Due Diligence and Valuation Report Arrowhead Code: 09-03-04 Coverage initiated: 27 June 2011 Company: Hot Rock Limited This document: 13 August 2012 Ticker: ASX: HRL Fair share value bracket: AU$0.80 to AU$1.37i Headquarters: Brisbane, Australia Share price on date: AU$0.017ii Managing Director: Mr. Peter Barnett Analyst team Vishal Pasari Mohanarangam Purushothaman Website: www.hotrockltd.com [email protected] [email protected] Market Data projects in the region. EDC recognized the potential of HRL’s projects and this was borne out 52-Week Range: AU$0.017 - AU$0.11iii Average Daily Volume: 188,191iv in a major recent deal between EDC and HRL in v which EDC executed joint venture agreements Market Cap. on date: AU$3.94MM covering HRL geothermal projects in Chile and Financial Forecast Data (in AU$) Peru on 03 February 2012. ‘12E ‘13E ‘14E ‘15E 16E ‘17E ‘18E Agreements on two HRL projects in Peru were High profit/ completed in May 2012 in which EDC will acquire (loss) MM (1.9) (1.0) (2.9) 63.9 63.2 68.2 71.28 a 70% interest in each project company in Peru High EPS and will sole fund the exploration stage of up to cents (0.8) (0.4) (1.3) 27.5 27.2 29.4 30.72 Low profit/ US$12MM per project. Post this, tenements are (loss) MM (1.9) (1.0) (2.9) 52.9 51.4 55.6 58.00 expected to be transferred from HRL into the JV Low EPS companies within the next 2 months. HRL is then cents (0.8) (0.4) (1.3) 22.8 22.1 24.0 25.00 expected to receive from EDC an initial payment Fiscal Year (FY) 1st July – 30th June of US$0.8MM and a further payment of US$1.2MM if EDC continues past an initial 15 Summary month period. - Hot Rock Limited (HRL) is a geothermal EDC has announced in May and June 2012 that it exploration and development company. will not proceed with the JV at Calerias and Focused on conventional volcanic and HSA Longavi projects in Chile and will instead focus geothermal projects with potential for their geothermal exploration and development 3000MWe of power generation. interests with HRL in Peru. HRL now holds 100% - Major joint ventures in Peru with Energy ownership in the Calerias and Longavi projects in Development Corporation (EDC) the world’s Chile. largest geothermal generator. In Peru, work is in progress on securing - EDC 1,400MWe generation: US$2,400MM, community engagement and land access HRL with 3000MWe potential generation: approvals at HRL’s two wholly owned, granted US$5MM market cap. geothermal exploration authorizations at Turu and - Current cash plus cash expected to be Rupha. The company has announced in June received from EDC over next 2 months is 2012 that EDC intends to soon commence AU$0.8MM, and a further $1.2MM within 15 detailed field work programs, including geological, months thereafter. geochemical and geophysical magneto-telluric The current portfolio of assets the company holds (MT) surveys, at Quellaapacheta followed by comprises geothermal development projects in Chocopata. Peru, Chile and Australia. In Chile, company is continuing with field After exhaustive analysis of geothermal settings investigations and delineation of inferred worldwide, it was determined that Chile and Peru geothermal resources at Calerias and Longavi possessed an optimal mix of characteristics for projects. It has recently received land access commercial geothermal power development. HRL approval from land owners for the Sta Macarena moved quickly and early and has secured one of prospect where geo-scientific exploration surveys the largest holdings of volcanic geothermal are now in progress. Also, the Chile Ministry of Hot Rock Ltd. – Arrowhead BID 1 ASX: HRL Due Diligence and Valuation Report See important disclosures on page 33 of this report. Energy has granted extension to two exploration 0.12 7000 concessions for a further two years at the Calerias Yearly Price Graph 6000 and Longavi projects. 0.1 5000 The company continues to discuss funding options 0.08 for Australian projects, for particularly proof of 4000 0.06 concept well drilling and testing along with pilot 3000 scale power generation at its Hot Sedimentary Price (AU$) 0.04 Volume ('000) Aquifer (HSA) project near Koroit. HRL is working 2000 closely with the Australian Geothermal Energy 0.02 1000 Association in formulating a broad package of 0 0 geothermal resource drilling and testing activities Australia wide to attract government funding from 13-Jul-11 13-Jul-12 13-Jan-12 13-Jun-11 13-Jun-12 13-Oct-11 13-Apr-12 13-Sep-11 13-Feb-12 13-Dec-11 13-Aug-11 13-Aug-12 13-Nov-11 13-Mar-12 13-May-12 the newly created Australian Renewable Energy 13-May-11 Agency (ARENA). Given due diligence and valuation estimates HRL’s five HSA tenements in the Otway Basin based on intrinsic revenue capacity of existing have now been extended to May 2013 during assets, Arrowhead believes that Hot Rock’s fair which time the company will seek funding from share value lies between AU$0.80 to AU$1.37vi. ARENA for the Koroit project. HRL has 13 granted This valuation is based solely on the Koroit projects in Chile and has filed application for project in Australia, the Longavi and Calerias exploration authorization at ten volcanic projects in Chile and the Turu, Chocopata and geothermal projects in Peru. Quellaapacheta projects in Peru. Hot Rock Ltd. – Arrowhead BID 2 ASX: HRL Due Diligence and Valuation Report See important disclosures on page 33 of this report. Table of Contents Company Presentation ...................................................................................................... 4 News ................................................................................................................................. 7 Contacts ............................................................................................................................ 8 Major Shareholders ........................................................................................................... 8 Management and Governance ........................................................................................... 9 Assets and Projects ......................................................................................................... 11 Technologies and Markets ............................................................................................... 20 Project Risk Profile Analysis ............................................................................................ 24 Hot Rock Risk Assessment .............................................................................................. 24 Value ............................................................................................................................... 30 Analyst Certifications and Important Disclosures............................................................ 33 Valuation ......................................................................................................................... 34 Notes and References ..................................................................................................... 35 Hot Rock Ltd. – Arrowhead BID 3 ASX: HRL Due Diligence and Valuation Report See important disclosures on page 33 of this report. Company Presentation Hot Rock is an ASX listed company focused on geothermal resource exploration and development in commercially attractive countries with growing energy markets. Strategically, the company is focusing on commercially proven volcanic geothermal systems and developing its extensive portfolio in Chile and Peru complimented with Hot Sedimentary Aquifer prospects in Australia. The Company is currently focused on its volcanic projects in South America which have the highest near term potential for creating value. In February 2012 the company executed joint venture agreements which have enabled EDC to become the majority partner in Hot Rock’s Quellaapacheta and Chocopata projects in Peru. After significant due diligence EDC is now proceeding with the JV at these two projects. This joint venture is a major milestone given EDC’s significant operating expertise and success in developing geothermal assets from discovery through to sale of power, over a time frame of 35 years. EDC intends to commence detailed field work programs in the next few months at Quellaapacheta and Chocopata, including geological, geochemical and magneto-telluric (MT) geophysical surveys. Hot Rock’s Asset Portfolio – Chile – South America: Hot Rock’s wholly owned subsidiary Hot Rock Chile SA holds thirteen granted geothermal exploration concessions covering 7 projects. All of these tenements remain 100% Hot Rock owned. The Chile Ministry of Energy has approved the applications to extend two exploration concessions for a further two years at the 100% held at Calerias and Longavi projects. Applications to renew two further exploration concessions at the Longavi project have been recently submitted. A reconnaissance field investigation program has been completed at HRL’s Santa Macarena project. – Peru – South America: Hot Rock’s wholly owned subsidiary Hot Rock Peru SA has filed applications for exploration authorizations at ten volcanic geothermal projects in Peru. Four of these have been granted to HRP of which two are included in the JV with EDC. Preliminary resource evaluation reports have been completed by HRL for the Quellaapacheta, Chocopata, Turu and Rupha projects. Also, HRL’s applications for a further five high quality geothermal exploration authorizations remain in process. – Otway Basin – Victoria, Australia: HRL’s five HSA tenements