STRAITS ASIA RESOURCES LIMITED (Incorporated in the Republic of Singapore on June 10, 1995) (Company Registration Number: 199504024R) ("Straits Asia" or the "Company") PROPOSED ACQUISITION OF COAL INTERESTS FROM STRAITS RESOURCES LIMITED 1. Introduction Straits Asia Resources Limited (the "Company" or "Straits Asia") is pleased to announce that, further to the announcement on April 17, 2008 in relation to the proposed restructure (the "Proposed Restructure") of Straits Resources Limited ("Straits Resources"), it has together with its wholly owned subsidiaries Straits Asia Energy Pte Ltd ("SAE") and Reyka Wahana Digdjaya Pte Ltd ("RWD"), on 15 August 2008 entered into a demerger sale agreement (the "Demerger Sale Agreement") with Straits Resources and its wholly owned subsidiary, Straits Bulk and Industrial Pty Ltd ("SBI"), pursuant to which the Brunei Interest (as defined below) and the Madagascar Interest (as defined below) (together the Coal Interests ) will be transferred from SBI to SAE and RWD respectively for an aggregate consideration of US$100.3 million, subject to the fulfilment of certain conditions, more particularly set out in paragraph 4.2 below (the "Proposed Acquisition"). The Madagascar Interest The Madagascar Interest comprises 33.5% of the issued capital of Red Island Minerals Limited ("RIM") and an option to acquire all of the remaining shares in RIM by the later of July 2009 (subject to extension for a further 6 months), or the grant of relevant mining licences ( RIM Agreement ). The rights represented by the Madagascar Interest covers parts of each of the four main, known coal fields within the Sakoa Coal Basin, being the Sakoa, Imaloto, Vohibory and Sakamena coal fields (Sakoa Coalfield). Macquarie Capital (Singapore) Pte Limited acted as the Sole Global Coordinator, Bookrunner and Underwriter for, and Macquarie Capital (Asia) Pte Limited acted as the Issue Manager for, the Initial Public Offering of Straits Asia on the Singapore Exchange Securities Trading Limited. This announcement has been prepared and released by Straits Asia.
RIM, through its wholly owned subsidiary, Yoxford Holdings Limited, currently owns 80% of the shareholding of Madagascar Consolidated Mining SA ( MCM ) which in turn holds exploration licences over the Sakoa Coalfield. MCM is 80% owned by RIM and the remaining 20% is held by an entity controlled by the Government of Madagascar. This 20% interest is expected to be diluted to 10% in the future, depending on whether the Government of Madagascar participates in the future capital funding requirements of MCM. Based on a preliminary review of the information Straits Asia has an exploration target of 300-500 million tonnes 1 of in situ coal. Straits Resources stated in its announcement dated January 21, 2008, that while production rates can only be determined following further drilling and feasibility work, it believes the Madagascar Interest is suited to a minimum three to five million tonne per annum with potential for rates significantly above this level. A large proportion of coal defined is potentially mineable by open pit methods. There is currently no production in the Sakoa Coalfield. JORC compliant resources and reserves and production rates can only be determined following further drilling and feasibility studies. Straits Resources is currently pursuing a work programme to delineate coal resources to JORC compliant standards. The completion and results of the full work programme is expected to take 18 months, and the results of the full programme will ultimately determine the development plan of the Madagascar Interest. This work programme, which will be assumed by Straits Asia following completion of the Proposed Acquisition, includes: - regional exploration; - a drilling programme aimed at defining JORC resources; 1 In relation to this exploration target, the potential quality and quantity is conceptual in nature, there has been insufficient work done at present to define a Mineral Resource (in accordance with the JORC Code) and it is uncertain if further exploration will result in the determination of a Mineral Resource. 2
- preparing reports into the feasibility of commercial mining operations to bankable feasibility standards; - reviewing coal transportation options; - engaging contractors and staff for the carrying out of the works programme; and - preparing marketing strategies plus a "life of mine" production plan. The location of the Madagascar Interest will enable Straits Asia to supply markets in India, Europe and Africa. In addition, the Sakoa Coalfield will be able to supply coal domestically in Madagascar. The intention of RIM is to prepare a feasibility study by early 2009 with the aim of beginning production in 2011. The Brunei Interest Pursuant to a joint venture agreement dated September 27, 2007 between SBI and Far East Energy Corporation Pty Limited ("FEE" and such joint venture agreement, the "JVA"), SBI entered into a joint venture with FEE (the "Brunei Joint Venture") to investigate the potential for coal resources in Brunei Darussalam ("Brunei"), under an exclusive Memorandum of Understanding ("MOU") signed by FEE with the Government of His Majesty the Sultan and Yang Di Pertuan of Brunei. The MOU provides a period of exclusivity to the Brunei Joint Venture to identify and progress potential coal projects in Brunei. If the acquisition of the Brunei Interest is completed, Straits Asia will have the opportunity to earn up to 70% of prospecting licences and mining leases to be obtained by the Brunei Joint Venture. 3
To date, exploration and reconnaissance work in relation to the Brunei Interest has predominantly comprised identification of coal outcrops. No comprehensive geological modelling of the coal measures strata has been undertaken and insufficient data exists to confirm seam correlation. As such, no estimation of coal resources has been undertaken. A work programme has been developed by the Brunei Joint Venture to delineate coal resources to JORC standards. The current work programme has been established in the Brunei Joint Venture Agreement and includes: - preparation of base maps for the potential project areas; - design of a data collection and recording management processes for new date; - undertaking geological mapping in three areas (Labi, Melilas and Tutong); - collecting and preparing coal samples for analysis; and - commencing work on the environmental base study. 2 Rationale for the Proposed Acquisition Further to the Proposed Restructure announcement dated April 17, 2008, the Company intends to reposition itself as a global coal player with a mandate to invest in coal assets across the world. The rationale for the Proposed Acquisition is described in further detail below: 4
2.1 Geographical Diversification The Proposed Acquisition will provide the Company with an exciting opportunity to transform itself into a global coal company. Almost all of the Company's revenue is currently derived from its Indonesian operations. Once developed and operational, the Coal Interests will allow the Company to diversify and expand its operations outside of Indonesia, making the Company's future cash flow less susceptible to Indonesia-specific operating risks. Madagascar and Brunei are both characterised by supportive political environments with the respective governments generally encouraging of investment in infrastructure and mining. 2.2 Proximity and Exposure to Untapped Demand The acquisition of the Coal Interests will allow the Company to pursue its new mandate of expanding both its exploration footprint and production capacity. It furthermore provides the Company with an opportunity to open up new markets and target new customers for its products in the medium and long term. Should the Company be successful in the development of the Madagascar Interest, a large part of the coal produced is likely to be sold to customers located in different geographical regions (such as Europe, Africa and India) as compared to its existing customer base (mainly North Asia). 2.3 Potential Boost to Long Term Production Levels The Company has two coal operations currently in production (Jembayan and Sebuku). It is important for Straits Asia to build an exploration portfolio that has a longer investment horizon, which will enable the Company to continue expanding its operations and increasing its future production profile. A large proportion of coal defined is potentially mineable by open pit methods. While production rates can only be determined following further drilling and feasibility work, it is believed that the Madagascar Interest is considered to be suited to a minimum three to five million tonne per annum operation. The acquisition of the Brunei Interest will grant exclusive rights to the Company, through the Brunei Joint Venture, in enlarged exploration areas. These areas are considered to be prospective and the ranges of coal types identified during early-stage studies have exhibited qualities that are similar to coal seams found in Kalimantan, Indonesia. 2.4 Significant Acreage with High Resource Potential The Company currently operates two producing coal assets. Natural resource extraction projects (including coal) have a finite operating life. Continued exploration and development is required to ensure continuity in the business of the Company. The acquisition of the Madagascar Interest will add substantial acreage to the Company s exploration footprint, allowing the Company to pursue further exploration initiatives. Following the implementation of a detailed exploration and drilling plan, the Madagascar Interest is 5
expected to contribute significantly to the Company s reserves and resources. The acquisition of the Brunei Interest will grant the Company exclusive rights in the areas covered by the MOU to conduct outcrop surveys, geological surveys, mapping and exploration. As Brunei is a resource rich nation with significant oil and gas operations already in production, the Company has been offered a unique opportunity which would provide it with the exclusive right to identify and progress potential coal projects in the region covered by the Brunei Joint Venture Agreement and to subsequently apply for production rights. The potential resource upside in the Brunei Interest, whilst it cannot be quantified at this stage, is therefore considered to be significant. 2.5 Leveraging on Proven Development Track Record The Company has proven its ability to develop and maximise the value of coal mines under challenging and untested conditions. When the Sebuku coal mine was acquired, the Company showed its capability to reinterpret the geological information and develop the asset successfully and into one of the lowest cost producers of coal in the world. This development was completed under challenging conditions. With the acquisition of the Coal Interests, the Company will be able to apply their knowledge and expertise and develop these assets which in turn is expected to create greater shareholders value. 3 Interested Person Transaction The Proposed Acquisition is an interested person transaction for the purposes of Chapter 9 of the listing manual of Singapore Exchange Securities Trading Limited as SBI holds a 47.1% direct interest in the Company as at the date of the Demerger Sale Agreement. The current total of all interested person transactions with SBI and Straits Resources since the start of this current financial year, including the Proposed Acquisition, is US$2,612,430. 4 Principal Terms of the Proposed Acquisition 4.1 Consideration The consideration for the Madagascar Interest is US$92.1 million (the Madagascar Consideration ) and the consideration for the Brunei Interest is US$8.2 million (the Brunei Consideration. The aggregate consideration was agreed upon on a willing buyer, willing seller basis and payment will be satisfied fully in cash. The consideration for the Brunei Interest and for the Madagascar Interest are based on the respective value of the Brunei Interest and the Madagascar Interest as at June 30, 2008 as valued by Tasman Mining Pty Limited, an independent technical consultant appointed by the Company and Straits Resources for the purpose of valuing the Madagascar Interest and the Brunei Interest (the "Independent Technical Consultant"). 6
Payment of the Brunei Consideration and the Madagascar Consideration will be made in three stages: i. On the date of signing of the Demerger Sale Agreement, SAE and RWD will pay to SBI amounts equal to 10% of the Brunei Consideration (US$820,000) and 10% of the Madagascar Consideration (US$9,210,000) respectively. ii. On completion of the in-specie distribution of shares in the Company held by Straits Resources to its shareholders and the issue of new share certificates in the name of CHESS Depositary Nominees Pty Limited ( CDN ) (the "Demerger Completion"), SAE and RWD will pay to SBI amounts equal to a further 25% of the Brunei Consideration (US$2,050,000) and a further 25% of the Madagascar Consideration (US$23,025,000) respectively. iii. On completion of the sale of Coal Interests (the Final Completion ), SAE and RWD will pay to SBI the balance of the Brunei Consideration (US$5,330,000) and the balance of the Madagascar Consideration (US$59,865,000) respectively. Pending completion of the sale of Coal Interests, all amounts paid by SAE and RWD to SBI shall be held by SBI in trust for SAE and RWD respectively. Final Completion will occur on such date after satisfaction of the conditions precedent as may be agreed between Straits Resources and the Company, being a date no later than 30 days after the Demerger Completion, unless otherwise agreed. If the Proposed Acquisition does not complete within 30 days after the Demerger Completion due to a failure of performance by Straits Resources or SBI, then SBI must repay to either or both SAE and RWD of the deposits for the Brunei Interest (up to US$2,870,000) and the Madagascar interest (up to US$32,235,000). If the failure to complete is due to failure of performance by SAE and RWD, then SBI must repay to SAE and RWD the deposits for the Brunei Interest and the Madagascar Interest less 5% of the consideration which is to be forfeited to SBI. Pursuant to the acquisition of the Madagascar Interest, the Company will be entitled to exercise the option in the RIM Agreement to acquire the remaining 66.5% of RIM. The amount of the option payment (the "RIM Option Exercise Price") will be based on the resource base defined by the further drilling program. Provided JORC measured and indicated resources exceed 100 million tonnes, the RIM Option Exercise Price will be US$0.60 per tonne for tonnage (measured and indicated resources) greater than 100 million tonnes and capped at a maximum of 400 million tonnes. For example, if total resources of 200 million tonnes are defined, the second tranche payment would be US$60 million or, if resources of 400 million tonnes or greater are defined, the second tranche payment would be US$180 million 2. The 2 The formulae for the calculation of the RIM Option Exercise Price has been done on the basis that RIM, through its wholly-owned subsidiary, owns 90% of the issued share capital of MCM while the remaining 10% is effectively Madagascar Government owned. Currently, MCM is 80% owned by RIM and 20% effectively owned by the Madagascar Government. The interests of the Madagascar Government in MCM is expected to be diluted to 10% in the future if it does not participate in the capital funding of MCM. 7
option is not exercisable if the JORC measured and indicated resources is less than 100 million tonnes. 4.2 Conditions Precedent and Completion Completion of the Demerger Sale Agreement is subject to and conditional upon, among others, the following conditions ( Conditions Precedent ) being fulfilled or obtained: (i) (ii) (iii) the distribution in specie of all of the Company's shares held by Straits Resources to the shareholders of Straits Resources and the issue of new share certificates in the name of CDN; in relation to the Brunei Interest, the approval of the shareholders for the acquisition of the Brunei Interest, the approval of the shareholders of Straits Resources for the sale of the Brunei Interest and the novation of the JVA from Straits Resources and SBI to the Company and SAE respectively; and in relation to the Madagascar Interest, the approval of the shareholders for the acquisition of the Madagascar Interest, the approval of the shareholders of Straits Resources for the sale of the Madagascar Interest and the novation of the RIM Agreement from Straits Resources and SBI to the Company and RWD respectively. In addition, the completion of the Demerger Sale Agreement is subject to the sale and purchase of each of the Brunei Interest and Madagascar Interest being completed simultaneously. If the Conditions Precedent are not satisfied by the date 30 days after the Demerger Completion, either Straits Resources or Straits Asia may elect to terminate this agreement. If the Demerger Sale Agreement is terminated, then SBI must immediately repay to SAE and RWD, respectively, the Brunei Consideration and the Madagascar Consideration. The Proposed Restructure, which involves the repositioning of the Company as a global coal vehicle and the separation of the Company from its current parent (Straits Resources), is contingent upon the Proposed Acquisition proceeding. That is, if the Proposed Acquisition is not approved by the shareholders of the Company, the Proposed Restructure will not proceed. 5 Financial Effects of the Proposed Acquisition The pro forma financial effects of the Proposed Acquisition on the net asset valuation (the "NAV") per share and the earnings per share (the "EPS") of the Company and its subsidiaries (the "Group") as set out below are prepared for illustration only and do not reflect the actual future financial situation of the Group after the Proposed Acquisition. If the interests of the Madagascar Government does not dilute to 10% of the issued share capital of MCM, then the RIM Option Exercise Price shall reduce by 10%. 8
The pro forma financial effects have been prepared based on the audited consolidated financial statements of the Group for the financial year ended December 31, 2007 ("FY2007"), assuming that the Proposed Acquisition had been completed at the beginning of FY2007. 5.1 NAV per share The effect of the Proposed Acquisition on the Group's NAV per share for FY2007 is illustrated in the table below: Before the Proposed Acquisition (as at December 31, 2007) Pro forma Group following the Proposed Acquisition NAV (US$'000) NAV per share (US cents) 304,172 304,172 (1) 27.833 27.833 Note: 5.2 EPS (1) Straits Asia will fund the total acquisition cost of the Proposed Acquisition (US$100.3 million) with existing cash from operations and additional cash raised through the issuance of new debt and/or equity, depending on the level of the Company s cash balances as well as prevailing equity and debt market conditions at the time. Purely for illustrative purposes, the pro forma calculations above assume that the Proposed Acquisition was funded entirely by additional cash raised through the issuance of additional debt by Straits Asia. The effect of the Proposed Acquisition on the Group's EPS for FY2007 is illustrated in the table below: Before the Proposed Acquisition (FY2007) Pro forma Group following the Proposed Acquisition Net profit (US$'000) EPS (US cents) 28,563 28,563 (1) 2.614 2.614 Note: (1) As mentioned in 5.1 above, the Proposed Acquisition may be funded with existing cash from operations and additional cash raised through the issuance of new debt and/or equity, but for the purposes of this announcement, it has been assumed that the Proposed Acquisition is funded entirely by cash raised through the issuance of additional debt. The pro forma calculations assume the Coal Interests were acquired on January 1, 2007 and US$6.22 million interest expense was incurred for FY2007 based on an interest rate of 6.2%, which represents Straits Asia's average effective interest rate at the balance sheet date. This interest expense is capitalised for accounting purposes. 5.3 Net Profits 9
There is no net profit attributable to the Madagascar Interest and the Brunei Interest as these assets are not operational at the time of acquisition. 6 Statement by the Independent Directors The Independent Directors of the Company are obtaining an opinion from an independent financial adviser, KPMG Corporate Finance Pte Ltd, as to whether the Proposed Acquisition is on normal commercial terms and whether it is prejudicial to the interests of the Company and its minority shareholders before forming its view, which will be set out in the Circular (as defined below). 7 Interests of Directors and Controlling Shareholders The Non-executive Chairman of the Company, Mr. Milan Jerkovic, is a Director and the Chief Executive Officer of Straits Resources. As at the date of this announcement, Mr. Milan Jerkovic holds an interest of 1.81% in Straits Resources. Mr. Richard Ong Chui Chat, the Chief Executive Officer of the Company, is an Executive Director of Straits Resources. As at the date of this announcement, Mr. Richard Ong Chui Chat holds an interest of 0.77% in Straits Resources. Mr. Michael George Gibson, a Non-executive Director of the Company, is an executive of Straits Resources. As at the date of this announcement, Mr. Michael George Gibson holds an interest of 0.32% in Straits Resources. Mr. Martin David Purvis, a Non-executive Director of the Company is an Executive Director of Straits Resources. As at the date of this announcement, Mr. Martin David Purvis holds an interest of 0.44% in Straits Resources. SBI, the vendor of the Brunei Interest and the Madagascar Interest, is a controlling shareholder of the Company and a wholly owned subsidiary of Straits Resources. As at the date of this announcement, SBI holds an interest of, and Straits Resources is deemed to be interested in, 47.1% in the Company. Save as disclosed above, none of the Directors or controlling shareholders of the Company has any interest, direct or indirect, in the Proposed Acquisition. 10
FURTHER DETAILS Further details of the Proposed Acquisition will be set out in a circular (the "Circular") to seek the Shareholders' approval. An appropriate announcement on the despatch of the Circular will also be released in due course. The Demerger Sale Agreement and the report of the Independent Technical Consultant are available for inspection during normal business hours at the Company's registered office for three months from the date of this announcement. By Order of the Board Straits Asia Resources Limited James Carter Company Secretary 15 August 2008 11