CASCADE ACQUISITION FAIR AND REASONABLE

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1 A S X R e l e a s e The Manager Company Announcements Office Australian Stock Exchange Highlights CASCADE ACQUISITION FAIR AND REASONABLE Independent Expert s report deems the Cascade acquisition fair and reasonable to Nonassociated Shareholders Independent Directors of White Energy unanimously support the transaction and recommend that Shareholders vote in favour of it Independent Expert s valuation range for 100% of the equity in Cascade is $459 million to $587 million - agreed acquisition price of $486 million at lower end of range Value accretive for White Energy Shareholders Next steps include dispatch of Notice of Meeting and Explanatory Memorandum ahead of a Shareholder vote to approve the transaction 23 February White Energy Company Limited (ASX:WEC; OTCQX:WECFY) ( White Energy or the Company ) today released the findings of the Independent Expert, Deloitte Corporate Finance Pty Limited ( Deloitte ), in relation to White Energy s proposed acquisition of Cascade Coal Pty Limited ( Cascade ). The purpose of the Independent Expert report is to advise the Independent Board Committee of White Energy on whether the proposed acquisition of the shares in Cascade is fair and reasonable to the Non-associated Shareholders of White Energy. The full Independent Expert s report is attached to this announcement, and includes the following highlights: Transaction deemed fair and reasonable for Non-associated Shareholders of White Energy Purchase price of $486 million for 100% of the equity in Cascade is at lower end of the Independent Expert s valuation range of $459 million - $587 million White Energy Ordinary Shares valued at $ $3.70 per share based on trading prices before announcement of the transaction, with the mid-point of $3.60 representing an 17% premium to the 1 month White Energy VWAP Key assumptions include real long-term export thermal coal price of $US80 - $US85 per tonne, compared to a current spot price of approximately US$125 per tonne Page 1

2 23 February 2011 A S X R e l e a s e Furthermore, White Energy s Independent Directors unanimously support the transaction and recommend that shareholders approve the acquisition. Managing Director and CEO of White Energy, Mr Brian Flannery, said; Cascade s Mt Penny deposit is expected to be an export quality open cut coal mine that, if brought into White Energy s fold, will represent a significant step-change for the company. The Independent Directors have carefully weighed up all the issues, including related party concerns, and the Independent Expert Report s valuation range supports the view that there is plenty of upside in this asset for all White Energy shareholders. You have a Board and management team with a track record of bringing coal assets just like Mt Penny to production, and I point to our immediate success with Felix Resources core assets such as the Moolarben and Ashton coal mines all highly value accretive for their shareholders. There is a huge amount of interest in the coal space, which we do not see abating anytime soon, and Cascade will help elevate White Energy into becoming a mid-tier coal miner. The point of difference over other pure play miners is that White Energy also has a global cleaner coal briquetting business with an upgrading plant now operating in Indonesia, just as governments and some large coal companies are turning their attention to upgrading lower quality coals, hence reducing CO2 make per unit of electricity production. Mt Penny is as good an opportunity as any of the coal mines I have been involved in. It is in a well-established coal basin with a rail line running through the property and connecting to the Port of Newcastle. The mine plan is relatively straightforward and we are working well with governments, regulators and local communities to bring this mine onstream in The Cascade assets will put White Energy well on the path of achieving its stated objectives of combining coal technology assets and coal mining assets to serve the booming Asian markets appetite for bituminous coal, Mr Flannery said. Next Steps White Energy is finalising the Notice of Meeting and Explanatory Memorandum (to be accompanied by the Independent Expert Report) to be sent to shareholders ahead of an EGM at which White Energy Shareholders, not associated with Cascade s shareholders, will have the opportunity to vote on the transaction. The EGM is scheduled to take place in the first week of April. Transaction Timing An indicative timetable for completion of the transaction is as follows: Page 2

3 23 February 2011 A S X R e l e a s e White Energy finalises and issues Notice of Meeting and explanatory materials (including Independent Expert report) to Shareholders Early March 2011 White Energy shareholder meeting to approve the transaction 6 April 2011 Completion of Cascade acquisition April 2011 For Further Information Call: Brian Flannery Ivan Maras Managing Director & CEO Chief Financial Officer White Energy Company Limited White Energy Company Limited Forward Looking Statements This press release contains forward-looking statements that are subject to risks and uncertainties. These forwardlooking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. In some cases, you may identify forward-looking statements by words such as "may," "should," "plan," "intend," "potential," "continue," "believe," "expect," "predict," "anticipate" and "estimate," the negative of these words or other comparable words. These statements are only predictions. One should not place undue reliance on these forward-looking statements. The forward-looking statements are qualified by their terms and/or important factors, many of which are outside the Company's control, involve a number of risks, uncertainties and other factors that could cause actual results and events to differ materially from the statements made. The forward-looking statements are based on the Company's beliefs, assumptions and expectations of our future performance, taking into account information currently available to the Company. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company. Neither the Company nor any other person assumes responsibility for the accuracy or completeness of these statements. The Company will update the information in this press release only to the extent required under applicable securities laws. If a change occurs, the Company's business, financial condition, liquidity and results of operations may vary materially from those expressed in the aforementioned forward-looking statements. Competent Persons Statement The information in this announcement concerning the proposed acquisition of Cascade by White Energy, which relates to Coal Reserves and Coal Resources at EL7406 and EL7405 is based on information compiled by Mr Michael Johnstone, who is a member of the Australasian Institute of Mining and Metallurgy. Mr Johnstone is the principal consultant of Minerva Geological Services PL. Mr Michael Johnstone has 32 years of relevant mining and geological experience in coal. During this time he has either managed exploration programs or contributed significantly to mining studies related to the estimation and assessment of coal resources, and in the development of coal mining operations in Australia, India, Pakistan, Philippines and Vietnam. He was the project Geologist responsible for implementing the Ulan Stage 2 exploration program, and Page 3

4 23 February 2011 A S X R e l e a s e Exploration Manager for the Ashton and recently commissioned Moolarben Development. He has sufficient experience which is relevant to the style of coal occurrence and type of deposit under consideration and to the activity he is undertaking to qualify as a Competent Person as defined in the 2004 Edition of the Australasian Code for Reporting Mineral Resources and Ore Reserves. Pursuant to the requirements of ASX Listing Rule 5.6, Mr Johnstone consents to the inclusion in the announcement of the matters based on their information in the form and context, which it appears. Michael Johnstone - February 2011 Member AIMM Principal Consultant Minerva Geological Services Pty Ltd Page 4

5 White Energy Company Limited Independent expert s report and Financial Services Guide 22 February 2011

6 Financial Services Guide What is a Financial Services Guide? This Financial Services Guide (FSG) provides important information to assist you in deciding whether to use our services. This FSG includes details of how we are remunerated and deal with complaints. Where you have engaged us, we act on your behalf when providing financial services. Where you have not engaged us, we act on behalf of our client when providing these financial services, and are required to give you an FSG because you have received a report or other financial services from us. What financial services are we licensed to provide? We are authorised to provide general financial product advice or to arrange for another person to deal in financial products in relation to securities, interests in managed investment schemes and government debentures, stocks or bonds. Our general financial product advice Where we have issued a report, our report contains only general advice. This advice does not take into account your personal objectives, financial situation or needs. You should consider whether our advice is appropriate for you, having regard to your own personal objectives, financial situation or needs. If our advice is provided to you in connection with the acquisition of a financial product you should read the relevant offer document carefully before making any decision about whether to acquire that product. How are we and all employees remunerated? Deloitte will receive a fee of approximately $400,000 exclusive of GST in relation to the preparation of this report. This fee is based on time spent at our normal hourly rates and is not contingent upon the success or otherwise of the proposed acquisition of Cascade Coal Pty Limited by White Energy Company Limited (WECL) (Proposed Transaction). Other than our fees, we, our directors and officers, any related bodies corporate, affiliates or associates and their directors and officers, do not receive any commissions or other benefits. All employees receive a salary and while eligible for annual salary increases and bonuses based on overall performance they do not receive any commissions or other benefits as a result of the services provided to you. The remuneration paid to our directors reflects their individual contribution to the organisation and covers all aspects of performance. We do not pay commissions or provide other benefits to anyone who refers prospective clients to us. Associations and relationships We are ultimately owned by the Deloitte member firm in Australia (Deloitte Touche Tohmatsu). Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. The following represents a summary of work performed by Deloitte and Deloitte Touche Tohmatsu (and other entities related to Deloitte Touche Tohmatsu) (together Deloitte Australia) over the past two years: taxation advisory services have been provided to White Energy in June 2010 we provided an independent expert s report in respect of the acquisition of South Australian Coal Limited by White Energy. All of these services were unrelated to the proposal herein. Neither we, or any other member of Deloitte Australia, nor any partner or employee thereof has any financial interest in the outcome of the Proposed Transaction. What should you do if you have a complaint? If you have any concerns regarding our report or service, please contact us. Our complaint handling process is designed to respond to your concerns promptly and equitably. All complaints must be in writing to the address below. If you are not satisfied with how we respond to your complaint, you may contact the Financial Ombudsman Service (FOS). FOS provides free advice and assistance to consumers to help them resolve complaints relating to the financial services industry. FOS contact details are also set out below. The Complaints Officer PO Box N250 Grosvenor Place Sydney NSW 1220 complaints@deloitte.com.au Fax: Financial Ombudsman Service GPO Box 3 Melbourne VIC 3001 info@fos.org.au Tel: Fax: Wh at compensation arrangements do we have? Deloitte Touche Tohmatsu holds professional indemnity insurance that covers the financial services provided by us. This insurance satisfies the compensation requirements of the Corporations Act 2001 (Cth). 31 July 2010 Deloitte Corporate Finance Pty Limited, ABN , AFSL of Level 1 Grosvenor Place, 225 George Street, Sydney NSW 2000

7 Deloitte Corporate Finance Pty Limited A.B.N AFSL Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia DX 10307SSE Tel: +61 (0) Fax: +61 (0) The Independent Directors White Energy Company Limited Maritime Trade Towers Level Kent Street Sydney NSW February 2011 Dear Directors Independent expert s report Introduction White Energy Company Limited (WECL or the Company) is a diversified coal company listed on the Australian Securities Exchange (ASX) and has American Depositary Receipts (ADR s) listed on the International OTCQX in the United States. WECL primarily engages in the commercialisation of coal upgrading technologies. The Company is the exclusive worldwide licensee of the Binderless Coal Briquetting technology (BCB Technology), a patented coal upgrading technology that converts low grade lignite and sub-bituminous coal into coal that has properties similar to higher value bituminous coal. Cascade Coal Pty Limited (Cascade Coal) is an unlisted company which owns exploration rights for two coal deposits in New South Wales (NSW). Exploration Licence 7406 (EL7406) is known as Mt Penny and Exploration Licence 7405 (EL7405) is known as Glendon Brook. On 30 November 2010 (Announcement Date) WECL announced it had been granted an option to acquire 100% of the equity of Cascade Coal for approximately $486 million. Subsequently, on 14 February 2011 WECL announced it had entered into an agreement to acquire 100% of the equity of Cascade Coal for approximately $486 million (Proposed Transaction). The shares will be acquired by a wholly owned subsidiary of WECL. The principal rationale for the Proposed Transaction is to continue to pursue WECL s strategy of building a diversified coal mining company with the objective of producing high energy bituminous coal for sale into key Asian markets. Under the terms of the Proposed Transaction the consideration offered by WECL is payable by way of a combination of cash and ordinary shares as follows: cash: Cascade Coal shareholders may elect to receive up to 20% of their consideration in cash, subject to a pro rata scale back should shareholders together elect to receive more than $41 million in total Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Member of Deloitte Touche Tohmatsu Limited

8 ordinary shares: the remainder of the consideration will be satisfied through the issue of fullypaid ordinary shares in WECL. The number of ordinary shares to be issued to Cascade Coal shareholders will be determined by reference to the WECL share price, based on the lesser of: o $3.85 per share and o the volume weighted average price (VWAP) of WECL ordinary shares for the 15 trading days immediately before completion of the Proposed Transaction, but subject to a minimum issue price of $3.50 per share. If 100% of the Cascade Coal shareholders accept ordinary shares as consideration WECL will issue a maximum of million ordinary shares as consideration, representing approximately 31% of the enlarged WECL on an undiluted basis. WECL has prepared an explanatory memorandum (Explanatory Memorandum) to be sent to its shareholders for the purpose of providing them with the information necessary in order to decide whether to vote in favour of the Proposed Transaction. The Explanatory Memorandum contains the detailed terms of the Proposed Transaction. An overview of the Proposed Transaction is provided in Section 1 of our detailed report. Purpose of the report ASX Listing Rule 10.1 requires a listed entity to obtain shareholder approval before it acquires a substantial asset from, or disposes of a substantial asset to, an entity that is a related party (or is in a position of substantial influence) when the consideration to be paid, or the value of the asset, constitutes more than 5% of the equity interest of that entity (Substantial Asset). Pursuant to ASX Listing Rules 10.1 and 10.10, the listed entity undertaking the transaction must prepare a notice of meeting containing a report by an independent expert stating whether the proposed transaction is fair and reasonable to shareholders whose votes are not to be disregarded. Mr Travers Duncan, Mr Brian Flannery, Mr John McGuigan, Mr John Atkinson and Mr John Kinghorn, through associated companies, are shareholders in Cascade Coal and are also directors of WECL. Accordingly Mr Duncan, Mr Flannery, Mr McGuigan, Mr Atkinson and Mr Kinghorn and their associates are related parties of WECL for the purposes of Chapter 10 of the ASX Listing Rules (the Related Parties). As the interests in Cascade Coal held by the Related Parties represent a Substantial Asset, the proposed acquisition of these interests requires approval by the shareholders of WECL whose votes are not to be disregarded (Non-associated Shareholders). WECL has requested Deloitte Corporate Finance Pty Limited (Deloitte Corporate Finance) to prepare an independent expert s report advising whether the proposed acquisition of the shares in Cascade Coal held by the Related Parties (the Proposed Acquisition) is fair and reasonable to Nonassociated Shareholders. In evaluating whether the Proposed Acquisition is fair and reasonable to the Non-associated Shareholders we have considered the ASX Listing Rules, Australian Securities and Investments Commission (ASIC) Regulatory Guides and common market practice. This report is to be included in the Explanatory Memorandum to be sent to WECL shareholders for the purpose of seeking their approval of the Proposed Acquisition and has been prepared for the exclusive purpose of assisting the Non-associated Shareholders in their consideration of the Proposed Acquisition. We are not responsible to you, or anyone else, whether for our negligence or otherwise, if the report is used by any other person for any other purpose. Basis of evaluation In our opinion the most appropriate basis on which to evaluate whether the Proposed Acquisition is fair and reasonable, is to consider the overall effect of the Proposed Acquisition on the Non-associated Shareholders and to form a view as to whether the expected benefits to the Non-associated Shareholders outweigh any disadvantages that may result from the Proposed Acquisition. 4

9 The Proposed Acquisition has come about as a consequence of the Proposed Transaction, pursuant to which WECL will acquire all the shares in Cascade Coal, including those owned by the Related Parties. The consideration that would be paid to the Related Parties is identical to that to be received by all other Cascade Coal shareholders. We are of the opinion that it is not possible to assess whether the Proposed Acquisition is fair and reasonable in isolation of the Proposed Transaction. We have therefore assessed whether the Proposed Acquisition is fair and reasonable by assessing whether the Proposed Transaction is fair and reasonable. The key issue for Non-associated Shareholders is to assess whether the consideration payable under the Proposed Transaction is no more than WECL would pay in an arm s length transaction with an unrelated party. We have also considered various other factors relevant to the Proposed Transaction so far as Non-associated Shareholders are concerned. In undertaking our analysis we have considered: the terms of the Proposed Transaction and their impact on Non-associated Shareholders the fair market value of Cascade Coal on a control basis and the fair market value of the consideration to be paid by WECL for the shares in Cascade Coal the impact of the Proposed Transaction on ownership and control of WECL other factors such as the impact on the management of WECL and the potential opportunities and risks afforded to WECL as a consequence of the Proposed Transaction. In forming our opinion as to whether the Proposed Transaction is fair and reasonable we have treated the concepts of fairness and reasonableness as a single opinion, that is, the Proposed Transaction is, or is not, fair and reasonable. Evaluation and conclusion In our opinion the Proposed Acquisition is fair and reasonable to Non-associated Shareholders. In forming our opinion we have considered the advantages and disadvantages of the Proposed Transaction for Non-associated Shareholders as set out below. Advantages of the Proposed Transaction The likely advantages to Non-associated Shareholders if the Proposed Transaction is approved are detailed below. The Proposed Transaction is at fair market value The following table sets out our assessment of the fair market value of Cascade Coal and the value of the consideration to be given by WECL. Table 1: Comparison of fair market value of Cascade Coal with fair market value of consideration Section Units Low Mid High Fair market value of 100% of the equity in Cascade Coal 7.7 $ million Maximum number of ordinary shares in WECL to be issued 1 million Fair market value of WECL ordinary share 8.4 $ Fair market value of the consideration $ million Source: Deloitte Corporate Finance analysis Notes: 1. Assumes 100% of Cascade Coal Shareholders accept ordinary shares as consideration and the issue price is $3.50 per share. Should Cascade Coal shareholders elect to receive the maximum cash consideration available, the value of the consideration will be in the range of $486 million to $511 million. 5

10 The number of WECL ordinary shares to be issued as consideration is contingent on the volume weighted average price of a WECL share during the 15 trading days immediately before completion of the transaction, subject to a minimum issue price of $3.50 per share and a maximum issue price of $3.85 per share. The value of the consideration has been calculated assuming the maximum number of shares is issued (i.e. assuming the issue price is $3.50 per share). If the VWAP during the 15 trading days immediately before completion of the Proposed Transaction exceeds $3.50 per share, fewer WECL shares will be issued. We estimated the fair market value of the equity in Cascade Coal on a control basis by aggregating the fair market value of its underlying assets and liabilities on a sum of the parts basis. In undertaking the sum of the parts valuation Cascade Coal s Mt Penny open cut development project (Mt Penny Open Cut) has been valued using the DCF methodology. We engaged Behre Dolbear Australia Pty Limited (BDA) to provide input into the formulation of key assumptions used in the valuation of Mt Penny Open Cut and to assess the value of Cascade Coal s other exploration assets. We have also had regard to resource multiples observed in recent transactions and implied by share market trading to cross check our valuation. Mt Penny Open Cut is the most significant component of the value of Cascade Coal. The value of Mt Penny Open Cut is highly sensitive to the discount rate and coal price assumptions. Our DCF valuation of the Mt Penny Open Cut utilises a nominal after-tax discount rate of 13.4% and a long term benchmark coal price of USD 80 to USD 85 per tonne. A sensitivity analysis for our overall valuation of Cascade Coal to changes in these factors is set out in Figure 1 and Figure 2 below. Figure 1: Sensitivity analysis to changes in the long term benchmark thermal coal price Figure 2: Sensitivity analysis to changes in the discount rate Equity value ($ millions) Assesed valuation range midpoint Long term coal price ($US/tonne) Equity value ($ millions) Assesed valuation range midpoint % 14.4% 13.9% 13.4% 12.9% 12.4% 11.9% Discount rate Source: Deloitte Corporate Finance analysis Source: Deloitte Corporate Finance analysis We estimated the fair market value of a WECL ordinary share using an analysis of share market trading prior to the announcement of the Proposed Transaction and have cross checked the value using a high level DCF analysis. Based on our analysis the fair market value of the shares in Cascade Coal is broadly equal to the fair market value of the consideration. The midpoint of the valuation range estimated for the equity in Cascade Coal is greater than the midpoint of the valuation range for the consideration. 6

11 Diversification of activities Should the Proposed Transaction proceed WECL will further diversify its business operations and asset base to include exploration and mining of conventional coal assets. This will result in WECL owning a resource that is expected to produce export quality thermal coal from an established thermal coal producing region, reducing WECL s relative reliance on the commercialisation of the BCB Technology. Disadvantages of the Proposed Transaction The likely disadvantages to Non-associated Shareholders if the Proposed Transaction is approved include: Changes to the nature of the business and associated risks On acquisition of Cascade Coal, WECL intends to continue to develop Mt Penny and, if feasible, to mine and produce export thermal coal. In addition WECL intends to conduct further exploration activities at Mt Penny and Glendon Brook. Changes to the underlying nature of the business to include conventional coal exploration and mining may not be compatible with the investment preferences of some Non-associated Shareholders. There are a number of risks associated with developing the coal assets of Cascade Coal including potential delays to the planned commencement of production and sales as a consequence of delays in receiving the necessary approvals, development or production delays, or insufficient port capacity. Furthermore, differences may arise between the expected and actual qualities of the coal produced, such as energy and ash content and this could have an impact on the yield or coal price achieved. Non-associated Shareholders may not want to be exposed to these risks. Dilution of interests in WECL If the Proposed Transaction is completed, the shareholders in Cascade Coal will be issued shares in WECL equivalent to up to 31% of the total ordinary shares in the enlarged WECL on an undiluted basis and the proportionate interests of Non-associated Shareholders in WECL will be reduced. The following table sets out the effect on the interests of the Related Parties and other significant shareholders in Cascade Coal if the Proposed Transaction is approved. Table 2: Interests of Cascade Coal shareholders in WECL Current WECL shareholding WECL shareholding post Proposed Transaction 1 Travers Duncan 9.6% 10.3% Brian Flannery 8.2% 9.3% John McGuigan 1.7% 4.9% John Atkinson 1.7% 4.9% John Kinghorn 3.2% 5.9% Amanda Poole 0.0% 3.7% Other Cascade Coal shareholders 0.0% 8.6% Total Cascade Coal shareholders 24.4% 47.6% Other WECL shareholders 75.6% 52.4% Total 100.0% 100.0% Deloitte Corporate Finance analysis Note: 1. Calculations assume 100% of Cascade Coal Shareholders accept ordinary shares as consideration 7

12 Conclusion On balance, in our opinion, the advantages of the Proposed Transaction outweigh the disadvantages and therefore the Proposed Transaction is fair and reasonable. As a consequence of the Proposed Transaction being fair and reasonable, we are of the opinion that the Proposed Acquisition, being the acquisition of Cascade Coal shares from the Related Parties, is fair and reasonable. This opinion should be read in conjunction with our detailed report which sets out our scope and findings. Yours faithfully DELOITTE CORPORATE FINANCE PTY LIMITED Rachel Foley-Lewis Director Mark Pittorino Director Note: All amounts stated in this report are in Australian dollars ($) unless otherwise stated, and may be subject to rounding 8

13 Contents 1 Terms of the Proposed Transaction Summary WECL s intentions Key conditions of the Proposed Transaction 12 2 Scope of the report Purpose of the report Basis of evaluation Limitations and reliance on information 15 3 Thermal coal industry Coal overview The Australian coal industry Pricing Infrastructure Regulation 26 4 Profile of Cascade Coal Pty Limited Overview Legal structure Summary of the assets Capital structure and shareholders Financial overview 33 5 Profile of WECL Overview Group structure BCB Technology Key commercialisation projects SACL Other opportunities Capital structure and shareholders Share price performance Financial performance Financial position 52 9

14 6 Valuation methodology Valuation methodologies Selection of valuation methodologies Appointment and role of the Technical Expert 57 7 Valuation of Cascade Coal Introduction Future cash flows for Mt Penny Open Cut Valuation of Mt Penny Open Cut Exploration assets Surplus assets Net debt/(cash) Equity value of Cascade Coal Comparable analysis 67 8 Valuation of shares in WECL Introduction Share trading analysis DCF analysis Conclusion 75 Appendices Appendix 1: Glossary 76 Appendix 2: Discount rate 80 Appendix 3: Comparable transactions 93 Appendix 4: Comparable entities 103 Appendix 5: Industry drivers and key markets 106 Appendix 6: Sources of information 114 Appendix 7: Technical Expert s Report 115 Appendix 8: Qualifications, declarations and consents

15 1 Terms of the Proposed Transaction 1.1 Summary On 30 November 2010 WECL announced it had been offered a free 28 day option and entered an exclusivity agreement to acquire the shares in Cascade Coal and subsequently established an Independent Board Committee (IBC) to review the terms of the proposal. On 23 December 2010 WECL announced that it had exercised the option to acquire the shares in Cascade Coal. On 14 February 2011 WECL announced it had entered into an agreement to acquire 100% of the equity of Cascade Coal for approximately $486 million. The shares will be acquired by a wholly owned subsidiary of WECL. Under the terms of the Proposed Transaction the consideration offered by WECL is payable by way of a combination of cash and ordinary shares as follows: cash: Cascade Coal shareholders may elect to receive up to 20% of their consideration in cash, subject to a pro rata scale back should shareholders elect to receive more than $41 million ordinary shares: the remainder of the consideration will be satisfied through the issue of fullypaid ordinary shares in WECL. The number of ordinary shares to be issued to Cascade Coal shareholders will be determined by reference to the WECL share price, based on the lesser of: o $3.85 per share; or o the VWAP of WECL ordinary shares for the 15 trading days immediately before completion of the Proposed Transaction, but subject to a minimum issue price of $3.50 per share. If 100% of the Cascade Coal Shareholders accept ordinary shares as consideration WECL will issue up to million ordinary shares as consideration, representing approximately 31% of the enlarged WECL on an undiluted basis. The Proposed Transaction is subject to the approval of shareholders at a general meeting of WECL shareholders to be held in early April The IBC has prepared a Notice of Meeting and Explanatory Memorandum containing the detailed terms of the Proposed Transaction. 1.2 WECL s intentions In the event that WECL shareholders vote in favour of the Proposed Transaction, WECL intends to progress the development of the Mt Penny coal resource with the intention of producing thermal coal for sale on the export market, and to pursue exploration activities on both the Mt Penny and Glendon Brook sites. WECL also intends to continue the development of its BCB Technology and exploration of the South Australian Coal Limited (SACL) tenement at Lake Phillipson in South Australia. As set out in Section 3 of the Explanatory Memorandum, the principal rationale for the Proposed Transaction is to further underpin WECL s strategy of building a diversified coal mining company with the objective of producing high energy bituminous coal for sale into key Asian markets. 11

16 1.3 Key conditions of the Proposed Transaction The Proposed Transaction is subject to various conditions summarised in Section 4.3 of the Explanatory Memorandum, the most significant being: the approval of the Proposed Transaction by shareholders of WECL Foreign Investment Review Board and other regulatory approvals and consents as required by law or other relevant authorities being successfully obtained 12

17 2 Scope of the report 2.1 Purpose of the report ASX Listing Rule 10.1 requires a listed entity to obtain shareholder approval before it acquires a Substantial Asset from, or disposes of a Substantial Asset to, an entity that is a related party (or is in a position of substantial influence). Pursuant to ASX Listing Rules 10.1 and 10.10, the listed entity undertaking the transaction must prepare a notice of meeting containing a report by an independent expert stating whether the proposed transaction is fair and reasonable to shareholders whose votes are not to be disregarded. Mr Travers Duncan, Mr Brian Flannery, Mr John McGuigan, Mr John Atkinson and Mr John Kinghorn, (through associated companies), are shareholders in Cascade Coal and are directors of WECL. Accordingly Mr Duncan, Mr Flannery, Mr McGuigan, Mr Atkinson and Mr Kinghorn and their associates are related parties for the purposes of Chapter 10 of the ASX Listing Rules. As the interests in Cascade Coal held by the Related Parties represent a Substantial Asset, the proposed acquisition of these interests requires approval by the Non-associated Shareholders. WECL has requested Deloitte Corporate Finance to prepare an independent expert s report advising whether the Proposed Acquisition of shares in Cascade Coal held by the Related Parties is fair and reasonable to Non-associated Shareholders. This report is to be included in the Explanatory Memorandum to be sent to WECL shareholders for the purpose of seeking their approval of the Proposed Acquisition, and has been prepared for the exclusive purpose of assisting WECL s Non-associated Shareholders in their consideration of the Proposed Acquisition. We are not responsible to you, or anyone else, whether for our negligence or otherwise, if the report is used by any other person for any other purpose. 2.2 Basis of evaluation Guidance Neither the ASX Listing Rules, nor the Corporations Act provides a definition of fair and reasonable for the purposes of ASX Listing Rule 10. In evaluating whether the Proposed Transaction is fair and reasonable to the Non-associated Shareholders we have considered the ASX Listing Rules, ASIC Regulatory Guides (in particular Regulatory Guide 111 (RG 111) in relation to the content of independent expert s reports) and common market practice. We have also had regard to ASIC Consultation Paper 143 which sets out proposed changes to RG 111. Listing Rule 10 can encompass a wide range of transactions. Accordingly, fair and reasonable must be capable of broad interpretation to meet the particular circumstances of each transaction. This involves judgement on the part of the expert as to the appropriate basis of evaluation to adopt given the particular circumstances of the transaction. RG 111 provides guidance in relation to the content of independent expert s reports prepared for various transactions. It does not provide specific guidance on the form and content of reports prepared in respect of related party transactions. RG 111 provides general guidance that an expert, in deciding the appropriate form of analysis for the report, should ensure that reasonably anticipated concerns of the people affected by the proposed transaction are adequately dealt with. 13

18 2.2.2 Fair and reasonable In our opinion the most appropriate basis on which to evaluate whether the Proposed Acquisition is fair and reasonable, is to consider the overall effect of the Proposed Acquisition on the Non-associated Shareholders and to form a view as to whether the expected benefits to the Non-associated Shareholders outweigh any disadvantages that may result from the Proposed Acquisition. The Proposed Acquisition has come about as a consequence of the Proposed Transaction, pursuant to which WECL will acquire all the shares in Cascade Coal, including those owned by the Related Parties. The consideration that would be paid to the Related Parties is identical to that to be received by all other Cascade Coal shareholders. We are of the opinion that it is not possible to assess whether the Proposed Acquisition is fair and reasonable in isolation of the Proposed Transaction. We have therefore assessed whether the Proposed Acquisition is fair and reasonable by assessing whether the Proposed Transaction is fair and reasonable. The key issue for Non-associated Shareholders is to assess whether the consideration payable under the Proposed Transaction is no more than WECL would pay in an arm s length transaction with an unrelated party. We have also considered various other factors relevant to the Proposed Transaction so far as Non-associated Shareholders are concerned. In undertaking our analysis we have considered: the terms of the Proposed Transaction and their impact on Non-associated Shareholders the fair market value of Cascade Coal on a control basis and the consideration to be paid by WECL for the shares in Cascade Coal the impact on ownership and control of WECL other factors such as the impact on the management of WECL and the impact on the potential opportunities and risks afforded to WECL as a consequence of the Proposed Transaction. In forming our opinion as to whether the Proposed Transaction is fair and reasonable we have treated the concepts of fairness and reasonableness as a single opinion, that is, the Proposed Transaction is, or is not, fair and reasonable. Fair market value is defined as the amount at which assets or shares would be expected to change hands between a knowledgeable willing buyer and a knowledgeable willing seller, neither of whom is under any compulsion to buy or sell. Special purchasers may be willing to pay higher prices to reduce or eliminate competition, to ensure a source of material supply or sales, or to achieve cost savings or other synergies arising on business combinations which could only be enjoyed by the special purchaser. Our valuation analysis has not been premised on the existence of a special purchaser Individual circumstances We have evaluated the Proposed Acquisition for Non-associated Shareholders as a whole and have not considered the effect of the Proposed Acquisition on the particular circumstances of individual investors. Due to their particular circumstances, individual investors may place a different emphasis on various aspects of the Proposed Acquisition from the one adopted in this report. Accordingly, individuals may reach different conclusions to ours on whether the Proposed Acquisition is fair and reasonable. If in doubt investors should consult an independent adviser who will have regard to their individual circumstances. 14

19 2.3 Limitations and reliance on information The opinion of Deloitte Corporate Finance is based on economic, market and other conditions prevailing at the date of this report. Such conditions can change significantly over relatively short periods of time. This report should be read in conjunction with the declarations outlined in Appendix 8. This engagement has been conducted in accordance with professional standard APES 225 Valuation Services issued by the Accounting Professional and Ethical Standards Board Limited (APESB). Our procedures and enquiries did not include verification work nor constitute an audit or a review engagement in accordance with standards issued by the Auditing and Assurance Standards Board (AUASB) or equivalent body and therefore the information used in undertaking our work may not be entirely reliable. 15

20 3 Thermal coal industry 3.1 Coal overview Coal is a fossil fuel composed primarily of carbon and hydrogen, formed through the natural application of high temperatures and pressure to biological matter over extended periods of time. Coal is found in seams layered between sedimentary rocks. The formation of coal follows a process called coalification and begins with peat being transformed into lignite or brown coal. After millions of years the lignite is converted into sub-bituminous coal. This process continues and sub-bituminous coal becomes harder and turns into bituminous coal. As the progressive maturity continues, bituminous coal ultimately forms anthracite. The characteristics of each class of coal and its uses are summarised in Figure 3 below. Figure 3: Classes of coal Carbon/energy content High High Moisture content Low rank coals (48%) Hard coal (52%) Brown coal Black coal Lignite (20%) Sub-bituminous (28%) Bituminous (51%) Anthracite (<1%) Thermal Metallurgical Largely power generation Power generation Cement manufacture Industrial uses Manufacture of iron and steel Domestic/industrial including smokeless fuels Source: Australian Coal Association As illustrated in the figure above, the low rank lignite coals have high moisture content, ranging from 30% to 70% and relatively low energy content. Sub-bituminous coals are also characterised by high moisture levels and low energy content. The harder bituminous coals have lower moisture levels, ranging from 1.5% to 7%, and greater energy content relative to the low rank coals. Bituminous coals are more stable, and are more economical to transport than the lower grade sub-bituminous coals. The mineral (or inorganic) content of coal is another significant characteristic and is measured by the ash content (incombustible material). Coal is mined by both open cut and underground mining methods. Open cut mining involves using a dragline, truck/shovel fleet, or a combination of these methods to remove waste rock (overburden). The uncovered coal is then removed using excavators and trucks. Underground mines in Australia predominantly use the longwall method of mining. This involves underground roadways being cut into the coal seam to expose blocks of coal that can be up to several hundred metres wide and several kilometres long. The majority of world coal production is consumed in the country in which it is produced. While exports represent a relatively small amount of total world coal production, more than three quarters of Australia s total coal production is exported 1. 1 BP Statistical Review of World Energy June

21 3.1.1 Thermal coal Thermal coal is primarily used as an energy source for coal-fired power plants, which generate approximately 41% of the world s electricity output 2. Thermal coal is also used in cement manufacturing and other major energy intensive industries which use heat and/or steam in their production processes. As a result, thermal coal is generally sold at prices which reflect its energy content. The majority of the world s imported thermal coal is represented by seaborne trade. As a result, the costs associated with ocean freight represent a significant portion of the cost of delivering export coal to the end user. As depicted in Figure 4 below, the International Energy Agency forecasts a continued dominance of coal and other fossil fuels in the energy mix in global energy consumption. Coal is generally considerably more cost effective than other energy sources, however generally is less favourable from an environmental perspective. Figure 4: World energy demand (million tonnes of oil equivalent) 17,000 12,750 Mtoe 8,500 4, Coal Oil Gas Nuclear Hydro Biomass and waste Other renewables Source: World Energy Outlook 2010, International Energy Agency In 2010 world thermal coal trade is estimated to have increased by 5% from The majority of future growth is expected to come from Asia, primarily China and India. Demand for energy in these countries has been rapidly growing, to the extent that they are turning increasingly to imported coal as a source of energy. China and India together accounted for 10% of the world s energy consumption in 1990, and are forecast to account for 30% in We have outlined below the status of, and outlook for, key countries in the global thermal coal export markets. 2 World Coal Statistics 2010, World Coal Association 3 Australian Commodities, December Quarter 2010, ABARES 4 International Energy Outlook 2010, U.S. Energy Information Administration 17

22 Importers China rapid economic growth and urbanisation has lead to increased electricity demand where domestic production can no longer satisfy domestic consumption requirements. This domestic production shortfall was magnified by government closure of a number of small locally owned mines due to safety concerns and inefficient coal utilisation. The country is now working to increase the speed of the development of its coal resources and related transport infrastructure in the northern and western parts of the country. Demand for thermal coal in China is expected to increase by approximately 40% over the five years to India demand for thermal coal imports is expected to grow due to the commissioning of coal fired electricity generation capacity to meet the electricity needs of the world s second largest population. There is a preference for imports because of its higher quality characteristics and supply relative to domestically produced coal. Much of this demand may be met by Indonesian imports South Korea increased electricity consumption and expansion of coal-fired generating capacity have caused thermal coal imports to significantly increase in recent years, however, going forward, imports are expected to increase at a more moderate pace given slower rates of forecast energy consumption growth Japan although there is expected to be a moderate increase in electricity demand, much of this is expected to be satisfied by a greater utilisation of nuclear power Malaysia historically, Malaysia s power stations have been gas-fired and it is expected that coal-fired power plants will comprise a substantial proportion of new electricity generating capacity 6 due to its government s policy to diversify its fuel sources. It is expected that these coal-fired power plants will use imported thermal coal Europe overall, Europe s demand for imports of thermal coal is expected to decline, primarily in the UK and Spain due to low population growth, carbon trading regulations (introduced in 2006) and competition from alternative sources of energy such as natural gas and nuclear power. However the decreases will be somewhat offset by small increases in demand in Germany and France. France ceased domestic coal production from Exporters Australia Australian thermal coal typically has high energy content, moderate ash levels and is generally low in contaminants. The coal qualities, abundant resources, well developed infrastructure and proximity to key markets have led to Australia becoming the world s second largest exporter of thermal coal. Since 2005 there has been insufficient capacity in the coal chain infrastructure to meet growing international demand. Australian exports are expected to contribute significantly to supplying growing world demand with substantial expansions planned in both infrastructure and mine capacity. Indonesia Indonesian thermal coal typically has lower energy content than Australian coal but like many geologically young deposits, has lower ash and sulphur levels. Indonesia s proximity to key markets together with capacity constraints in Australia have combined to facilitate Indonesia becoming the world s largest exporter of thermal coal (by volume) 5 Global Coal Mining, IBISWorld Industry Report, September Global Coal Mining, IBISWorld Industry Report, September

23 Russia demand for Russian coal exports has shifted from Europe to Asia. Expansions and modernisation to coal export infrastructure have provided higher export capacity South Africa supply chain problems and industrial action limited coal export growth in 2010, however planned infrastructure upgrades at the Richards Bay Coal Terminal are expected to increase supply going forward. Countering this is Eskom, the largest electricity producer in South Africa, which is lobbying the government to divert exports to the domestic market to meet demand requirements 3.2 The Australian coal industry Introduction and recent history Australia is rich in coal with proven reserves of approximately 76.2 billion tonnes (Bt) of coal as at 31 December Australia s coal production consists primarily of bituminous coal which includes thermal coal and metallurgical coal. A wide range of thermal coals are available from Australian coal producers with coal characteristics varying from mine to mine. Australian thermal coal typically has high energy content, moderate ash levels and is generally low in contaminants such as sulphur and other heavy metals which may reduce the value of the coal. Coal in Australia is exported from Queensland (QLD) and NSW where high grade resources are most abundant, proximate to the coast and where associated rail and port infrastructure is well established. The majority of Australia s metallurgical coal is produced in QLD while production in NSW is largely classed as thermal coal. NSW and QLD produced approximately 97% of Australia s saleable output of 8 black coal, as well as 100% of Australia s black coal exports in the year ended 30 June Subbituminous black coal and brown coal are used in domestic energy production in Victoria and to a lesser extent in South Australia where it is mined to meet expected production requirements of local or co-located coal-fired power plants. The figure below details the saleable coal production in Australia over the last five financial years by state. Figure 5: Australian saleable coal production by state (Mt) Mt FY05 FY06 FY07 FY08 FY09 Queensland Tasmania NSW Western Australia Victoria South Australia Source: Energy in Australia 2010, Department of Resources, Energy and Tourism, Deloitte Corporate Finance Analysis Notes: 1. Victorian coal production represents brown coal while all other states produce black coal 7 BP Statistical Review of World Energy June The Australian Coal Industry Coal Production, Australian Coal Association 19

24 Australian coal production and consumption has increased over the last decade. Annual production has grown between 1999 and 2009 at a compound average growth rate (CAGR) of 3.6% while consumption has grown at a CAGR of 1.0% 9. Figure 6: Australian thermal and metallurgical coal production and consumption ( ) 350 4% Mt of coal equivalent % 2% 1% 0% Production Production CAGR Consumption Consumption CAGR Source: BP Statistical review of world energy June 2010, Deloitte Corporate Finance analysis Notes 1. The source of this figure is presented in Mt of oil equivalent, we have converted to Mt of coal equivalent using a conversion factor of The analysis includes coking coal, which represents approximately 50% 10 of Australia s export coal industry Thermal coal In the financial year ended 30 June 2010 (FY10), thermal coal is forecast to be Australia s fourth largest commodity export and is projected to generate approximately $11 billion of revenue. This amount represents a decrease of 38% from $18 billion in FY09 primarily as a result of price decreases 11. Australia is the world s second largest exporter of thermal coal, on a per tonne basis, having exported Mt per annum in However, on an energy content basis, it is the world s largest exporter Demand The key drivers of demand for Australian thermal coal are as follows: global energy demand: particularly economic growth in Asia, is expected to drive a sustained increase in the demand for electricity. Growth in the Chinese and Indian economies has led to increased energy needs to the extent that a growing share of energy sources, including coal, now need to be imported 9 BP Statistical Review of World Energy June Australian Commodity Statistics 2010, ABARES 11 Department of Foreign Affairs and Trade 12 Australian Commodity Statistics 2010, ABARES 20

25 proximity to key export markets: Australia has a geographic advantage over many of its peers, apart from Indonesia, being located close to the world s largest importers of thermal coal, being Japan (113 Mtpa), China (102 Mtpa), South Korea (82 Mtpa) and India (44 Mtpa) (in 2009) 13. Australia s thermal coal exports from FY05 to FY09 by volume are set out in the following figure which illustrates the significance of the Asia Pacific region, particularly Japan Figure 7: Australian thermal coal exports (Mt) Mt Source: Energy in Australia 2010, Department of Resources Energy and Tourism In FY09, the increase in exports to China more than offset the decrease to Japan. China s imports grew strongly because of high electricity demand and high domestic prices relative to the price of imports competitiveness of coal: relative to alternative sources of energy in the production of electricity, from both a cost (favourable) and environmental impact perspective (unfavourable) high quality coal: Australia s coal contains a higher energy content relative to that of its major export competitors, with 48% of Australian proved coal reserves being anthracite or bituminous. This compares to 40% in Indonesia and 31% in Russia 14 reliability and accessibility of coal: Australia generally has efficient mining operations, high quality rail and port infrastructure as well as stable government policies relative to its major export competitors Supply 0 FY05 FY06 FY07 FY08 FY09 FY10 Japan Taiwan EU South Korea China Other The following factors influence the supply of thermal coal available for export in Australia: capacity constrained infrastructure: since 2005 there has been insufficient capacity in the NSW coal loading terminals and rail systems to match demand, resulting in large queues of ships forming at coal loading terminals. These infrastructure constraints have contributed to coal prices reaching historically high levels in recent years and there exists a need for significant investment in order to support the mining boom and facilitate the growth in exports. Recent and further planned expansion of coal loading terminals and rail systems are expected to ease capacity constraints over the medium term 13 World Coal Statistics 2010, World Coal Institute 14 BP Statistical Review of World Energy June

26 investment in new mining capacity: a significant number of new projects are expected to be developed as infrastructure constraints are eased skill shortages: job vacancies in the resources sector grew five-fold between 2002 and 2008 causing delays in some projects and higher costs. Industry projects suggest that the resources sector will require an additional 70,000 employees by 2015 with coal mine operators comprising some of the key shortage positions 15 weather conditions: while more of a short term supply impediment, there has recently been prolonged wet weather in Australia, which has limited supply Outlook Australian coal exports are forecast to increase over the period from 2008 to 2035, which will be driven by increased exports to Asian markets. The majority of the growth in Asian demand for coal exports is forecast to come from China and India. Figure 8: Australian coal exports (2008 to 2035) by energy level KCal (trillion) 1,800 1,500 1, Europe Asia America Source: International Energy Outlook 2010, U.S. Energy Information Administration In FY11, the value of Australia s thermal coal exports is forecast to increase by 32% to $15.7 billion (FY10: $11.9 billion) which is driven by higher export prices and volumes 16. The factors underpinning Australia s high rate of expected export growth in the medium term are as follows: improved infrastructure: exports are projected to rise substantially following completion of Australia s rail and port infrastructure investments. In particular, expanded port capacity in NSW is forecast to encourage a number of coal producers to increase production at existing mines new mines: an increase in recently completed coal mines, including Xstrata s Blakefield South, Rio Tinto s Clermont open cut and Whitehaven Coal s Narrabri Coal project, will provide additional supply to meet the growing demand from Asia. 15 Submission to the Visa Subclass 457 Reference Group, March 2008 Minerals Council of Australia 16 Australian Commodities, December Quarter 2010, ABARES 22

27 3.3 Pricing In recent years, the effect of strong demand for, and limitations to supply of, thermal coal in the Asia Pacific market has placed upward pressure on prices. The recent global financial crisis mitigated some of these effects on price due to its negative impact on global economic growth. Coal has traditionally been sold as a cost-plus commodity, with prices trending around the marginal cost of production for high cost producers. In addition to underlying supply and demand drivers the price of coal is also affected by the specific characteristics of the product. Thermal coal prices are dependent on energy content with the benchmark price set for coal with a calorific value of 6,700 kilocalories (kcal) per kilogram (gross air dried) and adjustments made depending on the specific energy and ash content of the coal. Low sulphur coals may also attract a premium price. The international coal market can be divided between the Asia Pacific and the Atlantic regions, where significantly different forces influence coal prices. The Atlantic market is highly competitive with numerous coal suppliers and a number of substitutes available such as established gas, hydroelectric and nuclear power. Asia Pacific is characterised by a lack of natural resources, resulting in a high dependence on imported fuels and raw materials. Customers in this region have historically secured the majority of their tonnage requirements via contract and supplemented these with limited purchases on the spot market. In the Asia Pacific market, coal is predominantly purchased and sold pursuant to term contracts, with volumes and prices renegotiated each year. These contracts generally specify key parameters associated with coal quality, tonnages, cargo sizes, delivery arrangements and prices agreed quarterly between the purchaser and the supplier. Historically, Japan has been the world s largest coal importer and coal price settlements between Japanese steel mills and the Australian coal mines tend to represent overall market conditions within the coal industry with prices becoming market reference prices for the Asia Pacific region. Prices are set on a quarterly basis during negotiations that generally take place in advance of the Japanese Financial Year (JFY), which commences on 1 April. Australia s thermal coal exports from FY2006 to FY2010 are summarised in the following table: Table 3: Australian thermal coal prices Volume (Mt) Value (A$ million) 7,206 6,758 8,365 17,885 11,884 Unit value (A$ per tonne) Source: ABARES Xstrata plc generally sets the benchmark prices for thermal coal. In November 2010 the Newcastle global thermal coal spot price had increased to US$107 per tonne and increased further to US$ in December 2010 and US$ by January The increase has been driven by cold weather in the Northern Hemisphere as well as increased imports by China and India. Subsequent weather disruptions affecting supply in Australia have forced spot prices even higher

28 A consensus of brokers forecasts for thermal coal prices is set out in the figure below. Figure 9: Broker consensus price forecast for thermal coal (US$/tonne) US$/tonne FY11 FY12 FY13 FY14 FY15 Source: Deloitte Corporate Finance analysis Note: Above prices are in nominal terms Thermal coal prices are expected to rise until FY12. Increases in thermal coal prices in the short to medium term are expected to be driven by increased demand from China, a reduction in exports from Indonesia due to increasing domestic demand and greater demand from India as part of the country s power station build program. Subsequent to FY13, prices are expected to decline due to coal supply shortages being mitigated by new infrastructure and mine developments in Australia and overseas. 3.4 Infrastructure As Australia exports the majority of its coal production, access to rail and port infrastructure is critical for producers in the coal industry. Since 2005 there has been insufficient capacity in the coal loading terminals and rail systems to match demand, resulting in large queues of ships forming at coal loading terminals. Large queues result in significant demurrage costs for miners. These infrastructure constraints have contributed to coal prices reaching historically high levels in recent years. The following sections outline the key rail network and coal loading terminals supporting the operations of coal mining companies in the Hunter Valley region Hunter Valley rail network Coal produced in the Hunter Valley, NSW is almost exclusively transported to the Port of Newcastle and Port Kembla via the Hunter Valley rail network (HVRN). The HVRN is managed by the Australian government via the Australian Rail Track Corporation (ARTC) which commenced a 60- year lease on 5 September 2004 and is 100% owned by the Australian government. The following figure provides an overview of the Hunter Valley coal chain The chain of coal delivery in NSW from coal mines in the Hunter Valley to the Port of Newcastle and to domestic coal-fired power stations in the Hunter Valley. 24

29 Figure 10: Overview of the Hunter Valley coal chain Source: Hunter Valley Coal Chain Logistics Team There are currently two major coal haulage operators using the HVRN, Pacific National Pty Limited and Queensland Rail. Coal producers will typically sign long term contracts with rail operators in order to secure the required rail capacity. In addition, some producers have undertaken to operate their own trains. In September 2009, Xstrata signed a deal with Freightliner Australia (a subsidiary of Freightliner Group Limited) for the provision of rail freight services, commencing in late 2010 thereby allowing Xstrata to bypass the incumbent operators. In 2009, the theoretical coal capacity of the HVRN was approximately 189 Mt per annum (Mtpa). Practical deliverable capacity is significantly lower due to factors such as maintenance, surge volumes, system reliability and constraints imposed by the capacity of the Port of Newcastle. In 2009, the declared capacity of the Hunter Valley coal chain as an integrated operation was 94.5 Mt. Since 2005, the ARTC has released annual infrastructure enhancement strategies to ensure that rail capacity stays ahead of demand. The most recent 2009 strategy update covers a ten-year horizon to This strategy examines the levels of operational delay on the network, the operational robustness of the network and any opportunities for improved operational performance in addition to the provision of sufficient capacity. ARTC projects approximately $2.3 billion will be invested in infrastructure projects over the 10 year period from FY2007 to FY2017. In addition, rail operators have sought to increase capacity by upgrading existing or purchasing new locomotives, increasing the number of wagons per train, and increasing the frequency of runs Port of Newcastle Infrastructure constraints in NSW are most evident at the Port of Newcastle which, together with the Dalrymple Bay Coal Terminal in Queensland, represents in excess of 55% of the total coal exporting capacity of the east coast of Australia. 25

30 There are currently three coal loading terminal operators serving the NSW coal export market; Port Waratah Coal Services Limited (PWCS) and Newcastle Coal Infrastructure Group (NCIG) operating at the Port of Newcastle and Port Kembla Coal Terminal Limited (PKCT) operating at Port Kembla. PWCS terminal has been identified by Cascade Coal as the most likely port of export and believe there may be an opportunity to utilise some excess capacity at Port Kembla. PWCS operates two coal loading terminals (Carrington and Kooragang) with a current combined capacity of 113 Mtpa. NCIG commenced port operations in March 2010, accepting its first coal to its newly constructed 30 Mtpa terminal at Kooragang Island, bringing total capacity at the Port of Newcastle to approximately 140 Mtpa. Prior to 2010, the Port of Newcastle used a capacity system to manage the coal supply. Each year, coal producers nominated the volumes they required to PWCS, which allocate volumes accordingly. A capacity balancing system (CBS) provided coal producers with a proportionate share of the available capacity of the coal export infrastructure supply chain. As a result, there had been little opportunity or incentive for coal producers to introduce new production capacity such as the development of new mines and expansion of existing capacity until port capacity was expanded or could be ensured. To alleviate the infrastructure constraints in the long term, the following measures have been implemented: expansion of the Kooragang coal loading terminal by PWCS to meet expected producer demand of 133 Mtpa in The development consents allow for further expansion to approximately 145 Mtpa terminal capacity by 2012 PWCS has recently obtained major project facilitation status from the Commonwealth Government for a fourth terminal which will allow further expansion after the capacity of the current PWCS footprint at Kooragang is fully developed. Depending on final planning approvals, the fourth terminal could deliver an additional 90Mtpa of coal loading capacity at Newcastle. PWCS recently announced that the fourth terminal is behind schedule by approximately one year NCIG constructed and commissioned a terminal on Kooragang Island at the Port of Newcastle, increasing capacity by 30 Mtpa during NCIG is forecast to complete stage 2 in 2012, expanding capacity to 53 Mtpa. There is potential for further expansion up to 66 Mtpa at a later date. Capacity at NCIG will be allocated to the shareholders of NCIG in line with their proportionate shareholding 19. Producers now nominate for ten-year rolling take-or-pay agreements at PWCS. This is an annual process with the first tranche of contracts having effect from Under the Terminal Access Protocol, PWCS is required to expand capacity once the total of existing ten-year agreements and binding nominations for new ten-year allocations exceed capacity. 3.5 Regulation Renewable energy In 2009 the Australian Government implemented a Renewable Energy Target (RET) scheme to encourage the uptake of renewable energy in electricity generation. The current target is to achieve 20% of the country s electric supply from renewable sources by Shareholders in the project include BHP Billiton Limited (35.5%), Centennial Coal Limited (8.8%), Donaldson Coal Pty Limited (11.6%), Peabody Energy Corporation (through Excel Coal Limited) (17.7%), Felix Resources Limited (15.3%) and Whitehaven Coal Limited (11.1%). 26

31 From January 2011, the existing RET scheme is separated into two parts the Small scale Renewable Energy Scheme (SRES) and the Large scale Renewable Energy Target (LRET). Both parts of the scheme have been established to encourage additional generation of electricity from renewable energy sources by providing a mechanism by which small-scale systems and renewable energy power stations can create and sell certificates based on how much renewable electricity they generate or displace. The SRES scheme will provide support to households and businesses to install small-scale solar, wind and hydro electricity systems. The LRET legislation supports the Government s commitment to achieving the RET via the obligation for purchasers of wholesale electricity to meet annual targets for the purchase of renewable energy and the use of Renewable Energy Certificates to demonstrate compliance Carbon Pollution Reduction Scheme On 27 April 2010, the Australian Government announced its decision to delay the implementation of the Carbon Pollution Reduction Scheme (CPRS), an emissions trading scheme which was aimed at reducing greenhouse gas emissions to enable Australia to meet future emission targets, until after the expiry of the Kyoto Protocol in 2012 and subject to obtaining greater clarity on the action of other major economies including the US, China and India. The CPRS was intended to form part of a framework for meeting Australia s target to reduce emissions either to: 25% below 2000 levels by 2020 under the proposed international agreement to restrain atmospheric concentrations of greenhouse gases to 450 parts per million, or; lower levels if there is insufficient contribution to carbon reduction by other emitters around the world. At the point of implementation of any emissions trading or similar scheme, the Government is expected to set a cap on the total amount of carbon pollution allowed to be emitted by certain industry sectors without a financial consequence. The Australian coal industry is likely to be impacted by any emissions scheme because of the waste methane that is produced during the coal mining process Proposed taxation legislation The Australian Government has recently announced proposed changes to the tax legislation for nonrenewable resource projects, which are yet to be enacted. If the proposed reforms are adopted, existing and new Australian coal and iron ore projects will be subject to a Minerals Resource Rent Tax (MRRT) commencing on 1 July The proposed tax has the following key characteristics: the tax is levied at a rate of 30% of the MRRT profit less an extraction allowance of 22.5% of the tax liability to focus the tax on value of resource instead of the value added through mining expertise MRRT profit is assessed after deducting operating costs and capital costs from revenue and after credits for state royalties paid unutilised royalties and losses can be carried forward and are uplifted at a 7% premium to the long term government bond carry forward losses can be transferred to other projects companies with MRRT assessable profits under $50 million p.a. will be excluded. 27

32 4 Profile of Cascade Coal Pty Limited 4.1 Overview Cascade Coal Pty Limited is an unlisted company incorporated in Australia in 2006 which owns exploration rights for two coal deposits in NSW. Exploration Licence 7406 (EL7406) is known as Mt Penny and Exploration Licence 7405 (EL7405) is known as Glendon Brook. 4.2 Legal structure Figure 11 below sets out a simplified group structure for Cascade Coal. Figure 11: Group structure for Cascade Coal Source: Cascade Coal 4.3 Summary of the assets Background The principal assets of Cascade Coal are detailed below: Mt Penny: located in the Western Coalfield of NSW 60km northeast of Mudgee and 180km west of the Port of Newcastle. Cascade Coal has focused its efforts on Mt Penny and is currently conducting an exploration program. The total area of the tenement is 84 square kilometres. Glendon Brook: is located 12km east of Singleton in the NSW Hunter Valley Coalfield and immediately south of ML 1309 known as Mitchell s Flat, which was granted to Xstrata. Cascade Coal commenced exploration activities in September

33 A location map of EL 7405 and EL 7406 is shown in Figure 12 below. Figure 12: Location of EL 7406 and EL 7405 EL 7406 Mt Penny EL 7405 Glendon Brook Source: Cascade Coal BDA has been commissioned to provide a specialist technical report (included as Appendix 7) including details in respect of the geology, minerals and resources of each of the tenements, approvals and licences to conduct exploration activities, status of exploration activities and likely paths to commercialisation. A brief overview of each of the tenements is set out below Mt Penny Coal resources Cascade Coal has defined its Mt Penny tenement into five Resource Blocks. Resource Blocks 1 to 4 have the potential to be mined using open cut methods while Resource Block 5 would require an underground mining method. Resource Block 1 is the main focus of development activity. Resource Block 1 is a development interest and has been the subject of a drilling program, conceptual/prefeasibility and mine planning studies. Resource Blocks 2 through 5 are exploration interests at the scoping and conceptual study stage. Insufficient drilling has been undertaken to prepare conceptual mine plans or define measured or indicated resources. 29

34 Figure 13: Map of the Mt Penny Tenement Resource Block 2 Resource Block 1 Resource Block 3 Resource Block 5 Resource Block 4 Source: Cascade Coal The Mt Penny tenement contains coal resources of 173.7Mt. All measured and indicated resources are contained within Resource Block 1. The resources, which have been certified by competent persons in accordance with the JORC Code in September 2010, are summarised in Table 4 below. Table 4: JORC certified in situ coal resources Mt Penny Surface area (ha) Measured resources (Mt) Indicated resources (Mt) Inferred resources (Mt) Total resources (Mt) Resource Block 1 1, Resource Block Resource Block Resource Block Resource Block Total 2, Source: Cascade Coal 30

35 Cascade Coal recently released a reserve statement identifying Mt (air dry basis) of run of mine (ROM) coal from Resource Block 1 as a probable reserve. Coal seams recognised are Coggan 2, Coggan 1, Ulan Lower, Ulan Upper and Goulburn River. The dominant Ulan Lower seam has high ash content. Specific energies of the seams are within the range for export products if ash content can be lowered through washing. Moisture content averages around 3% (air dry basis). Cascade Coal s management expect the coal resources of Resource Block 1 to be appropriate for producing thermal coal for export and domestic utility power generation. Washing will be required to achieve a product suitable for export, targeting 17.5% ash. Full washability studies have not been completed so definitive specifications for products available from beneficiation are not yet known. Marketable reserves can be quantified following completion of these studies. Mine plan / concept studies The conceptual mine plan developed for Resource Block 1 includes the following key data: target tonnage of 105 Mt at 5Mtpa ROM 557 Mbcm of overburden waste mining system to consist of truck and excavator with recovery of seams down to 0.2m thick water capture in dams ahead of mining activity mining to commence in the north and progress southwards in a series of east to west strips. As the pit develops, waste and rejects will be dumped back into the mined-out void rehabilitation of the mine and Coggan Creek to be progressive Cascade Coal has commenced preliminary environmental studies which include seasonality surveys, flora and fauna investigations, water assessment, Aboriginal and European heritage assessment and other studies which are generally consistent with the NSW Director General of Planning s (DGR) Environmental Assessment Requirements (EAR). Further environmental studies will be completed following receipt of the DGR s EAR. Land ownership Mt Penny Properties Pty Limited has put and call options to purchase all necessary land located within the Resource Block 1 area. Cascade Coal is negotiating with the other land owners within the EL. Native title As of 30 September 2010, according to searches conducted by the Native Title Tribunal the Mt Penny coal project is not covered by any native title determinations. Aboriginal Cultural Heritage commenced surveys in October 2010 in order to ensure that Cascade Coal complies with the guidelines set out by the NSW Department of Environment, Climate Change and Water (DECCW). Water licences Cascade Coal estimates that Resource Block 1 will require 1,500 megalitres of water for 5 Mt per annum of production. Cascade Coal expects to be able to control water access licences to provide adequate water from six different locations. 31

36 Commercialisation prospects The commercialisation plan identified by Cascade Coal is set out below: Cascade Coal management propose washing all coal to produce a blended product averaging 17.5% ash content, with a calorific value averaging approximately 6500 kcal per kilogram gross air dried (GAD) Cascade Coal management has estimated a saleable quantity of approximately 3.6 Mt per annum over 21 years based on an expected yield of 70% the blended product is expected to be suitable for the Korean, Chinese and Indian coal markets first coal is expected to be produced in FY2014 and full production in 2016 power and transportation networks: o staged bi-directional loop proposed to enable routing of trains to Newcastle. New passing lanes will need to be constructed at Wollar and Bylong o PWCS Terminal has been identified as the most likely port of export o Power is planned to be sourced from Bylong sub-station o Cascade Coal intends to negotiate contracts with ARTC and PWCS for rail and port access. Cascade Coal estimated development capital expenditure to first coal of approximately $440 million for Resource Block 1, with mining equipment, coal handling plant and coal preparation plant expected to be the largest capital outlays. Other key milestones include: receipt of the DGR s EAR application for and receipt of major project approval under Part 3A of the Environmental Planning and Assessment Act 1979 completion of detailed mine planning and design Management intends to further drill Resource Blocks 2 to 4 to upgrade resources from inferred status, undertake mine planning and feasibility studies, and mine these Resource Blocks in turn as smaller satellite style operations, concurrently with Resource Block Glendon Brook Glendon Brook is an early stage exploration project. At this stage there has not been sufficient exploration and drilling work performed to prepare a conceptual mine plan or define measured or indicated resources. Cascade Coal commenced exploration activities in September 2010, comprising a 263m deep fully cored stratigraphical hole in the central steep dipping zone of the Tenement. Cascade Coal recovered 22 ply samples from the stratigraphical hole ranging from 0.3 to 2.1m thick. Seven bore-holes previously drilled have all intersected coal at depths ranging from 11m to approximately 300m, with a cumulative thickness of between 6.5m and 26m. Cascade Coal estimates Glendon Brook has the potential to host a coal target in the order of 50 Mt. 32

37 4.4 Capital structure and shareholders The outstanding shares in Cascade Coal are closely held with 84% of the total shares on issue held by six shareholders. The following table sets out the key shareholders of Cascade Coal as at 30 November Table 5: Top Cascade Coal shareholders as at 30 November 2010 Number of securities Percentage of total issued securities Gaffwick Pty Limited 2,000,000 24% Riverbend Investments Pty Limited 1,000,000 12% Amanda Poole 1,000,000 12% Sanjur Pty Limited 1,000,000 12% J A Kinghorn and Co Pty Limited 1,000,000 12% Arthur Phillip Nominees Pty Limited 1,000,000 12% Subtotal 7,000,000 84% Other shareholders 1,319,055 16% Total 8,319, % Source: Computershare Investor Services Pty Limited Several beneficial shareholders of Cascade Coal are directors and shareholders of WECL: entities associated with Mr Travers Duncan hold 2.0 million shares in Cascade Coal through Gaffwick Pty Limited representing 24% of the outstanding equity in the company, of which 1.0 million of these shares are held beneficially for entities associated with Mr Brian Flannery entities associated with Mr John McGuigan, Mr John Atkinson and Mr John Kinghorn each hold 1.0 million shares in Cascade Coal through Sanjur Pty Limited, Riverbend Investments Pty limited and JA Kinghorn and Co Pty Limited respectively, each representing 12% of the outstanding equity in the company 4.5 Financial overview Financial performance Since Cascade Coal holds only exploration assets, the company does not generate any trading revenue. Accumulated losses totalled $0.3 million as at 30 November 2010 as costs related to exploration activities have been capitalised. 33

38 4.5.2 Financial position The unaudited consolidated balance sheet of Cascade Coal as at 30 November 2010 is set out in the table below. Table 6: Financial position 30 November 2010 unaudtied ($ 000) Cash and cash equivalents 1,174 Capitalised mining costs 41,761 Receivables 382 Total assets 43,317 Trade and other payables 3,212 Shareholder loans 12,445 Total liabilities 15,657 Net assets 27,660 Source: Cascade Coal We note the following in relation to the table above: capitalised mining costs of $41.8 million relate to the carrying value of acquisition, rights and other mining costs relating to the Mt Penny and Glendon Brook mining sites. Shareholder loans of $12.4 million relate to loans from several shareholders used to finance exploration and development activities the Cascade Coal tax consolidated group has tax losses estimated to be between $35 million and $42 million at 30 November Tax losses are not reflected on the balance sheet as deferred tax assets. 34

39 5 Profile of WECL 5.1 Overview WECL is a diversified coal company listed on the ASX with ADR s listed on the International OTCQX in the United States. WECL primarily engages in the commercialisation of coal upgrading technologies. The Company is the exclusive worldwide licensee of the BCB Technology, a patented coal upgrading technology that converts low grade lignite and sub-bituminous coal into coal that has energy content similar to higher value bituminous coal. WEC also owns SACL, which owns an exploration licence covering the Lake Phillipson coal and mineral exploration area in South Australia. The Tenement contains substantial coal resources and is believed to be prospective for metallic deposits including copper, gold, iron ore and uranium. WECL is headquartered in Australia, has operations in Indonesia and is pursuing further opportunities in the United States and South Africa. 5.2 Group structure Figure 14 below sets out a simplified group structure for WECL. Figure 14: WECL simplified group structure 1 Source: WECL Note 1: ownership 100% unless otherwise stated In relation to the group structure of WECL, we note the following: White Energy Mining Pty Limited owns South Australia Coal Limited which owns the SACL exploration licence in South Australia (discussed in Section 5.5 below) White Energy Technology Limited is the ultimate holding company for the BCB Technology operations Coking BCB Pty Limited holds an exclusive patented licence associated with upgrading low ranked coal to metallurgical coke. WECL intends to investigate the possibility of commercialising this technology in the future. 35

40 Binderless Coal Briquetting Company Pty Limited (BCB Company) holds the exclusive licence to use the patented BCB Technology. BCB Company is also the Australian holding company in respect of the commercial joint ventures which WECL has entered into (discussed in Section 5.4) Amerod Exploration Limited manages the mineral exploration activities of WECL. It primarily focuses on three nickel sulphide exploration projects located in Western Australia such as Bridgetown which is wholly owned by the Company. 5.3 BCB Technology Background WECL s BCB Technology processes high moisture content coal which has relatively low calorific value into a lower moisture coal with a higher calorific value, through a cost competitive production process as set out in Figure 15 below. In most instances, the drying of high moisture coal results in a proportion of fine coal particles being produced, which are highly susceptible to spontaneous combustion. The BCB Technology is designed to avoid susceptibility to spontaneous combustion by forming the dried coal into physically and chemically stable lumps, which can be transported in traditional coal infrastructure. The independent test work conducted to date has shown that upgraded BCB Coal burns more efficiently with lower pollutant emissions than processed sub-bituminous feedstock coal. Given the natural characteristics of the feedstock used (for example, lower ash and sulphur content), upgraded BCB coal results in lower pollutant emissions than bituminous coal of equivalent energy content. The BCB Technology was developed by CSIRO in conjunction with TraDet Inc, K.R.Komarek Inc and the Griffin Coal Mining Company Pty Limited. WECL acquired the exclusive worldwide rights to commercialise the BCB Technology in January 2006 and has worked to develop the know-how and processes associated with implementing the technology on a commercial scale. The BCB Technology has 14 years of patent remaining Briquetting process The BCB Technology comprises two distinct sub-processes; crushing and drying, followed by reclaiming and briquetting. Figure 15 illustrates the stages of WECL s briquetting process. Figure 15: The five stages to the BCB Technology Source: WECL 36

41 The crushing and drying process produces coal with the characteristics necessary to be used as an input to the briquetting process. Hot gases used to dry the crushed product are produced through separate combustion of a small proportion of the coal. The product is reclaimed from the airstream by passing it through two stages of four cyclones before briquetting, a mechanical procedure involving material distribution, compaction, cooling and storage. The BCB Technology makes it possible to generate close bonding between coal particles resulting in a high-density briquette with low permeability, with energy characteristics similar to higher value subbituminous coals as illustrated in Figure 16 below. Figure 16: The BCB Technology coal conversion Source: WECL WECL management have identified the following key advantages of the BCB Technology: simple production process: the BCB Technology uses a simple mechanical process designed to work at the mine site and does not require binding agents to stabilise the upgraded briquettes modular system and deployment strategy: the BCB Technology and related technology is designed for deployment in modules that are designed to each produce one million tonnes of upgraded coal per annum. This design allows the deployment to be staged on a module-bymodule basis flexible feedstock: WECL s upgrading process is effective for the upgrading of a range of high moisture coals and may also be used to produce a transportable briquette product from high energy discard coal fines integration into coal gasification 20 /poly-generation systems 21 : WECL s upgrading process produces feedstock that may be suitable for integration into coal gasification/poly-generation systems. 20 Coal gasification is the process of producing coal gas from coal. The coal gas output may be used as a chemical feedstock or a fuel for power generation. 21 Poly-generation refers to power stations which may be able to simultaneously produce electricity, heat and cold. 37

42 5.3.3 BCB Coal The figure below provides an illustrative comparison of the key characteristics of BCB Coal with bituminous (14% ash) and sub-bituminous coals (used as feedstock in creating the briquetted product). The parameters indicate that the BCB Coal has less ash, sulphur and nitrogen emissions than bituminous coal (although the energy content of upgraded coal is lower than the benchmark Australian bituminous coal). Figure 17: Comparison of the upgraded BCB Coal to other coals 1 Ash generation (Kg/MWh) Sulphur emissions (mg/nm3) 1,404 Nitrogen emissions (mg/nm3) Sub-bituminous coal BCB Coal Australian bitumous coal (14% ash) Source: WECL Note 1: ash generation refers to the solid residue following combustion. The key benefits of BCB Coal are set out in the table below: Table 7: The benefits of BCB Coal Characteristics Description High energy content Stable briquette product Competitive production costs Lower transportation costs Environmental benefits The BCB Technology demonstrates an ability to produce, depending on the specifications of the feed stock coal, up to 11,000 British thermal units per pound (6,200 kcal per kilogram GAR) briquettes from sub-bituminous coal, based on pilot testing of Indonesian sourced coal. The BCB Technology increases a low rank coal s specific energy content without altering the basic chemistry of the coal. BCB Coal is designed as a physically and chemically stable product that can be handled and transported like normal coal without the excessive fines (coal dust) associated with unprocessed sub-bituminous coal. The briquette product also has lower spontaneous combustion risk compared to sub-bituminous feedstock and lignite. Favourable production economics enables the BCB Coal to compete favourably with alternate technologies. The upgrading process reduces moisture resulting in up to a 30% decrease in load volumes and transportation costs compared to sub-bituminous feedstock coal. BCB Coal has lower carbon dioxide emissions compared to sub-bituminous coal. BCB Coal may have lower ash and sulphide content compared to many bituminous coals as a consequence of the characteristics inherent in many sub-bituminous coal deposits and maintains lower ash and sulphide content compared to the sub-bituminous feedstock coal. Source: WECL 38

43 5.4 Key commercialisation projects The figure below sets out the key commercialisation projects of WECL together with the key partners and target milestones for An industry overview of the Indonesian and US markets is provided in Appendix 5. Figure 18: Key WECL commercialisation projects Russia North America India China / Mongolia South America Africa Indonesia Australia / New Zealand North America Africa Indonesia Peabody Buckskin Kentucky project Secure Air and Development Permits for Buckskin and Peabody projects Complete the plant design for the United States Submit feasibility study for the Kentucky project and obtain Board approval Source: WECL Key partners Black River 2011 target milestones Primary focus is on the briquetting of coal fines Enter into commercial partnership with African coal company Finalise design and engineering plans for coal modules to upgrade discarded coal fines Bayan Resources Coal upgrading plant to operate at full capacity 1 Mtpa Sale of upgraded coal to Asian market and power utilities Arrange debt facility to expand the KSC JV to 5 Mtpa capacity Indonesia Indonesia remains the key commercialisation target for WECL since 60% of Indonesian coal is rated as either lignite or sub-bituminous 22 with high moisture content. WECL holds a 51% interest in the Tabang Coal Upgrading Project in Indonesia through PT Kaltim Supacoal (KSC). KSC is WECL s first commercial joint venture (JV). PT Bayan Resources Tbk (Bayan) holds the remaining 49%. Bayan is a member of the Bayan Resources Group, one of the largest coal miners in Indonesia. 22 BP Statistical Review of World Energy June