Half Yearly Report

MEDUSA MINING LIMITED

("Medusa" or the "Company")

ABN 60 099 377 849

and Controlled Entities

HALF-YEAR FINANCIAL REPORT

31 DECEMBER 2013

This report should be read in conjunction with Medusa's Annual Report for the year ended 30 June 2013 and any announcements made by the Company during the interim reporting period, as it does not include all the notes of the type normally included in an annual financial report.

Appendix 4D

Half year report

For the 6 months ended 31 December 2013

Results for announcement to the market

MANAGING DIRECTOR'S ADDRESS

For the half year ended 31 December 2013, I am pleased to report that the mill is in the final phase of commissioning and that mining operations are able to meet the increased throughput requirements for the ensuing periods ahead.

The six month period to 31 December 2013 proved challenging to get the new Co-O SAG Mill fully operational. The start-up of the new mill was delayed due to the installation of faulty powercells which were repaired and re-installed in early December. The SAG mill operated for the rest of December without any interruptions and is currently running at approximately 2,000 tonnes per day.

The detoxification circuit, thickener, CIL tanks, gold room and associated equipment for "wet" processing are all fully operational. Planning for additional tailings storage facilities is completed and construction is planned to commence after the wet season in the March 2014 quarter.

Complementary infrastructure construction completed includes a new junior staff accommodation, assay laboratory and metallurgy offices.

At the Co-O Mine, the L8 Shaft is pulling ore and waste from Level 8 (350 metres below surface). Rock passes from Levels 6 and 7 to Level 8 are operating and allow ore and waste from these levels to be hoisted from Level 8. Level development continued on Level 8 and all veins in the resource model were intersected and are being developed. The Don Pedro veins near the L8 Shaft are being developed and stoped while development continues on Levels 1 to 7 concurrent with production stoping.

The Baguio Shaft has been deepened to Level 5 to access additional ore on the west side of the mine and to reduce double handling.

The Bananghilig area has continued to progress well with drilling re-commenced between the Bananghilig Deposit and the B2 discovery with the view of combining the two areas. Sterilisation and geotechnical drilling and associated technical work were completed.

The extreme wet weather during December 2013 and January 2014 caused damage to the haul road between the mine and mill. A works program is in place to repair the haul road after the wet season as well as to develop alternative road access.

There were no Lost Time Incidents between July and December 2013, however as advised to the market on 13 February 2014, regretfully a fatality happened in a stope underground. The Lost Time Incidents Frequency Rate ("LTIFR") for the past 4 years to 31 December 2013 stands at 0.10 compared to the Western Australian LTIFR for the mining industry of 2.0 for 2012-13.

The Company has provided rescue and relief efforts in response to natural disasters that struck the Philippines last calendar year. The Co-O Mine Rescue Team provided rescue aid to the Bohol earthquake victims and relief support to the local communities on the island of Leyte after the devastation caused by Typhoon Haiyan (Yolanda).

The company continues to support the local communities through employment, (99% Filipino workforce), education (scholarships, school expenditure and adopt-a-school supporting over 5,500 students), health and essential infrastructure.

DIRECTORS' REPORT

The Directors present their report together with the consolidated financial report for the half-year ended 31 December 2013 and the review report thereon:

DIRECTORS:

The Directors of the Company at any time during or since the end of the half-year are:

HIGHLIGHTS FOR THE SIX MONTHS:

Financials

Revenues of US$34.0 million compared to US$52.4 million for the corresponding period in the previous year, a decrease of 35% due to a decrease in both gold production and a lower average price received on sale of gold. Medusa is an un-hedged gold producer and received an average gold price of US$1,304 per ounce from the sale of 27,334 ounces of gold for the half-year to December 2013 (corresponding period to December 2012: 43,492 ounces at US$1,676 per ounce).

Earnings before interest, tax, depreciation and amortisation ("EBITDA") of US$19.4 million, (US$35.3 million in the prior corresponding period), a decrease of 45%.

Earnings per share ("EPS") of US$0.067 on a weighted average basis is based on NPAT of US$13.0 million (six months to December 2012: EPS of US$0.152 based on NPAT of US$28.6 million), a decrease of 56%.

The Company had total cash, cash equivalent in gold on metal account and bullion on hand of US$20.8 million at 31 December 2013 (corresponding period to 31 December 2012: US$15.8 million), an increase of 32%.

Dividends

No dividend will be payable for the half year to 31 December 2013 (No dividend was payable for the previous half year to 31 December 2012).

Operations

The Company produced 26,089 ounces of gold for the half-year, compared to 32,580 ounces from the previous corresponding period, at an average recovered grade of 5.07 g/t gold (six months to December 2012: 7.82 g/t gold).

Average cash cost for the half-year of US$422 per ounce, was higher than the previous corresponding period's costs of US$300 per ounce due to delayed new mill commissioning and previously highlighted operational issues with the old plant.

Production Guidance

The revised forecast gold production for the fiscal year to 30 June 2014 after taking into account current year to date production of 26,089 is now between 70,000 to 80,000 ounces at anticipated cash costs of US$400 per ounce.

The production guidance for FY 2015 is between 140,000 to 160,000 ounces and from FY 2016 onwards, 160,000 to 200,000 ounces per annum.

OPERATIONS OVERVIEW

The locations of the Company's projects are shown on Figures 1 and 2 (please see link at the end of this announcement).

EXECUTIVE ORDER ON MINING SECTOR REFORMS IN THE PHILIPPINES

On 06 July 2012, Philippine President Benigno Aquino III signed Executive Order No. 79 entitled "Institutionalizing and Implementing Reforms in the Philippine Mining Sector Providing Policies and Guidelines to Ensure Environmental Protection and Responsible Mining in the Utilization of Mineral Resources" ("EO 79").

On 10 September 2012, the Department of Environment and Natural Resources ("DENR") issued Administrative Order No. 2012-07 ("Rules and Regulations to Implement EO-79" or "EO-79 IRR"), and on 08 October 2012, issued Administrative Order No. 2012-07-A2 ("EO-79 Amended IRR") to revise Sections 3, 7 and 9 of EO-79 IRR. EO-79 IRR and its amendments took effect on October 25, 2012.

The implications of the EO-79 with regards to the Company's projects are discussed in the June 2012 and September 2012 quarterly reports to the ASX. There has been no change in the Company's view since then.

On 07 March, 2013, the Secretary of the Department of Environment and Natural Resources (DENR) approved the lifting of the moratorium on acceptance of applications for Exploration Permits and Financial and Technical Assistance Agreements.

The new legislation on mining taxes and royalties is yet to be finalised for submission to Congress.

EXECUTIVE ORDER ON EXTRACTIVE INDUSTRIES TRANSPARENCY IN THE PHILIPPINES

On 26 November 2013, Philippine President Benigno Aquino III signed Executive Order No. 147 entitled "Creating the Philippine Extractive industries transparency Initiative" ("EO 147").

Pursuant to Section 14 of the EO 79, the Philippine government commits to participate in the Extractive Industries Transparency Initiative ("EITI") that sets international standards for transparency and accountability in the extractive industries and in government. Established in 2003, the EITI is a global coalition of governments, companies and civil society collaborating to improve honest and responsible management of revenues from natural resources, particularly oil, gas, metals and minerals.

Through EO 147, the Philippine government has instituted the Philippine Extractive Industries Transparency Initiative ("PH-EITI"), which commits to ensure greater transparency and accountability in the extractive industries, specifically in the way the government collects, and companies pay taxes from extractive industries;

The implications of the EO 147 with regards to the Company's projects are not considered to have any negative impact and the Company sees the Executive Order as a positive commitment by the Philippine Government to adopt good governance practices in accordance with International Guidelines of the EITI.

MINERAL RESOURCES AND ORE RESERVES

The Company's current mineral resources (including the Saugon resource) and ore reserves were previously announced in accordance with the guidelines of the JORC Code 2004 (Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves). Refer to announcement of 08 August 2013, the September 2013 Quarterly Report, and the 2013 Annual Report.

The Co-O and Bananghilig deposits are currently undergoing review, interpretations and revised mineral resource and ore reserve estimations in accordance with the guidelines of the recently adopted JORC Code 2012. Since there may be material changes to the mineral resources and ore reserves, due to changes in gold price, mining dilution and so forth, the Company will not be reporting the resources and reserves until the revised estimations have been completed and signed off by the independent Competent Persons. The revised resources and reserves for Co-O and Bananghilig are expected to be reported during the September 2014 quarter.

GOLD PRODUCTION

The production statistics for the six months to 31 December 2013 with comparatives for the December 2012 half year are summarised in Table I.

Table I. Gold production statistics

Note:

(1) Net of development costs and includes royalties and local business taxes but no by-product credits.

Gold production for the six months to 31 December 2013 was 26,089 ounces of gold at an average grade of 5.07 g/t gold was lower than last year's production of 32,580 ounces of gold at recovered grades averaging 7.82 g/t gold.

The average cash costs of US$422 per ounce, inclusive of royalties and local business taxes are higher than the previous period's average cash costs of US$300 per ounce.

Medusa, an un-hedged gold producer, sold 27,334 ounces of gold at an average price of US$1,304 per ounce during the period (corresponding period last year 43,492 at average price received of US$1,676 per ounce).

The revised production guidance for the fiscal year to 30 June 2014, following production of 26,089 ounces of gold for the half year to December 2013 is now between 70,000 to 80,000 ounces at anticipated cash costs of US$400 per ounce.

The production guidance for FY 2015 is 140,000 to 160,000 ounces and from FY 2016 onwards is 160,000 to 200,000 ounces per annum.

Co-O MINE and MILL

Co-O Mine

Mine development and expansion achievements include:

· The L8 Shaft is operating at 1,500 tonne per day. (Photo 1) hauling from Level 8 (350 metres below surface). The current mine combined shaft haulage capacity is now 2,500 tonnes per day from the L8, Baguio, Agsao and Ventilation Shafts;

· The rock-passes from Levels 6 and 7 to Level 8 have been completed allowing broken material to move from both Levels to the L8 haulage shaft;

· The upgrade to the Baguio Shaft has been completed allowing material to be hauled from Level 5, thus opening up new mining areas in the western side of the mine;

· Development is progressing at 1,500 metres per month and will continue at approximately 1,500 metres per month for the foreseeable future, resulting in a continuing high percentage of development ore in the mill feed, and;

· A winze is being sunk from Level 8 to Level 9 to expose and gain access to the ore on Level 9.

Please see the link at the end of this announcement to view Photo 1: L8 Shaft and stockpile area.

Co-O Mill

The new SAG Mill commenced operation on the 6th December 2013. The delay in starting the SAG Mill was due to manufacturing defects in the Powercells, which were repaired and re-installed. Production for FY 2014 has been revised to 70,000 to 80,000 ounces and 140,000 to 160,000 ounces in FY 2015.

Please see the link at the end of this announcement to view:

· Photo 2: SAG Mill

· Photo 3: Primary Crusher

Tailings Storage

Planning and design for tailings storage facility number 5 has been completed with construction planned when the "Wet" season finishes.

Health and Safety

Lost time incident frequency rate (LTIFR) for the six months to 31 December 2014 is 0.1 including exploration. There were no breaches of any of the project's operating regulations during the period.

Co-O RESOURCE DRILLING

Diamond drilling has continued since the last resource model update was announced on 08 August 2013 and has focused on extending the Co-O Vein system along the eastern and western sides of the resource model. Since the 2013 resource estimation, 41 underground drill holes totalling 11,412 have been completed using two large and two smaller portable diamond drilling rigs.

The Company has recently purchased six additional portable underground diamond drill rigs to be deployed at various levels within the mine to assist in exploring for zones of additional mineralisation.

Table II. Co-O surface and underground drill hole results of ≥ 0.5 metres at ≥ 3g/t gold

(Refer Appendix A for JORC Code 2012 Edition)

Notes:

1. Composited intercepts' 'weighted average grades' calculated by using the following parameters:

(i) no upper gold grade cut-off applied;

(ii) lower cut-off grade of 3.0 g/t gold,

(iii) high-grade samples (>20g/t gold) within composited interval are individually reported ;and

(iv) ≥ 0.5 metres down hole intercept width at ≥ 3.0 g/t gold, or

(v) ≥ 6 gram.metres.

(vi) maximum of 1.0 metre of down-hole internal dilution at , 3g/t gold

2. Intersection widths are downhole drill widths not true widths;

3. Assays are by Philsaga Mining Corporation's laboratory; and

4. Grid coordinates based on the Philippine Reference System 92.RL is elevation in metres relative to Mine Datum

Co-O EXPLORATION

IP Survey

The ground Induced Polarisation ("IP") and Resistivity ("RES") survey is ongoing within the Co-O tenements including the Co-O mine environs. During the six months to December 2013, approximately 127 line kilometres of IP and RES surveys were completed. Heavy rain has hampered the survey and it is now expected that the balance (of approximately104 line kilometres) will be completed in the June 2014 quarter, with interpretations undertaken during the June and September 2014 quarters.

A Ground Magnetics survey is ongoing, using the same grid as the IP survey. A total of approximately 162 line kilometres were completed during the six months to December 2013. Approximately 94 line kilometres remains to be surveyed, and are expected to be completed and interpreted concurrent with the IP interpretation.

Reconnaissance Programmes

Reconnaissance mapping and sampling programmes are ongoing.

TAMBIS REGION

BACKGROUND

The Tambis Project, which includes the Bananghilig Gold Deposit as shown on (Fig. 2), is operated under a Mining Agreement with Philex Gold Philippines Inc. over Mineral Production Sharing Agreement ("MPSA") 344-2010-XIII, which covers 6,262 hectares.

The Executive Order on Mining (EO 79) signed on 6 July 2012, by the President of the Philippines, will have no immediate impact on the Bananghilig Project as the Company can continue to explore, conduct feasibility studies and planning.

REGIONAL GEOLOGICAL SETTING

The announcement of 12 September 2011 summarises the Tambis regional geological setting, local geological setting, deposit description and mineralisation.

BANANGHILIG GOLD DEPOSIT

Additional information with respect to the Bananghilig gold deposit is contained in the September 2011 quarterly report dated 24 October 2011, drilling updates on 17 January 2012, 8 August 2012, 21 November 2012, and 02 April 2013, operations update on 08 July 2013, and resource estimation updates on 29 January 2013 and 08 August 2013.

Indicated & Inferred Mineral Resource Estimation

The Bananghilig resource was previously announced in accordance with the guidelines of the JORC Code 2004 (Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves). Refer to announcement of 08 August 2013, the September 2013 Quarterly Report, and the 2013 Annual Report.

The Bananghilig deposit is currently undergoing review, re-interpretation and revised mineral resource and estimation in accordance with the guidelines of the recently adopted JORC Code 2012. Consequently the project's revised mineral resources are expected to be completed by the independent consultants and reported during the September 2014 quarter.

Bananghilig Scoping & Pre-Feasibility Study*

On 09 April 2013, the Company published the results of a first pass Scoping Study1 of the Bananghilig Gold Deposit. The Scoping Study was carried out and reported under the guidelines of the JORC Code 2004, therefore the results of the Scoping Study do not now necessarily comply with the requirements of the JORC Code 2012 and will not be reported henceforth.

*The Scoping Study referred to in the announcement dated 9 April 2013 was based on low-level technical and economic assessments of Indicated and Inferred Mineral Resources, as defined under the guidelines of JORC Code 2004, and is insufficient to support estimation of Ore Reserves or to provide assurance of an economic development case at this stage, or to provide certainty that the conclusions of the Scoping Study will be realised.

A Feasibility Study was initiated on the completion of the Scoping Study. Sterilisation and geotechnical drilling programmes were completed in early October 2013.

A decision was made towards the end of the September quarter to temporarily suspend the feasibility study given the mineralisation being encountered at the new B2 discovery area, as well as given consideration to the depressed gold price and commissioning of the new Co-O milling circuit.

Figure 3 (please see link at the end of this announcement) showd the Tambis Project geology showing location of Bananghilig resource relative to the B2 mineralisation discovery area & other prospect areas.

Figure 4 (please see link at the end of this announcement) shows the drill hole projection plan of the B2 drill holes relative to the Bananghilig 2013 resource model.

BANANGHILIG EXPLORATION

B2 Discovery Area

During the September 2013 quarter, two large capacity diamond drilling rigs completed two diamond drill holes (TDH332 and TDH334) within the B2 area for a total advance of 622.6 metres.

Figure 3 shows the Bananghilig area geology and the position of the B2 discovery, beneath limestone cover relative to the Bananghilig resource.

B2 Drilling Results

Results of diamond drilling at B2 were announced on 2 April 2013 and 8 July 2013, in the March 2013, June 2013 and September 2013 Quarterly Reports, and the September 2013 Annual Report. Results have subsequently been received for all outstanding sample submissions as well as for the holes completed during this quarter. Significant intercepts for completed drill holes are shown in Table III below.

Geotechnical and Sterilisation Drilling Programmes

Geotechnical drilling and test pitting programmes were completed in first week of October with one last diamond drill hole completed for a total of 60 metres. Drilling was carried out to investigate sites suitable for infrastructure associated with the potential development of the Bananghilig Deposit, including plant site, waste, tailings and process water storage facilities. A sterilisation drilling programme was successfully completed with no significant drill hole assay results received in these areas.

Regional Exploration

Reconnaissance mapping and sampling is on-going within the Tambis Region.

Table III. Bananghilig B2 Discovery Area drill hole results ≥ 1 g/t gold.

 (Refer Appendix A for JORC Code 2012 Edition)

Notes:

1. Composited intercepts' 'weighted average grades' calculated by using the following parameters:

(i) no upper gold grade cut-off applied;

(ii) lower cut-off grade of 0.5 g/t gold;

(iii) high-grade samples (>10 g/t gold) within composited interval are individually reported;

(iv) ≥ 5 metres down hole intercept width at ≥ 1.0 g/t gold, or

(v) ≤ 5 metres down hole intercept width at ≥ 5 gram per metres, and

(vi) maximum of 3 metres of downhole internal dilution at ≤0.5 g/t gold;

2. Intersection widths are downhole drill widths not true widths;

3. Assays are by Intertek McPhar Mineral Services Inc. in Manila; and

4. Grid coordinates and RL (elevation) based on the Philippine Reference System 92.

LINGIG

The Lingig prospect is located in Mineral Production Sharing Agreement 343-2010-XIII with an area of 3,824 hectares over which the Company has an operating agreement.

Activities completed include Induced Polarisation, Resistivity and ground magnetics surveys, Data processing and interpretation of the geophysical data by an independent geophysical consultant and detailed geological mapping.

Data compilation from the mapping, soil sampling, and geophysical surveys will commence during the March 2014 quarter. Interpretations will be reviewed prior to planning drill targets.

USA PROJECT

A Memorandum of Agreement with Corplex Resources Inc. covers the Usa prospect, which is located within MPSA application XIII-00077. Processing of the tenement application is progressing.

SAUGON PROJECT 

Detailed and reconnaissance geological mapping, trenching and sampling programmes are on-going.

FINANCIALS

Medusa recorded a net profit after tax ("NPAT") of US$13.0 million and earnings before interest, tax depreciation and amortisation ("EBITDA") of US$19.4 million for the half year to 31 December 2013, compared to US$28.6 million and US$35.3 million respectively in the previous corresponding period.

The Company recorded Revenues of US$34.0 million compared to US$52.4 million in the previous corresponding period. Medusa is an un-hedged gold producer and received an average price of US$1,304 per ounce from the sale of 27,334 ounces of gold for the half-year to December 2013 (previous corresponding period: 43,492 ounces at US$1,676 per ounce).

The decrease in NPAT, EBITDA and Revenues is directly linked to a decrease in gold production (26,089 ounces compared to 32,580 ounces) and a lower average price received on sale of gold (US$1,304 per ounce compared to US$1,676 per ounce). As at 31 December 2013, the Company had total cash, cash equivalent in gold on metal account and bullion on hand of approximately US$20.8 million (Dec 2012: US$15.8 million).

During the half-year:

· The Company recorded Revenue of US$33.9 million from gold and silver sales (Dec 2012 half-year: gold and silver sales of US$52.3 million and interest of US$0.3 million);

· Depreciation and amortisation was lower at US$6.3 million, compared with US$6.7 million in the December half of 2012;

· US$8.5 million outlay on exploration expenditure, including US$5.3 million on the Co-O Mine (Dec 2012 half-year: US$14.6 million, including US$9.8 million for the Co-O Mine);

· US$11.6 million was spent on sustaining capital at mine and mill and capital works associated with the new mill construction and infrastructure (Dec 2012 half-year: US$23.5 million); and

· Incurred US$17.5 million on general and accelerated mine development costs, inclusive of shaft sinking costs (Dec 2012 half-year: on general and accelerated mine development costs, inclusive of shaft sinking costs of US$15.8 million).

CORPORATE

Dividend

No dividend will be payable for the half year to 31 December 2013 (No dividend was payable for the previous half year to 31 December 2012).

CAPITAL RAISING

During the quarter, the Company raised gross proceeds of A$34,002,702 via the issue of 18,890,390 shares at A$1.80 each to clients of Euroz Securities Limited.

BOARD CHANGES

Mr Geoff Davis (Founding Managing Director of Medusa) retired as Non-executive Chairman on 22 November 2013 and was succeeded by Non-Executive Director, Mr Andrew Teo.

JORC CODE 2012 COMPLIANCE - CONSENT OF COMPETENT PERSONS

Medusa Mining Limited

Information in this report relating to Exploration Results is based on information compiled by Mr Gary Powell, who is a member of The Australian Institute of Geoscientists and the Australasian Institute of Mining and Metallurgy. Mr Powell is a Non-Executive Director of the Board of Medusa Mining Limited and has sufficient experience which is relevant to the style of mineralisation and type of deposits under consideration and to the activity which he is undertaking to qualify as a "Competent Person" as defined in the 2012 Edition of the "Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves" and is a "Qualified Person" as defined in "National Instrument 43-101" of the Canadian Securities Administrators. Mr Powell consents to the inclusion in the report of the matters based on his information in the form and context in which it appears.

DISCLAIMER

This report may contain certain forward-looking statements. The words 'anticipate', 'believe', 'expect', 'project', 'forecast', 'estimate', 'likely', 'intend', 'should', 'could', 'may', 'target', 'plan' and other similar expressions are intended to identify forward-looking statements. Indications of, and guidance on, future earnings and financial position and performance are also forward-looking statements.

Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors, many of which are beyond the control of Medusa, and its officers, employees, agents and associates, that may cause actual results to differ materially from those expressed or implied in such statements.

Actual results, performance or outcomes may differ materially from any projections and forward-looking statements and the assumptions on which those assumptions are based.

You should not place undue reliance on forward-looking statements and neither Medusa nor any of its directors, employees, servants or agents assume any obligation to update such information.

LEAD AUDITOR'S INDEPENDENCE DECLARATION

The lead auditor's independence declaration under section 307C of the Corporations Act 2001 is set out on page 21 for the half-year ended 31 December 2013.

ROUNDING OF AMOUNTS

The Company has applied the relief available to it under Class Order 98/100 and accordingly, amounts in the financial report and directors' report have been rounded to the nearest $1,000.

This report is signed in accordance with a resolution of the Board of Directors.

PETER HEPBURN-BROWN

Managing Director

Dated this 27th day of February 2014.

AUDITOR'S INDEPENDENCE DECLARATION 

Level 1

10 Kings Park Road

West Perth WA 6005

Correspondence to:

PO Box 570

West Perth WA 6872

T +61 8 9480 2000

F +61 8 9322 7787

E [email protected]

W www.grantthornton.com.au

Auditor's Independence Declaration

To The Directors of Medusa Mining Limited 

In accordance with the requirements of section 307C of the Corporations Act 2001, as lead auditor for the review of Medusa Mining Limited for the half-year ended 31 December 2013, I declare that, to the best of my knowledge and belief, there have been:

a No contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the review; and

b No contraventions of any applicable code of professional conduct in relation to the review.

GRANT THORNTON AUDIT PTY LTD

Chartered Accountants

P W Warr

Partner - Audit & Assurance

Perth, 27 February 2014

FINANCIALS

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

AND OTHER COMPREHENSIVE INCOME

for the half-year ended 31 December 2013

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

for the half-year ended 31 December 2013

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the half-year ended 31 December 2013

CONSOLIDATED STATEMENT OF CASH FLOWS

for the half-year ended 31 December 2013

CONDENSED NOTES TO THE FINANCIAL STATEMENTS

for the half-year ended 31 December 2013

Note 1: Basis of preparation

Medusa Mining Limited (the "Company") is a company domiciled in Australia.

The consolidated interim financial report of the Company as at and for the six months ended 31 December 2013 comprises the Company and its subsidiaries (together referred to as (the "Group") and the consolidated group's interests in associates and jointly controlled entities.

The functional currency of each of the Group's entities is the currency of the primary economic environment in which that entity operates. Though the Company's functional currency is Australian dollars the presentation currency for the Group is US dollars. The reason for using US dollars as the presentation currency is US dollars is the primary currency used in the global gold market.

The consolidated annual financial report of the consolidated group as at and for the year ended 30 June 2013 is available on the company's website.

(a) Statement of compliance

These general purpose financial statements for the interim half-year reporting period ended 31 December 2013 have been prepared in accordance with requirements of the Corporations Act 2001 and Australian Accounting Standards including AASB 134: Interim Financial Reporting. Compliance with Australian Accounting Standards ensures that the financial statements and notes also comply with International Financial Reporting Standards.

The consolidated interim financial report does not include all of the information required for a full annual financial report, and should be read in conjunction with the consolidated annual financial report of the Consolidated Group as at and for the year ended 30 June 2013.

This consolidated interim financial report was approved by the Board of Directors on 26 February 2014.

(b) Significant accounting policies

The interim financial statements have been prepared in accordance with the accounting policies adopted in the Group's last annual financial statements for the year ended 30 June 2013, except for the application of the following standards as of 1 January 2013:

· AASB 10 Consolidated Financial Statements;

· AASB 11 Joint Arrangements; and

· AASB 119 Employee Benefits (September 2013)

·

The effects of applying these standards are described below.

AASB 10 Consolidated Financial Statements

AASB 10 supersedes AASB 127 Consolidated and Separate Financial Statements and Interpretation 112 Consolidation - Special Purpose Entities. AASB 10 revises the definition of control and provides extensive new guidance on its application. These new requirements have the potential to affect which of the Group's investees are considered to be subsidiaries and therefore change the scope of consolidation. The requirements on consolidation procedures, accounting for changes in non-controlling interests and accounting for loss of control of a subsidiary are unchanged.

Management has reviewed its control assessments in accordance with AASB 10 and has concluded that there is no effect on the classification (as subsidiaries or otherwise) of any of the Group's investees held during the period or comparative periods covered by these financial statements.

AASB 11 Joint Arrangements

AASB 11 supersedes AASB 131 Interests in Joint Ventures and Interpretation 113 Jointly Controlled Entities - Non-Monetary-Contributions by Venturers. It aligns more closely the accounting by the investors with their rights and obligations relating to the joint arrangement. In addition, AASB 131's option of using proportionate consolidation for joint ventures has been eliminated. AASB 11 now requires the use of the equity accounting method, which is currently used for investments in associates.

The application of AASB 11 has no impact on the Group as there are no joint arrangements in place.

AASB 119 Employee Benefits (September 2013)

AASB 119 makes a number of changes to the accounting for employee benefits, the most significant relating to defined benefit plans. AASB 119:

· eliminates the 'corridor method' and requires the recognition of remeasurements (including actuarial gains and losses) arising in the reporting period in other comprehensive income

· changes the measurement and presentation of certain components of the defined benefit cost. The net amount in profit or loss is affected by the removal of the expected return on plan assets and interest cost components and their replacement by a net interest cost based on the net defined benefit asset or liability

(c) Significant events and transactions

During the six months the Company experienced a decrease in Revenues which is directly linked to a decrease in gold production (26,089 ounces compared to 32,580 ounces) and a lower average price received on sale of gold.

The Group's objectives and policies for managing capital, credit risk and liquidity risk are described in its recent annual financial statements.

During the quarter, the Company raised gross proceeds of A$34,002,702 via the issue of 18,890,390 shares at A$1.80 each to clients of Euroz Securities Limited.

(d) Comparative figures

Where required by Accounting Standards, comparative figures have been adjusted to conform with changes in presentation for the current financial year.

(e) Rounding of amounts

The Company has applied the relief available to it under Class Order 98/100 and accordingly, amounts in the financial report and directors' report have been rounded to the nearest $1,000.