broker note, caledon resources, 12/12/2006 (cannacord adams)

8/15/2019 Broker Note, Caledon Resources, 12/12/2006 (Cannacord Adams)

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Caledon Resources plc 12 December 2006

Company Statistics (pre-money) Price Chart

Symbol CDN : AIM

Share Price 0.07

52-week Range: 0.08-0.03

Weekly Volume: 3.8M

Market Capitalisation: 24M US$47M

Cash 8M US$16M

Long-term Debt 6M US$12M

Enterprise Value 22M US$43M

Historical Financials6 mts to 6 mts to 12 mts to

30-Jun-06 30-Jun-05 31-Dec-05Explortn & admin costs M -1.49 -0.96 -2.30

Other operating income M 2.53 0.00 5.49

Operating profit/loss M 1.04 -0.96 3.19

Net earnings/loss /shr 0.25 -0.36 0.67

Net current assets M 6.77 3.61 6.78

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Source: Bloomberg

Forecast Earnings Summary Company Description

FYE Dec 2007e 2008e 2009eTotal coal production kT 853 1,473 1,748

Average coal price US$/t 86 79 76

Average cash cost US$/t 69 60 55

CFPS /shr 0.011 0.027 0.028

EPS /shr 0.007 0.021 0.028

Source: Canaccord Adams estimates; company reports

Caledon Resources is an AIM listed mining company thatowns 100% of the Cook Coking Coal Mine and someassociated infrastructure in Queensland's Bowen Basin. Italso has an option to purchase the adjacent Minyango CoalExploration License. It plans to re-develop the Cookoperation and to commence production at the end of 2006,building to 1.8Mtpa coal from mid-2008.


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earmarked for the refurbishment of the mine and a further A$12-15 million for the coal

preparation plant. Estimates for working capital and other owners costs are A$12

million and A$8 million respectively.

Caledons development plan as outlined in its AIM re-admission document is to

outsource mining to South African contractor Magatar, which is an experienced operator

of the continuous mining equipment to be employed at the mine. The mining method isto combine customised continuous-mining units with continuous-haulage equipment to

provide an efficient, flexible and highly productive mining system.

Caledon has yet to finalise contract negotiations, but SRK has assumed fixed mining costs

of A$33.50 per tonne of RoM coal for the Magatar operation in its Competent Persons

Report, this figure being based on projections provided by Caledon. We note that given

the fixed-cost structure of the mining contract, any cost benefit of this new system

compared to conventional continuous miner/shuttle car systems would accrue to the

contractor, the benefit obviously being that any overrun would be borne by the

contractor. However, we also note that Caledon may seek to finalise a mining contract

which is not fixed cost, therefore allowing it to benefit from any cost-savings achieved by

the proposed continuous mining-haulage system. Given the potential for cost savings andthe economies of scale offered by the project, we feel the latter option would be the

optimum outcome for Caledon.

The coal processing plant washes and sorts the coal, on the basis of density, to reduce

the ash content and to produce separate coking and thermal coal products. These are

then loaded onto wagons using the existing rail loop that connects the plant with the

state owned rail system, which transports the coal the 200 kilometres to export terminals

on the coast. Queenslands rail and port infrastructure is currently running at around its

annual capacity of approximately 140-150 million tonnes of coal. As a consequence of

the mining industrys plans to increase production to 210 million tonnes of coal by 2010,

port and rail capacity is being expanded with the aim of removing the current bottleneck

within two years. In the interim, Caledon will have the right to part of Xstratas quota for

rail and port capacity. Marketing of the coal will be undertaken by Xstrata under an

agreement which lasts for two years.

There is potential for additional reserves on the Cook license itself and further potential

exists on the adjacent Minyango Exploration License, over which Caledon has an option

to purchase 100% for total payments of A$40 million (US$30 million). Minyango hosts

down-dip extensions of the coal being mined at the adjacent Blackwater and Curragh

open pit mines, and strike extensions of the coal being mined at Cook. Company

presentations refer to a non-JORC compliant global in-situ resource inventory of 500

million tonnes of coal and SRK quotes Queensland government estimates that in-situ

resources within two seams to less than 300 metres of overburden total 205 million

tonnes. We note, it is likely that only one of the two coal seams will be mined. Caledons

management believes Minyango has the potential to be brought into production within arelatively short period, at a rate of up to two million tonnes per annum for over 20 years.

Caledons initial work will focus on additional seismic and drilling programmes to better

define the structural characteristics of the seams, coal quality and extent of resources on

the property.

Caledon has assembled an experienced management team for the project. This includes

Peter Seear, as chief operating officer, and Mark Trevan, as managing director of its

Australian subsidiary. Mr. Seear has almost forty years experience in the coal industry,


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12 December 2006 Caledon Resources plc

including time in coal contracting and equipment manufacturing. Mr. Trevan joins

Caledon after 25 years with Rio Tinto, where for the last nine years he was general

manager marketing for Rio Tinto Coal Australia.

Finances

At the end of November, Caledon raised a total of US$52 million (26.5 million) in equitythrough the issue of 331 million shares at a price of 0.08 per share. Together with the

25 million shares to be issued in connection with the acquisition of MTP (the company

that owns agency rights to the use of the proposed mining system in Australia) this will

increase the (pre-consolidation) number of shares in issue from 338 to 694 million.

Caledon will also receive US$12 million (A$15 million) in vendor financing from Xstrata

in the form of a convertible loan note. Together with cash held at the end of June 2006 of

US$16 million (8 million), this takes Caledons total financial resources to US$79

million.

Of this amount, US$36 million (A$46.5 million) will be paid to Xstrata for the purchase of

the Cook Mine, and around a further US$7 million will be paid in stamp duty, transaction

costs and financing fees. Approximately US$9 million is to be used for the deposit and

first option payment in relation to the acquisition of the Minyango exploration license.

(The next A$9.6 million option payment due in March 2007 is payable in shares or cash,

at Caledons option. The company intends to fund the final payment of A$20.4 million,

which is due by the end of 2007, from cash flow.) Including a cash payment of US$0.4

million as part consideration for the purchase of MTP takes the total initial cash outflow

to US$51 million, which would leave cash of US$27 million at the end of 2006.

Together with after-tax operating cash flow from Cook during the first year (2007),

which we estimate to be US$14 million net of corporate G&A, the remaining cash

balance will be used to fund the mine and plants refurbishment (US$15 million) and

associated working capital and owners costs (US$15 million). By our calculations this

would leave cash of around US$11 million, which we note would be insufficient to fund

the planned feasibility programme and US$15 million (A$20.4 million) final optionpayment at Minyango. However, we note the potential for operating profit in 2007 to

come in higher than our forecast, particularly if coking coal prices were to remain

around current levels of US$115 per tonne, compared with our 2007 forecast price for

Cook coking coal of US$93 per tonne. We also note that the company states in the re-

admission document that, if necessary, it may seek to raise additional debt or equity to

meet the deferred Minyango payments and capital expenditure commitments over the

next 15-months as they fall due.


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Figure 2: Summary production and financial forecast

FYE Dec 2006e 2007e 2008e 2009e 2010e 2011e 2012eRevenue US$M 73 117 132 132 123 126

Costs US$M -59 -88 -96 -100 -97 -97

Corp G&A US$M -6 -6 -6 -6 -6 -6

EBITDA US$M 8 23 30 27 21 23DD&A US$M -1 -2 -2 -2 -2 -2

EBIT US$M 7 21 28 24 19 21Interest US$M 0 0 0 0 0 0

Tax US$M -2 -6 -8 -7 -6 -6

Earnings US$M 5 15 20 17 13 15Cash FlowOperating cash flow US$M 0 8 19 20 17 13 15

Invested cash flow US$M -53 -45 -1 0 0 0 0

Cash flow from financing activities US$M 64 0 0 0 0 0 0

Net cash flow US$M 11 -37 18 19 17 12 14Cumulative cash flow US$M 11 -27 -9 10 26 39 53

Cash balance US$M 27 -12 6 25 41 54 68Source: SRK Competent Persons Report (Oct 2006), Canaccord Adams estimates

Valuation

Given its status as a development company, we consider that a sum-of-the-parts

approach is the most appropriate valuation methodology for Caledon at this stage. We

have also compared the valuation with other listed coal companies to provide context.

Using a discount rate of 8%, which we would typically use for a non-precious metal

producer located in Australia, we derive an NPV for the Cook Mine of A$148 million(US$116 million) for the first 10-years of operation, or A$230 million (US$181 million)

for the potential 20-year life as supported by SRKs expectation that additional resources

will be converted to reserves (see summary cash flow model for Cook Mine in Figure 26).

To arrive at our target price we have reduced the value of the first 10-years by 20% to

take account of the risks that we believe are associated with achieving the targeted

production levels and cost structure. We have reduced the value of the second 10 years

of the project by 30% in recognition of the additional risks we believe are involved with

completion and resource conversion.

We have also allowed for the value of Minyango at cost (US$8 million first option

payment), Caledons Chinese exploration interests (nominally valued at US$5 million)

and the companys stake in Dynasty Gold (US$2 million). We have also allowed for ourestimate of residual cash at end of 2006 and the convertible debt provided by Xstrata.

The following table gives a breakdown of our suggested valuation for Caledon.


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Figure 3: Valuation

8% Full value Risk Riskeddiscount rate A$M US$M ValuationCook (yrs1-10) 148 116 20% 93Cook (yrs 11-20) 82 65 30% 45Minyango 10 8 0% 8Chinese gold assets 6 5 5

Dynasty stake 2 2 2

Enterprise Value 249 196 153Net current assets 27 27

Long-term debt -12 -12

Net Asset Value 211 168Pro-forma issued shares 730 730US$ per share* 0.29 0.23

per share* 0.147 0.117Post 1-for-5 consolidation 0.74 0.59

* Pro-forma, fully diluted 'in-the-money'

Source: Canaccord Adams estimates

With respect to this valuation, we note that the forecast operating costs are relatively

fixed (mining and processing are both contracted) and that capital costs are relatively

limited. As a result, even more than usual with this type of analysis, the main driver of

the valuation relates to revenue, both in terms of production and coal price.

With respect to the rate of production, we consider that the ability to control ground

conditions at the operation is the most significant factor. We note that the planned

mining method incorporates a revised bolting pattern which should allow mining in a

given area to be completed more rapidly than previous methods.

With respect to the coal price, we note that coking coal from Cook is categorised as being

between hard and semi-hard in quality. Coal consultant McCloskey suggests that, as anindependently-marketed product, it would sell at a discount of around 7% to McCloskeys

long-term forecast price for premium hard coking coal. In our base-case valuation, we

have applied a similar discount to Canaccord Adams long-term forecast price for hard

coking coal, which we note is somewhat lower than McCloskeys. We note that if

McCloskeys suggested long-term price of US$84 per tonne for Cook coking coal was

applied to our model, our risked valuation would increase from 0.12 per share to 0.16

per share.

The following sensitivity table plots our risked NAV estimate for a range of coking coal

prices and discount rates. We would point out that this sensitivity table assumes coking

coal prices are flat from 2008 onwards, whereas in our base-case valuation our long-

term flat price of US$74 per tonne comes in at year 2012.


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Figure 4: Risked NAV sensitivity to coking coal prices

Coking coal price (US$/t)55 60 65 70 75 80 85

5% 0.02 0.05 0.08 0.11 0.14 0.17 0.208% 0.02 0.04 0.07 0.09 0.11 0.14 0.16

10% 0.02 0.04 0.06 0.08 0.10 0.12 0.1412% 0.02 0.03 0.05 0.07 0.09 0.10 0.12

Ds

ae

15% 0.01 0.03 0.04 0.06 0.07 0.09 0.10Source: Canaccord Adams estimates

We note that our risked valuation in Figure 3 does not take account of the potential for

additions to reserves, particularly from the Minyango license area, but also from Cook,

beyond the 40 million tonnes assumed in our model. Nor does it take account of the

potential to increase throughput at the coal plant, which was originally designed to

process 3.5Mtpa of coal, some 75% greater than the anticipated production rate. We note

that additional capital would be required to bring the plant up to its original design

capacity and to expand existing mine site infrastructure to cope with the increased

production rate.

We have assembled a table of Australian listed coal companies and their consensus cash

flow and earnings (Figure 28). This indicates that, on average, these companies trade on

multiples of earnings ranging from 5.4-20.6 times (average 12.6) 2008 earnings and

within the range of 3.8-17.4 (average 8.8) times 2008 cash flow. Applying these averages

to Caledons forecast earnings and cash flow would suggest a value of 0.12-0.14 per

share.

Investment Risks

The main risks to our target price, and rating, are attached to revenue (being a function

of coking and thermal coal prices), the Australian/US dollar exchange rate and

production volumes. The large amount of existing infrastructure and plant already onsite, together with the planned use of contract miners and plant operators, results in

relatively low budgeted capital costs and an operating cost structure that is largely fixed.

The key risk to our valuation is that the company may not achieve its targeted production

rate at the cost it has indicated should be possible, and we note that the valuation is

particularly sensitive to coal prices.

Risks relating to coal transport and marketing are limited by the two-year port and rail

access deal and marketing contracts negotiated with Xstrata, although longer-term we

note that the company will have to make its own rail and port arrangements.

We also note the significant potential for additional exploration on the Minyango coal

license area to better define coal resources, to establish the coking coal/thermal coal split

of the seams, and also to get a better understanding of the structural geology of the area.

Conclusion

We consider that the refurbishment of the Cook Mine offers the prospect of generating

significant cash flow in the short-term and the option over the Minyango license offers

the potential for an increase in reserves and production rate in the future.

We initiate coverage on Caledon with a BUY recommendation and a 0.12 per share

target price (or 0.59 per share on a post-consolidation basis). We note that achieving


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the operating targets at Cook would remove the risk factors that we have chosen to

apply, with the result that our calculated NAV would increase by around 30% to 0.15

per share.


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BACKGROUND

Overview

Caledon Resources plc was admitted to Londons AIM market in 2003, initially focusing

on four gold projects in Southern China. More recently, the company has taken equity

interests in a number of companies through private placements. This included minority

stakes in Afcan Mining Corp (owner of the Tanjianshan gold project in western China)

and Dynasty Gold.

However, mid-2005 brought a change of direction, with management agreeing to pursue

the acquisition of an advanced-stage mining asset with the potential for near-term

production and positive cash flow, with the intention of diversifying the companys asset

portfolio and balancing the risks posed by the hitherto focus on China. This new strategy

was aided by a C$16.9 million (8.5 million) increase in treasury funds following the

companys disposal of its interest in TSX-listed Eldorado Gold Corp (ELD:TSX) towards

the end of last year (Eldorado had earlier acquired Afcan through an all-share

transaction that valued the latter at a 75% premium to Caledons initial investment).

The companys search for an appropriate acquisition culminated in late 2005 with an

approach from a third-party proposing Caledon purchase the Minyango coal property, an

undeveloped brown-field coking coal asset in Queenslands prolific Bowen Basin. Whilst

in preliminary discussions over Minyango, Caledon became aware of a competitive

tender for the adjacent Cook Mine by the latters owner, a subsidiary of Xstrata plc

(XTA:LSE). Management subsequently decided to proceed with both the Minyango and

Cook transactions, on the basis that Cook added existing production and supporting

infrastructure, plus an estimated resource base of over 100 Mt of high-quality coking

coal, to Minyangos exploration potential.

In June 2006 Caledon signed a heads of agreement with Xstrata to acquire Cook for a

total consideration of A$45.6 million in cash, and the companys shares were suspendedfrom trading (by virtue of its size the transaction was deemed a reverse takeover under

AIMs rules). The principal acquisitions and disposals are scheduled to be completed

following an extraordinary general meeting on 13 December 2006, at which

shareholders will vote to approve the transactions and the recently completed 26.5

million equity financing. Assuming approval, the newly issued shares will be admitted for

trading on AIM the following day (14 December 2006).

In connection with the Cook and Minyango acquisitions, Caledon also agreed to purchase

a company called MTP, owner of certain intellectual property rights and revenue

royalties arising from mining technology that Caledon intends to use at Cook. A$5 million

of the A$8.5 million purchase price will be settled through the issue of new Caledon

shares at the placing price of 0.08 per share. A further A$3 million in shares will bepaid, at the then prevailing market price of the shares, on completion of the Minyango

acquisition, and the A$0.5 million balance of the total consideration will be settled in

cash. MTPs principal directors, Peter Seear and Mark Syropoulo, introduced Caledon to

the Minyango and Cook acquisition opportunities, and will be appointed to Caledons

board of directors.

A summary of the transactions is presented in Figure 5 below. The company structure on

completion of these transactions is summarised in Figure 6.


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Figure 5: Transaction summary

Transaction Vendor/ Value Transaction Expected AssetsAcquirer A$M currency close

AcquisitionsCook Coal Xstrata A$45.6M Cash Dec-06 Cook Coal Mine/Infrastructure, 132Mt coal resource.

Minyango Watami Trading A$42.0M Cash-plus-shares Dec-07 Minyango brown-field coal exploration property.

MTP Peter Seear A$8.5M Shares Dec-06* Intellectual property rights to mining method technology.

* The final A$3M in shares is payable on completion of all Minyango payments.Source: Company press releases and AIM Re-admission Document

Figure 6: Post-transaction company structure

Source: AIM Re-admission Document, October 2006


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Share Structure

Caledons shares are listed on AIM under the ticker CDN. The shares were suspended

from trading on 19 June 2006 following the announcement of the proposed acquisition of

Cook, the transaction constituting a reverse takeover under AIMs rules. Caledon had

338 million shares in issue prior to suspension, which at that time were trading at

0.0588 per share.

During the suspension period, the company placed 331 million new shares at 0.08 per

share, raising gross proceeds of 26.5 million. The placing, plus a planned one-for-five

share consolidation to follow, is subject to shareholder approval at an extraordinary

general meeting scheduled for 13 December 2006. If approved, the new shares will be

admitted for trading on AIM the following day (14 December 2006).

A further A$5 million in shares will be issued as part payment under the A$8.5 million

MTP acquisition agreement. The company will therefore have approximately 139 million

post-consolidation shares in issue, giving it a market capitalisation of 56 million based

on the placing price. On a fully-diluted in-the-money basis, Caledon will have 140

million shares outstanding.

Figure 7: Share structure

Shares Price ValueM M US$M

At June suspension 338.2 0.06 19.9 38.4

Placing 331.2 0.08 26.5 51.2

MTP acquisition 25.0 0.08 2.0 3.9

On admission after 1-for-5 consolidation 138.9 0.40 55.6 109.2Fully diluted 139.8 0.40 55.9 109.9

Source: Company reports, Canaccord Adams estimates

Caledons largest institutional shareholders (pre-admission of the placing shares) include

RAB Capital (9%), UBS Global (5%) and CIBC World Markets (3%). On admission of theplacing shares, management will hold just over 7% of the companys issued share

capital.Finances

Caledon had US$16 million (8 million) of cash at its last balance sheet date of 30 June

2006. The US$36 million (A$45.6 million) Cook acquisition and initial deposit and option

payment under the Minyango acquisition agreement (US$9 million) will be funded using

the US$47 million (23.7 million) net placing proceeds. The balance of the placing

proceeds, plus a further US$12 million (A$15 million) which is to be raised through the

issue of a convertible loan note to Xstrata, will be used to fund initial capital expenditure

requirements at Cook (US$15 million) and initial working capital and owners costs

(US$15 million). Caledon is still negotiating with Xstrata over the terms of the loan note,but it is expected to have an annual coupon of 9% and to be convertible into Caledon

shares at a price equal to a 10% premium to the 0.08 per share placing price. The

principal amount is repayable after a year if the note has not by that date been converted

by Xstrata.


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The second, A$9.6 million option payment due in March 2007 is payable in shares or

cash at Caledons option. The company intends to fund the final payment of A$20.4

million, which is due by the end of 2007, from cash flow. However, we note that Caledon

states in its AIM re-admission document that, if necessary, it may seek to raise additional

debt or equity to meet the deferred Minyango payments and capital expenditure

commitments over the next 15 months as they fall due.

Figure 8: Estimated Cash and debt position at end of 2006

M US$M A$MCash at 30 June 2006 8 16 20

Net placing proceeds 24 47 59

Cook acquisition cost -18 -36 -46

Stamp duty -1 -2 -2

Initial Minyango payments -5 -9 -12

MTP acquisition 0 0 -1

Xstrata loan proceeds 6 12 15

Est cash at end 2006 14 27 33Xstrata convertible loan note 6 12 15

Debt 6 12 15Source: Company announcements, Canaccord Adams estimates


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BOARD/MANAGEMENT

Robert Alford - Executive Chairman

Mr. Alford joined Caledon as non-executive chairman in February 2005. He took up the

position of executive chairman in September 2006 in order to manage the companys

transition from Chinese-focused gold explorer to Australian coal producer. Mr. Alford

previously spent over 20 years with Nelson Hurst Group plc, where he was latterly joint

managing director. He is a member of Lloyds.

George Salamis - Chief Executive Officer

Mr. Salamis is one of the founding shareholders of Caledon and has held the position of

managing director and chief executive officer since 2003. Prior to this, he has held senior

management positions with several well-established mining companies, most notably

Placer Dome Inc and Cameco Corp. His career in the mining industry spans over 20

years, involving assignments in many different regions of the world on various resource

commodities. In recent years, he has also played integral roles, both executive and non-

executive, in several large M&A transactions between major and junior miners, totalingover US$ 0.5 billion in value, in addition to participating in various major financing

initiatives in the mining industry. Mr. Salamis holds a degree in geology from the

Universite de Montreal/Ecole Polytechnique.

Peter Seear - Chief Operating Officer (proposed)

Mr. Seear has been actively engaged in the coal mining industry since 1977. He achieved

chartered engineer status in the UK in 1983, and then proceeded to work for several

contract coal mining companies. Additionally, he spent time with underground coal

mining equipment manufacturers as an engineer, including 10-years with Joy Mining in

South Africa and North America. He was also engineering and chairman of Cutting Edge

Technology Pty Ltd in Australia for ten years. Mr. Seear holds a PMD degree from the

Harvard Business School.

Mark Trevan - Managing Director of Caledon Coal Pty Ltd (proposed)

Mr. Trevan joined Caledon in September 2006 following a 25-year career with Rio Tinto,

where he started as an accountant and progressed to hold senior executive roles in the

areas of marketing, general commercial, corporate strategy and project feasibility.

During his last nine years with the Rio Tinto group, Mr. Trevan was general manager

marketing for Rio Tinto Coal Australia, during which time the latter company opened

two new coking coal mines. Caledon Coal is Caledons holding company in Australia.

Paul Ingram - Executive Director

Mr. Ingram has been based in south-east Asia for the past 15-years, during which time

he has managed several major mineral exploration programmes for Menzies Gold Ltd, acompany he joined in 1985 and with whom he has been managing director since 1989.

Mr. Ingram manages all operations from project assessment to corporate acquisitions

and financing, and has conducted project assessments in numerous countries including

Australia, Mexico, Greece, Thailand, Laos, China, Malaysia and Myanmar. His work

typically involves the design and implementation of innovative techniques for exploration

in remote areas. In the early 1980s Mr. Ingram was a geological consultant for EMS Pty

Ltd, where he advised clients throughout Australia on gold and base metal projects, a


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role which led eventually to the establishment of Menzies Gold. He is a member of the

Australian Institute of Mining and Metallurgical Society and a Member of the Mining

Industry Consultants Association.

Mark Syropoulo (proposed non-executive director of Caledon Coal)

Mr. Syropoulo has over 30 years experience in finance, much of it focused specifically onthe mining, oil and gas sectors. He has occupied the position of managing director of

Anglo Pacific Resources Plc, a diversified mining group with industrial mineral interests

in the UK and metal interests in Australasia. He has also held several positions with

various brokerage and financial institutions, dealing in corporate finance, broking and

mergers and acquisitions advisory.

Graham Mascall (non-executive director)

Mr. Mascall has over 35 years of commercial, financial and transaction experience in

mergers and acquisitions work, business development and project management in

mining and mining finance. Over the course of his career he has worked as an executive

for a number of mining and finance companies, including Billiton plc where in 2000, as

chief executive for mergers and acquisitions base metals and new business, he led theUS$2.1 billion acquisition of Rio Algom Ltd. He has also worked for BHP Billiton plc,

Deutsche Morgan Grenfell, Outokumpu Metals and Resources and Barclays Bank.

Nicholas Clarke (non-executive director)

A graduate of the Camborne School of Mines and a Chartered Engineer, Mr. Clarke has

been involved in the mining industry since 1974 in a number of production and service

capacities. In 1996 he was made managing director of CSMA Consultants, which was

subsequently acquired by Wardell Armstrong International. During this period he

managed numerous technical studies on mineral projects in Africa, Europe and the

Former Soviet Union. He was author and project manager on a number of AIM and TSX

CPRs during this period, and was most specifically involved in the economic valuation of

mineral assets. In 2004 Mr. Clarke joined Oriel Resources, an AIM and TSX quotedcompany with nickel and chrome assets in Kazakhstan, and was appointed managing

director in 2005.


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PROJECT DESCRIPTIONS

COOK COAL MINE, QUEENSLAND

The Cook Coal Mine is located 30 kilometres south of the town of Blackwater in thesouth-central part of Queenslands Bowen Basin, one of the worlds great coal provinces.

The coal preparation plant (CPP) is located 14 kilometres north of the mine, at the site of

the abandoned Leichhardt colliery. The Cook property is bounded to the east by the BHP-

Mitsubishi owned Blackwater mine, one of Australias largest open-pit export-quality

coal mines.

There are currently 30 coal-mining operations in the Bowen Basin, collectively producing

approximately 115 Mt per annum of coking coal. Open pit and underground production

from the basin represents more than 50% of the worlds sea-borne coking coal. The vast

majority of underground coking-coal mines in the Bowen Basin are longwall mining

operations.

Figure 9: Cook Coal Mine Location

Source: AIM Re-admission Document (Nov 2006)

Cook acquisition

Prior to its acquisition by Caledon, Cook was part of Xstratas Queensland Coal

operations, which encompass two well-established mining complexes, Oakey Creek and

Newlands-Collinsville-Abbot Point. In June 2006, Caledon and Xstrata signed a heads of


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Production history

Cook was established by Broken Hill Proprietary (BHP) in 1975 to replace production

from the failing Leichhardt Colliery to the north, which was eventually closed in 1982.

BHPs operations focused on the Castor Seam, which when washed produces export-

quality coking and thermal coals.

In 1983 the mine was sold to McIlwraith McEachern, whom subsequently sold it to Arco

in 1989. Arco held Cook for four years, before selling to Oakbridge in 1993. Oakbridge

sold 50% to Resource Management & Mining (RM&M) and 50% to Glencore International

AG in 1994. RM&M sold their half share to Centennial Coal in 1997, and Xstrata took

over Glencores interest in 2002. Xstrata subsequently purchased Centennials 50% share

in April 2004, increasing its ownership to 95%. Tokyo Boeki Limited (TBL) purchased the

outstanding 5% from Glencore as part of its coal-purchasing strategy. Xstrata replaced

Centennial as the mine operator at this time.

Both longwall and continuous mining techniques have been employed at Cook in the

course of its operating history. Prior to placing the mine under care and maintenance,

Xstrata was operating a board and pillar underground mine in the Castor Seam, utilizing

conventional continuous mining equipment. Initial workings were also driven into theArgo Seam below. Production has fluctuated widely over recent years, due mainly to

difficult geological and geotechnical conditions. Continuous miners have proved better

equipped to deal with these issues, as the performance of longwall mining units is

inhibited by the occurrence of extensive faulting in the area. Saleable coal production at

Cook has averaged around 400,000 tpa over the past five years, but declined to around

200,000 tpa in the year to June 2005 (Figure 10).

The coking coal product from Cook is currently railed 318 kilometer via the Blackwater

rail system to the port of Gladstone for export.

Figure 10: Cook historical production

0

100

200

300

400

500

600

700

2001 2002 2003 2004 2005

kT

RoM production Saleable production

Source: CRM


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Geology and resources

The Cook Coal Mine lies in the southern part of the Bowen Basin, on the eastern limb of

the Comet Anticline. The strata dips gently (less than five degrees) to the east, and strikes

slightly east of north. The coal-bearing Rangal Coal Measures lie unconformably beneath

80-200 metres of claystones. The upper section of the Rangal group comprises four coal

seams interbedded with sandstones, siltstones and claystones. Two of these seams,Castor and Argo, are of sufficient thickness for mining.

The Castor Seam has been the primary source of historic production from Cook, and is

encountered at a depth of approximately 170 metres from surface. The seam averages

2.8 metres in thickness and its product mix is approximately 55% coking quality and

45% thermal quality. The Argo Seam (which is actually a coalesce of two seams, Pollux

and Orion) is encountered at a depth of around 183 metres, and is the primary target

seam for mining by Caledon. Argo ranges in thickness from 2-6 metres, averaging

between 4.5-5 metres. There is limited data on the quality of Argo Seam coal, but initial

indications are that the coking/thermal split is higher in favour of coking coal compared

with the Castor Seam. Caledon indicates that the split could be around 80-85% coking

and 20-15% thermal, with the Pollux Seam material indicating higher coking-coal

qualities than the Orion Seam material.

Workings on the Castor Seam at Cook have been bounded by two major fault systems

the Kennedy fault to the north and the Tannyfoil fault to the east. Many smaller faults

have also been identified through the progression of mine development, and the

structural geology of the seam is now well understood.

Figure 11: Cook Coal schematic cross-section

Source: SRK Competent Persons Report (Oct 2006)

Over 3,000 boreholes have been drilled over the entire Cook and Leichhardt Collieries, of

which 1,400 holes cover Caledons Cook project area. The Castor Seam was intersected

by 1,350 holes, and the Argo Seam by 400 holes.

The most recent resource estimation for Cook was compiled by McElroy Brian Geological

Services (MBGS) in June 2005. Since calculation of that resource estimate, less than


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200,000 tonnes of coal has been mined from the Castor Seam, while none of the Argo

Seam has been depleted. As part of its due diligence review of Cook Coal, SRK reviewed

MBGS resource estimation and concluded that it satisfies the requirements of the JORC

Code for mineral resource reporting. SRK points out that the area to the northeast of the

Kennedy and Tannyfoil faults is not entirely included in the MBGS resource report, and

believes it is an area which may yield a significant amount of additional resources.

Figure 12: JORC compliant resources

South of Kennedy Fault North of Kennedy FaultCategory Seam Tonnes M Seam Tonnes MMeasured Castor 7.7

Argo 53.9

Pollux 3.9

Total Measured 65.5Indicated Argo 12.0 Castor 20.3

Pollux 6.1 Argo 2.6

Pollux 20.0

Total Indicated 18.1 42.9Total M&I 83.6 42.9Inferred Argo 5.3

Total Inferred 5.3Total Resources 88.9 42.9

Source: McElroy Brian Geological Services (June 2005) and SRK (October 2006)

SRK also prepared an independent estimate of reserves at Cook based on the MBGS

resource numbers and a 10-year mine plan prepared by SMG Consultants. The estimated

reserves are inclusive of the estimated coal resources, and are based on recovery factors

ranging between 32-50%, depending on the mining method and panel layout. SRK notes

that these extraction factors could possibly be optimised as more information becomes

available during the mining process, and states that adequate accessible resources are

available to justify 40Mt of recoverable coal. No out-of-seam dilution has been appliedto the RoM numbers as Caledon plans to leave behind around 0.5 metres of hanging-wall

coal to support roof control. In-seam dilution is minimal. The reserves are reported as

saleable based on an overall yield of 89% from January 2008 onwards.

Figure 13: JORC compliant reserves

Category Seam Tonnes Ash Saleable*M % M

Proved Argo 5.93 7 to 15 5.21

Probable Argo 11.15 7 to 15 9.92

Total Reserves 17.08 15.13*Saleable tonnes at 89% yield (dry-basis)

Source: SRK (October 2006)

Coal quality

Coal quality data for the Argo Seam is scarce, and, based on currently available

information, SRK concluded that only broad assumptions can be drawn. The data

captured to date comes from two Xstrata boreholes, strip samples and a bulk sample

(Figure 14). We note that a significant amount of coal from Xstratas trial Argo Seam


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workings has been washed in the past, yielding approximately 80% coking-quality

product and 20% thermal-quality product.

According to MBGS, the down-hole geophysical trace of the Argo Seam shows a

consistent profile across the project area. MBGS concludes this indicates that the Argo

Seam has a tendency to be reasonably consistent in terms of coal quality attributes, and

that ash content and density could be expected to be regular across the project area.

Despite the lack of coal-quality data for Argo, SRK assumes in its competent persons

report that the product mix will be 82% coking coal and 18% thermal coal. This

assumption is based on a coal-quality report by A&B Mylec published in September

2006. The moisture and ash parametres adopted by SRK (coking product 9.5% moisture

and 8% ash, thermal product 9% moisture and 15% ash) are assumptions based on

parametres shown in a frame agreement that Cook Colliery negotiated with the adjacent

Blackwater Colliery.

Caledon is currently testing a total of 32 data sources (drill core and bulk samples) for

coal-quality purposes.

Figure 14: Argo seam coal-quality database (MBGS)

Data Source Predicted Ash Predicted Ash Combined Ash Flotation Ashcoke % % thermal % % product % % product % %

Bulk samples 75.8 7.6 7.5 11.8 83.3 8.0 4.9 5.0

Strip samples 72.2 7.2 13.2 9.1 85.4 7.5 3.8 4.3

Bore core 73.0 8.6 13.2 11.4 86.2 9.0 4.3 5.0

Source: Cook Due Diligence Report (SRK, September 2006)

Mining

Caledon plans to increase Cooks run-of-mine (RoM) production from its most recent

levels of 300,000 tpa to around 1.5 Mtpa by mid 2008, and to approximately 2 Mtpa over

the longer-term. The existing mine-transport infrastructure and CPP has a design

capacity of 3.5 Mtpa. The company envisages employing mining contractors, contract

mine managers and wash-plant managers to achieve its production targets. The total

initial investment required to upgrade the mine is estimated by Caledon at A$5.6 million

(US$4.2 million).

Caledon plans to resume underground unit mining operations at the Castor Seam by the

end of 2006 or early in 2007. However, in the longer-term mining will be focused on the

Argo Seam, which lies 10-20 metres below Castor. As mining will take place beneath the

existing Castor Seam workings, the likelihood of encountering unknown geological

structures which could adversely impact the proposed mining operations is deemed to be

minimal. However, SMGs preliminary mine design report identifies the potential for an

adverse interaction between the Castor Seam and the proposed Argo Seam workings,particularly at goaf edges between Castor-workings panels, and concludes that further

studies are needed to establish the probability, nature and extent of potential rib failure.

The base-case mining plan developed by SMG works off the estimated reserve of 17 Mt,

which would provide for a 10-year life of mine at the forecast RoM production rate of

approximately 430 kt for the financial year ending June 2007, 1,400 kt in financial year

2008 and 2,000 ktpa thereafter. However, we note that SRK considers that adequate


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resources exist to provide approximately 40 Mt of recoverable coal, which could extend

the life of mine to around 20 years at the currently forecast production levels.

The initial phase of production is scheduled to run from the end of this year to 2009, and

will be undertaken by Australian mining contractor Titan. Mining will focus on the

Castor Seam, making use of existing access points and mine infrastructure. Production

will come from two rented continuous miners, supported by a fleet of shuttle cars, andwill follow a conventional board-and-pillar method similar to that employed prior to the

recent cessation of operations.

The second phase of production is expected to commence during the second half of

calendar year 2007, and will be undertaken by South African-based mining contractor

Magatar. The proposed Magatar operation involves a partial-extraction mining method,

utilising a custom-built continuous-mining unit coupled with a Prairie continuous

conveyor system. This set-up is expected to provide the necessary flexibility required to

exploit the resource effectively. Magatars is a patented system, the agency rights to

which are held by MTP in Australia. Caledon believes the system can achieve

significantly higher productivity rates than the conventional continuous miner-shuttle car

system employed at Cook to date.

Figure 15: Continuous miner (top) and continuous haulage unit (bottom)

Source: Company presentation

We note that Cook will be only the second coal mine, and the first in Australia, to utilise

the proposed continuous haulage system. The first such system to be applied at a coal

mine is due to be in operation by year-end 2006 in South Africa. The technology was

developed in the potash mines of Canada, where eight of the systems are currently in

operation. The first such system has been in operation for more than a decade.


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Caledon has yet to finalise contract mining negotiations for the second phase of

production, but SRK has assumed fixed mining costs of A$33.50 per tonne of RoM coal

for the Magatar operation in its Competent Persons Report, and we note that this figure

is based on projections provided by Caledon. As outlined earlier, Caledon may seek to

finalise a mining contract which does not have such a fixed-cost structure in order to

benefit from any costs savings which may arise from the proposed mining system. Wealso note that Caledon would have the ability to ramp back up its conventional board-

and-pillar operation to make up for some or all of any shortfall from the Magatar

operation.

LD Operations (LDO), a company established to provide dedicated mine-management

services to the coal industry, will operate the mine under contract for Caledon.

Figure 16: Forecast RoM and saleable production

0

500

1,000

1,500

2,000

2,500

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

kT

RoM production Saleable coal

Source: SRK (October 2006)

Processing

Caledon has entered into a long-term rental agreement with Xstrata for use of the latters

coal handling and preparation plant (CPP) at Cook. The CPP has a nameplate capacity of

500 tph, which equates to an annual capacity of 3.5 Mt. The plant has been in operation

since 1975 and employs standard coal-washing technology (jigs, dense media separation

and cyclones).

Figure 17: Simplified process flow-sheet

Source: CRM, Xstrata


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The condition of the CPP has deteriorated due to a lack of investment since its

construction, and requires a significant amount of repair work to return it to an

acceptable operating condition. In order to handle the increased volumes of RoM coal

feed envisaged by Caledon, a flotation circuit may also need to be installed to prevent the

fines circuit from overloading. This is particularly important given the higher proportion

of fines in Argo Seam coal, which is expected to have coking properties across the fullsize range. SRK estimates that 17% of coal feed will be lost to fines pre-modification of

the CPP, and 6% post.

Caledon anticipates that a total investment of A$12-15 million (US$9-11 million) will be

required to upgrade the preparation plant, including the addition of a flotation circuit.

The planned upgrades essentially involve equipment add-ons, and so no significant

downtime is expected. We note that SRK recommends that a full review of the process

route is undertaken using representative size-by-size washability data of the new Argo

Seam RoM feed.

Infrastructure

SRK concluded that the existing mine infrastructure is generally in an acceptable

condition, and is capable of sustaining continued operations at the current nominal

capacity and of permitting expansion as envisaged under Caledons longer-term

development plans. In terms of regional infrastructure, the Bowen Basin is host to four

heavy-haul railway systems and five ship-loading terminals. However, due to over-

capacity, rail and port access is severely constrained at present.

Under the Cook purchase agreement, Xstrata agreed to provide the necessary rail and

port access for Caledons production for the first two years of scheduled operations at

Cook, at a time when access to rail and port facilities is expected to be particularly

challenging. To the extent that Xstrata is unable to provide such access, Xstrata will

acquire Cook coal directly at market prices on an open-book basis. Caledon must source

its own rail and port access beyond the second year of operations (2009 onwards).

Caledon expects rail and port allocation constraints to ease beyond 2008, as the

Queensland Government has committed to make significant investment in infrastructure

over the intervening period. Gladstone Port is currently being expanded by 30 Mt, to an

annualised rate of 75 Mt, with work scheduled for completion by 2009. The rail-carrying

capacity is also being expanded over the same period to match the port expansion.

Despite these planned expansions, SRK recommends that scheduling of the upgrade of

the Cook CPP be linked to confirmation of future availability of additional rail and port

capacity. We note that Caledon believes that several producers in the region are over-

committed in terms of requested capacity use under Queenslands take-or-pay rail and

port capacity-allocation system, and the company is confident of receiving offers to take

up excess capacity as those producers seek to avoid penalty charges.


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Marketing

Xstrata is making its general marketing expertise available to Caledon on a take-or-pay

basis for the first two years of Cooks operation. Under the terms of the agreement,

Caledon pays a marketing fee equal to the higher of 3% of gross revenue or US$2.75/t of

coal sold. Caledon and Xstrata have agreed a production schedule (Nominated Annual

Tonnage) of 900,000 tonnes of coal in 2007, escalating to 1.5 million tonnes in 2008.

Caledon is limited to this production level until 2009 due to the rail and port constraints

referred to above.

Caledon mandated coal market consultant McCloskey evaluated the likely market price

achievable for Cook coal, based on McCloskeys forecast FOB prices for bench-mark

Queensland hard and semi-hard coking coal. McCloskey concluded that, being a

premium semi-hard product, Cook coking coal could achieve a price similar to or better

than the mid-point of its forecast future prices for hard and semi-hard coals (Figure 18).

Figure 18: McCloskey coal price forecasts

Coal Type Base-case forecast (US$/t FOB)2007e 2008e 2009e 2010e 2012e 2014e 2016eHard 110 110 110 100 80 85 90

Cook 100 100 100 90 75 80 84

Semi-hard 90 90 90 80 70 75 78

Source: McCloskey, September 2006

Project parameters/valuation

We have used the CPR to guide the inputs to our cash flow model but have made a

number of adjustments, particularly with regard to coal prices and the US$/A$ exchange

rate, to reflect Canaccord Adams internal forecasts. We have based our production

profile and operating cost structure (Figure 19) directly on the numbers presented in the

CPR, which we note SRK based on estimates provided by Caledon. On this basis, we

calculate total cash costs (inclusive of Queenslands 7% state coal royalty) atapproximately A$72 per tonne of saleable coal produced (US$54 per tonne)

Figure 19: Operating cost assumptions

Item Unit ValueCaledon mining costs A$/t mined 37.5

Magatar mining costs A$/t mined 33.5

Infrastructure A$/t mined 1.5

Mine-CPP haulage A$/t mined 2.75

CPP costs A$/t washed 4.25

G&A and insurance A$/t washed 2.43

Marketing - higher of % of revenue 3%

or US$/t product 2.75Rail haulage A$/t product 10.7

Port handling A$/t product 3.3

Queensland State royalty % of revenue 7%

Source: Competent Persons Report (SRK, October 2006)

We have assumed initial capital expenditure of approximately US$15 million in 2007, in

line with company presentations, and have allowed for a further US$15 million in initial


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working capital and other owners costs. We note that Caledons estimated capex figure

includes 15% contingency.

To arrive at our base-case valuation we have used Canaccord Adams Australian forecast

FOB prices for Australian hard coking coal (Goonyella) and thermal coal, as presented in

Figure 20 below. As outlined on page 24, we note that Cook coal is a semi-hard product,

which McCloskey believes could achieve a long-term price equal to around a 7% discountto its forecast long-term price for premium hard coal. We have therefore applied a

similar discount to our own long-term hard coking coal price forecast of US$79 per

tonne, which we note is somewhat lower than McCloskeys long-term price forecast for

hard coking coal of US$90 per tonne.

Figure 20: Canaccord Adams coal forecasts

2007e 2008e 2009e 2010e 2011e LT estHard coking coal (Goonyella) US$/t 103.29 94.12 88.79 84.35 80.14 79.10

Implied Cook coking coal* US$/t 93.90 85.57 80.72 75.92 72.12 73.82

Thermal coal (Aus spot) US$/t 52.06 52.50 52.50 52.50 52.50 52.50

*Applying McCloskeys Cook discount to Canaccord Adams coking coal forecasts


The following chart compares the forecast coking coal prices, as suggested by McCloskey

against those of Canaccord Adams.

Figure 21: Comparison of McCloskey and Canaccord Adams coking coal price forecasts

Coking coal price forecasts (US$/tonne)

60.00

70.00

80.00

90.00

100.00

110.00

120.00

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

McCloskey hard coking

McCloskey suggested Cook

McCloskey semi-hard

Canaccord Adams hard coking forecast

Adjusted Canaccord Adams forecast

Source: McCloskey

We also provide a chart showing our forecast of the breakdown of operating costs and

operating margin per tonne of coal sold, over the first 10-years of the operations life.


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Figure 22: Breakdown of average operating cost and operating margin per tonne

Forecast operating costs and operating margin (US$/t)

0

10

20

30

40

50

60

70

80

90

20062007200820092010201120122013201420152016

Cashcosts(US$/t)

16

17

18

19

20

21

22

Cashmargin(US$/t) Cash margin

Marketing and royalty

Rail and port

On-site costs

Cash margin RH scale

Source: CRM and Canaccord Adams estimates

A summary of our base-case cash flow model of Cook using our discounted internal

coking coal price forecasts is presented in Figure 26 in the appendix. The following

sensitivity tables (Figures 23 and 24) plot the 10-year and 20-year NPV of Cook

(assuming 100% equity funding and discount rates of 8% and 10%), against a range of

flat (from 2008) coking and thermal coal prices.

Figure 23: 10-year Cook NPV sensitivity tables

10-year NPV at 8% discount rate

Coking Coal price50 60 70 80 90 100

20 -134 -31 49 122 194 26630 -112 -9 65 138 210 28240 -89 8 81 153 225 29850 -66 24 97 169 241 31360 -44 41 113 185 257 329T

maPc

70 -21 56 129 201 273 34410-year NPV at 10% discount rate

Coking Coal price50 60 70 80 90 10020 -123 -30 43 108 174 239

30 -103 -10 57 123 188 25340 -83 6 72 137 202 26750 -62 20 86 151 216 28160 -42 35 100 166 231 295T

maPc

70 -21 49 115 180 245 309Source: Canaccord Adams estimates


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Figure 24: 20-year Cook NPV sensitivity tables

20-year NPV at 8% discount rate


20 -193 -33 88 200 312 42430 -158 -1 113 225 337 44940 -123 25 137 249 361 47350 -87 50 162 274 386 49860 -52 74 187 298 410 522T

maPc

70 -17 99 211 323 435 54520-year NPV at 10% discount rate


20 -168 -32 72 168 264 35930 -138 -4 93 189 285 38040 -108 18 115 210 306 40150 -78 40 136 231 327 42260 -48 61 157 252 348 443T

maPc

70 -18 82 178 273 368 463Source: Canaccord Adams estimates


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MINYANGO COAL PROJECT, QUEENSLAND

The Minyango property (EPC 699) is located in the immediate vicinity of the mining town

of Blackwater in south-central Queensland. The 78 square-kilometer exploration

tenement is bounded to the west by BMAs (BHP Billiton-Mitsubishi Alliance) Blackwater

mining lease, to the north by the Westfarmers Curragh mine, and to the south by theCook property. The Blackwater open-pit mine has been in operation since 1968, and

produced over 10 Mt of coking and thermal coal in the last financial year from seams

which Caledon believes continue into the Minyango property. The Curragh mine has

been in operation since 1982, producing approximately 7 Mtpa of coking and thermal

coal from seams which are again thought to extend into the Minyango tenements.

Figure 25: Minyango project location

Source: AIM Re-admission Document (Nov 2006)

While there is no compliant resource at Minyango, Caledon believes, based on historical

coal data and adjacent mining properties, that the project can be developed into a

producing mine within a relatively short timeframe, and at relatively low capital cost,

utilising existing processing and transportation infrastructure at Cook. The company

plans to undertake advanced exploration studies on potentially underground mineable

portions of Minyango over the next 12-15 months, at the end of which it must have paid

the A$40 million acquisition cost in full in order to retain the property.

Local company QCoal Pty Ltd, which is affiliated to the vendor, has reserved rights to

develop near-surface, potentially open-pitable portions of the deposit, but only within a

limited defined area at one end of the property. QCoal also has the right to a 1.75%

royalty on any future coal production from Minyango.


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Acquisition Agreement

Title to the Minyango property is held by Blackwater Coal, a wholly-owned subsidiary of

BVI company Hazelhurst Holdings. Hazelhurst is in turn owned 100% by BVI company

Watami Trading, the ultimate vending party.

On 29 September 2006, Caledon signed an option agreement to acquire the entire issued

capital of Hazelhurst for a total consideration of A$40 million, payable over a 15-month

period. Caledon can exercise the option at any time during the option period, which ends

on the tenth business day following the fulfillment of certain conditions, including

shareholder approval of the transaction at the upcoming EGM.

As part of the total consideration due, a non-refundable option fee of US$1.5 million

(A$2 million) was paid to Watami in lieu of acquiring the option. The first staged

payment of A$10 million is due to be paid to Watami no later than 10-days after

admission of the placing shares. After this payment, Caledon has until six months and 45

days from the date of the acquisition agreement to undertake initial resource delineation

and coal-quality studies on Minyango.

Should Caledon decide to proceed with the project beyond this point, a further A$9.6

million is payable to Watami in cash, shares or a combination of the two (at Caledons

election). Upon payment, Caledon would then be free to proceed with more advanced

exploration studies on the project. Should it elect not to proceed with the project after

these initial studies, Watami has the right to buy back all the shares in Hazelhurst in

consideration for the full refund of all monies paid by Caledon to that date.

Within nine months of the second staged payment, Caledon must make the final payment

installment of A$20.4 million. This payment may be delayed by up to three months in the

event that Caledon has not completed its planned feasibility work. However, if the

company chooses not to proceed at this point and therefore declines to pay the A$20.4

million due, Watami has the right to buy-back 51% of Hazelhurst for a consideration

expected to amount to A$15 million less the aggregate amount of any third-party

borrowings of Hazelhurst and its subsidiaries at that time.

Geology and resources

Four coal seams within the Rangal Coal Measures occur in Minyango: Aries, Castor,

Pollux and Orion (in stratigraphic order from top to base). These four seams commonly

split and coalesce to form other seams, particularly towards the south where the Castor

and Pollux seams combine to form the Gemini Seam. To the west of Minyango the

Rangals are sufficiently shallow to be mined by open pit, as exemplified by BMAs

adjacent Blackwater operation.

Of the four target coal seams, Caledon considers Aries, Castor and Pollux as offering

potential for delineation of resources and reserves. These seams are of sufficient

thickness to allow extraction via underground mining methods and, from the limited coalquality data available, Caledon believes all three can produce a high-quality thermal coal

and an export-quality coking coal product.


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CHINESE GOLD ASSETS

Prior to its move into the coal sector, Caledon was best known as a Chinese-focused gold

explorer, holding a number of gold exploration assets in the countrys Guangxi and

Yunnan provinces via various subsidiary companies and joint ventures.

Directly-owned gold assets

Caledons principal gold asset is an earn-in option on the Mojiang gold project in

southwestern Yunnan. Mojiang Mining Ltd Co (MMLC) commenced mining at the

property in 1980, establishing a mill and CIP plant in 1982 which has steadily produced

10,000 to 15,000 oz per annum, initially from underground high-grade ore and latterly

through lower-grade open-pit ore. Since 2002, MMLC has produced around 40,000 oz of

gold per annum from heap-leaching of oxide ore.

In 2004, Caledon signed an agreement with MMLC to earn a 70% equity interest in the

7.2 square kilometer Mojiang mining concession and surrounding exploration

tenements, as well as a 90% interest in exploration ground to be acquired in defined

counties in southern Yunnan Province, in return for funding US$1 million of exploration

expenditure over a three-year period and completing a feasibility study. Caledon

commenced drilling at Mojiang in February 2006, with a view to completing a resource

estimate by the end of the year.

In addition to Mojiang, Caledon holds majority interests in the Hengxian, Gaolong and

Badu exploration projects in Guangxi Province. These assets are held through subsidiary

companies Blackwatch Resources and Blackwatch Mining.

Dynasty Gold Corp

During 2005, Caledon acquired a total of 7.2 million shares in Chinese gold explorer

Dynasty Gold Corp (TSX.V:DYG), at a total cost of 1.1 million. Caledons interest

represents approximately 10.6% of Dynastys total issued shares, which at Dynastys

current share price has a market value of approximately C$2.1 million (US$1.8 million).

Dynasty owns three advanced gold exploration projects in northern China Hatu, Wild

Horse and Red Valley. It has inferred resources of just under one million ounces of gold.

Other noteworthy shareholders in Dynasty include AngloGold Ashanti Ltd (AU:NYSE) and

Avocet Mining plc (AVM:AIM).


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Caledon Resources plc

APPENDIX

Figure 26: Cook coal mine summary cash flow model

FYE Dec LoM Total 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2CC production kT 1,777 732 646 348 51 0 0 0

Magatar production kT 36,136 316 1,058 1,549 1,954 1,954 1,954 1,954

Total ROM production kT 37,913 1,049 1,703 1,897 2,005 1,954 1,954 1,954 1Wash plant recovery % 92% 81% 86% 92% 92% 92% 92% 92%

Coking coal yield 82% kT 28,467 699 1,208 1,433 1,515 1,476 1,476 1,476

Thermal coal yield 18% kT 6,249 154 265 315 332 324 324 324

Coking coal price (FOB) US$/t 92.93 85.30 80.75 75.94 72.12 74.15 74.15

Thermal coal price (FOB) US$/t 52.06 52.50 52.50 52.50 52.50 52.50 52.50

Coking revenue US$M 2,142 65 103 116 115 106 109 109

Thermal revenue US$M 328 8 14 17 17 17 17 17

Exchange rate US$/A$ 0.75 0.75 0.75 0.75 0.75 0.75 0.75

Gross revenue A$M 3,294 97 156 176 177 165 169 169 Cash operating costs A$M -2,169 -68 -101 -109 -114 -111 -111 -111 Marketing fee A$M -127 -3 -5 -6 -7 -7 -7 -7

Queensland royalty 7% A$M -231 -7 -11 -12 -12 -12 -12 -12

Total cash costs A$M -2,526 -78 -118 -128 -133 -129 -129 -129 DD&A A$M -54 -1 -2 -3 -3 -3 -3 -3

Total operating costs A$M -2,580 -80 -120 -131 -136 -132 -132 -132

Pre-tax cash flow A$M 767 19 38 48 43 36 39 39 Taxation 30% A$M -214 0 -5 -14 -13 -11 -12 -12

Net operating cash flow A$M 553 19 33 34 31 25 28 28

Capex A$M -54 -39 -2 0 0 0 0 0

Project free cash flow A$M 499 -20 32 34 30 25 27 27 10-year NPV at 8% DR 8% DR A$M 148

US$M 116

20-year NPV at 8% DR 8% DR A$M 230US$M 181



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Figure 27: Caledon summary financials

FYE Dec 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014ProductionCoking coal kT 699 1,208 1,433 1,515 1,476 1,476 1,476 1,47

Thermal coal kT 154 265 315 332 324 324 324 32

Total coal production kT 853 1,473 1,748 1,847 1,800 1,800 1,800 1,80Coking coal price US$/t 93 85 81 76 72 74 74 7Thermal coal price US$/t 52 53 53 53 53 53 53 5Average coal price US$/t 86 79 76 72 69 70 70 7Average cash cost US$/t -69 -60 -55 -54 -54 -54 -54 -5FYE Dec 2007e 2008e 2009e 2010e 2011e 2012e 2013e 2014Profit and LossRevenue US$M 73 117 132 132 123 126 126 12

Costs US$M -59 -88 -96 -100 -97 -97 -97 -9

Corp G&A US$M -6 -6 -6 -6 -6 -6 -6

EBITDA US$M 8 23 30 27 21 23 23 2DD&A US$M -1 -2 -2 -2 -2 -2 -2

EBIT US$M 7 21 28 24 19 21 21 2Interest US$M 0 0 0 0 0 0 0

Tax US$M -2 -6 -8 -7 -6 -6 -6

Earnings US$M 5 15 20 17 13 15 15 1Cash FlowOperating cash flow US$M 8 19 20 17 13 15 15 1

Invested cash flow US$M -45 -1 0 0 0 0 0

Cash flow from financing activities US$M 0 0 0 0 0 0 0

Net cash flow US$M -37 18 19 17 12 14 14 1Cumulative cash flow US$M -27 -9 10 26 39 53 67 8



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Figure 28: Comparable Australian coal producers (mixed coking and thermal)

Consensus EPS PECompany Ticker Currency Price(local)

SharesOut(M)MktCap(US$M) EV(US$M) 2007e 2008e 2007e 2008e 20

Centennial Coal CEY AUD 2.75 302 653 1,183 0.15 0.27 18.2 10.1

Coal & Allied CNA AUD 78.00 87 5,311 5,465 3.17 3.80 24.6 20.6 Excel Coal* EXL AUD 9.50 215 1,606 1,786 0.54 0.81 17.6 11.7

Felix Resources FLX AUD 4.16 188 615 626 0.19 0.23 22.2 18.4

Gloucester Coal GCL AUD 4.03 79 249 262 0.45 0.41 8.9 9.7

Macarthur Coal MCC AUD 4.91 187 724 610 0.37 0.44 13.3 11.1

New Hope NHC AUD 1.30 808 823 493 0.07 0.09 18.2 13.9

Resource Pacific RSP AUD 1.34 194 204 237 0.05 0.25 27.9 5.4

Average 0.62 0.79 18.9 12.6 *Share price represents Peabody take-out priceSource: Company reports, Bloomberg

An analyst has visited the issuers main operations in Queensland, Australia and partial payment was received from the


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broker note, caledon resources, 12/12/2006 (cannacord adams)

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