BALAMARA RESOURCES LIMITED ACN 061 219 985 NOTICE OF GENERAL MEETING
TIME: 12:00pm (WST)
DATE: 30 July 2014
PLACE: BDO, Ground Floor Rokeby Room 38 Station Street Subiaco Western Australia
This General Meeting, Explanatory Statement and Proxy Form should be read in its entirety. If Shareholders are in doubt as to how they should vote, they should seek advice from their professional advisers prior to voting.
The Independent Expert has concluded that the transaction subject to resolution 1 of the General Meeting is fair and reasonable to non-associated shareholders. All Shareholders should refer to the Independent Expert’s Report enclosed with this Notice
of General Meeting. For personal use only use personal For
Should you wish to discuss the matters in this Notice of Meeting please do not hesitate to contact the Company Secretary on (+61 8) 6365 4519
CONTENTS PAGE
Business of the Meeting (setting out the proposed resolutions) 3
Explanatory Statement (explaining the proposed resolutions) 4
Glossary 6
Proxy Form 7
Appendix 1 – Independent Expert’s Report 9
IMPORTANT INFORMATION
TIME AND PLACE OF MEETING
Notice is given that the general meeting of the Shareholders to which this Notice of Meeting relates will be held at 12:00pm (WST) on 30 July 2014 at:
BDO, Ground Floor Rokeby Room 38 Station Street Subiaco Western Australia
YOUR VOTE IS IMPORTANT
The business of the General Meeting affects your shareholding and your vote is important.
VOTING ELIGIBILITY
The Directors have determined pursuant to Regulation 7.11.37 of the Corporations Regulations 2001 (Cth) that the persons eligible to vote at the General Meeting are those who are registered Shareholders at 7:00pm (AEST) on 28 July 2014.
VOTING IN PERSON
To vote in person, attend the General Meeting at the time, date and place set out above.
VOTING BY PROXY
To vote by proxy, please complete and sign the enclosed Proxy Form and return by the time and in accordance with the instructions set out on the Proxy Form.
In accordance with section 249L of the Corporations Act, members are advised that:
• each member has a right to appoint a proxy; For personal use only use personal For • the proxy need not be a member of the Company; and
• a member who is entitled to cast 2 or more votes may appoint 2 proxies and may specify the proportion or number of votes each proxy is appointed to exercise. [If the member appoints 2 proxies and the appointment does not specify the proportion or number of the member’s votes, then in accordance with section 249X(3) of the Corporations Act, each proxy may exercise one-half of the votes.]
New sections 250BB and 250BC of the Corporations Act came into effect on 1 August 2011 and apply to voting by proxy on or after that date. Shareholders and their proxies should be aware of these changes to the Corporations Act, as they will apply to this General Meeting. Broadly, the changes mean that:
if proxy holders vote, they must cast all directed proxies as directed; and
any directed proxies which are not voted will automatically default to the Chair, who must vote the proxies as directed.
Further details on these changes is set out below.
Proxy vote if appointment specifies way to vote
Section 250BB(1) of the Corporations Act provides that an appointment of a proxy may specify the way the proxy is to vote on a particular resolution and, if it does:
the proxy need not vote on a show of hands, but if the proxy does so, the proxy must vote that way (i.e. as directed); and
if the proxy has 2 or more appointments that specify different ways to vote on the resolution – the proxy must not vote on a show of hands; and
if the proxy is the chair of the meeting at which the resolution is voted on – the proxy must vote on a poll, and must vote that way (i.e. as directed); and
if the proxy is not the chair – the proxy need not vote on the poll, but if the proxy does so, the proxy must vote that way (i.e. as directed).
Transfer of non-chair proxy to chair in certain circumstances
Section 250BC of the Corporations Act provides that, if:
an appointment of a proxy specifies the way the proxy is to vote on a particular resolution at a meeting of the Company's members; and
the appointed proxy is not the chair of the meeting; and
at the meeting, a poll is duly demanded on the resolution; and
either of the following applies:
o the proxy is not recorded as attending the meeting;
o the proxy does not vote on the resolution,
the chair of the meeting is taken, before voting on the resolution closes, to have been appointed as the proxy for the purposes of voting on the resolution at the meeting.
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2 BUSINESS OF THE MEETING
1. RESOLUTION 1 – ISSUE OF SHARES FROM SUBSIDIARY COAL HOLDING SP. Z.O.O. TO AMPLE SKILL LIMITED
To consider and, if thought fit, to pass, with or without amendment, the following resolution as an ordinary resolution:
"That, for the purpose of ASX Listing Rule 10.1 and for all other purposes, the Company be authorised to issue shares equating to 15% of Coal Holding Sp. Z.o.o. in return for US$5,000,000 to a Substantial Shareholder, Ample Skill Limited, as set out in the Explanatory Statement.”
Expert’s Report: Shareholders should carefully consider the report prepared by the Independent Expert for the purposes of Shareholder approval under ASX Listing Rule 10.1. The Independent Expert’s Report comments on the fairness and reasonableness of the transaction outlined within this Resolution, to the non-associated Shareholders of the Company. The Independent Expert has concluded that the transaction referred to within this Resolution is fair and reasonable to non-associated shareholders.
Voting Exclusion: The Company will disregard any votes cast on this Resolution by Ample Skill Limited and any of its associates. However, the Company need not disregard a vote if it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form, or, it is cast by the person chairing the meeting as proxy for a person who is entitled to vote, in accordance with a direction on the Proxy Form to vote as the proxy decides.
DATED: 24 JUNE 2014
BY ORDER OF THE BOARD
DANIEL KENDALL COMPANY SECRETARY
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3 EXPLANATORY STATEMENT
This Explanatory Statement has been prepared to provide information which the Directors believe to be material to Shareholders in deciding whether or not to pass the Resolutions which are the subject of the business of the Meeting.
1. RESOLUTION 1 – ISSUE OF SHARES FROM SUBSIDIARY COAL HOLDING SP. Z.O.O. TO AMPLE SKILL LIMITED
1.1 Introduction
On 2 June 2014, the Company announced that it had secured a US$5 million strategic investment into the Polish Nowa Ruda Coking Coal Project (the “Project”) from its Substantial Shareholder, Ample Skill Limited.
The US$5 million is to be paid in tranches, with the first instalment of US$3 million once shareholder approval is obtained, and then US$1 million to be made each subsequent month thereafter.
Ample Skill Limited currently has a 36.87% holding in Balamara Resources Limited (“Balamara” or the “Company”), and subject to the approval of Resolution 1, will also have a direct 15% equity interest in the Nowa Ruda Project via Balamara’s foreign subsidiary Coal Holding Sp. Z.o.o. (“Coal Holding”).
The investment by Ample Skill is expected to cover the cost of completing the Nowa Ruda drilling and feasibility costs through to mid-2015. A 5-hole resource definition drilling programme is currently underway in parallel with initial feasibility studies on all key areas.
In accordance with ASX Listing Rule 10.1, the transaction outlined above is subject to the approval of its Shareholders, and an Independent Expert has been engaged to as per Listing Rule 10.1 to determine if the transaction is fair and/or reasonable from the perspective of the non-associated Shareholders in the Company. Balamara has engaged BDO Corporate Finance (“BDO”) to prepare an Independent Expert’s Report.
1.2 Listing Rule 10.1
ASX Listing Rule 10.1 provides that a company must not, subject to specified exceptions, dispose of a substantial asset to a Substantial Shareholder, without the approval of its Shareholders.
As Ample Skill Limited has greater than a 10% (36.87%) relevant interest in the Company at the time of the transaction described within Resolution 1, they are considered to be a Substantial Shareholder in accordance with ASX Listing Rule 10.1.3.
For the purpose of this Listing Rule, an asset is deemed to be substantial if its value, or the value of consideration received, is 5% or more of the equity
interests of the entity as set out in the latest accounts given to the ASX under the For personal use only use personal For Listing Rules. As at 31 December 2013, the Company had equity interests of $7,537,008. Given the US$5 million being offered for 15% of the Project, this would value the asset at approximately $36 million; concluding the asset to be considered substantial per the ASX Listing Rules.
Although the proposed transaction is for an issue of new securities from the subsidiary Coal Holding, this is seen to be a decrease in the Company’s
4 economic interest, and therefore a considered as a disposal under the ASX Listing Rules.
1.3 Independent Expert’s Report
The Independent Expert’s Report is included as an appendix to this Notice of Meeting and provides an opinion on whether the price paid by Ample Skill Limited for the 15% interest in Coal Holding is fair and/or reasonable to the non- associated shareholders in the Company.
Before voting Shareholders are encouraged to read the report in its entirety. The report concludes that the proposed transaction is fair and reasonable to the Company’s non-associated Shareholders.
1.4 Directors’ recommendation
The Directors recommend that Shareholders support Resolution 1 in order to further progress the Company’s flagship Nowa Ruda Project.
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5 GLOSSARY
$ means Australian dollars.
ASIC means the Australian Securities and Investments Commission.
ASX means Australian Securities Exchange.
ASX Listing Rules means the Listing Rules of the ASX.
Board means the current board of directors of the Company.
Business Day has the meaning given in the Listing Rules.
Company means Balamara Resources Limited (ACN 061 219 985).
Constitution means the Company’s constitution.
Corporations Act means the Corporations Act 2001 (Cth).
Directors means the current directors of the Company.
Explanatory Statement means the explanatory statement accompanying the Notice.
General Meeting or Meeting means the meeting convened by the Notice.
Notice or Notice of Meeting or Notice of General Meeting means this notice of general meeting including the Explanatory Statement and the Proxy Form.
Proxy Form means the proxy form accompanying the Notice.
Resolutions means the resolutions set out in the Notice of Meeting, or any one of them, as the context requires.
Share means a fully paid ordinary share in the capital of the subsidiary Coal Holding Sp. Z.o.o.
Shareholder means a holder of a Share.
Substantial Shareholder has the meaning given to it per ASX Listing Rule 10.1.3.
US$ means the United States Dollar.
WST means Western Standard Time as observed in Perth, Western Australia.
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6 PROXY FORM
APPOINTMENT OF PROXY BALAMARA RESOURCES LIMITED ACN 061 219 985 GENERAL MEETING
I/We
of
being a member of Balamara Resources Limited entitled to attend and vote at the General Meeting, hereby Appoint Name of proxy
OR the Chair of the General Meeting as your proxy
or failing the person so named or, if no person is named, the Chair of the General Meeting, or the Chair’s nominee, to vote in accordance with the following directions, or, if no directions have been given, and subject to the relevant laws as the proxy sees fit, at the General Meeting to be held at 12:00pm (WST), on 30 July 2014 at BDO, Ground Floor, Rokeby Room, 38 Station Street, Subiaco Western Australia, and at any adjournment thereof. The Chair intends to vote undirected proxies in favour of all Resolutions in which the Chair is entitled to vote.
Voting on Business of the General Meeting FOR AGAINST ABSTAIN Resolution 1 – Issue of Shares from subsidiary Coal Holding Sp. Z.o.o. to Ample Skill Limited.
Please note: If you mark the abstain box for a particular Resolution, you are directing your proxy not to vote on that Resolution on a show of hands or on a poll and your votes will not to be counted in computing the required majority on a poll.
If two proxies are being appointed, the proportion of voting rights this proxy represents is %
Signature of Member(s): Individual or Shareholder 1 Shareholder 2 Shareholder 3
Sole Director / Company Secretary Director Director/Company Secretary
Contact Name ……………………………………….. Contact Ph (daytime): ……………………………………………
Dated: / / 2014 For personal use only use personal For
7 BALAMARA RESOURCES LIMITED ACN 061 219 985 INSTRUCTIONS FOR COMPLETING ‘APPOINTMENT OF PROXY’ FORM 1. (Appointing a Proxy): A member entitled to attend and cast a vote at a General Meeting is entitled to appoint a proxy to attend and vote on their behalf at the meeting. If the member is entitled to cast 2 or more votes at the meeting, the member may appoint a second proxy to attend and vote on their behalf at the meeting. However, where both proxies attend the meeting, voting may only be exercised on a poll. The appointment of a second proxy must be done on a separate copy of the Proxy Form. A member who appoints 2 proxies may specify the proportion or number of votes each proxy is appointed to exercise. If a member appoints 2 proxies and the appointments do not specify the proportion or number of the member’s votes each proxy is appointed to exercise, each proxy may exercise one-half of the votes. Any fractions of votes resulting from the application of these principles will be disregarded. A duly appointed proxy need not be a member of the Company.
2. (Direction to Vote): A member may direct a proxy how to vote by marking one of the boxes opposite each item of business. Where a box is not marked the proxy may vote as they choose. Where more than one box is marked on an item the vote will be invalid on that item.
3. (Signing Instructions):
(Individual): Where the holding is in one name, the member must sign.
(Joint Holding): Where the holding is in more than one name, all of the members should sign.
(Power of Attorney): If you have not already provided the Power of Attorney with the registry, please attach a certified photocopy of the Power of Attorney to this form when you return it.
(Companies): Where the company has a sole director who is also the sole company secretary, that person must sign. Where the company (pursuant to Section 204A of the Corporations Act) does not have a company secretary, a sole director can also sign alone. Otherwise, a director jointly with either another director or a company secretary must sign. Please sign in the appropriate place to indicate the office held.
4. (Attending the Meeting): Completion of a Proxy Form will not prevent individual members from attending the General Meeting in person if they wish. Where a member completes and lodges a valid Proxy Form and attends the General Meeting in person, then the proxy’s authority to speak and vote for that member is suspended while the member is present at the General Meeting.
5. (Return of Proxy Form): To vote by proxy, please complete and sign the enclosed Proxy Form and return by:
(a) post to Balamara Resources Limited, PO Box 222, Subiaco WA 6904 (Attn:
Company Secretary); or For personal use only use personal For (b) facsimile to the Company on facsimile number +61 8 9388 6040; or
(c) email to the Company at [email protected],
so that it is received not less than 48 hours prior to commencement of the Meeting.
Proxy forms received later than this time will be invalid.
8 APPENDIX 1 – INDEPENDENT EXPERT’S REPORT
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BALAMARA RESOURCES LIMITED Independent Expert’s Report
OPINION: The Proposal is fair and reasonable to shareholders
17 June 2014 For personal use only use personal For
Financial Services Guide
17 June 2014
BDO Corporate Finance (WA) Pty Ltd ABN 27 124 031 045 (‗we‘ or ‗us‘ or ‗ours‘ as appropriate) has been engaged by Balamara Resources Limited (‗Balamara‗) to provide an independent expert‘s report on the proposal to issue a direct 15% equity interest in its 100% owned Polish subsidiary Coal Holding Sp. Z.o.o. (‗Coal Holding’) to Hong Kong based Ample Skill Limited (‗Ample Skill’) for consideration of USD 5 million. You will be provided with a copy of our report as a retail client because you are a shareholder of Balamara.
Financial Services Guide In the above circumstances we are required to issue to you, as a retail client, a Financial Services Guide (‗FSG‘). This FSG is designed to help retail clients make a decision as to their use of the general financial product advice and to ensure that we comply with our obligations as financial services licensees.
This FSG includes information about:
Who we are and how we can be contacted; The services we are authorised to provide under our Australian Financial Services Licence, Licence No. 316158; Remuneration that we and/or our staff and any associates receive in connection with the general financial product advice; Any relevant associations or relationships we have; and Our internal and external complaints handling procedures and how you may access them.
Information about us BDO Corporate Finance (WA) Pty Ltd is a member firm of the BDO network in Australia, a national association of separate entities (each of which has appointed BDO (Australia) Limited ACN 050 110 275 to represent it in BDO International). The financial product advice in our report is provided by BDO Corporate Finance (WA) Pty Ltd and not by BDO or its related entities. BDO and its related entities provide services primarily in the areas of audit, tax, consulting and financial advisory services.
We do not have any formal associations or relationships with any entities that are issuers of financial products. However, you should note that we and BDO (and its related entities) might from time to time provide professional services to financial product issuers in the ordinary course of business.
Financial services we are licensed to provide We hold an Australian Financial Services Licence that authorises us to provide general financial product advice for securities to retail and wholesale clients.
When we provide the authorised financial services we are engaged to provide expert reports in connection with the financial product of another person. Our reports indicate who has engaged us and the nature of the report we have been engaged to provide. When we provide the authorised services we are not acting for you.
General Financial Product Advice We only provide general financial product advice, not personal financial product advice. Our report does not take into account your personal objectives, financial situation or needs. You should consider the appropriateness of this general advice having regard to your own objectives, financial situation
and needs before you act on the advice. For personal use only use personal For
BDO CORPORATE FINANCE (WA) PTY LTD Financial Services Guide
Page 2
Fees, commissions and other benefits that we may receive We charge fees for providing reports, including this report. These fees are negotiated and agreed with the person who engages us to provide the report. Fees are agreed on an hourly basis or as a fixed amount depending on the terms of the agreement. The fee payable to BDO Corporate Finance (WA) Pty Ltd for this engagement is approximately $17,000.
Except for the fees referred to above, neither BDO, nor any of its directors, employees or related entities, receive any pecuniary benefit or other benefit, directly or indirectly, for or in connection with the provision of the report.
Other Assignments BDO undertook Due Diligence work in connection with Balamara‘s proposed AIM listing in 2012 with total fees charged in the last two years to 2 June 2014 of $13,339. BDO provides taxation services and audit services to Balamara with total fees charged as disclosed in Balamara‘s Annual Reports. BDO Audit and Assurance (WA) Pty Ltd is the appointed Auditor of Balamara. We do not consider that this impacts on our independence in accordance with the requirements of Regulatory Guide 112 ‗Independence of Experts‘. We have completed a conflict search of BDO affiliated organisations within Australia. This conflict search incorporates all Partners, Directors and Managers of BDO affiliated organisations. We are not aware of any circumstances that, in our view, would constitute a conflict of interest or would impair our ability to provide objective assistance in this matter.
Remuneration or other benefits received by our employees All our employees receive a salary. Our employees are eligible for bonuses based on overall productivity but not directly in connection with any engagement for the provision of a report. We have received a fee from Balamara for our professional services in providing this report. That fee is not linked in any way with our opinion as expressed in this report.
Referrals We do not pay commissions or provide any other benefits to any person for referring customers to us in connection with the reports that we are licensed to provide.
Complaints resolution Internal complaints resolution process As the holder of an Australian Financial Services Licence, we are required to have a system for handling complaints from persons to whom we provide financial product advice. All complaints must be in writing addressed to The Complaints Officer, BDO Corporate Finance (WA) Pty Ltd, PO Box 700 West Perth WA 6872.
When we receive a written complaint we will record the complaint, acknowledge receipt of the complaint within 15 days and investigate the issues raised. As soon as practical, and not more than 45 days after receiving the written complaint, we will advise the complainant in writing of our determination.
Referral to External Dispute Resolution Scheme A complainant not satisfied with the outcome of the above process, or our determination, has the right to refer the matter to the Financial Ombudsman Service (‗FOS‘). FOS is an independent organisation that has been established to provide free advice and assistance to consumers to help in resolving complaints relating to the financial service industry. FOS will be able to advise you as to whether or not they can be of assistance in this matter. Our FOS Membership Number is 12561. Further details about FOS are available at the FOS website www.fos.org.au or by contacting them directly via the details set out below.
Financial Ombudsman Service GPO Box 3 Melbourne VIC 3001 Toll free: 1300 78 08 08 Facsimile: (03) 9613 6399 For personal use only use personal For Email: [email protected]
Contact details You may contact us using the details set out on page 1 of the accompanying report.
TABLE OF CONTENTS
1. Introduction 1
2. Summary and Opinion 1
3. Scope of the Report 4
4. Outline of the Proposal 6
5. Profile of Balamara Resources Limited 7
6. Profile of Coal Holding Sp. Z.o.o. 13
7. Economic analysis 14
8. Industry analysis 15
9. Valuation approach adopted 18
10. Valuation of Asset being disposed of by Balamara 19
11. Valuation of consideration 21
12. Is the Proposal fair? 21
13. Is the Proposal reasonable? 22
14. Conclusion 23
15. Sources of information 24
16. Independence 24
17. Qualifications 25
18. Disclaimers and consents 25
Appendix 1 – Glossary
Appendix 2 – Valuation Methodologies
Appendix 3 - Independent Technical Report prepared by Salva Resources Pty Ltd For personal use only use personal For
17 June 2014
The Directors Balamara Resources Limited Level 1, 350 Hay Street Subiaco WA 6008
Dear Directors INDEPENDENT EXPERT’S REPORT
1. Introduction
On 2 June 2014, Balamara Resources Limited (‗Balamara‗) announced its proposal to issue a direct 15% equity interest in its 100% owned Polish subsidiary Coal Holding Sp. Z.o.o. (‗Coal Holding‘) to Hong Kong based Ample Skill Limited (‗Ample Skill‘) for consideration of USD $5 million (‗Proposal‘).
Under the Australian Securities Exchange (‗ASX‘) Listing Rules Chapter 10, Ample Skill is a substantial holder in Balamara by virtue of its 36.87% shareholding, and the 15% equity interest in Coal Holding represents disposal of a substantial asset of Balamara. Consequently ASX Listing Rules require Balamara to seek the approval of shareholders to the Proposal. The ASX Listing Rules require that the notice of meeting at which approval of the Proposal is sought must include a report on the Proposal from an Independent Expert.
The Directors of Balamara Resources have appointed BDO Corporate Finance (WA) Pty Ltd (‗BDO‘) to prepare an independent expert‘s report in relation to the Proposal.
2. Summary and Opinion
2.1 Purpose of the report
The directors of Balamara have requested that BDO Corporate Finance (WA) Pty Ltd (‗BDO‘) prepare an independent expert‘s report (‗our Report‘) to express an opinion as to whether or not Balamara‘s proposal to issue a direct 15% equity interest in its 100% owned Polish subsidiary Coal Holding to Ample Skill) for consideration of USD 5 million (‗Proposal‘) is fair and reasonable to the non associated shareholders of Balamara. Our Report is prepared pursuant to ASX Listing Rule 10.1 and is to be included in the Explanatory
For personal use only use personal For Memorandum accompanying the notice of meeting for Balamara in order to assist the Shareholders in their decision whether to approve the Proposal.
BDO Corporate Finance (WA) Pty Ltd ABN 27 124 031 045 AFS Licence No 316158 is a member of a national association of independent entities which are all members of BDO (Australia) Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Corporate Finance (WA) Pty Ltd and BDO (Australia) Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania.
2.2 Approach
Our Report has been prepared having regard to Australian Securities and Investments Commission (‗ASIC‘) Regulatory Guide 111 ‗Content of Expert‘s Reports‘ (‗RG 111‘) and Regulatory Guide 112 ‗Independence of Experts‘ (‗RG 112‘).
In arriving at our opinion, we have assessed the terms of the Proposal as outlined in the body of this report. We have considered: How the value of the assets being disposed of compares to the value of the consideration to be paid for the assets; How the value of a Balamara share prior to the Proposal compares to the value of a Balamara share following the Proposal; The likelihood of a superior alternative offer being available to Balamara; Other factors which we consider to be relevant to the Shareholders in their assessment of the Proposal; and The position of Shareholders should the Proposal not proceed.
2.3 Opinion We have considered the terms of the Proposal as outlined in the body of this report and have concluded that, in the absence of a superior offer, the Proposal is fair and reasonable to Shareholders.
2.4 Fairness
In section 12 we determined that the Proposal consideration compares to the value of assets to be disposed of, as detailed below.
Low Preferred High Ref USD$m USD$m USD$m
Value of a 15% equity in Coal Holding 12 2.2 3.2 4.2
Value of the Consideration 12 5.0 5.0 5.0
Source: BDO analysis
The above pricing indicates that, in the absence of any other relevant information, and a superior offer, the Proposal is fair for Shareholders.
2.5 Reasonableness
We have considered the analysis in section 13 of this report, in terms of both
For personal use only use personal For advantages and disadvantages of the Proposal; and other considerations, including the position of Shareholders if the Proposal does not proceed and the consequences of not approving the Transaction.
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In our opinion, the position of Shareholders if the Proposal is approved is more advantageous than the position if the Proposal is not approved. Accordingly, in the absence of any other relevant information and/or a superior proposal we believe that the Proposal is reasonable for Shareholders. The respective advantages and disadvantages considered are summarised below:
ADVANTAGES AND DISADVANTAGES
Section Advantages Section Disadvantages
13.3 The Proposal is fair 13.4 Dilution of the Company‘s exposure to the Nowa Ruda Project
13.3 Funding of the Company‘s flagship project
13.3 Control of Balamara unaffected
Other key matters we have considered include:
Section Description
13.1 Alternative Proposals
13.2 Consequences of not approving the Proposal
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3. Scope of the Report
3.1 Purpose of the Report ASX Listing Rule 10.1 requires that a listed entity must obtain shareholders‘ approval before it acquires or disposes of a substantial asset, when the consideration to be paid for the asset or the value of the asset being disposed constitutes more than 5% of the equity interest of that entity at the date of the last accounts presented to the ASX. Based on the reviewed accounts as at 31 December 2013, the value of the consideration to be paid for a 15% equity interest in Coal Holding (the asset being disposed of) is approximately 700% of the equity interest of Balamara. Listing Rule 10.1 applies where the vendor or acquirer of the relevant assets is a substantial shareholder of the listed entity. Ample Skill is a substantial shareholder of Balamara by virtue of its 36.87% holding in the Company. Listing Rule 10.10.2 requires the Notice of Meeting for shareholders‘ approval to be accompanied by a report by an independent expert expressing their opinion as to whether the transaction is fair and reasonable to non-associated shareholders, being the shareholders whose votes are not to be disregarded in respect of the transaction.
Accordingly, an independent experts‘ report is required for the Proposal. The report should provide an opinion by the expert stating whether or not the terms and conditions in relation thereto are fair and reasonable to non-associated shareholders of Balamara.
3.2 Regulatory guidance Neither the Listing Rules nor the Corporations Act defines the meaning of ‗fair and reasonable‘. In determining whether the Proposal is fair and reasonable, we have had regard to the views expressed by ASIC in RG 111. This regulatory guide provides guidance as to what matters an independent expert should consider to assist security holders to make informed decisions about transactions. RG 111 suggests that, where an expert assesses whether a related party transaction is ‗fair and reasonable‘ for the purposes of ASX Listing Rule 10.1, this should not be applied as a composite test—that is, there should be a separate assessment of whether the transaction is ‗fair‘ and ‗reasonable‘, as in a control transaction. An expert should not assess whether the transaction is ‗fair and reasonable‘ based simply on a consideration of the advantages and disadvantages of the proposal. We do not consider the Proposal to be a control transaction. As such, we have used RG 111 as a guide for our analysis but have considered the Proposal as if it were not a control transaction.
3.3 Adopted basis of evaluation RG 111 states that a transaction is fair if the value of the offer price or consideration is greater than the value of the securities subject of the offer. In the case of Balamara the 15% equity interest in Coal Holding is the ‗subject of the offer‘. This comparison should be made assuming a knowledgeable and willing, but not anxious, buyer and a knowledgeable and willing, but not anxious, seller acting at arm‘s For personal use only use personal For length. RG 111 states that when considering the value of the securities subject of the offer in a control transaction the expert should consider this value inclusive of a control premium. However, as stated in Section 3.2 we do not consider that the Proposal is a control transaction. As such, we have not included a premium for control when considering the Proposal.
4
Further to this, RG 111 states that a transaction is reasonable if it is fair. It might also be reasonable if despite being ‗not fair‘ the expert believes that there are sufficient reasons for security holders to accept the offer in the absence of any higher bid. Having regard to the above, BDO has completed this comparison in two parts:
A comparison between the value of the consideration provided and the value of the asset being disposed of and the value of the consideration (fairness – see Section 12 ‗Is the Proposal Fair?‘); and An investigation into other significant factors to which Shareholders might give consideration, prior to approving the resolution, after reference to the value derived above (reasonableness – see Section 13 ‗Is the Proposal Reasonable?‘).
3.4 APES 225 Compliance This assignment is a Valuation Engagement as defined by Accounting Professional & Ethical Standards Board professional standard APES 225 ‗Valuation Services‘ (‗APES 225‘).
A Valuation Engagement is defined by APES 225 as follows: ‘an Engagement or Assignment to perform a Valuation and provide a Valuation Report where the Valuer is free to employ the Valuation Approaches, Valuation Methods, and Valuation Procedures that a reasonable and informed third party would perform taking into consideration all the specific facts and circumstances of the Engagement or Assignment available to the Valuer at that time.’ This Valuation Engagement has been undertaken in accordance with the requirements set out in APES 225.
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4. Outline of the Proposal
On 2 June 2014, Balamara announced that its major shareholder, Ample Skill, had agreed to invest US$5 million as a direct equity investment in its flagship project, the Nowa Ruda Coking Coal Project in Poland, through the issue of shares in Balamara‘s 100% owned subsidiary Coal Holding. Subject to receiving shareholder approval, the funds will be transferred in three tranches over a period of two months as set out below.
Placement shares Tranche Date Amount US$ (as % of Coal Holding) Tranche 1 Upon Shareholder approval 3,000,000 9% Tranche 2 Within 30 days of tranche 1 1,000,000 3% Tranche 3 Within 30 days of tranche 2 1,000,000 3% Total 5,000,000 15%
Balamara expects the $US 5 million investment by Ample Skill to cover the cost of completing the Nowa Ruda drilling and feasibility costs through to mid 2015, when the Company is targeting a decision to mine and will seek project development funding. Once completed, the Proposal will give Ample Skill a 15% interest in the Nowa Ruda Project through the
shares it will be issued in Coal Holding, along with its 36.87% direct interest in Balamara. For personal use only use personal For
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5. Profile of Balamara Resources Limited
5.1 History Balamara was incorporated on 16 August 1993 and listed on the ASX on 19 April 1996. The Company is focussed on the exploration and development of mineral deposits in Central Europe with its core asset being the Nowa Ruda Project. The Company is headquartered in Perth, Western Australia and its current directors and senior management comprise of:
Mr Derek Lenartowicz, Executive Chairman; Mr Mike Ralston, Managing Director; Mr Milos Bosnjakovic, Director;
Mr Michael Hale, Non-executive Director; and Mr Daniel Kendall, Company Secretary On 19 February 2014, the Company announced that it had entered into an agreement for the sale of its wholly owned subsidiary Balkan Mining Pty Ltd, which holds the Monty Project (Montenegro), the RSC and Varesh Projects (Bosnia-Herzegovina) for a total of approximately $15.2 million. Under the sale agreement, consideration was to be received within 30 days of the date, once all final completion requirements were met. On 22 May 2014, the Company announced that the sale had yet to be completed, however the buyer remains committed to acquire the subsidiary with the buyer having secured an escrow agent and completing all necessary due diligence. The Company‘s most recent capital raising was completed on 21 March 2014, which saw a total of $1 million raised through an equity placement at $0.10 per share to Hong Kong-based Ample Skill Limited.
Set out below is a brief description of the Company‘s projects. Nowa Ruda Coal Project The Nowa Ruda Project is located in the Central Sudeten range within the lower Silesian Coal Basin, close to the Czech Republic border. The project covers a total area of approximately 20km2 and consists of two large coal deposits, Waclaw and Piast, and holds infrastructure such as roads, rail, power and water. Historically, Nowa Ruda was an underground producing coal mine, and in 1995 was placed in care and maintenance due to low coking coal prices along with inefficient cost structures. In July 2013, Balamara‘s 100% owed Polish subsidiary, Coal Holding Sp. Z.o.o., was awarded the rights to explore and develop the Nowa Ruda Project.
Currently, the Company is undertaking a 5-hole resource definition programme along with a Feasibility Study which includes all key areas, such as, infrastructure, mine planning, mine design, coal quality, environmental studies, discussions with potential off-take partners and potential funding solutions.
Bogdan Project For personal use only use personal For The Bodgan Project is prospective for copper, zinc, lead and silver and is located in the Upper Silesia region of South Western Poland. The project area covers approximately 42km2 . The Company acquired the project in September 2011 via an 85% ownership in ‗Polmetal‘, a local polish company holding the Bodgan tenement.
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Historically, over 20 million tonnes of copper have been produced over the past forty years, with the majority being produced by KGHM Polska Miedz (‗KGHM‘). The area is defined by a large fault system that runs south-east and a vast tabular mineralised zone is associated with this fault. In early 2013, the Company commenced its Phase Two drilling programme at the Bogdan Project which was designed to test for the presence of a higher grade copper system, close to KGHM operations. The Company plans to divest its Bodgan Project, such that its interest in the project remains, however the Company will have access to third party funding for future activities.
Peelwood Project The Peelwood deposit is prospective for copper and zinc. The project area is located approximately 50 kms north of Crookwell and 75 kms south of Bathurst, NSW, in the Upper Lachlan Shire. Access to the project site is via the Peelwood Road at Peelwood. Balamara Resources has 100% ownership in four exploration licenses as follows: EL2934 Peelwood North
EL2934 Peelwood South EL6831 Black Springs EL6955 Mount Costigan. Balamara‘s main asset at Peelwood is the Peelwood North deposit. Since early 2012, there have been no significant exploration activities undertaken at the Peelwood project as the Company has shifted its focus on its Central European projects.
Furthermore, on 18 December 2013, the Company announced that it had reached an agreement with AIM listed company, CEB Resources, to farm into its Peelwood Project. Under the agreement, CEB Resources can earn up to a 49% interest in the Peelwood Project by spending $1.2 million in three tranches over the next 12 months. Elsienora Project The Elsienora Project is prospective for gold and is situated in the Lachlan Fold Belt of Eastern NSW, Australia. The project covers an area of 37km2 and was first discovered in the 1860‘s, with the majority of mining carried out between 1890 and 1911. Modern explorations was conducted in the early 1970‘s, however there has been little recent activity.
Balamara Resources has 100% ownership in two exploration licenses – EL 6082 and EL 6767. On 17 February 2012, the Company announced the deep diamond drilling of three holes returned strong anomalous gold and zinc results with the potential for a large-scale gold system.
On 3 September 2013, Balamara announced that it had reached an agreement with Alkane Resources Limited to farm into its Elsienora project. Under the agreement, Alkane Resources Limited can earn up to an 80% interest in the tenements by spending $0.5 million on exploration over three years, with a
For personal use only use personal For minimum $0.25 million spent over two years. The farm-in agreement will enable the Company to advance exploration at Elsienora without having to commit its cash resources to the Elsienora Project.
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Monty Project
The Monty Project is located near the town of Mojkovac, approximately 100 km from the capital city of Podgorica, Montenegro. The project area is prospective for zinc, lead, copper and silver and consists of five deposits being Brskovo, Visnjica, Zuta Pria, Igriste and Razvrsje.
Modern exploration at the Brskovo field commenced in 1950, and continued until the beginning of exploitation of Zuta Pria in 1976. Visnjica and Igriste are relatively less explored and have not been exploited.
In late 2010, Balamara received a 25 year exploration and mining lease of the Monty Project with drilling programmes at Brskovo and Visnijica completed in late 2013. RSC Project
The RSC project is located immediately across the Montenegrin border in the Srpska Republic, which is part of Bosnia-Herzegovina. The Company acquired the project, which covers an area of approximately 50km2 and is prospective for zinc and lead, in March 2013.
The project area has had various forms of geological exploration over a 50-year period, resulting in the establishment of a large database of information on geological, chemical and mineralogical composition. Varesh Project
The Varesh Project was acquired by Balamara in September 2012 and is located 30km north of the capital city Sarajevo, Bosnia-Herzegovina.The project is prospective for zinc and silver. The Varesh Project consists of two advanced polymetallic deposits, Veocave and Rupice, which are approximately ten kilometres apart.
5.2 Historical Balance Sheet
Reviewed as at Audited as at Audited as at 31-Dec-13 30-Jun-13 30-Jun-12 Statement of Financial Position $ $ $ CURRENT ASSETS Cash and cash equivalents 1,204,356 433,442 1,942,835 Trade and other receivables 247,106 128,104 204,271 Other assets 105,440 318,398 130,895 TOTAL CURRENT ASSETS 1,556,902 879,944 2,278,001 NON -CURRENT ASSETS Exploration and evaluation 5,841,926 6,141,999 3,333,836 Plant and equipment 71,952 67,036 48,145 Other assets 390,510 364,571 313,178 TOTAL NON-CURRENT ASSETS 6,304,388 6,573,606 3,695,159
For personal use only use personal For TOTAL ASSETS 7,861,290 7,453,550 5,973,160 CURRENT LIABILITIES Trade and other payables 308,882 1,948,019 412,874 TOTAL CURRENT LIABILITIES 308,882 1,948,019 412,874
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Reviewed as at Audited as at Audited as at 31-Dec-13 30-Jun-13 30-Jun-12 Statement of Financial Position $ $ $ NON-CURRENT LIABILITIES Provision for long service leave 15,400 9,442 - TOTAL NON-CURRENT LIABILITIES 15,400 9,442 - TOTAL LIABILITIES 324,282 1,957,461 412,874
NET ASSETS 7,537,008 5,496,089 5,560,286
EQUITY Issued capital 61,599,419 56,012,446 49,763,911 Reserves 2,917,914 4,947,840 4,257,133 Accumulated losses (56,822,386) (55,346,141) (48,408,793)
Capital and reserves attributable to the owners of Balamara Resources Limited 7,694,947 5,614,145 5,612,251 Non-controlling interest (157,939) (118,056) (51,965) TOTAL EQUITY 7,537,008 5,496,089 5,560,286
Source:Balamara Resources Limited Annual Report for the years ended 30 June 2013, 30 June 2012, and 31 December 2013.
We note that Balamara‘s auditor issued an Emphasis of Matter paragraph in the review report on the financial statements for the half year ended 31 December 2013. The auditor outlined the existence of a material uncertainty with the Company‘s ability to continue as a going concern dependent on Balamara being able to successfully raise funding through equity and/or sale of assets.
The auditor also expressed an Emphasis of Matter to similar effect in the audit report dated 25 September 2013 relating to the financial year ended 30 June 2013. We note the following in relation to Balamara‘s Statement of Financial Position:
Cash and cash equivalents decreased from $1.94 million at 30 June 2012 to $0.43 million at 30 June 2013 due to the Company acquiring the Varesh Zinc-Silver Project in Bosnia-Herzegovia for approximately $1.5 million cash and the issue of 18 million Balamara shares. As at 31 December 2013, cash and cash equivalents was $1.20 million, with the increase due to the proceeds for the issue of 70.13 million share at $0.075 per share on 1 August 2013. Other non-current assets primarily comprise of tenement bonds for the Australian and Balkans projects for the grants of applicable exploration and exploitation leases. Exploration and evaluation increased from $3.33 million at 30 June 2012 to $6.14 million at 30 June 2013.The increase is predominantly due to the Company capitalising the acquisition of its
Varesh Project on 21 September 2012. For personal use only use personal For Trade and other payables decreased from $0.4 million at 30 June 2012 to $1.95 million at 30 June 2013 with the increase predominately due to a payable amounting to $0.56 million to Centurion Resources PLC. In February 2013, Balamara secured a strategic partner for its Monty Project in which Centurion Resources PLC paid £0.38 million to Balamara for a 10% stake in its subsidiary
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North Mining., the holder of the Monty project. The agreement also included a cancellation clause, to which if executed, the Company would have to pay back the consideration received plus and interest component. On 2 July 2013, the agreement was terminated. Share capital increased from $56.01 million at 30 June 2013 to $61.60 million at 31 December 2013.The increase is primarily due to the successful completion of the 3:11 renounceable rights issue on 1 August 2013, raising $5.26 million comprising of 70.13 million ordinary shares at a price of $0.075 per share.
5.3 Historical Statement of Comprehensive Income
Reviewed for the Audited for Audited for the half year ended year ended year ended 31-Dec-13 30-Jun-13 30-Jun-12 Statement of Comprehensive Income $ $ $ Revenue Interest Revenue 25,823 45,839 169,215 Expenses Exploration costs expense (2,009,062) (3,102,232) (2,974,045) Foreign exchange gain/(loss) 4,575 (76,099) 828 Director and employee costs (413,386) (678,954) (592,031) Share based payments (2,155,724) (165,739) (3,810,675) Consultancy costs (350,461) (215,380) (316,435) Professional services (73,461) (215,334) (591,431) Write-off of capitalised exploration expenditure - (1,424,150) - Convertible note settlement costs - - (350,626) Administrative/ other corporate expenses (531,878) (1,198,215) (908,434) Loss before income tax (5,503,574) (7,030,264) (9,373,634) Income tax expense - - - Loss after income tax (5,503,574) (7,030,264) (9,373,634) Foreign currency translation reserve (198,204) 524,745 (79,017) Total comprehensive loss for the period (5,701,778) (6,505,519) (9,452,651)
Source: Balamara Resources Limited Annual Report for the years ended 30 June 2013, 30 June 2012, and 31 December 2013. We note the following in relation to Balamara‘s Historical Statement of Profit or Loss and Other Comprehensive Income: Revenue mainly comprises interest income, with the decrease in revenue over the three reporting
periods arising from a reduction in cash held. For personal use only use personal For Share based payments decreased from $3.81 million for the year ended 30 June 2012 to $0.02 million for the year ended 30 June 2013. Write-off capitalised exploration expenditure of $1.42 million for the year ended 30 June 2013 relates to the Company impairing the Elsienora Project by $0.50 million along with $0.92 million
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being written off the Peelwood Project as a result of Balamara relinquishing the EL 6081 (Single Tree Hill) tenement. Convertible note settlement costs of $0.35 million for the year ended 30 June 2012 relates to the Company closing out an existing US$4 million legacy debt instrument with La Jolla Cove Investors on 27 October 2011.The debt was fully repaid along with a cancellation fee of US$0.35 million. Other corporate expenses increased from $0.91 million at 30 June 2012 to $1.20 million at 30 June 2013.The increase was primarily due to the Company incurring higher business development costs.
5.4 Capital Structure The share structure of Balamara as at 13 June 2014 is outlined below:
Number
Total ordinary shares on issue 341,680,538
Top 20 shareholders 229,637,998
Top 20 shareholders - % of shares on issue 67.21%
Source: Balamara Resources Limited Share Registry.
The ordinary shares held by the most significant shareholders as at 13 June 2014 are detailed below:
Number of Ordinary Percentage of Name Shares Held Issued Shares (%)
Ample Skill Limited 125,971,956 36.87%
Derek Lenartowicz 16,741,254 4.90%
HSBC Custody Nominees (Australia) Limited 16,304,786 4.77%
MBL Constructions Pty Ltd 15,640,000 4.58%
Citicorp Nominees Pty Limited 12,175,467 3.56%
Subtotal 186,833,463 54.68%
Others 154,847,075 45.32%
Total ordinary shares on Issue 341,680,538 100.00%
Source: Balamara Resources Limited Share Registry.
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6. Profile of Coal Holding Sp. Z.o.o.
6.1 History Coal Holding is based in Katowice, Poland and operates as a 100% owned subsidiary of Balamara. On 24 July 2013, Coal Holding was awarded the exclusive rights to the Nowa Ruda coking coal project in Poland. The current license held by Coal Holding can be converted into a mining license subject to the successful completion of a Feasibility Study. The license was awarded directly from the Polish Government, with a minor concession fee payable. On 30 September 2013, Balamara appointed Mr Andrew Zibrow as Chief Executive of Coal Holding to spearhead development of its Nowa Ruda Project in south-west Poland. Details of interest in tenements held by Coal Holding are below:
Tenement Project Interest Status
License no.8/2013/p Nowa Ruda Project 100% Exploration
6.2 Financial information In addition to its interest in the Nowa Ruda Project, the other assets and liabilities of Coal Holding are as follows: Assets Cash at Bank of PLN 91,449 Liabilities Trade creditors of PLN 331,546 Accruals for drilling of PLN 650,215
Intercompany loan from Balamara $AUD 711,740 Intercompany loan from Polmetal PLN 238,664.
Coal Holding does not produce a balance sheet. The balances set out above have been provided by Balamara‘s management with supporting documentation.
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7. Economic analysis
Growth in the global economy is continuing at a moderate pace, helped by firmer conditions in the advanced countries. China's growth appears to have slowed a little in early 2014 but remains generally in line with policymakers' objectives. Commodity prices in historical terms remain high, but some of those important to Australia have continued to decline of late. Financial conditions overall remain very accommodative. Long-term interest rates have fallen further and risk spreads remain low. Emerging market economies are once again receiving capital inflows. Volatility in many financial prices is currently unusually low. Markets appear to be attaching a very low probability to any rise in global interest rates over the period ahead.
In Australia, the economy grew at a below-trend pace in 2013 overall, but growth looks to have been somewhat firmer around the turn of the year. This has resulted partly from very strong increases in resource exports as new capacity has come on stream, but smaller increases in such exports are likely in coming quarters. Moderate growth has been occurring in consumer demand and a strong expansion in housing construction is now under way. At the same time, resources sector investment spending is set to decline significantly. Signs of improvement in investment intentions in some other sectors are emerging, but these plans remain tentative, as firms wait for more evidence of improved conditions before committing to significant expansion. Public spending is scheduled to be subdued. There has been some improvement in indicators for the labour market in recent months, but it will probably be some time yet before unemployment declines consistently. Recent data confirm that growth in wages has declined noticeably. If these and other domestic costs remain contained, inflation should remain consistent with the target over the next one to two years, even with lower levels of the exchange rate. Monetary policy remains accommodative. Interest rates are very low and for some borrowers have edged lower over recent months. Savers continue to look for higher returns in response to low rates on safe instruments. Credit growth has picked up a little. Dwelling prices have increased significantly over the past year, though there have been some signs of a moderation in the pace of increase recently. The earlier decline in the exchange rate is assisting in achieving balanced growth in the economy, but less so than previously as a result of the higher levels over the past few months. The exchange rate remains high by historical standards, particularly given the further decline in commodity prices. Looking ahead, continued accommodative monetary policy should provide support to demand, and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years. In the Board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates. Source: www.rba.gov.au Statement by Glenn Stevens, Governor: Monetary Policy Decision 3 June 2014.
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8. Industry analysis
8.1 Overview Coal deposits are found below the earth‘s surface with the quality of a coal deposit determined by the length of time in formation, commonly known as its ‗organic maturity‘, temperature and pressure. The rank of coal refers to the physical and chemical properties that coals of different maturities possess. Lower rank coals such as lignite generally possess a much lower organic maturity, have a soft texture, a dull earthly appearance and are characterized by high moisture levels and low energy (carbon) content. Higher ranked coals such as Anthracite, which is the highest ranking coal, are harder, stronger, contain less moisture, and produce more energy.
To date coal has been mined by two broad methods, opencast mining and underground mining, the choice of extraction method determined by the geology of the coal deposit. The two major coal types are coking coal and thermal coal. Coking coal is used for the production of metallurgical coke, which is used as a reductant in the production of both iron and steel. It is primarily used because of its high carbon content and coking characteristics, however it is also used for the smelting and casting of base metals. Of the different types of coking coal, hard coal is the most valuable as it produces the highest quality coke. Semi soft coking coal and Pulverised Coal Injection are used more in blending with hard coking coal to be used as an auxiliary fuel source to increase the effectiveness of blast furnaces.
Thermal coal, also referred to as steaming coal generally contains less carbon than coking coal therefore it cannot be used in the production of steel. It is therefore primarily used as an energy source for coal fired power plants. The major producers of thermal coal are China, USA and India, with the largest importers being China, Japan and South Korea.
8.2 Prices Coal is a global commodity and, as such, prices are determined by global supply and demand factors. With both the international community and the world‘s dependency on energy growing, fuel products are the single most important input affecting global economic growth. The continued growth of emerging nations such as India and China are key drivers for the coal demand. In particular, the demand for electricity in these emerging nations is considered to be a key determinant for the current performance of the industry. Worldwide, electricity generators account for over 41.0% of coal consumption. The demand for coking coal is inextricably linked to the demand for coke as an input into iron ore production via blast furnaces. The demand for coking coal is implicitly linked to changes in blast furnace technology, whereby improvements may reduce the requirement for coking coal and thus reduce demand.
During 2007-2008, elevated demand for coal as the cheapest source of power caused prices to increase by around 200%. This diverged from historical trends where coal has generally traded at a lower, more stable price than more volatile commodities such as oil and gas. Speculation about sustainability of prices in light
of the economic slowdown and a slackening steel market caused the correction from the highs For personal use only use personal For experienced, however in comparison to an average between US$20/t to US$40/t throughout the 1990‘s, the current price is still well above historical levels.
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Thermal Coal Prices 250
200
150
US$/t 100
50
0
Thermal Coal Spot Price Coal Forecast Price Source: Bloomberg & Consensus Economics
Coking Coal Prices 400.00 350.00 300.00 250.00 200.00 US/t 150.00 100.00 50.00 0.00
Historical Spot Coking Coal Price Coking Coal Forecast Price
Source: Bloomberg & Consensus Economics Coal prices have retracted substantially since the commodity boom during 2007 and 2008. This spike was not only fuelled by the surge in demand from developing economies such as China but was also exacerbated by supply side factors. Disruptions to global supply occurred as a result of extremely heavy snowfall in China and long term power shortages in South Africa.
Prices are expected to remain fairly stable at current levels as is shown by the consensus forecast in the chart above. China and India‘s coal demand growth is forecast to be slower in this decade than it has been in the last decade driven by efficiency improvements and a movement towards less coal intensive economic activities.
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8.3 Outlook
Growing imports are expected to drive further expansion and integration of global coal markets. The international trade of thermal coal is expected to be at the forefront of this movement and should continue to support the demand for electricity. The coal industry is forecast to increase at an annualised rate of 6.4% over the next five years. In 2014, revenue is forecast to increase by 7.8% due to rising output. Demand for coal will be constrained to the extent that countries, both developed and emerging, shift towards alternative sources of energy. For example countries such as Japan and other European nations are focused on reducing greenhouse gas emissions. This view is also supported by forecast pressures on downstream demand for coal as there is a push towards energy sources like natural gas. The fastest growing alternative sources of fuels are forecast to be renewable, nuclear and hydro.
The coal industry is considered to be a mature industry. This is reflected by higher levels of consolidation evident in the industry. There is an expected trend towards achieving economies of scale and extracting synergies via a merger and acquisition strategy. Source: IBIS World & BDO Analysis
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9. Valuation approach adopted
There are a number of methodologies which can be used to value a business or the shares in a company. The principal methodologies which can be used are as follows:
Capitalisation of future maintainable earnings (‗FME‘) Discounted cash flow (‗DCF‘) Quoted market price basis (‗QMP‘) Net asset value (‗NAV‘) Market based assessment. A summary of each of these methodologies is outlined in Appendix 2. Different methodologies are appropriate in valuing particular companies, based on the individual circumstances of that company and available information. In our assessment of the value of a 15% equity interest in Coal Holding we have chosen to employ the following methodology: Net Asset Basis.
We have chosen this methodology for the following reasons: Coal Holding is a wholly owned subsidiary of Balamara and accordingly does not have a quoted market price; Coal Holding does not have a history of profits or forecast cash flows accordingly we are unable to use either the FME or DCF approaches; There is no appropriate comparable transaction information available to allow us to use market based assessment.
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10. Valuation of Asset being disposed of by Balamara
Valuation of Coal Holding mineral assets We instructed Salva Resources Pty Ltd (―HDR Salva‖) to provide an independent market valuation of the exploration assets held by Coal Holding. HDR Salva considered a number of different valuation methods when valuing the exploration assets of Coal Holding. HDR Salva applied the comparable transaction method. The comparable transaction method involves calculating a value per common attribute in a comparable transaction and applying that value to the subject asset. A common attribute could be the amount of resource or the size of a tenement. We consider these methods to be appropriate given the advanced exploration stage of development for Coal Holding exploration assets.
HDR Salva‘s report is attached as Appendix 3 to this report. The range of values for each of Coal Holding exploration assets as calculated by HDR Salva is set out below:
Low Value Preferred Value High Value Mineral Asset US$m US$m US$m
JORC Resources 9.9 15.4 20.9
Exploration Target 5.6 6.8 8.0
Total 15.5 22.2 28.9
Source: The table above indicates a range of values between US$15.5 million and US$28.9 million, with a preferred value of US$22.2 million for Coal Holding‘s exploration assets. The other assets and liabilities of Coal Holding (reference 6.2 above) as at June 2014 are as follows:
Assets Cash at Bank of PLN 91,449 Liabilities
Trade creditors of PLN 331,546 Accruals for drilling of PLN 650,215 Intercompany loan from Balamara $AUD 711,740
Intercompany loan from Polmetal PLN 238,664. As stated in section 6.2, Coal Holding does not prepare a balance sheet. The balances set out above have been provided by Balamara‘s management together with supporting information (bank statement, creditor
listing etc) to allow us to assess a net asset value for Coal Holding. For personal use only use personal For
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Overall the total net asset value of Coal Holding is as set out below.
Low Preferred High
USD$m USD$m USD$m
Total value of mineral assets 15.5 22.2 28.9
Net value of other assets and liabilities (1.0) (1.0) (1.0)
Overall net asset value of Coal Holding 14.5 21.2 27.9
Pro-rata value of 15% interest 2.2 3.2 4.2
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11. Valuation of consideration
The consideration to be provided is USD $5 million. Subject to shareholder approval, the funds will be transferred in three tranches over a period of two months as set out below.
Placement shares Tranche Date Amount US$ (as % of Coal Holding) Tranche 1 Upon Shareholder approval 3,000,000 9% Tranche 2 Within 30 days of tranche 1 1,000,000 3% Tranche 3 Within 30 days of tranche 2 1,000,000 3% Total 5,000,000 15%
Due to the short term nature of the payment schedule we do not consider it necessary to undertake a DCF to take into account the present value of the deferred payments.
12. Is the Proposal fair?
The value of the sale of a 15% equity interest in Coal Holding for USD $5 million is compared below:
Low Preferred High Ref USD$m USD$m USD$m
Value of a 15% equity interest in Coal Holding 10 2.2 3.2 4.2
Value of the Consideration 11 5.0 5.0 5.0
We note from the table above that our assessed value range is less than the value of the consideration. Therefore, we consider that the Proposal is fair.
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13. Is the Proposal reasonable?
13.1 Alternative Proposal We are unaware of any alternative proposal that might offer the Shareholders of Balamara a premium over the value ascribed to, resulting from the Proposal.
13.2 Consequences of not Approving the Proposal
Consequences
If the Proposal is not approved Balamara will need to source alternate means of financing the cost of completing the Nowa Ruda drilling and feasibility costs through to mid-2015. For shareholders this means that the funding will have to be from other sources which may:
Dilute their interest (if sourced from new equity) Require further investment (if sourced from existing equity) or Reduce the returns available (if sourced from debt).
Potential impact on share price We have analysed movements in Balamara‘s share price since the Proposal was announced. A graph of Balamara‘s share price since the announcement is set out below.
BMB share price and trading volume history 0.14 0.450 Announcement of Proposal – 2 June 2014 0.12 0.400 0.350 0.10 0.300 0.08 0.250 0.06 0.200
0.150 Share Price ($) Price Share
0.04 (millions) Volume 0.100 0.02 0.050 0.00 0.000
Volume Closing share price
Source: Bloomberg The announcement of the Proposal was made to the market on 2 June 2014. On that day approximately
For personal use only use personal For 0.37 million shares were traded and Balamara‘s share price closed 8.5% lower to $0.086. Since the announcement, Balamara‘s share price has continued to trade between $0.080 and $0.086. On 13 June 2014, 0.28 million shares were traded and the Company‘s share price closed at $0.080.
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Given the above analysis it is possible that if the Proposal is not approved then Balamara‘s share price may not return to pre-announcement levels.
13.3 Advantages of Approving the Proposal
We have considered the following advantages when assessing whether the Proposal is reasonable.
Advantage Description
The Proposal is fair As set out in Section 12 the Proposal is fair. RG 111 states that an offer is reasonable if it is fair.
Funding of the Company‘s flagship project Balamara intends to use the funds received by Coal Holding to finance the cost of completing the Nowa Ruda drilling and feasibility costs through to mid-2015.
Control of Balamara unaffected The proposal does not involve the issuance of any shares in Balamara and as such there is no change to the level of ownership in Balamara.
13.4 Disadvantages of Approving the Proposal If the Proposal is approved, in our opinion, the potential disadvantages to Shareholders include those listed in the table below:
Disadvantage Description
Dilution of the Company‘s Balamara will no longer hold 100% of Coal Holding and current shareholders will have exposure to the Nowa Ruda their level of exposure to Nowa Ruda reduced by 15%. Project
14. Conclusion We have considered the terms of the Proposal as outlined in the body of this report and have concluded that the Proposal is fair and reasonable to the Shareholders of Balamara.
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15. Sources of information
This report has been based on the following information: Draft Notice of General Meeting and Explanatory Statement on or about the date of this report; Audited financial statements of Balamara Resources for the years ended 30 June 2013 and 30 June 2012 and reviewed financial statements for the half year ended 31 December 2013. Unaudited current financial information for Coal Holding; Independent Valuation Report on Coal Holding‘ mineral assets dated 13 June 2014 prepared by Salva Resources Pty Ltd; Share registry information; Information in the public domain; and Discussions with Directors and Management of Balamara.
16. Independence
BDO Corporate Finance (WA) Pty Ltd is entitled to receive a fee of $17,000 (excluding GST and reimbursement of out of pocket expenses) for preparing this report. The fee is not contingent on the conclusion, content or future use of this Report. Except for this fee, BDO Corporate Finance (WA) Pty Ltd has not received and will not receive any pecuniary or other benefit whether direct or indirect in connection with the preparation of this report.
BDO Corporate Finance (WA) Pty Ltd has been indemnified by Balamara Resources Limited in respect of any claim arising from BDO Corporate Finance (WA) Pty Ltd's reliance on information provided by the Balamara Resources Limited including the non provision of material information, in relation to the preparation of this report. Prior to accepting this engagement BDO Corporate Finance (WA) Pty Ltd has considered its independence with respect to Balamara and Ample Skill Limited and any of their respective associates with reference to ASIC Regulatory Guide 112 ‗Independence of Experts‘. In BDO Corporate Finance (WA) Pty Ltd‘s opinion it is independent of Balamara and Ample Skill Limited and their respective associates. The provision of our services is not considered a threat to our independence as auditors under Professional Statement APES 110 – Professional Independence. The services provided have no material impact on the financial report of Balamara. A draft of this report was provided to Balamara and its advisors for confirmation of the factual accuracy of its contents. No significant changes were made to this report as a result of this review. BDO is the brand name for the BDO International network and for each of the BDO Member firms. BDO (Australia) Ltd, an Australian company limited by guarantee, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of Independent Member Firms. BDO in Australia, is a national association of separate entities (each of which
For personal use only use personal For has appointed BDO (Australia) Limited ACN 050 110 275 to represent it in BDO International).
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17. Qualifications
BDO Corporate Finance (WA) Pty Ltd has extensive experience in the provision of corporate finance advice, particularly in respect of takeovers, mergers and acquisitions.
BDO Corporate Finance (WA) Pty Ltd holds an Australian Financial Services Licence issued by the Australian Securities and Investment Commission for giving expert reports pursuant to the Listing rules of the ASX and the Corporations Act.
The persons specifically involved in preparing and reviewing this report were Adam Myers and Sherif Andrawes of BDO Corporate Finance (WA) Pty Ltd. They have significant experience in the preparation of independent expert reports, valuations and mergers and acquisitions advice across a wide range of industries in Australia and were supported by other BDO staff. Adam Myers is a member of the Australian Institute of Chartered Accountants. Adam‘s career spans 16 years in the Audit and Assurance and Corporate Finance areas. Adam has considerable experience in the preparation of independent expert reports and valuations in general for companies in a wide number of industry sectors. Sherif Andrawes is a Fellow of the Institute of Chartered Accountants in England & Wales and a Member of the Institute of Chartered Accountants in Australia. He has over 25 years‘ experience working in the audit and corporate finance fields with BDO and its predecessor firms in London and Perth. He has been responsible for over 200 public company independent expert‘s reports under the Corporations Act or ASX Listing Rules. These experts‘ reports cover a wide range of industries in Australia with a focus on companies in the natural resources sector. Sherif Andrawes is the Chairman of BDO in Western Australia, Corporate Finance Practice Group Leader of BDO in Western Australia and the Natural Resources Leader for BDO in Australia.
18. Disclaimers and consents
This report has been prepared at the request of Balamara for inclusion in the Explanatory Memorandum which will be sent to all Balamara Shareholders. Balamara engaged BDO Corporate Finance (WA) Pty Ltd to prepare an independent expert's report to consider the sale of a 15% equity interest in Coal Holding to Ample Skill Limited.
BDO Corporate Finance (WA) Pty Ltd hereby consents to this report accompanying the above Explanatory Memorandum. Apart from such use, neither the whole nor any part of this report, nor any reference thereto may be included in or with, or attached to any document, circular resolution, statement or letter without the prior written consent of BDO Corporate Finance (WA) Pty Ltd. BDO Corporate Finance (WA) Pty Ltd takes no responsibility for the contents of the Explanatory Memorandum other than this report.
We have no reason to believe that any of the information or explanations supplied to us are false or that material information has been withheld. It is not the role of BDO Corporate Finance (WA) Pty Ltd acting For personal use only use personal For as an independent expert to perform any due diligence procedures on behalf of the Company. The Directors of the Company are responsible for conducting appropriate due diligence in relation to Balamara. BDO Corporate Finance (WA) Pty Ltd provides no warranty as to the adequacy, effectiveness or completeness of the due diligence process.
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The opinion of BDO Corporate Finance (WA) Pty Ltd is based on the market, economic and other conditions prevailing at the date of this report. Such conditions can change significantly over short periods of time. With respect to taxation implications it is recommended that individual Shareholders obtain their own taxation advice, in respect of the Proposal, tailored to their own particular circumstances. Furthermore, the advice provided in this report does not constitute legal or taxation advice to the Shareholders of Balamara, or any other party. BDO Corporate Finance (WA) Pty Ltd has also considered and relied upon independent valuations for mineral assets held by Coal Holding. The valuer engaged for the mineral asset valuation, Salva Resources Pty Ltd, possesses the appropriate qualifications and experience in the industry to make such assessments. The approaches adopted and assumptions made in arriving at their valuation are appropriate for this report. We have received consent from the valuer for the use of their valuation report in the preparation of this report and to append a copy of their report to this report.
The statements and opinions included in this report are given in good faith and in the belief that they are not false, misleading or incomplete. The terms of this engagement are such that BDO Corporate Finance (WA) Pty Ltd has no obligation to update this report for events occurring subsequent to the date of this report.
Yours faithfully
BDO CORPORATE FINANCE (WA) PTY LTD
Adam Myers Sherif Andrawes Director Director
For personal use only use personal For
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Appendix 1 – Glossary of Terms
Reference Definition
Ample Skill Ample Skill Limited
The Act The Corporations Act
APES 225 Accounting Professional & Ethical Standards Board professional standard APES 225 ‗Valuation Services‘
ASIC Australian Securities and Investments Commission
ASX Australian Securities Exchange
Balamara Balamara Resources Limited
BDO BDO Corporate Finance (WA) Pty Ltd
Coal Holding Coal Holding Sp. Z.o.o.
The Company Balamara Resources Limited
DCF Discounted Future Cash Flows
EBIT Earnings before interest and tax
EBITDA Earnings before interest, tax, depreciation and amortisation
FME Future Maintainable Earnings
HDR Salva Salva Resources Pty Ltd
JORC Code The Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves
KGHM KGHM Polska Miedz
NAV Net Asset Value
Our Report This Independent Expert‘s Report prepared by BDO
The Proposal Balamara‘s proposal to issue a direct 15% equity interest in its 100% owned Polish
For personal use only use personal For subsidiary Coal Holding Sp. Z.o.o. to Hong Kong based Ample Skill Limited for consideration of USD 5 million.
QMP Quoted Market Price
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Reference Definition
RG 111 Content of expert reports (March 2011)
RG 112 Independence of experts (March 2011)
Shareholders Shareholders of Balamara Resources Limited not associated with Ample Skill Limited
Valmin Code The Code of Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports 2005
Valuation Engagement An Engagement or Assignment to perform a Valuation and provide a Valuation Report where the Valuer is free to employ the Valuation Approaches, Valuation Methods, and Valuation Procedures that a reasonable and informed third party would perform taking into consideration all the specific facts and circumstances of the Engagement or Assignment available to the Valuer at that time.
VWAP Volume Weighted Average Price
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Appendix 2 – Valuation Methodologies
Methodologies commonly used for valuing assets and businesses are as follows:
1 Net asset value (‘NAV’) Asset based methods estimate the market value of an entity‘s securities based on the realisable value of its identifiable net assets. Asset based methods include: Orderly realisation of assets method Liquidation of assets method Net assets on a going concern method The orderly realisation of assets method estimates fair market value by determining the amount that would be distributed to entity holders, after payment of all liabilities including realisation costs and taxation charges that arise, assuming the entity is wound up in an orderly manner. The liquidation method is similar to the orderly realisation of assets method except the liquidation method assumes the assets are sold in a shorter time frame. Since wind up or liquidation of the entity may not be contemplated, these methods in their strictest form may not be appropriate. The net assets on a going concern method estimates the market values of the net assets of an entity but does not take into account any realisation costs. Net assets on a going concern basis are usually appropriate where the majority of assets consist of cash, passive investments or projects with a limited life. All assets and liabilities of the entity are valued at market value under this alternative and this combined market value forms the basis for the entity‘s valuation. Often the FME and DCF methodologies are used in valuing assets forming part of the overall Net assets on a going concern basis. This is particularly so for exploration and mining companies where investments are in finite life producing assets or prospective exploration areas. These asset based methods ignore the possibility that the entity‘s value could exceed the realisable value of its assets as they do not recognise the value of intangible assets such as management, intellectual property and goodwill. Asset based methods are appropriate when an entity is not making an adequate return on its assets, a significant proportion of the entity‘s assets are liquid or for asset holding companies. 2 Quoted Market Price Basis (‘QMP’) A valuation approach that can be used in conjunction with (or as a replacement for) other valuation methods is the quoted market price of listed securities. Where there is a ready market for securities such as the ASX, through which shares are traded, recent prices at which shares are bought and sold can be taken as the market value per share. Such market value includes all factors and influences that impact upon the ASX. The use of ASX pricing is more relevant where a security displays regular high volume
trading, creating a ‗deep‘ market in that security. For personal use only use personal For 3 Capitalisation of future maintainable earnings (‘FME’) This method places a value on the business by estimating the likely FME, capitalised at an appropriate rate which reflects business outlook, business risk, investor expectations, future growth prospects and other entity specific factors. This approach relies on the availability and analysis of comparable market data.
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The FME approach is the most commonly applied valuation technique and is particularly applicable to profitable businesses with relatively steady growth histories and forecasts, regular capital expenditure requirements and non-finite lives. The FME used in the valuation can be based on net profit after tax or alternatives to this such as earnings before interest and tax (‗EBIT‘) or earnings before interest, tax, depreciation and amortisation (‗EBITDA‘). The capitalisation rate or ‗earnings multiple‘ is adjusted to reflect which base is being used for FME.
4 Discounted future cash flows (‘DCF’) The DCF methodology is based on the generally accepted theory that the value of an asset or business depends on its future net cash flows, discounted to their present value at an appropriate discount rate (often called the weighted average cost of capital). This discount rate represents an opportunity cost of capital reflecting the expected rate of return which investors can obtain from investments having equivalent risks.
Considerable judgement is required to estimate the future cash flows which must be able to be reliably estimated for a sufficiently long period to make this valuation methodology appropriate. A terminal value for the asset or business is calculated at the end of the future cash flow period and this is also discounted to its present value using the appropriate discount rate. DCF valuations are particularly applicable to businesses with limited lives, experiencing growth, that are in a start up phase, or experience irregular cash flows.
5 Market Based Assessment The market based approach seeks to arrive at a value for a business by reference to comparable transactions involving the sale of similar businesses. This is based on the premise that companies with similar characteristics, such as operating in similar industries, command similar values. In performing this analysis it is important to acknowledge the differences between the comparable companies being analysed and the company that is being valued and then to reflect these differences in the valuation.
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Appendix 3 – Independent Technical Report of Salva Resources Pty Ltd
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Balamara Resources Ltd
Independent Mineral Asset Valuation Report
Nowa Ruda Coal Project Poland For personal use only use personal For
Prepared for BDO Corporate FinancePage (WA) | i Pty Ltd
June 2014
Balamara Resources Limited Independent Valuation Report - Nowa Ruda Coal Mining Project, Poland
Salva Resources Pty Ltd
Head Office Level 11, 82 Eagle Street, Brisbane, QLD 4000, Australia PO Box 10791, Adelaide Street, Brisbane, QLD 4000, Australia
Email: [email protected] Website: www.salvaresources.com
Phone: +61 (0) 7 3211 9911 Fax: +61 (0) 7 3221 5725
13 June 2014 Corresponding author:
Manish Garg BEng (Hons), Master of Applied Finance MAusIMM, MAICD Director- Consulting, HDR | Salva
Other contributing authors:
Craig Williams, Principal Consultant – Geology, HDR | Salva - Brisbane Office Sachin Sudhanshu, Consultant – Valuations, HDR | Salva - Brisbane Office
Peer Reviewed By: For personal use only use personal For Rob Jewson, Principal Consultant – Geology (Associate)
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Table of contents
Executive Summary ...... 7
1 Introduction ...... 10
1.1 Scope ...... 10
1.2 Reporting standard ...... 10
1.3 Data sources ...... 10
1.4 Competent Persons and Experts statement - VALMIN ...... 11
1.5 Disclaimer and warranty ...... 11
2 Poland Coal Overview ...... 12
3 Nowa Ruda Project ...... 13
3.1 Location ...... 13
3.2 Accessibility ...... 15
3.3 Climate ...... 15
3.4 Ownership and Concession ...... 16
4 Regional Geology ...... 17
4.1 Geological Settings ...... 17
4.2 Coal Basins ...... 18
5 Local Geology ...... 21
5.1 Waclaw Deposit ...... 22
5.2 Lech Deposit ...... 23
6 Geological Resources ...... 25
6.1 Historical Foreign Resource Estimate as at 24 July 2013 ...... 25
6.1.1 Statement Regarding The Foreign Resource Estimate ...... 25
6.2 Coal Quality ...... 27
6.3 Recent Exploration ...... 28
6.4 JORC Resource Estimate ...... 29
6.4.1 Coal Resource Statement (JORC 2012) ...... 29 For personal use only use personal For 7 Historical Mining ...... 32
7.1 Waclaw ...... 32
7.2 Lech ...... 32
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8 Valuation ...... 35
8.1 Valuation Approaches ...... 35
8.2 Valuation of the Nowa Ruda Project...... 36
8.2.1 Nowa Ruda Project – Valuation of JORC Resources ...... 37
8.2.2 Nowa Ruda Project – Valuation of Additional Exploration Target ...... 41
8.3 Valuation Summary ...... 47
9 References ...... 48
List of Figures
Figure 2:1 Hard Coal, Resource and Production Output in Poland ...... 12
Figure 3:1 Nowa Ruda Project Location ...... 13
Figure 3:2 Nowa Ruda Lease Boundary ...... 14
Figure 3:3 Nowa Rowa Project Accessibility ...... 15
Figure 4:1 Regional Geological Map ...... 17
Figure 4:2 Coal Basins in Poland ...... 18
Figure 4:3 Hard Coal and CBM Concession Area Lower Silesian Basin...... 20
Figure 5:1 Local Geological Map ...... 21
Figure 5:2 Geological Cross Section Waclaw Seam ...... 22
Figure 5:3 Geological Profile of Waclaw ...... 23
Figure 5:4 Geological Cross Section Paist Seam ...... 24
Figure 5:5 Average Geological Profile of Paist ...... 24
Figure 6:1 Existing and Proposed Exploration Boreholes ...... 28
Figure 6:2 Seam 304 Resource Classification and Exploration Targets ...... 31
Figure 7:1 Nowa Ruda Mine, circa 1970 ...... 32
Figure 7:2 Nowa Ruda Coal Mine, Access ...... 33
Figure 7:3 Power Support in Historical Nowa Ruda Mine ...... 33 For personal use only use personal For
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List of Tables
Table 3:1 Nowa Ruda Project Concession ...... 16
Table 6:1 Foreign Coal Estimates and Quality Parameters ...... 25
Table 6:2 Coal Quality Parameters ...... 27
Table 6:3 Coal Resource (JORC 2012) ...... 29
Table 6:4 Additional Exploration Target ...... 30
Table 6:5 Coal Quality ...... 30
Table 8:1 Typical Valuation Methods ...... 35
Table 8:2 Comparable Market Transactions, Resource Estimate ...... 38
Table 8:3 Valuation – Resource Estimate (JORC 2012) ...... 40
Table 8:4 Comparable Market Transactions, Exploration Target ...... 42
Table 8:5 Valuation – Exploration Target ...... 46
Table 8:6 Valuation Summary - Nowa Ruda Project...... 47
For personal use only use personal For
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Key abbreviations
ASL Above Sea Level An anticline is a fold that is convex, with older layers closer to the centre or Anticline core ASIC Australian Securities and Investment Commission ASX Australian Securities Exchange $ or AUD Australian dollars AusIMM Australian Institute of Mining and Metallurgy Balamara Balamara Resources Limited BDO BDO Corporate Finance (WA) Pty Ltd EEM Exploration expenditure multiples (method of mineral valuation) A formation consists of a certain number of rock strata units that have a Formation comparable lithology, facies, or other similar properties Ha Hectare(s) HDR | Salva Salva Resources Pty Ltd 2012 Edition of the Australasian Code for Reporting of Exploration Results, JORC Mineral Resources and Ore Reserves Km Kilometre(s)
km2 Square kilometre(s)
M Million A lithostratigraphic unit of subordinate rank, comprising some specially Member developed part of a Formation Mt Millions of tonnes Mtpa Millions of tonnes per annum NPV Net present value RD Relative density Syncline A syncline is a fold that is concave, with younger layers closer to the centre of the structure or core T Tonne USD United States Dollar VALMIN 2005 Edition of the Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports
WAI Wardell Armstrong International Pty Ltd For personal use only use personal For
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Executive Summary
BDO Corporate Finance (WA) Pty Ltd (“BDO”) has engaged Salva Resources Pty Ltd (“HDR | Salva”) to prepare an independent market valuation of the Nowa Ruda Project (“Project”) in Poland. Balamara Resources Ltd (“Balamara” or the “Company”) owns the rights to explore the Nowa Ruda Coal Project, through its 100% owned Polish subsidiary company, Coal Holding Sp z.o.o (Coal Holding Co). HDR | Salva understands that this report will be relied on by BDO within its Independent Expert’s Report (“IER”) as part of the proposed transaction to be presented to Balamara’s shareholders.
Balamara is an Australian Securities Exchange (“ASX”) listed coal explorer and developer (ASX: BMB). Its major assets include the Nowa Ruda Coking Coal Project in Poland along with the early stage poly-metallic projects in Montenegro, Bosnia & Poland. These poly-metallic projects are subject to a conditional sale process.
The Nowa Ruda Coking Coal Project in located in the Lower Silesia Coal Basin in the Klodzko District in the South West of Poland and extend over an area of 20km2.. The project comprises of a single lease area covering two large, underground coal deposits – known as the Waclaw and the Lech deposits. Both the Waclaw and the Lech deposits are historically producing mines. These mines were shut in 1995 due to decline in coal price and reduced domestic consumption due to broader economic decline.
Locally, geology of the project area is well understood with the stratigraphy of the deposits well documented. The individual coal seams can be correlated across the deposits and are also recognised more generally within the Lower Silesian Coal Basin.
Balamara obtained the rights to explore and develop the Nowa Ruda Coal Project from the Government of Poland in July 2013 through its 100% Polish owned subsidiary company Coal Holding Sp. z.o.o. (Coal Holding). At that time, there was official Polish estimates of mineralisation for both the Waclaw and Lech deposits. These were reported as “Foreign resource estimates” in the company announcement dated 24 July 2013. These foreign resource estimates are obtained from official reports and annexes issued by the Polish Ministry of Mines and Ministry of Environmental Protection. The total Foreign Resource Estimate for the Nowa Ruda Project was 106.5 Mt with majority of being as coking coal.
Wardell Armstrong International Pty Ltd (WAI), a mining consultancy firm based in United Kingdom completed a mineral resources estimate for the Nowa Ruda deposit in April 2014 using three dimensional interpretations and modelling. WAI reported a total Coal Resources for the Wacław and Lech deposits of approximately 23.1 Mt including 8.8 Mt of Indicated Resource and 14.3 Mt of Inferred Coal Resource, in accordance with the JORC 2012 Guidelines. Table below outlines the Resource Estimate as announced by Balamara on ASX on 28 April 2014.
Project Indicated (Mt) Inferred (Mt) Total (Mt)
For personal use only use personal For Waclaw 7.00 14.01 21.01
Lech 1.76 0.30 2.06
Total 8.76 14.31 23.07
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Further, WAI has estimated an additional Exploration Target based on historical data ranging from 112.50 Mt to 160.71 Mt for these deposits as announced by Balamara on ASX on 28 April 2014 and 5 May 2014. Exploration Target (Mt) Project Lower Range Upper Range Waclaw 84.91 121.31 Lech 27.59 39.41 Total 112.50 160.72
Balamara further announced the details of the coal quality on ASX on 5 May 2014. These are outlined in the Table below:
Net Calorific Coal Tonne Sample Moisture Volatiles Sulphur Ash Value Category s (Mt) Type % % % % (Kcal/kg) As - 21.35% 0.73% 29% Indicated 8.76 Received Air Dried 1.10% 22.78% As - 21.35% 0.73% 29% Inferred 14.3 Received Air Dried 1.10% 22.78% As 1.3%-35% 16%-26% 0.3%-3% 7%-65% 2,800-7,100 Exploration 112 - Received (9.4%)* (20%)* (0.94%)* (28%)* (5,700)* Target ** 161 0.3%-1.9% 17%-27% 0.4%-3% 6%-58% 2,900-8,000 Air Dried (1.02%)* (22%)* (1.16%)* (22%)* (6,400)*
*Full range of values included for Exploration Target tonnage as required under JORC (2012) standard indicate the variety of coal types at Nowa Ruda. The coal quality data is based on samples taken from mine workings sampling points and surface boreholes. Data is available for samples as-received (i.e. before drying) and for samples subjected to air drying. The values for the Indicated and Inferred Resources are expressed as an average. The values for the Exploration Target are expressed as a range and the arithmetic mean of all the values used to make up the range has also been provided in brackets.
**The potential coal quality is conceptual in nature as there has been insufficient exploration to date to define a Coal Resource and it is uncertain if further exploration will result in the determination of a Coal Resource.
For personal use only use personal For Balamara confirms that it is not aware of any new information that would materially affects the information included in the announcement released on 28 April 2014 and 5 May 2014.
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HDR | Salva has opted to value the “Resource Estimate” of 23.06 Mt and a separate “Exploration Target” of 112.50 Mt to 161.71 Mt on the basis of market comparable method. Since the area for Resource Estimate and Exploration Target is quite distinct, HDR | Salva has opted to add both to determine the total value of the project.
Using market comparable approach, HDR | Salva’s opinion of the fair market value of 100% of the Nowa Ruda Project is in the range of USD 15.5M to USD 28.9M with a preferred value of USD 22.2M. The Valuation summary for the Nowa Ruda Project (JORC Resources and Additional Exploration Target) has been given below.
Market Value (USD M) Item Lower Upper Preferred Value - JORC Resources 9.9 20.9 15.4 Value - Exploration Target 5.6 8.0 6.8 Total (100% of Nowa Ruda Project) 15.5 28.9 22.2
A valuation range of USD 15.5M to USD 28.9M is deemed reflecting the uncertainty of potential Resource delineation and eventual extraction of a number of seams.
Competent Persons Statement: Information above that relates to Exploration Targets and Mineral Resources is based on information compiled by Dr Laurance Donnelly who is an employee of independent consultant Wardell Armstrong International and who is a Fellow of the Geological Society of London. Dr Donnelly has sufficient experience that is relevant to the style of mineralization and type of deposit under consideration and to the activity in which he is undertaking to qualify as a Competent Person under the 2012 edition of the Australasian Code for reporting of Exploration Results, Mineral Resources and Ore Reserves”. Dr Donnelly consents to the inclusion of the data in the form and
context in which it appears. For personal use only use personal For
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1 Introduction
BDO Corporate Finance (WA) Pty Ltd (“BDO”) has engaged Salva Resources Pty Ltd (“HDR | Salva”) to prepare an independent market valuation of the Nowa Ruda Project (“Project”) in Poland. Balamara Resources Ltd (“Balamara” or the “Company”) owns the rights to explore the Nowa Ruda Coal Project, through its 100% owned Polish subsidiary company, Coal Holding Sp z.o.o (Coal Holding Co). HDR | Salva understands that this report will be relied on by BDO within its Independent Expert’s Report (“IER”) as part of the proposed transaction to be presented to Balamara’s shareholders.
Balamara is an Australian Securities Exchange (“ASX”) listed coal explorer and developer (ASX: BMB). Its major assets include the Nowa Ruda Coking Coal Project in Poland along with early stage poly-metallic projects in Montenegro, Bosnia & Poland.
The Nowa Ruda Coking Coal Project in located in the Lower Silesia Coal Basin in southwest Poland, close to the border with the Czech Republic. Balamara Resources Ltd (Balamara) owns the exploration lease, which provides the rights to conduct coal exploration, through its 100% Polish owned subsidiary company Coal Holding Sp. z.o.o. (Coal Holding).
1.1 Scope
BDO has requested that HDR | Salva provide an independent valuation of the following mineral asset:
100% interest in the Nowa Ruda Coal Project in Poland.
1.2 Reporting standard
The Report is prepared in accordance with the Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Experts (“the VALMIN Code”) as issued in 1995 and updated in 2005. For the purposes of this Report, value is defined as “fair market value”, being the amount for which a mineral asset should change hands between a willing buyer and a willing seller in an arm’s length transaction where each party is assumed to have acted knowledgeably, prudently and without compulsion.
1.3 Data sources
This review is based on the information provided by Balamara, the technical reports of consultants and previous explorers, as well as other published and unpublished data relevant to the area. HDR | Salva has carried out, to a limited extent, its own independent assessment of the quality of the geological data. The
For personal use only use personal For status of agreements, royalties or concession standing pertaining to the assets was, however, Legal review was beyond the scope and qualifications of HDR | Salva.
In developing our assumptions for this Report, HDR | Salva has relied upon information provided by the Company and information available in the public domain. Key sources are outlined in this Report and all data included in the preparation of this Report has been detailed in the references
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section. HDR | Salva has accepted all information supplied to it in good faith as being true, accurate and complete, after having made due enquiry as of June 2014.
1.4 Competent Persons and Experts statement - VALMIN
Mineral asset valuation in this report was prepared by, or under the supervision of Manish Garg (B.Engg (Minerals Engineering), MAusIMM, MAICD). Mr Garg has sufficient assessment and valuation experience, which is relevant to the activity that they are undertaking to qualify as an Expert as defined in the 2005 Edition of the “Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports” (VALMIN Code).
1.5 Disclaimer and warranty
This Report was commissioned by Balamara on a fee-for-service basis according to HDR | Salva’s schedule of rates and are in the order of $15,000 to $20,000. HDR | Salva’s fee is not contingent on the outcome of its valuation or the success or failure for the transaction for which the report was prepared. None of HDR | Salva’s consultants or their immediate families involved in the preparation of this valuation report have (or had) a pecuniary or beneficial interest in Balamara prior to or during the preparation of this report.
A draft version of this report was provided to the directors of Balamara for comment in respect of omissions and factual accuracy. As recommended in Section 39 of the VALMIN Code, Balamara has provided HDR | Salva with an indemnity under which HDR | Salva is to be compensated for any liability and/or any additional work or expenditure, which:
results from HDR | Salva’s reliance on information provided by Balamara and/or Independent consultants that is materially inaccurate or incomplete, or relates to any consequential extension of workload through queries, questions or public hearings arising from this report.
This report may contain or refer to forward-looking information based on current expectations, including, but not limited to timing of mineral Resource estimates, future exploration or project development programs and the impact of these events on the Balamara. Forward-looking information is subject to significant risks and uncertainties, as actual results may differ materially from forecasted results. Forward-looking information is provided as of the date hereof and HDR | Salva assumes no responsibility to update or revise them to reflect new events or circumstances.
The conclusions expressed in this updated valuation report are appropriate as at June 2014. The valuation is only appropriate for this date and may change in time in response to variations in economic, market, legal or political factors, in addition to ongoing exploration results. All monetary values outlined in this report are expressed in the United States dollars (USD)
For personal use only use personal For unless otherwise stated. HDR | Salva services exclude any commentary on the fairness or reasonableness of any consideration in relation to this acquisition.
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2 Poland Coal Overview
Poland occupies an area of approximately 313,000km² in central Europe. It is bordered by Germany to the west, Czech Republic and Slovakia to the south, Ukraine and Belarus to the east, and the Baltic Sea, Kaliningrad and Lithuania to the north.
Poland is the largest hard coal producer in the European Union and is ranked seventh is the world, producing ~72 Mtpa of hard coal annually. Historically, Poland was Europe’s biggest coal producer with an annual output of more the 200 Mtpa. Poland had established mining industry with 81 operating coal mines and 102 coal preparation plants.
The Government of Poland estimates the countries’ coal resources of 48 Bt, out of which coking coal resource is estimated to be 13 Bt. This resources as not in accordance with JORC Guidelines. These coals are present within 146 identified coal deposits located mainly in the three coal basins.
Coal dominates the power generation in Poland. In 2012, 92% of electricity and 89% of heat in Poland was generated from coal. According to the official Polish Government Energy Policy Strategy, coal should remain the key element of the country’s energy security until at least 2030.
However in the recent time, Poland has significantly decreased both hard coal and lignite production from ~200 Mtpa in the early 90’s to ~140 mtpa due to closure of unprofitable coal mines. During the same period, the demand for the black coal in Poland has grown substantially, resulting in narrowing the demand - supply gap in the country. The recent trend of coal production and resources has been shown in Figure 2:1 below.
Figure 2:1 Hard Coal, Resource and Production Output in Poland
Source: Geo-portal, Government of Poland For personal use only use personal For
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3 Nowa Ruda Project 3.1 Location
The Nowa Ruda Coking Coal Project in located in the Lower Silesia Coal Basin in southwest Poland, close to the border with the Czech Republic. Balamara Resources Ltd (Balamara) owns the exploration lease, which provides the rights to conduct coal exploration, through its 100% Polish owned subsidiary company Coal Holding Sp. z.o.o. (Coal Holding).
The project comprises of a single lease area covering two large, adjacent underground coal deposits – known as the Waclaw and Lech deposits (Figure 3:1 & Figure 3:2). These deposits are located in the Klodzko District in the South West of Poland. The coal deposit is predominantly coking coal in nature.
The Project is located in Lower Silesian Coal Basin and covers an area of approximately 20.289km2 in close proximity to the extensive key infrastructure including roads, rail, power and water.
Figure 3:1 Nowa Ruda Project Location For personal use only use personal For
Source: Balamara Resources
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Figure 3:2 Nowa Ruda Lease Boundary
Source: Balamara Resources
Nowa Ruda was a substantial producing underground coal mine for a large part of the last century, before being placed on care and maintenance at the end of 1995 due to lower coking
For personal use only use personal For coal prices along with excessive and inefficient cost structures attached to the overall project; these structures were established by the Communist Government almost 50 years ago.
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3.2 Accessibility
The lease is readily accessible by road and railway. The nearest international airport is located at Wrocław, which is located approximately 100 km to the northwest of Nowa Ruda. Port Polnocny is the nearest large port, which is located near to Gdansk, approximately 700 km away in the north of Poland. A northwest to southeast railway line occurs in the Wrocław area, linking Kłodko and Wałbrzych. A branch approximate 1.5km long diverts in a northwest direction from the Ludwikowice Kłodzkie railway station towards the Wacław mine (now abandoned) at Miłkow. The Kłodzko-Nowa Ruda-Wałbrzych road runs through the area, with branches to Jugów and Sokolec. In addition, there are numerous small roads, which may vary in condition, including paved and unsealed tracks.
At present, there are three existing coke plants in operation, located within a 100 km radius of the Project, all of which are linked to the Nowa Ruda Project by rail line. One of the largest coke oven plants in Poland, the Walbrzych plant, is located only 40 km away and is linked by rail from the mine site. The project area is readily accessible by series of road networks which connects it to different regions of Poland and Czech Republic (Figure 3:3).
Figure 3:3 Nowa Rowa Project Accessibility
Nowa Ruda Project
Czech Republic
Source: Bing Maps
The Nowa Ruda Project is located only 5 km from the border of Czech Republic, which provides another coal dispatch and sales channel.
3.3 Climate
For personal use only use personal For The climate in Poland is influenced by both European maritime and Eastern Europe continental air masses. Southwest Poland can be categorised as having a warm temperate climate with warm summers and some rainfall in all months. The maximum daytime temperature can range from approximately 1°C to 24°C and the with minimum night time temperatures ranging from about -5°C to 12°C. The warmest months tend to extend from June to August, with temperatures around 22°C to 24°C. The coldest months are usually from November to March with
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temperatures in the range about 1°C to -5°C. However, winter temperatures may become reduced in mountainous areas. The annual precipitation is approximately 590 mm, with the wettest months in June to July. Snow may cover parts of the region from during the winter and colder months. 3.4 Ownership and Concession
Balamara owns the rights to explore the Nowa Ruda Coal Project, through its 100% owned Polish subsidiary company, Coal Holding Sp z.o.o (Coal Holding Co). Coal Holding Co. has obtained these rights from Government of Poland in 2013. The Project consists of a single lease as detailed in Table 3:1 below:
Table 3:1 Nowa Ruda Project Concession
Project Concession Area (km2) Status Granted Expiry Number
Nowa Ruda 8/2013/p 20 Granted 18 July 2013 18 Jan 2016
HDR | Salva has not independently verified the current ownership status and legal standing of the material tenements that are the subject of this Report. HDR | Salva is not qualified to make statements in this regard and has relied upon information provided by:
• Dr Iwona Karasek-Wojciechowicz, Attorney at Law at Kancelaria Radcy Prawnego Lawyers in Poland,
regarding the status of the material tenements underlying the mineral assets involved in the transaction and this advice confirms that the material tenements are in good standing in all
material respects. For personal use only use personal For
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4 Regional Geology 4.1 Geological Settings
The geological evolution of Poland is associated with the continental collision between Eurasia and Africa plates during Hercynian (Variscan) and possibly to a lesser extent the Alpine orogenic events. It has also been influenced by more ‘recent’ geological processes associated with the Pleistocene Ice Age. The Lower Silesia Coal Basin covers an area of approximately 350km2. It is significantly smaller than the Upper Silesia Coal Basin (7,400km2) and the Lublin Coal Basin (9,100km²). The Lower Silesia Coal Basin forms part of the Intra Sudetic Basin. This is one of the most extensive structures of the Sudetes and the easternmost part of the intramontane basin system of the Bohemian Massif (Polish Geological Institute 2007). The coal seams in Lower Silesia are characterised by variations in thickness, changes in horizontal and vertical continuity, and complex geological structures (including faults and folds) and elevated gas concentrations. There are reported to be at least 30 coal seams with thicknesses exceeding 1m (Thomas 2013; HDR | Salva 2013).Figure 4:1 shows the regional geological map of Poland.
Figure 4:1 Regional Geological Map For personal use only use personal For
Source: Polish Geological Institute, 2000
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4.2 Coal Basins
Black Coal in Poland is mainly found in three the coal basins - Upper Silesia, Lower Silesia and Lublin Basin (Figure 2:2).
The Upper Silesia Basin is the main coal production centre is Poland which is followed by the Lubin Basin where currently the Bogdanka coal mine is in operation. Most of the coal mines in the Lower Silesia Basin has been closed due to cost economics during the 1990’s.
Figure 4:2 Coal Basins in Poland
Source: WAI Resource Report
Brief discussion of hard coal basins has been given below:
Upper Silesian Basin:
It is the most important coal basin with largest coal production in the country. The identified reserves cover 23% and perspective areas cover 27% of the basin area. Almost 80% of Poland’s coal deposits lie in this basin;
2 For personal use only use personal For It covers an area of about 7,400 Km in southern Poland and in the Ostrava Karvina region in the Czech Republic. Total area in Poland is about 5,800 km2;
The basin comprises a thick sequence of Upper Carboniferous sediments, up to 8,500 m. The rocks of that sequence include four lithostratigraphic units - the Paralic Series, Upper Silesian Sandstone Series, Siltstone Series and Cracow Sandstone Series. They
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represent Namurian and Westphalian ages. The upper part contains 60 coal seams and the lower part of the sequence contains 250 coal seams. The thickness of the seams can be up to 6-7 m. The mining operations in this basin are complicated because of the large scale faulting and folding caused by the high tectonics. Igneous intrusions of the Permian, Triassic and Miocene age influenced the coal rank. The coal is primarily high volatile bituminous, with low ash and sulphur content;
The Upper Silesian Coal basin was formed as a foredeep of the Moravo-Silesian fold zone. It is a deep molasses basin of different origin. The layers of Namurian age was deposited in a paralic environment and the upper part from late Namurian to Westphalian D is of continental origin The coal-bearing formations were subjected to erosion and denudation after the Variscan uplift; and
In the southern part of the basin, the coals are overlain by Miocene interbedded clay and sand of marine origin, and in the northern part by Permian-Jurassic layers. In the central part the Pennsylvanian strata are covered only by Quaternary sediments.
Lower Silesian Basin:
The Lower Silesian Basin is characterised by a considerable thickness variability and small horizontal and vertical extension of the coal bearing formations;
Coalfield is much smaller in size as compared to the Upper Silesian Coalfield and it contains thinner seams. Coal seams cover an area of about 350 km2; and
The coal basin contains 30 coal beds with thickness exceeding 1 m. It predominantly contains superior quality coking coal with low ash.
Lubin Coal Basin:
The Lubin Basin is an emerging coal basin located in south-eastern of Poland, close to the Ukraine border. It covers an area of approximately 9,100 km²;
This basin is a pericratonic depression within the East-European Platform. The lower part is of marine paralic origin, the middle part is paralic, and the upper part are continental sediments;
In comparison with the Silesian Coalfields, the seams are moderate structurally disturbed. The Lublin Basin has bituminous coals with low ash and sulphur contents with limited coking properties. The coal seams are represented by four lithostratigraphic units of Carboniferousage (Terebin, Deblin, Lublin and Magnuszew formations);
At present, only the Bogdanka coal mine is operating in this basin.
In recent times, the Government of Poland has identified the Lower Silesian Basin as a key area
for future exploitation of coking coal and coal bed methane. The area where significant coal For personal use only use personal For resources remain has been allocated to Balamara for exploitation of the high grade coking coal deposits (Figure 4:2). The remainder of the area has been identified as a potential region for coal bed methane.
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Figure 4:3 Hard Coal and CBM Concession Area Lower Silesian Basin
Nowa Ruda Project
Source: Minister of Environmental Protection, Government of Poland For personal use only use personal For
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5 Local Geology
The Nowa Ruda coal project consists of two adjacent coal deposits, the Waclaw deposit to the north and the Lech deposit to the south. The Waclaw deposit covers larger area ( approximately 14.5 km2) spreading from central to north eastern section of the lease area while the Paist deposit is the smaller in size and is located in the southern portion of the lease area.
The two deposits are separated by a geological fault line but are located very close together. A 200-300 m zone separates the southernmost blocks of the Waclaw deposit from the northernmost portion of the Lech deposit.
Stratigraphy of these deposits is well documented and individual coal seams can be correlated across the deposits. These are also recognised more generally within the Lower Silesian Coal Basin (Figure 5:1).
Figure 5:1 Local Geological Map For personal use only use personal For
Source: WAI Resource report
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5.1 Waclaw Deposit
The Waclaw deposit is an established coal deposit with significant mining history. The remaining coal inventories occur in eight (8) different coal seams of thickness greater than 1 m. The maximum thickness reaches up to 2.75 m. These coal seams are separated by layers of sandstone, mudstone and conglomerates. These coal seams occur at depth of less than 1000 meters.
Figure 5:2 and Figure 5:3 shows the geological cross section and profile across the Waclaw seam.
Figure 5:2 Geological Cross Section Waclaw Seam
Source: Balamara Resources
For personal use only use personal For
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Figure 5:3 Geological Profile of Waclaw
Source: Balamara Resources
As evident in the above bore hole profile (Figure 5:3) and Geological Cross section (Figure 5:2), the bore hole BW-1 intersects the coal seam PK405 occurs at the depth of around 524 m. Geological cross section shows that the area is intruded by several dykes and at least 3 faults can be recognised. These geological intrusion and faults may present challenges in mining extraction of the coal.
5.2 Lech Deposit
The Lech deposit is also an established coal deposit with significant mining history. The remaining coal Inventories occur in 10 different coal seams of thickness greater than 1 m. The maximum thickness reaches up to 7.05 m. These coal seams are separated by layers of sandstone, mudstone and conglomerates. These coal seams dip from east to west at an average
For personal use only use personal For angle of 23° and reported to extend up to a depth of 1200 m.
Figure 5:4 and Figure 5:5 shows the geological cross section and profile across the Lech seam.
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Figure 5:4 Geological Cross Section Paist Seam
Source: Balamara Resources
Figure 5:5 Average Geological Profile of Paist
Source: Balamara Resources
For personal use only use personal For The average Gross Calorific value (GCV) of the coal found in the region is 6500 kcal/kg which ash and sulphur content stands at 17% and 0.7% respectively. As evident in the above bore hole profile (Figure 5:3), the first intersection of coal seam is at 200 m (301 coal seam) and bore hole #1 has intersected coal seam up to 953 m. There are some intrusions present in the area (Figure 5.5).
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6 Geological Resources
The Polish Government awarded Balamara rights to the Nowa Ruda coking coal concessions in July 2013. 6.1 Historical Foreign Resource Estimate as at 24 July 2013
There were official Polish estimates of mineralisation for both the Waclaw and Lech deposits at the time of award of rights to Balamara. These were reported as “foreign estimates” under ASX listing rule 5.10 in the company announcement dated 24 July 2013.
These Foreign Estimates are obtained from official reports and annexes issued by the Polish Ministry of Mines and Ministry of Environmental Protection. They are shown as two tables with Table 6:1 containing tonnages and coal quality in various categories and Table 6:2 containing coal tonnage versus various coal parameters.
Table 6:1 Foreign Coal Estimates and Quality Parameters
Coal Deposit Waclaw Lech Total
Polish Classifications:
A + B 15,491 15,491
C1 48,748 1,373 50,121
C2 35,138 5,772 40,910
Tonnage (000's) 83,886 22,636 106,522
It should be noted that: the foreign estimates are not reported in accordance with the JORC Code; and It is uncertain that following evaluation and/or further exploration work that these foreign estimates will be able to be reported as mineral resources or ore reserves in accordance with the JORC Code.
Source: Balamara Resources ASX Announcement 24 July 2013
6.1.1 Statement Regarding The Foreign Resource Estimate
The categories of mineralisation reported under Polish system are different to those defined
For personal use only use personal For under JORC Code. The system of classification of mineral resources in Poland is based on the system that was developed and used in the Comecon countries in the period from 1949-1991. A comprehensive description of the system with some comparisons with other classification systems is given in Jakubiak, Z. and Smakowski, T. (1994). - Classification of mineral reserves in
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the former Comecon countries. Geological Society, London, Special Publications 1994, v. 79, p. 17-28.
Under the Polish system classification of reserves is based on two reference criteria, with the first representing the degree of resource definition and the second related to the possibility of economic exploitation. This is conceptually similar to JORC (see Figure 1, JORC Code 2012 Edition) where the axis from top to bottom represents the increasing level of geological knowledge and confidence proceeding through the categories from Inferred to Indicated to Measured. Also in JORC the axis from left to right represents the “Modifying Factors” including mining, processing, infrastructure, economic and others. There is a difference in terminology in that under the Polish system the single term reserve is used more generally and differentiation is based on category whereas JORC differentiates on category and also between resources and reserves.
Accordingly under the Polish system of resource and reserve classification, reserves are classified as ‘identified’ and ‘prospective’ and as ‘economic’ and ‘uneconomic’. The identified Polish reserves for the Nowa Ruda project are divided into categories A, B, C1 and C2.
Categories A and B relate only to developed and blocked reserves, with category A being in practical terms restricted to reserves under advanced exploitation. These materials have been selected for mining and partially exploited based on a very high degree of geological confidence and the application of “Modifying Factors”.
Category B also corresponds to a category of reserve or resource known to a relatively high degree of confidence. Depending on the application of specific “Modifying Factors” under the Polish system Category B represents material that is ready for exploitation.
Category C1 comprises reserves which have been identified and examined to such an extent as to enable a positive definition of their suitability for exploitation - these reserves are often in early production phases. They are similar to an ‘Indicated Mineral Resource’ in that the quantity, grade (or quality), densities, shape and physical characteristics have been estimated with sufficient confidence to allow the application of Modifying Factors in sufficient detail to support preliminary mine planning and evaluation of the economic viability of the deposit.
Category C2 relates to reserves which have been identified and documented at a preliminary stage only. Under the Polish system the C2 reserves have not been documented with sufficient confidence to apply economic parameters. This is similar to Inferred Mineral Resources under JORC where confidence in the estimation of resources is not sufficient to allow the application of technical and economic parameters for detailed planning in Pre-Feasibility or Feasibility Studies. For this reason under JORC, there is no direct link under Inferred Mineral Resources to any category of Polish Ore Reserves.
For personal use only use personal For
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6.2 Coal Quality
The historical coal quality data was reviewed by independent consultants Wardell Armstrong International (“WAI”) as part of their JORC resource estimation for the project (Table 6:2). The data suggests that Nowa Ruda has historically produced a high quality coking coal product. The records indicate that the coal which was produced from the project (Lech deposit) and sold to the nearby coking plant at Walbrzych was consistently presented as a high-quality coking coal product. Balamara provided further historical sales data on coal quality. This was announced by Balamara on ASX on 5 May 2014. Table 6:2 summaries that announcement:
Table 6:2 Coal Quality Parameters
Coal Deposit Waclaw Lech Total
Calorific value (kcal/kg) 6,523 6,500 6,518
Ash content (%) 18.35 31.23 21.09
Sulphur (total) (%) 1.09 0.7 1.01
For personal use only use personal For
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6.3 Recent Exploration
In 2013, Balamara started a confirmation drilling campaign including the drilling of five boreholes; three boreholes in Wacław deposit and two borehole in Lech deposit, totalling an estimated 4,876m of drilled strata (Figure 6:1). The objective of the drilling was to bring the Polish ‘resource and reserve’ estimates in Wacław and Lech into compliance with the JORC (2012) Code.
Figure 6:1 Existing and Proposed Exploration Boreholes
Source: WAI Resource Report For personal use only use personal For
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6.4 JORC Resource Estimate
Mineral Resources for the Nowa Ruda deposit were estimated by Wardell Armstrong International Pty Ltd (“WAI”) using three dimensional interpretations and modelling methods with specialist coal modelling software (Maptek™ Vulcan©). The Inverse Distance method of seam and thickness interpolation was used to estimate the seam floor and roof, and a nearest neighbour interpolation was used to estimate the coal quality and relative density within the seams. Coal resources were estimated for both Wacław and Lech Prospects.
The mineral resources reported were derived from data and information that included available borehole information and historical mine abandonment plans. The seams were modelled using Vulcan’s stratigraphical modelling module, Inverse Distance Weighting methodology with a maximum search radius of 1,500 m.
Coal Quality grids were created separately using ‘Nearest Neighbour’ methodology and the two combined to produce a block model of the lease areas. At this stage, a thickness cut-off of 0.60m has been used within the modelling and resource estimation.
There are at least nine major faults that influence the geology within the lease. This includes normal and reverse (thrust) faults with displacements, which vary in throw from approximately 10m to >1,000 m. Due to the low level of geological confidence, the precise location and characteristics of these faults are largely unproven. WAI has used the approximated fault positions to define the principal structural domains (cells) and therefore to dictate the fault blocks used in the modelling. Stand-off zones (buffer zones) have not been included around the principal faults. WAI recommends for further work to be conducted in order to decide whether fault stand- off zones may need to be included, and if so what dimensions may be required.
6.4.1 Coal Resource Statement (JORC 2012)
WAI reported a total Coal Resources for the Wacław and Lech deposits of approximately 23.07 Mt including 8.76 Mt of Indicated Resource and 14.31 Mt of Inferred Coal Resource, in accordance with the JORC 2012 Guidelines. Table 6:3 summarised the Resource estimate as announced by Balamara on ASX on 28 April 2014.
Table 6:3 Coal Resource (JORC 2012)
Project Indicated (Mt) Inferred (Mt) Total (Mt)
Waclaw 7.00 14.01 21.01 Lech 1.76 0.30 2.06 Total 8.76 14.31 23.07
Source: WAI Resource report
For personal use only use personal For Further, WAI has estimated an additional Exploration Target ranging from 112.50 Mt to 160.71Mt for these deposits as announced by Balamara on ASX on 28 April 2014 and 5 may 2014 (Table 6:4).
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Table 6:4 Additional Exploration Target Exploration Target (Mt) Project Lower Range Upper Range Waclaw 84.91 121.31 Lech 27.59 39.41 Total 112.50 160.72
Source: WAI Resource report
Balamara further announced the details of the coal quality on ASX on 5 May 2014. These are outlined in the Table 6:5 below:
Table 6:5 Coal Quality
Net Calorific Coal Tonnes Sample Moisture Volatiles Sulphur Ash Value Category (Mt) Type % % % % (Kcal/kg) As - 21.35% 0.73% 29% Indicated 8.76 Received Air Dried 1.10% 22.78% As - 21.35% 0.73% 29% Inferred 14.3 Received Air Dried 1.10% 22.78% As 1.3%-35% 16%-26% 0.3%-3% 7%-65% 2,800-7,100 Exploration Received (9.4%)* (20%)* (0.94%)* (28%)* (5,700)* 112 -161 Target ** 0.3%-1.9% 17%-27% 0.4%-3% 6%-58% 2,900-8,000 Air Dried (1.02%)* (22%)* (1.16%)* (22%)* (6,400)*
*Full range of values included for Exploration Target tonnage as required under JORC (2012) standard indicate the variety of coal types at Nowa Ruda. The coal quality data is based on samples taken from mine workings sampling points and surface boreholes. Data is available for samples as-received (i.e. before drying) and for samples subjected to air drying. The values for the Indicated and Inferred Resources are expressed as an average. The values for the Exploration Target are expressed as a range and the arithmetic mean of all the values used to make up the range has also been provided in brackets.
**The potential coal quality is conceptual in nature as there has been insufficient exploration to date to define a Coal Resource and it is uncertain if further exploration will result in the determination of a Coal Resource. Balamara confirms that it is not aware of any new information that would materially affects the information included in the announcement released on 28 April 2014 and 5 May 2014.
For personal use only use personal For
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Figure 6:2 shows the area covered under Indicated and Inferred Resource along with area under Exploration Target for one of the major seams (Seam 304).
Figure 6:2 Seam 304 Resource Classification and Exploration Targets
Source: WAI Resource Report
Competent Persons Statement: Information above that relates to Exploration Targets and Mineral Resources is based on information compiled by Dr Laurance Donnelly who is an employee of independent consultant Wardell Armstrong International and
For personal use only use personal For who is a Fellow of the Geological Society of London. Dr Donnelly has sufficient experience that is relevant to the style of mineralization and type of deposit under consideration and to the activity in which he is undertaking to qualify as a Competent Person under the 2012 edition of the Australasian Code for reporting of Exploration Results, Mineral Resources and Ore Reserves”. Dr Donnelly consents to the inclusion of the data in the form and context in which it appears.
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7 Historical Mining
The Nowa Ruda region is a major historical coal producing area in the south-west Poland. There has been substantial documented historical production at the Nowa Ruda Project and the vast majority of this coal has been processed at the coke producing plants in the vicinity.
Figure 7:1 Nowa Ruda Mine, circa 1970
Source: Balamara Resources 7.1 Waclaw
Wacław mine operated from 1771 to 1939 when the mine was closed due to an underground gas explosion (or outburst). Coal production over the 12 year period from 1919 to 1930 was 8.35 Mt at an average rate of 696,000 tonnes per annum. Over the four year period from 1934-1937, the mine produced approximately 869,000 tonnes at 217,000 tonnes per annum.
Wacław mine included four extraction levels and some of these were stowed with rock in an attempt to reduce gas outbursts. The coal was transported from the face on conveyor belts, chutes and mine wagons towed by electric trolley wire locomotives. From 1919 to 1923, the number of employees at the mine ranged from 480 (in 1933) to 4275 (in 1923). For at least the past ten years of mining the coal was extracted by the longwall mining method using hydraulic supports, although the exact method and technology is unclear. This included both advance and retreat methods, with and without stowing. 7.2 Lech
Coal mining at Lech took place from 1771 to 1995, although there was some additional production until 2001 at Slupiec, located about 5km to the south of Piast. Annual production rates
For personal use only use personal For began to increase following the expansion of mining in the 1970’s. From 1970 to 1978, the Lech Mine produced 1.84 Mt over a nine year period averaging approximately 205,000 tonnes per annum.
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Conventional underground mining method using longwall techniques were practised at both of these deposits. Access to coal seams was by shafts along with series of drifts, drives and cross cuts (Figure 7:2).
Figure 7:2 Nowa Ruda Coal Mine, Access
Source: Balamara Resources
Coal was exploited at the Lech Mine by low capacity longwall mining method using power supports and shearers / Coal Plough. The multiple coal seams were exploited by longwall retreating method with or without stowing.
Figure 7:3 Power Support in Historical Nowa Ruda Mine For personal use only use personal For
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Over 90% of the coal production from the Nowa Ruda Mines was processed at four coking plants in the Walbrzych region (approximately 40 km north of the Nowa Ruda Project) to produce coke for steel making. In 1961, the four coke plants were amalgamated into a single larger plant at Walbrzych. It consists of five coke oven batteries and is a significant European producer of foundry coke of +100 mm granulation. Total coke production at the Walbrzych Plant is currently at over 500,000 tonnes per annum. The present of existing infrastructure may assist in reducing
capital cost associated with the redevelopment of the project. For personal use only use personal For
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8 Valuation 8.1 Valuation Approaches
There are a number of recognised methods used in valuing mineral assets. The applicability of these methods depends on several project specific factors including the level of maturity of the mineral assets and the availability and reliability of the information about the project.
In determining the appropriate method(s) to be used for valuation of these assets, HDR | Salva has taken into consideration the classification of these assets as defined in the VALMIN Code and the different methodologies that are generally accepted as industry practice for each classification. Generally there are three broad methods of valuation that are used for valuing mineral assets. These are the cost approach, income approach and market approach. Each of them is more suitable for the relevant status of the exploration or mining project from grass roots exploration through to operating mine. The asset classifications that may be applied to a project are set out in Table 8:1 below.
Table 8:1 Typical Valuation Methods
Classification General Description Valuation Methods
Exploration Properties where mineralisation may or Rule of Thumb, Geo- Areas may not have been identified, but a scientific method, Resource has not been identified. Comparable Transactions
Advanced Properties where considerable Geo-scientific method, Exploration exploration has been undertaken and Appraised Value Method, Areas specific targets identified. Resource Comparable Transactions estimation may or may not have been made. Good understanding of mineralisation present.
Pre- development Properties where mineral resources The above methods and Projects have been identified but decision to DCF/NPV valuation proceed with development have not been made. Includes properties held on retention titles.
Source: VALMIN CODE, 2005
A summary of each of these methodologies is outlined in Appendix A.
The valuation approach that is generally adopted for early exploration project is generally defined
For personal use only use personal For as inferential methods that rely on comparative or subjective inputs such as a rule of thumb or appraised value method. These include the estimated metal content and a value of the metal derived from recent transactions. Typically, such a method values the property in $/unit area. The value would be discounted by any specific site factors as well as the status of the resource classification.
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The understanding of the geology of the coal deposit, structure and defined resources places the coal area in the Advanced Exploration or Pre-Development classification phase. A large range of valuation methods are recognised for this status with some requiring a degree of subjective estimation. All have been used by valuation practitioners and usually a combination of methods is used as cross checks to the reasonableness of the input assumptions.
The valuation of the identified mineral areas is a “rule of thumb” methodology where comparative sales are compared on a value per concession area. Fair market value is usually the technical value plus a premium or discount to account for market, strategic considerations and special purposes.
8.2 Valuation of the Nowa Ruda Project
Considering the historical production and the JORC resource present at the Nowa Ruda Project, in HDR | Salva’s opinion it is not appropriate to value it as an early stage exploration project on cost based methods.
HDR | Salva considers the Nowa Ruda Project as an advance stage exploration project where resources have been delineated. HDR | Salva considers it is not appropriate to use discounted cash flow (DCF) methods to value Mineral Resources at the Nowa Ruda Project as the project is not at an advanced stage for the determination of meaningful NPV of the project.
Therefore for the purpose of valuation, HDR | Salva has opted to value the “Resource Estimate” of 23.06 Mt and a separate “Exploration Target” of 112.50 Mt to 161.71 Mt on the basis of market comparable method. Since the area for Resource Estimate and Exploration Target is quite distinct, HDR | Salva has opted to add both to determine the value of the project.
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8.2.1 Nowa Ruda Project – Valuation of JORC Resources
To determine the fair market value for the Resource estimate (JORC 2012), HDR | Salva has reviewed recent comparable transactions for the coal asset with Resource estimate. The Nowa Ruda Project is an underground mine with significant history of mining operations which was shut down in 1995. Balamara have converted existing Foreign Resource Estimate into Resource Estimate under JORC 2012 Code.
Therefore, to find an appropriate market comparable transaction, HDR | Salva opted to review only those transactions involving sale and purchase of non-operating underground mines with Resource estimate, where mining activity was suspended. Unfortunately, HDR | Salva is unable to identify any market transactions for a coking coal project similar to the Nowa Ruda Coal project, which has occurred in recent time in Poland. Therefore, to increase the number of observations, HDR | Salva has included projects located globally that are similar in nature to the Nowa Ruda Project. The selected transactions have been listed in Table 8:2.
HDR | Salva notes that some of the transactions included in the data set are historical in nature requiring it to be adjusted to reflect the present market conditions. Considering the fact that coal market & prices are currently subdued due to potential oversupply with significant price volatility in the recent period, HDR | Salva has opted to adjust the implied value of the transaction based on current coal prices and the spot price of coal at the time of the transaction.
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Table 8:2 Comparable Market Transactions, Resource Estimate
Year Project Buyer Seller Location Interest Conside Value - Mine Coal Type Resource Value of Value of % ration 100% type (Mt) Resources at Resources (USDM) Asset prevailing adjusted to (USDM) coal prices current prices (USD/t) (USD/t)
Pike River New July-12 Solid Energy 100% 6.75 6.75 UG Coking 58.5 0.12 0.06 Pike River Coal Limited Zealand Project
Colombia Ruku Clean Power Unknown Colombia 100% 5.71 5.71 UG Coking 4.2 1.36 0.54 Aug-11 Concessions and Fuels
Verticalnaya Lysander Anthracite East Coal Ukarine 23% 11.50 49.04 UG Anthracite 76.2 0.64 0.43 Oct-10 Minerals Corp Project
May-07 Elouera Mine Gujarat NRE BHP Illawara Australia 100% 40.18 40.18 UG Coking 41 0.98 1.13 Coal
Semi Soft June-05 Southland Yancoal Gympie Gold Australia 100% 23.00 23.00 UG Coking & 221* 0.10 0.08 Colliery Thermal (Austar)
UG - Underground, *Resource published at a later date
Transactions in AUD were converted into USD using the exchange rate prevailing on the date of announcement
Source: Company Announcement
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HDR | Salva’s analysis of the recent market transactions on project by project basis has been elucidated below.
Acquisition of Pike River mine in New Zealand by Solid Energy is the most recent acquisition by any company for a closed underground coal mine. The Pike River Mine was closed in 2010 after multiple methane explosions killing 29 people. This was one of the worst mining disaster in New Zealand. In HDR | Salva’s opinion, the implied value derived for the acquisition of Pike River Mine should be lower than the value of Nowa Ruda Project. The sale was not completed under normal conditions as deceased trapped miners were yet to be recovered. Since acquiring this property in 2012, Solid Energy is yet to commence any program to ascertain the remaining coal resource and its accessibility or mine-ability.
HDR | Salva considers the Ruku Project located in Colombia to be comparable to the Nowa Ruda project in terms of coal quality and type of deposit (steeply-dipping, multi-seam), although artesian mining was intermittently carried out at the Ruku Project in the past. In HDR | Salva’s opinion, Ruku Project is inferior to Nowa Ruda Project because of its location and size of the Resource.
In HDR | Salva’s opinion, acquisition of the Lysander’s Verticalnaya Mine located in Ukraine can be considered as one of the closest comparable transaction to the Nowa Ruda Project. The Verticalnaya Mine was a closed mine that produced anthracite coal. It was located close to domestic steel operations, industrial users and power plants in Ukraine. The mine had similar geological condition as the Nowa Ruda Project and had an NI43-101 resource base of 76 Mt. The sale price of anthracite coal is significantly less than that for coking coal. In HDR | Salva’s opinion, the implied value derived from this transaction can be taken as lower bound of value range, for the Nowa Ruda Project.
Yancoal entered into the Australian coal market after it acquired the Southland Colliery from Gympie Gold in 2005. The Southland Colliery was later renamed as the Austar Coal Mine, went to receivership after a mine fire accident. Coal present in the Southland Colliery was of inferior grade (semi-soft & Thermal) as compared to the Nowa Ruda’s coal quality. Yancoal reopened the mine, after introducing top-slicing mining method. In HDR | Salva’s opinion, implied value derived from this transaction should be lower than that of Nowa Ruda Project, as it was potentially a distressed sale and the coal quality was inferior.
The Gujarat NRE acquired the Elouera mine (later renamed as Wongawilli Colliery) from BHP Illawarra Coal in 2007. The Elouera Mine is located in the Sydney Basin, near Wollongong. It was well connected to established infrastructure. Although, the majority of resources in the major seam at the Elouera mine, was depleted and under care and maintenance at the time of the sale. Significant coking coal resources were available for immediate mining at the time of transaction. The geological and mining conditions at Elouera mine are relatively comparable to the Nowa Ruda Project. Available coal resources were amenable to be exploited by conventional longwall mining method. However, higher coal seam gas content at the Nowa Ruda Project may require additional gas drainage facilities. In HDR | Salva’s opinion, implied value derived from this
acquisition of can be taken as upper bound valuation range for the Nowa Ruda Project. For personal use only use personal For Based on the reasons mentioned above, it is in opinion of HDR | Salva that the valuation range for the JORC Resources present at the Nowa Ruda Project should be between USD 0.43/t to USD 0.90/t (a 20% discount to implied value of Elouera Mine). Therefore, the valuation of Mineral Resources is considered to lie within a range of USD 9.9M to USD 20.9M with a preferred value
of USD 15.4M. The valuation of JORC Resources at the Nowa Ruda Project has been summarised in Table 8:3 below.
Table 8:3 Valuation – Resource Estimate (JORC 2012)
Resources Market Value of Resource Item (Mt) Lower Upper Preferred Nowa Ruda Project - Resource 23.1 0.43 0.90 0.67 (USD/t)
Valuation of JORC Resource (USD M) 9.9 20.9 15.4
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8.2.2 Nowa Ruda Project – Valuation of Additional Exploration Target
In addition to the JORC (2012) Coal Resource estimate, Balamara has also announced an additional Exploration Target, ranging from 112.50 Mt to 160.71 Mt, for the south-western area on the two principal coking coal deposits comprising Nowa Ruda Project. The Coal Resource estimate and an additional Exploration Target were calculated by European coal consulting firm Wardell Armstrong International (WAI), which has significant expertise in coal exploration and mining engineering, particularly in Polish coal basins.
To find out value of this area with additional Exploration Target, HDR | Salva reviewed underground mining projects with Exploration Target. HDR | Salva has included projects located in EU and the Commonwealth of Independent States Countries (CIS). In addition to this, HDR | Salva have also considered a project in USA and Colombia, which involved a closed mine with coking coal Exploration Target resources, as it consider it to be similar to the Nowa Ruda Project. The selected transactions have been listed in Table 9:2. Some of these projects have thermal coal or anthracite coal which generally trades at a lower implied value ($/t) as compared to coking coal.
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Table 8:4 Comparable Market Transactions, Exploration Target
Exploration Value Value/ Target / Mine Coal 100% Exploration Year Project Buyer Seller Location % Consideration (USDM) Foreign Type Type Asset target Estimate (USDM) (USD/t) (Mt) Financing of Przedsiebiors Construction of Barbara- Columbus Coking Apr- Uslugt Project and Payment Chorzow Energy Poland 60% UG and N/A N/A N/A 13 Gorniczych of Royalty fixed at Coal Limited Thermal Greenway 40% of Capex to Greenway 3 Million Ordinary Shares- Up front. 2.5 Million Ordinary Shares- JORC MI Kulk, Resources on or Aug- Cycow, Prairie 1,100- Undisclosed Poland 100% before Dec 2014. UG Thermal 1.5 0.01 12 Syczyn, Downs 1,300 3 Million Ordinary Kopina Shares- JORC M&I Resource of 1 Billion tonne on and before Dec 2015. 500 Million Ordinary Shares at deemed Tuyuk- price (A$ 0.02), A$ Jun- kargasha, Kokkia Coal UG & Celsius Coal Kyrgyzstan 80% 2.5 M exploration Thermal 12.5 500-700 0.02 12 Kokkia and Limited OP expenditure and 900 Min-teke Million Performance Shares. Kodiak Coke No.1 Attila May- Mining mine Resources USA 70% UG Coking 15.8 100 0.16 12 Company (Closed) Ltd
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US$ 3.6M cash and a Feb- MMEX future payment of $0.7 Hunza Mine Undisclosed Colombia 50% UG Coking 8.6 16-90 0.10 -0.54 12 Corporation M to finance exploration. US $ 2.6 M cash and Sary Mogol 100 Million. Coking Nov- and Bel Oshpur Celsius Coal Kyrgyzstan 90% Ordinary Shares and OP and 3.6 N/A N/A 11 Alma Limited 500,000 Performance Thermal Licences Shares.
Corinto Project Dec- Tiger Realm (FEL-165, Unknown Colombia 100% Farm in to earn 70% OP Coking 25 95 0.13 10 Coal Ltd EK7-151 & EIQ-092)
Transactions in AUD was converted into USD using the exchange rate prevailing on the date of announcement Source: Company Announcements For personal use only use personal For
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HDR | Salva’s analysis of the recent market transactions has been elucidate below.
The acquisition of the Barbara-Chorzow Coal was based on the terms that the acquirer “Columbus Energy Limited” will finance the total capital cost for refurbishing and recommissioning the mine including the cost for the Joint Venture partner. Although this project is located in Poland and involves an underground coking coal project, the consideration involved in the asset transaction is dependent on the unknown amount of capital expenditure to be incurred at a uncertain future date. Therefore, in HDR | Salva’s opinion, it is not appropriate to assign any value to the project without any estimated capital expenditure. Hence, Barbara-Chorzow Coal has not been considered for the further analysis.
MMEX Corporation acquired the Hunza Mine located in Colombia in Feb 2012.This project contains coking coal with historical underground mining operating. In HDR | Salva’s opinion, the valuation of the Nowa Ruda Project’s area with exploration target should be lower than that for Hunza Mine for the following reasons:
The mining conditions at Hunza Mine were relatively simple and the area was relatively free of geological disturbances; and At the time of acquisition underground artesian mining was carried out in one of the three tenements, but some of the coal seams were also amenable to be exploited by conventional open-pit mining method.
The Kulk, Cycow, Syczyn, Kopina tenements (together known as the Lubin Coal Project) acquired by Prairie Downs, an ASX listed company. It may be a comparable to the Nowa Ruda Project as both of them are located in Poland and both have significant exploration history. In HDR | Salva’s opinion the valuation of the Nowa Ruda Project’s area with exploration target should be done at a significant higher rate than these tenements because of the following reasons:
The presence of hard coking coal at the Nowa Ruda Project, against the presence of thermal coal, at the Lubin Project; The Nowa Ruda Project is located in the Lower Silesian Basin, which has pre-existing infrastructure, in close vicinity. The Lubin Project is located in the Lubin Basin which has limited infrastructure and only one operating mine; There is presence of coke oven plants in close vicinity, along with established rail network; The access to coal seam and development drives are in place at the Nowa Ruda Project which will significantly reduce the development cost and development period for the project; and The Foreign Resource Estimate is available for the Nowa Ruda Project which gives higher level of confidence to a certain extent.
From the above reasons, it can be conclude that the Nowa Ruda Project should be valued at a significantly higher value than that of the Lubin Project.
For personal use only use personal For Tiger Realm Coal’s Contorio Project is located in Central Colombia. It was part of acquisition which also involved the larger Landazuri project. The Contorio Project had history of artesian mining with limited production. In HDR | Salva’s opinion, Contorio Project was a relatively better project than the Nowa Ruda Project because of following reasons:
The geological conditions at the Contario Project were relatively simpler than that at the Nowa Ruda Project; and Historical Coal Seams present in the region were amenable to be extracted by open-pit mining method.
The Coke No.1 mine, acquired by Attila Resources Ltd., an ASX listed company. It has significant exploration and underground mining history, similar to that of the Nowa Ruda Project. In terms of coal type, both of these projects contains hard coking coal and are located in well-established coal basins. In HDR | Salva’s opinion, the valuation of the Nowa Ruda Project’s area with exploration target should be lower than that for Coke-1 for the following reasons:
Geologically, the coal seams present at the Nowa Ruda Project are complex as compared to that at the Coke-1 deposit; Coal seam gas is present at a significantly higher quality at the Nowa Ruda Project which may require an additional gas drainage arrangement; The Coke No.1 Mine was placed in care and maintenance in 2008, due to underperformance by the mining contractors along with geo-technical and ventilation issues because of inadequate mine planning, whereas the Nowa Ruda Mine was stopped in long ago, in 1995; At the Coke No.1 Project, coal handling and preparation plant (CHPP) infrastructure was already was in place while at the Nowa Ruda Project, new CHPP may be required; and Permits to commence mining operations was in place for the Coke No.1 Project while Balamara will need to apply for mining permit after completion of feasibility studies.
The assets acquired by Celsius Coal Ltd., an ASX listed company, are located in Kyrgyzstan. However, these assets are mostly thermal in nature and amenable to be exploited by the underground and open pit mining methods. Given the thermal nature of coal and higher geo- political risk associated with the project’s location, HDR | Salva has not considered this project for further analysis and comparison.
In HDR | Salva’s opinion, the preferred value for the Nowa Ruda Project Exploration Target should be based at a significant discount to the implied value for the Coke No.1 Project and preferably around USD 0.05/t of Exploration Target. This implies the preferred value for the Nowa Ruda Projects’ Exploration Target is assigned at USD 6.8M, within the range of USD 5.6M to USD 8.0M.
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A summary of valuation for Nowa Ruda Project’s Exploration Target has been given in Table 8:5 below.
Table 8:5 Valuation – Exploration Target
Value of Exploration Valuation - Exploration Target Exploration Item Target (Mt) (USD M) Target (USD/t) Lower Upper Lower Upper Preferred Nowa Ruda Project - $0.05 112.5 160.7 5.6 8.0 6.8 Exploration Target
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8.3 Valuation Summary In forming its opinion of the fair market value of the Nowa Ruda Project, HDR | Salva has taken guidance from the comparable transactions method. In consideration of comparable transactions, HDR | Salva has taken into account the current market, locality and technical and strategic factors which HDR | Salva has assessed to have an impact on the development of the concession.
HDR | Salva has derived a valuation range for 100% of the Nowa Ruda Project of between USD 15.5M and USD 28.9M with a preferred value of USD 22.2M. The Valuation summary for Nowa Ruda Project (JORC Resources and Additional Exploration Target) is given in Table 8:6 below.
Table 8:6 Valuation Summary - Nowa Ruda Project
Market Value (USD M) Item Lower Upper Preferred Value - JORC Resources 9.9 20.9 15.4 Value - Exploration Target 5.6 8.0 6.8 Total (100% of Nowa Ruda Project) 15.5 28.9 22.2
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9 References
ASX Announcements, Balamara Resources.
ASIC, 2011. Regulatory Guide 112: Independence of Experts. Australian Securities & Investments Commission [online]. Available from:
Balamara Resources, Quarterly Activities Reports.
Balamara Resources, Investor Presentation dated 29th July 2013.
Bucci, L. A., Hodkiewicz, P. F., Jankowski, P., Guibal, D., & Song, X. (2006 ). JORC and the Poland Resource Classification Scheme- an SRK view. Bulletin, 24-27.
CIMVAL, 2003, Standards and Guidelines for Valuation of Mineral Properties, The CIMVAL Committee of the Canadian Institute of Mining, Metallurgy and Petroleum [online]. Available from:
Department of Mineral Resources and Mining Areas Information Polish Geological Institute-National Research Institute (www.pgi.gov.pl) [Accessed 08 Sep 2013].
Etheridge, M A, 2009. The Black Art of Valuing Mineral Properties, paper presented to Mineral Asset Reporting and Valuation Seminar, Perth 18 October 2009 [online]. Available from
Goulevitch, J and Eupene GS, 1994. Geoscience Rating for Valuation of Exploration Properties – Applicability of the Kilburn Method in Australia and Examples of its Use, in VALMIN'94: Mineral Valuation Methodologies 1994, (pp. 175-190). Sydney, Australia: Australasian Institute of Mining and Metallurgy and the Mineral Industry Consultants Association.
Grant R, 1994. The Comparable Sales (Real Estate) Method of Valuation.VALMIN'94: Mineral Valuation Methodologies 1994, (pp. 155-165). Sydney, Australia: Australasian Institute of Mining and Metallurgy and the Mineral Industry Consultants Association.
Guj, P and Garzon, R 2007.Modern Asset Pricing – A Valuable Real Option Complement to Discounted Cash Flow Modelling of Mining Projects. Project Evaluation Conference Proceedings, 113-120, Australasian Institute of Mining and Metallurgy.
Smakowsi, T Malon, A and Tymiński M-Hard Coal Reserves and Resources in Poland According to UNFC-2009.
For personal use only use personal For Hinjer, J. 2006 A Presentation on Market Based Valuation Practices in the Canadian Minerals Industry, November, 2006. www.mlr.gov.cn.
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Jakubiak, Z. and Smakowski, T. (1994). - Classification of mineral reserves in the former Comecon countries. Geological Society, London, Special Publications 1994, v. 79, p. 17-28.
Jan Drzewiecki Coal mining in Poland in complicated geological conditions.
JORC, 2004. Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves – The JORC Code – 2004 Edition [online], The Australian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and Mineral Council of Australia. Available from:
Kilburn L C, 1990. Valuation of Mineral Properties which do not Contain Exploitable Reserves; CIM Bulletin, 83:90-93.
Lord, D, Etheridge M A, Wilson M, Hall G and Uttley P, (2001). Measuring Exploration Success: An alternative to the discovery – cost – per – ounce method of quantifying exploration effectiveness. Society of Economic Geologist Newsletter, No 45, April 2001.
Onley P G, 1994. Multiples of Exploration Expenditure as a Basis for Mineral Valuation, in VALMIN94:Mineral Valuation Methodologies 1994, pp191-197 (Mineral Industry Consultants Association, The Australian Institute of Mining and Metallurgy; Sydney).
Prairie Downs Metal Limited, Lubin Coal Project, Company Presentation November 2012.
Posykek Eva, Central Mining Institute, Katowice 1987, republished in 2012 Hydrogeological Characteristics of the lower Silesian Coal Basin.
Volkmer G, Coal Deposits of Poland , including discussion about the degree of peat
consolidation during lignite formation. For personal use only use personal For
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Appendix A Valuation Approaches and Methods
Valuation considerations
To ensure compliance with the ASX’s listing rules and Australian Corporations Law, this Report has been prepared in accordance with the VALMIN Code.
Under the VALMIN Code, mineral assets are classified according to their maturity. A mineral asset includes all property held for the purpose of near term or eventual mineral extraction, including but not limited to:
real property intellectual property concessions, plant, equipment and associated infrastructure. Most mineral assets can be classified as outlined in Table below.
Mineral asset classification
Project Criterion development stage Exploration areas Mineralisation may or may not have been defined, but where a Mineral Resource has not been identified. Advanced Considerable exploration has been undertaken and specific exploration areas targets identified. Sufficient work has been completed on at least one prospect to provide a good geological understanding and encouragement that further work is likely to result in the determination of a Mineral Resource. Pre-development / Mineral Resources and/or Ore Reserves have been identified Resource estimated. A positive development decision has not been made. This includes properties where a development decision has been negative and properties are either on care and maintenance or held on retention titles. Development Committed to production but not yet commissioned or not initially operating at design levels. Operating Mineral properties, in particular mines and processing plants, which have been fully commissioned and are in production.
Source: VALMIN, 2005
Under the VALMIN Code, value is the fair market value of a mineral asset (2005). Fair market value is the amount of money or the cash equivalent that a willing buyer and seller would exchange on the valuation date in an arm’s length transaction (VALMIN, 2005). Each party is assumed to have acted knowledgeably, and without compulsion. In essence, fair market value is comprised of:
For personal use only use personal For Underlying or ‘technical value’ - a mineral asset’s future economic benefit under a set of assumptions, excluding any premium or discount for market, strategic, or other considerations Market component - a premium relating to market, strategic or other considerations, which can be either positive, negative, or zero.
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The market value should include all material information to the asset. For projects with extensive technical detail, the valuer determines materiality of information based on whether its inclusion would result in the valuation reaching a different conclusion.
There is no single method of valuation which is appropriate for all situations. Rather, there are several valuation methods, each of which have some merit and are more or less applicable depending on the circumstances. Mineral assets are generally valued based on approaches that assess income, cost, and the open market. As the VALMIN Code is not prescriptive in this regard, the 2008 Edition of The South African Code for the Reporting of Mineral Asset Valuation (SAMVAL) and the Canadian 2003 Edition of the Standards and Guidelines for Valuation of Mineral Properties (CIMVAL) provide insight into applicable approaches, as shown in the Table below.
Valuation approaches for different types of mineral assets
Approach Project development stage Exploration Resource Development Operating Income No Rarely Yes Yes Cost Yes Rarely No No Market Yes Yes Yes Yes
Source: CIMVAL, 2003
Market-based approach
The market-based approach uses the transaction prices of projects in similar geographical, geopolitical, and geological environments to derive a market value using a process similar to that in the real estate industry (CIMVAL, 2003). The market-based approach may use the assumption either of joint venture terms or outright acquisitions, and can be presented in range of unitised values including on a dollar per ounce or tonne of contained metal/mineral; dollar per square km; or as a percentage of the prevailing commodity price.
In the HDR | Salva’s opinion, a market-based approach is well suited to establishing a likely value for mineral deposits and exploration projects, as it inherently takes into account all value drivers.
Related comparable transactions
Recent comparable transactions can be relevant to the valuation of projects and concessions. While it is acknowledged that it can be difficult to determine to what extent the properties and transactions are indeed comparable, unless the transactions involve the specific parties, projects or concessions under review, this method can provide a useful benchmark for valuation purposes. The timing of such transactions must be considered as there can be substantial change in value with time.
HDR | Salva has considered whether any comparable relevant transactions have taken place in For personal use only use personal For recent years which can be used as a basis for estimation of value of the mining assets assessed herein.
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As no two mineral assets are the same, the Expert must be cognisant of the quality of the assets in the comparable transactions, with specific reference to:
the grade of the resource the metallurgical qualities of the resource the proximity to infrastructure such as an existing mill, roads, rail, power, water, skilled work force, equipment, etc. likely operating and capital costs the amount of pre-strip (for open pits) or development (for underground mines) necessary the likely ore to waste ratio (for open pits) the size of the concession covering the mineral asset, and the overall confidence in the resource.
Alternative offers and joint venture terms
If discussions have been held with other parties and offers have been made on the project or concessions under review, then these values are certainly relevant and worthy of consideration. Similarly, joint venture terms where one party pays to acquire an interest in a project, or spends exploration funds in order to earn an interest, provide an indication of value.
Rules of thumb or yardsticks
Certain industry ratios are commonly applied to coal mining projects to derive an approximate indication of value. The most commonly used ratios are dollars per tonne of coal in resources, dollars per tonne of coal in reserves, and dollars per tonne of annual production. The ratios used commonly cover a substantial range which is generally attributed to the ‘quality’ of the coal, the infrastructure to reach markets and the status of the tonnes estimates. Low cost of production tonnes are clearly worth more than high cost tonnes. Where a project has substantial future potential not yet reflected in the quoted resources or reserves a ratio towards the high end of the range may be justified.
Other Expert Valuations
Where other independent experts or analysts have made recent valuations of the same or comparable properties, these opinions clearly need to be reviewed and to be taken into consideration.
Cost-based Approaches
Appraised Valuation or Multiple of exploration expenditure method (MEE)
Past expenditure, or the amount spent on exploration of a concession is commonly used as a guide in determining the value of exploration concessions, and ‘deemed expenditure’ is frequently the basis of joint venture agreements. The assumption is that well directed exploration has added value to the property. This is not always the case and exploration can also downgrade a property
For personal use only use personal For and therefore a ‘prospectively enhancement multiplier’ (PEM), which commonly ranges from 0.5- 3.0, is applied to the effective expenditure. The selection of the appropriate multiplier is a matter of experience and judgement.
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To eliminate some of the subjectivity with respect to this method, HDR | Salva applies a scale of PEM ranges as follows to the exploration expenditure:
Prospectively enhancement multipliers
PEM Rationale 0.5 -1.0 Previous exploration indicates the area has limited potential. 1.0 -1.5 The existing (historical and/or current) data consists of pre-drilling exploration and the results are sufficiently encouraging to warrant further exploration. 1.5 -2.0 The prospect contains one or more defined targets warranting additional exploration. 2.0 -2.5 The prospect has one or more targets with significant drill hole intersections. 2.5 -3.5 Exploration is well advanced and in-fill drilling is required to define a Resource. 5.0 A Resource has been defined but a (recent) pre-feasibility study has not yet been completed
Source: HDR | Salva
Over-riding any mechanical or technical valuation method for exploration ground must be recognition of prospectivity and potential, which is the fundamental value in relation to exploration properties.
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