Target Cokal Potentially Offers Substantial Upside …...BBM, a coking coal project located...

This report has been prepared by Cedrus Investments Ltd. PLEASE SEE IMPORTANT DISCLOSURES BEGINNING ON PAGE 13

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January 30, 2013 Global Equity Research

Dr. Thomas Kenny, Chief Emerging Technology Advisor [email protected]

Key Points:

We believe Cokal Limited (“Cokal”; ASX: CKA) presents an opportunity for potentially substantial upside for long‐term investors, as the company looks significantly undervalued. Our target price, AU$0.57 per share, is based on the summation of the discounted cash flow (DCF) valuation of the company’s 60% stake in the Bumi Barito Mineral (BBM) project (AU$207 million as at year‐end 2013) and its net cash on hand (AU$25 million as at September 30, 2012). Cokal’s share price of AU$0.195 as of January 29, 2013 close translates into a 66% discount to our valuation.

At the moment, our valuation of the BBM project is based entirely on its stage one production schedule. In our view, there could be further upside potential to our valuation should the production schedules of Cokal’s following coking coal projects become clearer: stage two of the BBM project, the Borneo Bara Prima (BBP) project, the Anugerah Alam Katingan (AAK) project, the Anugerah Alam Manuhing (AAM) project, the PT Silangkop Nusa Raya (SNR) project, the Tanzania projects and the Mozambique projects.

BBM, a coking coal project located immediately adjacent to BHP Billiton’s (BHP) Juloi tenement in Central Kalimantan, Indonesia has the highest probability of producing in the near‐term among Cokal’s projects. In October 2012, Cokal achieved two major milestones, namely, receiving the exploration forestry permit (IPPKH) from the Indonesian government, and completing the initial pre‐feasibility study. In our view, receiving the IPPKH is a significant achievement, as it allows Cokal to use large capacity equipment and develop a roadway system within BBM. Furthermore, IPPKH is a pre‐requisite for converting the BBM exploration IUP (mining business license) into a production IUP.

For the initial pre‐feasibility study, Cokal has come up with a detailed development plan. For stage one,

production is planned to be commenced in 2Q calendar year (CY) 2014, with a total production for that stage of 18.2 million tonnes (Mt). Production is planned to be at 2 Mt per annum. Total capital expenditure for stage one, US$100 million, would be spent over CY2013‐CY2014. Average cash operating cost (excluding royalties of 7%) is estimated by Cokal to be US$67.9 per tonne for the first five years of production. We note that the projected average cash operating cost for stage one of BBM is meaningfully lower than its major Indonesian peer, Borneo Lumbung (with an average cash operating cost at US$77.5 per tonne during fiscal year 2011‐2012). In our view, the cost savings could be coming from BBM’s slightly higher strip ratio for the first five years and lower marketing cost.

Further exploration upside is possible for BBM. At the moment, the BBM project has a reported coal resources of

77 Mt (7 Mt indicated and 70 Mt inferred; 70% of the resources are coking coal and 30% are PCI coal). However, Cokal has an exploration target of 200 Mt to 350 Mt of coal down to a depth of 200 meters in thirteen seams in the eastern area of the BBM project (approximately 40% of the project area).

Macro risks include a drop in the global coking coal demand and a major decline in coking coal prices due to a

slowdown in the global economy. We estimate that if coking coal prices increase/decrease by 5%, Cokal’s net estimated profit in FY2016 (first full fiscal year of earnings contribution from the BBM project) could increase/decrease by 11%. Company‐specific risks include:

The inability or delay in converting BBM’s exploration IUP into a production IUP;

Higher‐than‐expected cash operating costs and capital expenditure;

Lower‐than‐expected production volume;

Unexpected policy changes regarding exports, mining and/or foreign investments in Indonesia.

Cokal Potentially Offers Substantial Upside for Long‐term Investors as Its Shares Look Significantly Undervalued

Target

AU$0.57


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Table of Contents

I. Company Description .................................................................................................................................... 3

II. Financial Information of Cokal ........................................................................................................................ 4

Income Statement ............................................................................................................................................................... 4

Balance Sheets ...................................................................................................................................................................... 4

III. Competitive Advantages of Indonesian Coal .............................................................................................................. 5

IV. Project Economics – Bumi Barito Mineral (BBM) and Other Projects ........................................................................ 5

V. Valuation ................................................................................................................................................................... 10

VI. Management ............................................................................................................................................................ 11

VII. Risks ......................................................................................................................................................................... 12

Important Disclosures ........................................................................................................................................................ 13


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I. Company Description

Cokal Limited (Cokal) is an emerging Australian Securities Exchange (ASX)‐listed coal company (ASX: CKA), with a key focus on metallurgical coal exploration and mining. The company commenced business as Jack Doolan Capital Pty Ltd. (JDC), a private company, formed primarily by the current Board of Directors. In December 2010, JDC was acquired by the then ASX‐listed Altera Resources Limited, with the Board of JDC assuming the control of Altera Resources. Altera Resources was renamed Cokal Limited in February 2011. Cokal’s vision is to build a global metallurgical coal business, which delivers valuable results to all its stakeholders. At the moment, Cokal has acquired stakes in seven Indonesian coal exploration projects, namely 60% stakes in the Bumi Barito Mineral (BBM) and Borneo Bara Prima (BBP) projects located in Central Kalimantan, 75% stakes in Anugerah Alam Katingan (AAK) and Anugerah Alam Manuhing (AAM) in Central Kalimantan, and a 75% interest in PT Silangkop Nusa Raya (SNR), which owns three exploration licenses in West Kalimantan. The company is also involved in other early‐stage coking coal mining opportunities in Tanzania and Mozambique. Among the aforementioned coking coal exploration projects, the BBM project has the highest probability of producing in the near term. According to Cokal, production of the BBM project is expected to start in 2Q calendar year (CY) 2014. As such, the focus of this report and our valuation on Cokal is primarily based on the BBM project. We may revise our valuation on Cokal in the future should the production roadmap of the company’s other projects become clearer.

Cokal’s Coking Coal Projects in Indonesia

Source: Cokal


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II. Financial Information of Cokal

In this section of the report, an analysis of the key financial data of Cokal is provided, including estimated earnings until fiscal year (FY) 2016 and the potential financing needs by Cokal until the BBM project begins to produce.

Income Statement For FY2011 and FY2012 (fiscal year ending June 30), Cokal’s net losses were AU$2.6 million (mn) and AU$6.3 mn respectively. As Cokal’s coking coal projects have not been producing yet, revenues in FY2011 and FY2012 were mainly coming from interest income. According to Cokal, production of the BBM project is expected to commence in 2Q CY2014. As such, we are estimating that the BBM project would start contributing earnings to Cokal from FY2015 onward. We may revise our earnings estimates on Cokal in the future should there be any changes to the estimated production schedules of the BBM project and should the production roadmap for the company’s other projects become clearer.

Earnings Estimates for Cokal during FY2013‐FY2016

(AU$ mn) FY2013E FY2014E FY2015E FY2016E

CKA's attributable net profit from BBM 0 0 40 87

Corporate level net income/(loss) (7) (7) (7) (7)

Net profit/(loss) (7) (7) 34 81

EPS (AU$) (0.02) (0.02) 0.08 0.20

No. of shares outstanding (mn) 411 411 411 411

Source: Cedrus’ estimates

Key assumptions of our earnings estimates include coking coal prices, unit production cost and production volume. While unit production cost and production volume are mainly based on Cokal’s guidance, coking coal price assumptions are based on the latest contract coking coal prices for 4Q CY2012. We will discuss these variables in further detail in section IV “Project Economics – Bumi Barito Mineral (BBM) and Other Projects” of this report. We note that Cokal’s earnings are very sensitive to coking coal price changes; for example, if coking coal prices increase/decrease by 5%, Cokal’s net profit in FY2016 (first full fiscal year of earnings contribution from the BBM project) is estimated to increase/decrease by 11%.

Balance Sheets Cokal is debt free as at September 30, 2012. To‐date, the company’s operations have been funded mainly by equity capital raised such as from the share placements to Passport Capital at AU$0.75 per share for 16 mn shares in April 2011 (AU$12 mn) and AU$0.50 per share for 17 mn shares in November 2011 (AU$8.5 mn), and to BlackRock at AU$0.50 per share for 40.2 mn shares in December 2011 (AU$20.1 mn). As at year‐end of FY2012, Cokal had cash and cash equivalents of about AU$29.5 mn. Based on Cokal’s quarterly report, its ending cash balance as at September 30, 2012 was AU$25.3 mn; this implies a cash outlay rate of AU$4.3 mn for 1Q FY2013, which was about 50% related to exploration and evaluation and 50% related to administration. Based on the AU$25.3 mn cash on hand as at September 30, 2012, a cash outlay rate of AU$4.3 mn per quarter (based on the cash outlay rate in 1Q FY2013) and an estimated capital expenditure of US$100 mn for the BBM project (before the project becomes operational in 2Q CY2014), we believe it is very likely that Cokal may need to plan another financing in the next 12‐18 months in order to satisfy its investment needs.


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III. Competitive Advantages of Indonesian Coal

The key competitive advantage of the Indonesian coal mining industry is that the country is closer to Asia’s major coal markets than its major peer, Australia. Therefore, its transportation costs for coal exports are significantly lower. Moreover, in general, Indonesia has more flexible and modular inland transportation systems. Within Indonesia, the Kalimantan provinces have the largest coal resources.

Comparison between Major Coal Ports in Australia (Abbot Pt), Indonesia (Balikpapan) and South Africa (Richards Bay) in terms of Proximity (in Nautical Miles) with Asia’s Major Coal Markets

Source: Roleva Energy

Indonesia’s Coal Resources by Province, 2009 (Million Tonnes)

Province Inferred Indicated Measured Total

Sumatra 13,949 10,735 7,699 32,383

Kalimantan 21,029 2,894 13,156 37,079

Other 96 33 55 184

Total 35,074 13,662 20,910 69,646

Source: Indonesian Coal Book

IV. Project Economics – Bumi Barito Mineral (BBM) and Other Projects

Bumi Barito Mineral (BBM) Cokal has a 60% stake in the Bumi Barito Mineral (BBM) project. The project comprises approximately 19,920 hectares and is located immediately adjacent to BHP Billiton’s Juloi tenement in Central Kalimantan. On August 6, 2012, Cokal reported that the project has 77 million tonnes (Mt) of coal resources (7 Mt indicated and 70 Mt inferred) in accordance with the JORC Code. Approximately 70% of the resources are coking coal and 30% are PCI coal. In addition, the BBM project has an exploration target of 200 Mt to 350 Mt of coal down to a depth of 200 meters (m) in thirteen seams in the eastern area of the BBM project (approximately 40% of the project area).


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Initially, premium coking coal from Seam J would be extracted; no coal washing is required from the initial production and all of the coal extracted could be shipped directly, reducing operating expenses and capital expenditure. Borehole cores for Seam B, C and D have been analyzed and produced two coal types within the BBM eastern area, coking coal and PCI coal. The coals are typically low ash (4% to 8%), low sulphur (0.2% to 0.4%) and ultra‐low phosphorus (0% to 0.003%). Coking coal typically has a good swelling index of 8 to 9 and volatile matter in the range of 18% to 20%. PCI coal has very high carbon content (80% to 85%) due to the low volatile matter (around 10%).

Resources by Seam and by Depth

Seam name

Seam Thickness

(m)

Indicated Resources

(Mt)

Inferred Resources

(Mt)

Total Resources

(Mt)

Depth Range (m)

Indicated Resources

(Mt)

Inferred Resources

(Mt)

Total Resources

(Mt)

J 1.4 7.0 10.0 17.0 0‐50 4.0 8.0 12.0

D 1.3 ‐ 25.0 25.0 51‐100 3.0 13.0 16.0

C 1.1 ‐ 20.0 20.0 101‐150 0.0 12.0 12.0

B 0.9 ‐ 15.0 15.0 151‐200 0.0 11.0 11.0

Total 7.0 70.0 77.0 201‐300 0.0 26.0 26.0

Total 7.0 70.0 77.0

Source: Cokal

Coal Quality of J Seam

Source: Cokal

Coal Quality of B, C and D Seams

Source: Cokal

In October 2012, Cokal achieved two key milestones for the BBM project, namely, receiving the exploration forestry permit, Pinjam Pakai (IPPKH), from the Indonesian government, and completing the initial pre‐feasibility study. IPPKH is critical if Cokal wants to use large capacity equipment for the BBM project; in particular, it allows Cokal to develop a roadway system within BBM. In addition, IPPKH is a crucial pre‐requisite for converting the BBM exploration Izin Usaha Pertambangan (IUP; i.e. Mining Business License) into a production IUP. For the initial pre‐feasibility study, Cokal has come up with a two‐stage development plan for the BBM project. For stage one, production is planned to be commenced in 2Q CY2014, with total production for that stage of 18.2 Mt. Annual targeted production is at 2 Mt; the targeted production rate is planned to be achieved by 4Q CY2014. Total capital expenditure (capex) for stage one would be about US$100 mn, and it would be spent over CY2013‐CY2014.

Product Yield (%)Inherent

MoistureAsh

Volatile

Matter

Fixed

Carbon

Total

Suphur

Calorific

Value

(kcal/kg)

CSNRelative

DensityPhosphorus

Raw Coal ‐ 0.8 4.6 ‐ 14.3 17.9 71.1 0.40 7,752 9+ 1.35 0.003

Washed Coal @F1.60 87.95 1.0 5.2 18.3 75.5 0.47 8,237 9+ 1.32 0.002

Seam ProductInherent

MoistureAsh

Volatile

Matter

Fixed

Carbon

Total

Suphur

Calorific

Value

(kcal/kg)

CSNRelative

DensityPhosphorus

D PCI 0.9 5.1 10.3 83.7 0.43 8,204 1.5 1.36 0.002

D Coking 0.9 5.1 14.4 79.7 0.39 8,287 9.0 1.33 0.002

C PCI 1.0 5.5 9.3 84.3 0.41 8,191 1.0 1.36 0.001

C Coking 0.5 5.5 14.5 79.5 0.24 8,265 8.5 1.33 0.001

B PCI 0.9 14.0 9.5 75.6 0.41 7,676 1.5 1.40 0.004

B Coking 0.5 12.6 13.8 73.1 0.23 7,591 7.5 1.38 0.002


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Average cash operating cost (excluding royalties of 7%) is estimated to be US$67.9 per tonne for the first five years of production.

Estimated Capital Expenditure and Cash Operating Cost per Tonne (excluding Royalties)

Development Capital for Stage 1 US$ mn Cash Operating Cost US$/ tonne

Direct ship to start production 50 Average for first 5 years 67.9

Ramp up to 2 Mt per annum 50 Stand‐alone life of mine 89.6

Total 100

Source: Cokal

At the moment, there is no clear production schedule for stage two. It is expected that additional capex would have to be spent on expanding the mining, port and logistics operations. Furthermore, a coal handling and preparation plant would have to be constructed. As such, our analysis and valuation of the BBM project is mainly based on stage one. Average selling price assumptions According to Cokal’s October 31, 2012 announcement, the company is assuming a long‐term hard coking coal price of less than US$170 per tonne and a semi‐soft coking coal price of US$122 per tonne. In our view, these assumptions look reasonable as the latest contract price for hard coking coal for 4Q CY2012 was US$163 per tonne. In our model, we have assumed a long‐term hard coking coal price of US$160 per tonne and a semi‐soft coking coal/PCI price of US$120 per tonne. While our hard‐coking coal price assumption is based on the latest contract price, our semi‐soft coking coal/PCI price assumption is a function of the hard coking coal price assumption; particularly, we have assumed the long‐term semi‐soft coking coal/PCI price to be equaled to 75% of the long‐term hard coking coal price based on Sumitomo’s historical coking coal purchase prices.

Historical Hard Coking Coal Contract Prices, CY2007‐CY4Q2012

Source: Wesfarmers

Sumitomo’s Historical Semi‐soft Coking Coal/PCI Purchase Price as a % of Hard Coking Coal Purchase Price

Source: Sumitomo

Cash operating cost assumptions Cokal assumes the average cash operating cost to be US$67.9 per tonne for the first five years and US$89.6 per tonne during the mine’s life. In our view, the average cash operating cost assumption for the first five years looks reasonable as it is in‐line with the company’s Australian peers such as Whitehaven Coal Limited (ASX: WHC) and Wesfarmers (ASX: WES). However, that assumption is significantly lower than its Indonesian peer, Borneo Lumbung. In our view, the cost savings by Cokal over its Indonesian competitor may be coming from BBM’s slightly higher strip ratio for the first five years and lower marketing cost (as Cokal plans to market BBM’s coal by itself versus Borneo Lumbung, which uses Glencore [805.HK] to market its coal).

(US$/tonne) CY2007 CY2008 CY2009 CY2Q10 CY3Q10 CY4Q10 CY1Q11 CY2Q11 CY3Q11 CY4Q11 CY1Q12 CY2Q12 CY3Q12 CY4Q12

Hard coking coal

contract price92 304 124 212 235 209 234 358 322 293 238 212 220 163

Period on period

changeNA 230% ‐59% 70% 11% ‐11% 12% 53% ‐10% ‐9% ‐19% ‐11% 4% ‐26%

As a % of Hard coking price (CY) 2007 2008 2009 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Average

Semi ‐soft coking coa l 66% 80% 64% 84% 76% 68% 80% 78% 72% 63% 76% 69% 73%

PCI coal 71% 82% 69% 85% 80% 72% 80% 83% 73% 73% 73% 73% 76%

Average 68% 81% 67% 84% 78% 70% 80% 81% 73% 68% 74% 71% 75%


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Whitehaven, Wesfarmers and Borneo Lumbung’s Cash Operating Cost per Tonne during FY2011‐FY2012

(AU$ per tonne) FY2011 FY2012

Whitehaven 60.5 69.9

Wesfarmers 63.8 60.6

Borneo Lumbung 77.0 78.0

Source: Whitehaven, Wesfarmers, Borneo Lumbung

Of the US$67.9 cash operating cost per tonne, US$29 is transportation cost. While the proportion of transportation cost looks high (43% of total) when compared with Borneo Lumbung’s barging and logistic costs (26% of total), we believe it is reasonable as coal mined at BBM will be transported some 774 km from the mine site to the Java Sea.

Proposed Transportation Route for BBM’s Coking Coal

Source: Cokal


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Other projects Borneo Bara Prima (BBP) Cokal also has a 60% stake in the Borneo Bara Prima (BBP) project. The BBP project comprises approximately 13,050 hectares and is located adjacent to BHP Billiton’s Maruwai tenement in Central Kalimantan. According to Cokal, two drilling rigs secured for BBP have commenced drilling, and core samples have been sent to Australia for laboratory analysis. Initial results indicate some of the coal is suitable for the PCI and anthracite markets. To‐date, the drilling has only tested the outcrops in the southern part of the BBP project; another two locations of mapped outcrops have yet to be tested for coal quality attributes. Anugerah Alam Katingan (AAK) Cokal has a 75% stake in the Anugerah Alam Katingan (AAK) project. The AAK project, located in Central Kalimantan, covers approximately 5,000 hectares and has five outcrops (1‐2m in thickness) with bright coal and possible anthracite. Anugerah Alam Manuhing (AAM) Cokal has a 75% interest in the Anugerah Alam Manuhing (AAM) project. The AAM project, located in Central Kalimantan, encompasses approximately 10,000 hectares and has eleven outcrops (1‐2m in thickness) with bright coal. Mapping and preliminary exploration work has been started in AAM to identify the coal potential within the tenement. PT Silangkop Nusa Raya (SNR) After the conclusion of a technical due diligence, which involved a Cokal geological team conducting a preliminary surface mapping exercise, Cokal has completed the acquisition of 75.2% of SNR in FY2012. SNR holds three exploration licenses in West Kalimantan near the Malaysian border. The SNR licenses cover an area of 13,000 hectares. Recent exploratory work for metallurgical coal in the area has been limited, although surfaces samples of coal from surrounding areas had shown good coking coal properties, and there is possibility of opening up a new area. According to Cokal, SNR’s outcrop samples show high volatile, low ash, moderate sulfur and low phosphorus coking coal. Tanzania An initial drilling program has been completed in Tanzania, with seven boreholes drilled on the Manda Project (Cokal owns 50%) and one borehole drilled on the adjoining Iwela lease (Cokal owns 60%). However, the drilling results from the Tanzanian tenements have not yielded any viable coal seams. Cokal will continue to work with its joint venture partner, Tanzoz Resource Company Limited, a private company, to gain access into other parts of Tanzania for the purpose of conducting a coal exploration program. Mozambique Cokal signed a co‐operation agreement with Empresa Mocambicana de Exploracao Mineira (EMEM – Mozambique Mining Exploration Company) to explore tenements in Mozambique for coal mining potential and to jointly develop mines and associated facilities. EMEM is a state‐owned corporation formed by the Mozambique government in order to participate in mining projects, undertake exploration and mining development as well as promoting value addition to mineral products. Under the terms of the agreement, EMEM will bring tenements to Cokal for review, and if deemed suitable by Cokal, these tenements will be brought into the 80:20 (Cokal:EMEM) joint venture. To‐date, no tenements have been deemed suitable for exploration.


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V. Valuation

We are assigning Cokal a target price of AU$0.57 based on the summation of the DCF valuation of the company’s 60% interest in the BBM project and Cokal’s latest net cash on hand as at September 30, 2012. In our view, Cokal looks undervalued, as it is trading at a 66% discount to our target price of AU$0.57 based on the company’s closing price as at January 29, 2013. We believe Cokal’s other projects such as the BBP, AAK, AAM, SNR, the Tanzania and Mozambique projects could provide further upside to the company’s valuation should their development schedules become clearer.

Valuation Estimate for Cokal (assumed AU$0.96 per US$1.00)

Valuation for Cokal Cokal's Stake

Valuation Method

At end CY2013 (AU$ mn)

BBM 60% DCF @ 12% 207

Add: latest net cash/(debt) [9/30/2012] Company data 25

Net asset value (NAV) 233

NAV per share (AU$) 0.57

No. of shares outstanding (mn) 411

Closing price as at January 29, 2013 (AU$) 0.195

(Discount)/Premium to NAV (%) ‐66%


DCF Model for the BBM Project


Note that we have assumed Cokal’s ownership of the BBM project to decline from 60% in CY2021 to 56% in CY2022 and to 49% in CY2023. The reason is that under Indonesia’s mining law, the holder of an IUP for the purpose of foreign investment is obligated to divest its shares gradually so that on the tenth year of the operation at least 51% of its shares will be held by an Indonesian citizen.

Required Ownership by an Indonesian Citizen under the Mining Law

Sixth year 20%

Seventh year 30%

Eighth year 37%

Ninth year 44%

Tenth year 51%

Source: Indonesian Ministry of Mining & Energy

Year (US$ mn) ‐ calendar year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Revenues 75 302 302 302 302 302 302 302 302 181

Less : cash operating costs (34) (136) (136) (136) (136) (142) (148) (154) (160) (99)

Less : roya l ties (5) (21) (21) (21) (21) (21) (21) (21) (21) (13)

Cash profit 36 145 145 145 145 139 133 127 121 69

Less : tax (7) (34) (34) (34) (34) (32) (31) (29) (28) (15)

Free cash flow before capex 0 30 111 111 111 111 107 102 98 93 54

CKA's ownership of BBM 60% 60% 60% 60% 60% 60% 60% 60% 56% 49%

Attributable FCF before capex to CKA 0 18 67 67 67 67 64 61 59 52 27

Less : capex borne by CKA (25) (75) 0 0 0 0 0 0 0 0 0

Attributable actual FCF to CKA (25) (57) 67 67 67 67 64 61 59 52 27


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VI. Management

Board of Directors and Company Secretaries

Board of director Mr. Peter Lynch Executive Chairman

Board of director Mr. Pat Hanna Executive Director

Board of director Mr. Jim Middleton Managing Director/CEO

Board of director Mr. Domenic Martino Non‐Executive Director

Company secretary Mr. Duncan Cornish Joint Company Secretary

Company secretary Mr. Victor Kuss Joint Company Secretary/CFO

Source: Cokal

Cokal’s management team has tremendous experience in the coal and finance industries in Australia and overseas:

Mr. Peter Lynch, Executive Chairman, has held various positions such as mining engineer, project manager, mine manager, general manager and managing director within the coal industry in Australia since his graduation with a Mining Engineering degree in the University of New South Wales in 1988. He has a proven track record in coal project evaluation, development and operation. Furthermore, he was responsible for the design and construction of one of Australia’s best producing longwall projects, Oaky North. Prior to his appointment at Cokal, he was the President, CEO and Director of Waratah Coal Inc., a Toronto Stock Exchange (TSX)‐listed company, which was taken over by the Mineralogy Group. Mr. Lynch is a member of Cokal’s Audit Committee.

Mr. Pat Hanna, Executive Director, has over 30 years of experience as a coal geologist in the areas of exploration and evaluation, including planning, budgeting and managing drilling programs in Australia and Indonesia since his graduation from the University of New South Wales in 1976. When Mr. Hanna was the Exploration Manager for Riversdale Mining, he was principally responsible for the discovery and documentation of a new coking coal basin in Mozambique. Furthermore, Mr. Hanna was a member of the JORC committee, and he has authored and co‐authored numerous coal industry publications. Mr. Hanna is a member of Cokal’s Audit Committee.

Mr. Jim Middleton, Managing Director and Chief Executive Officer, has held various positions such as technical, operational, exploration and corporate in the coal industry in Australia, including Coal Allied, Exxon, Glencore, Xstrata and Illawarra Coal since 1981. He has a reputation for designing and developing low‐cost, high‐production, and innovative projects. For example, he designed and built Xstrata’s highest ROI United Longwall Project with a payback period of 12 months. Prior to his appointment at Cokal, he was the Vice President‐Mining Operations of Illawarra Coal owned by BHP Billiton.

Mr. Domenic Martino, Non‐Executive Director, is a Chartered Accountant and an experienced director of ASX‐listed companies such as Pan Asia Corporation Limited (ASX: PZC), Synergy Plus Limited (ASX: SNR), Australasian Resources Limited (ASX: ARH) and Clean Global Energy Limited (currently known as Citation Resources Limited [ASX: CTR]). He has significant experience in the development of “micro‐cap” companies and was a key player in the re‐birth of a broad grouping of ASX companies including Sydney Gas, Pan Asia, Clean Global Energy and NuEnergy Capital. As a former CEO of Deloitte Touche Tohmatsu Australia, Mr. Martino has strong reputation in the Australian and Chinese capital markets. He has a proven track record in capital raisings across a range of markets and a lengthy track record of closing key energy and resources deals with key local players in Indonesia. Mr. Martino is the Chairman of Cokal’s Audit Committee.

Mr. Duncan Cornish, Joint Company Secretary, is an accomplished and highly regarded corporate administrator and manager. He has many years of experience in pivotal management roles in capital raisings and stock exchange listings for numerous companies on the Australian Securities Exchange (ASX), AIM Market of the London Stock Exchange and the Toronto Stock Exchange (TSX). Mr. Cornish is highly skilled in the areas


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of company financial reporting, company regulatory, secretarial and governance, business acquisition and disposal due diligence. He has worked with Ernst & Young and PricewaterhouseCoopers both in Australia and the UK. Mr. Cornish is a Chartered Accountant.

Mr. Victor Kuss, Chief Financial Officer and Joint Company Secretary, has tremendous experience in M&A activities and capital raising. He has a strong track record in the successful growth and development of resources and resource related companies. Mr. Kuss is a Chartered Accountant and has a Masters in Economics.

VII. Risks

As coking coal is a key raw material for 70% of the world’s steel industry, a decline in the global steel demand due to a slowdown in the global economy would affect the demand and prices of coking coal. As highlighted previously, Cokal’s earnings are highly sensitive to changes in coking coal prices. Therefore, a further slowdown in the global economy could significantly impact Cokal’s earnings. However, in the case of a further deceleration in the global economy, we believe Cokal would be in a better position than most of its global peers, as the cash operating costs of its BBM project it forecasts rank at the low end of the global cost curve.

In our view, company‐specific risks for Cokal include (a) the inability or delay in converting BBM’s exploration IUP license into a production IUP license, (b) higher‐than‐expected cash operating costs and capex, (c) lower‐than‐expected production volume, and (d) unexpected policy changes with respect to exports, mining and/or foreign investment in Indonesia.

Source: Cokal


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IMPORTANT DISCLOSURES

STOCK OWNERSHIP AND CONFLICT OF INTEREST DISCLOSURE

Neither Thomas Kenny nor the rest of the research team or their households is an owner of Cokal Limited common shares.

Cedrus Investments Ltd. (“Cedrus”) does and seeks to do business with companies covered in research reports distributed by Cedrus, and Cedrus is an investor of the subject company and may have investment banking relationship with the subject company. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Cedrus will identify such companies in the reports of the companies covered. Therefore, investors should consider this report as only a single factor in making their investment decision.

Cedrus will receive or has received compensation for investment banking services provided within the past 12 months from Cokal Limited.

Cedrus will receive or has received within the past 12 months compensation from Cokal Limited.

ANALYST CERTIFICATION

Thomas Kenny hereby certifies that the views expressed in this research report accurately reflect his personal views about the subject companies and their securities. He also certifies that he has not been, and will not be, receiving direct or indirect compensation in exchange for expressing the specific recommendations in this report.

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For private circulation only. This report is prepared by Cedrus and is for informational purposes only and is not intended to be, nor should it be construed to be, an advertisement or an offer or a solicitation of an offer to buy or sell any securities. The information herein, or upon which opinions have been based, has been obtained from sources believed to be reliable, but no representations, express or implied, or guarantees, can be made as to their accuracy, timeliness or completeness. The information and opinions in this report are current as of the date of the report. We do not endeavor to update any changes to the information and opinions in this report. Unless otherwise stated, all views expressed herein (including estimates or forecasts) are solely those of our research department and subject to change without notice.

This report does not take into account the specific investment objectives, financial situation, and the particular needs of any specific company that may receive it. Before acting on any advice or recommendation in this report, companies should consider whether it is suitable for their own particular circumstances. The value of securities mentioned in this report and income from them may go up or down, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future terms are not guaranteed, and a loss of original capital may occur.

Neither the analysts responsible for this report nor any related household members are officers, directors, or advisory board members of any covered company. No one at a covered company is on the Board of Directors of Cedrus or its affiliates. The compensation for the analysts who prepare reports is determined exclusively by senior management. Analyst compensation is not based on investment banking revenues; however, compensation may relate to the revenues of Cedrus as a whole, of which investment banking, sales and trading are a part. Cedrus does engage in investment banking. Cedrus does trade securities on a principal basis; however, Cedrus’ research analysts are not prohibited from owning securities they cover through Research Reports.

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Target Cokal Potentially Offers Substantial Upside …...BBM, a coking coal project located...

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