 of the
                Project, subject to the achievement of the Dow Process Improvements. These options have
                lapsed.


Sub-Note 2:       Directors Options

1,350,000 options (post consolidation) in three tranches were issued following approval by shareholders
at the Annual General Meeting on 27 August 2004. The Managing Director received 750,000 options and the
four Directors (Messrs Karpin, Elliott, Hogendijk and Richmond) each received 150,000 options.  Details
of the tranches are as follows:





                                     MAGNESIUM INTERNATIONAL LIMITED
                                         AND CONTROLLED ENTITIES
                                    NOTES TO THE FINANCIAL STATEMENTS
                                FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005

21. SHARE OPTIONS (CONTINUED)

Tranche 1:      450,000 io( 2 450,000 options (250,000 options for the Managing Director and 50,000
                options for each of the four directors) at 20% above the average market price of the
                ordinary shares of the Company subsequent to the date of approval by shareholders of the
                option grant. The exercise price for these options is $1.38. The options are exercisable
                at any date from the date of Financial Close (described in Sub-Note 4) up until 30 June
                2011.

Tranche 2:      450,000 io( 2 450,000 options (250,000 options for the Managing Director and 50,000
                options for each of the four directors) at the average market price of the Company's
                ordinary shares for the 5 trading days subsequent to Financial Close (described in
                Sub-Note 4). The options are exercisable at any date from the date of Mechanical
                Completion up until 30 June 2011.

Tranche 3:      450,000 options (250,000 options for the Managing Director and 50,000 options for each of
                the four directors) at 20% above the average market price of the Company's ordinary shares
                for the 5 trading days subsequent to Financial Close (described in Sub-Note 4). The
                options are exercisable at any date from the date of Commissioning up until 30 June 2011.

Sub-Note 3:     Employee Options

                300,000 options (post consolidation) were issued pursuant to the company's Employee Share
                Option Plan in three Tranches. The details of the three Tranches are as follows:

Tranche 1:      100,000 options at 20% above the average market price of the Company's ordinary shares for
                the first 5 trading days in July 2004. The exercise price for these options is $1.46. The
                options are exercisable at any time from the date of Financial Close (described in
                Sub-Note 4) up until 30 June 2011.

Tranche 2:      100,000 options at the average market price of the Company's ordinary shares for the 5
                trading days subsequent to Financial Close (described in Sub-Note 4). The options are
                exercisable at any date from the date of Mechanical Completion up until 30 June 2011.

Tranche 3:      100,000 options at 20% above the Tranche 2 price of the
                Company's ordinary shares. The options are exercisable at any date from the date of
                Commissioning up until 30 June 2011.

Sub-Note 4:     Financial Close

                Financial Close is defined for the purposes of these options as the date upon which the
                Board resolves that commitments for equity and debt funding suitable and sufficient for
                the Company's magnesium smelter project have been accepted.


22. EMPLOYEE SHARE OPTION PLAN (ESOP)


The ESOP was approved by shareholders at a meeting held on 28 November 2001.
The ESOP is a standard type plan which limits the number of options that can be
issued to not more than 5% of the total number of shares on issue.  It provides:



•   that Directors can issue options to employees, consultants, contractors or
agents at an option price of nil and an exercise price determined by the
Directors,

•   options vest, unless otherwise determined, over 3 years, 25% on the 1st
anniversary of the issue date, 25% on the 2nd anniversary and 50% on the 3rd
anniversary.  The Directors may impose performance conditions,

•   options are exercisable within 5 years of vesting,

•   options lapse 30 days after termination of employment or of the contract/
consultancy agreement, and

•   loans may be made in connection with the shares issued pursuant to the
exercise of options to employees.  The loan may be at no interest or a less than
commercial rate and the amount repayable of the loan may be limited to the
proceeds of the sale of the shares acquired with the loan.



Details of employee options issued under the plan during the year ended 30 June
2005 are shown in Note 21 to the financial statements, sub-note 3.

No options were exercised under the Employee Share Option Plan in the year ended
30 June 2005.


                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                       NOTES TO THE FINANCIAL STATEMENTS
                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005

                                                       Economic Entity          Parent Entity
                                                      2005        2004        2005        2004
                                                      $'000       $'000       $'000       $'000
23.    CONTRIBUTED EQUITY
       38,040,170 fully paid ordinary shares            90,227      73,384      90,227      73,384
       (2004: 470,110,606 or 23,505,530 post 1 for
       20 consolidation)

       Nil fully paid 'B' shares (2004: 29,060,524           -       2,906           -       2,906
       pre conversion to ordinary shares at 1.6918
       for 1 pre consolidation)

                                                        90,227      76,290      90,227      76,290

       Fully paid shares carry one vote per share and the right to dividends.

       Fully paid 'B' shares converted into ordinary shares on 10 January, 2005, the conversion
       was done at 1.6918 ordinary shares for each 'B' class share.

       Movements in ordinary share capital

       Balance at beginning of year                  76,290      73,390      76,290      73,390

       Shares issued during year:
       29,060,524 'B' shares converted into             -           -           -           -
       2,458,230 ordinary shares post
       consolidation, the conversion was done at
       1.6918 ordinary shares for each share.
       Nil  'B' shares issued (2004: 152,137 post       -          180          -          180
       conversion and consolidation)
       Nil  ordinary shares issued as                   -          50           -          50
       consideration for services rendered (2004:
       28,090)
       408,000 shares post consolidation (2004:        612        1532         612        1532
       1,131,534) issued on exercise of options
       1,250,247 shares issued pursuant to            1,500       1,454       1,500       1,454
       Shareholder Share Purchase Scheme (2004:
       1,454,532 post consolidation) at $1.20 per
       share
       Placement of 10,416,667 shares at $1.20 per   12,500         -        12,500         -
       share
       Transaction costs relating to share issues     (675)       (316)       (675)       (316)

                                                     90,227      76,290      90,227      76,290

24.    ACCUMULATED LOSSES

       Accumulated losses at the beginning of  the  (28,410)    (14,363)     (28,612)   (14,565)
       financial year
       Net loss for year                             (4,150)    (14,047)     (4,147)    (14,047)
       Accumulated losses at the end of the         (32,560)    (28,410)    (32,759)    (28,612)
       financial year


25.       COMMITMENTS FOR EXPENDITURE

(a)    Capital Expenditure Commitments

Magnesium International had no capital commitments at the end of the financial year.


                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                       NOTES TO THE FINANCIAL STATEMENTS
                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005



25. COMMITMENTS FOR EXPENDITURE (CONTINUED)

(b)    Lease Commitments

         Operating leases are non-cancellable and relate to office facilities with lease terms of
         between one to three years. The company does not have an option to purchase the leased asset
         at the expiry of the lease period.

         Non-cancellable operating leases
         Not later than one year                          144         144          144         144
         Later than 1 year but not later than 5 years     144         288          144         288
                                                          288         432          288         432

26.    FINANCIAL INSTRUMENTS

(a)    Significant  Accounting Policies

Details of the significant accounting policies and methods including the criteria for recognition, the
basis of measurement and the basis on which revenues and expenses are recognised, in respect of each
class of financial liability and equity instrument are disclosed in Note 1 to the financial statements.

(b)    Interest Rate Risk

The economic entity has not entered into interest rate hedging transactions. The economic entity's
exposure to interest rate risk and the effective weighted average interest rate for classes of financial
assets and liabilities is set out below: -

          2005               Note       Weighted     Floating      Fixed    Non-Interest       Total
                                        Average      Interest    Interest      Bearing
                                        Interest      Rates     Maturing in
                                         Rates                   1 year or
                                                                   less
Financial Assets
Cash                          8           5.5%        2,669        8,463          -           11,132
Receivables                   9                         -            -          2,011          2,011
Other Non-Current Assets      17                        -            -          1,293          1,293
Total Assets                                          2,669        8,463        3,304         14,436
Financial Liabilities
Payables                      18                        -            -           836            836
Employee Entitlements         19                        -            -           103            103
Total Liabilities                                       -            -           939            939

          2004               Note       Weighted     Floating      Fixed    Non-Interest       Total
                                        Average      Interest    Interest      Bearing
                                        Interest      Rates     Maturing in
                                         Rates                   1 year or
                                                                   less
Financial Assets
Cash                          8           5.4%         124         4,000          -            4,124
Receivables                   9                         -            -           144            144

Total Assets                                           124         4,000         144           4,268
Financial Liabilities
Payables                      18                        -            -           284            284
Employee Entitlements         19                        -            -           72             72
Total Liabilities                                       -            -           356            356




                                  MAGNESIUM INTERNATIONAL LIMITED
                                      AND CONTROLLED ENTITIES
                                 NOTES TO THE FINANCIAL STATEMENTS
                             FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005



26. FINANCIAL INSTRUMENTS (CONTINUED)

(c)     Foreign Exchange Risk

It is the current policy of the economic entity to maintain foreign currency cash balances in order
to match projected foreign currency denominated expenses. The economic entity does not enter into
foreign exchange hedging contracts.

(d)    Credit Risk

There is negligible credit risk on financial assets, excluding investments, of the economic entity
since there is no exposure to individual customers or countries and the economic entity's exposure
is limited to the amount of cash, short term deposits and receivables which have been recognised in
the balance sheet and is minimised by using recognised intermediaries as counterparties.


27.    RELATED PARTY INFORMATION

(a)    Directors

The Directors of Magnesium International Limited during the year were:

DS Karpin
PJD Elliott
GT Galt
MR Richmond
AJ Hogendijk
OFR Al-Sharif (appointed 28/02/2005)

(b)    Directors' remuneration

Details of directors' remuneration are shown in the Remuneration Report, which forms part of the
Directors' Report and in Note 31 to the Financial Statements.

(c)     Transactions within wholly-owned group                            Economic Entity
                                                                     2005              2004
MANAGEMENT FEES
                                                                     $'000             $'000
A controlled entity, SAMAG Limited, paid management fees to
Magnesium International Limited in the year ended 30 June 2004                          118
for services provided by senior management of that company. The
fees were determined on a commercial basis.                            -

(d)    Transactions with related parties

Other non-current receivables - Magnesium International Limited
provided cash advances to EMAG


                                                                      1,852               -


                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                       NOTES TO THE FINANCIAL STATEMENTS
                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005


       NOTES TO STATEMENTS OF CASH FLOWS

28.

(a)    Reconciliation of Cash

For the purposes of the statement of cash flows, cash includes cash on hand, in banks, investments in
money market instruments, and is net of outstanding bank overdrafts. Cash at the end of the financial
year as shown in the statements of cash flows is reconciled to the related items in the statements of
financial position as follows: -

                                                     Economic Entity             Parent Entity
                                                      2005         2004         2005          2004
                                                     $'000        $'000        $'000         $'000
Cash                                                   2,669          124        2,669            123
Short Term Deposits                                    8,463        4,000        8,463          4,000
                                                      11,132        4,124       11,132          4,123
(b)     Non-cash financing and investing
activities

Shares issued in satisfaction of liabilities               -           50            -             50


Reconciliation of operating loss after income tax to net cash flows from operating activities

Operating loss after income tax                 (4,150)   (14,047)     (4,147)       (14,047)

Non-cash items included in profit and loss

Depreciation and amortisation                        29         27          26             25

Diminution - loans to controlled entities             -          -           -         11,366

Employee entitlements                                31       (26)          31           (26)

Net loss on sales of assets                           -         12           -             12

Net (profit) loss on sale of investments              -      (130)           -          (130)

Shares issued in satisfaction of liabilities          -         50           -             50

Changes in assets and liabilities

Decrease/(increase) in receivables              (1,865)          5     (1,850)              9

Decrease / (increase) in prepayments                 44       (87)          43           (87)

(Increase)/decrease in exploration                    -     10,072           -              -
expenditure

Increase /(decrease) in payables                    552      (253)         552          (254)

Net cash used in operating activities           (5,359)    (4,377)     (5,345)        (3,100)


29.    CONTINGENT LIABILITIES

Termination Benefits

Under the Managing Director's service agreement there is a contingent liability for termination benefits
equal to one year of his salary package. At the date of this report the contingent liability is $615,000.
Dow Chemicals

Under an agreement with The Dow Chemical Company ('Dow') a controlled entity has purchased an exclusive
licence to Dow's technology for the manufacture of magnesium. The purchase gives full access to Dow's
technology for the manufacture of magnesium and to Dow's magnesium database and patents. A technology fee of
US$5.56 million is payable within 30 days after Financial Close.


                                      MAGNESIUM INTERNATIONAL LIMITED
                                          AND CONTROLLED ENTITIES
                                     NOTES TO THE FINANCIAL STATEMENTS
                                 FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005



29. CONTINGENT LIABILITIES (CONTINUED)

Other - Success Fees

A number of the Company's advisors and consultants have entered into Success Fee arrangements, whereby
amounts may become payable upon Financial Close of the Dow technology development project.
Other - Directors retirement benefits

A number of the Company's former Directors have agreed that certain retirement benefits amounting to
$182,001 will only become payable upon Financial Close of the Dow technology development project.
Other - Commonwealth Scientific and Industrial Research Organisation (CSIRO) Options

Magnesium International (No 1) Pty Limited has entered into an Option Agreement with the CSIRO, initially
exercisable by November 2007, which will give a worldwide exclusive licence to the magnesium alloy sheet
metal technology (Magsheet) developed by CSIRO.

The exercise price of the option is $9.58 million if exercised by November 2007 or $12.5 million if
exercised by November 2008.

Under the terms of the Agreement with the CSIRO, Magnesium International (No 1) Pty Limited has undertaken
to commit another $1.55 million to the development of the product, technology and market by 30 June 2006.



30. SEGMENT REPORTING

The economic entity operates in one segment only, being mineral exploration and
development predominantly in Australia.



31. DIRECTORS AND EXECUTIVES DISCLOSURES



The parent entity's policy for determining the nature and amount of emoluments
of board members and senior executives of the company is as follows:



The remuneration structure for executive officers and Directors, including
executive Directors, seeks to emphasise payment for results through providing
individual reward arrangements, for example the use of share options as
disclosed in the Directors Report.



The objective of the individual reward arrangements is to both reinforce the
short and long term goals of the company and to provide a common interest
between management and shareholders.



Shares and options



The relevant interest of each Director in the shares and options issued by the
companies within the consolidated entity, as notified by the Directors to the
Australian Stock Exchange in accordance with S205G(1) of the Corporations Act,
2001, at the date of this report is as follows :


Magnesium International Limited                     Ordinary shares   Unlisted Options  Listed Options

Mr DS Karpin                                                  100,000          150,000                -
Mr PJD Elliott                                                206,998          510,000            4,168
Mr AJ Hogendijk                                                31,581          300,000            4,168
Mr GT Galt                                                     17,561          900,000            2,050
Mr MR Richmond                                                      -          150,000                -
Mr OFR Al-Sharif                                            2,300,000                -        1,150,000
Total Directors and related entities                        2,656,140        2,010,000        1,160,386



                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                       NOTES TO THE FINANCIAL STATEMENTS
                    FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005



31. DIRECTORS AND EXECUTIVES DISCLOSURES (CONTINUED)

Share options



Unlisted share options granted by Magnesium International Limited to directors
and officers during the financial year ended 30 June 2005 were as follows:


Magnesium International Limited                  Number of options   Exercise price         Expiry date

Directors
Mr DS Karpin                                               150,000              (i)        30 June 2011
Mr PJD Elliott                                             150,000              (i)        30 June 2011
Mr GT Galt                                                 750,000              (i)        30 June 2011
Mr AJ Hogendijk                                            150,000              (i)        30 June 2011
Mr MR Richmond                                             150,000              (i)        30 June 2011

Officers
Mr R Eaglesham                                             150,000              (i)        30 June 2011
Mr P Baily                                                 150,000              (i)        30 June 2011
Total Directors and officers                             1,650,000

(i)  The terms of the options granted to directors and officers
are described in Note 21 to the Financial Statements.

(ii) No options have been issued since the end of the financial year.

Directors and specified executives remuneration

The directors of the Company during or since the end of the financial year are:

Name                             Position
DS Karpin                        Chairman
PJD Elliott                      Deputy Chairman
AJ Hogendijk                     Non-Executive Director
GT Galt                          Managing Director
MR Richmond                      Non-Executive Director
OFR Al-Sharif                    Non-Executive Director (appointment 28 February 2005

Remuneration of Directors

Directors                  Salary and  Con-sulting   Super-annuation  Options (i)     FBT       Totals
                              Fees        Fees
                               $            $               $              $           $           $
DS Karpin         2005      100,000      115,000            -              -           -        215,000
                  2004      100,000         -               -              -           -        100,000
PJD Elliott       2005       40,000      30,000             -              -           -        70,000
                  2004       40,000      35,625             -              -           -        75,625
AJ Hogendijk      2005       40,000       3,863          13,125            -           -        56,988
                  2004       40,000      38,225             -              -           -        78,225
GT Galt (iii)     2005      344,478         -            45,000                     35,773      425,251
                  2004      448,650         -            60,000                     15,237      523,887
MR Richmond       2005       40,000         -             7,875            -           -        47,875
                  2004       40,000         -             3,600            -           -        43,600
OFR Al-Sharif     2005       13,556         -               -              -           -        13,556
(ii)              2004         -            -               -              -           -           -
Total             2005      578,034      148,863         66,000            -        35,773      828,670
                  2004      668,650      73,850          63,600            -        15,237      821,337


                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                       NOTES TO THE FINANCIAL STATEMENTS
                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005



31. DIRECTORS AND EXECUTIVES DISCLOSURES (CONTINUED)



(i)   No option expense arises for the financial years ended 30
June 2004 and 30 June 2005 as the options, as described in sub-note 2 of Note 21
to the Financial Statements, do not vest until after the date of Financial
Close. When vesting occurs these options will be valued using the Black Scholes
option pricing model.

(ii)  OFR Al-Sharif was appointed a director on 28 February 2005.

(iii) GT Galt was seconded to EMAG in March 2005 and EMAG have
been responsible for his remuneration arrangements since that date.

(iv)   The specified executives in the consolidated group who received the 
highest remuneration for the financial year are:


Name                  Position

J Beecher             Company Secretary, Magnesium International Limited
P Baily               General Manager Operations, Magnesium International Limited
R Eaglesham           General Manager Project Delivery, Magnesium International Limited

Remuneration of executives

Executives                   Salary and  Consulting Fees  Super-annuation  Options (i)  Termination    Totals
                                Fees                                                      Benefit
                                 $              $                $              $            $            $
J Beecher (ii)     2005          -           225,403                                                   225,403
                   2004          -           10,000              -              -            -         10,000
P Baily (iii)      2005          -           126,719             -                                     126,719
                   2004          -           230,612             -              -            -         230,612
R Eaglesham (iv)   2005          -           246,109             -              -            -         246,109
                   2004          -           254,464          16,416            -         44,000       314,880
D Smith (v)        2005          -              -                -              -            -            -
                   2004          -           282,500             -              -            -         282,500
Total              2005          -           598,231                            -                      598,231
                   2004          -           778,576          16,416            -         44,000       837,992

(i)     Refer to footnote (i) on Page 44

(ii)    J Beecher commenced with Magnesium International Limited on
28 May 2004. Mr Beecher has also provided consulting services to EMAG since
March 2005.

(iii)   P Baily has provided consulting services to EMAG since March 2005.

(iv)    R Eaglesham has provided consulting services to EMAG since March 2005.

(v)     D Smith ceased employment on 15 June 2004.





                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                       NOTES TO THE FINANCIAL STATEMENTS
                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005



32. INTERNATIONAL FINANCIAL REPORTING STANDARDS



For reporting periods beginning on or after 1 January 2005, the economic entity
must comply with International Financial Reporting Standards (IFRS) as issued by
the Australian Accounting Standards Board.

This financial report has been prepared in accordance with Australian accounting
standards and other financial reporting requirements (Australian GAAP). The
differences between Australian GAAP and IFRS identified to date as potentially
having a significant effect on the economic entity's financial performance and
financial position are summarised below. The summary should not be taken as an
exhaustive list of all the differences between Australian GAAP and IFRS. No
attempt has been made to identify all disclosure, presentation or classification
differences that would affect the manner in which transactions or events are
presented.

TRANSITION MANAGEMENT

The economic entity has established a project to assess the impact of the
transition to IFRS and to achieve compliance with AIFRS reporting for the
financial year commencing 1 July 2005. The consolidated entity will be in a
position to fully comply with the requirements of AIFRS for the 31 December 2005
half year and the 30 June 2006 financial year.

Assessment and planning: The assessment and planning phase generated a high
level overview of the impacts of conversion to AIFRS on existing accounting and
reporting policies and procedures, systems and processes, business structures
and staff. The assessment and planning phase is completed as at 30 June 2005.

Design: The design phase is in progress as at 30 June 2005.

Implementation: The implementation phase includes implementation of identified
changes to accounting and business procedures, systems and processes and
operational training for staff and will enable the consolidated entity to
generate the required reconciliations and disclosures of AASB 1 First time
Adoption of Australian Equivalents to International Financial Reporting
Standards. This phase is in progress as at 30 June 2005.

IMPACT OF TRANSITION TO AIFRS

The economic entity has not quantified the effects of the differences except as
discussed below. Accordingly, there can be no assurances that the consolidated
statements of financial performance and financial position would not be
significantly different if determined in accordance with IFRS. Only a complete
set of financial statements and notes together with comparative balances can
provide a true and fair presentation of the company's and consolidated entity's
financial position, results of operations and cash flows in accordance with
IFRS.

The key potential implications of the conversion to IFRS on the economic entity
are as follows:

•                Equity-based compensation in the form of shares and options
will be recognized as expenses in the periods during which the employee provides
related services. The economic entity issues equity based compensation to
employees. Options remaining unvested at transition date, 1 July 2004, will be
recognized in the opening balance sheet through retained earnings resulting in a
$nil impact on first-time transition. For the financial year ended 30 June 2005,
employee benefits expenses are expected to result in a nil charge as the options
do not vest until Financial Close. This adjustment is based on current best
estimates based on accounting interpretations as at 30 June 2005. This cost does
not include the cost of all options as it is not possible to ascribe a share
price to future periods when certain options are exercisable.




                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                       NOTES TO THE FINANCIAL STATEMENTS
                   FOR THE FINANCIAL YEAR ENDED 30 JUNE 2005



32. INTERNATIONAL FINANCIAL REPORTING STANDARDS (CONTINUED)

•                            Under current Australian GAAP exploration and
evaluation expenditure carried forward is valued on a cost basis in accordance
with the exploration, evaluation and development expenditure accounting policy
set out in Note 1 to the Financial Statements. Under AIFRS this will remain
unchanged except that 'pre-exploration' cost will not be recognised.
Pre-exploration costs are costs incurred prior to licences being granted.
Management are currently analysing capital expenditures, however at this stage
it is expected that no adjustments will arise at 1 July 2004 on transition to
AIFRS. No pre-exploration costs were incurred in the year ended 30 June 2005.

•                        Changes in accounting policies will be recognised by
restating comparatives rather than making current year adjustments with note
disclosures of prior year effects.





33.  RECONCILIATION OF AUSTRALIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
     TO UNITED KINGDOM GENERALLY ACCEPTED ACCOUNTING PRINCIPLES



The financial statements are prepared in accordance with Australian Generally
Accepted Accounting Principles ('A GAAP'), which differ in certain aspects from
United Kingdom Generally Accepted Accounting Principles ('UK GAAP'). There are
no material differences between A GAAP and UK GAAP for the year ended 30 June
2005 as they relate to the financial statements of Magnesium International
Limited.


                             DIRECTORS' DECLARATION

In the opinion of the directors of Magnesium International Limited:

1    The attached financial statements and notes, as set out on
     pages 24 to 47 are in accordance with the Corporations Act 2001, including:

(a)  Complying with Accounting Standards in Australia, the Corporations 
     Regulations and;

(b)  Giving a true and fair view of the financial position of the company and 
     consolidated entity as at 30 June 2005 and of their performance, as
     represented by the results of their operations and cash flows, for the year
     ended on that date;

2    There are reasonable grounds to believe that the Company
     will be able to pay its debts as and when they become due and payable.

The directors have been given the declarations required by Section 295A of the
Corporations Act 2001 from the Chief Executive Officer and the Chief Financial
Officer function for the financial year ended 30th June 2005.

Signed in accordance with a resolution of the directors.



On behalf of the Directors



GT GALT
Managing Director
Cairo, Egypt
13 September 2005


   Independent Audit Report to the Members of Magnesium International Limited

Scope

The financial report and Directors' responsibility

The financial report comprises the statements of financial position, statements
of financial performance, statements of cash flows, accompanying notes to the
financial statements, and the Directors' declaration for both Magnesium
International Limited (the 'Company') and the economic entity, for the year
ended 30 June 2005.  The economic entity comprises both the company and the
entities it controlled during that year.

The Directors of the Company are responsible for the preparation and true and
fair presentation of the financial report in accordance with the Corporations
Act 2001. This includes responsibility for the maintenance of adequate
accounting records and internal controls that are designed to prevent and detect
fraud and error, and for the accounting policies and accounting estimates
inherent in the financial report.

Audit approach

We conducted an independent audit in order to express an opinion to the members
of the Company.  Our audit was conducted in accordance with Australian Auditing
Standards in order to provide reasonable assurance as to whether the financial
report is free of material misstatement.  The nature of an audit is influenced
by factors such as the use of professional judgement, selective testing, the
inherent limitations of internal control, and the availability of persuasive
rather than conclusive evidence.  Therefore, an audit cannot guarantee that all
material misstatements have been detected.

We performed procedures to assess whether in all material respects the financial
report presents fairly, in accordance with the Corporations Act 2001, Australian
Accounting Standards and other mandatory financial reporting requirements in
Australia, a view which is consistent with our understanding of the Company's
and the economic entity's financial position, and of their performance as
represented by the results of their operations and cash flows.

We formed our audit opinion on the basis of these procedures, which included:

•         examining, on a test basis, information to provide evidence
supporting the amounts and disclosures in the financial report, and

•         assessing the appropriateness of the accounting policies and
disclosures used and the reasonableness of significant accounting estimates made
by the Directors.

While we considered the effectiveness of management's internal controls over
financial reporting when determining the nature and extent of our procedures,
our audit was not designed to provide assurance on internal controls.

Audit opinion

In our opinion, the financial report of Magnesium International Limited is in
accordance with:

a)       the Corporations Act 2001, including:

                i.      giving a true and fair view of the Company's and
economic entity's financial position as at 30 June 2005 and of their performance
for the financial year ended on that date; and

              ii.      complying with Accounting Standards in Australia and the
Corporations Regulations 2001; and

b)       other mandatory financial reporting requirements in Australia.


Magnesium smelter project

Without qualification to the opinion expressed above, attention is drawn to the
following matter. As indicated in the exploration, evaluation and development
expenditure accounting policy and note set out in Note 1 and Note 15
respectively to the Financial Statements, the Company's and economic entity's
ability to develop its magnesium smelter project and recoup exploration and
evaluation expenditure carried forward in respect of its magnesium smelter
project is dependent upon raising the equity and project finance necessary to
develop the project or alternatively by its sale or joint venturing.  If the
Company is unable to commercialise the project, a write down in the carrying
amount of its magnesium smelter project and the parent entity's loans to
controlled entities may be required.






KPMG






Sydney,   13 September 2005


                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
               Additional Information for Listed Public Companies





Additional information required by the Australian Stock Exchange Listing Rules
and not disclosed elsewhere in this report:


1. Shareholding - Ordinary shares

(i) Distribution schedule of ordinary shareholdings as at 31st August 2005.

                                  1 - 1,000                                           3,946
                                1,001 - 5000                                          2,037
                               5,001 - 10,000                                           408
                              10,001 - 100,000                                          300
                              100,001 and over                                           26

      Total number of holders                                                         6,717

(ii) Number of shareholders with less than a marketable parcel                        1,997

(iii) 20 Largest Shareholders - Ordinary Shares
                                                                             Number of
                                                                          Ordinary Fully
                                                                         Paid Shares Held        % Held

      1. Citicorp Nominees Pty Limited                                            4,484,770           11.79%
      2. Ossama Fathi Rabah Al-Sharif                                             2,300,000            6.05%
      3. Vatas Holding GmbH                                                       2,300,000            6.05%
      4. ANZ Nominees Limited                                                     2,190,424            5.76%
      5. JP Morgan Nominees Australia Limited                                     1,920,011            5.05%
      6. Excel Mining Limited                                                     1,837,552            4.83%
      7. National Nominees Limited                                                1,684,402            4.43%
      8. Westpac Custodian Nominees Limited                                         606,840            1.60%
      9. Magdalena Finance Corp                                                     520,000            1.37%
      10. Pacific Gold Resources Ltd                                                476,449            1.25%
      11. Bestfield Company                                                         466,400            1.23%
      12. Ucan Nominees Pty Ltd                                                     312,130            0.82%
      13. HSBC Custody Nominees (Australia) Limited                                 304,953            0.80%
      14. Fiske Nominees Limited                                                    274,114            0.72%
      15. Budberth Pty Ltd                                                          225,000            0.59%
      16. Ipseity Pty Ltd                                                           208,443            0.55%
      17. Mr PJD Elliott                                                            206,998            0.54%
      18. Mrs Sandra Lyn Baker                                                      200,000            0.53%
      19. Latitude Investments Pty Limited                                          181,270            0.48%
      20. Fulur Pty Ltd                                                             172,295            0.45%

      Percentage held by 20 largest shareholders                                 20,872,051           54.90%








                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
               Additional Information for Listed Public Companies


1. Shareholding - Listed Options

(i) Distribution schedule of ordinary shareholdings as at 31st August 2005.

                                 1 - 1,000                                              187
                               1,001 - 5000                                             250
                              5,001 - 10,000                                             11
                             10,001 - 100,000                                            13
                             100,001 and over                                             7
    Total number of holders                                                             468

(ii) Number of shareholders with less than a marketable parcel                          208

(iii) 20 Largest Option holders                                                Number of
                                                                             Options Held          % Held

    1. Citicorp Nominees Pty Limited                                              1,156,252           19.82%
    2. Ossama Fathi Rabah Al-Sharif                                               1,150,000           19.71%
    3. Vatas Holding GmbH                                                         1,150,000           19.71%
    4. National Nominees Limited                                                    672,500           11.53%
    5. Magdalena Finance Corp                                                       260,000            4.46%
    6. Westpac Custodian Nominees Limited                                           145,000            2.49%
    7. KBC Peel Hunt  Limited                                                       107,500            1.84%
    8. Susan Michelle Snelling                                                       94,250            1.62%
    9. National Nominees Limited                                                     75,000            1.29%
    10. Anchorite Limited                                                            62,500            1.07%
    11. Ucan Nominees Pty Ltd                                                        47,500            0.81%
    12. Mr Geoff Swanson                                                             43,750            0.75%
    13. Mr Rod Whyte                                                                 35,000            0.60%
    14. Mr Nicholas Baradakis                                                        32,075            0.55%
    15. Magdalena Mayer                                                              26,084            0.45%
    16. Fiske Nominees Pty Limited                                                   25,000            0.43%
    17. Latitude Investments Pty Limited                                             25,000            0.43%
    18. Porchester Capital Investment Limited                                        22,500            0.39%
    19. Debuscey Pty Limited                                                         15,000            0.26%
    20. Mr Paul Vincent Dwyer                                                        15,000            0.26%
    Percentage held by 20 largest shareholders                                    5,159,911           88.47%


(v)  Voting Rights

Article 37 of the parent entity's Constitution stipulates the voting rights of
members as follows:

Subject to any rights or restrictions attached to any class of shares and to
these Articles:

a)   at a meeting of Members or class of Members each Member entitled to
vote may vote in person or by proxy or attorney;

b)   on a show of hands every person present who is a Member or a
representative of a Member shall have (1) vote ; and

c)   on a poll, every Member present in person or by proxy or by  or
attorney or representative shall have in respect of:

      I.  each fully paid share held by him in the parent company, one (1) vote; 
          and
      II. each contributing share held by him in the parent entity, voting 
          rights pro rata to the amount paid up on each share.


                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
               Additional Information for Listed Public Companies



(vi) Unquoted equity securities

Unlisted Options

Gordon Galt holds 900,000 unlisted options, representing 22.65% of the total
number on issue.





2.   The address of the principal office in Australia is:

     Level 6, 210 George Street, Sydney NSW 2000. Telephone (02) 9252 1505



1.   Registers of securities are held at:

     Computershare Registry Services Pty Limited
     Level 5, 115 Grenfell Street
     ADELAIDE SA 5000
     Phone: (08) 8236 2300            Facsimile: (08) 8236 2305

     Computershare Investor Services PLC
     PO Box 82, The Pavilions, Bridgwater Road
     BRISTOL BS99 7NH
     United Kingdom
     Phone: +44 (0) 870 702 0000      Facsimile: +44 (0) 870 703 6114


     Deutsche Borse AG
     Neue Boersenstrasse 1
     D-60487 Frankfurt am Main
     Germany
     Phone: +49 (0) 69-2 11-1 14 00   Facsimile: +49 (0) 69-2 11-1 14 01



5.   Stock Exchange Listings

The parent entity's shares are quoted on the Australian Stock Exchange, the
Alternative Investment Market (AIM) on the London Stock Exchange and the
Regulated Unofficial Market on the Frankfurt Stock Exchange.

The Home Exchange is Sydney, Australia.



6.   Restricted Securities- there are no restricted securities.



7.    Unquoted Securities - 3,973,540 Unlisted Options are on issue.


                        MAGNESIUM INTERNATIONAL LIMITED
                            AND CONTROLLED ENTITIES
                               ABN 23 003 669 163





CORPORATE DIRECTORY


DIRECTORS                    David Karpin        (Chairman)
                             Gordon Galt         (Managing Director)
                             Patrick Elliott     (Deputy Chairman)
                             Andy Hogendijk 
                             Malcolm Richmond
                             Ossama Al-Sharif


SECRETARY                    James Beecher


REGISTERED OFFICE            Level 6
                             210 George Street
                             SYDNEY NSW 2000
                             Phone:       (02) 9252 1505
                             Facsimile:   (02) 9252 1507



HEAD OFFICE                  Level 6
                             210 George Street
                             SYDNEY NSW 2000
                             Phone:       (02) 9252 1505
                             Facsimile:  (02) 9252 1507



AUDITORS                     KPMG
                             10 Shelley Street
                             Sydney NSW 2001


SHARE REGISTRAR              Computershare Registry Service Pty Limited
                             Level 5
                             115 Grenfell Street
                             ADELAIDE SA  5000
                             Phone:       (08) 8236 2300
                             Facsimile:  (08) 8236 2305



BANKERS                      Westpac Banking Corporation
                             Westpac Plaza Branch
                             273 George Street
                             SYDNEY NSW 2001


WEBSITE                      www.mgil.com.au


ASX CODE                     MGK
AIM CODE                     MGK
DAX CODE                     MIC








                      This information is provided by RNS
            The company news service from the London Stock Exchange