LIONORE MINING INTERNATIONAL LTD: Management's Discussion &

           Analysis 
LionOre                       August 9, 2006 


                                            
        Management's Discussion and Analysis
                                            


 
This document has been prepared as of August 9, 2006 and should be read in
conjunction with the Company's Consolidated Interim Financial Statements for
the period ended June 30, 2006 and the Company's audited consolidated financial
statements for the year ended December 31, 2005, which are prepared in
accordance with Canadian generally accepted accounting principles.  In
addition, reference should also be made to Management's Discussion and Analysis
of the 2005 Consolidated Annual Financial Statements dated March 15, 2006 and
the Annual Information Form filed with Canadian regulatory authorities. The
Company's reporting currency is United States dollars.  Reference herein of $
is to United States dollars.  
 
Forward-Looking Statements 
 
Certain statements contained in this document, including information as to the
future financial or operating performance of the Company and its projects,
constitute forward-looking statements.  All statements, other than statements
of historical fact, are forward-looking statements. The words "believe",
"expect", "anticipate", "contemplate", "target", "plan", "intend", "continue",
"budget", "estimate", "may", "will", "schedule" and similar expressions
identify forward-looking statements.  Forward-looking statements include, among
other things, statements regarding targets, estimates and assumptions in
respect of nickel, gold or other metal production and prices, operating costs
and results, capital expenditures, mineral reserves and mineral resources and
anticipated grades and recovery rates.   Forward-looking statements are
necessarily based upon a number of estimates and assumptions related to future
business, economic, market, political, social and other conditions that, while
considered reasonable by the Company, are inherently subject to significant
uncertainties and contingencies.  Many known and unknown factors could cause
actual events or results to differ materially from estimated or anticipated
events or results reflected in such forward-looking statements.  Such factors
include, but are not limited to: competition; mineral prices; ability to meet
additional funding requirements; exploration, development and operating risks;
uninsurable risks; uncertainties inherent in ore reserve and resource
estimates; dependence on third party smelting facilities; factors associated
with foreign operations and related regulatory risks; the impact of HIV/AIDS on
operations in Botswana and South Africa; environmental regulation and
liability; currency risks; effects of inflation on results of operations;
factors relating to title to properties; native title and aboriginal heritage
issues; dependence on key personnel; and share price volatility, and also
include unanticipated and unusual events, many of which are beyond the
Company's ability to control or predict. For further information concerning
certain such factors, see the Company's most recent Annual Information Form
filed with Canadian securities regulatory authorities on SEDAR at
www.sedar.com. The Company disclaims any intent or obligation to update any
forward-looking statements, whether as a result of new information, future
events or results or otherwise.  All forward-looking statements made in this
document are qualified by the foregoing cautionary statements.  Investors are
cautioned that forward-looking statements are not guarantees of future
performance and, accordingly, not to put undue reliance on such statements. 
 
Non-GAAP Measures 
 
The Company uses cash cost per pound of nickel produced and cash cost per ounce
of gold produced in its analysis.  These are not generally accepted accounting
principle ("GAAP") measures and are referred to as "Non-GAAP" measures.  See
"cash cost per pound of nickel produced and per ounce of gold produced" on
pages 21 and 22 of this Management's Discussion and Analysis. 
 
Introduction 
 
LionOre is an international nickel and gold producer headquartered in Toronto, Canada. The Company's operations are loca
ted in Western Australia, Botswana and South Africa. 
The Company owns 80% of the Activox® process, a proprietary technology for processing metal sulphide concentrates. This
 technology has been developed from laboratory to pilot scale, and finally on a demonstration plant basis (Activox® Pha
se I plant), operating under continuous operating conditions at the Phoenix mine in Botswana since 2004. A full scale Ac
tivox® Refinery is expected to be commissioned in 2008. 
 
Operating Results 
 
LionOre had net earnings of $62.0 million, or $0.28 per diluted share, on net
mineral sales of $187.5 million for the three months ended June 30, 2006,
compared to net earnings of $21.3 million, or $0.10 per diluted share, on net
mineral sales of $95.8 million in the same quarter of the prior year.   Second
quarter earnings were boosted by the current high prices for nickel and
by-product metals. Revenues include $30.5 million recorded in the current
period related to the settlement of previous quarters' metal sales. This
compares with revenues of $6.4 million in the same period of the previous year
related to the settlement of previous quarters' sales.  Nickel prices averaged
$9.09/lb for the quarter (Q2-2005:  $6.96/lb).  
 
Operating earnings were $85.2 million for the quarter ended June 30, 2006,
compared to $19.6 million in the second quarter of the prior year.  
 
The increase in net mineral sales for the quarter is attributable to the higher
prices and the positive effects of final settlements of previous quarters'
sales, but also reflects increased production and sales volume over the same
quarter of the previous year. 6,625 tonnes of payable nickel were sold during
the quarter, compared to 5,585 tonnes in the second quarter of 2005. While net
mineral sales increased by 96%, operating earnings increased by 334% and net
earnings increased by 190% over the second quarter of the prior year.   
 
For the six months ended June 30, 2006 LionOre earned net income of $75.2
million on net mineral sales of $314.2 million, up 70% over net income of $44.3
million on net mineral sales of $201.4 million for the same period in the prior
year. Operating earnings for the six months ended June 30, 2006, were $120.7
million, compared to $53.7 million for the six months ended June 30, 2005. 
 
Cash and cash equivalents totaled $206.0 million at June 30, 2006 (December 31,
2005: $229.5 million, including $102.2 million of restricted cash).  This
included $144.8 million held at the corporate level, $16.6 million held in
Australia and $44.6 million held in Africa (December 31, 2005:  $40.0 million
at corporate, $123.3 million, including  $94.7 million of restricted cash, in
Australia and $66.2 million, including $7.5 million of restricted cash, in
Africa). 
 
A summary of the production for the Company during the quarter and six months
ended June 30, 2006 and 2005 is as follows: 
Production               YTD                                Q2                                Q1                 
                                                                                                            
Summary             June 30, 2006                          2006                              2006                


                                                                                                                
            Tonnes                           Tonnes                             Tonnes                          
           Payable                          Payable                            Payable                          


          Ni    Tonnes Payable             Ni    Tonnes Payable               Ni    Tonnes Payable          
  Nickel   produced  Ni produced            produced  Ni produced              produced  Ni produced            
Operations 1 (100%) (attributable) Cost/lb  1 (100%) (attributable)  Cost/lb   1 (100%) (attributable)  Cost/lb  


                                                                                                                
                                                                                                                


                                                                                                            
LJO           4,122          4,122 $   3.55    2,227          2,227  $    3.46    1,895          1,895  $   3.65 
                                                                                                            
BSNO          3,164          2,531 $   5.63    1,351          1,081  $    6.12    1,813          1,450 $    5.27 
                                                                                                            
Tati          5,224          4,440 $   3.81    2,877          2,445  $    3.96    2,347          1,995 $    3.61 
                                                                                                            
Nkomati       1,230          1,230 $   0.23      561            561  $    0.04      669            669 $    0.39 


                                                                                                                
             13,740         12,323 $   3.83    7,016          6,314  $    3.90    6,724          6,009 $    3.75


                                                                                                            
1      100% of production except for the Nkomati mine which is shown at 50% (LionOre's share of the Nkomati mine) 
Production                  YTD                                  Q2                                 Q1                 
                                                                                                                  
Summary                June 30, 2005                            2005                               2005                


                                                                                                                      
            Tonnes                                Tonnes                             Tonnes                           
           Payable                               Payable                            Payable                           


          Ni    Tonnes Payable                  Ni    Tonnes Payable               Ni    Tonnes Payable           
  Nickel   produced  Ni produced                 produced  Ni produced              produced  Ni produced             
Operations 1 (100%) (attributable)    Cost/lb    1 (100%) (attributable)  Cost/lb   1 (100%) (attributable)  Cost/lb   


                                                                                                                      
                                                                                                                      


                                                                                                                  
LJO           5,983          5,983     $    2.48    2,953          2,953  $    2.51    3,030          3,030  $    2.45 
                                                                                                                  
BSNO          3,115          2,492     $    5.07    1,493          1,194  $    5.86    1,622          1,298  $    4.35 
                                                                                                                  
Tati          3,752          3,189     $    4.22    1,913          1,626  $    4.45    1,839          1,563  $    3.99 
                                                                                                                  
Nkomati         389            389     $    1.46      389            389  $    1.46        -              -          - 


                                                                                                                      
             13,239         12,053     $    3.55    6,748          6,162  $    3.74    6,491          5,891   $   3.36


                                                                                                                  
1      100% of production except for the Nkomati mine which is shown at 50% (LionOre's share of the Nkomati mine) 
 
The Company expects to achieve its previously stated total annual total
production target for 2006 of 34,100 tonnes of payable nickel. 
 
In the Australian nickel operations, production was lower and costs were higher
at the Lake Johnston Operations (LJO) for the quarter and six months ended June
30, 2006 than in the same periods of the previous year. The lower production
was due to the introduction of lower grade ore from the newly developed Maggie
Hays mine into the processing facilities during the quarter and six months
ended June 30, 2006.  A similar production profile change is taking place at
the Black Swan Nickel Operations (BSNO), where more ore is being mined and
processed from the lower grade open pit as the development of the pit
continues. Both operations are currently undergoing plant upgrades to
accommodate higher volumes of lower grade ore and the production will increase
once these upgrades are commissioned. A lower cost per pound is expected to
result from the higher production at the upgraded facilities. 
 
In the African nickel operations, Nkomati experienced a low cash cost of $0.04/
lb for the quarter, as a result of the significant by-product credits received
by the mine. The cash costs at the Phoenix nickel mine in Botswana for the
quarter were $3.96/lb, compared to $4.45/lb in the second quarter of 2005, as a
result of the significant improvement in production compared to the three
months ended June 30, 2005.  In the second quarter of 2005, the mine
experienced lower production and higher costs related to the revisions in the
mine plan after operations were adversely affected by heavy rainfalls in the
fourth quarter of 2004 and the first quarter of 2005. The positive impacts
resulting from the mining and processing improvements initiated as a
consequence of the production problems in the first half of 2005 are now
beginning to be realized. 
Gross nickel sales, at $158.8 million, amounted to 71% of the total gross mineral sales for the second quarter of 2006 (
Q2-2005: $87.6 million, 75%). Gold sales of $28.2 million were 13% of mineral sales (Q2-2005: $20.3 million, 17%), coppe
r sales of $ 23.4 million were 10% (Q2-2005: $6.0 million, 5%) and other metals sales of $13.9 million were 6% (Q2-2005:
 $3.3 million, 3%).  The increase in commodity prices, particularly copper which averaged $3.27/lb for the quarter, more
 than double the average of $1.54/lb in the second quarter of 2005, has led to the increase in by-product metal sales. 
For the six month period ended June 30, 2006, gross nickel sales of $275.4 million amounted to 73% of the total gross mi
neral sales (2005:  $195.8 million, 79%). Gold sales of $44.4 million were 12% of gross mineral sales (2005: $34.7 milli
on, 14%), copper sales of $36.9 million were 10% (2005: $10.4 million, 4%) and other metals sales of $22.1 million were 
5% (2005:  $6.8 million, 3%). 
The Company receives final price determination on its sales of nickel and copper based on prices prevailing up to betwee
n four and six months subsequent to the actual shipment. Consequently, the final price for sales which have been made du
ring recent past quarters is not known with certainty at the end of the period. When final settlement is made, a positiv
e or negative adjustment is recorded in income to reflect the difference in the price initially recorded and the price a
ctually realized. The total amount of metal sales receivables is evaluated at the end of each reporting period to ensure
 that the prices of metals in receivables are not in excess of the current prevailing market prices. 
Operational Review - Australia 
 
Australia Nickel recorded net earnings of $24.3 million from $65.9 million of net mineral sales for the quarter ended Ju
ne 30, 2006 (Q2-2005: earnings of $13.1 million from $46.7 million of net mineral sales).  Australia Gold recorded a pro
fit of $2.7 million from $27.9 million of net gold sales for the quarter (Q2-2005: loss on earnings of $3.8 million from
 $20.1 million of net gold sales).   Included in the profit is a loss of $0.4 million (Q2-2005: $1.0 million) resulting 
from the revaluation of the Company's gold forward contracts and current period deliveries into forward contracts. 
The Company has terminated its review of strategic options for the Thunderbox
Gold Mine and has determined that it will operate the mine to the end of its
mine life, expected in mid-2007.  The Company will also commit limited
resources to seek an extension of the mine life. 
 
AUSTRALIANICKEL - LAKE JOHNSTON OPERATIONS 
 
The Lake Johnston Operations are located 540kilometreseast of Perth in the Lake
Johnston greenstone belt of Western Australia and hosts the Emily Ann and
Maggie Hays underground nickel mines.  The Maggie Hays mine is located 3
kilometers south of the processing plant at Emily Ann and will enter commercial
production in 2006.  The operations utilize an on-site conventional nickel
sulphide concentrate plant having a nominal annual throughput of 500,000 tonnes
of ore per year which is in the process of being upgraded to 1.5 million tonnes
per annum ("Mtpa") as part of the Maggie Hays Upgrade Project. 
 
The Lake Johnston operations produced 17,186 tonnes of concentrate during the
second quarter of 2006 (Q2-2005: 22,387 tonnes) to yield 2,227 tonnes of
payable nickel (Q2-2005: 2,953 tonnes).  
 
A summary of the production from the Lake Johnston Operations is as follows: 


                                                             YTD        Q2       Q1
                     Production                                                  
                                                          2006      2006     2006


                                                                             
Ore mined (tonnes                                      246,133   133,537  112,596 
                                                                             
Grade (% Ni)                                         2.09      2.12          2.06 
                                                                             
Ore treated (tonnes)                                 250,598   128,852    121,746 
                                                                             
Feed grade (% Ni)                                    2.07      2.17          1.97 
                                                                             
Plant recovery (%)                                        83.9      85.6     82.0 
                                                                             
Recovered nickel (tonnes)                                4,360     2,395    1,965 
                                                                             
Concentrate produced (tonnes)                           31,401    17,186   14,215 
                                                                             
Payable Ni produced (tonnes)                             4,122     2,227    1,895 
                                                                             
Concentrate sold (tonnes)                               29,537    15,306   14,231 
                                                                             
Payable Ni (tonnes) sold                                 3,861     1,933    1,928 
                                                                             
Concentrate in inventory (tonnes)                        4,946     4,946    2,719 
                                                                             
Payable Ni in inventory (tonnes)                           615       615      356 
                                                                             
Cash cost per pound of payable Ni produced(1)            $3.55     $3.46    $3.65 
                                                                              
Cash cost per pound of nickel produced is a non-GAAP measure.  See "Cash cost
per pound of nickel produced and per ounce of gold produced" on pages 21-22 of
this Management's Discussion and Analysis 


     
                                      Total         Q4       Q3      Q2         Q1
             Production                                                           
                                         2005     2005     2005    2005       2005


                                                                              
Ore mined (tonnes)                    481,498  139,406  124,792 111,807    105,493 
                                                                              
Grade (% Ni)                             2.84     2.19     2.96    3.10       3.34 
                                                                              
Ore treated (tonnes)                  480,487  124,729  127,434 118,801    109,523 
                                                                              
Feed grade (% Ni)                        2.89     2.28     2.94    3.01       3.39 
                                                                              
Plant recovery (%)                       87.8     85.4     88.6    88.8       87.8 
                                                                              
Recovered nickel (tonnes)              12,182    2,425    3,323   3,175      3,259 
                                                                              
Concentrate produced (tonnes)          85,357   16,621   22,951  22,387     23,398 
                                                                              
Payable Ni produced (tonnes)           11,329    2,255    3,091   2,953      3,030 
                                                                              
Concentrate sold (tonnes)              83,971   34,666   14,539  19,332     15,434 
                                                                              
Payable Ni (tonnes) sold               11,000    4,647    1,975   2,382      1,996 
                                                                              
Concentrate in inventory (tonnes)       2,662    2,662   22,584  13,180      9,868 
                                                                              
Payable Ni in inventory (tonnes)          348      348    3,012   1,717      1,285 
                                                                              
Cash cost per pound of payable Ni        $       $        $        $       $      
produced(1)                              2.57     2.84     2.58    2.51       2.45 
                                                                               
Cash cost per pound of nickel produced is a non-GAAP measure.  See "Cash cost
per pound of nickel produced and per ounce of gold produced" on pages 21-22 of
this Management's Discussion and Analysis 
 
Mining and Processing 
 
Payable nickel produced in the three months ended June 30, 2006 of 2,227 tonnes
was 25% lower than the 2,953 tonnes of payable nickel produced in the same
period of the previous year.   The feed grade of the ore treated through the
plant during the period was 28% lower than the grade in the second quarter of
2005 due to a large proportion of Maggie Hays disseminated ore being treated.
Maggie Hays disseminated ore, with a feed grade of 1.60 represented 50% of the
ore feed for the quarter. In addition, lower grade material was treated from
the Emily Ann mine (Q2-2006: 2.69% compared to Q2-2005: 3.01%).  Recovery rates
are lower due to the lower grades of ore being processed.  
 
Ore grade is expected to continue to be lower than prior year due to increased
proportion of ore being mined from Maggie Hays.   Recoveries are also expected
to remain lower than last year as a result of the lower grade ore. 
 
The Lake Johnston plant is on schedule to be upgraded from 500,000 to 1,500,000
tonnes per annum in the third quarter of 2006 as part of the Maggie Hays
Upgrade Project. 
 
Mineral Sales and Operating Costs 
 
Gross nickel sales for the Lake Johnston Operations for 2006 and 2005 were
determined as follows: 
 
($000s except where noted)                      YTD           Q2             Q1 


                                                                               
                                               2006         2006           2006


                                                                           
Nickel sold (tonnes)                          3,861        1,933          1,928 
                                                                           
Revenue recognized (1)                      $64,648     $ 36,833      $  27,815 
                                                                           
Sales adjustment (2)                         19,515        9,781          9,734 
                                                                           
Other adjustments (3)                           649        (299)            948 
                                                                           
Total Lake Johnston                         $84,812      $46,315        $38,497 


                                                                               
     


($000s except where           Total         Q4         Q3        Q2          Q1
noted)                                                                          
                           2005       2005       2005       2005       2005 
                                                                           
Nickel sold (tonnes)         11,000      4,647      1,975      2,382      1,996 
                                                                           
Revenue recognized (1)   $  151,620       $          $    $   35,513 $   30,279 
                                    59,717     26,111                       
                                                                           
Sales adjustment (2)          3,948      (402)      (844)      2,710      2,484 
                                                                           
Other adjustments (3)           562     -           1,042      (801)        321 
                                                                           
Total Lake Johnston             $         $          $    $   37,422 $   33,084 
                        156,130     59,315     26,309                       
                                                                            
Recognized at the price on shipment date. 
For past quarters' sales that were recognized in income at a lower (higher)
price than the final settlement price. 
When final settlement takes place the amount of payable nickel may be slightly
different from the amount that was expected at the time of shipment. 
 
Sales of Lake Johnston concentrate production are recorded when Inco Limited
("Inco") takes physical delivery on board its ship at the Western Australian
port of Esperance. Production is stockpiled until the periodic shipments occur,
which can lead to an uneven pattern of revenues being recognized. 
 
Gross nickel sales were $46.3 million (Q2-2005: $37.4 million) in the second
quarter of 2006 with an average recorded price on current period sales of $8.64
/lb (Q2-2005: $7.12/lb).    If nickel prices remain at current high levels
positive adjustments would result in future periods when these sales are
finalized. 
 
The total nickel concentrate stockpile at quarter end stood at 4,946 dry tonnes
(or 615 tonnes of payable nickel) representing an inherent after-tax profit of
$3.4 million at the nickel price and exchange rate that was in effect at the
end of the quarter. 
 
The cash cost of production at the Lake Johnston Operations was $3.46/lb for
the quarter ended June 30, 2006 (Q2-2005: $2.51/lb).  The higher cash cost in
comparison to the same period of 2005 was due to lower grade material being
mined and processed through the plant, resulting in less payable nickel being
recovered despite the tonnes treated being higher than the previous year. 
 
Depreciation and amortization of $4.4 million (Q2-2005: $5.6 million) is
attributable to the Lake Johnston Operations for the quarter. This charge
reflects the depreciation and amortization of the Company's producing mining
assets in the region, based on the units of production calculation. The Company
commenced the amortization of the Maggie Hays mineral property during the first
quarter of 2006. 
 
Maggie Hays Upgrade Project 
 
On the 18th January, 2006 the Company announced board approval for the Maggie
Hays Upgrade Project ("MHU Project"), a A$91.4 million expansion project which
will increase production by approximately 20% to over 14,000 tonnes per annum
payable nickel by the end of 2006. The total board preproduction capital of
A$91.4 million represents A$14.6 million for mine development; A$7.4 million
for mine equipment; A$7.9 million for shared infrastructure; and $61.5M for the
plant upgrade. 
 
Development of the lake Johnston Plant continued during the quarter with total
commitments now in excess of A$50 million.  Civil works are now complete and
the crushing plant was successfully commissioned during the quarter. 
 
The majority of equipment and materials procurement is now complete and
construction is progressing well.  Installation of the tailings thickener, ball
mill shells and lubrication system and power station buildings is now complete
while off site assembly of the power station switchgear has now commenced. 
Some delays in steel supply for pipe racks and reworks have occurred but this
is not expected to impact the schedule. 
 
Total amount spent during the quarter was A$16.5 million ($12.3 million). 
 
The plant upgrade continues to remain on schedule for completion in the third
quarter ramping up to full production in the fourth quarter and is still
forecast to remain within the board approved budget of A$61.5M.   Key risks; 
 
Power Supply - Delivery of 11kV Alternators delayed, and 
Supply & cost of labour in the current market. 
Development of the underground continued during the quarter, with the decline
now located at the 938m RL (the bottom extraction level is currently planned to
be at the 900m RL).  Both the 1075m and 1050m levels have been developed
through to the extent of the ore and grade control drilling is currently being
completed.  The SLC (Sub-Level Cave) will commence on these levels during the
early part of the third quarter.  Development of the 1025, 1000 and 975m levels
is progressing well, with massive sulphides being encountered in the eastern
(footwall) headings.  Development is on schedule to provide feed for the
upgraded mill upon commissioning. 
 
AUSTRALIANICKEL - BLACK SWAN OPERATIONS (LIONORE: 80%) 
 
The Black Swan Operations are located 53 kilometres northeast of the city of
Kalgoorlie-Boulder, which is 600 kilometres east of Perth, Western Australia.
The operations consist of Silver Swan, a small high grade nickel sulphide
underground mine, and Black Swan, a disseminated nickel deposit mined by open
pit.  The operations utilize an on-site conventional nickel sulphide flotation
plant having a capacity of 600,000 tpato produce nickel concentrate grading
18-20% nickel.  This plant is being upgraded to a capacity of 2.15 mtpa as part
of the BSD2 project. Concentrate produced at the Black Swan Operations is
transported by road to Kalgoorlie-Boulder and then by rail to the southern
coastal port of Esperance. The concentrate is then shipped to OMG Kokkola
Chemicals Holdings BV (OMG), part of the USA-based OM Group, in Finland. OMG is
the owner of the remaining 20% interest in the project.  The Company
consolidates 100% of the Black Swan Operations. 
The Black Swan Operations produced 8,686 tonnes of concentrate during the
second quarter of 2006  (Q2-2005: 9,091  tonnes) to yield 1,351 tonnes of
payable nickel (Q2-2005: 1,493 tonnes).  A summary of the production from the
Black Swan Operations is as follows: 


     
                                                           YTD        Q2       Q1
           (100% basis)                                                          
                                                          2006      2006     2006


                                                                             
Ore mined (tonnes)                                     532,630   333,205  199,425 
                                                                             
Grade (% Ni)                                         1.05      0.89          1.32 
                                                                             
Ore treated (tonnes)                                 280,979   149,294    131,685 
                                                                             
Feed grade (% Ni)                                    1.55      1.31          1.83 
                                                                             
Plant recovery (%)                                        79.2      75.6     82.1 
                                                                             
Recovered nickel (tonnes)                                3,449     1,476    1,973 
                                                                             
Concentrate produced (tonnes)                           20,081     8,686   11,395 
                                                                             
Payable Ni produced (tonnes)                             3,164     1,351    1,813 
                                                                             
Concentrate sold (dry tonnes)                           23,369     9,471   13,898 
                                                                             
Payable Ni (tonnes) sold                                 3,801     1,500    2,301 
                                                                             
Concentrate in inventory (tonnes)                        6,514     6,514    7,301 
                                                                             
Payable nickel in inventory (tonnes)                     1,002     1,002    1,151 
                                                                             
Cash cost per pound of payable Ni produced(1)            $5.63     $6.12    $5.27 
                                                                              
Cash cost per pound of nickel produced is a non-GAAP measure.  See "Cash cost
per pound of nickel produced and per ounce of gold produced" on pages 21-22 of
this Management's Discussion and Analysis 


     
                                      Total    Q4        Q3             Q2     Q1   
           (100% basis)                                                             
                                        2005      2005      2005      2005      2005


                                                                                
Ore mined (tonnes)                   504,399   133,305   142,643   143,211    85,240 
                                                                                
Grade (% Ni)                            2.00      2.59      1.83      1.32      2.51 
                                                                                
Ore treated (tonnes)                 503,670   146,395   125,024   127,886   104,365 
                                                                                
Feed grade (% Ni)                       2.00      2.38      1.97      1.59      2.00 
                                                                                
Plant recovery (%)                      82.7      86.2      80.6      77.6      84.5 
                                                                                
Recovered nickel (tonnes)              8,402     3,011     2,016     1,617     1,758 
                                                                                
Concentrate produced (tonnes)         47,601    16,622    12,076     9,091     9,812 
                                                                                
Payable Ni produced (tonnes)           7,744     2,784     1,845     1,493     1,622 
                                                                                
Concentrate sold (dry tonnes)         53,644    21,479     8,654     7,384    16,127 
                                                                                
Payable Ni (tonnes) sold               7,510     2,153     1,393     1,206     2,758 
                                                                                
Concentrate in inventory (tonnes)      2,445     2,445     7,302     3,880     2,173 
                                                                                
Payable nickel in inventory              388       388     1,094       583       347
(tonnes)                                                                             
                                                                                
Cash cost per pound of payable Ni      $        $         $         $         $     
produced(1)                             4.41      3.70      4.36      5.86      4.35 
                                                                                 
Cash cost per pound of nickel produced is a non-GAAP measure.  See "Cash cost
per pound of nickel produced and per ounce of gold produced" on pages 21-22 of
this Management's Discussion and Analysis 
 
Mining and Processing 
 
The total ore mined in the second quarter of 2006 of 333,205 tonnes was more
than double the 143,211 tonnes of ore mined in the second quarter of 2005.
Mining activities in the second quarter of 2005 were adversely affected by the
performance of the contract mining company who was in bankruptcy protection at
that time. The current quarter ore mined comprised: 300,909 tonnes at 0.58%
nickel from the Black Swan open pit (Q2-2005: 120,724 tonnes at 0.82% Ni); and
32,296 at 3.84% from the Silver Swan underground mine (Q2-2005: 22,487 tonnes
at 3.96% Ni). The ore grade in the open pit was lower due to mining at the top
of the mineralized zone in the section of the pit which is weathered material
(BSD2) and of a lower grade than the fresher material mined in the same period
of 2005 (BSD1). 
 
Ore mined and treated grade is expected to continue to be lower than prior
periods as the proportion of ore mined from the Silver Swan underground mine
continues to decrease in proportion to the lower grade open pit ore. 
Accordingly, recoveries will also continue to be lower than prior periods. 
 
The amount of ore treated during the three months ended June 30, 2006 was 16.7%
higher than the amount of ore treated in the second quarter of 2005, resulting
in higher payable nickel production in the quarter despite lower grades treated
and a lower recovery rate than in the second quarter of 2005. 
 
Mineral Sales and Operating Costs 
 
Gross nickel sales for the Black Swan Operations were determined as follows: 
 
(000's                            YTD                       Q2                       Q1 
except where                      2006                     2006                     2006
noted)                                                                                   


                                                                                        
                                                                                        


                                                                                    
Nickel sold                      3,801                    1,500                    2,301
(tonnes)                                                                                 
                                                                                    
Revenue                        $59,053                  $24,895                  $34,158
recognized                                                                              
(1)                                                                                      
                                                                                    
Sales                            9,995                    7,286                    2,709
adjustment                                                                              
(2)                                                                                      
                                                                                    
Other                            (795)                    (795)                        -
Adjustments                                                                             
(3)                                                                                      
                                                                                    
Total Black                    $68,253                  $31,386                  $36,867
Swan                                                                                     
                                                                                     
 
(000's except      Total         Q4                  Q3           Q2           Q1       
where noted)                                        2005                           
                2005       2005                              2005         2005 
                                                                              
Nickel sold        7,510      2,153                1,393        1,206        2,758
(tonnes)                                                                           
                                                                              
Revenue             $          $             $    18,372 $     17,870     $       
recognized (1)   107,726     29,276                                         42,208 
                                                                              
Sales adjustment     426    (1,834)              (1,875)        3,195          940
(2)                                                                                
                                                                              
Other            (2,192)    (1,662)                (530)            -            -
Adjustments  (3)                                                                   
                                                                              
Total Black Swan    $    $25,780             $    15,967 $     21,065     $        
             105,960                                                    43,148 
                                                                               
Recognized at the price on shipment date. 
For past quarters' sales that were initially recognized in income at a lower
(higher) price than the final settlement price and adjustments to previous
quarter's unfixed sales where the receivable value exceeded market value at the
end of the period. 
When final settlement takes place the amount of payable nickel may be slightly
different from the amount that was expected at the time of shipment. 
 
Sales of Black Swan concentrate production are recorded when concentrates are
delivered to OMG, or when provisional payment is received, at which time title
and risk are passed to OMG. Production is stockpiled until the periodic
shipments occur, which can lead to an uneven pattern of revenues being
recognized. Provisional payment is normally received shortly after each
shipment sails from the port of Esperance.  
 
Gross nickel sales were $31.4 million (Q2-2005: $21.1 million) in the second
quarter of 2006 with an average recorded price of $7.53/lb (Q2-2005: $6.72/lb)
on current period shipments. If nickel prices remain at current high levels
positive adjustments would result in future periods when these sales are
finalized. 
 
The total nickel concentrate stockpile at quarter end stood at 6,514 dry tonnes
(or 1,002 tonnes of payable nickel) representing an inherent after-tax profit
of $3.3 million at the nickel price and exchange rate that was in effect at the
end of the quarter. 
 
The cash cost of production at the Black Swan Operations was $6.12/lb (Q2-2005:
$5.86/lb) for the quarter ended June 30, 2006. The positive impact of better
mining productivities was offset by the higher unit treatment costs associated
with processing lower grade ore.  Third party treatment and refining costs,
which are a significant component of the cash cost, increase as the nickel
price increases due to price participation. 
Depreciation and amortization of $4.0 million (Q2-2005: $3.5 million) is
attributable to the Black Swan Operations for the quarter.  This charge
reflects the depreciation and amortization of the Company's producing mining
assets in the region, based on a units of production calculation. 
 
Black Swan Disseminated 2 Project 
 
On 6 October 2005 the Company announced the approval of the Black Swan
Disseminated 2 Project ("BSD2 Project"), a A$68.8 million expansion project
which is intended to increase production and mineral reserves and reduce cash
operating costs at the operations. The total board approved preproduction
capital of A$68.8 million represents A$12.9 million for pit expansion, and
A$55.9 million for the plant upgrade. 
 
Development at Black Swan plant continued during the quarter with total
commitments now in excess of A$50 million.   Site civil works have been
completed & construction is progressing.  Structural steelwork, piping,
mechanical erection & equipment installation is continuing.  SAG & Ball Mill
refurbishment is complete & all components have been delivered to site. 
 
Total spent during the quarter was A$10.2 million ($7.6 million). 
 
The plant upgrade continues to remain on schedule for completion during the
third quarter of 2006, with ramp up to full production by the fourth quarter of
2006 and is forecast to remain within the board approved budget of A$55.9
million.  
 
AUSTRALIAGOLD - THUNDERBOX (100%) 
 
The Thunderbox gold mine is located in the Northeastern Goldfields of Western
Australia. It consists of an open pit mine that utilizes an on-site treatment
facility incorporating single stage crushing, a SAG mill and a ball mill
followed by conventional CIL leaching and elution circuits. The treatment
facility has a throughput in excess of 2.3 Mtpa. 
 
The Thunderbox gold mine produced 38,403 ounces of gold during the second
quarter of 2006 (Q2-2005: 43,724 ounces).   A summary of the production from
the Thunderbox gold mine is as follows: 


     
                                              YTD      Q2      Q1
                                                                 
                                             2006    2006    2006


                                                             
Ore mined  (tonnes)                     1,155,092 549,398 605,694 
                                                             
Grade (grams per tonne)                      2.22    2.35    2.11 
                                                             
Ore treated  (tonnes)                   1,129,615 559,768 569,847 
                                                             
Feed grade (grams per tonne)                 2.13    2.22    2.03 
                                                             
Plant recovery (%)                           96.0    96.0    95.0 
                                                             
Gold produced (ounces)                     73,715  38,403  35,312 
                                                             
Gold sold (ounces)                         76,265  44,848  31,417 
                                                             
Cash cost per ounce of gold produced(1)      $388    $394    $381 
                                                              
Cash cost per pound of nickel produced is a non-GAAP measure.  See "Cash cost
per pound of nickel produced and per ounce of gold produced" on pages 21-22 of
this Management's Discussion and Analysis 


     
                                        Total          Q4      Q3      Q2      Q1
                                             2005                                
                                                     2005    2005    2005    2005


                                                                             
Ore mined  (tonnes)                     1,937,513 573,897 239,566 549,859 574,191 
                                                                             
Grade (grams per tonne)                      2.15    1.82    2.08    2.45    2.27 
                                                                             
Ore treated  (tonnes)                   2,176,627 481,057 568,650 582,265 544,655 
                                                                             
Feed grade (grams per tonne)                 2.21    1.96    1.84    2.49    2.51 
                                                                             
Plant recovery (%)                           93.8    92.7    93.7    93.7    95.0 
                                                                             
Gold produced (ounces)                    145,413  28,008  31,869  43,724  41,812 
                                                                             
Gold sold (ounces)                        143,654  24,652  36,793  47,791  34,418 
                                                                             
Cash cost per ounce of gold produced(1)   $   339 $   486 $   359 $   282 $   284 
                                                                              
Cash cost per pound of nickel produced is a non-GAAP measure.  See "Cash cost
per pound of nickel produced and per ounce of gold produced" on pages 21-22 of
this Management's Discussion and Analysis 


     
    Mining and Processing


 
Ore mined for the second quarter was 549,398 tonnes. This is in line with
expectations and is comparable to the second quarter of the previous year
(Q2-2005: 549,859). Production is expected to be maintained at this level for
the remainder of this year. 
 
The gold produced during the quarter of 38,403 ounces was less than the 43,724
ounces produced during the second quarter of the previous year due to an 11%
lower grade of ore being processed. 
 
Mineral Sales and Operating Costs 
 
Gold sales were determined as follows: 


     
                                             YTD               Q2               Q1
                                                                                  
                                            2006             2006             2006


                                                                              
Gold sold (ounces)                        76,265           44,848           31,417 
                                                                              
Gross Revenues                         $  44,062        $  27,865        $  16,197 


                                                                                  
     
                                 Total          Q4          Q3          Q2          Q1
                                                                                  
                              2005        2005        2005        2005        2005


                                                                              
Gold sold (ounces)         143,654      24,652      36,793      47,791      34,418 
                                                                              
Gross Revenues           $  61,634   $  11,673   $  15,561   $  20,126   $  14,274 
                                                                               
 
Gross gold sales were $27.9 million in the second quarter of 2006, compared to
$20.1 million in the same period of 2005. The average realized price for the
quarter was $621/oz compared to $429/oz in the same period of 2005. Of the
quarter's sales, 36% or 16,063 ounces were delivered into gold forward
contracts during the quarter. Of remaining reserves, 48% is expected to be
delivered into gold forward contracts. 
 
The gross revenue represents the spot prices for gold at the time of delivery.
The change in the loss position of the gold forward contracts and the realized
gains and losses experienced as gold ounces are delivered into the forward
contracts are recorded in income as non-operating items as required to comply
with CICA Accounting Guideline 13-Hedging Relationships, which was adopted by
the Company in 2004. 
 
The cash cost per ounce at Thunderbox of $394/oz for the quarter ended June 30,
2006 was greater than the cash cost of $282/oz in the second quarter of the
previous year, but consistent with the cash cost of $381/oz in the first
quarter of 2006.  The higher cash cost per ounce was due to the impact of lower
gold grades and higher mining costs as a result of mining and processing
predominantly primary ore. 
                            
Depreciation and amortization of $5.7 million (Q2-2005: $7.2 million) was
attributable to the Thunderbox mine for the quarter. This charge reflects the
depreciation and amortization of the Thunderbox 's producing mining assets,
 based on a units of production calculation. 
 
AUSTRALIANICKEL - WATERLOO MINE PROJECT (LionOre 100%). 
 
The Waterloo Nickel Mine is located 35 kilometers south of Leinster in the
Northeastern Goldfields region of Western Australia and five kilometers
north-west of Thunderbox. It consists of a massive and matrix nickel sulphide
orebody between 100 - 400 metres from surface which is intended to be mined
using a variety of mining methods ranging from airleg mining to open stoping. 
 
Development rates at Waterloo continued above expectations and at the end of
the quarter, a total of 2,491m has been completed. The first ore intersection
is expected during the third quarter. 
 
Work is continuing on developing various mine design options that will enable
optimum mining efficiencies for the various geological conditions that are
likely to be encountered.  The final decision will depend on the conditions
encountered and it is likely that more than one mining method will be
employed.  Plans are also being developed to commence drilling of the Amorac
deposit from an underground position that will be developed for this purpose. 
 
Establishment of the surface infrastructure neared completion at the end of the
quarter.  


     
    Operational Review - AFRICA NICKEL


 
Africa Nickel recorded net earnings of $43.0 million from $93.8 million of net
mineral sales for the quarter ended June 30, 2006 (Q2-2005: earnings of $15.8
million from $29.0 million of net mineral sales).  The earnings for the second
quarter of the current year include a foreign exchange gain of $13.9 million,
while earnings in the second quarter of the previous year include a foreign
exchange gain of $17.7 million.   
 
Gross mineral sales have increased from $37.5 million in the second quarter of
2005 to $116.3 million in the second quarter of 2006.  In the second quarter of
2005, Africa Nickel included the mineral sales from the Nkomati nickel mine for
only the month of June, as the purchase of the Company's 50% interest in the
mine was completed on June 1, 2005. Nkomati contributed gross mineral sales of
$39.1 million in the quarter ended June 30, 2006.  Included in the current
period sales for Tati Nickel are positive sales adjustments on the settlement
of previous period sales in the amount of $12.9 million. This compares to sales
adjustments of $2.4 million in the same period of the previous year.  The
remaining increase is due to increased production and sales volume and
increased commodity prices experienced compared to the same quarter of 2005. 


     
    AFRICA NICKEL - TATI PHOENIX MINE (85%)


 
Tati Nickel operates the Phoenix open pit nickel mine located 35 kilometres
east of Francistown in Botswana. The mine utilizes an on-site conventional
nickel sulphide concentrator having a design capacity of 3.6 million tonnes of
ore producing 12,500 tonnes of payable nickel per year. A Phase I Activox®
refinery is operating on site at Tati Nickel. During the quarter the Company
announced the successful completion of  "Project 5 million" a low capital cost
project to increase the mill throughput from an annualized rate of 3.6 million
tonnes per annum to  5 million tones per annum. 
 
Payable nickel produced in the quarter increased significantly over the
previous quarter to 2,877 tonnes at a cash cost per pound of $ 3.96 (Q2-2005:
1,913 tonnes, $4.45/lb). This brings the cumulative year to date figure to
5,224 tonnes of payable nickel which is in line with forecast. 
 
A summary of Tati Nickel's mine production is as follows: 
 
Production  (100%basis)                          YTD  Q2        2006  Q1        2006 


                                                                                    
                                                2006                                


                                                                                
Ore mined (tonnes)                         2,149,936       1,175,166         974,770 
                                                                                
Grade (% Ni)                                    0.32            0.32            0.35 
                                                                                
Ore treated (tonnes)                       2,233,000       1,154,000       1,079,000 
                                                                                
Grade (% Ni)                                    0.35            0.34            0.37 
                                                                                
Plant recovery (% )                            77.39           73.58            80.1 
                                                                                
Recovered  nickel (tonnes)                     7,094           3,870           3,225 
                                                                                
Concentrate produced (tonnes)                111,047          55,162          55,885 
                                                                                
Concentrate sold (tonnes)                    108,547          54,124          54,423 
                                                                                
Payable nickel produced (tonnes)               5,224           2,877           2,347 
                                                                                
Total payable nickel sold (tonnes)             4,549           2,333           2,216 
                                                                                
Concentrate in inventory (tonnes)              2,547           2,547           1,416 
                                                                                
Selkirk ore in inventory (tonnes)             29,350          29,350           4,000 
                                                                                
Payable nickel in inventory (tonnes)             676             676             131 
                                                                                
Cash cost per pound of Ni produced (1)         $3.81           $3.96         $  3.61 
                                                                                
Copper (tonnes)                                3,692           1,852           1,840 
                                                                                
Platinum (ounces)                              2,452           1,217           1,235 
                                                                                
Palladium (ounces)                            14,273           7,235           7,038 
                                                                                 
(1)            Cash cost per pound of nickel produced is a non-GAAP measure. 
See "Cash cost per pound of nickel produced and per ounce of gold produced" on
pages 21-22  of this Management's Discussion and Analysis 
 
Production  (100%basis)           Total   Q4         Q3          Q2          Q1        


                                              2005        2005        2005        2005
                                   2005                                               


                                                                                  
Ore mined (tonnes)            3,170,441    927,510     760,206     894,309     588,416 
                                                                                  
Grade (% Ni)                       0.37       0.39        0.36        0.35        0.43 
                                                                                  
Ore treated (tonnes)          3,582,000  1,090,000     935,000     845,000     712,000 
                                                                                  
Grade (% Ni)                       0.39       0.39        0.40        0.37        0.42 
                                                                                  
Plant recovery (% )                82.0       81.0        84.0        82.0        82.0 
                                                                                  
Recovered  nickel (tonnes)       11,644      3,491       3,132       2,576       2,445 
                                                                                  
Concentrate produced (tonnes)   235,152     67,206      77,178      48,105      42,663 
                                                                                  
Concentrate sold (tonnes)       231,201     66,959      76,544      45,760      41,938 
                                                                                  
Payable nickel produced           8,581      2,527       2,302       1,913       1,839
(tonnes)                                                                               
                                                                                  
Total payable nickel sold         8,510      2,624       2,249       1,830       1,807
(tonnes)                                                                               
                                                                                  
Concentrate in inventory              -          -       1,116       2,278           -
(tonnes)                                                                               
                                                                                  
Selkirk ore in inventory              -          -           -           -           -
(tonnes)                                                                               
                                                                                  
Payable nickel in inventory           -          -          97          83           -
(tonnes)                                                                               
                                                                                  
Cash cost per pound of Ni       $  3.69    $  3.52     $  2.99     $  4.45     $  3.99
produced (1)                                                                           
                                                                                  
Copper (tonnes)                   6,807      1,926       2,218       1,498       1,165 
                                                                                  
Platinum (ounces)                 5,007      1,266       1,614       1,220         907 
                                                                                  
Palladium (ounces)               27,965      7,486       9,031       6,398       5,050 
                                                                                   
(1)            Cash cost per pound of nickel produced is a non-GAAP measure. 
See "Cash cost per pound of nickel produced and per ounce of gold produced" on
pages 21-22 of this Management's Discussion and Analysis 
 
Mining and Processing 
 
The production profile has considerably improved from the second quarter of
2005 due to major changes made to the Tati mine plan in early 2005. As a result
of two significant rainfall events in December 2004 and January 2005, which
rendered certain areas of the pit inaccessible, the decision was made to
develop the pit to the North and South to allow for five working faces within
the pit at any one time providing flexibility for future operations. 
 
Volumes of material mined from the Phoenix pit were significantly higher than
the first quarter and the same quarter of the prior year. Mined grades in the
quarter at 0.32% were as expected. In the latter part of the quarter grades
showed continued improvement.   These higher volumes and grades were as
predicted in line with a newly introduced dynamic resource modeling process
which is continuously updated by information from the "in pit" RC drilling and
geological mapping programs. Through the use of this facility mine management
is now able to predict more accurately the expected grades that will be mined
in the future. 
 
Mining operations at Tati, during the second quarter, continued to focus on
developing through various cuts in the west and south of the main pit and in
stripping the oxidised overburden from the near north pit. A total of 1,175
million tonnes of ore was mined in the quarter, some 20% higher than the first
quarter of 2006.  In June a new record of 710,000 bcm, equivalent to a
quarterly rate of 2.14  million tonnes, was mined. 
 
In the coming quarter we expect to see a continued improvement in grades
delivered to the plant as a result of the commissioning of the interim Dense
Media Separation (DMS) Plant. The plant has been fully fabricated in South
Africa and has now been delivered to the Phoenix Mine site. The final
commissioning of this plant is expected to occur in August 2006. 
 
To ensure further flexibility in the operational plan and as part of the
strategic plan for Phoenix, the lower grade oxidized overburden is still being
stripped from the near north pit at increased production rates. It is planned
that this pit will be in a position to deliver ore to the concentrator by the
end of the year. 
 
Milling throughput volumes increased by 7% in the period to 1.174 million
tonnes. This performance was achieved despite continuous shutdowns encountered
in the quarter as a result of the commissioning of the "Project 5 Million"
upgrade program. This project has now been successfully commissioned ahead of
the original schedule and under budget by approximately US$ 1 million. Capital
projects to address the bottlenecks in the crushing and ore processing areas
have been commissioned successfully as planned. 
 
Plant recoveries are low, as predicted, as a result of lower feed grades and
higher mill throughputs. Production volumes in the next quarter will remain
high while metal grades will remain low.  By the fourth quarter it is
anticipated that there will be an increase in grades as a result of mining in
higher grade areas of the pit and the introduction of the DMS phase 1 plant.  
 
Pillar extraction program continued in the old, mined out areas of the Selkirk
mine. A total of 29,350 tonnes of massive sulphides were extracted from pillars
in the quarter representing approximately 676  tonnes of contained nickel. This
is the second phase of a process to prepare the operations at Selkirk for
commercial opencast mining operations in the future should the exploration
program currently in progress be successful. 
 
Mineral Sales and Operating Costs 
 
Tati's gross nickel sales were determined as follows: 
($000s except where noted)           YTD        2006          Q2          Q1 


                                                                            
                                                            2006        2006


                                                                        
Nickel sold (tonnes)                           4,549       2,333       2,216 
                                                                        
Revenue recognized (1)                    $   82,231   $  49,303   $  32,928 
                                                                        
Sales adjustment (2)                          14,949      12,865       2,084 
                                                                        
Total nickel sales                         $  97,180   $  62,168   $  35,012 
                                                                         
Recognized at the price on shipment date. 
For past quarters' sales that were recognized in income at a lower/(higher)
price than the final settlement price. 
 
($000s except where        Total Q4        Q3         Q2           Q2       
noted)                                                     2005         2005 


                            2005    2005                                    
                                              2005                          


                                                                        
Nickel sold (tonnes)       8,510   2,624     2,249        1,830        1,807 
                                                                        
Revenue recognized (1)        $        $                                     
                     112,710  25,713  $ 35,854     $ 25,046     $ 26,097 
                                                                        
Sales adjustment (2)       7,242   6,412   (7,510)        2,434        5,906 
                                                                        
Total nickel sales            $        $                                     
                     119,952  32,125  $ 28,344     $ 27,480     $ 32,003 
                                                                         
Recognized at the price on shipment date. 
For past quarters' sales that were initially recognized in income at a lower
(higher) price than the final settlement price. 
 
Tati Nickel does not hedge any of its metal production. The Company's revenue
recognition policy is to record revenue based on metal prices at the date of
shipment. These amounts are adjusted to actual prices at the time of final
settlement.  The final settlement price is arrived at between four and nine
months, respectively, for nickel and precious metals after the month of
delivery of concentrate to coincide with the smelting and refining processes
producing final saleable metals. 
 
During the quarter, Tati had a positive $12.9 million adjustment in respect of
the final settlement of previous quarters' nickel sales.  The average recorded
price on current quarter sales was $9.59/lb. If prices remain at current high
levels a positive adjustment would be expected at the time of final settlement
of these sales, whereas, if prices retreat below $9.59/lb negative adjustments
would result. 
 
Tati Nickel's cash cost for the quarter ended June 30, 2006 was $ 3.96/lb. This
compares to $3.61/lb in the first quarter of the year and $4.45/lb in the
second quarter of 2005. Costs were unusually high in the second quarter of last
year due to the production problems previously discussed under Mining and
Processing.   
 
At Tati, copper sales were $ 18.3 million; PGMs were $ 4.9 million, while other
minerals contributed $2.0 million. 
 
The total concentrate and Selkirk ore on hand at the end of June 2006 contained
approximately 676 tonnes of payable nickel, with an embedded after-tax profit
of $ 8.3 million at the exchange rates and metal prices prevailing at the end
of the period. 
 
Depreciation and amortization of $5.1 million for the quarter ended June 30,
2006 (Q2-05: $4.2 million) is attributable to Tati operations. This charge
represents the depreciation and amortization of the Company's producing mining
assets at the Phoenix mine, based on a units of production calculation. The
current quarter's charge reflects the increased production levels as well as
the investment in capital that has taken place at the Phoenix mine over the
course of the last year.  
 
Activox® Demonstration Plant 
 
The Bankable Feasibility Study is progressing, with the Phase 1 plant used to
confirm critical design parameters generated in 2005. This process evolved
primarily around solid-liquid separation and the recovery of platinum group
metals ("PGMs")via flotation of the Activox® leach residue. 
 
During the quarter, the operations of the phase 1 Activox® plant focussed on
the review of the metallurgical balance of the plant and on plant
availabilities. It was necessary to complete these trials in line with the
feasibility study that was being completed in the quarter. Base metal
accountability targets continue to be achieved and metal deportment confirmed. 
 
Training continues to be an important focus of the Phase 1 plant, with process
operators being successfully rotated though all unit operations and into
supervisory positions.  Significant process and engineering know-how is being
accumulated by the Tati operating team, thereby lowering the risks of
commercial scale production. 
 
AFRICANICKEL - NKOMATI MINE (LIONORE - 50%) 
 
The Nkomati Mine operates the massive sulphide body underground nickel mine
located 300 kilometres east of Johannesburg. The project utilizes an on-site
conventional nickel sulphide concentrator with an average annual throughput of
320,000 tonnes of ore producing 4,500 to 5,000 tonnes of payable nickel per
year. The current massive sulphide ore body (MSB) will be depleted and ramped
down by Q1 2008. On February 17, 2006, the Company announced the approval of
the Interim Expansion Project that will extend the operations at Nkomati at an
estimated cost of $62 million. 50% of the Nkomati Mine is held by African
Rainbow Minerals Limited ("ARM"). 
 
Payable nickel produced in the quarter amounted to 1,122 tonnes (561 tonnes
attributable) at a cash cost per pound of $0.04.  Year to date nickel
production at Nkomati amounts to 2,460 tonnes (1,230 tonnes attributable) which
is slightly ahead of expectations. Nkomati continues to produce at levels
anticipated at the time of acquisition and cash costs are amongst the lowest in
the industry.  The results of operations from Nkomati for June 2005 were
included in LionOre's June 30, 2005 consolidated interim statements as the
transaction to purchase a 50% interest in the Nkomati mine was completed on
June 1, 2005. 
 
A summary of the production of the Nkomati Mine is as follows: 


     
                     100% Basis                          TOTAL        Q2      Q1 
                                                                                 
                                                          2006      2006    2006 


                                                                             
Ore mined (tonnes)                                     195,591   101,798  93,793  
                                                                             
Grade (% Ni)                                              1.88      1.91    1.84  
                                                                             
Ore treated (tonnes)                                   190,078    92,393  97,686  
                                                                             
Feed grade (% Ni)                                         1.81      1.71    1.92  
                                                                             
Plant recovery (%)                                          79        79      79  
                                                                             
Recovered nickel (tonnes)                                2,730     1,242   1,488  
                                                                             
Concentrate produced (tonnes)                           30,683    14,486  16,197  
                                                                             
Concentrate sold (dry tonnes)                           32,096    20,208  11,888  
                                                                             
Payable Ni produced (tonnes)                             2,460     1,122   1,338  
                                                                             
Payable Ni (tonnes) sold                                 2,637     1,718     919  
                                                                             
Concentrate in inventory (tonnes)                        1,908     1,908   7,630  
                                                                             
Payable nickel in inventory (tonnes)                       164       164     761  
                                                                             
Cash cost per pound of payable Ni produced               $0.23     $0.04   $0.39  
                                                                             
Copper (tonnes)                                          1,661     1,164     497  
                                                                             
Platinum (ounces)                                        4,328     2,922   1,406  
                                                                             
Palladium (ounces)                                      13,279     9,021   4,258  
                                                                              
1. Cash cost per pound of payable nickel produced is a non-GAAP measure. See
"Cash costs per pound of nickel produced and per ounce of gold produced" on
pages 21-22 of this Management's Discussion and Analysis. 


     
                                             TOTAL     Q4     Q3      Q2      Q1 
                100% Basis                                                       
                                              2005   2005   2005 2005(2) 2005(2) 


                                                                             
Ore mined (tonnes)                         340,946 83,875 95,031  89,304  72,736  
                                                                             
Grade (% Ni)                                  1.94   1.82   1.81    1.99    2.18  
                                                                             
Ore treated (tonnes)                       335,418 95,449 88,760  83,491  67,718  
                                                                             
Feed grade (% Ni)                             2.08   1.95   1.98    2.13    2.35  
                                                                             
Plant recovery (%)                              80     80     80      81      81  
                                                                             
Recovered nickel (tonnes)                    5,611  1,490  1,397   1,436   1,288  
                                                                             
Concentrate produced (tonnes)               60,242 16,268 15,513  14,741  13,720  
                                                                             
Concentrate sold (dry tonnes)               63,477 19,863 11,597  14,746  17,271  
                                                                             
Produced payable Ni (tonnes)                 4,655  1,348  1,267   1,135     905  
                                                                             
Payable Ni (tonnes) sold                     5,240  1,683    851   1,331   1,375  
                                                                             
Concentrate in inventory (tonnes)            3,321  3,321  6,917   3,014   3,018  
                                                                             
Payable nickel in inventory (tonnes)           343    343    677     262     296  
                                                                             
Cash cost per pound of payable Ni produced   $1.40  $0.86  $1.22   $1.56   $2.23  
                                                                             
Copper (tonnes)                              3,051    961    524     765     801  
                                                                             
Platinum (ounces)                            8,101  2,408  1,469   1,941   2,283  
                                                                             
Palladium (ounces)                          25,241  7,555  4,565   6,125   6,996  
                                                                              
1. Cash cost per pound of payable nickel produced is a non-GAAP measure. See
"Cash costs per pound of nickel produced and per ounce of gold produced" on
pages 21-22 of this Management's Discussion and Analysis. 
2.  2005 Q1 and full Q2 amounts are provided from Nkomati's records for
information purposes only.  The cash cost calculations for Nkomati prior to the
acquisition have not been verified by LionOre. 
 
Metal Production- 100% basis- Month of June only                           June  


                                                                                
                                                                            2005


                                                                            
Payable nickel produced (tonnes)                                             389 
                                                                            
Total payable nickel sold (tonnes)                                           333 
                                                                            
Cash cost per pound of nickel produced(1)                                  $1.46 
                                                                            
Copper (tonnes)                                                              140 
                                                                            
Platinum (ounces)                                                            394 
                                                                            
Palladium (ounces)                                                         1,232 
                                                                             
1. Cash cost per pound of payable nickel produced is a non-GAAP measure. See
"Cash costs per pound of nickel produced and per ounce of gold produced" on
pages 21-22 of this Management's Discussion and Analysis. 


     
    OreMining and Processing


 
A total of 1,122 tonnes (561 tonnes attributable) of payable nickel was
produced in the quarter. This level of production, which is lower than first
quarter production, is due to the slightly lower nickel grades in the quarter.
These lower grades are anticipated and will continue as the current high grade
mining operations from the Massive Sulphide Body (MSB) start to ramp down to
the expected end of the MSB's life anticipated for Q1 2008. The ore treated
still reflects the improvement in levels of production since April 2005
resulting from a deliberate effort by mine management to optimize plant
utilization. Concentrator recoveries are in line with expectations and reflect
the lower plant feed grades. 
 
With the final depletion of the massive sulfide body (MSB), expected early in
2008, operations are targeting the extraction of mineralized stringersassociated with the MSB so that final extraction o
f all economical resources is
completed at the same time. 
 
Mineral Sales and Operating Costs 
 
Nkomati's gross nickel sales (50% basis for each quarter) were determined as
follows: 


     
                              YTD         Q2          Q1 
                                                         
                             2006        2006        2006


                                                     
Nickel sold (tonnes)        2,637         859         919 
                                                     
Revenue recognized (1) $   37,326 $    17,273 $    10,483 
                                                     
Sales adjustment (2)        1,772       1,623      ( 203) 
                                                     
Total nickel sales     $   39,098 $    18,896  $   10,280 
                                                      
(1) Recognized at the price on shipment date.  
(2) For past quarters' sales that were initially recognized in income at a
lower (higher) price than the final settlement price. 


     
                                TOTAL           Q4          Q3          Q2   Q1
                                                                               
                                 2005         2005        2005        2005 2005


                                                                           
Nickel sold (tonnes)            1,434          841         426         167    - 
                                                                           
Revenue recognized (1)    $    18,968  $    10,138  $    6,144  $    2,686    - 
                                                                           
Sales adjustment (2)            (332)          641         153     (1,126)    - 
                                                                           
Total nickel sales        $    18,636  $    10,779  $    6,297  $    1,560    - 
                                                                            
Recognized at the price on shipment date. 
For past quarters' sales that were initially recognized in income at a lower
(higher) price than the final settlement price. 
Sales in the second quarter of 2005 are for the month of June only. The
transaction to purchase a 50% interest in the Nkomati minewas completed on June
1, 2005 and the Company's share of the results of operations are consolidated
from that date. 
 
LionOre South Africa and ARM do not hedge Nkomati's metal production. The
Company's revenue recognition policy is to record revenue based on metal prices
prevailing at the time of delivery. These amounts are adjusted to actual prices
at the time of final settlement.  The final settlement price is arrived at up
to three and up to six months for nickel and precious metals, respectively,
after the month of delivery of concentrate to coincide with the smelting and
refining processes producing final saleable metals. Concentrates are sold to
both Impala Platinum Holdings Limited with smelting at Impala's facility in
South Africa, and Falconbridge Limited with smelting at either BCL Ltd. in
Botswana or Falconbridge's facility in Sudbury, Canada.  
 
Total Nickel sales in the quarter amounted to 1,718 tonnes, well above the
levels produced. This is due to the timing of shipments to Sudbury in Canada. 
 
The total concentrate on hand at the end of June 2006 was 1,908 tonnes,
containing approximately 164 tonnes of payable nickel, with an embedded
after-tax profit of $1.6 million (LionOre's share was 82 tonnes of payable
nickel, with an embedded after-tax profit of $0.8 million) at the exchange
rates and metal prices prevailing at the end of the period. 
 
The Company regularly reviews the metal sales receivables to ensure that the
amount recorded as receivable is not in excess of the receivables value based
on the prevailing price at the end of the reporting period.  Where the value of
metal in receivables based on the period end price is less than the book value
of the receivable, an adjustment is made to reduce the receivables to the
period end value through an adjustment to sales in the current period.   
 
Nkomati's cash cost for the second quarter of 2006 was $0.04/lb and is
reflective of the robust by-product metal prices and a more favorable Rand/US
Dollar exchange rate.   If by-product metal prices remain at current levels,
the cash cost of production for the year will be approximately $0.75/lb as
opposed to the $1.00/lb reported in the May 10, 2006 Management's Discussion
and Analysis. 
 
Interim Expansion Project 
 
On February 17, 2006, the Company announced the approval of the Interim
Expansion Project that will extend the operations at Nkomati at an estimated
cost of R384 million ($62 million).  The Interim Expansion Project anticipates
mining the disseminated Main Mineralized Zone (MMZ) orebody with commissioning
planned for September 2007 and full production, at an annualized rate of 5,000
tonnes of payable nickel, expected by the end of 2007. The objective of the
project is to bridge the gap between the depletion of the MSB and the proposed
Expansion Project, planned for 2010.  The Expansion Project, envisaged to
include an Activox® Refinery is currently under evaluation by the joint venture
partners and the feasibility study is expected to be completed during 2007.
 The project is progressing well and is on schedule. 
 
At the time of acquisition, it was expected that the main Expansion Project
would only focus on the exploitation of the Main Mineralized Zone (MMZ)
disseminated orebody giving a life of 16 years producing 17,000 tpa of payable
Nickel. A re-evaluation of the Nkomati expansion is on-going and both the
Company and ARM are of the view that there is considerable upside on the
original project. 
 
ChromeOreMining 
 
In conjunction with ARM, the Company negotiated the smelting of a bulk sample
of 250,000 tonnes of chrome ore at ARM's joint venture smelter at Machadadorp.
As a result, a trial a new trial pit was opened in the area of the outcrop on
surface of the massive chromite layer. The results of the bulk smelter tests
have indicated that a saleable chrome ore product can be produced economically
at Nkomati. The chrome reserves overlay the nickel mineralized zones and
therefore form part of the pre-strip requirements for the Main Expansion. On
July 7, 2006 the Company announced the approval of a 60,000 tonne per month
chrome ore mining and processing operation at a cost of $2.2 million with full
production levels expected in the first quarter of 2007. 


     
    Cash costs per pound of nickel produced and per ounce of gold produced


 
LionOre provides cash cost information as it is a key performance indicator
required by users of the Company's financial information in order to assess the
Company's profit potential and performance relative to its peers.  The cash
cost figure represents the total of all cash costs directly attributable to the
related mining operations after the deduction of credits in respect of
by-product sales. Cash cost is not a GAAP measure and, although it is
calculated according to accepted industry practice, the Company's disclosed
cash costs may not be directly comparable to other nickel producers. 
By-product credits, in particular copper and PGMs, are an important factor in
determining the cash costs. The cost per pound experienced by the Company will
be positively affected by rising prices for copper and PGMs, and adversely
affected when prices for these metals are falling. 
 
Cash costs can be reconciled to the Company's operating costs as follows: 


         
    Cash cost per pound of nickel x pounds sold:                                 


                                                                           
  Lake Johnston- current production sold ($3.46 x 3,476,686)   $   12.0 million 
                                                                           
  Lake Johnston- inventory sold ($3.65 x 784,845)              2.9 million      
                                                                           
  Black Swan- current production sold ($6.12 x 769,412)        4.7 million      
                                                                           
  Black Swan- inventory sold ($5.27 x 2,537,518)               13.4 million     
                                                                           
  Tati- current production sold ($3.96 x 4,854,573)            19.2 million     
                                                                           
  Tati- inventory sold ($3.61 x 288,805)                       1.0 million      
                                                                           
  Nkomati- current production sold ($0.04 x 1,054,911)         0.1 million      
                                                                           
  Nkomati- inventory sold ($0.39 x 838,858)                    0.3 million      


                                                                               
                                                                               


                                                                           
  Cash cost per ounce of gold x ounces sold:                                    
                                                                           
  Thunderbox- current production sold ($394 x 38,403)          15.1 million     
                                                                           
  Thunderbox- inventory sold ($422 x 6,445)                    2.7 million      


                                                                               
                                                                               


                                                                           
  Total cash costs                                             71.4 million     


                                                                               
                                                                               


                                                                           
  Adjusted by:                                                                  
                                                                           
  By-product revenues                                          37.6 million     
                                                                           
  Other                                                        0.3 million      
                                                                           
  Total operating and third party treatment and refining costs $  109.3 million 


                                                                               
                                                                               


                                                                           
  Represented by:                                                               
                                                                           
  Third party treatment and refining costs                     $36.7 million    
                                                                           
  Operating costs                                              72.6 million     
                                                                           
  Total operating and third party treatment and refining costs $  109.3 million 
                                                                            
 
Review of administrative and other expenses 
 
General and administrative 
 
General and administrative (G&A) expense for the three months ended June 30,
2006, was $5.4 million, compared to $4.0 million for the same quarter of the
prior year.  The G&A has increased over the prior year in the Australian
operations reflecting the restructuring of the non-strategic exploration
properties and gold assets. The G&A expense in Australia during the quarter was
$2.9 million compared to $1.8 million in the same quarter of the previous year. 
 
Foreign exchange 
 
The Company recorded a foreign exchange gain of $13.2 million for the three
months ended June 30, 2006 compared to a foreign exchange gain of $17.8 million
in the second quarter of 2005. The Company holds cash and receivables in US
dollars in both Australia and Botswana, and will experience gains as the US
dollar appreciates against the Botswana pula(BP) and Australian dollar and
losses as the US dollar depreciates against these currencies.  The gain was
experienced in Africa as the South African rand and the Botswana pula declined
in value against the US dollar by 14% and 12%, respectively. 
Gains and losses on gold forward sales contracts 
 
The Company records the unrealized gains and losses on the change in the
mark-to-market position of the Company's gold forward contracts from period to
period. In addition, the Company records realized gains and losses experienced
upon delivery into gold forward contracts during the period. The total change
in the market value of the gold forward contracts and the realized losses on
contracts concluded during the quarter amounted to a loss of $0.4 million for
the current quarter, compared to a loss of $1.0 million in the second quarter
of 2005. 
 
At June 30, 2006, the fair value of the gold forward sales contracts was an
unrealized loss of $19.9 million, which is recorded as a liability in "Other
current liabilities". The gold forward contract position will continue to be
revalued at each period end until the Company has divested of all of the
contracts, with changes in the market value recorded to income.   The gold
forward contracts are scheduled to be delivered into over the period to July
2007. 
 
Interest expense 
 
Interest expense was $6.2 million in the three months ended June 30, 2006
compared to $5.2 million in the three months ended June 30, 2005.  $2.3 million
of the expense in the second quarter of 2006 (Q2- 2005: $2.3 million) is
attributable to the $144.0 million convertible notes due July 2011.  In
Australia, interest charges of $2.8 million were incurred (Q2-2005: $1.8
million), including charges on the corporate facility. The remaining interest
expense was related to African operations.   
 
Current and future income taxes 
 
The Company recorded a current income tax expense of $18.3 million and a future
income tax expense of $8.1 million, for a combined tax expense of $26.3 million
for the three months ended June 30, 2006. This compares to $8.9 million of
current income tax recovery and $18.0 million of future income tax expense
recorded in the second quarter of 2005. The current quarter expense reflects an
effective tax rate of 27.8% for the quarter (Q2-2005:  27.3%). The statutory
tax rate is 25% in Botswana, 30% in Australia and 30% in South Africa. 
 
Non-controlling interests 
 
All of LionOre's principal subsidiaries are wholly-owned with the exception of
the following: 
* Tati Nickel Mining Company: 85%-owned
  * Western Minerals Technology ("WMT"):  80%-owned; and
  * MPI Nickel (a subsidiary of 100%-owned MPI Mines Limited): 80%-owned 
The non-controlling interests charge in the second quarter of 2006 of $6.4
million (Q2-2005: $2.9 million) reflects $5.4 million for the 15% interest in
Tati Nickel held by the Government of the Republic of Botswana (Q2-2005: $2.5
million), and $1.0 million for the 20% interest in MPI Nickel held by OMG
(Q2-2005: $0.4 million).  
 
There is no non-controlling interest recorded for the 20% of WMT that is held
by Aqueous Metallurgy Pty Ltd., as that company is currently in a net loss
position.  The losses, which are not material, are fully recorded by LionOre. 
 
Financial Condition and Cash Reserves 
 
The Company continued to maintain its strong financial position during the
quarter.  LionOre's changes in financial position are described in detail
below.  
 
Cash and cash equivalents and restricted cash 
 
Total cash and cash equivalents at June 30, 2006 were $206.0 million. The
balance, including restricted cash, at December 31, 2005 was $229.5  million. 
 
The Company generated cash of $70.0 million from operations during the quarter
(Q2-2005: $42.4 million) and invested $64.5 million in the Company's capital
assets (Q2-2005: $31.8 million). 
 
LionOre Australia's cash balance stood at $16.6 million at June 30, 2006.
During the first quarter of 2006, $94.7 million of cash was released from
restrictions upon the repayment of the short-term credit facility in the amount
of A$122.8 million. The short-term, cash-backed facility was repaid by the
establishment of a longer-term, asset-backed facility of A$150.0 million
($107.5 million). Net proceeds of A$27.2 million ($19.5 million) resulted from
the difference between the proceeds from the asset-backed facility and the
repayment of the cash-backed facility. 
 
This principal repayment schedule on this A$150.0 million facility, when
arranged in January of 2006,  required the repayment of A$100.0 million ($73.4
million) during 2006, including A$75.0 million ($55.1 million) at June 30,
2006, and A$25 million ($18.4 million) at December 31, 2006. 
 
This facility was restructured during the second quarter of 2006. The
restructured facility provides a revised principal repayment schedule requiring
quarterly repayments commencing in March 2007 and concluding in December 2008. 
This schedule more accurately reflects the timing of cash flows anticipated to
be generated by LionOre Australia's current expansion projects. The other
terms, conditions, and fees of the new facility correspond in most material
respects to the prior facility. 
 
In addition to the restructured credit facility, LionOre Australia secured an
A$30 million ($22.3 million) short-term working capital facility to meet short
term working capital demands in Australia during 2006. A$15.0 million has been
drawn down on this facility in the third quarter of 2006. The facility expires
on December 31, 2006. 
 
In Africa, cash balances totaled $44.6 million at June 30, 2006 (December 31,
2005: $66.2 million including $7.5 million of restricted cash).  During the
quarter, the Tati expansion loan was fully repaid in the amount of  $13.2
million, the Tati purchase loan was fully repaid in the amount of $5.0 million
and the Nkomati purchase loan was fully repaid in the amount of $10.0 million. 
The extinguishing of these loans during the quarter resulted in a remaining
long term debt balance in Africa of $0.3 million at June 30, 2006 and the
removal of restricted cash in the amount of $7.5 million. 
 
Accounts receivable 
 
The Company's receivables amounted to $150.7 million at June 30, 2006, an
increase of $45.4 million from the $105.3 million at December 31, 2005. 
 
The receivables in LionOre Australia were $49.2 million (December 31, 2005:
$30.4 million). Tati Nickel's receivables increased to $81.4 million from $61.0
million at December 31, 2005.  Nkomati's receivables were $19.7 million
compared to $11.2 million at December 31, 2005. The higher balances in all
regions reflect the increase in metal prices from the end of 2005. The nickel
price at December 31, 2005 was $6.07/lb, compared to the June 30, 2006 quarter
end price of $10.10/lb. 
 
Inventories 
 
Inventories of $38.8 million at June 30, 2006 increased from $29.0 million at
December 31, 2005.  Inventories included nickel concentrate representing 2,457
tonnes of payable nickel compared to 2,305 tonnes at December 31, 2005. 
 
Property, plant and equipment 
 
The net book value of property, plant and equipment was $332.8 million at June
30, 2006, compared to $284.4 million at December 31, 2005.     
 
During the quarter and six months ended June 30, 2006, $39.2 million and $60.4
million was invested, respectively, in property plant and equipment. In
addition, an amount of $50.2 million related to the ore producing development
drives at the Maggie Hays mine were transferred from Exploration and
Development Properties to Mineral Properties and began to be amortized during
the first quarter of 2006. 
 
At Tati Nickel, an amount of $3.3 million was capitalized during the quarter
for expenditures related to the development of Activox®.  
 
Depreciation and amortization 
 
The current quarter's expense is attributable to the operating segments as
follows: 
 
In millions      Depreciation of plant and equipment   Amortization of mineral property     Total   


                                                                                                   
                                                                                                   


                                                                                               
Australia Nickel               $   2.3                             $    6.8                $   9.1  
                                                                                               
Australia Gold                     3.8                                  1.9                     5.7 
                                                                                               
Africa Nickel                       2.2                                 4.6                    6.8  
                                                                                               
Other                               0.1                                    -                    0.1 
                                                                                               
Total                          $   8.4                            $    13.3               $   21.7  
                                                                                                
 
The carrying value of the mineral property is the capitalized cost of the
mineral resources/reserves. These amounts are a combination of capitalized
exploration and development costs, amounts paid to acquire and maintain
tenements, and other costs directly attributable to the mineral property. The
depreciation and amortization of mineral properties, plant and equipment is
based on units of production. 
 
Mineral exploration and development properties 
 
Mineral exploration and development properties increased to $413.7 million at
June 30, 2006, from $394.8 million at December 31, 2005. 
 
During the six months ended June 30, 2006 $50.2 million was transferred to
Property Plant and Equipment related to the Maggie Hays mine. An amount of
$49.7 million related to Maggie Hays remains in exploration and development
properties, including $17.1 million spent during the quarter on Maggie Hays.
 This reduction was offset by expenditures during the six months ended June 30,
2006 of $73.8 million for development of mine properties. In Australia, $23.3
million was spent on the development of BSD2, $3.3 million for Avalon, $3.4
million for Honeymoon Well and $9.0 million for Waterloo. In Africa, $1.7
million was spent on the Nkomati Interim Expansion and $0.3 million was spent
on the Main Expansion Project Feasibility.  These amounts will be transferred
to mineral properties and will be amortized once the mines are commissioned. 
 
Accounts payable and accrued liabilities 
 
Accounts payable and accrued liabilities increased to $118.5 million at June
30, 2006 from $79.7 million at December 31, 2005.  The Company's increased
expenditures on development projects contributed to this movement.     
 
Short-term financing and long-term debt 
 
There is no short term financing at June 30, 2006. At December 31, 2005 there
was an amount of A$122.8 million (equivalent to $90.1 million as at December
31, 2005) in short term financing. This facility was established to pay the
consideration due to MPI shareholders in January 2005. In January 2006, the
short-term financing was replaced by a longer term A$150.0 million credit
facility. 
 
On June 28, 2006 LionOre restructured the new A$150 million ($110.1 million)
credit facility.  The original credit facility principal repayment schedule
required the repayment of A$100.0 million ($73.4 million) during 2006,
including A$75.0 million ($55.1 million) at June 30, 2006, and A$25 million
($18.4 million) at December 31, 2006.  The restructured facility provides a
revised principal repayment schedule requiring quarterly repayments commencing
in March 2007 and concluding in December 2008.  This schedule more accurately
reflects the timing of cash flows anticipated to be generated by LionOre
Australia's current expansion projects. The other terms, conditions, and fees
of the new facility correspond in most material respects to the prior facility. 
 
In addition to the restructured credit facility, LionOre Australia has secured
an A$30 million ($22.0 million) short-term working capital facility to meet
short term working capital demands in Australia during 2006. 
 
Non-controlling interests 
 
The non-controlling interests at June 30, 2006 of $41.3 million are comprised
of a non-controlling interest in Tati Nickel of $27.4 million (December 31,
2005: $25.4 million) held by the Government of the Republic of Botswana and a
non-controlling interest in MPI Nickel of $13.9 million held by OMG (December
31, 2005: $11.4 million). During the quarter a dividend was paid from Tati
Nickel resulting in a cash payment of BP8.6 million ($1.4 million) to the
Government of the Republic of Botswana. 


     
    Summary of Quarterly Results


 
During the fourth quarter of 2005, the Company determined that operating
expenses reported for its Black Swan Operations in the first and third quarters
of 2005 had been understated by $3.0 million and $5.0 million, respectively. 
At the end of each period, the Company records an adjustment to decrease cost
of sales for inventory produced but not sold.  In the first and third quarters
of 2005, the Company's calculation of this adjustment was too high, which had
the effect of overstating net earnings.  The following table summarizes the
statement of earnings restated to correctly reflect the cost of sales: 


     
                                             Quarter 1                  Quarter 3       


                                                                                
Statement of Earnings            As Reported    Restated     As Reported  Restated   


                                                                                    
                                                                                    


                                                                                
Net mineral sales                $    106,101 $    106,101   $    89,066 $    89,066 
                                                                                
Operating costs                        44,052       47,017        47,633      52,595 
                                                                                
Operating earnings                     37,053       34,088        16,972      12,010 
                                                                                
Earnings before taxation and                                                         


                                                                                    
     non-controlling interests         43,357       40,392        15,916      10,954


                                                                                
Current income tax expense           (10,153)      (9,264)      (12,785)    (11,296) 
                                                                                
Future income tax expense             (3,883)      (3,883)         9,819       9,819 
                                                                                
Earnings before non-controlling                                                      


                                                                                    
     Interests                         29,321       27,245        12,950       9,477


                                                                                
Net earnings                      $    25,009  $    22,933   $    11,323  $    7,850 


                                                                                    
                                                                                    


                                                                                
Basic earnings per share             $   0.12     $   0.11      $   0.05    $   0.04 
                                                                                
Diluted earnings per share           $   0.12     $   0.11      $   0.05    $   0.04 


                                                                                    
     


The following summarizes the Company's results for the most recent eight
quarters: 
 
In millions                 Q2          Q1       Q4      Q3           Q2          Q1          Q4    Q3        
                                                          2005                                       2004
(except per share         2006        2006        2005                   2005       2005       2004          
amounts)                                                                                                      
                                                                                                         
Total gross revenues         $   $   154.7  $    161.3    $  109.5   $  117.4                                 
                     224.6                                                  $  130.5   $  131.7  $   83.7 
                                                                                                         
Net earnings (loss)       62.0  $     13.2   $ (128.5)  $      7.9  $    21.3  $    22.9  $    24.0  $   13.9 
                                                                                                         
Basic and diluted  EPS    $     $     0.06  $   (0.59)   $    0.04  $    0.10                                 


                         0.28                                                  $    0.11   $   0.12  $   0.07
                                                                                                             
     
    Gold Forward Sales Program


 
Gold forward sales contracts represent approximately 48% of the current gold
reserves, and are scheduled to be delivered into over the period to July 2007. 
 
Gold Delivery Obligations (in ounces)                   2006      2007      Total   
                                                                               
Total                                                  30,192    69,419    99,611   
                                                                                
 
The prices set on delivery into these gold forward sales contracts are all
approximately A$568 ($422)  per ounce as at June 30, 2006.  The mark-to-market
position of the gold forward contracts as at June 30, 2006 was a loss of A$26.8
million ($19.9 million). 
 
Liquidity and Capital Resources 
 
At June 30, 2006, the Company had a total of $206.0 million of cash, all of
which is unrestricted. At December 31, 2005, the Company had a total cash
balance of $229.5 million, with $102.2 million of that balance classified as
restricted. 
 
The Company has a number of major projects currently in progress that will
continue to require funding during 2006.  At December 31, 2005, the Company
advised that approximately $214.0 million in capital expenditures are to be
made in the Company's operations during 2006. Of this total, $145.0 million is
to be spent by the Company's Australian operations, $49.0 million at Tati and
A$20.0 million, the Company's share, is to be spent at Nkomati.  For the six
months ended June 30, 2006, $120.4 million has been spent on the Company's
capital projects. A total of $94.3 million has been spent in Australia, $3.0
million has been spent at Nkomati and $23.1 million has been spent at Tati. 


     
    Contractual Obligations and Commitments


 
In connection with the Maggie Hays Upgrade Project and the Black Swan
Disseminated 2 Project the Company has awarded contracts for structural,
mechanical, piping and electrical installation among other capital works. The
value of the contracts awarded to date on the projects are in excess of $100
million. The contracts were awarded in accordance with the approved budgets for
the development projects at the mines and are being carried out as those
developments are completed. 
 
Risk Factors 
 
The Company's risk factors, as discussed in the Company's Annual MD&A dated
March 15, 2006, should be reviewed in conjunction with this document. 


     
    For more information about LionOre:


 
In addition to visiting the Company's website at www.lionore.com, readers are
encouraged to view the Company's Annual Information Form and other public
regulatory filings. These can be found on SEDAR at www.sedar.com. Public
filings may also be accessed through the Australian Stock Exchange website,
www.asx.com.au and the London Stock Exchange website,
www.londonstockexchange.com. 
  
END 
-0- Aug/13/2006 17:49 GMT
 
 
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