INTERIM MANAGEMENT S DISCUSSION AND ANALYSIS QUARTERLY HIGHLIGHTS. For the three and six months ended June 30, 2018 (Presented in South African Rands)

Transcription

1 REGISTRATION NUMBER: EXTERNAL COMPANY REGISTRATION NUMBER: 2011/011661/10 SHARE CODE ON THE TSX VENTURE EXCHANGE: BUF SHARE CODE ON THE JSE LIMITED: BUC ISIN: CA INTERIM MANAGEMENT S DISCUSSION AND ANALYSIS QUARTERLY HIGHLIGHTS (Presented in South African Rands)

2 Contents BASIS OF PREPARATION... 1 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION... 1 OVERVIEW OF THE COMPANY... 2 OVERVIEW OF THE PERIOD AND OUTLOOK FOR THE GROUP... 2 CONSOLIDATED OPERATIONAL RESULTS FOR Q2 2018, Q AND Q CONSOLIDATED FINANCIAL RESULTS FOR Q2 2018, Q AND Q FINANCIAL CONDITION REVIEW CASH FLOW REVIEW RELATED PARTY TRANSACTIONS SUBSEQUENT EVENTS OTHER RISKS AND UNCERTAINTIES NON-IFRS PERFORMANCE MEASURES SUMMARY OF SECURITIES AS AT AUGUST 10, LIST OF DIRECTORS AND OFFICERS... 17

3 BASIS OF PREPARATION The following ( MD&A ) relates to the financial condition and results of operations of Buffalo Coal Corp. and its subsidiaries ( we, our, us, BC Corp, the Company or the Group ) for the three and six months ended June 30, 2018 and should be read in conjunction with the audited annual consolidated financial statements for the years ended December 31, 2017 and December 31, 2016, the Management s Discussion and Analysis for the year ended December 31, 2017 and the unaudited condensed interim consolidated financial statements for the three and six months ended June 30, The condensed interim consolidated financial statements ( Interim Results ) and related notes have been prepared in accordance with International Financial Reporting Standards ( IFRS ) and are in compliance with IAS 34, Interim Financial Reporting. Certain non-ifrs measures are discussed in this Interim MD&A which are clearly disclosed as such. Additional information and press releases have been filed electronically through the System for Electronic Document Analysis and Retrieval ( SEDAR ) and are available online under the Buffalo Coal Corp. profile at This Interim MD&A reports our activities through August 10, 2018 unless otherwise indicated. References to Q mean the three months ended June 30, 2018, Q mean the three months ended March 31, 2018 and Q4 2017, Q3 2017, Q and Q refer to the three months ended December 31, 2017, September 30, 2017, June 30, 2017 and March 31, 2017, respectively. References to 2018 YTD mean the six months ended June 30, 2018 and 2017 YTD mean the six months ended June 30, Unless otherwise noted all amounts are recorded in South African Rands ( R or Rands or ZAR ). References to C$ mean Canadian Dollars and to US$ mean United States Dollars. Amounts stated in Canadian Dollars or US Dollars are translated at the date of transaction, unless otherwise stated. These other amounts stated in Canadian Dollars were translated at C$1:R and amounts in US Dollars were translated at US$1:R CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This Interim MD&A contains forward-looking information under Canadian securities legislation. Forward-looking information includes, but is not limited to, information with respect to the Company s expected production from, and further potential of, the Company s properties; financial and operational planning and strategic goals; the Company s ability to raise additional funds; the timing and amount of advances under existing loan facilities; the future price of minerals, particularly coal and overall market conditions for resource issuers; the estimation of mineral reserves and mineral resources; conclusions of economic evaluations; the realization of mineral reserve estimates; the timing and amount of estimated future production; costs of production; capital expenditures; success of exploration activities; mining or processing issues; currency exchange rates; government regulation of mining operations; labour relations and future collective agreements; and environmental risks. In general, forward-looking information can be identified by the use of forward-looking terminology such as plans, expects or does not expect, budget, scheduled, estimates, forecasts, intends, anticipates or does not anticipate, or believes, or variations of such words and phrases or statements that certain actions, events or results may, could, would, might or will be taken, occur or be achieved. Forward-looking information is based on the opinions, estimates and assumptions of management as of the date such statements are made, and the Company can give no assurance that such opinions, estimates and assumptions are correct. Estimates regarding the anticipated timing, amount and cost of exploration, development and production activities are based on assumptions underlying mineral reserve and mineral resource estimates and the realization of such estimates. Capital and operating cost estimates are based on extensive research of the Company, purchase orders placed by the Company to date, recent mining costs and other factors. 1

4 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION (continued) Forward-looking information involves known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking information. Such factors include: risks relating to the requirement for additional capital; production estimate risks; the price of coal; labour and employment risks; cost estimate risks; mineral legislation risks; title to mineral holdings risks; power supply risks; risks relating to the depletion of mineral reserves; litigation risks; South Africa country risks; infrastructure risks; environmental risks and other hazards; risks relating to dependence on key personnel; dependence on outside parties; exploration and development risks; risks relating to foreign mining tax regimes; insurance and uninsured risks; competition risks; the Company s securities may experience price volatility; risks relating to owning foreign assets; currency fluctuation risks; and the Company s directors and officers may have conflicts of interests. Although management of the Company has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking information, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such information. Accordingly, readers should not place undue reliance on forward-looking information. The Company does not undertake to update any forward-looking information, except in accordance with applicable securities laws. OVERVIEW OF THE COMPANY BC Corp is a coal mining and supply company operating in South Africa. The Company is primary listed on the TSX Venture Exchange ( TSXV ) and has a secondary listing on the Alternative Exchange ( AltX ) operated by the JSE. BC Corp trades under the symbol BUF on the TSXV and BUC on the AltX. The Company owns 100 of the shares in Buffalo Coal Dundee Proprietary Limited ( BC Dundee ), a South African company, with an interest in two operating coal mines in South Africa ( BC Dundee Properties ). The BC Dundee Properties comprise the Magdalena bituminous mine ("Magdalena") and the Aviemore anthracite mine ("Aviemore"). The Group is currently engaged only in underground coal mining. BC Dundee indirectly holds a 70 interest in the BC Dundee Properties through its 70 interest in Zinoju Coal Proprietary Limited ( Zinoju ), which holds all of the mineral rights with respect to the BC Dundee Properties. The remaining 30 interest in Zinoju is held by South African Black Economic Empowerment ("BEE") partners. OVERVIEW OF THE PERIOD AND OUTLOOK FOR THE GROUP Markets The Group supplies high energy bituminous coal and anthracite to both the export and domestic markets. The Group continues to utilise an export allocation of 51,125 tonnes per quarter through the Quattro scheme at Richards Bay Coal Terminal (RBCT). Firm dates have not yet been announced by the Department of Mineral Resources for the new application process for allocation in the Quattro system. Buffalo Coal will report when these details are available. As previously reported, no overall impact is expected on export tonnages regardless of whether the Company has an allocation under the Quattro program or not. 2

5 OVERVIEW OF THE PERIOD AND OUTLOOK FOR THE GROUP (continued) Markets (continued) Bituminous The API4 coal index increased steadily during the quarter averaging $ per ton in the second quarter of 2018, a very strong performance. This price level largely reflects an on-going tightness in the supply of RB1 quality coals for export. The ZAR exchange rate to the US$ weakened through the quarter, having averaged R12.63 against a quarter 1 average rate of R Rand receipts will therefore improve. The API4 index still remains solidly in backwardation, weighing against the fixing of any long-term sales agreements. The group s export bituminous sales are still mainly being fixed in ZAR for relatively short periods, guaranteeing cash flow in local currency. Domestically, the bituminous industrial market remains stable in volume terms, with little variation in the demand predicted for Additional demand from Eskom is, however, further contributing to the previously noted tightness in the overall domestic market. Availability remains particularly tight for sized coal fractions, causing on-going upward pressure on pricing. This scenario is extremely positive for future sales. Anthracite Anthracite s use as a source of carbon reductant in metallurgical processes means that the market, both domestically and for export, does not correlate well with movements in the steam coal markets. Settlements for anthracite supplies are therefore on an individually negotiated basis, with no real reference pricing available. Demand for 2018 remains buoyant, and the Group has already placed the vast majority of planned production into the markets. Demand for the Group s products, particularly from the domestic consumers, continues to be positively impacted by the fact that no new production has been forthcoming to close the availability gap after some mine closures in recent years. The outlook for the remainder of 2018 is therefore very positive for both the bituminous and anthracite sectors of the business, with both demand and pricing remaining strong. Production and cash flow Buffalo Coal currently has approximately 18 months life-of-mine ( LOM ) reserves left to mine at its Aviemore Mine and 5 LOM years reserves at its Magdalena Mine, however, once the Aviemore LOM reserves have been mined out, the operations will have to close as Magdalena Mine will not be able to carry the full overhead costs on its own. In order to extend Aviemore s LOM to 15 years, additional capital in the order of approximately R445 million will be required to open up a new adit at Aviemore Mine which will provide access to additional reserves to mine. Buffalo Coal Dundee will require additional funding for the capital required to open up the new adit. 3

6 OVERVIEW OF THE PERIOD AND OUTLOOK FOR THE GROUP (continued) Production and cash flow (continued) The Group s ability to continue long term operations and ultimately continue as a going concern, is dependent on its ability to secure funding required for the adit expansion at Aviemore Mine. To facilitate the process, BC Corp appointed a Financial Advisor, Northcott Capital to embark on a process to obtain further funding for the Company. A bidding process commenced at the start of June 2018, which allowed interested bidders to do a high level due diligence via a data room setup for this purpose and site visits. The Company received indicative offers at the end of June following which a formal due diligence process commenced to give shortlisted candidates the opportunity to obtain more detailed information in order to firm up their indicative offers. The due diligence process ends at the end of August 2018 following which final offers have to be made. It is uncertain at this point in time what the outcome of this process will be. As such, management has reviewed its cash flow forecast based on current production with remaining reserves left over the next 18 months to determine whether the company (group) will be able to meet its obligations in the normal course of business. The cash flow forecast based on current production forecast over the next 18 months, indicates that Buffalo Coal should be able to service all its liabilities at the end of the period. Although the Group has implemented various restructuring initiatives, the Group continues to experience operational challenges. The Group remains dependent upon sustaining profitable levels of operation, as well as the continued support of Investec, RCF and other stakeholders and believes that subject to its ability to meet current forecasts, it should be able to generate positive cash flows in the foreseeable future. However, there is no assurance that the Company will be able to meet its covenants in the future, or that Investec will provide future waivers, if required. These matters constitute material uncertainties which cast significant doubt as to whether the Group can continue as a going concern. Investec funding The Group continues to be in breach of certain covenants with respect to its borrowings from Investec at June 30, On November 22, 2016, Investec provided a forbearance letter stating that it does not intend to exercise its rights to request early payment of the outstanding debt; however, no waiver has been provided and Investec has reserved its right to review this decision periodically, with no obligation to keep the Company advised in this regard. Also, Investec issued a further letter dated August 02, 2018, in terms of which Investec agreed not to exercise its acceleration rights with respect to any existing events of default under the Investec Facility until September 28, Pursuant to the Amendment agreement, the Group settled R36.6 million due to Investec under the existing Investec Facility on March 19, 2018, of which R30.0 million reduced the aggregate amount outstanding on the Investec Facility, with the remaining R6.6 million applied to the mine royalty payment in the amount of R6.1 million and the balance of R0.5 million applied to default interest, all of which were due and payable on March 16, On June 25, 2018, the Group also settled the required principal payments of R7.5 million for each of the March and June quarters (R15 million in total) as well as R3.1 million mine royalties due to Investec. The Group did not utilize the additional R16 million facility that was made available by Investec (see Note 5 to the Financial Statements). 4

7 OVERVIEW OF THE PERIOD AND OUTLOOK FOR THE GROUP (continued) RCF loan facilities The RCF loan is due and payable on June 30, The Company will need to arrange for an extension or otherwise obtain other financing in order to settle this amount when it comes due as it currently does not expect to have the means to repay this amount in full on the due date. CONSOLIDATED OPERATIONAL RESULTS FOR Q2 2018, Q AND Q Operational results 2018 YTD 2017 YTD VARIATION Q Q VARIATION Q VARIATION ROM (t) (23) (20) Aviemore (t) (1) (4) - Aviemore (t) (bought-in) Magdalena (t) (38) (32) Bituminous (t) (bought-in) (97) (100) (100) Saleable production (excluding calcine) (t) (4) (0) Anthracite (t) Anthracite (t) (bought-in) Bituminous (t) (17) (11) (3) - Bituminous (t) (bought-in) (98) (100) 635 (100) Yield on plant feed (excluding calcine) () (4) - Anthracite () Anthracite () (bought-in) (5) Bituminous () (10) - Bituminous () (bought-in) (15) N/A 73.8 N/A 60.2 N/A Sales (t) (2) (2) - Anthracite (t) Bituminous (t) (21) (20) (3) - Calcine (t) (28) - Anthracite high-ash sales (t) (26) (10) (29) Sales (t) (excluding high-ash sales) Saleable inventory tonnes (38) (38) Anthracite (t) (43) (43) Bituminous (t) (21) - Calcine (t) (75) (75) An analysis of the operational results for Q and 2018 YTD compared to Q and 2017 YTD, respectively, as well as Q compared to Q are discussed below: ROM Production Total ROM production for Q and 2018 YTD decreased 20 and 23, respectively, compared to Q and 2017 YTD. The decreases over comparative periods were due to a combination of decreased production at Magdalena offset marginally by improved production at Aviemore. The 9 improvement in total ROM tonnes from Q to Q was the result of a 10 improvement in production at Magdalena along with additional buy-ins at Aviemore offset by lower (4) production at Aviemore. 5

8 CONSOLIDATED OPERATIONAL RESULTS FOR Q2 2018, Q AND Q (continued) ROM Production (continued) Aviemore s ROM production for Q was 1 lower compared to Q and 4 lower compared to Q1 2018, mainly due to dykes encountered and community strikes taking place during Q which resulted in two shifts being lost. Notwithstanding the lower production in Q2 2018, Aviemore s ROM production for 2018 YTD remained 8 higher compared to 2017 YTD, reflecting the overall good performance at Aviemore during the current year to date. Magdalena s ROM production for Q and 2018 YTD was 32 and 38 lower compared to Q and 2017 YTD, respectively, primarily as a result of difficult geological mining conditions and pit-room constraints that resulted in only three sections being mined to date during calendar 2018 versus four sections that were mined during the comparative periods in calendar The 10 improvement in ROM tonnes from Q to Q was, in large part, a result of a team building exercise with Magdalena s underground workers which lead to an improvement in production. In order to mitigate the loss of production at Magdalena, the Company has entered into an arrangement with a neighbouring coal miner, to buy in approximately 6 kt of anthracite coal per month. The buy-in tonnes may increase, subject to availability. Saleable Production The overall saleable coal production for Q and 2018 YTD was in line with its comparative periods, as a result of improvement in overall yields from plant feed over the comparative periods which negated the decrease in ROM production to a large extent. Anthracite yields for Q and 2018 YTD improved with 15 and 10, respectively, compared to Q and 2017 YTD. There was a 3 improvement in anthracite yields compared to Q Bituminous yields for Q and 2018 YTD improved with 29 and 33, respectively, compared to Q and 2017 YTD. However, there was a 10 decline in the bituminous yields compared to Q The main reason for the overall improved yields compared to Q and 2017 YTD, were the mining of combined seem and Gus seem areas which had less contamination. Sales Overall sales of anthracite products and bituminous coal for Q increased by 8 compared to Q2 2017, however, decreased by 2 compared to Q The overall sales for 2018 YTD were also 2 lower compared to 2017 YTD. Anthracite sales for Q and 2017 improved with 71 and 48, respectively, compared to Q and 2017 YTD, mainly as a result of an increase in saleable anthracite production along with increased buy-in tonnes and sales from inventories carried. Anthracite sales increased with 19 compared to Q due to a significant increase in buy-in tonnes during Q along with additional sales from inventories carried over from Q Bituminous sales for Q and 2018 YTD were 20 and 21 lower compared to Q and 2017 YTD, respectively, mainly due to lower production in current periods. Bituminous sales for Q were slightly lower (3) compared to Q due to lower yields achieved quarter-over-quarter. 6

9 CONSOLIDATED OPERATIONAL RESULTS FOR Q1 2018, Q AND Q (continued) Sales (continued) Calcine sales and anthracite high-ash sales fluctuates from quarter to quarter, based on demand for these products. Health and Safety The Company s operations maintain an integrated Health, Safety and Environment ( HSE ) management system, established using the OHSAS18001 and ISO14001 frameworks as well as minimum standards, and fully supports the coexistence of occupational health, safety and the environment within which the Company operates, in order to ensure compliance and achieve zero harm. Operating safely and responsibility is an integral part of our business strategy. We strive to obtain an injury free workplace and to create a company culture that protects employees and visitors from harm. The Company undertakes training and development initiatives and related ventures on a regular basis in order to improve individual outlook on health, safety and the environment. As at June 30, 2018, the Group had achieved more than six thousand fatality free production shifts at Coalfields. Aviemore Colliery achieved 1919 and Magdalena Colliery 544 fatality free production shifts. During the six months ended June 30, 2018, the Company did not have any lost time injuries. Subsequent to June 30, 2018, there was one lost time injury reported. CONSOLIDATED FINANCIAL RESULTS FOR Q2 2018, Q AND Q Financial results 2018 YTD 2017 YTD VARIATION Q Q VARIATION Q VARIATION Revenue (R'millions) Net Revenue (R'millions) (*) Operating profit/(loss) (R'millions) (77) (20.2) 223 Adjusted EBITDA (R'millions) (*) (6.1) Average selling price per ton sold (R) (excluding high-ash sales) Cash cost of sales per ton (R) (excluding high-ash export costs) (4) (11) Cash generated from/(utilized in) operating activities (R'millions) 58.5 (2.3) (6.6) Cash (utilized in) investing activities (17.7) (23.1) (24) (11.1) (15.5) (29) (6.6) (68) Cash (used in)/generated from financing activities (R'millions) (45.0) 21.5 (309) (15.0) 21.5 (170) (30.0) 50 CAD:ZAR (average) (3) USD:ZAR (average) (7) (4) (*) See Non-IFRS Performance Measures section of this MD&A. An analysis of the financial results for Q and 2018 YTD compared to Q and 2017 YTD, respectively, as well as Q compared to Q are discussed below: 7

10 CONSOLIDATED FINANCIAL RESULTS FOR Q2 2018, Q AND Q (continued) Revenue R' YTD 2017 YTD VARIATION Q Q VARIATION Q VARIATION Anthracite Domestic Export Bituminous (11) (7) Domestic Export (28) (17) Calcine (28) Revenue (excluding high-ash sales) Export (high-ash) (20) Sundry sales (slurry/discard) (29) (14) Total Revenue Revenues (excluding high-ash sales) for Q and 2018 YTD improved 34 and 24, respectively, compared to Q and 2017 YTD, primarily due to higher anthracite and calcine sales partially offset by lower bituminous sales. Revenues for Q increased 7 compared to Q as a result of higher anthracite and bituminous sales partially offset with lower calcine sales. The higher anthracite revenue for Q and 2018 YTD compared to its comparative periods was a result of increased anthracite sales volumes along with higher anthracite sales prices over the comparative periods, together with an increase in buy-in tonnes. The 18 increase in anthracite revenue compared to Q was mainly the result of higher anthracite sales volumes from the buy-in of anthracite coal. Bituminous revenue for Q and 2018 YTD were lower compared to its comparative periods as a result of the lower production levels achieved at Magdalena during the current periods. Bituminous revenue improved with 10 compared to Q due to a combination of improved production levels at Magdalena and higher bituminous sales prices. Average selling prices (excluding high-ash sales) for Q and 2018 YTD both reflected a 21 improvement compared to its comparative periods. The average selling prices for Q were 4 higher compared to Q In 2018, the overall selling price per ton were higher as a result of an increase in overall market prices that resulted in the negotiation of better selling prices in new sales contracts entered into with the Group s significant customers. Calcine revenue was also higher over comparative periods as result of higher calcine sales volumes at better sales prices. There was a 28 decrease in calcine sales tonnes from Q to Q2 2018, revenue decreased with 28 in line with the decrease in sales tonnes. 8

11 CONSOLIDATED FINANCIAL RESULTS FOR Q2 2018, Q and Q (continued) Cost of Sales Cost of sales for Q and 2018 YTD was 7 and 8 lower compared to Q and 2017 YTD, respectively. Cost of sales for Q was 3 higher compared to Q The Group continues to be cost conscious and ensuring expenditure is kept to a minimum in order to ensure the sustainability of the Group. Cost of sales includes mining and processing costs, salaries and wages, depreciation and amortization, transportation, railage, port handling and wharfage costs. Cash cost of sales per ton for Q and 2018 YTD decreased with 11 and 4, respectively, compared to Q and 2017 YTD. Cash cost of sales per ton for Q remained constant compared to Q The lower costs compared to Q and 2017 YTD are attributable to overall reductions in costs at the mine in order to ensure the sustainability of the Group. Other Income/(Expense) - net Other income and expense comprises profit on sale of assets, foreign exchange gains/losses, discounts received, commissions paid and fair value adjustments on financial assets and conversion option liabilities. The R9.6 million net expense for Q (Q2 2017: net income of R24.6 million) was mainly attributable to a fair value adjustment gain of R44.1 million in relation to the valuation of the conversion option liability (RCF convertible loan) (Q2 2017: R13.7 million), the warrant liability (Investec warrants) and financial assets offset by a net foreign currency exchange loss of R54.3 million (Q2 2017: gain of R9.2 million). The R53.3 million net expense for 2018 YTD (2017 YTD: net income of R44.9 million) was mainly attributable to a fair value adjustment loss of R17.4 million in relation to the valuation of the conversion option liability (RCF convertible loan) (2017 YTD: gain of R24.0 million), the warrant liability (Investec warrants) and financial assets offset by a net foreign currency exchange loss of R38.8 million (2017 YTD: gain of R17.4 million). The net expense of R43.7 million for Q was mainly attributable to a fair value adjustment loss of R57.4 million in relation to the valuation of the conversion option liability (RCF convertible loan), the warrant liability (Investec warrants) and financial assets, partially offset by a net foreign currency exchange gain of R15.5 million. General and administration expenses The Company recorded general and administration expenses for Q and 2018 YTD that were 20 and 32 higher compared to Q and 2017 YTD, respectively. General and administration expenses for Q YTD were 8 lower compared to Q The expenses include general and administration expenses relating to BC Dundee s head office at Coalfields and the Company s corporate office in Centurion including Canadian expenses. The higher general and administration expenses for Q are mainly due to the consulting fees for the Northcott process and bankable feasibility study for the new adit at Aviemore, increased social and labour plan expenses as well as increases in salaries and wages. 9

12 CONSOLIDATED FINANCIAL RESULTS FOR Q2 2018, Q and Q (continued) General and administration expenses (continued) In addition to the increases noted above, the higher general and administration expenses 2018 YTD also include a R1.7 million impairment of receivables as well as a R2 million penalty provision due to the Calcine plant operating without an Air Emissions License ( AEL ) (refer Other Risks and Uncertainties). The impairment related to a customer that went into business rescue during the quarter which resulted in R1.7 million in trade debt being written off. Finance Costs/Income-net Finance costs for Q and 2018 YTD were 58 and 30 higher compared to its comparative periods. The increases were due to royalties payable to Investec during 2018 pursuant to the 6 th Amendment Agreement in terms of which a Life of Mine Royalty ("LOMR") is payable to Investec on all bituminous coal sales with effect from July 1, 2017, calculated at a rate of 3.54 on all bituminous coal sold which was mined from the Magdalena reserve. The 4 increase from Q to Q was due to an increase in royalties driven by higher production at Magdalena during Q Income tax No income tax was payable during Q An additional provision of R1 million was made in Q with regards to potential taxes payable (Q2 2017: Rnil). FINANCIAL CONDITION REVIEW A summary of the statements of financial position is shown below: R'000 June 30, 2018 December 31, 2017 VARIANCE March 31, 2018 VARIANCE Property, plant and equipment Other non-current assets - restricted Other non-current assets Trade and other receivables (20) (5) Inventories (12) Cash and cash equivalents (19) Other current assets (17) (98) Total assets (7) RCF loan facilities Other borrowings (22) (9) Trade and other payables (16) (3) Asset retirement obligation (1) (12) Current tax liabilities Total liabilities (1) (1) Total equity (3) The analysis below relates to changes from financial year end, December 31, 2017, to the six months ended June 30,

13 FINANCIAL CONDITION REVIEW (continued) Assets The 7 decrease in total assets was mainly due to a R24.4 million (20) decrease in trade and other receivables, a R4.7 million (12) decrease in inventories, a R4.1 million (19) decrease in cash and cash equivalents partially offset by a R5.3 million (5) increase in property, plant and equipment. The decrease in trade and other receivables comprised primarily of trade receivables recovered, but also included a R1.7 million impairment of trade receivables. The impairment related to a customer that went into business rescue during the first quarter which resulted in R1.7 million in trade debt being written off. The decrease in inventory was mainly as a result of inventory at the end of December 2017 being sold during Q The increase in property, plant and equipment related to additional capital incurred over the period as well as an increase in the asset retirement obligation at the end of Q that resulted in a R4.8 million increase in capital. Liabilities The 20 increase in the RCF loan facilities was due to a loss of R17.1 million recognized for the six months ended June 30, 2018 on the revaluation of the conversion option liability and a foreign exchange loss of R3.3 million on translation of the US$ denominated liability on June 30, The negative movement in the conversion option liability was mainly driven by the annualised volatility of the Company s stock price (see Note 3 to the Financial Statements). The weakening of the Rand in relation to the US Dollar at the end of June 30, 2018 compared to December 31, 2017, resulted in the foreign exchange loss recognised for the six months ended June 30, The RCF loan facility is due and payable as at June 30, Consequently, the long-term portion of the RCF loan facility as well as the related conversion option liability has been reclassified as current as at June 30, The 22 decrease in other borrowings was primarily due to settlement against the Investec loan facility of R30 million in Q and a further R15 million at the end of Q (refer Overview of the Group and Outlook for the Group). At June 30, 2018, the Group had outstanding debt with Investec of R154.6 million and R371.0 million (US$27.2 million) (including accrued interest) outstanding on the RCF convertible loan. The Investec debt consists of R30.0 million outstanding on the term loan facility, R45.5 million on the bullet facility and R79.1 million outstanding on the working capital facility, all of which are current. The decrease in trade and other payables was mainly attributable to the payment of 2017 accrued Investec royalties at the end of Q and a decrease in long outstanding amounts owing to the mining contractor at Magdalena. Current taxes payable increased 45 as a result of an additional provision of potential taxes (C$ denominated) in Q

14 CASH FLOW REVIEW The condensed consolidated statements of cash flows are summarized below: VARIATION Q Q VARIATION Q VARIATION R' YTD 2017 YTD Net cash generated from/(utilized in) operating activities (2 295) (6 600) Net cash (utilized in) investing activities (17 665) (23 100) (24) (11 045) (15 547) 29 (6 620) 67 Net cash (utilized in)/generated from financing activities (45 000) (309) (15 000) (170) (30 000) (50) Change in cash and cash equivalents (4 149) (3 895) (647) 637 (7 622) 146 Operating activities The improvement in cash generated from operating activities for Q and 2018 YTD compared to cash utilized during Q and 2017 YTD were attributable to improved revenues and lower costs over the comparative periods. Cash generated from operating activities for Q was also higher compared to Q1 2018, mainly due to improved revenues. Investing activities Cash on investing activities for Q and 2018 YTD included R11.5 million and R18.1 million, respectively, related to capital spent on property, plant and equipment (Q2 2017: R14.2 million; 2017 YTD: R20.3 million). Financing activities Financing activities utilized R15.0 million and R45 million, respectively, during Q and 2018 YTD to partially settle the Investec term loan facility. RELATED PARTY TRANSACTIONS During Q and 2018 YTD, the Company did not enter into any transactions with related parties in the ordinary course of business. During Q1 2017, the Company entered into related party transactions in the ordinary course of business with RCF¹ to the value of R No related party transactions were entered into other than in the ordinary course of business. The following balances were outstanding as at June 30, 2018 and December 31, 2017: These amounts are unsecured, non interest bearing with no fixed terms of repayment. June 30, 2018 December 31, 2017 R'000 Related party payables RCF ¹

15 RELATED PARTY TRANSACTIONS (continued) ¹ RCF is a related party to the Company as a result of owning a controlling investment in the Company and, in addition, having a representative, Mr. David Thomas on the Board of Directors of the Company. As set out in the Third Amended RCF Agreement, RCF has invoiced the Company for costs incurred relating to the loan facilities, which are disclosed above. [Mr Thomas resigned from the Board of Directors effective June 1, 2018.] Compensation of key management personnel In accordance with IAS 24 - Related-Party Disclosures, key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company directly or indirectly, including any directors (executive and non executive) of the Company. The remuneration of directors and other key members of management personnel (officers) during Q and 2018 YTD were as follows: R' YTD 2017 YTD Q Q Short-term benefits Share-based payments Total Amounts owing to directors and other members of key management personnel were R0.7 million as of June 30, 2018 (December 31, 2017: R0.9 million). SUBSEQUENT EVENTS Other Matters Except for the matters discussed above, no other matters which management believes are material to the financial affairs of the Company have occurred between the statement of financial position date and the date of approval of the Interim Results. OTHER RISKS AND UNCERTAINTIES Investing in the Company involves risks that should be carefully considered. The business of the Company is speculative due to the high-risk nature of coal mining and exploration. Investors should be aware that there are various risks, including those discussed below, that could have a material adverse effect on, among other things, the operating results, earnings, properties, business and condition (financial or otherwise) of the Company. The current operational adit at Magdalena does not have an amended Environmental Management Program ( EMP ) or an amended Integrated Water Use License Application ( IWULA ). As a result, the mine needs to apply for a Section 24G retrospective Environmental Impact Analysis ( EIA ). The application was submitted on March 23, 2018 and the mine is awaiting outcome from the DMR. 13

16 OTHER RISKS AND UNCERTAINTIES (continued) The Company s Calcine plant has been operating without an AEL, and this has necessitated that a Section 24G application be submitted to the Economic Development, Tourism and Environmental Affairs ( EDTEA ). The Section 24G application relates to the commencement of certain listed activities which have commenced at the Calcine plant at Coalfields, prior to obtaining environmental authorization ( EA ). To comply with legislation, a full scoping and EIA report should be undertaken. With the aim to continually strive to be compliant with the operations of the Calcine plant, the Company approached the EDTEA for AEL. Once the plant has been refurbished it was agreed with EDTEA that stack tests will be carried out and the results submitted. Once the results are submitted, EDTEA will issue a fine, and once paid, the EA will be issued. On approval of the EA, an AEL can then be obtained in compliance with the Air Quality Act. Initial tests have been scheduled for mid-july 2018 and a second round of tests scheduled for mid to end of August Authorization of the Section 24G is dependent on compliant monitoring results. The Company is currently completing specialist studies to complete these retrospective 24G environmental applications following which the EDTEA will finalise the way forward on the 24G process. Management is awaiting the final outcome of this process and has provided for a R2 million provision for a potential 24G penalty (included in general and administration expenses). On June 15, 2018 the DMR published the draft Mining Charter Parties were given 30 days to respond to the draft. The deadline has subsequently been extended to the end of August The draft Mining Charter 2018 includes a 30 black ownership target on new mining rights, with shares allocated for communities, organised labour and black entrepreneurs. Some of the elements of the Mining Charter do not promote competitiveness. Without competitiveness, investment in new exploration and mining will be limited and the current mining sector will continue to decline, to the detriment of all citizens. Further, the Mining Charter contains elements that are unconstitutional and contrary to South African Company Law such as the free carried interest of 5 allocated to each of labour and communities. Given South Africa s mature mining sector, a 10 total free carried interest on new mining rights will materially undermine investment, by pushing up investment hurdle rates and ensuring that many potentially new projects become unviable. Imposition of a free carried interest is a public policy choice, which must be weighed against the critical need to attract investment for growth and employment creation. The draft Mining Charter 2018 also includes a 1 EBITDA target to communities and labour and topping up existing right holders BEE ownership to 30 within five years. Also, despite a High Court declaratory order judgment and an agreement with the DMR, the issue of recognising the continuing consequences of previous BEE deals on existing rights, including for renewals, has not been properly captured in the Mining Charter. 14

17 NON-IFRS PERFORMANCE MEASURES The Company has included in this document certain non-ifrs performance measures that are detailed below. These non-ifrs performance measures do not have any standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other companies. The Company believes that, in addition to conventional measures prepared in accordance with IFRS, certain investors use this information to evaluate the Company s performance. Accordingly, they are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. The definition for these performance measures and reconciliation of the non-ifrs measures to reported IFRS measures are as follows: Net Revenue The Group s offtake contracts are a mixture of free-on-board shipping ( FOB ) and free carrier ( FCA ) contracts, resulting in revenue not being directly comparable quarter on quarter. Below is a reconciliation of revenue as disclosed in the Interim Results for Q2 2018, Q and Q to net revenue which excludes all railage, port handling and wharfage related costs: R' YTD 2017 YTD Q Q Q Revenue Less: Railage, port handling and wharfage cost (9 940) (12 721) (4 835) (5 191) (5 105) Net revenue Adjusted EBITDA Adjusted EBITDA is defined as earnings before interest, tax, depreciation and amortization and adding back the following: Impairment or reversal of an impairment of an asset, fair value adjustments to financial instruments, stockbased compensation, foreign exchange gains and losses, and non-recurring transaction expenses or income. The reconciliation of operating profit to adjusted EBITDA is as follows: R' YTD 2017 YTD Q Q Q Operating profit/(loss) for the period (20 235) Depreciation and amortization Impairment of receivables (3) Fair value adjustments of financial assets and conversion option liability (24 876) (44 113) (13 728) Stock-based compensation Foreign exchange gains (17 421) (9 156) (15 531) Adjusted EBITDA (6 135)

18 NON-IFRS PERFORMANCE MEASURES (continued) Working Capital Working capital includes current assets and current liabilities, excluding provisions and non-financial instruments. Headline profit & (loss) per share Headline profit & (loss) is a profit measure required for JSE-listed companies as defined by the South African Institute of Chartered Accountants. Headline loss per share is a basis for measuring earnings per share which accounts for all the profits and losses from operational, trading, and interest activities, that have been discontinued or acquired at any point during the year. Excluded from this figure are profits or losses associated with the sale or termination of discontinued operations, fixed assets or related businesses, or from any permanent devaluation or write-off of their values. Reconciliation of profit/(loss) for the periods to headline profit/(loss) is disclosed below: June 30, 2018 December 31, 2017 March 31, 2018 R'000 Current assets Cash and cash equivalents Trade and other receivables Inventories Non-interest bearing receivables Taxation receivable Current liabilities Trade and other payables (excluding provisions) Current portion of borrowings Current tax liability Net working capital ( ) ( ) ( ) R' YTD 2017 YTD Q Q Q (Loss)/profit for the period (24 442) (2 734) (6 959) (34 842) Net (profit) on disposal of property, plant and equipment - (1 281) - (1 281) - Headline (loss)/profit for the period (24 442) (4 016) (8 240) (34 842) Headline (loss)/profit per share - basic and diluted (0.06) (0.01) 0.03 (0.02) (0.08) 16

19 SUMMARY OF SECURITIES AS AT AUGUST 10, 2018 As at August 10, 2018 the following Common Shares, Common Share purchase options and share purchase warrants were issued and outstanding: Common Shares; Common Share purchase options with exercise prices ranging from C$ C$0.29 with a weighted average remaining contractual life of 1.51 years; warrants with a strike a price of C$ maturing on July 3, LIST OF DIRECTORS AND OFFICERS Craig Wiggill Robert Francis Edward Scholtz Rowan Karstel Graham du Preez Director, Chairman of the Board of Directors Director Director Chief Executive Officer Interim Chief Financial Officer and Corporate Secretary August 10, 2018 Sponsor: Questco Corporate Advisory Proprietary Limited 17