firestone energy limited abn 71 058 436 794 page 2 business of the meeting ordinary business –...

FIRESTONE ENERGY LIMITED ABN 71 058 436 794

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NOTICE OF GENERAL MEETING

11am (AWST) on 4 January 2011 at BDO Chartered Accountants

38 Station Street Subiaco, Western Australia

Notice is hereby given that a General Meeting of Firestone Energy Limited will be convened at 11am (AWST) on 4 January 2011, at the offices of BDO Chartered Accountants, 38 Station Street, Subiaco, Western Australia 6008.


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BUSINESS OF THE MEETING

ORDINARY BUSINESS – RESOLUTIONS

RESOLUTION 1 – APPROVAL OF EMPLOYEE INCENTIVE OPTION SCHEME

To consider and, if thought fit, to pass the following resolution as an ordinary resolution:

"That, for the purpose of Exception 9(b) of ASX Listing Rule 7.2 and for all other purposes, the Firestone Energy Limited Employee Incentive Option Scheme tabled at the meeting (and signed by the Chairperson for the purpose of identification), and the issue of securities under that Scheme, be approved."

RESOLUTIONS 2(a) to 2(c) – APPROVAL OF ISSUE OF OPTIONS TO JOHN DREYER, JOHN WALLINGTON AND TIMOTHY TEBEILA

To consider and, if thought fit, to pass the following resolutions, each as an ordinary resolutions:

"That, for the purpose of ASX Listing Rule 10.1, Chapter 2E of the Corporations Act and for all other purposes, approval be given to the issue of:

2(a) - 10,000,000 Options to John Dreyer, a Director of Firestone;

2(b) - 10,000,000 Options to John Wallington, a Director of Firestone; and

2(c) - 8,000,000 Options to Timothy Tebeila, a Director of Firestone,

each Option entitling the Optionholder to subscribe for 1 Share at an exercise price of $0.04 and otherwise in accordance with the terms set out in the Explanatory Statement. The issue to John Dreyer, John Wallington and Timothy Tebeila of any Shares subscribed for by them on exercise of the Options is also approved."

RESOLUTION 3 – APPROVAL OF THE ACQUISITION OF A SUBSTANTIAL ASSET FROM, AND ISSUE OF SHARES TO, A RELATED PARTY UNDER THE T3 TRANSACTION

To consider and, if thought fit, to pass the following resolution as an ordinary resolution:

“That, for the purpose of ASX Listing Rule 10.1, ASX Listing Rule 10.11, Chapter 2E of the Corporations Act, item 7 of section 611 of the Corporations Act and for all other purposes, approval be given for the Company to acquire, through its wholly-owned subsidiary Lexshell 126 General Trading (Proprietary) Limited, a substantial asset from Sekoko Coal (Proprietary) Limited in consideration for the Company issuing 200,000,000 fully paid ordinary Shares in the capital of the Company to Sekoko Coal (Proprietary) Limited (or its nominee) within 1 month after the date of this General Meeting, in accordance with the terms set out in the Explanatory Statement.”


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OTHER BUSINESS

To consider any other business brought forward in accordance with Firestone's constitution or the law.

VOTING EXCLUSION STATEMENT

RESOLUTION PERSONS EXCLUDED FROM VOTING

Resolution 1 – Approval of Employee Incentive Option Scheme

Any person who may participate in the Scheme, and any person who might obtain a benefit as a result of the Scheme, except a benefit solely in the capacity of a holder of ordinary securities, and any associates of those persons

Resolution 2(a) – Approval of issue of Options to John Dreyer John Dreyer and any of his associates

Resolution 2(b) – Approval of issue of Options to John Wallington John Wallington and any of his associates

Resolution 2(c) – Approval of issue of Options to Timothy Tebeila Timothy Tebeila and any of his associates

Resolution 3 – Approval of the Acquisition of a Substantial Asset from, and issue of Shares to, a Related Party under the T3 Transaction

Sekoko Resources (Proprietary) Limited, Sekoko Coal (Proprietary) Limited and any of their associates

However, Firestone need not disregard a vote on any of the above Resolutions (except Resolution 3) if:

• it is cast by a person as proxy for a Shareholder who is entitled to vote, in accordance with the directions on the proxy appointment form; or

• it is cast by the Chairperson of the meeting as proxy for a Shareholder who is entitled to vote, in accordance with a direction on the proxy appointment form to vote as the poxy decides and the Shareholder who is entitled to vote has indicated on the proxy appointment form that the Chairperson of the meeting may vote as a proxy in relation to each resolution to which the voting exclusion relates.

Dated this 19 November 2010

BY ORDER OF THE BOARD

____________________ JERRY MONZU COMPANY SECRETARY


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NOTES

These Notes form part of the Notice of General Meeting.

Undirected Proxies

Where permitted, the Chairperson of the General Meeting in respect of each item of business intends to vote undirected proxies in favour of each Resolution.

Entitlement to Attend and Vote

The Board has determined that, for the purposes of the General Meeting (including voting at the General Meeting), Shareholders are those persons who are the registered holders of Shares at 5.00pm (WST) on 31 December 2010.

Holders of convertible notes in Firestone are entitled to attend the General Meeting but are not entitled to vote.

Voting by Proxy

A Shareholder who is entitled to attend and cast a vote at the General Meeting may appoint a proxy. A proxy need not be a Shareholder. A person can appoint an individual or a body corporate as a proxy. If a body corporate is appointed as a proxy, it must ensure that it appoints a corporate representative in accordance with section 250D of the Corporations Act to exercise its powers as proxy at the General Meeting.

A Shareholder who is entitled to cast 2 or more votes may appoint up to 2 proxies and may specify the proportion or number of votes each proxy is appointed to exercise. The following addresses are specified for the purposes of receipt of proxy appointments and any authorities under which proxy appointments are signed (or certified copies of those authorities):

Computershare Investor Services Pty Limited GPO Box 242 Melbourne Victoria 3001, Australia

Proxy appointments and any authorities under which they are signed (or certified copies of those authorities) may be sent by fax to facsimile number 1800 783 447 (within Australia) or +61 3 9473 2555 (outside Australia). For Intermediary Online subscribers only (custodians) please visit www.intermediaryonline.com to submit your voting intentions.

To be effective, a proxy appointment and, if the proxy appointment is signed by the Shareholder’s attorney, the authority under which the appointment is signed (or a certified copy of the authority) must be received by Firestone at least 48 hours before the General Meeting.

For more information concerning the appointment of proxies and the addresses to which proxy forms may be sent, please refer to the proxy form.

Voting by Attorney

A Shareholder may appoint an attorney to vote on his/her behalf. For an appointment to be effective for the General Meeting, the instrument effecting the appointment (or a certified copy of it) must be


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received by Firestone at its registered office, or the addresses listed above for the receipt of proxy appointments, at least 48 hours before the General Meeting.

Corporate Representatives

A body corporate which is a Shareholder, or which has been appointed as a proxy, may appoint an individual to act as its representative at the General Meeting. The appointment must comply with the requirements of section 250D of the Corporations Act. The representative should bring to the General Meeting evidence of his or her appointment, including any authority under which it is signed, unless it has previously been given to Firestone.

EXPLANATORY STATEMENT

This Explanatory Statement forms part of the Notice of General Meeting.

This Explanatory Statement has been prepared for the information of Shareholders in relation to the business to be conducted at the General Meeting of Firestone convened for 4 January 2011 commencing at 11am (AWST). Amongst other things, this Explanatory Statement provides Shareholders with the information required to be provided to Shareholders by the Corporations Act and the ASX Listing Rules.

Capitalised terms in this Explanatory Statement are defined in the Glossary.

BUSINESS OF THE MEETING

ORDINARY BUSINESS – RESOLUTIONS

RESOLUTION 1 – APPROVAL OF EMPLOYEE INCENTIVE OPTION SCHEME

Firestone seeks approval of the Scheme for the purposes of Exception 9(b) of ASX Listing Rule 7.2 and for all other purposes.

ASX Listing Rule 7.1 provides that a company must not issue more than 15% of its total shares in a 12 month period without the consent of Shareholders by ordinary resolution. ASX Listing Rule 7.2 provides a number of exceptions to the requirements of ASX Listing Rule 7.1. Exception 9(b) of ASX Listing Rule 7.2 provides that equity securities issued under an employee incentive scheme that has been approved by shareholders for that purpose within the last three years will not be counted for the purposes of ASX Listing Rule 7.1.

The purpose of the Scheme is to encourage participation by full or part time employees of Firestone (excluding Directors), in Firestone through share ownership and to attract, motivate and retain employees.

The Scheme is annexed as Annexure A to this Notice of General Meeting.

A summary of the terms and conditions of the Scheme is set out below:

Eligible Participants

Full or part time employees and consultants of Firestone, excluding Directors and Associated Bodies Corporate.

Commencement On a date determined by the Board.

Consideration The Scheme Options issued under the Scheme will be issued for no consideration.

Number of Scheme Options

A Scheme Option may not be issued if immediately following its issue, the Shares to be received on exercise of the Scheme Option when aggregated with the number of Shares which would be issued if each outstanding offer of Shares or Scheme Options under the Scheme or another employee incentive scheme were accepted or exercised, and the number of Shares issued during the previous 5 years under the Scheme or another employee incentive scheme, exceeds 5% of the total number of Shares on issue in Firestone.

Entitlement Each Scheme Option entitles the holder, on exercise, to one ordinary fully paid share in Firestone.

Time of issue Scheme Options will be issued to an eligible participant at the discretion of the Board

Exercise price There is no issue price for the Scheme Options. The exercise price for the Scheme Options will be such price as determined by the Board (in its discretion) on or before the date of issue provided that in no event shall the exercise price be less that the weighted average sale price of Shares sold on ASX during the five business days prior to the date of issue or such other period as determined by the Board (in its discretion).

Expiry Date The expiry date of the Scheme Options will be as determined by the Board, being a date no longer than 5 years from the issue date of the Scheme Options.

Rank Shares issued on exercise of Scheme Options will rank equally with other Shares.

Transfer Scheme Options may not be transferred other than to a nominee of the holder.

Quotation The Scheme Options will not be quoted on ASX. However, Firestone will apply to ASX for official quotation of Shares issued on the exercise of Scheme Options.

Exercise A Scheme Option may only be exercised after that Scheme Option has vested and any other conditions of exercise imposed by the Board are satisfied. The Board may determine the vesting period (if any). A Scheme Option will lapse upon the first to occur of the expiry date, the holder acting fraudulently or dishonestly in relation to Firestone, the employee ceasing to be employed by Firestone or on certain conditions associated with a party acquiring a 90% interest in the Shares of Firestone.

Trigger Event If, in the opinion of the Board any of the following has occurred or is likely to occur, Firestone entering into a scheme of arrangement, the commencement of a takeover bid for Firestone's Shares, or a party acquiring a sufficient interest in Firestone to enable them to replace the Board, the Board may declare a Scheme Option to be free of any conditions of exercise. Scheme Options which are so declared may, subject to the lapsing conditions set out above, be exercised at any time on or before their expiry date and in any number.

Taxation Under current taxation laws any taxation liability in relation to the Scheme Options, or the Shares issued on exercise of the Scheme Options, will fall on the participants. Firestone will not be liable to fringe benefits tax in relation to Scheme Options or Shares issued under the Scheme.

RESOLUTIONS 2(a) to 2(c) – APPROVAL OF ISSUE OF OPTIONS TO JOHN DREYER, JOHN WALLINGTON AND TIMOTHY TEBEILA

The purpose of the grant of Options to John Dreyer, John Wallington and Timothy Tebeila is to provide cost effective consideration for their ongoing commitment and contribution to Firestone in their role as Directors of Firestone.

ASX Listing Rule 10.11 states that, unless one of the exceptions in Rule 10.12 applies, an entity must not issue or agree to issue equity securities to any "related party" without the approval of holders of ordinary securities. Firestone seeks Shareholders approval under ASX Listing Rule 10.11 and section 208 of the Corporations Act to issue Options to John Dreyer, John Wallington and Timothy Tebeila, who are Directors and accordingly "related parties" of Firestone.

If approval is given under ASX Listing Rule 10.11, approval is not required under ASX Listing Rule 7.1. In other words, if this Resolution is approved, neither the Options nor any Shares issued on exercise of the Options will be subject to the limitation in Listing Rule 7.1. Accordingly, the issue of these Options will not be included in the 15% calculation of Firestone’s annual placement capacity under ASX Listing Rule 7.1, which will preserve flexibility for Firestone's ability to raise capital if required.

The terms of the Options are:

Exercise Price $0.04

Entitlement Each Option gives the Optionholder the right to subscribe for one Share.

Expiry Date The Options will expire at 5:00 pm (WST) on the second anniversary of the issue date (Expiry Date). Any Option not exercised before this date will automatically lapse.

Exercise Price The amount payable upon exercise of each Option will be $0.04 (Exercise Price).

Exercise of Options

The Options held by the Optionholder may be exercised in whole or in part, and if exercised in part, multiples of 1,000 must be exercised on each occasion.

The Options may be exercised by lodging with the Company, before the Expiry Date:

• a written notice of exercise of Options specifying the number of options being exercised; and

• a cheque or electronic funds transfer for the Exercise Price for the number of Options being exercised,

(Exercise Notice).

An Exercise Notice is only effective when Firestone has received the full amount of the Exercise Price in cleared funds.

Within 10 Business Days of receipt of the Exercise Notice accompanied by the Exercise Price, Firestone will allot and issue the number of Shares required under these terms and conditions in respect of the number of Options specified in the

Exercise Notice.

Vesting conditions

There are no vesting conditions upon the grant of Options.

Transfer The Options are not transferable.

Quotation Firestone will not apply for quotation of the Options on ASX. However, Firestone will apply for quotation of all Shares allotted pursuant to the exercise of Options on ASX.

Rank All Shares allotted upon the exercise of Options will upon allotment rank pari passu in all respects with other Shares.

Timing If this Resolution is approved the Options will be issued within 1 month after the date of this General Meeting (or such later date as permitted by any ASX waiver or modification of the ASX Listing Rules).

Consideration The Options will be granted for nil consideration.

Change or terms on Reconstruction

If at any time the issued capital of the Company is reconstructed, all rights of an Optionholder are to be changed in a manner consistent with the Corporations Act and the ASX Listing Rules at the time of the reconstruction.

Participating rights

There are no participating rights or entitlements inherent in the Options and Optionholders will not be entitled to participate in new issues of capital offered to Shareholders during the currency of the Options. However, the Company will ensure that for the purposes of determining entitlements to any such issue, the record date will be at least 6 Business Days after the issue is announced. This will give Optionholders the opportunity to exercise their Options prior to the date for determining entitlements to participate in any such issue.

No right to change

An Option does not confer the right to a change in exercise price or a change in the number of underlying securities over which the Option can be exercised.

Under the Corporations Act and the ASX Listing Rules, Firestone is required to give Shareholders certain information to be able to vote on a related party transaction (such as the issue of Options to John Dreyer, John Wallington and Timothy Tebeila, who are all Directors of Firestone). That information is set out below:

a) Valuation of Options

Attached as Annexure B is a valuation report prepared by Stantons International Securities (Stantons) dated 18 November (Report). Subject to the assumption contained in paragraphs 1-8 of the Report, the value of the Options (determined by using the Black Scholes model) is 0.85 cents (undiscounted value 1.07 cents).

Stantons have also provided valuations based on a 100% volatility factor and a 125% volatility factor. Using a 100% volatility, Stantons state that the discounted valuation approximates 0.96 cents (undiscounted approximately 1.21 cents). Using a 125% volatility, the discounted valuation approximates 1.21 cents (undiscounted approximately 1.52 cents).

b) Maximum number of Options

Name Position Number of Options

John Dreyer Non Executive Director Chairman

10,000,000

John Wallington Non Exeutive Director 10,000,000

Timothy Tebeila Non Executive Director Deputy Chairman

8,000,000

c) Date of issue

If the Resolutions are approved, the Options will be issued within 1 month after the date of this General Meeting (or such later date as permitted by any ASX waiver or modification of the ASX Listing Rules).

d) Current relevant interest

The current relevant interests of the Directors in securities of the Company are set out below:

Related Party Shares Options John Dreyer Nil Nil

John Wallington Nil Nil

*Timothy Tebeila 972,937,832 110,000,000

*The current relevant interest of Timothy Tebeila in Firestone is 972,937,832 Shares (made up of 917,937,832 Shares through Sekoko Resources (Proprietary) Limited (Sekoko Resources)and 55,000,000 shares through Uzalile (Proprietary) Limited (a company in which Mr Tebeila's wife is a 33.3% shareholder)) and 110,000,000 unlisted options held by Sekoko Resources (prior to the current issue of Options).

Timothy Tebeila, through his shareholding in Tebcon Resources (Proprietary) Limited, is the majority shareholder and the controller of Sekoko Resources.

e) Remuneration

The remuneration and emoluments from the Company to the Directors for both the current financial year and previous financial year are set out below:

Related Party Current Financial Year 2010

Previous Financial Year 2009

John Dreyer $55,000 $12,500

John Wallington $50,000 $12,500

Timothy Tebeila $50,000 $8,333

f) Dilution – Resolutions 2(a) – (c)

If the 28,000,000 Options to be issued (collectively) to John Dreyer, John Wallington and Timothy Tebeila under Resolutions 2(a) – 2(c) are exercised and Shares are issued, this will increase the number of Shares on issue from 2,361,300,464 to 2,389,300,464 (assuming that no other Options are exercised and no other Shares issued) and existing Shareholders will be diluted as follows:

Related Party Issued Shares as at the date of this Notice of Meeting

Shares issued exercise of Options

Issued Shares upon exercise of all Director Options

Dilutionary effect upon exercise of Director Options

John Dreyer, John Wallington and Timothy Tebeila

2,361,300,464 28,000,000 2,389,300,464 1.1%

The market price for Shares during the term of the Director Options would normally determine whether or not the Options are exercised. If, at any time any of the Options are exercised and the Shares are trading on ASX at a price that is higher than the exercise price of the Director Options, there may be a perceived cost to the Company.

g) Trading history

The trading history of the Shares on ASX in the 12 months before the date of this Notice of General Meeting is set out below:

Price Date

Highest $0.053 16/09/2009

Lowest $0.014 30/06/2010

Last $0.025 04/11/2010

h) Use of funds raised

The Options will be granted for nil cash consideration, accordingly no funds will be raised at this stage. Any funds raised by the Company when the Options are exercised will be used to

cover general corporate expenditure.

i) Directors' Recommendation

The Directors of Firestone decline to make a recommendation to Shareholders in relation to Resolutions 2(a) – (c) due to their material personal interest in the outcome of those Resolutions, being the grant of the Options described above.

j) Other Information

The Board does not consider that there are any significant opportunity costs to Firestone or benefits foregone by Firestone in issuing the Options upon the terms proposed.

The Company and the Board are not aware of any other information that would be reasonably required by Shareholders to allow them to make a decision whether it is in the interests of Firestone to pass the Resolution.

RESOLUTION 3 – APPROVAL OF THE ACQUISITION OF A SUBSTANTIAL ASSET FROM, AND ISSUE OF SHARES TO, A RELATED PARTY UNDER THE T3 TRANSACTION

As announced to ASX on 2 February 2010, Firestone and Sekoko Coal (Proprietary) Limited (Sekoko Coal) had entered into the Second Addendum whereby Firestone, through its wholly owned subsidiary Lexshell 126 General Trading (Proprietary) Limited (Lexshell), would acquire an interest in the prospecting rights held by Sekoko Coal over the farms Swanepoelpan and Duikerfontein (T3 Properties). Under the Second Addendum, Firestone will acquire a 60% interest in the rights relating to the T3 Properties, with Sekoko Coal retaining a 40% interest (T3 Transaction or T3 joint venture).

In consideration for the acquisition of the 60% interest in the T3 Properties under the Second Addendum, Firestone must:

a) pay Sekoko Coal (or its nominee) a non-refundable amount of $100,000 on execution of the Second Addendum;

b) pay Sekoko Coal (or its nominee) a further non-refundable payment of $100,000 on or before 1 July 2010;

c) pay Sekoko Coal (or its nominee) a cash payment of $1,800,000 on or before 31 July 2011; and

d) issue 200 million fully paid ordinary additional shares in Firestone to Sekoko Coal (or its nominee) as soon as practicable after the fulfilment or waiver (as the case may be) of the last of the conditions under the Second Addendum.

Firestone has discharged its obligations under paragraphs (a) and (b) above, and the obligation under paragraph (c) is not yet due.

Background

The Sekoko Coal - Firestone relationship encompasses three separate joint venture agreements (T1, T2 and T3) between Sekoko Coal and Firestone and establishes three unincorporated joint ventures between the parties. These joint ventures relate to the following properties:

Vetleegte T1 PROPERTIES

Olieboomsfontein

Smitspan

Minnasvlakte

Massenberg

T2 PROPERTIES

Hooikraal

Swanepoelpan T3 PROPERTIES

Duikerfontein

The joint ventures are referred to as T1, T2 and T3, respectively.

The Second Addendum is subject to various conditions, including the approval of Firestone's shareholders for the purposes of ASX Listing Rule 10.1, ASX Listing Rule 10.11 and item 7 of section 611 of the Corporations Act. Save for these suspensive conditions (which are being dealt with under this Resolution 3) and the approval of the South African Department of Mineral Regulation of South Africa (DMR) under section 11 of the South African Minerals and Petroleum Resources Development Act 28 of 2002 (MPRDA) to the transfer of the prospecting rights relating to T1, T2 and T3 (currently these prospecting rights are held by Sekoko Coal), all other suspensive conditions have been fulfilled or waived. As discussed more fully below, it is envisaged that Sekoko Coal/Firestone will approach the DMR to obtain the section 11 approval following the formation and consolidation of the 3 unincorporated JVs (T1, T2 and T3) into an incorporated JV.

a) Need for Shareholder approval

ASX Listing Rule 10.1

ASX Listing Rule 10.1 provides that a listed company must ensure that neither it, nor any of its child entities, acquires a substantial asset from any a related party without the approval of holders of the listed company's ordinary securities. ASX Listing Rule 10.2 provides that an asset is substantial if its value, or the value of the consideration for it is, or in ASX's opinion is, 5% or more of the equity interests of the entity as set out in the latest accounts given to ASX under the Listing Rules.

On the basis of Firestone's Annual Financial Report for the year ended 30 June 2010, Firestone's equity interest (as per the Statement of Financial Position, p14) is noted as $64,162,743 (on a Consolidated Group basis).

Annexure C to this Notice of Meeting contains a summary of an independent valuation report dated 27 August 2010 prepared by Venmyn Rand (Proprietary) Limited trading as Venmyn

(Venmyn). Venmyn has valued the T3 Properties at ZAR67.03 million. Based on an average ZAR:$ exchange rate of 6.7:1, the value of Firestone's 60% stake in the T3 Properties is approximately $6 million, which exceeds 5% of Firestone's contributed equity as set out in the latest accounts given to ASX under ASX Listing Rule 10.2 (5% of equity being approximately $3.2 million). The T3 Properties are accordingly a "substantial asset" for purposes of the ASX Listing Rules.

In accordance with ASX Listing Rule 10.1, the Company seeks Shareholder approval to approve the proposed acquisition of the 60% stake in the T3 Properties in accordance with the Second Addendum.

ASX Listing Rule 10.11 and Part 2E of the Corporations Act

ASX Listing Rule 10.11 and section 208 of the Corporations Act each provides that a company must not, subject to specified exceptions, issue or agree to issue equity securities, or give a financial benefit, to a related party without the approval of holders of ordinary securities.

The Company is seeking Shareholder approval for the proposed issue of 200,000,000 fully paid ordinary Shares as required pursuant to ASX Listing Rule 10.11 and section 208 of the Corporations Act. If approval is given under ASX Listing Rule 10.11, approval is not required under ASX Listing Rule 7.1.

Item 7 of section 611 of the Corporations Act

If Resolution 3 is passed, the issue of the Shares will have the effect of increasing the voting power of Sekoko Resources in the Company from a starting point that is above 20% and below 90%. This means that the Share issue needs to fall within one of the exemptions from the prohibition against exceeding the 20% limit (or increasing voting power above 20% and below 90%) as provided for in section 611 of the Corporations Act. One such exemption is where shareholder approval is obtained.

Item 7 in the table in section 611 of the Corporations Act explains the requirements needed to be satisfied to fall within the exemption as follows:

"Approval by resolution of target

An acquisition approved previously by a resolution passed at a general meeting of the company in which the acquisition is made, if:

(a) no votes are cast in favour of the resolution by:

(i) the person proposing to make the acquisition and their associates; or

(ii) the persons (if any) from whom the acquisition is to be made and their associates; and

(b) the members of the company were given all information known to the person proposing to make the acquisition or their associates, or known to the company, that was material to the decision on how to vote on the resolution, including:

(i) the identity of the person proposing to make the acquisition and their associates; and

(ii) the maximum extent of the increase in that person's voting power in the company that would result from the acquisition; and

(iii) the voting power that person would have as a result of the acquisition; and

(iv) the maximum extent of the increase in the voting power of each of that person's associates that would result from the acquisition; and

(v) the voting power that each of that person's associates would have as a result of the acquisition."

Under the Corporations Act and the ASX Listing Rules, Firestone is required to give Shareholders certain information to be able to vote on the acquisition of a substantial asset or to approve a related party transaction (such as the issue of fully paid Shares to Sekoko Coal or its nominee). That information is set out below:

b) The name of the related party from whom the substantial asset will be acquired and to whom the Resolution would permit financial benefits to be given

Under the Second Addendum, the 200,000,000 Shares will be issued to Sekoko Coal or its nominee. Sekoko Coal is a wholly owned subsidiary of Sekoko Resources. Sekoko Coal has nominated Sekoko Resources to acquire the Shares.

Timothy Tebeila (a Director of Firestone), through his shareholding in Tebcon Resources (Proprietary) Limited, is the majority shareholder and controller of Sekoko Resources. Sekoko Resources is accordingly a related party of Firestone under section 228 of the Corporations Act.

Sekoko Resources is the largest of Firestone's Shareholders and currently holds 917,937,832 or 38.87% of Firestone's Shares. In addition, Sekoko Resources also holds 110,000,000 unlisted Share options in Firestone. If Resolution 3 is approved, it will increase Sekoko Resources' shareholding in the Company to 42.65%.

c) Reasons for the proposed allotment

As described more fully above, the Shares will be issued as consideration for the acquisition of a 60% interest in the T3 Properties under the Second Addendum.

d) Independent Expert Report

Under ASX Listing Rule 10.10, Firestone is required to give Shareholders a report on the transaction from an independent expert. An independent valuation prepared by BDO Corporate Finance (WA) Pty Limited (BDO) relating to the T3 Properties is provided at Annexure D.

In its report, BDO states that the T3 Transaction is fair and reasonable having regard to the interests of non-associated Shareholders.

Annexure E to this Notice of Meeting contains Venmyn's full independent valuation report on the T3 Properties and has been provided as it may be relevant to a Shareholder’s decision on how to vote on Resolution 3.

e) Expected date of allotment and issue price of Shares

The 200,000,000 Shares will be issued to Sekoko Resources no later than 1 month after the date of the General Meeting and it is anticipated that allotment and issue will occur on 31 January 2011. The issue price of the Shares is $0.05 per Share. The Shares issued will rank parri passu with the Company’s existing Shares.

f) The nature of the financial benefit and dilutionary effect

The maximum number of Shares to be issued is 200,000,000 fully paid Shares in the Company. The following table sets out Firestone's share structure pre- and post- T3 Transaction and illustrates the dilutionary effect of the T3 Transaction on the shareholding of current Shareholders:

Firestone Share Structure Pre T3 Transaction Post T3 transaction

Current Shareholders 1,443,362,632 1,443,362,632

Sekoko Resources 917,937,832 1,117,937,832

Total 2,361,300,464 2,561,300,464

The acquisition of the further 200,000,000 Shares will dilute the current Shareholders and increase the level of Sekoko Resources' voting power in the Company from 38.87% to 43.65%.

If the T3 Transaction was approved and Sekoko Resources exercised its 110,000,000 options (with no other options or convertible notes being exercised), it would result in Sekoko Resources holding 45.97% of Firestone.

g) Trading history

The trading history of the Shares on ASX in the 12 months before the date of this Notice of General Meeting is set out below:

Price Date

Highest $0.053 16/09/2009

Lowest $0.014 30/06/2010

Last $0.025 04/11/2010

h) The date by which the Company will issue the Shares

The 200,000,000 Shares will be issued to Sekoko Resources no later than 1 month after the date of the General Meeting and it is anticipated that allotment and issue will occur on 31 January 2011.

i) The issue price of the Shares

The Shares will be issued as fully paid ordinary Shares with an issue price of $0.05 per Share. The Shares issued will rank parri passu with the Company’s existing Shares.

j) Advantages of the T3 Transaction

The Directors are of the view that the following advantages of the T3 Transaction may be relevant to a Shareholder’s decision on how to vote on Resolution 3:

• The acquisition of the T3 Properties has the potential of extending both the size and the minelife of the planned Smitspan open cast mine. From the Second Addendum between Sekoko Coal and Firestone it is expected that substantial additional size and scale will be added to the existing Waterberg project. Significantly, the farms share boundaries along strike West from the farm Smitspan. Drilling data from 9 exploration holes on these farms indicate that the full sequence of 12 coal zones exists on these farms, 3 holes on farm Swanepoelpan indicate access at shallow depth to coal within 1.5km West of the proposed Smitspan pit.

• The acquisition of the T3 Properties could enable the joint venture to realise significant synergies in scale and mine options. Swanepoelpan shares a common boundary with the farm Smitspan where the Firestone - Sekoko Coal joint venture has recently acquired the surface rights and the joint venture is completing a bankable feasibility study for the establishment of an open cast coal mine. Duikerfontein is immediately adjacent to Swanepoelpan. In this regard, Shareholders are referred to p2 of Annexure C for a diagram of the Firestone/Sekoko Coal joint venture properties.

• The T3 Transaction removes potential competition by ensuring that Sekoko Coal does not sell the T3 Properties to competing companies.

• Properties in the T2 and properties in T3 are all covered by one prospecting right (PR137). The approval of the T3 Transaction by Shareholders (and the subsequent completion of the T3 Transaction under the Second Addendum) will mean that the prospecting right will not need to be subdivided. Subdivision of a prospecting right is highly discouraged by the DMR and may cause long delays to the intended incorporation of the Joint Venture and construction of a mine.

• The application for the requisite mining right (which has been accepted and is currently being reviewed by the DMR) covers properties in both T2 and T3. If the T3 Transaction is not approved, the mining right application will be rejected by the DMR and the parties will have to start afresh with, firstly, a subdivision of a prospection right and then re-submitting a new mining right application.

k) Disadvantages of the T3 Transaction

The Directors are of the view that the following list of disadvantages may be relevant to a Shareholder’s decision on how to vote on Resolution 3:

• The T3 Transaction will result in the issue of securities to Sekoko Resources which will dilute the current holdings of the Shareholders and increase Sekoko Resources' control of Firestone.

• The T3 Properties may not be mined for the next 10 or 20 years. As explained above, subject to the DMR granting the necessary approvals and on completion of a bankable feasibility study, Firestone and Sekoko Coal intend establishing an open cast coal mine on the Smitspan property (one of the T2 Properties). Smitspan will be the initial focus of the mining operations, with mining operations only to be commenced on the T3 Properties at a much later stage.

• A minimum annual expenditure of approximately ZAR5 million (approximately $745,000) per property is required to service the prospecting right.

• The T3 Properties are exploration assets and therefore not cash generative in the short term. These exploration assets will require further funding to be developed to their full potential. There is no clear evidence that exploration assets will be cash generative until the Bankable Feasibility Study has been completed and a mine has been constructed.

• The increased Share float may require consolidation in the future.

• The costs associated with registering new issued Shares are high.

• Shares issued as a block are unlikely to be liquid immediately and therefore might reduce liquidity and percentage of Shares traded in the stock market, ultimately resulting in less responsive Share price.

l) Directors' Recommendation

The Directors (other than Timothy Tebeila who has not been involved in Board discussions or voting on this issue) recommend that Shareholders vote in favour of the acquisition of a 60% interest in the T3 Properties from Sekoko Coal and the issue to Sekoko Resources of 200,000,000 Shares, as contemplated under the T3 Transaction.

The Directors are of the view that the acquisition is in the interests of the Company because it has the potential of extending both the size and the minelife of the planned Smitspan open cast mine and could enable the joint venture to realise significant synergies in scale and mine options. Shareholders are also referred to BDO's report (Annexure D) which states that the T3 Transaction is fair and reasonable having regard to the interests of non-associated Shareholders.

Timothy Tebeila has abstained from making a recommendation given his interests in Sekoko Coal and Sekoko Resources.

m) Other contracts or arrangements connected with the arrangement

It is envisaged that the Company will acquire a further 5% participation interest in the T1 Joint Venture, thereby increasing the Company's interest in the T1 Joint Venture to 60%. This will align the participation interests of the parties under the T1 joint venture with that of T2 and T3 and facilitate the conversion of the three separate unincorporated joint ventures into a single incorporated joint venture (see discussion below). This change will be implemented under a Second Addendum to the T1 Joint Venture Agreement between Sekoko Coal, Checkered Flag Investments 2 (Proprietary) Limited (Checkered Flag) (a wholly owned subsidiary of the Company) and the Company, in terms of which:

• Firestone will earn in a further 5% on the T1 Joint Venture Agreement; and

• Sekoko Coal will earn down 5% of its participation interest in the T1 Joint Venture Agreement,

in consideration for the Company paying to Sekoko Coal an additional ZAR20 million in production royalties.

The proposed acquisition (of a further 5% participation interest in the T1 join venture) does not require the approval of the Company's shareholders under ASX Listing Rule 10.1 as the value of the 5% interest (approximately $1.1 million according to Venmyn, see Annexures C & E) is less than 5% of Firestone's equity interest (being approximately $3.2 million) and is accordingly not a substantial asset. Alternatively, if one uses the ZAR20 million consideration to determine whether Firestone's 5% equity interest would be exceeded (and assuming a ZAR6.6/$ exchange rate), the value of the 5% increase (approximately $3 million) would also not exceed Firestone's 5% equity interest.

Following the completion of the T3 Joint Venture (and the implementation of the Second Addendum to the T1 Joint Venture Agreement (discussed above)), it is proposed that Sekoko Resources (through its wholly owned subsidiary Sekoko Coal) and Firestone (through its wholly owned subsidiary Checkered Flag) will enter into a shareholders agreement. The purpose of the shareholders agreement will be:

• To convert and consolidate the unincorporated join ventures contemplated by the T1, T2 and T3 joint ventures into a single incorporated joint venture to be held 60% and 40% by each of Checkered Flag and Sekoko Coal, respectively.

• To facilitate the construction of a mine, and ultimately, the management and operation of an operating mine.

• To transfer and consolidate all rights and obligations under each of the T1, T2 and T3 joint venture agreements to a single agreements. It is not the intention of the shareholders agreement to change or interfere with commercial undertakings of T1, T2 and T3 but legal, technical and operational undertakings will be streamlined, to take advantage of, and maximize, potential synergies. This is not expected to substantially affect the transaction value of T1, T2 and T3 (if it has any impact at all).

• To enable logdement of application for transfer of prospecting rights (ie under S11 of the MPRDA) from Sekoko Resources and Sekoko Coal into a single incorporated entity as contemplated in T1, T2 and T3 and that its shares will be owned 60:40 by Checkered Flag and Sekoko Coal, respectively.

Other than these agreements, as far as the Directors are aware:

• there is no other contract or proposed contract between Sekoko and the Company and/or Lexshell or any of their respective associates which is conditional upon, or directly or indirectly dependent on, shareholders agreement to the acquisition of Shares by Sekoko; and

• there is no proposal whereby any property will be transferred between the Company and/or Lexshell and Sekoko or any person associated with any them.

n) Intentions of Sekoko Resources in relation to the Company

As stated above, if the T3 Transaction was approved and Sekoko Resources exercised its 110,000,000 options (with no other options or convertible notes being exercised), it would result in Sekoko Resources holding 45.97% of Firestone. However, Sekoko Resources would still, for most practical purposes, not have control of the Board and/or the Company. As such, Sekoko Resources does not have any specific intentions regarding the future of Firestone if shareholders agree to the allotment.

Notwithstanding the foregoing and for the sake of completeness, Sekoko Resources has informed the Company that:

• it has no intention to change the business of the Company;

• it has no intention to inject further capital into the Company, although if the Company undertook a rights issue, Sekoko Resources would seek to participate if it had funds to do so;

• it has no intention to alter the future employment of the present employees of the Company (noting that the Company currently does not have any employees);

• other than as described in this Notice of Meeting, it does not contemplate any proposal whereby any property will be transferred between the Company and Sekoko Resources or any person associated with any of them;

• it has no intention to otherwise redeploy the fixed assets of the Company.

o) Other Information

Save as described elsewhere in this Notice of Meeting, the Company and the Board are not aware of any other information that would be reasonably required by Shareholders to allow them to make a decision whether it is in the interests of Firestone to pass the Resolution.

p) Competent Persons Statement

Information in this Notice of Meeting that relates to exploration results and coal resources on the property Smitspan 306LQ is based on information compiled by Mr Paul S Norman who is employed by Wardell Armstrong LLP and is a Fellow of the Geological Society of London, a Fellow of the Institution of Materials, Minerals and Mining, a Fellow of the Energy Institute, a Chartered Geologist and Chartered Engineer. Mr Norman has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity he is undertaking to qualify as a Competent Person as defined by the South African Code of the Reporting of Exploration Results, Mineral Resources and Mineral Reserves (The SAMREC Code) 2007 edition and the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (The JORC Code). Mr Norman consents to the inclusion in the Notice of the matters based on his information in the form and context in which it appears.

The information in this Notice of Meeting that relates to coal reserve estimation is based on work completed by Mr Peter I Watkinson who is an employee of Parsons Brinckerhoff and a Member of the Institute of Materials, Minerals and Mining, a Member of the Minerals Engineering Society and a Chartered Engineer. Mr Watkinson has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the

activity which he is undertaking to qualify as a Competent Person as defined by the South African Code of the Reporting of Exploration Results, Mineral Resources and Mineral Reserves (The SAMREC Code) 2007 edition and the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (The JORC Code). Mr Watkinson consents to the inclusion in the Notice of the matters based on his information in the form and context in which it appears.

GLOSSARY

$ means Australian dollars.

AWST means Australian Western Standard Time as observed in Perth, Western Australia.

Associated Body Corporate means:

(a) a related body corporate (as defined in the Corporations Act) of Firestone;

(b) a body corporate which has an entitlement to not less than 20% of the voting shares of Firestone; and

(c) a body corporate in which Firestone has an entitlement to not less than 20% of the voting shares.

ASX means ASX Limited (ACN 008 624 691).

ASX Listing Rules means the Listing Rules of ASX.

Board means the board of Directors of Firestone.

Business Day means Monday to Friday inclusive, except New Year’s Day, Good Friday, Easter Monday, Christmas Day, Boxing Day, and any other day that ASX declares is not a business day.

Chairperson means the person chairing the General Meeting.

Corporations Act means the Corporations Act 2001 (Cth).

Directors means the directors of Firestone.

Firestone or Company means Firestone Energy Limited (ACN 058 436 794).

Directors mean the directors of Firestone.

Explanatory Statement means the explanatory statement accompanying the Notice of Meeting.

General Meeting means the meeting convened by the Notice of Meeting.

Notice of Meeting or Notice of General Meeting means this notice of General Meeting including the Explanatory Statement.

Options means the options contemplated in Resolution 2, or any one of them, as the context requires.

Optionholders means the holders Options, or any one of them, as the context requires.

Resolutions means the resolutions set out in the Notice of Meeting, or any one of them, as the context requires.

Scheme means the Firestone Energy Limited Employee Incentive Option Scheme.

Scheme Options means options issued under the Scheme.

Second Addendum means the Second Addendum to Joint Venture Agreements dated on or about 28 January 2010 between Sekoko Coal (Proprietary) Limited, Lexshell 126 General Trading (Proprietary) Limited and Firestone.

Share means a fully paid ordinary share in the capital of Firestone.

Shareholder means a holder of a Share.

ZAR means South African rands.

Annexure A

FIRESTONE ENERGY LIMITED EMPLOYEE INCENTIVE OPTION SCHEME

C:\Documents and Settings\LDB\Desktop\Firestone\Employee Incentive Option Scheme AGM 2010.doc 2


EMPLOYEE INCENTIVE OPTION SCHEME

The Directors are empowered to operate the Firestone Energy Limited Employee Incentive Option Scheme (Scheme) on the following terms and in accordance with the Listing Rules of ASX:

1. DEFINITIONS AND INTERPRETATION

1.1 Definitions

For the purposes of the Scheme, the following words have the following meanings:

Associate has the meaning given to that term in Section 12(2) of the Corporations Act.

Associated Body Corporate means:

(a) a related body corporate (as defined in the Corporations Act) of the Company;

(b) a body corporate which has an entitlement to not less than 20% of the voting Shares of the Company; and

(c) a body corporate in which the Company has an entitlement to not less than 20% of the voting shares.

ASX means Australian Stock Exchange Ltd.

Board means the board of directors of the Company.

Business Day means those days other than a Saturday, Sunday, New Year’s Day, Australia Day, Good Friday, Easter Monday, Anzac Day, Christmas Day, Boxing Day and any other day which the ASX shall declare and publish is not a business day.

Ceasing Date has the meaning given in Rule 7.5.

Ceasing Event has the meaning given in Rule 7.6.

Class Order means ASIC Class Order 03/184 (or any amendment to or replacement of that Class Order).

Company means Firestone Energy Limited (ACN 104 855 067).

Corporations Act means the Corporations Act 2001 (Cth), as amended from time to time.

Directors means the directors of the Company.

Eligible Participant means full or part time employees and consultants of the Company, but excludes a Director or an Associated Body Corporate.


Exercise Condition means in respect of an Option, any condition set out in the Offer which must be satisfied before that Option can be exercised or any other restriction on exercise of that Option specified in the Offer or in these Rules.

First Quotation means the day on which Shares are first quoted on the official list of ASX.

Group means the Company or an Associated Body Corporate.

Income Tax Assessment Act means the Income Tax Assessment Act 1936 (Cth) or the Income Tax Assessment Act 1997 (Cth) as appropriate.

Lapsing Date means, in respect of an Option, the date which is two (2) years after the date of the grant of that Option, or such other date as the Board determines in its discretion with respect to that Option at the time of the grant of that Option.

Listing Rules means the official listing rules of ASX as amended from time to time.

Offer means an offer made to an Eligible Participant to subscribe for one or more Options under the Scheme.

Offer Document means an offer document in substantially the same form as set out in Schedule 2, or such other form as prescribed by the Corporations Act or the Class Order.

Option means an option granted pursuant to these Rules to subscribe for one Share upon and subject to the terms of these Rules and the terms of the Offer.

Option Exercise Price means the exercise price of an Option, as determined in accordance with clause 6.1.

Marketable Parcel has the meaning given to that term in the Listing Rules.

Participant means an Eligible Participant to whom Options have been granted under the Scheme, or if Rule 5.4 applies, an Associate of the Eligible Participant to whom Options have been granted under the Scheme.

Permanently Disabled means, in relation to a Participant, a Participant who is deemed, at the discretion of the Board, to be totally and permanently disabled.

Relevant Person means:

(a) in respect of an Eligible Participant, that person; and

(b) in respect of a Nominee of an Eligible Participant being a permitted Nominee under Rule 5.4, that Eligible Participant.

Rules means the rules of the Scheme set out in this document.

Scheme means the scheme established in accordance with these Rules.

Share means a fully paid ordinary share in the Company.

Shareholder means a holder of Shares.

Trigger Event means:


(a) the despatch of a notice of meeting to consider a scheme of arrangement between the Company and its creditors or members or any class thereof pursuant to section 411 of the Corporations Act;

(a) the announcement of a takeover bid or receipt by the Company of a bidder’s statement in respect of the Company; or

(b) the date upon which a person or a group of associated persons becomes entitled, subsequent to the date of grant of the Option, to sufficient Shares to give it or them the ability, in general meeting, to replace all or allow a majority of the Board in circumstances where such ability was not already held by a person associated with such person or group of associated persons.

1.2 Interpretation

In this Scheme unless the context otherwise requires:

(a) headings are for convenience only and do not affect its interpretation;

(b) an obligation or liability assumed by, or a right conferred on, 2 or more Parties binds or benefits all of them jointly and each of them severally;

(c) the expression person includes an individual, the estate of an individual, a corporation, an authority, an association or joint venture (whether incorporated or unincorporated), a partnership and a trust;

(d) a reference to any party includes that party’s executors, administrators, successors and permitted assigns, including any person taking by way of novation;

(e) a reference to any document (including this Scheme) is to that document as varied, novated, ratified or replaced from time to time;

(f) a reference to any statute or to any statutory provision includes any statutory modification or re-enactment of it or any statutory provision substituted for it, and all ordinances, by-laws, regulations, rules and statutory instruments (however described) issued under it;

(g) words importing the singular include the plural (and vice versa) and words indicating a gender include every other gender;

(h) reference to parties, clauses, schedules, exhibits or annexures are references to parties, clauses, schedules, exhibits and annexures to or of this Scheme and a reference to this Scheme includes any schedule, exhibit or annexure to this Scheme;

(i) where a word or phrase is given a defined meaning, any other part of speech or grammatical form of that word or phrase has a corresponding meaning; and

(j) a reference to $ or dollar is to Australian currency.


2. PURPOSE

The purpose of the Scheme is to:

(a) encourage participation by Eligible Participants in the Company through Share ownership; and

(b) attract, motivate and retain Eligible Participants.

3. COMMENCEMENT

This Scheme will commence on the date determined by the Board.

4. OPTION GRANTS

4.1 Entitlements

The formula by which the entitlements of Eligible Participants shall be determined shall be at the absolute discretion of the Directors and shall take into account skills, experience, length of service with the Company, remuneration level and such other criteria as the Directors consider appropriate in the circumstances.

4.2 Number of Options

Subject to Rule 4.4, the number of Options (if any) to be offered to an Eligible Participant from time to time will be determined by the Board in its discretion and in accordance with the Rules and applicable law.

4.3 No Consideration

Options issued under the Scheme will be issued for no consideration.

4.4 Limitation of Offers

If the Company makes an Offer where:

(a) the total number of Shares to be received on exercise of Options the subject of that Offer, exceeds the limit set out in the Class Order; or

(b) the Offer does not otherwise comply with the terms and conditions set out in the Class Order,

the Company must comply with Chapter 6D of the Corporations Act at the time of that Offer.

5. OFFERS OF OPTIONS

5.1 Determination by the Board

The Board, acting in its absolute discretion, may:

(a) offer Options to any Eligible Participant from time to time as determined by the Board and in exercising that discretion, may have regard to some or all of the following:

(i) the Eligible Participant's length of service with the Group;

(ii) the contribution made by the Eligible Participant to the Group;


(iii) the potential contribution of the Eligible Participant to the Group; or

(iv) any other matter the Board considers relevant; and

(b) impose conditions, including performance-related conditions, on the right of a Participant to exercise any Option granted.

5.2 Offer Document

An Offer must be made using an Offer Document.

5.3 Personal Offer

Subject to Rule 5.4, an Offer is personal and is not assignable.

5.4 Renunciation

Upon receipt of an Offer, an Eligible Participant may, by notice in writing to the Board, nominate an Associate of that Eligible Participant (Nominee) in whose favour the Eligible Participant wishes to renounce the Offer. The Board may, in its discretion, resolve not to allow a renunciation of an Offer in favour of a Nominee without giving any reason for that decision. If the Board resolves to allow a renunciation of an Offer in favour of a Nominee, the Eligible Participant will procure that the permitted Nominee accepts the Offer made to that Eligible Participant and that both the Eligible Participant and the Nominee agree to be bound by the Rules.

5.5 Time Period

An Eligible Participant (or permitted Nominee) may only accept an Offer within the time period specified in the Offer Document.

6. EXERCISE PRICE

6.1 Option exercise price

In respect of any proposed Offer, the Board may determine the Option Exercise Price for that Offer in its absolute discretion.

6.2 Minimum Exercise Price

Subject to the Listing Rules, the Option Exercise Price may be nil but to the extent the Listing Rules specify or require a minimum price, the Option Exercise Price in respect of an Offer made following First Quotation must not be less than any minimum price specified in the Listing Rules.

7. WHEN OPTIONS MAY BE EXERCISED

7.1 Exercise

(a) Subject to Rules 7.1(b), 7.4 and 7.5, a Participant will be entitled to exercise Options granted as a result of an Offer in respect of which all Exercise Conditions have been satisfied and which are otherwise capable of exercise in accordance with the terms of the relevant Offer and the Rules.


(b) An Option may not be exercised if it was issued in accordance with the Class Order and the Class Order prohibits the exercise of the Option.

(c) Once an Option is capable of exercise in accordance with this Rule 7.1, it may be exercised at any time up until 5.00pm in Perth on the Lapsing Date.

7.2 One or Several Parcels

Subject to Rule 7.1, Options may be exercised in one or more parcels of any size, provided that the number of Shares issued upon exercise of the number of Options in any parcel is not less than a Marketable Parcel.

7.3 Adjustment to Terms of Exercise

(a) The Board will have the power to make adjustments to or vary the terms of exercise of an Option. Following First Quotation, any proposed variation or adjustment will be subject to any requirements of the Listing Rules.

(b) No adjustment or variation of the terms of exercise of an Option will be made without the consent of the Participant who holds the relevant Option if such adjustment or variation would have a materially prejudicial effect upon the Participant (in respect of his or her outstanding Options), other than an adjustment or variation introduced primarily:

(i) for the purpose of complying with or conforming to present or future State, Territory or Commonwealth legislation governing or regulating the maintenance or operation of the Scheme or like Schemes;

(ii) to correct any manifest error or mistake; or

(iii) to enable a member of the Group to comply with the Corporations Act, the Listing Rules, applicable foreign law, or a requirement, policy or practice of the ASIC or other foreign or Australian regulatory body.

7.4 Lapsing of Options

Subject to the terms of the Offer made to a Participant and unless Rule 7.6 or 7.7 applies, a Participant’s Options will lapse immediately and all rights in respect of those Options will thereupon be lost if, in respect of a Participant or an Offer:

(a) the Relevant Person ceases to be an employee or director of, or to render services to, a member of the Group for any reason whatsoever (including without limitation resignation or termination for cause) and the Exercise Conditions have not been met;

(b) the Exercise Conditions are unable to be met;

(c) the Lapsing Date has passed; or

(d) the deadline provided for in Rule 7.5 has passed,

whichever is earlier.


7.5 Cessation of Employment where Exercise Conditions met

Where a Relevant Person ceases to be an employee of, or to render services to, a member of the Group for any reason whatsoever (including without limitation resignation or termination for cause) prior to the Lapsing Date in relation to the Options granted under an Offer (Ceasing Date) and the Exercise Conditions have been met, the Participant will be entitled to exercise Options granted as a result of an Offer in accordance with the terms of the Offer and the Rules, for a period of up to 60 days after the Ceasing Date, after which the Participant's Options will lapse immediately and all rights in respect of those Options will thereupon be lost.

7.6 Death, Permanent Disability, Retirement or Redundancy

If in respect of a Participant, the Relevant Person dies, becomes Permanently Disabled, resigns employment on the basis of retirement from the workforce or is made redundant by the relevant member of the Group, prior to the Lapsing Date of any Options granted to that Participant (Ceasing Event):

(a) the Participant or the Participant’s legal personal representative, where relevant, may exercise those Options which at that date:

(i) have become exercisable;

(ii) have not already been exercised; and

(iii) have not lapsed,

in accordance with Rule 7.6(c);

(b) at the absolute discretion of the Board, the Board may resolve that the Participant, or the Participant's legal personal representative, where relevant, may exercise those Options which at that date:

(i) have not become exercisable; and

(ii) have not lapsed,

in accordance with Rule 7.6(c) and, if the Board exercises that discretion, those unexercisable Options will not lapse other than as provided in Rule 7.6(c);

(c) (i) The Participant or the Participant’s legal personal representative (as the case may be) must exercise the Options referred to in Rule 7.6(a) and, where permitted, Rule 7.6(b), no earlier than First Quotation and not later than the first to occur of: (A) the Lapsing Date of the Options in question; and (B) the date which is 6 months after the Ceasing Event or 6 months after First Quotation (whichever occurs first) provided that in the case of Options referred to in Rule 7.6(b), all Exercise Conditions have been met at that time (unless the Board decides to waive any relevant Exercise Conditions, in its absolute discretion).

(ii) Options which have not been exercised by the end of the period specified in Rule 7.6(c)(i) lapse immediately at the end of that period and all rights in respect of those Options will thereupon be lost.


(iii) Where the Lapsing Date for an Option the subject of this Rule 7.6 occurs before First Quotation, that Option lapses at the end of its Lapsing Date and all rights in respect of that Option will thereupon be lost notwithstanding the terms of this Rule 7.6.

7.7 Discretionary Exercise of Options

Where, in respect of a Participant, the Relevant Person ceases to be an employee of, or to render services to, a member of the Group, for any reason, prior to the date on which Options become exercisable, the Board may, in its absolute discretion, determine that some or all of the Options held by that Participant do not lapse and may be exercised by the Participant, if otherwise permitted under the Rules, within such additional time as is determined by the Board following the Ceasing Date. Options which have not been exercised by the end of that period lapse immediately and all rights in respect of these Options will thereupon be lost.

7.8 Entitlement

(a) Each Option entitles the holder to subscribe for and be allotted one Share.

(b) Shares issued pursuant to the exercise of Options will in all respects, including bonus issues and new issues, rank equally and carry the same rights and entitlements as other Shares on issue.

8. MANNER OF EXERCISE OF OPTIONS

8.1 Delivery to Company Secretary

Options granted to a Participant may only be exercised by delivery to the Company's secretary (at a time when the Options may be exercised) of:

(a) the certificate for the Options or, if the certificate for the Options has been lost, mutilated or destroyed, a declaration to that effect, accompanied by an indemnity in favour of the Company against any loss, costs or expenses which might be incurred by the Company as a consequence of its relying on the declaration that the certificate has been lost, mutilated or destroyed;

(b) a notice in the form of Schedule 1 addressed to the Company and signed by the Participant:

(i) stating that the Participant exercises the Options and specifying the number of Options which are exercised; and

(ii) specifying the subregister of the Company in which the Shares referred to in Rule 8.2(a) are to be recorded; and

(c) payment to the Company of an amount equal to the Option Exercise Price multiplied by the number of Options which are being exercised unless there is no exercise price payable in respect of the Options to be exercised.


8.2 Issue of Shares

If the items specified in Rule 8.1 are delivered in accordance with that Rule, the Company will, subject to the Listing Rules (if relevant):

(a) within 10 Business Days of delivery of the documents referred to in Rule 8.1 issue to the Participant the Shares credited as being fully paid in respect of which the Options are exercised together with any additional Shares an entitlement to which has arisen under Rules 9 and 10 in consequence of the exercise of the Options; and

(b) cancel the certificate delivered pursuant to Rule 8.1(a) and, if any Options which have not lapsed remain unexercised, deliver to the Participant a replacement certificate reflecting the number of those Options which remain unexercised.

8.3 Death of Participant

If a Participant has died, the Participant's legal personal representative will stand in the place of the Participant for the purposes of Rules 8.1 and 8.2 subject only to prior production to the Company of such evidence as would be required to permit the legal personal representative to become registered as a shareholder in respect of the Shares held by the Participant.

8.4 Beneficial Owner of Shares

From and including the date of issue to a Participant of any Shares in accordance with these Rules, the Participant will:

(a) be the beneficial owner of those Shares; and

(b) subject to Rule 8.6, the Corporations Act, the Constitution and, after First Quotation, the Listing Rules, be entitled to deal with those Shares as beneficial owner.

8.5 Equal Rank

A Share issued on exercise of an Option will rank equally in all respects with Shares already on issue on the date of exercise of the Option, except for entitlements which had a record date before the date of issue of that Share.

8.6 Official Quotation

After First Quotation, the Company will make application for Shares which are issued after that time pursuant to Rule 8.2 to be quoted in accordance with the Listing Rules.

9. NOTICE OF ADJUSTMENTS AND CUMULATION OF ADJUSTMENTS

9.1 Cumulation of Adjustments

Effect will be given to Rule 10 in such manner that the effect of the successive applications of them is cumulative, with the intention being that the adjustments they progressively effect will reflect previous adjustments.


9.2 Notice of Adjustments

Whenever the number of Shares comprised in an Option or the Option Exercise Price is adjusted pursuant to these Rules, the Company will give notice of the adjustment to the Participant and ASX together with calculations on which the adjustment is based.

10. NEW ISSUES AND ADJUSTMENTS FOR RIGHTS ISSUES

10.1 Participation generally

There are no participating rights or entitlements inherent in the Options and holders will not be entitled to participate in new issues of capital offered to Shareholders during the currency of the Options. However, the Company will ensure that for the purposes of determining entitlements to any such issue, the record date will be at least 7 Business Days after the issue is announced. This will give Option holders the opportunity to exercise their Options prior to the date for determining entitlements to participate in any such issue.

10.2 Rights Issues

If the Company makes a pro rata issue of securities (except a bonus issue) to the holders of Shares (other than an issue in lieu or in satisfaction of dividends or by way of dividend reinvestment) the Option Exercise Price shall be reduced according to the formula specified in the Listing Rules.

10.3 Bonus issues

In the event of a bonus issue of Shares being made pro-rata to Shareholders, (other than an issue in lieu of dividends), the number of Shares issued on exercise of each Option will include the number of bonus Shares that would have been issued if the Option had been exercised prior to the record date for the bonus issue. No adjustment will be made to the exercise price per Share of the Option.

10.4 Quotation

Options will not be quoted on ASX. However, application will be made to ASX for official quotation of the Shares allotted pursuant to the exercise of Options if the Company’s Shares are listed on ASX at that time.

10.5 Applications

An application to be issued Options may be made by persons invited to participate in the Scheme in such form and upon such terms and conditions concerning the closing date for applications as are approved by the Directors from time to time.

10.6 Reorganisation

The terms upon which Options will be granted will not prevent the Options being reorganised as required by the Listing Rules on the reorganisation of the capital of the Company.

11. OVERRIDING RESTRICTIONS ON ISSUE AND EXERCISE

Notwithstanding the Rules or the terms of any Option, no Option may be offered, granted or exercised and no Share may be issued under the Scheme if to do so:


(a) would contravene the Corporations Act, the Listing Rules or any other applicable law; or

(b) would contravene the local laws or customs of an Eligible Participant’s country of residence or in the opinion of the Board would require actions to comply with those local laws or customs which are impractical.

12. AMENDMENT OF RULES

Subject to and in accordance with the Listing Rules (including any waiver granted under such Listing Rules), the Directors (without the necessity of obtaining the prior or subsequent consent of Shareholders of the Company in a general meeting) may from time to time amend (including the power to revoke, add to or vary) all or any provisions of the Rules in any respect whatsoever, by an instrument in writing, provided that rights or entitlements in respect of any Option granted before the date of amendment shall not be reduced or adversely affected unless prior written approval from the affected holder(s) is obtained.

13. TRIGGER EVENT

Notwithstanding the Rules of the Scheme, upon the occurrence of a Trigger Event, the Directors may determine:

(a) that the Options may be exercised at any time from the date of such determination, and in any number until the date determined by the Directors acting bona fide so as to permit the holder to participate in any change of control arising from a Trigger Event, provided that the Directors will forthwith advise in writing each holder of such determination. Thereafter, the Options shall lapse to the extent they have not been exercised; or

(b) to use their reasonable endeavours to procure that an offer is made to holders of Options on like terms (having regard to the nature and value of the Options) to the terms proposed under the Trigger Event in which case the Directors shall determine an appropriate period during which the holder may elect to accept the offer and, if the holder has not so elected at the end of that period, the Options shall immediately become exercisable and if not exercised within 10 days, shall lapse.

14. ADMINISTRATION OF SCHEME

(a) The Directors may appoint for the proper administration and management of the Scheme, such persons as it considers desirable and may delegate thereto such authorities as may be necessary or desirable for the administration and management of the Scheme.

(b) Subject to the provisions of the Rules, the Directors may make such regulations and establish such procedures for the administration and management of the Scheme as they consider appropriate.

(c) The decision of the Directors as to the interpretation, effect or application of the Rules will be final.


15. RIGHTS OF ELIGIBLE PARTICIPANTS

Neither participation in the Scheme by the Company or an Associated Body Corporate or any Eligible Participants or Option holders or anything contained in these Rules shall in any way prejudice or affect the right of the Company or an Associated Body Corporate to dismiss any Eligible Participant or Option holder or to vary the terms of employment of any Eligible Participant or Option holder. Nor shall participation or the rights or benefits of an Eligible Participant or Option holder under the Rules be relevant to or used as grounds for granting or increasing damages in any action brought by an Eligible Participant or Option holder against the Company or an Associated Body Corporate whether in respect of any alleged wrongful dismissal or otherwise.

16. ATTORNEY

Each Participant, in consideration of an Offer:

(a) irrevocably appoints the Company and any person nominated from time to time by the Company (each an "attorney"), severally, as the Participant's attorney to complete and execute any documents including applications for Shares and Share transfers and to do all acts or things on behalf of and in the name of the Participant which may be convenient or necessary for the purpose of giving effect to the provisions of these Rules;

(b) covenants that the Participant will ratify and confirm any act or thing done pursuant to this power;

(c) releases each member of the Group and the attorney from any liability whatsoever arising from the exercise of the powers conferred by this Rule; and

(d) indemnifies and holds harmless each member of the Group and the attorney in respect thereof.

17. ASIC RELIEF

Notwithstanding any other provisions of the Scheme, every covenant or other provision set out in an exemption or modification granted from time to time by the ASIC in respect of the Scheme pursuant to its power to exempt and modify the Corporations Act and required to be included in the Scheme in order for that exemption or modification to have full effect, is deemed to be contained in the Scheme. To the extent that any covenant or other provision deemed by this Rule to be contained in the Scheme is inconsistent with any other provision in the Scheme, the deemed covenant or other provision shall prevail.

18. NOTICES

Any notice to Participants may be given in such manner as the Board determines.

19. GOVERNING LAW

This Scheme is governed by and shall be construed and take effect in accordance with the laws of Western Australia.


SCHEDULE 1

NOTICE OF EXERCISE OF OPTIONS

To: The Directors Firestone Energy Limited

I/ We _______________________________ of _______________________________________

_________________________________ being registered holder(s) of the options to subscribe

for fully paid ordinary shares in the Company set out on the certificate annexed to this

notice, hereby exercise _________________ of the abovementioned options. I/We enclose

my/our cheque for $ ________________ in payment of the application monies due in

respect of those shares calculated on the basis of $ ______________ per share.

I/ We authorise and direct the Company to register me/us as the holder(s) of the shares

to be allotted to me/us and I/we agree to accept such shares subject to the provisions

of the Constitution of the Company.

Dated the day of 200 .

_________________________________

Signature of Holder(s)

Note:

1. Each holder must sign.

2. An application by a company must be executed in accordance with section 127 of the Corporations Act 2001 (Cth) and if signing for a company as a sole director/secretary – ensure “sole director” and “sole secretary” is written beside the signature.

3. Cheques should be made payable to Firestone Energy Limited.


SCHEDULE 2

OFFER DOCUMENT

[Name and address of employee]

Dear [*]

INCENTIVE OPTION SCHEME

The board of directors of Firestone Energy Limited (Company) is pleased to make an offer to you of [*] options pursuant to its employee incentive option scheme (Scheme).

In accordance with ASIC Class Order 03/184, the Company informs you of the following:

(a) accompanying this letter is a full copy of the terms of the Scheme;

(b) this offer remains open for acceptance by you for 14 days from the date of this letter (Offer Period);

(c) the options under the Scheme will be granted to you for nil consideration;

(d) the exercise price of each of the options is $[*] and the expiry date is [*];

(e) the Company undertakes that during the period commencing on the date of this letter and expiring at the end of the Offer Period, it will within a reasonable period of you so requesting, make available to you the current market price of the underlying shares to which the options relate;

(f) that, unless at the time of the exercise of the options the shares the subject of those options will be in the same class as securities which have been quoted on the financial market operated by Australian Stock Exchange Limited or an approved foreign market throughout the 12 month period immediately preceding the exercise date of the options without suspension for more than a total of 2 trading days during that period, the Company will have a prospectus available in relation to the shares the subject of the options which complies with the requirements of the Corporations Act; and

(g) employees cannot exercise the options being offered unless either a current prospectus is available to them or the shares the subject of the options are in the same class as securities which have been quoted on the financial market operated by Australian Stock Exchange Limited or an approved foreign market throughout the 12 month period immediately preceding the exercise date of the options without suspension for more than a total of 2 trading days during that period.

Could you please confirm your acceptance of the offer set out in this letter by signing in the appropriate place below and returning it to the Company on facsimile number (08) 9381 4799.


Yours faithfully

[*] For and on behalf of FIRESTONE ENERGY LIMITED

Encl.

I agree to the terms and conditions set out above and accept the offer of options as contained in the letter set out above.

Name:

Date:

*Note: The Company does not have to include the information set out in paragraphs (f) and (g) above if its Shares have been quoted on the financial market operated by ASX or an approved foreign market throughout the 12 month period immediately before the offer of Options without suspension for more than a total of 2 trading days during that period.

Annexure B

Liability limited by a scheme approved under Professional Standards Legislation

18 November 2010

The Directors Firestone Energy Limited Suite B, 431 Roberts Road SUBIACO WA 6008

Attention: Mr Jerry Monzu

Dear Sir

At the request of Jerry Monzu on behalf of Firestone Energy Limited (“Firestone” or the Company”) received on 18 November 2010, Stantons International Securities hereby set out our technical valuation of 28,000,000 share options (“Options”) proposed to be issued at a general meeting of shareholders of Firestone on 4 January 2011. In arriving at the above mentioned valuation of the Options, we have used the following assumptions.

Assumptions

1. The Black Scholes Option Valuation methodology has been used. The options vest immediately but it has been assumed that the exercise of the Options will be towards the last date to expiry.

2. The date of the valuation for the Options is based on a closing price on 18 November 2010 of a Firestone share of 2.7 cents but it is assumed the Options will not be issued until after shareholders approve the issues on 4 January 2011. The Options once shareholders approve the grants will need to be valued formally for IFRS purposes.

3. The Options expiry 2 years from grant date.

4. The risk free rate based on Bonds expiring in late 2012 is approximately 4.8%.

5. No dividends are payable.

6. Over the past 12 months to 18 November 2010, the shares in Firestone listed on the ASX have traded between 1.4 cents and 5.4 cents for an annualised volatility using a computer generated volatility model of around 88.99%. In the past 8 months to 18 November 2010, the shares traded in the range of 1.4 cents and 3.3 cents. The share price of a Firestone share is quite sensitive to announcements (positive and negative) made by Firestone to the ASX. We consider a volatility of 90% is deemed as being reasonable in comparison to the spot price as at 18 November 2010 and the relatively short term time frame of the Options.

FIR0000/Firestone Energy – Option Valuation for NOM November 2010 Final

7. The Options are exercisable at 4 cents each and expire 2 years after grant date.

8. The valuations noted below are not necessarily the market prices that the Options could be traded at and it is not automatically the market prices for taxation purposes. The recipients of the Options should seek their own tax advice as to the tax treatment of receiving Options in Firestone and the value for taxation purposes.

9. Arguably, a discount could be applied to the valuations arrived at to reflect the unlisted status of the share options. It is acceptable practice that a discount could be applied to the share options for the unlisted status of the share options of between 20% and 30%. We consider a 20% discount to reflect the unlisted status of the Options is reasonable.

10. Based on the above assumptions the value determined using the Black Scholes model of the Options is 0.85 cents (undiscounted value 1.07cents).

As the valuation is for a Notice of Meeting and Explanatory Statement, we have also provided valuations based on a 100% volatility factor and a 125% volatility factor. Using a 100% volatility, the discounted valuation approximates 0.96 cents (undiscounted approximately 1.21 cents). Using a 125% volatility, the discounted valuation approximates 1.21 cents (undiscounted approximately 1.52 cents).

Yours faithfully STANTONS INTERNATIONAL SECURITIES

John Van Dieren - FCA Director

Annexure C

1

Waterberg Coal Project Valuation July 2010

First Floor, Block G

Rochester Place

173 Rivonia Road

Sandton 2146

PO Box 782761

Sandton 2146

Republic of South Africa

Tel: +27 11 783 9903

Fax: +27 11 783 9953

www.venmyn.com

Directors: A N Clay (British); S E Conquest, E de V Greyling; N Mc Kenna C A Telfer Venmyn Rand (Pty) Ltd. trading as VenmynReg. No. 1988/004918/07

D852L

The Directors BDO Kendalls Corporate Finance (WA) Pty Ltd Level 8, 256 St Georges Terrace Perth WA 6000

27th August 2010

SUMMARY OF INDEPENDENT VALUATION REPORTS ON THE COAL ASSETS OF THE

SEKOKO COAL - FIRESTONE JV

AT THE

WATERBERG COAL PROJECT

Venmyn was commissioned by the directors of Lexshell 126 General Trading (Pty) Ltd (Lexshell) to conduct an independent valuation of certain of the coal assets (contributing properties) of the Joint Venture (JV) between Sekoko Coal (Pty) Limited (Sekoko Coal) and Firestone Energy Limited (Firestone) at their Waterberg Coal Project (Sekoko Coal –Firestone JV), located in the Limpopo Province, South Africa (Figure 1).

This letter is a summary of Venmyn’s full Valuation Reports which have been prepared for Lexshell in compliance with, and to the extent required by, the Australian Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports (Valmin Code, 2005). The reader is referred to the full Valuation Reports (to be made available on Firestone’s web site or at Firestone’s offices) for more detail.

The Sekoko Coal - Firestone JV encompasses three separate joint venture agreements (T1, T2 and T3) between Sekoko Coal and Firestone, as summarized in the table below and illustrated in Figure 2.

Table 1: Sekoko Coal-Firestone JV Agreements

AGREEMENT SIGNATURE DATE PROPERTIES

SEKOKO COAL CURRENT

EFFECTIVE INTEREST

FIRESTONE CURRENT

EFFECTOVE INTEREST

T1 12/06/2008 Olieboomsfontein 220LQ 65% 35%Vetleegte 304LQ

T2 01/03/2009

Minnasvlakte 258LQ

40% 60%Smitspan 306LQMassenberg 305LQHooikraal 315LQ

T3 02/02/2010 Duikerfontein 263LQ 40% 60%Swanepoelpan 262LQ

The contributing properties cover a surface area of ~7,980 hectares (ha).

Venmyn’s valuation considered the full Fair Value of the coal assets of the various joint venture agreements, at the effective date (31st July 2010).

Approximately 1,420.84 million TTIS of coal has been classified into the Measured, Indicated and Inferred categories for the contributing properties (Table 2). These JORC compliant Coal Resources form the basis of the valuation of these properties, reported herein.

The mineral assets of the contributing properties of the Waterberg Coal Project were valued on the basis of available historical and recent exploration data and current Coal Resources, using methods appropriate for the development status of the project.

4


Table 2: Summary Resource Statement as at 31st July 2010

FARM NAME & NO. RESOURCE CATEGORY ZONE

COAL TOTAL

TONNES IN SITU

Minnasvlakte 258 LQ Indicated All 21,201,000Inferred All 173,012,000

TOTAL / AVE RESOURCE MINNASVLAKTE 194,213,000

Smitspan 306 LQ Measured All 214,800,600Indicated All 380,671,000

TOTAL / AVE RESOURCE SMITSPAN 595,471,600

Massenberg 305 LQ Indicated All 16,635,000Inferred All 82,148,000

TOTAL / AVE RESOURCE MASSENBERG 98,783,000

Hooikraal 315 LQ Indicated All 4,366,000Inferred All 77,742,000

TOTAL / AVE RESOURCE HOOIKRAAL 82,108,000

Vetleegte 315 LQMeasured All 1,040,300Indicated All 143,146,000Inferred All 11,090,000

TOTAL / AVE RESOURCE VETLEEGTE 155,276,300

Swanepoelpan 262 LQ Indicated All 853,000Inferred All 283,666,000

TOTAL / AVE RESOURCE SWANEPOELPAN 284,519,000Duikerfontein 263 LQ Inferred All 10,457,000

TOTAL / AVE RESOURCE DUIKERFONTEIN 10,457,000GRAND TOTAL / AVE 1,420,827,900

Venmyn’s valuation considered the prospectivity of the projects and attached value ranges consistent with that assessment. The methods applied are accepted industry methods which aim to reduce subjectivity by assessing the relevance and effectiveness of exploration work.

The multiples of exploration expenditure (MEE) valuation method or Cost Approach was used in the first instance to value the mineral assets of the contributing properties on the basis that recent expenditures have contributed to its present value. Through the introduction of a prospectivity enhancement multiplier (PEM), a premium (or discount) multiplier can be applied to the total cost of exploration to date, depending on whether the exploration expenses being considered have relatively enhanced the prospectivity of the target or not. The table below summarises the results from this valuation approach:-

Table 3: Summary Dynamics and Results of the MEE/Cost Approach

JV FARMTOTAL

EXPLORATION EXPENDITURE

(ZARm)

LOWER PEM

UPPER PEM

FAIR PEM

MIN PROJECT

VALUE (ZARm)

MAX PROJECT

VALUE (ZARm)

FAIR PROJECT

VALUE(ZARm)

T1 Olieboomsfontein 220 LQ 0.54 1 2 2 0.54 1.08 1.08Vetleegte 304 LQ 11.72 6 12 9 70.32 140.64 105.48

TOTAL/ WT. AVE T1 12.26 6 12 9 70.86 141.72 106.56

T2

Minnasvlakte 258 LQ 1.47 5 11 8 7.37 16.21 11.79Smitspan 306 LQ 56.19 20 30 25 1,123.76 1,685.64 1,404.70Massenberg 305 LQ 4.11 5 11 8 20.55 45.20 32.87Hooikraal 315 LQ 2.10 5 11 8 10.50 23.10 16.80

TOTAL/ WT. AVE T1 63.87 18 28 23 1,162.18 1,770.15 1,466.16

T3 Swanepoelpan 262LQ 2.75 5 11 8 13.74 30.22 21.98Duikerfontein 263LQ 0.00 2 5 4 - - -

TOTAL/ WT. AVE T1 2.75 5 11 8 13.74 30.22 21.98GRAND TOTAL/ WT. AVE 78.88 16 25 20 1,246.77 1,942.10 1,594.70

As Coal Resources were classified for the projects, it was appropriate to attach a comparable unit market value to those resources. In order to arrive at reasonable market comparisons, appropriate recent and similar transactions were identified.

While Venmyn has considered the entire transaction database to derive an appropriate comparable transaction value, the valuation specifically took into account recent transactions/valuations within the Waterberg Coalfield that were considered to represent recent transactions of a similar nature, and have been used to define a Waterberg Coal Valuation Curve.

Table 4 and Figures 3 – 5 summarise the results from the comparable transaction valuation method.

5

Wat

erbe

rg C

oal P

roje

ct V

alua

tion

July

201

0

Tabl

e 4:

Sum

mar

y D

ynam

ics

of th

e C

ompa

rativ

e Va

luat

ion

Met

hod/

Mar

ket A

ppro

ach

JVFA

RM

INFE

RR

ED C

OAL

RES

OU

RC

EIN

DIC

ATED

CO

AL R

ESO

UR

CE

MEA

SUR

ED C

OAL

RES

OU

RC

EPR

OJE

CT

MAR

KET

VAL

UE

TOTA

L IN

FER

RED

R

ESO

UR

CE

(Tot

al

Tonn

es in

-si

tu) (

Mt)

LOW

ER

UN

IT

VALU

E (Z

AR/t)

UPP

ER

UN

IT

VALU

E (Z

AR/t)

MEA

N

VALU

E

(ZAR

m)

TOTA

L IN

DIC

ATED

R

ESO

UR

CE

(Tot

al

Tonn

es in

-si

tu) (

Mt)

LOW

ER

UN

IT

VALU

E (Z

AR/t)

UPP

ER

UN

IT

VALU

E (Z

AR/t)

MEA

N

VALU

E

(ZAR

m)

TOTA

L M

EASU

RED

R

ESO

UR

CE

(Tot

al

Tonn

es in

-si

tu) (

Mt)

LOW

ER

UN

IT

VALU

E (Z

AR/t)

UPP

ER

UN

IT

VALU

E (Z

AR/t)

MEA

N

VALU

E

(ZAR

m)

MIN

PR

OJE

CT

VALU

E (Z

ARm

)

MAX

PR

OJE

CT

VALU

E (Z

ARm

)

FAIR

PR

OJE

CT

VALU

E

(ZAR

m)

T1O

liebo

omsf

onte

in

220

LQ-

0.15

0.30

--

0.80

1.

20

--

2.50

3.00

-

-

-

-

Vet

leeg

te 3

04 L

Q11

.09

0.15

0.30

2.50

14

3.15

0.

80

1.20

14

3.15

1.

04

2.50

3.00

2.86

11

8.78

17

8.22

14

8.50

T2

Min

nasv

lakt

e 25

8 LQ

173.

010.

150.

3038

.93

21.2

00.

80

1.20

21

.20

-2.

503.

00-

42.9

1 77

.34

60.1

3

Smits

pan

306

LQ0.

000.

200.

40-

380.

671.

10

1.50

49

4.87

21

4.80

3.

003.

5069

8.10

1,

063.

14

1,32

2.81

1,

192.

97

Mas

senb

erg

305

LQ82

.15

0.10

0.20

12.3

2 16

.64

0.60

0.

90

12.4

8 -

1.50

2.00

-18

.20

31.4

0 24

.80

Hoo

ikra

al 3

15 L

Q77

.74

0.10

0.20

11.6

6 4.

370.

60

0.90

3.

27

-1.

502.

00-

10.3

9 19

.48

14.9

4

T3

Sw

anep

oelp

an

262L

Q28

3.67

0.15

0.30

63.8

2 0.

850.

801.

200.

85

-1.

502.

50-

43.2

3 86

.12

64.6

8

Dui

kerfo

ntei

n 26

3LQ

10.4

60.

150.

302.

35

-0.

801.

20-

-1.

502.

50-

1.57

3.

14

2.35

TOTA

L/ W

T. A

VE63

8.12

0.

2213

1.58

56

70.

9867

5.82

21

5.84

2.38

700.

96

1,29

8.22

1,

718.

52

1,50

8.37

9


While Venmyn has considered its entire transaction database to derive an appropriate comparable transaction value, the valuation specifically took into account a number of recent transactions/valuations within the Waterberg Coalfield that were considered to represent transactions of a similar nature, and have been used to define a Waterberg Coal Valuation Curve.

Since preliminary economic studies on the Smitspan 306LQ property have been conducted, Venmyn undertook to construct independent financial models in order to verify the economic assessments made by these studies and to formulate its own opinion on the project value.

Table 5 summarizes Venmyn’s preferred Cash Flow Model which is based on selective mining and a fleet leasing option. This valuation method results in a Net Present Value ofZAR1,226.654m. The upper value for the Smitspan 306LQ is ZAR1,471.985m and the lower value is ZAR980.800m.

The sensitivity of the Venmyn model to Income, Capex and Opex is illustrated in Figure 6, Figure 7 and Figure 8, respectively

Figure 6: Sensitivity of Project to Income

Figure 7: Sensitivity of Project to Capex

10


Figure 8: Sensitivity of Project to Opex

11

Wat

erbe

rg C

oal P

roje

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alua

tion

July

201

0

Tabl

e 5:

Cas

h Fl

ow M

odel

usi

ng U

pdat

ed P

aram

eter

s Ye

arYe

arYe

arYe

arYe

arYe

arYe

arYe

arYe

arYe

arYe

arYe

arYe

arYe

arYe

arYe

arYe

arYe

arYe

arYe

arYe

ar1

23

45

67

89

1011

1213

1415

1617

1819

2021

MIN

ING

R

OM

Ton

nage

mt

193.

582

0.74

3 1.

470

2.04

6 2.

036

1.95

9 3.

950

4.08

6 4.

388

7.58

3 7.

404

9.70

2 9.

771

9.84

4 10

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11

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17

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17

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17

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18

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18

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leab

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0 0.

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0 5.

000

5.00

0 7.

000

7.00

0 7.

000

7.00

0 7.

000

10.0

00

10.0

00

10.0

00

10.0

00

10.0

00

10.0

00

REV

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REV

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Rm

21,5

91

9916

227

027

027

054

054

054

090

090

01,

260

1,26

0 1,

260

1,26

0 1,

260

1,80

0 1,

800

1,80

0 1,

800

1,80

0 1,

800

OPE

XM

inin

g C

ost

ZAR

m(8

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)(1

13)

(100

)(9

8)(8

4)(7

9)(1

45)

(166

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80)

(332

)(3

28)

(426

)(4

09)

(418

)(4

28)

(543

)(7

96)

(834

)(8

34)

(856

)(8

56)

(610

)Pr

oces

sing

Cos

tZA

Rm

(2,5

84)

(17)

(26)

(43)

(43)

(43)

(67)

(68)

(80)

(112

)(1

14)

(130

)(1

31)

(131

)(1

33)

(150

)(2

10)

(217

)(2

17)

(219

)(2

19)

(214

)O

ther

Cos

tZA

Rm

(306

)(8

)(8

)(8

)(8

)(7

)(1

0)(1

0)(1

0)(1

3)(1

3)(1

6)(1

6)(1

6)(1

6)(1

8)(2

3)(2

4)(2

4)(2

4)(2

4)(1

0)TO

TAL

OPE

XZA

Rm

(11,

524)

(138

)(1

34)

(148

)(1

34)

(129

)(2

21)

(244

)(2

71)

(457

)(4

55)

(572

)(5

56)

(566

)(5

78)

(711

)(1

,028

)(1

,074

)(1

,074

)(1

,099

)(1

,099

)(8

35)

CA

PEX

TOTA

L C

APE

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12


The table below summarises the results from the valuation methods employed:-

Table 6: Summary of Valuation Results

JV FARMCOST

APPROACH (ZARm)

MARKET APPROACH

(ZARm)

CASH FLOW

APPROACH (ZARm)

PREFFERED VALUE (ZARm)

T1 Olieboomsfontein 220 LQ 1.08 - n/a 1.08Vetleegte 304 LQ 105.48 148.50 n/a 148.50

TOTAL T1 106.56 148.50 N/A 149.58

T2

Minnasvlakte 258 LQ 11.79 60.13 n/a 60.13Smitspan 306 LQ 1,404.70 1,192.97 1,226.65 1,192.97Massenberg 305 LQ 32.87 24.80 n/a 24.80Hooikraal 315 LQ 16.80 14.94 n/a 14.94

TOTAL T2 1,466.16 1,292.84 1,226.65 1,292.84

T3 Swanepoelpan 262LQ 21.98 64.68 n/a 64.68Duikerfontein 263LQ 0.00 2.35 n/a 2.35

TOTAL T3 21.98 67.03 N/A 67.03GRAND TOTAL 1,594.70 1,508.37 1,226.65 1,509.45

Although there is general agreement between the various methods employed, Venmyn considers the comparative transaction method or Market Approach a more appropriate valuation technique as it considers more fully the actual transactions and market values, and allows for a thorough review of the logistical, infrastructural and strategic merits of projects. Therefore, Venmyn have favored the use of the comparable transaction value method in the case of the Sekoko Coal-Firestone JV Waterberg Coal Project.

Venmyn’s preferred Fair Value represents the mean value achieved from the comparative valuation method. The valuation of Olieboomsfontein 220LQ is an exception, as the comparable valuation method results in a Zero value as there are currently no classifiable Coal Resources associated with this property. In this case therefore, the value estimated from the Cost Approach has been utilised.

Venmyn’s full Fair Value for the contributing properties of the Sekoko Coal-Firestone JV Waterberg Coal Project is therefore considered to be ZAR1,509.45m.

The valuation of exploration assets is, by nature, subjective and uncertain. The placing of a specific monetary value on historical exploration can be misleading, and the reader is advised to consider the ranges in which each property has been evaluated, and to further consider the technical merits of each project area and form an opinion regarding its prospectivity on the basis of the data presented in this report.

Kind Regards,

N. Mc KENNA A N CLAY M.Sc (Geol), Pr. Sci. Nat. M.Sc. (Geol.), M.Sc. (Min. Eng.), Dip. Bus. MMGSSA , MSAIMM, MIASSA, M.Inst.D. Pr Sci Nat, MSAIMM, FAusIMM, FGSSA, MAIMADIRECTOR MANAGING DIRECTOR

Annexure D

FIRESTONE ENERGY LTD Independent Expert’s Report

5 November 2010

BDO CORPORATE FINANCE (WA) PTY LTD

Financial Services Guide

5 November 2010

BDO Corporate Finance (WA) Pty Ltd ABN 27 124 031 045 (“BDO” or “we” or “us” or “ours” as appropriate) has been engaged by Firestone Energy Ltd (“Firestone”) to provide an independent expert’s report on the acquisition of a 60% interest in a further two properties in the Waterberg Coalfield. You will be provided with a copy of our report as a retail client because you are a shareholder of Firestone.

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

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 for this engagement is approximately $35,000. 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 Corporate Finance prepared an independent expert’s report for Firestone in July 2009 on the acquisition of a 30% interest in a Joint Venture with Sekoko Coal Pty Ltd. The fee for this engagement was approximately $20,000 excluding GST. BDO Audit and Assurance (WA) Pty Ltd is the appointed Auditor of Firestone. 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 Firestone 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 Subiaco 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 Email: [email protected] Contact details You may contact us using the details set out at the top of our letterhead on page 1 of this FSG.

TABLE OF CONTENTS

1. Introduction 1

2. Summary and Opinion 1

3. Scope of the Report 4

4. Outline of the Transactions 6

5. Profile of Firestone Energy Ltd 7

6. Profile of Sekoko Coal Pty Ltd 13

7. Economic Analysis 13

8. Coal Industry Analysis 14

9. Valuation Approach Adopted 19

10. Valuation of a Firestone share prior to the Transaction 20

11. Value of a Firestone share following the implementation of the Transaction 28

12. Is the Transaction Fair? 31

13. Is the Transaction Reasonable? 32

14. Conclusion 35

15. Sources of Information 35

16. Independence 35

17. Qualifications 36

18. Disclaimers and Consents 36

Appendix 1 – Glossary

Appendix 2 – Valuation Methodologies

Appendix 3 – Summary Valuation Report

1

5 November 2010 The Directors Firestone Energy Limited Level 1 63 Hay Street SUBIACO WA 6008 Dear Sirs

Independent Expert's Report

1. Introduction On 2 February 2010, Firestone Energy Ltd (“Firestone” or “the Company”) announced that it had entered into an agreement with Sekoko Coal Pty Ltd (“Sekoko”) to acquire a 60% interest in a further two properties in the Waterberg Coalfield (“the Transaction” or “T3”). Firestone will pay cash of $2 million and will issue 200 million ordinary shares in Firestone to Sekoko if the Transaction is approved.and scrip as part of the Transaction.

2. Summary and Opinion

2.1 Purpose of the report

The Directors of Firestone 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 the Transaction is fair and reasonable to the non associated shareholders of Firestone (“Shareholders”).

Our Report is prepared pursuant to ASX Listing Rule 10.1 and Section 611 of the Corporations Act and to be included in the Explanatory Memorandum in order to assist the Shareholders in their decision whether to approve the Transaction.

2.2 Approach

Our Report has been prepared having regard to Australian Securities and Investments Commission (“ASIC”) Regulatory Guide 111 (“RG 111”), ‘Content of Expert’s Reports’ and Regulatory Guide 112 (“RG 112”) ‘Independence of Experts’.

In arriving at our opinion, we have assessed the terms of the Transaction as outlined in the body of this report. We have considered:

2

How the value of the consideration payable by Firestone compares to the value of the interest to be acquired in the properties;

The likelihood of a superior alternative offer being available to Firestone;

Other factors which we consider to be relevant to the Shareholders in their assessment of the Transaction; and

The position of Shareholders should the Transaction not proceed.

2.3 Opinion

We have considered the terms of the Transaction as outlined in the body of this report and have concluded that the Transaction is fair and reasonable to Shareholders.

2.4 Fairness

In Section 12 we determined that the value of a Firestone share prior to the Transaction compares to the value of a Firestone share following the implementation of the Transaction, as detailed below:

Fairness Ref

Low $

High $

Value of a Firestone share prior to the Transaction 10 0.0340 0.0480

Value of a Firestone share following the implementation of the Transaction 11 0.0447 0.0447

The above valuation ranges are graphically presented below:

The value of a Firestone share following the implementation of the Transaction falls within the range of the value of a Firestone share prior to the Transaction. The wide range of values prior to the Transaction reflects the range in values calculated using the quoted market price methodology.

Accordingly, in our opinion the Transaction is fair.

$0.000 $0.010 $0.020 $0.030 $0.040 $0.050 $0.060

Value of a Firestone share following the implementation of

the Transaction

Value of a Firestone share prior to the

Transaction

Valuation Summary

3

2.5 Reasonableness

We have considered the analysis in Section 13 of this report, in terms of both

advantages and disadvantages of the Transaction; and

alternatives, including the position of Shareholders if the Transaction does not proceed.

In our opinion, the position of Shareholders if the Transaction is approved is more advantageous than the position if the Transaction is not approved. Accordingly, in the absence of any other relevant information and/or a superior transaction we believe that the Transaction is reasonable for Shareholders.

Advantages and Disadvantages

Section Advantages Section Disadvantages

13.4.1 The Transaction is fair 13.5.1 Dilution of existing shareholders’ interests in

the Company

13.4.2 Further exposure to coal assets 13.5.2 Additional funds required to advance the

Properties

13.4.3 Potential synergistic benefits 13.5.3 Sekoko will increase its control of Firestone

Other key matters we have considered include:

Section Description

13.1 Alternative Transaction

13.2 Practical level of control

13.3 Potential decline in share price

4

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 audited accounts. Based on the Company’s audited accounts as at 30 June 2010, the value of the consideration to be paid for the additional interest in the Waterberg coalfield assets represents approximately 15%-20% of the equity interest of Firestone. Listing Rule 10.1 applies where the vendor or acquirer of the relevant assets is a related party of the listed entity.

Under Listing Rule 10.11, an entity must not issue or agree to issue equity securities to a related party without the approval of holders of ordinary securities.

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 the shareholders whose votes are not to be disregarded in respect of the transaction non-associated shareholders.

Accordingly, an independent experts’ report is required for the Transaction. 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 Firestone.

In addition to this, the current shareholders of Sekoko (and their associates) together own 38.9% of the shares in Firestone. Section 606 of the Corporations Act Regulations (“the Act”) expressly prohibits the acquisition of further shares by a party who already holds (with associates) more than 20% of the issued shares of a public company, unless a full takeover offer is made to all shareholders.

Section 611 permits such an acquisition if the shareholders of that entity have agreed to the issue of such shares. This agreement must be by resolution passed at a general meeting at which no votes are cast in favour of the resolution by any party who is associated with the party acquiring the shares, or by the party acquiring the shares. Section 611 states that shareholders of the company must be given all information that is material to the decision on how to vote at the meeting.

Regulatory Guide 74 issued by ASIC deals with "Acquisitions Agreed to by Shareholders". It states that the obligation to supply shareholders with all information that is material can be satisfied by the non-associated directors of Firestone, by either:

undertaking a detailed examination of the Transaction themselves, if they consider that they have sufficient expertise; or

by commissioning an Independent Expert's Report.

The Directors of Firestone have commissioned this Independent Expert's Report to satisfy this obligation.

5

3.2 Regulatory guidance

In determining whether the Transaction 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 states:

“A control transaction, when a person acquires, or increases, a controlling stake in a company, can be achieved by way of a number of different legal mechanisms. It is important for an expert to focus on the substance of a control transaction, rather than the legal mechanism used to affect it.”

RG 111 suggests that where a transaction is a control transaction it should be analysed on a basis consistent with a takeover bid.

In our opinion the Transaction is a control transaction as defined by RG 111 and we have therefore assessed the Transaction to consider whether in our opinion it is fair and reasonable to Shareholders.

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. 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. 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 additional interest in the Properties being acquired and the value of the consideration (fairness – see Section 12 “Is the Transaction 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 Transaction Reasonable?”).

This assignment is a Valuation Engagement as defined by APES 225 Valuation Services. A Valuation Engagement means an engagement or assignment to perform a valuation and provide a valuation report where we determine an estimate of value of the Company by performing appropriate valuation procedures and where we apply the valuation approaches and methods that we consider to be appropriate in the circumstances.

6

4. Outline of the Transactions Firestone announced on 2 February 2010 that it intends to acquire a 60% interest in two farms, Swanepoelpan 262LQ and Duikerfontein 263LQ (“T3 Properties”), through its wholly owned subsidiary Lexshell 126 General Trading Pty Ltd (“Lexshell”).

As part of the consideration for this interest in the T3 Properties, Firestone will issue the following:

A cash non-refundable payment of A$100,000, on or before 31 January 2010;

A cash non-refundable payment of A$100,000, on or before 1 July 2010;

A cash payment of A$1,800,000, on or before 28 July 2011; and

200,000,000 fully paid ordinary shares in Firestone at A$0.05 per share to Sekoko or its nominee.

If the Transaction is approved, Firestone will have a 60% interest in the T3 Properties.

Firestone currently has:

a 49.32% interest in two other properties in the Waterberg Coalfield, namely: Olieboomsfontein 220LQ, and Vetleegte 304LQ (“T1 Properties”); and

a 60% interest in four other properties in the Waterberg Coalfield, namely: Minnasvlakte 258LQ, Smitspan 306LQ, Massenberg 305LQ, and Hooikraal 315LQ (“T2 Properties”).

The issue of the scrip will have the following affect on the share capital of Firestone:

Firestone Share Structure Pre Transaction Post Transaction

Current Shareholders 1,443,362,632 61.1% 1,443,362,632 56.4%

Sekoko Coal Pty Ltd 917,937,832 38.9% 1,117,937,832 43.6%

Total 2,361,300,464 100.0% 2,561,300,464 100.0%

Sekoko also holds 110 million unlisted options in Firestone. If the Transaction was approved, and these options were to be exercised with no other options or convertible notes being exercised, it would result in Sekoko holding 45.97% of the issued shares in Firestone.

Firestone also has a further 152,779,767 unlisted options on issue, as well as 58 convertible notes. If other option holders exercised their options into shares, and the convertible note holders converted their debt bearing notes into Firestone shares, then Sekoko’s interest in Firestone would be further diluted.

7

5. Profile of Firestone Energy Ltd

5.1 History

Firestone is a Perth based exploration company which is co-listed on the Australian Securities Exchange (“ASX”) and the Johannesburg Stock Exchange (“JSE”). The Company was incorporated on 11 January 1993 and listed on the ASX on 24 June 1993. Firestone’s head office is situated in Subiaco, Western Australia.

In January 2006, Administrators were appointed to the Company and in July 2006, the Administrators and the Company entered into an amended Deed of Company Arrangement (“DOCA”). The Administrators accepted a proposal by an investment group for the restructuring and recapitalisation of the Company, including the settlement of all creditor claims. The proposal was accepted by creditors and the DOCA was subsequently executed. At a meeting of shareholders held in September 2006, the shareholders of the Company approved the various resolutions required to complete the restructuring and recapitalisation of the Company. Following the meeting, on 17 October 2006, the DOCA was terminated and the management of the Company was returned to the new Directors. As part of the administration process, a large proportion of the Company’s assets were sold to a third party including tenements; mining information; property, plant and equipment; subsidiary shares; and properties.

The Company changed its name to Firestone Energy Limited in December 2007, from the previous Centralian Minerals Limited. Firestone became dual listed on the Johannesburg Stock Exchange in October 2008.

5.2 Previous Transactions with Sekoko

T1 Transaction

On 18 June 2008, Firestone announced that it had agreed with Sekoko to acquire an interest in a 500 million tonne coal project in the Waterberg Coalfield of South Africa. The agreement was to conditionally acquire up to a 55% interest in the T1 Properties.

As part of the transaction, Firestone reached an agreement to acquire 100% of the issued capital of Checkered Flag Investments 2 Pty Ltd, a South African registered company that has signed a Joint Venture agreement with Sekoko, to acquire an interest in, and to farm into, the T1 Properties.

Under the T1 Joint Venture Agreement, Firestone:

earned an initial 30% equity interest in the T1 Joint Venture by making payment to Sekoko of ZAR12.5 million (approximately A$1.64 million) cash, issuing 220 million Firestone shares and granting 110 million options in the capital of Firestone (exercisable at $0.06 on or before 31 May 2013);

can earn a further 25% interest (for a total of 55%) through spending a maximum of ZAR50 million (approximately A$6.76 million) within a two year period on the T1 Properties to advance to a Bankable Feasibility Study (“BFS”) level, enabling the establishment of a future commercial mining operation; and

will pay a production royalty being the equivalent of ZAR0.50 (approximately A$0.07) per tonne of coal sold from the T1 Properties during the term of the mining operations to a maximum of ZAR25 million (approximately A$3.38 million) if mining activity is established.

Shareholder approval was granted for the T1 Transaction on 18 September 2008 and the T1 Joint Venture Agreement was finalised on 24 October 2008.

8

During October 2010, an addendum to the Joint Venture agreement was signed giving Firestone the opportunity to increase its potential interest in the T1 Joint Venture from 55% to a maximum of 60%. To do so, Firestone has agreed to pay Sekoko a production royalty fee of ZAR0.50 per tonne of coal sold from the Waterberg properties up to a maximum aggregate amount of ZAR45 million. Also, in order to obtain the 60% interest, Firestone must spend a maximum of R50 million for the additional 30% interest (five tranches of ZAR10 million each for a 6% interest) expended towards the completion of a BFS on the Waterberg properties.

T2 Transaction

On 1 April 2009, Firestone announced that it had added to its ground holding in the Waterberg Coalfield in the Limpopo Province in South Africa by signing a joint venture agreement with Sekoko. As part of the agreement, Firestone would have a 50% interest in four additional farms, those being the T2 Properties. On 3 July 2009 a market update was released in which the Company advised that the agreement had been revised to a 30% initial interest with an option to acquire an additional 30% interest.

Under the terms of the Agreement, Lexshell will establish a joint venture (“JV”) whereby Lexshell can earn an initial 30% interest in the T2 Properties in consideration for:

the issue to Sekoko of 868,176,563 new ordinary shares in Firestone; and

the reimbursement of expenditure of an amount not more than ZAR32.99 million which has been expended by Sekoko in the exploration and development of the T2 Properties.

Firestone can earn a further 30% interest (for a total of 60%) in five tranches of 6% for every ZAR10 million expended towards the completion of a BFS. Should the BFS cost less than ZAR50 million then Firestone is required to provide additional funds to the Lexshell JV whereby Firestone’s total contribution totals ZAR50 million. If the cost of the BFS is in excess of ZAR50 million then the additional funding is to be provided by Firestone on the basis of a loan to the Lexshell JV.

If a decision is made to mine the Properties then Sekoko will receive a management fee from the Lexshell JV of up to ZAR50 million over a seven year period from the date of commercial mining operations.

Total Payments

As at the date of our report, Firestone has spent a total of ZARR82.2 million towards the BFS. Under the Joint Venture agreement, Firestone must spend ZARR50 million to obtain a 60% interest in the T1 Properties, and ZAR50 million to obtain a 60% interest in the T2 Properties. Therefore, Firestone must spend a further ZAR17.8 million to obtain the 60% interests in both the T1 and T2 Properties.

After discussions with Firestone management, the apportioning of the spending thus far should be ZAR50 million towards the T2 Properties and the remainder contributing to the T1 Properties, being ZAR32.2 million, due to the majority of spending relating to the T2 Properties.

Therefore, as at the date of our report, Firestone holds a 60% interest in its T2 Properties and a 49.32% interest in its T1 Properties.

The 49.32% has been calculated by ZAR32.2million divided by ZAR50 million equating to 64.4% of the funding needed. The 64.4% is then multiplied by 30% (being the maximum additional interest to be acquired) resulting in an additional interest of 19.32%. This is then added to Firestone’s existing interest in the T1 Properties of 30%, to total a current interest of 49.32%.

9

5.3 Projects Firestone’s current project is the Waterberg coal project in the Limpopo Province of South Africa.

The project consists of eight farms in the Waterberg coalfield totalling 7,979 hectares. The identified area

over the Smitspan farm (first phase base case) indicates a mine layout covering 507 hectares extending for

3.5km east to west and 1.8km north to south. This area contains 258Mt (ROM) which will produce 103Mt of

domestic coal for local power stations and 10Mt of export quality coal with an average yield of 44% and 15%

respectively.

Reserves and resources

Firestone has saleable coal reserves of 120Mt where 51Mt are proven and 69Mt are probable.

Life of mine 21 years at an average strip ratio of overburden to saleable coal of 2.

Status

A definitive feasibility study was completed at the end of September 2010. The mining right has been

submitted and accepted by the mines regulation authorities of South Africa. The social & labour plan has

been submitted, the environmental impact assessment scoping study has been submitted and the

environmental management plan will be submitted at the end of November 2010.

Capital expenditure

Estimated ZAR2.7billion (A$394 million) to establish the first phase of the operation while the NPV is

estimated between ZAR1.2 and ZAR1.5 billion (A$176 to A$221 million).

More on the Waterberg coalfield

The Waterberg coalfield extends for approximately 85km in a westerly direction from Lephalale and has a

40km north south extent and contains approximately 50% of South Africa’s remaining coal resources with

thick, near surface coal seams. The coalfield is located within the growth area for Eskom supply with the

4,800MW Medupi power station currently under construction and a further 4,000MW power station in the

planning phase. Firestone is on track to start mining operations by the end of 2011. Ramp-up will be

determined by the timing of offtake agreements.

Source: www.Firestoneenergy.com.au

For further information regarding Firestone’s Waterberg coal project, please refer to Appendix 3.

10

5.4 Historical Balance Sheet

Balance Sheet

Audited As at

30-Jun-10 $

Audited As at

30-Jun-09 $

Audited As at

30-Jun-08 $

CURRENT ASSETS

Cash and cash equivalents 2,130,542 1,870,754 2,169,804

Trade and other receivables 420,031 30,047 107,145

2,550,573 1,900,801 2,276,949

NON-CURRENT ASSETS

Property, plant and equipment 113,330 30,454 34,758

Interest in joint venture 79,371,322 19,645,502 176,000

Receivables 147,119 179,649 -

Intangible - - 75,307

79,631,771 19,855,605 286,065

TOTAL ASSETS 82,182,344 21,756,406 2,563,014

CURRENT LIABILITIES

Trade and other payables 3,489,487 1,914,532 451,526

Borrowings - 600,000 -

3,489,487 2,514,532 451,526

NON CURRENT LIABILITIES

Borrowings 14,530,114 - -

14,530,114 - -

TOTAL LIABILITIES 18,019,601 2,514,532 451,526

NET ASSETS 64,162,743 19,241,874 2,111,488

EQUITY

Issued Capital 62,704,867 14,781,022 57,819,281

Reserves 6,210,265 5,776,916 2,590,000

Accumulated losses (4,752,372) (1,316,064) (58,297,793)

TOTAL EQUITY 64,162,743 19,241,874 2,111,488

Source: Audited financial statements for the years ended 30 June 2010, 30 June 2009 and 30 June 2008.

11

5.5 Historical Income Statements

Income Statement

Audited Year ended 30 June 10

$


$


$

Revenue from continuing operations 62,386 55,667 100,181

Other income 28,863 - -

Accounting Fees (4,437) (33,803) (54,661)

Administration expenses (538,204) (25,133) (91,271)

African project costs - - (222,531)

ASX fees and share registry expenses (237,201) (122,629) (176,759)

Director's Fees (252,911) (164,705) (111,909)

Foreign Exchange gain/(loss) 144,762 (9,921) -

Employee and consultant expenses (420,075) (550,336) (186,258)

Interest expenses (1,281,555) (35,466)

Legal and professional fees (642,791) (202,447) (65,037)

Occupancy costs (76,242) (108,603) (135,201)

Other project costs - - (19,351)

Share Based Payments - (11,645) (1,110,000)

Travel and accommodation (218,903) (107,043) (114,201)

Loss before income tax (3,436,308) (1,316,064) (2,186,998)

Income tax expense - - -

Loss for the year (3,436,308) (1,316,064) (2,186,998)

Source: Audited financial statements for the years ended 30 June 2010, 30 June 2009 and 30 June 2008.

12

5.6 Capital Structure

The share structure of Firestone as at 16 September 2010 is outlined below:

Description Number

Total Ordinary Shares on Issue 2,331,300,464

Top 20 Shareholders 1,578,629,985

Top 20 Shareholders - % of shares on issue 67.7% Source: Firestone’s annual financial report for the year ended 30 June 2010

The range of shares held in Firestone as at 16 September 2010 is as follows:

Range of Shares Held No. of Ordinary

Shareholders

1-1,000 2,469

1,001-5,000 1,543

5,001-10,000 350

10,001-100,000 1,492

100,001 – and over 1,018

TOTAL 6,872

Source: Firestone’s annual financial report for the year ended 30 June 2010

The ordinary shares held by the most significant shareholders as at 16 September 2010 are detailed below:

Name No of Ordinary

Shares Held Percentage of

Issued Shares (%)

Sekoko Resources Pty Ltd 997,937,832 42.8

Colbern Fiduciary Nominees Pty Ltd 113,500,000 4.9

Bell Potter Nominees Ltd 76,500,000 3.3

Uzalile Investments Pty Ltd 55,000,000 2.4

Total Top 4 1,242,937,832 53.4

Others 1,088,362,632 46.6

Total Ordinary Shares on Issue 2,331,300,464 100.0

Source: Firestone’s annual financial report for the year ended 30 June 2010

As at 5 October 2010, Firestone had the following unlisted options on issue:

Unlisted Options Number of Options Exercise Price Expiry date Cash Raised if

Options Exercised

FSEAK 30,000,000 $0.05 30 November 2012 $1,500,000

FSEAM 110,000,000 $0.06 31 May 2013 $6,600,000

FSEAO 96,904,767 $0.06 30 June 2013 $5,814,286

FSEAI 25,875,000 $0.06 30 June 2014 $1,552,500

Total 262,779,767 $15,466,786

Source: www.asx.com.au

13

6. Profile of Sekoko Coal Pty Ltd Sekoko is a wholly owned subsidiary of Sekoko Resources (Pty) Limited. Sekoko Resources (Pty) Limited is a South African black-owned mining and energy company based in the Limpopo Province. The company operates in the mining and exploration sectors. Its development strategy is to focus on acquisition, development and beneficiation of mineral resources for the benefit of its shareholders.

Sekoko and its joint venture partner, Firestone, have completed a definitive feasibility study on the Waterberg Project.

Sekoko’s other activities include early-stage screening and viability studies on the possibility of developing coal-to-liquids, coal-fired generation, as well as co-generation downstream projects.

The directors and management of Sekoko Resources (Pty) Limited are as follows:

Mr Timothy Tebeila (CEO and Executive Chairman) Malin Makou (Non Executive Director) MA Ntwampe (Non Executive Director)

7. Economic Analysis

7.1 Current Economic Conditions

The global economy grew faster than trend over the year to mid 2010, but will probably ease back to about trend pace over the coming year. Recent information is consistent with a more sustainable, but still strong, pace of growth in China and most of the Asian region. In Europe and the United States, growth prospects appear to be modest in the near term, a legacy of the financial crisis and its impact on private and public finances. Financial markets are still characterised by a degree of uncertainty, and are responding both to differences in growth outlooks between regions and evident strains on public finances and banking systems in several smaller countries in Europe. Most commodity prices have changed little over recent months, and those most important to Australia remain very high.

Information on the Australian economy shows growth around trend over the past year. Public spending was prominent in driving aggregate demand for several quarters but this impact is now lessening, while the prospects for private demand, and in particular business investment, have been improving. This is to be expected given the large rise in Australia’s terms of trade, which is now boosting national income very substantially.

Asset values are not moving notably in either direction, and overall credit growth is quite subdued at this stage, notwithstanding evidence of some greater willingness to lend. Inflation has moderated from the excessive pace of 2008. The effects of the rise in tobacco taxes aside, CPI inflation has been running at around 2¾ per cent over the past year. That looks likely to continue in the near term.

The current stance of monetary policy is delivering interest rates to borrowers close to their average of the past decade. The Board regards this as appropriate for the time being. If economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target.

Source: www.rba.gov.au

14

8. Coal Industry Analysis 8.1 Background 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 and depth of the coal deposit. 8.2 Coal Mining in South Africa According to the 2010 BP Statistical Energy Survey, South Africa had end 2009 coal reserves of 30,408 million tonnes, 3.68% of the world total. South Africa has Africa's only significant coal reserves.

South Africa had 2009 coal production of 250.02 million tonnes, 4.13% of the world total. The world's major producers are China, the USA, India, Australia, Russia, Indonesia and South Africa.

South Africa had 2009 coal consumption of 99.43 million tonnes oil equivalent, 3.03% of the world total. South Africa is Africa's only significant coal consuming nation.

South Africa is currently the fifth largest coal producing country in the world, producing, on average, around 224 million ton of marketable coal each year. Currently, about 77% of South Africa’s primary energy needs are provided by coal. Due to the relative lack of suitable alternatives, this situation is unlikely to change over the next 10 years.

Coal’s role as a fossil fuel is likely to become increasingly important in a world in which concerns over energy security are rising and demand for energy is growing strongly. According to the World Coal Institute, proven coal reserves are sufficient to sustain production at current levels for 147 years.

According to the 2009 BP Statistical Energy Survey, South Africa had 2008 coal production of 250.39 million tonnes, 4.24% of the world total. South Africa’s coal production was valued at approximately R59.9Bn in 2009.

According to the 2009 BP Statistical Energy Survey, South Africa had end 2008 coal reserves of 30408 million tonnes, 3.68% of the world total. This figure differs somewhat from those published by Eskom in 2009, which state that South Africa’s coal reserves are estimated to be 53 billion tonnes.

South Africa is the world’s third largest coal exporting country, exporting 25% of its production internationally. South Africa uses 53% of the balance of its coal production for electricity generation, 33% for petrochemical industries (Sasol), 12% for metallurgical industries (Iscor) and 2% for domestic heating and cooking. Eskom is the 11th largest electricity generator in the world, while Sasol is the largest coal-to-chemicals producer.

The main challenge to the ongoing use of coal as an energy source is environmental concerns.

15

About 51% of South African coal mining in carried out underground, with the balance produced by open cast methods. The industry is highly concentrated, with a handful of companies producing about 80% of the saleable coal production. More than 58 000 workers are employed in this industry.

Most of the country’s coal is currently mined in the Highveld, Witbank and Ermelo coalfields located in Mpumalanga province. Geology has determined that the Witbank coalfield is by far the most important source of South Africa’s mined coal at present. However, the future of South Africa’s coal industry depends on the development of the Waterberg deposits, which extend into Botswana.

Source: http://www.mbendi.com/

8.3 Companies Active in South Africa BHP Billiton Energy Coal South Africa Ltd, one of the largest energy coal exporters in the world, owns and operates four collieries (Douglas, Khutala, Klipspruit, Middelburg) in the Mpumalanga Province in South Africa. BHP Billiton Energy Coal South Africa is one of the largest suppliers to the seaborne energy coal market. This coal is sold into Europe, the Far East, India, Africa and South America. Coal is also sold to South Africa’s local utility company, Eskom. BHP Billiton Energy Coal South Africa is one of Eskom’s largest suppliers.

Anglo American's thermal coal business owns and operates nine mines and has a 50% interest in the Mafube colliery and Phola washing plant. The Zibulo project is under construction and includes a 50:50 joint venture coal washing plant with BHP Billiton Energy coal South Africa. The project is on track to deliver 6.6 Mtpa of export and Eskom coal from 2012.

With a complementary mix of 13 underground and open cut mines which produce thermal, coking and semi-soft coal products, Xstrata Coal is South Africa's third largest coal exporter.

The 6.7m tonne-per annum Goedgevonden Colliery, a joint venture between ARM Coal and Xstrata Coal, has signed a 17-year coal supply agreement with South Africa’s national power utility, Eskom.

In terms of the contract, Goedgevonden will supply approximately 60 million tonnes of thermal coal (3.5 million tonnes per annum) to Eskom’s Majuba coal-fired power station from December 2009 through to 2026.

Exxaro Coal’s eight managed coal mines produced 45,2Mtpa of power station, steam and coking coal in 2009. Exxaro’s Grootegeluk, in the Waterberg coal field, is one of the most efficient mining operations in the world. This mine is currently being expanded at a cost of R9 billion. Exxaro also has another greenfields development, expected to supply 10 mtpa for the export market by 2018.

Anglo Coal is also investigating a coal bed methane project in the area.

Sasol’s Thubelisha coal mine near Secunda is due to reach full mining production in 2015. The mine is expected to have a lifespan of between 32 and 35 years.

Optimum Coal has purchased a 49.998% interest in Siyanda Coal, which owns the Koornfontein mines. This will take Optimum Coal’s interest in Koornfontein to 91%.

The Waterberg Coalfield is being investigated by State-owned Sasol and PetroSA to supply potential coal-to-liquids and gas-to-liquids projects; while Anglo Coal over the last 15 years has established considerable reserves of coal bed methane gas.

16

Firestone Energy and joint venture partners Sekoko Coal have been granted approval to commence a small scale mining operation in this area. Mining operations were due to commence at the end of 2009 at a rate of 60 000tpm ROM, which is expected to yield between 30 000 and 40 000tpm of saleable coal. This small operation will provide a starter pit for a larger scale operation planned to commence in 2011.

Source: http://www.mbendi.com/

8.4 Coal Demand & Supply Characteristics Europe, Japan, Korea and Taiwan have traditionally been the largest importers of coal. Demand from these markets has fallen over the past few years due to deterioration in economic conditions and a subsequent fall in demand for energy. Economic conditions in emerging markets such as China, India, Thailand, Malaysia and Chile have been much more favourable by comparison. As a result, demand for energy has actually increased in these markets. This trend is illustrated in the table below, which shows consumption patterns from 1999 to 2009 for hard and sub-bituminous coals. Total global coal consumption increased from 2,249 million tonnes in 1999 to 3,278 million in 2009.

China accounted for approximately 47% of all coal consumed in 2009 while the USA accounted for approximately 16%.

Source: BP Statistical Review of World Energy June 2010

The table below illustrates total coal production patterns from 1999 to 2009 for hard and sub-bituminous coals. Total global coal production increased from 2,225 million tonnes in 1999 to 3,409 million in 2009. The trend in production over the past ten years is similar to that of consumption in that production has increased significantly in the Asia Pacific region and remained relatively stable in Europe, the Americas and Africa.

0200400600800

1,0001,2001,4001,6001,800

Mt

oil e

quiv

alen

t

17


Despite the increase in coal production in the Asia Pacific region, demand has not kept pace with supply. Recent changes in Chinese coal mining policy have improved safety and focused on closing small mines with poor recovery rates. Approximately 1000 small coal mines were closed in China in 2008. In addition, the majority of China’s coal resources are located in Northern and Northwest China, while the primary consuming areas are in the country’s coastal provinces. The scale of China’s demand for coal is placing significant strain on the country’s transportation network, particularly the rail system. Together, changes in mining regulation and infrastructure constraints mean that the country is likely to remain a net coal importer.

India relies on thermal coal for approximately 75% of its power requirements. India suffers from severe power shortages and blackouts are common in all of the country’s capital cities. Because of this the Indian government has set a goal to significantly increase its power capacity. Future growth in India’s power demand is expected to be dependent on speed in which the country can accumulate infrastructure.

For the reasons mentioned above it is expected that the Asia Pacific region will become increasingly competitive with Europe, Japan, Korea and Taiwan for future coal resources. There are significant coal reserves in this region but an inability to bring reserves to production rapidly enough to keep pace with economic development has resulted in this region increasingly becoming a net coal importer. In some instances safety issues and infrastructure constraints have also been production constraints. Key producers in close proximity to these markets such as Indonesia, Australia and South Africa are likely to benefit from this trend.

8.5 Coal Reserves Globally, it is estimated that there is enough coal to last 190 years, compared to 42 and 60 years respectively for oil and gas reserves (Coal Facts 2008, World Coal Institute).

Coal reserves are available in almost every country worldwide, with recoverable reserves in around 70 countries. As shown below, 33 per cent of the world’s proven reserves are located in Europe and Eurasia, 32 per cent are found in the American continent 14 per cent are found in China and 9 per cent are found in Australia.

0200400600800

1,0001,2001,4001,600

Mt

oil e

quiv

ilent

18


8.6 Price Trends 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. Coal is a highly marketable commodity, and with world consumption estimated to increase 60% by 2030, the long term price outlook is strong.

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. Coking coal currently trades at an average price of around US$250/t, near the peak levels of mid 2008.

Source: Bloomberg & the International Monetary Fund

32%

33%

4%

9%

14%

7% 1%

North & South America

Europe & Eurasia

Middle East & Africa

Australia

China

India

Remaining Asia Pacific

0

50

100

150

200

250

300

2004 2005 2006 2007 2008 2009 2010

US$

/ton

ne

Thermal Coal

Coking Coal

19

8.7 Outlook Global coal reserves are more plentiful than oil or gas reserves. According to the World Coal Institute there is currently approximately 119 years of coal remaining worldwide. World energy consumption is expected to increase by approximately 60% over the 30 years and coal’s role as a input for steel and iron production is likely to continue for the foreseeable future. Developing countries such as China and India are expected to account for approximately two thirds of the future increase in energy demand. Growth is expected to be strongest in the steam and coking coal markets, stemming from electricity demand, car production, and demand for household appliances. Demand and supply are set to remain fairly tight into the future, substantiating a positive outlook for the industry.

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:

Net Tangible Assets on a going concern basis (“NTA”)

Quoted Market Price Basis (“QMP”)

Capitalisation of future maintainable earnings (“FME”)

Discounted Cash Flow (“DCF”)

Multiple of Exploration Expenditure (“MEE”)

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 Firestone shares we have chosen to employ the following methodologies:

Net Tangible Assets on a going concern basis (“NTA”)

Quoted Market Price Basis (“QMP”)

We have chosen these methodologies for the following reasons: Being an exploration company, the core value of Firestone is in the exploration assets it holds. These assets are recorded in the balance sheet. We have instructed Venmyn Rand Pty Ltd (“Venmyn”) to provide us with an independent specialist report on the value of these assets and have considered these in the context of Firestone’s other assets and liabilities. Firestone’s exploration assets are still in the exploration stage. As such, Firestone is not able to prepare reliable forecasts on the future cash flows of any mining activity. This means that the DCF method is not appropriate. Firestone is an exploration company and does not generate any regular trading income. Therefore, there are no historic profits that could be used to represent future earnings. This means that the FME valuation methodology will not be appropriate. Firestone’s shares are traded on the ASX and the JSE. This means there is a regulated, liquid and observable market where Firestone’s shares can be traded. However, in order for the quoted market price to be considered appropriate the Company’s shares should be liquid and the market should be fully informed as to Firestone’s activities. We have considered these factors in Section 13.

20

10. Valuation of a Firestone share prior to the Transaction In valuing a Firestone share prior to the Transaction, we have utilised the NTA and QMP valuation methodologies as outlined in section 9.

10.1 Net Tangible Asset Valuation of Firestone

The value of Firestone assets on a going concern basis is reflected in our valuation below:

Firestone Energy Ltd

Ref

Audited as at

30 June 2010 $

Preferred Value $

ASSETS

Cash and cash equivalents a 2,130,542 2,730,542

Trade and other receivables 420,031 420,031

Property, plant and equipment 113,330 113,330

Interest in joint venture b 79,371,322 124,920,000

Receivables 147,119 147,119

TOTAL ASSETS 82,182,344 128,331,022

LIABILITIES

Trade and other payables 3,489,487 3,489,487

Borrowings 14,530,114 14,530,114

TOTAL LIABILITIES 18,019,601 18,019,601

NET ASSETS 64,162,743 110,311,421

Shares on issue c 2,331,300,464 2,361,300,464

Value of a Firestone share prior to the Transaction 0.0467

The table above indicates the value of a Firestone share after adjustments on a net asset basis is $0.0467 per share. We have adjusted cash & cash equivalents, interest in joint venture, and shares on issue as set out below: a) Cash and cash equivalents We have adjusted cash as a result of the issue of 30 million shares at $0.02 each raising $600,000 from the part conversion of a convertible note. This conversion was announced on the ASX on 5 October 2010 under Appendix 3B.

21

b) Exploration & evaluation expenditure We instructed Venmyn to prepare valuations of the projects which Firestone currently has an interest in. A summary of the valuations is attached as Appendix 3 to this report. The results of the market value of Firestone’s exploration interests are set out below:

Valuation Total Preferred Value

ZAR(m) Firestone’s current percentage interest

Preferred Value of Firestone’s interest

ZAR(m)

T1 Properties 149.58 49.32% 73.77

T2 Properties 1,292.84 60.00% 775.70

T3 Properties 67.03 - -

Total 849.47

Source: Appendix 3

Based on the table above, the preferred value of Firestone’s current interests is ZAR 849.47 million.

As we are performing our analysis in Australian Dollars, we have converted Venmyn’s values from South African Rand into Australian Dollars.

The below graph outlines the AUD/ZAR exchange rate over the year to 4 November 2010:

Source: www.oanda.com

6.00

6.20

6.40

6.60

6.80

7.00

7.20

05-Nov-09 05-Jan-10 05-Mar-10 05-May-10 05-Jul-10 05-Sep-10

22

We have also sourced from the Bloomberg Data Service the forecasted AUD/ZAR exchange rate through to 4 November 2011:

Source: Bloomberg data service

From the historic and forecast AUD/ZAR exchange rate, we believe a reasonable exchange rate to adopt in converting the value of Firestone’s projects is 6.80.

Properties Valuation Preferred Value of Firestone’s

interest

Venmyn Valuation (ZARm) 849.47

Exchange rate 6.80

Venmyn Valuation (AUDm) 124.92

The table above indicates the preferred value of Firestone’s current interest in the Properties is $124.92 million.

c) Shares on issue We have adjusted shares on issue as a result of the issue of 30 million shares at $0.02 each raising $600,000 from the part conversion of a convertible note. This conversion was announced on the ASX on 5 October 2010 under Appendix 3B.

23

10.2 Quoted Market Prices for Firestone Securities

To provide a comparison to the valuation of Firestone in Section 10.1, we have also assessed the quoted market price for a Firestone share.

The quoted market value of a company’s shares is reflective of a minority interest. A minority interest is an interest in a company that is not significant enough for the holder to have an individual influence in the operations and value of that company.

RG 111.22 suggests that when considering the value of a company’s shares for the purposes of approval under Item 7 of s611 the expert should consider a premium for control. An acquirer could be expected to pay a premium for control due to the advantages they will receive should they obtain 100% control of another company. These advantages include the following:

control over decision making and strategic direction

access to underlying cash flows;

control over dividend policies; and

access to potential tax losses.

Whilst Sekoko will not be obtaining 100% of Firestone, RG 111 states that the expert should calculate the value of a target’s shares as if 100% control were being obtained. RG 111.24 states that the expert can then consider an acquirer’s practical level of control when considering reasonableness. Reasonableness has been considered in Section 13.

Therefore, our calculation of the quoted market price of a Firestone share including a premium for control has been prepared in two parts. The first part is to calculate the quoted market price on a minority interest basis. The second part is to add a premium for control to the minority interest value to arrive at a quoted market price value that includes a premium for control.

Minority interest value

Our analysis of the quoted market price of a Firestone share is based on the pricing prior to the announcement of the Transaction. This is because the value of a Firestone share after the announcement may include the affects of any change in value as a result of the Transaction. However, we have considered the value of a Firestone share following the announcement when we have considered reasonableness in Section 13.

Information on the Transaction was announced to the market on 2 February 2010. Therefore, the following chart provides a summary of the share price movement over the year to 1 February 2010 which was the last trading day prior to the announcement.

24

Source: Bloomberg

The daily price of Firestone shares from 2 February 2009 to 1 February 2010 has ranged from a high of $0.059 on 14 September 2009 to a low of $0.012 on 13 March 2009.

During this period a number of announcements were made to the market. The key announcements are set out below:

Date Announcement

Closing Share Price Day of

Announcement $ (movement)

Closing Share Price Three Days After

Announcement $ (movement)

1 April 2009 Firestone adds 1 billion tonnes of coal to its existing inventory

0.030 (�15%) 0.039 (�30%)

11 May 2009 Convertible note issue 0.039 (�5%) 0.036 (�8%)

12 June 2009 Placement & board restructure, and 24% increase in Vetleegete coal resource

0.041 (�5%) 0.036 (�12%)

3 July 2009 Resource upgrade and Sekoko Agreement 0.036 (�2%) 0.034 (�6%)

21 August 2009 Funding and proposed issue of shares 0.044 (�6%) 0.045 (�2%)

3 September 2009 Mining approval granted 0.049 (�6%) 0.047 (�4%)

11 September 2009 $25 million capital raising 0.047 (-) 0.049 (�4%)

25 September 2009 Second joint venture with Sekoko effective 0.047 (�2%) 0.045 (�4%)

20 November 2009 Acquisition of surface rights on Smitspan Farm 0.039 (-) 0.038 (�2%)

25 November 2009 Firestone/Sekoko JV agree on third transaction

0.038 (�2%) 0.034 (�10%)

25 November 2009 Increases Waterberg coal tonnage to 3.802 billion tonnes

0.038 (�2%) 0.034 (�10%)

To provide further analysis of the market prices for an Firestone share, we have also considered the weighted average market price for 10, 30, 60 and 90 day periods to 1 February 2010.

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

$0.000$0.005$0.010$0.015$0.020$0.025$0.030$0.035$0.040$0.045$0.050$0.055

Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09

Volume Close

25

1 February 2010 10 Days 30 Days 60 Days 90 Days

Closing Price $0.031

Weighted Average $0.034 $0.034 $0.036 $0.038

The above weighted average prices are prior to the date of the announcement of the Transaction, to avoid the influence of any increase in price of Firestone shares that has occurred since the offer was announced.

An analysis of the volume of trading in Firestone shares for the twelve months to 1 February 2010 is set out below:

Share price low Share price high Cumulative Volume

traded As a % of Issued

capital

1 day $0.031 $0.032 647,800 0.03%

10 days $0.031 $0.036 10,656,402 0.46%

30 days $0.030 $0.038 24,990,945 1.07%

60 days $0.030 $0.040 88,250,270 3.79%

90 days $0.030 $0.045 146,355,645 6.28%

180 days $0.021 $0.051 489,646,384 21.00%

This table indicates that Firestone’s shares display a low level of liquidity, with 21% of the Company’s current issued capital being traded in a six month period. For the quoted market price methodology to be reliable there needs to be a ‘deep’ market in the shares. RG 111.53 indicates that a ‘deep’ market should reflect a liquid and active market. We consider the following characteristics to be representative of a deep market:

Regular trading in a company’s securities;

Approximately 1% of a company’s securities are traded on a weekly basis;

The spread of a company’s shares must not be so great that a single minority trade can significantly affect the market capitalisation of a company; and

There are no significant but unexplained movements in share price.

A company’s shares should meet all of the above criteria to be considered ‘deep’, however, failure of a company’s securities to exhibit all of the above characteristics does not necessarily mean that the value of its shares cannot be considered relevant.

In the case of Firestone, while the shares are not highly liquid they are traded on a regular basis. However, the share price is volatile and small changes in share price can result in a significant change in the market capitalisation of Firestone. Therefore, we consider that the quoted market price can be relied upon as an indicator of the value of a Firestone share when compared with alternative valuation methods.

Our assessment is that a range of values for Firestone shares based on market pricing, after disregarding post announcement pricing, is between $0.030 and $0.038.

When considering the QMP value of a Firestone share we also analysed the trading of Firestone’s shares on the JSE. We note that in the month prior to the announcement of the Transaction, there were only two days where Firestone’s shares were traded. Just 132,990 shares were traded over the period and the share

26

price only moved once, from ZAR0.44 to ZAR0.43. Do to the illiquidity of Firestone shares on the JSE, we have not considered this price with our QMP valuation of Firestone’s shares.

Control Premium

We have reviewed the control premiums paid by acquirers of companies listed on the ASX. We have summarised our findings below:

Transaction Period Number of Transactions Average Deal Value

(US$m) Average Control Premium

2010 11 82.26 62.14%

2009 38 467.40 57.96%

2008 36 911.46 25.08%

2007 32 1,566.40 18.88%

Total 117 868.41 37.55%

Source: Mergerstat/BVR Control Premium Study

We have also reviewed control premiums paid by acquirers of Australian mining companies, both listed and unlisted. We have summarised our findings below:

Transaction Period Number of Transactions Average Deal Value

(US$m) Average Control Premium

2010 8 34.28 26.31%

2009 55 97.81 23.56%

2008 34 165.08 11.02%

2007 43 298.91 17.95%

Total 140 172.28 17.43%

Source: Bloomberg data service

We have concluded that an appropriate control premium to use in our valuation is between 15% and 25%

Quoted market price including control premium

Applying a control premium to Firestone’s quoted market share price results in the following quoted market price value including a premium for control:

Quoted market price including control premium Low

$ High

$

Quoted market price value 0.030 0.038

Control premium 15% 25%

Quoted market price valuation including a premium for control 0.034 0.048

27

Therefore, our valuation of a Firestone share based on the quoted market price method and including a premium for control is between $0.034 and $0.048.

10.3 Conclusion on value of a Firestone share prior to the Transaction

The results of the valuations performed are summarised in the table below:

Value of an Firestone Share Low

$ High

$

Net tangible assets (Section 10.1.1) 0.0467 0.0467

ASX market prices (Section 10.1.2) 0.034 0.048

BDO Preferred Valuation 0.034 0.048

We consider Firestone’s quoted market price to be reflective of the value of a Firestone share. Whilst we consider that Firestone’s shares are not highly liquid and therefore, do not present a deep market, Firestone’s shares are regularly traded, albeit in small volumes, and there has been clear market response to announcements made by Firestone. Therefore, in our opinion, the net asset value of a Firestone share does not fully reflect the markets’ assessment of the value of Firestone’s interest in the Waterberg Coal Project. As such, we consider that the value of a Firestone share to be between $0.034 and $0.048. It is to be noted that the value per share we have calculated on a net tangible asset basis falls within the range we have calculated using the QMP valuation methodology.

28

11. Value of a Firestone share following the implementation of the Transaction

Under the terms of the T3 Transaction, Firestone, through Lexshell, will obtain a 60% interest in T3 with Sekoko holding onto the remaining 40%.

In summary, Firestone will pay Sekoko:




200,000,000 fully paid ordinary shares in Firestone at A$0.05 per share to Sekoko or its nominee.

In valuing a Firestone share after the implementation of the Transaction, we have utilised the NTA valuation methodology as outlined in section 9.

11.1 Net Tangible Asset Valuation of Firestone

The value of a Firestone share following the implementation of the Transaction is reflected in our valuation below:

Firestone Energy Ltd Ref

Pre Transaction (Section 10.1)

$ Preferred Value

$

ASSETS

Cash and cash equivalents a 2,730,542 930,542

Trade and other receivables 420,031 420,031

Property, plant and equipment 113,330 113,330

Interest in joint venture b 124,920,000 130,830,000

Receivables 147,119 147,119

TOTAL ASSETS 128,331,022 132,441,022

LIABILITIES

Trade and other payables 3,489,487 3,489,487

Borrowings 14,530,114 14,530,114

TOTAL LIABILITIES 18,019,601 18,019,601

NET ASSETS 110,311,421 114,421,421

Shares on issue c 2,361,300,464 2,561,300,464

Value of a Firestone share prior to the Transaction 0.0447

29

The table above indicates the value of a Firestone share following the implementation of the Transaction after adjustments on a net asset basis is $0.0447 per share. We have adjusted cash & cash equivalents, interest in joint venture, and shares on issue as set out below:

a) Cash and cash equivalents

The cash consideration payments are as follows:




Following our adjustments to cash in section 10.1, we have adjusted cash by A$1.8 million, as this is the amount still payable by Firestone. It is to be noted that as at the date of our report, Firestone had already made cash payments for the T3 Properties of A$200,000. We have not adjusted the cash balance by A$200,000 as these payments are non refundable, and if the Transaction is rejected, Firestone will not be able to request a refund for these cash payments. b) Exploration & evaluation expenditure We have instructed Venmyn to prepare a specialist valuation of the Properties held by the Lexshell JV.

In valuing the properties, Venmyn utilised the multiple of exploration expenditure method, the comparable transaction method, and the discounted cash flow method. The multiple of exploration expenditure method involves applying a multiple to historic expenditure that reflects the development stage of the assets, resource quality and amount of resource defined. Given the development stage of the Properties we consider this method to be reasonable. The comparable transaction method compares the attributes and characteristics of properties that have been involved in historic transactions to the Properties and calculates a value based on these historic, comparable transactions. This method involves estimating any value differences that may occur due to the timing of transactions and the differences in property attributes and characteristics. The value of the comparable transactions was based on a unit of coal resource. The discounted cash flow method was not used by Venmyn in a resultant preferred value.

We consider that both the multiple of exploration expenditure and comparable transaction methods are acceptable methods for valuing the Properties given their stage of exploration. A summary of Venmyn’s report is attached as Appendix 3. A full version of Venmyn’s report is available free of charge at Firestone’s office located at Level 1, 63 Hay Street, Subiaco, Western Australia.

The values calculated by Venmyn for the T3 Properties are set out below:

T3 Cost Approach

(ZARm) Market Approach

(ZARm) Cash Flow Approach

(ZARm) Preferred Value

(ZARm)

Swanepoelpan 262 LQ 21.98 64.68 n/a 64.68

Duikerfontein 263 LQ 0.00 2.35 n/a 2.35

Total 21.98 67.03 n/a 67.03

Source: Appendix 3

30

Firestone will be acquiring 60% of the T3 Properties. The resultant value of Firestone’s interests as part of the Transaction is as follows:

Firestone’s Interests 100% Venmyn Valuation

(ZARm)

Firestone additional interest (ZARm)

Firestone’s additional interest in Properties

(ZARm)

T3 Properties 67.03 60% 40.22

As we are performing our analysis in Australian Dollars we have converted Venmyn’s value into Australian Dollars. We have used the average AUD/ZAR exchange rate calculated previously of 6.80 in our conversion of Venmyn’s valuation.

Properties Valuation Preferred Value

A$m

Venmyn Valuation (ZARm) 40.22

Exchange rate 6.80

Venmyn Valuation (AUDm) 5.91

The table above indicates the preferred value of Firestone’s additional interests in the Properties is A$5.91 million.

c) Shares on issue We have adjusted shares on issue as a result of the issue of 200,000,000 fully paid ordinary shares in Firestone at A$0.05 per share to Sekoko or its nominee.

31

12. Is the Transaction Fair? The value of a Firestone share prior to the Transaction and following the implementation of the Transaction is compared below:

Fairness Ref

Low $

High $

Value of a Firestone share prior to the Transaction 10 0.0340 0.0480

Value of a Firestone share following the implementation of the Transaction 11 0.0447 0.0447

The above valuation ranges are graphically presented below:

The value of a Firestone share following the implementation of the Transaction falls within the range of the value of a Firestone share prior to the Transaction. The wide range of values prior to the Transaction reflects the range in values calculated using the quoted market price methodology.

Accordingly, in our opinion the Transaction is fair.

$0.000 $0.010 $0.020 $0.030 $0.040 $0.050 $0.060

Value of a Firestone share following the implementation of

the Transaction

Value of a Firestone share prior to the

Transaction

Valuation Summary

32

13. Is the Transaction Reasonable?

13.1 Alternative Transaction

We are unaware of any alternative transaction that might offer the non-associated shareholders of Firestone a premium over the value ascribed to that resulting from the Transaction. Given Sekoko’s current 38.9% interest in Firestone, we do not consider it likely that an alternative transaction will arise before the Transaction is put to Shareholders.

13.2 Practical Level of Control

If the Transaction is approved then Sekoko will hold an interest of approximately 43.6% in Firestone.

When shareholders are required to approve an issue that relates to a company there are two types of approval levels. These are general resolutions and special resolutions. A general resolution requires 50% of shares to be voted in favour to approve a matter and a special resolution required 75% of shares on issue to be voted in favour to approve a matter. If the Transaction is approved, Sekoko will hold less than 50% of the shares on issue and will not be able to block special resolutions or pass general resolutions.

We do not consider the movement in Sekoko’s interest from 38.9% to 43.6% a significant movement with regards to its level of control in Firestone.

Sekoko’s control of Firestone following the Transaction will be significant when compared to all other shareholders. Therefore, in our opinion, while Sekoko will be able to significantly influence the activities of Firestone, it will not be able to exercise a similar level of control as if it held 100% of Firestone. As such, Sekoko should not be expected to pay a similar premium for control as if it were acquiring 100% of Firestone.

13.3 Potential movement in share price

We have analysed movements in Firestone’s share price since the Transaction was announced. A graph of Firestone’s share price since the announcement is set out below.

Source: Bloomberg

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

$0.000

$0.005

$0.010

$0.015

$0.020

$0.025

$0.030

$0.035

$0.040

01-Feb-10 01-Apr-10 01-Jun-10 01-Aug-10 01-Oct-10

Volume Close

33

The price of Firestone’s shares did not move dramatically from the date of the announcement of the Transaction on 2 February 2010. The price of a Firestone share immediately after the announcement of the Transaction was in the range of $0.030 to $0.038, which we concluded was the value of a Firestone share prior to the announcement of the Transaction based on the QMP methodology. Given the above analysis it is possible that if the Transaction is not approved then Firestone’s share price is unlikely to decline.

13.4 Advantages of Approving the Transaction

We have considered the following advantages when assessing whether the Transaction is reasonable.

Ref Advantage Description

13.4.1 The Transaction is

fair

As set out in section 12 the Transaction is fair. RG 111 states that a

Transaction is reasonable if it is fair

13.4.2 Further exposure to

coal assets

The T1, T2 and T3 Properties have a combined 1,881 million gross tonnes

in situ in the measured, indicated and inferred categories.

While the Properties are prospective for coal resource, it is important to

note that a bankable feasibility study has not been completed and there

is no guarantee that the Properties are or will be economically feasible.

However, a definitive feasibility study has recently been completed as

per Firestone’s announcement on the ASX on 12 October 2010.

13.4.3 Potential

Synergistic Benefits

The properties are contiguous to the Smitspan property and geology and

depth continues from Smitspan to the Swanepoelpan property. This

means that there is the potential for significant production synergies and

mine optimisation should the T1, T2 and T3 properties prove to be

economically viable. This means that Firestone may achieve benefits from

shared production assets, infrastructure and production volumes. The

Company could also achieve benefits from producing lower cost or

premium quality reserves before producing higher cost, lower quality

reserves.

34

13.5 Disadvantages of Approving the Transaction

If the Transaction is approved, in our opinion, the potential disadvantages to Shareholders include those listed in the table below:

Ref Disadvantage Description

13.5.1 Dilution of existing

shareholders

The consideration to be paid involves the issue of 200 million shares in

Firestone. This will result in a dilution in the interest held by

Shareholders in Firestone from 61.1% to 56.4%.

In addition to the shares noted above, Firestone also issued 110 million

options in Firestone to Sekoko as part of T1. If these options were

exercised, and assuming no other options are exercised, then

Shareholders interests in Firestone would be further diluted to 54.0%.

Any dilution in the percentage of shares held by a shareholder reduces

the interest they have in any potential dividends and distributions that

may be paid by a company.

13.5.2 Additional funds

required to advance

the Properties

Firestone is responsible for funding the BFS on the Properties. Additional

funds will be required to commence feasibility of the Properties. This

means that Firestone will be required to issue more shares in the future.

This is indicated in Resolution 3 of Firestone’s annual general meeting

for 2010 whereby Firestone is seeking approval to issue convertible notes

with the ability to convert to approximately 320 million shares in the

future. This will further dilute Shareholders’ interest in Firestone.

13.5.3 Sekoko will increase

its control of

Firestone

Sekoko will hold an initial interest of at least 43.6% in the shares of

Firestone. This means that Sekoko will be able to influence any voting

required on the activities of Firestone.

35

14. Conclusion We have considered the terms of the Transaction as outlined in the body of this report and have concluded that the Transaction is fair and reasonable to the Shareholders of Firestone.

15. Sources of Information This report has been based on the following information:

Draft Explanatory Statement on or about the date of this report; Financial statements of Firestone for the years ended 30 June 2009 and 30 June 2010; Independent specialist valuation reports prepared by Venmyn; Draft notice of meeting dated on or about the date of this report; Joint Venture Agreement between Sekoko, Lexshell and Firestone; Share registry information; Information in the public domain; and Discussions with Directors and Management of Firestone.

16. Independence BDO Corporate Finance (WA) Pty Ltd is entitled to receive a fee of $35,000 (excluding GST and reimbursement of out of pocket expenses). 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 Firestone in respect of any claim arising from BDO Corporate Finance (WA) Pty Ltd's reliance on information provided by the Firestone, 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 Firestone and Firestone 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 independence of Firestone and Firestone and their respective associates.

Neither the two signatories to this report nor BDO Corporate Finance (WA) Pty Ltd, have had within the past two years any professional relationship with Firestone, or their associates, other than in connection with the preparation of this report.

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 Firestone.

A draft of this report was provided to Firestone 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 has appointed BDO (Australia) Limited ACN 050 110 275 to represent it in BDO International).

36

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 Sherif Andrawes and Adam Myers 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.

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 twenty 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 120 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.

Adam Myers is a member of the Australian Institute of Chartered Accountants. Adam’s career spans 11 years in the Audit and Assurance and Corporate Finance areas.

18. Disclaimers and Consents This report has been prepared at the request of Firestone for inclusion in the Explanatory Memorandum which will be sent to all Firestone Shareholders. Firestone engaged BDO Corporate Finance (WA) Pty Ltd to prepare an independent expert's report to consider the acquisition of a 60% interest in a further two properties in the Waterberg Coalfield.

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.

BDO Corporate Finance (WA) Pty Ltd has not independently verified the information and explanations supplied to us, nor has it conducted anything in the nature of an audit or review of Firestone in accordance with standards issued by the Auditing and Assurance Standards Board. However, we have no reason to believe that any of the information or explanations so supplied are false or that material information has been withheld. It is not the role of BDO Corporate Finance (WA) Pty Ltd acting 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 Firestone. BDO Corporate Finance (WA) Pty Ltd provides no warranty as to the adequacy, effectiveness or completeness of the due diligence process.

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.

37

BDO Corporate Finance (WA) Pty Ltd has also considered and relied upon independent valuations for properties held by the Joint Venture. The valuer engaged for the valuations possesses the appropriate qualifications and experience in the coal industry to make such assessments. The approaches adopted and assumptions made in arriving at the valuations are appropriate for this report. We have received consents from the valuer for the use of their valuation reports in the preparation of 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

Sherif Andrawes Director

Adam Myers Associate Director Authorised Representative

38

Appendix 1 – Glossary of Terms

Reference Definition

ASIC Australian Securities and Investments Commission

ASX Australian Securities Exchange

AUD or $ Australian Dollar

BDO BDO Corporate Finance (WA) Pty Ltd

BFS Bankable Feasibility Study

DCF Discounted Future Cash Flows

DOCA Deed of Company Arrangement

EBIT Earnings before interest and tax

EBITDA Earnings before interest, tax, depreciation and amortisation

Firestone or the Company Firestone Energy Limited

FME Future Maintainable Earnings

FSG Financial Services Guide

JSE Johannesburg Stock Exchange

JV Joint Venture

Lexshell Lexshell 126 General Trading Pty Ltd

MEE Multiple of Exploration Expenditure

NTA Net Tangible Assets

Our Report This Independent Expert’s Report prepared by BDO

PEM Prospectivity Enhancement Multiplier

QMP Quoted Market Price Basis

RG 111 Regulatory Guide 111 ‘Content of Expert Reports’

RG 112 Regulatory Guide 112 ‘Independence of Experts’

Sekoko Sekoko Coal Pty Ltd

Shareholders Shareholders of Firestone Energy Limited

T1 Properties Vetleegte and Olieboomsfontein

T2 Properties Minnasvlakte, Smitspan, Massenberg, and Hooikraal

T3 Properties Swanepoelpan and Duikerfontein

T3 Transaction Firestone acquiring a 60% interest in the T3 Properties

The Act The Corporations Act

The Transaction The T3 Transaction

Venmyn Venmyn Rand Pty Ltd

ZAR South African Rand

39

Appendix 2 – Valuation Methodologies

Methodologies commonly used for valuing assets and businesses are as follows:

1 Net tangible asset value on a going concern basis (“NTA”) 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 entities are not profitable, a significant proportion of the entity’s assets are liquid or for asset holding companies.

2 Quoted Market Price Basis 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.

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.

40

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.

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 Multiple of Exploration Expenditure (“MEE”) The Past Expenditure method is a method of valuing exploration assets in the resources industry. It is applicable for areas which are at too early a stage of prospectivity to justify the use of alternative valuation methods such as DCF. The Past Expenditure method is often referred to as the Multiple of Exploration Expenditure method.

Past expenditure, or the amount spent on exploration of a tenement, is commonly used as a guide in determining value. The assumption is that well directed exploration adds value to a property. This is not always the case and exploration can also downgrade a property. The Prospectivity Enhancement Multiplier (“PEM”) which is applied to the effective expenditure therefore commonly ranges from 0.5 to 3.0. The PEM generally falls within the following ranges:

0.5 to 1.0 where work to date or historic data justifies the next stage of exploration;

to 2.0 where strong indications of potential for economic mineralisation have been identified; and

to 3.0 where ore grade intersections or exposures indicative of economic resources are present.

41

Appendix 3 – Summary Valuation Report

1


First Floor, Block G

Rochester Place

173 Rivonia Road

Sandton 2146

PO Box 782761

Sandton 2146


Tel: +27 11 783 9903

Fax: +27 11 783 9953

www.venmyn.com

Directors: A N Clay (British); S E Conquest, E de V Greyling; N Mc Kenna C A Telfer Venmyn Rand (Pty) Ltd. trading as VenmynReg. No. 1988/004918/07

D852L

The Directors BDO Kendalls Corporate Finance (WA) Pty Ltd Level 8, 256 St Georges Terrace Perth WA 6000

27th August 2010

SUMMARY OF INDEPENDENT VALUATION REPORTS ON THE COAL ASSETS OF THE

SEKOKO COAL - FIRESTONE JVAT THE

WATERBERG COAL PROJECT

Venmyn was commissioned by the directors of Lexshell 126 General Trading (Pty) Ltd (Lexshell) to conduct an independent valuation of certain of the coal assets (contributing properties) of the Joint Venture (JV) between Sekoko Coal (Pty) Limited (Sekoko Coal) and Firestone Energy Limited (Firestone) at their Waterberg Coal Project (Sekoko Coal – Firestone JV), located in the Limpopo Province, South Africa (Figure 1).

This letter is a summary of Venmyn’s full Valuation Reports which have been prepared for Lexshell in compliance with, and to the extent required by, the Australian Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports (Valmin Code, 2005). The reader is referred to the full Valuation Reports (to be made available on Firestone’s web site or at Firestone’s offices) for more detail.

The Sekoko Coal - Firestone JV encompasses three separate joint venture agreements (T1, T2 and T3) between Sekoko Coal and Firestone, as summarized in the table below and illustrated in Figure 2.

Table 1: Sekoko Coal-Firestone JV Agreements


SEKOKO COAL CURRENT

EFFECTIVEINTEREST

FIRESTONE CURRENT

EFFECTOVE INTEREST

T1 12/06/2008 Olieboomsfontein 220LQ 70% 30% Vetleegte 304LQ

T2 01/03/2009

Minnasvlakte 258LQ

40% 60% Smitspan 306LQ Massenberg 305LQ Hooikraal 315LQ

T3 02/02/2010 Duikerfontein 263LQ 40% 60% Swanepoelpan 262LQ

The contributing properties cover a surface area of ~7,980 hectares (ha).

Venmyn’s valuation considered the full Fair Value of the coal assets of the various joint venture agreements, at the effective date (31st July 2010).

Approximately 1,420.84 million TTIS of coal has been classified into the Measured, Indicated and Inferred categories for the contributing properties (Table 2). These JORC compliant Coal Resources form the basis of the valuation of these properties, reported herein.

The mineral assets of the contributing properties of the Waterberg Coal Project were valued on the basis of available historical and recent exploration data and current Coal Resources, using methods appropriate for the development status of the project.

4


Table 2: Summary Resource Statement as at 31st July 2010

FARM NAME & NO. RESOURCE CATEGORY ZONE

COAL TOTAL

TONNES IN SITU

Minnasvlakte 258 LQ Indicated All 21,201,000 Inferred All 173,012,000

TOTAL / AVE RESOURCE MINNASVLAKTE 194,213,000

Smitspan 306 LQ Measured All 214,800,600 Indicated All 380,671,000

TOTAL / AVE RESOURCE SMITSPAN 595,471,600

Massenberg 305 LQ Indicated All 16,635,000 Inferred All 82,148,000

TOTAL / AVE RESOURCE MASSENBERG 98,783,000

Hooikraal 315 LQ Indicated All 4,366,000 Inferred All 77,742,000

TOTAL / AVE RESOURCE HOOIKRAAL 82,108,000

Vetleegte 315 LQ Measured All 1,040,300 Indicated All 143,146,000 Inferred All 11,090,000

TOTAL / AVE RESOURCE VETLEEGTE 155,276,300

Swanepoelpan 262 LQ Indicated All 853,000 Inferred All 283,666,000

TOTAL / AVE RESOURCE SWANEPOELPAN 284,519,000 Duikerfontein 263 LQ Inferred All 10,457,000

TOTAL / AVE RESOURCE DUIKERFONTEIN 10,457,000 GRAND TOTAL / AVE 1,420,827,900

Venmyn’s valuation considered the prospectivity of the projects and attached value ranges consistent with that assessment. The methods applied are accepted industry methods which aim to reduce subjectivity by assessing the relevance and effectiveness of exploration work.

The multiples of exploration expenditure (MEE) valuation method or Cost Approach was used in the first instance to value the mineral assets of the contributing properties on the basis that recent expenditures have contributed to its present value. Through the introduction of a prospectivity enhancement multiplier (PEM), a premium (or discount) multiplier can be applied to the total cost of exploration to date, depending on whether the exploration expenses being considered have relatively enhanced the prospectivity of the target or not. The table below summarises the results from this valuation approach:-

Table 3: Summary Dynamics and Results of the MEE/Cost Approach

JV FARM TOTAL


(ZARm)

LOWER PEM

UPPERPEM

FAIR PEM

MINPROJECT

VALUE (ZARm)

MAX PROJECT

VALUE (ZARm)

FAIR PROJECT

VALUE (ZARm)

T1 Olieboomsfontein 220 LQ 0.54 1 2 2 0.54 1.08 1.08Vetleegte 304 LQ 11.72 6 12 9 70.32 140.64 105.48

TOTAL/ WT. AVE T1 12.26 6 12 9 70.86 141.72 106.56

T2

Minnasvlakte 258 LQ 1.47 5 11 8 7.37 16.21 11.79 Smitspan 306 LQ 56.19 20 30 25 1,123.76 1,685.64 1,404.70 Massenberg 305 LQ 4.11 5 11 8 20.55 45.20 32.87 Hooikraal 315 LQ 2.10 5 11 8 10.50 23.10 16.80

TOTAL/ WT. AVE T1 63.87 18 28 23 1,162.18 1,770.15 1,466.16

T3 Swanepoelpan 262LQ 2.75 5 11 8 13.74 30.22 21.98 Duikerfontein 263LQ 0.00 2 5 4 - - -

TOTAL/ WT. AVE T1 2.75 5 11 8 13.74 30.22 21.98 GRAND TOTAL/ WT. AVE 78.88 16 25 20 1,246.77 1,942.10 1,594.70

As Coal Resources were classified for the projects, it was appropriate to attach a comparable unit market value to those resources. In order to arrive at reasonable market comparisons, appropriate recent and similar transactions were identified.

While Venmyn has considered the entire transaction database to derive an appropriate comparable transaction value, the valuation specifically took into account recent transactions/valuations within the Waterberg Coalfield that were considered to represent recent transactions of a similar nature, and have been used to define a Waterberg Coal Valuation Curve.

Table 4 and Figures 3 – 5 summarise the results from the comparable transaction valuation method.

5

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L IN

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R

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(Tot

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LOW

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R/t)

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2.86

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173.

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38.9

321

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2021

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67

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4.87

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9


While Venmyn has considered its entire transaction database to derive an appropriate comparable transaction value, the valuation specifically took into account a number of recent transactions/valuations within the Waterberg Coalfield that were considered to represent transactions of a similar nature, and have been used to define a Waterberg Coal Valuation Curve.

Since preliminary economic studies on the Smitspan 306LQ property have been conducted, Venmyn undertook to construct independent financial models in order to verify the economic assessments made by these studies and to formulate its own opinion on the project value.

Table 5 summarizes Venmyn’s preferred Cash Flow Model which is based on selective mining and a fleet leasing option. This valuation method results in a Net Present Value of ZAR1,226.654m. The upper value for the Smitspan 306LQ is ZAR1,471.985m and the lower value is ZAR980.800m.

The sensitivity of the Venmyn model to Income, Capex and Opex is illustrated in Figure 6, Figure 7 and Figure 8, respectively

Figure 6: Sensitivity of Project to Income

Figure 7: Sensitivity of Project to Capex

10


Figure 8: Sensitivity of Project to Opex

11

Wat

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aram

eter

s Ye

ar

Year

Ye

ar

Year

Ye

ar

Year

Ye

ar

Year

Ye

ar

Year

Ye

ar

Year

Ye

ar

Year

Ye

ar

Year

Ye

ar

Year

Ye

ar

Year

Ye

ar

12

34

56

78

910

11

12

13

14

15

16

17

18

19

20

21

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G

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193.

582

0.

743

1.

470

2.

046

2.

036

1.

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3.

950

4.

086

4.

388

7.

583

7.

404

9.

702

9.

771

9.

844

10

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11

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17

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17

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17

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18

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18

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18

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Pro

duct

m

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9.95

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1.50

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1.50

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3.00

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5.00

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5.00

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7.00

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7.00

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7.00

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7.00

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1,

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(113

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00)

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(84)

(79)

(145

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66)

(180

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32)

(328

)(4

26)

(409

)(4

18)

(428

)(5

43)

(796

)(8

34)

(834

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56)

(856

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10)

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cess

ing

Cos

t ZA

Rm

(2

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7)(2

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3)(4

3)(4

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7)(6

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12)

(114

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30)

(131

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31)

(133

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50)

(210

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17)

(217

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19)

(219

)(2

14)

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er C

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(306

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)(8

)(8

)(8

)(7

)(1

0)(1

0)(1

0)(1

3)(1

3)(1

6)(1

6)(1

6)(1

6)(1

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3)(2

4)(2

4)(2

4)(2

4)(1

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TAL

OPE

X ZA

Rm

(1

1,52

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38)

(134

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48)

(134

)(1

29)

(221

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44)

(271

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57)

(455

)(5

72)

(556

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66)

(578

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11)

(1,0

28)

(1,0

74)

(1,0

74)

(1,0

99)

(1,0

99)

(835

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X

TOTA

L C

APE

X ZA

Rm

(1

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)(3

66)

(18)

(18)

(3)

(99)

(29)

(6)

(307

)(9

)(1

22)

(24)

(35)

(11)

(11)

(12)

(27)

(47)

(13)

(13)

(10)

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ZAR

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(1,1

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(0)

(2)

(13)

(16)

(6)

(35)

(35)

(3)

(53)

(40)

(80)

(81)

(82)

(81)

(66)

(92)

(84)

(88)

(85)

(86)

(116

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x P

aym

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ZAR

m

(2,2

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(26)

(33)

(10)

(71)

(72)

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(9

5)(7

9)(1

64)

(165

)(1

68)

(165

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32)

(183

)(1

66)

(175

)(1

69)

(169

)(2

36)

Rea

l ZA

Rm

5,

461

(4

05)

866

8426

184

184

(40)

286

203

421

424

432

425

339

470

428

449

434

435

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1610

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(19)

121

7814

713

512

511

281

102

8581

7165

82

12


The table below summarises the results from the valuation methods employed:-

Table 6: Summary of Valuation Results

JV FARM COST

APPROACH (ZARm)

MARKET APPROACH

(ZARm)

CASH FLOW

APPROACH (ZARm)

PREFFEREDVALUE (ZARm)

T1 Olieboomsfontein 220 LQ 1.08 - n/a 1.08Vetleegte 304 LQ 105.48 148.50 n/a 148.50

TOTAL T1 106.56 148.50 N/A 149.58

T2

Minnasvlakte 258 LQ 11.79 60.13 n/a 60.13 Smitspan 306 LQ 1,404.70 1,192.97 1,226.65 1,192.97 Massenberg 305 LQ 32.87 24.80 n/a 24.80 Hooikraal 315 LQ 16.80 14.94 n/a 14.94

TOTAL T2 1,466.16 1,292.84 1,226.65 1,292.84

T3 Swanepoelpan 262LQ 21.98 64.68 n/a 64.68 Duikerfontein 263LQ 0.00 2.35 n/a 2.35

TOTAL T3 21.98 67.03 N/A 67.03 GRAND TOTAL 1,594.70 1,508.37 1,226.65 1,509.45

Although there is general agreement between the various methods employed, Venmyn considers the comparative transaction method or Market Approach a more appropriate valuation technique as it considers more fully the actual transactions and market values, and allows for a thorough review of the logistical, infrastructural and strategic merits of projects. Therefore, Venmyn have favoured the use of the comparable transaction value method in the case of the Sekoko Coal-Firestone JV Waterberg Coal Project.

Venmyn’s preferred Fair Value represents the mean value achieved from the comparative valuation method. The valuation of Olieboomsfontein 220LQ is an exception, as the comparable valuation method results in a Zero value as there are currently no classifiable Coal Resources associated with this property. In this case therefore, the value estimated from the Cost Approach has been utelised.

Venmyn’s full Fair Value for the contributing properties of the Sekoko Coal-Firestone JV Waterberg Coal Project is therefore considered to be ZAR1,509.45m.

The valuation of exploration assets is, by nature, subjective and uncertain. The placing of a specific monetary value on historical exploration can be misleading, and the reader is advised to consider the ranges in which each property has been evaluated, and to further consider the technical merits of each project area and form an opinion regarding its prospectivity on the basis of the data presented in this report.

Kind Regards,

N. Mc KENNA A N CLAY M.Sc (Geol), Pr. Sci. Nat. M.Sc. (Geol.), M.Sc. (Min. Eng.), Dip. Bus. M MGSSA , MSAIMM, MIASSA, M.Inst.D. Pr Sci Nat, MSAIMM, FAusIMM, FGSSA, MAIMA DIRECTOR MANAGING DIRECTOR

Annexure E

i

Directors: A N Clay (British); S E Conquest; E de V Greyling; N McKenna; C A Telfer

Block G, First Floor

Rochester Place

173 Rivonia Road

Sandton 2146

PO Box 782761

Sandton 2146


Tel: +27 11 783 9903

Fax: +27 11 783 9953

www.venmyn.com

Venmyn Rand (Pty) Ltd. trading as Venmyn Reg. No. 1988/004918/07

INDEPENDENT VALUATION REPORT ON THE T3 COAL ASSETS

OF THE SEKOKO COAL (PTY) LIMITED (SEKOKO COAL) –

FIRESTONE ENERGY LIMITED (FIRESTONE) JOINT VENTURE

(SEKOKO COAL - FIRESTONE JV) AT THEIR

WATERBERG COAL PROJECT, SOUTH AFRICA, COMPILED BY

VENMYN RAND (PTY) LIMITED (VENMYN)

COMPILED BY:- N. MCKENNA M.SC. (GEOL), PR. SCI. NAT MSAIMM, MGSSA, M. INST. D DIRECTOR A. N. CLAY M.SC. (GEOL.), M.SC. (MIN. ENG.), DIP. BUS. M. PR SCI NAT, MSAIMM, FAUSIMM, FGSSA, MAIMA, M.INST.D, AAPG MANAGING DIRECTOR OUR REFERENCE:- D852R_3 FIRST DRAFT:- 30TH JULY 2010 FINAL REPORT: - 05TH AUGUST 2010 EFFECTIVE DATE : - 31ST JULY 2010

Valuation of the T3 Properties of the Waterberg Coal Project July 2010 Venmyn Rand (Pty) Ltd

INDEPENDENT VALUATION REPORT ON THE T3 COAL ASSETS

OF THE SEKOKO COAL (PTY) LIMITED (SEKOKO COAL) –

FIRESTONE ENERGY LIMITED (FIRESTONE) JOINT VENTURE

(SEKOKO COAL - FIRESTONE JV) AT THEIR

WATERBERG COAL PROJECT, SOUTH AFRICA, COMPILED BY


Lexshell 126 General Trading (Pty) Limited Hampton Office Park Fulham House, 1st Floor 20 Georgian Crescent Bryanston, 2140

SYNOPSIS

Venmyn was commissioned by the directors of Lexshell 126 General Trading (Pty) Limited (Lexshell) to conduct an independent valuation of certain of the coal assets (contributing properties) of the Joint Venture (JV) between Sekoko Coal and Firestone Energy Limited (Firestone) at their Waterberg Coal Project (Sekoko Coal – Firestone JV), located in the Limpopo Province, South Africa. This valuation considers the Fair Value of the coal assets of the T3 agreement properties (the contributing properties) only. This Valuation Report presents the total Fair Value of the contributing properties. These properties are situated less than 5km to the west of the Grootegeluk Colliery mining lease boundary, approximately 240km northwest of Pretoria (Tshwane) and 70km south of the border with Botswana. The area is accessed via the tarred R517 between Modimolle (formerly Nylstroom) and Lephalale. The railway line from Thabazimbi terminates immediately north of Grootegeluk Colliery and power lines from the Matimba Power Station traverse the area. Approximately 294.98 million TTIS of coal has been classified into the Indicated and Inferred categories for the T3 properties. These JORC compliant Coal Resources form the basis of the valuation of these properties, reported herein. The mineral assets of the contributing properties of the Waterberg Coal Project were valued on the basis of available historical and recent exploration data and current Coal Resources, using methods appropriate for the development status of the project. Venmyn’s valuation considered the prospectivity of the project and attached a value range consistent with that assessment. The methods applied are accepted industry methods which aim to reduce subjectivity by assessing the relevance and effectiveness of exploration work. This report has been prepared for Lexshell in compliance with, and to the extent required by, the Australian Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports (Valmin Code, 2005). The multiples of exploration expenditure (MEE) valuation method was used in the first instance to value the mineral assets of the contributing properties on the basis that recent expenditures have contributed to its present value. As Coal Resources were classified for the project, it was appropriate to attach a comparable unit market value to those resources. In order to arrive at reasonable market comparisons, appropriate recent and similar transactions were identified.


While Venmyn has considered its entire transaction database to derive an appropriate comparable transaction value, the valuation specifically took into account a number of recent transactions/valuations within the Waterberg Coalfield, that were considered to represent transactions of a similar nature, and have been used to define a Waterberg Coal Valuation Curve. The table below summarises the results from the valuation methods employed:-

FARM COST

APPROACH (ZARm)

MARKET APPROACH

(ZARm)

CASH FLOW

APPROACH (ZARm)


Swanepoelpan 262LQ 21.98 64.68 n/a 64.68 Duikerfontein 263LQ 0.00 2.35 n/a 2.35

TOTAL 22.0 67.03 n/a 67.03 The table above demonstrates a very poor agreement between the values derived from the Cost Approach and Market approach respectively. The Cost Approach results in a value far lower than those derived using the Market Approach. This difference can be explained by the fact that the Coal Mineral Resources defined on the Contributing Properties have been defined from borehole information on these properties as well as other properties comprising the Greater Waterberg Coal Project. There has also been an intangible benefit from Venmyn’s experience and prior knowledge of the coal on the neighbouring properties. As a consequence, Venmyn does not consider the cost approach an appropriate valuation technique in this instance. Venmyn considers the comparative transaction method a more appropriate valuation technique as it considers more fully the actual transactions and market values, and allows for a thorough review of the logistical, infrastructural and strategic merits of projects. In Venmyns’ opinion the Fair Value of the Contributing Properties of the Waterberg Coal Project, given their current state of development is represented by the mean of the Market Approach. This suggests a current Fair Value of ZAR67.03m for the Contributing Properties. The valuation of exploration assets is, by nature, subjective and uncertain. The placing of a specific monetary value on historical exploration can be misleading, and the reader is advised to consider the ranges in which each property has been evaluated, and to further consider the technical merits of each project area and form an opinion regarding its prospectivity on the basis of the data presented in this report.


DISCLAIMER AND RISKS Venmyn has prepared this Valuation Report and, in so doing, has utilised information provided by Lexshell as to its operational methods and forecasts. Where possible this information has been verified from independent sources with due enquiry in terms of all material issues that are a prerequisite to comply with the SAMREC Code. Venmyn and its directors accept no liability for any losses arising from reliance upon the information presented in this report. The authors of this Valuation Report are not qualified to provide extensive commentary on legal issues associated with Lexshell’s right to the mineral properties. Lexshell and its attorneys have provided certain information, reports and data to Venmyn in preparing this Valuation Report which, to the best of Lexshell’s knowledge and understanding is complete, accurate and true and Lexshell acknowledges that Venmyn has relied on such information, reports and data in preparing this Valuation Report. No warranty or guarantee, be it express or implied, is made by the authors with respect to the completeness or accuracy of the legal aspects of this document.

OPERATIONAL RISKS The business of mining and mineral exploration, development and production by their nature contain significant operational risks. The business depends upon, amongst other things, successful prospecting programmes and competent management. Profitability and asset values can be affected by unforeseen changes in operating circumstances and technical issues.

POLITICAL AND ECONOMIC RISKS Factors such as political and industrial disruption, currency fluctuation and interest rates could have an impact on Lexshell’s future operations, and potential revenue streams can also be affected by these factors. The majority of these factors are, and will be, beyond the control of Lexshell or any other operating entity.

FORWARD LOOKING STATEMENTS The following report contains forward-looking statements. These forward looking statements are based on opinions and estimates of Lexshell management and Venmyn at the date the statements are made. They are subject to a number of known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those anticipated in our forward-looking statements. Factors that could cause such differences include changes in world coal markets, equity markets, costs and supply of materials relevant to the projects, and changes to regulations affecting them. Although we believe the expectations reflected in our forward-looking statements to be reasonable, we cannot guarantee future results, levels of activity, performance or achievements.


INDEPENDENT VALUATION REPORT

ON THE T3 COAL ASSETS OF THE

SEKOKO COAL (PTY) LIMITED (SEKOKO COAL) – FIRESTONE ENERGY LIMITED (FIRESTONE)

JOINT VENTURE (SEKOKO COAL - FIRESTONE JV)

AT THEIR WATERBERG COAL PROJECT,

SOUTH AFRICA, COMPILED BY


LIST OF CONTENTS

1. INTRODUCTION ......................................................................................................................................... 8 2. SCOPE OF THE OPINION ......................................................................................................................... 8 3. COMPETENT PERSONS’ DECLARATION .............................................................................................. 11 4. EFFECTIVE OWNERSHIP OF THE WATERBERG COAL PROJECT .................................................... 11 5. LEGAL TENURE ....................................................................................................................................... 11

5.1. Mineral Rights Summary .............................................................................................................. 11

6. THE COAL MARKET................................................................................................................................. 13

6.1. Global Coal Reserves .................................................................................................................. 13 6.2. Supply .......................................................................................................................................... 14

6.2.1. Exports .......................................................................................................................... 16

6.3. Demand ........................................................................................................................................ 17

6.3.1. Exports .......................................................................................................................... 18

6.4. Global Outlook.............................................................................................................................. 19

6.4.1. Demand ........................................................................................................................ 19

6.4.1.1. Steam Coal ................................................................................................. 19 6.4.1.2. Coking Coal ................................................................................................ 20

6.4.2. Supply ........................................................................................................................... 21

6.5. Prices ........................................................................................................................................... 22

6.5.1. Steam Coal ................................................................................................................... 23 6.5.2. Coking coal ................................................................................................................... 23

6.6. South African Coal Mining Industry .............................................................................................. 23

6.6.1. Reserves ....................................................................................................................... 23 6.6.2. Supply ........................................................................................................................... 23 6.6.3. Demand ........................................................................................................................ 24

6.6.3.1. The Export Market ...................................................................................... 25 6.6.3.2. The Domestic Market .................................................................................. 25

6.6.4. Prices ............................................................................................................................ 25

6.6.4.1. Steam Coal ................................................................................................. 25 6.6.4.2. Coking coal ................................................................................................. 26

6.6.5. Outlook .......................................................................................................................... 27

6.6.5.1. Export sales ................................................................................................ 27

6.6.5.1.1. Infrastructure ...................................................................... 27


6.6.5.1.2. Changing Product Emphasis ................................................ 27 6.6.5.1.3. Coal as a Strategic Mineral .................................................. 27 6.6.5.1.4. Environmental Issues........................................................... 28 6.6.5.1.5. Costs .................................................................................... 28

6.6.5.2. Sales to Eskom ........................................................................................... 28 6.6.5.3. Environmental issues .................................................................................. 28 6.6.5.4. Sales to Sasol ............................................................................................. 28 6.6.5.5. Coking Coal ................................................................................................ 29

7. THE WATERBERG COAL PROJECT DESCRIPTION AND LOCATION ................................................ 30

7.1. Location ........................................................................................................................................ 30 7.2. Accessibility .................................................................................................................................. 30 7.3. Climate and Vegetation ................................................................................................................ 30 7.4. Local Resources .......................................................................................................................... 30 7.5. Infrastructure ................................................................................................................................ 30 7.6. Topography .................................................................................................................................. 30

8. GEOLOGICAL SETTING .......................................................................................................................... 31

8.1. Regional Geological Setting ......................................................................................................... 31

8.1.1. The Volksrust Formation ............................................................................................... 33 8.1.2. The Vryheid Formation ................................................................................................. 33 8.1.3. Grootegeluk Colliery ..................................................................................................... 33

8.2. Local Geology .............................................................................................................................. 34

9. GEOLOGICAL MODELLING ..................................................................................................................... 36 10. RESOURCE STATEMENT ....................................................................................................................... 36

10.1. Coal Resource Classification of the T3 Properties ...................................................................... 37

11. THE WATERBERG COAL MINERAL ASSET VALUATION ..................................................................... 39

11.1. Valuation Methodologies .............................................................................................................. 41

11.1.1. MEE .............................................................................................................................. 41 11.1.2. Comparable Transaction Value Method ....................................................................... 41

11.2. The Waterberg Coal Project MEE Valuation ................................................................................ 41 11.3. The Waterberg Coal Project Comparable Transaction Valuation ................................................ 43 11.4. Valuation Summary ...................................................................................................................... 47

12. CONCLUSIONS ........................................................................................................................................ 47

LIST OF FIGURES Figure 1: Locality of the Coal Assets in Relation to South African Coalfields ................................................... 9 Figure 2: Location of the Contributing Properties of the Waterberg Coal Project ........................................... 10 Figure 3: Corporate Structure and Participation Interests of the Joint Venture............................................... 12 Figure 4: Global Coal Reserves (end 2009) .................................................................................................... 13 Figure 5 : Coal Global Production 1999 – 2009 (Mtoe) ................................................................................... 15 Figure 6: Coal Global Production 1999 – 2009 (Mt) ........................................................................................ 16 Figure 7: Coal Consumption 2001-2009 (Mtoe) .............................................................................................. 17 Figure 8 : Coal Consumption 2001-2008 (Mt) ................................................................................................. 18 Figure 9: Projected Demand for Coal (Mtoe)................................................................................................... 19 Figure 10 :Coal Prices (1987-2009) ................................................................................................................ 22 Figure 11 : South African Coal Sales (1885 - 2009) ........................................................................................ 24 Figure 12: Coal Price History from January 1990 to April 2010 ...................................................................... 26 Figure 13: Regional Geology ........................................................................................................................... 32 Figure 14: Stratigraphy of the Waterberg Coal Zones and Grootegeluk Colliery Mining Benches ................. 35 Figure 15: Project Lifetime Value and Valuation Methodology Curve for Mineral Resource Projects ............ 40 Figure 16: Valuation Curve for South African Coal Projects ........................................................................... 46


LIST OF TABLES

Table 1: Sekoko Coal-Firestone JV Agreements .............................................................................................. 8 Table 2: Legal Tenure Summary for the Contributing Properties .................................................................... 11 Table 3: Global Coal Reserves (end 2009) ..................................................................................................... 14 Table 4: Selected Coal Producers (2009) ....................................................................................................... 15 Table 5: Selected Exporters of Steam and Coking Coal (2008/2009) ............................................................ 16 Table 6: Selected Importers of Steam and Coking Coal (2008/2009) ............................................................. 18 Table 7: Predicted World Coal-fired Generating Capacity by Country and Region (GW) ............................... 20 Table 8: Selected Importers of Steam Coal (2009-2015) ................................................................................ 20 Table 9: Selected Importers of Coking Coal (2009-2015) ............................................................................... 21 Table 10: World Coal Forecast Production by Region (2010 – 2030) ............................................................. 21 Table 11: Selected Exporters of Steam Coal (2009-2015) .............................................................................. 22 Table 12: Selected Exporters of Coking Coal (2009-2015) ............................................................................. 22 Table 13: Weighted Coal Qualities by Sector .................................................................................................. 25 Table 14: SANS Classification of Coal Resources. ......................................................................................... 36 Table 15: Coal Resources of the T3 Properties (Venmyn, June 2009) ........................................................... 38 Table 16: Valuation Approaches and Methodologies. ..................................................................................... 41 Table 17: Venmyn’s Coal Prospect Exploration Phase Classification. ........................................................... 42 Table 18: MEE Valuation ................................................................................................................................. 43 Table 19: Comparative Valuation .................................................................................................................... 45 Table 20: Summary of Valuation Results ........................................................................................................ 47

8


1. INTRODUCTION Venmyn was commissioned by the directors of Lexshell 126 General Trading (Pty) Limited (Lexshell) to conduct an independent valuation of certain of the coal assets (contributing properties) of the Joint Venture (JV) between Sekoko Coal (Pty) Limited (Sekoko Coal) and Firestone at their Waterberg Coal Project, located in the Limpopo Province, South Africa (Figure 1). The Sekoko Coal-Firestone JV encompasses three separate agreements between Sekoko Coal and Firestone:- Table 1: Sekoko Coal-Firestone JV Agreements


SEKOKO COAL CURRENT EFFECTIVE

INTEREST

FIRESTONE CURRENT EFFECTOVE INTEREST

T1 12/06/2008 Olieboomsfontein 220LQ 70% 30% Vetleegte 304LQ

T2 01/03/2009

Minnasvlakte 258LQ

40% 60% Smitspan 306LQ Massenberg 305LQ Hooikraal 315LQ

T3 02/02/2010 Duikerfontein 263LQ 40% 60% Swanepoelpan 262LQ

The contributing properties for this Valuation Report are T3 properties only (Figure 2). The contributing properties cover a surface area of ~1,411.9 hectares (ha). These properties are situated less than 5km to the west of Exxaro’s Grootegeluk Colliery mining lease boundary, approximately 240km northwest of Pretoria (Tshwane) and 70km south of the border with Botswana. The area is accessed via the tarred R517 between Modimolle (formerly Nylstroom) and Lephalale. The railway line from Thabazimbi terminates immediately north of Grootegeluk Colliery and power lines from the Matimba Power Station traverse the area. Since the inception of the Waterberg Coal Project in 2007, significant exploration drilling and sampling has been conducted predominantly by Sekoko Coal (and more recently by Firestone) as part of an on-going exploration programme which is intended to increase the level of geological confidence with respect to the Coal Resources and provide the basis for a Feasibility Study for the development and exploitation of the project in the near term (by ~2015).

2. SCOPE OF THE OPINION This valuation considers the Fair Value of the coal assets of the T3 agreement properties (the contributing properties) only. In the execution of the mandate, Venmyn have considered the strategic merits of the contributing properties of the Sekoko Coal-Firestone JV Waterberg Coal Project and defined the valuation outcomes on an open and transparent basis. Venmyn’s mineral asset valuation (MAV) has been carried out using industry accepted methods being mindful of the development status of each property. A site visit to the contributing properties, in preparation of this report, was conducted by the authors of this report in July 2010. In addition, Venmyn is fully familiar with the operating environment in which the Sekoko Coal-Firestone JV Waterberg Coal Project occurs. This report has been prepared for Lexshell in compliance with, and to the extent required by, the Australian Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports (VALMIN Code, 2005). The guidelines are considered by Venmyn to be a concise recognition of the best practice valuation methods for this type of mineral asset and accord with the principles of open and transparent disclosure that are embodied in internationally accepted Codes for Corporate Governance. This Valuation Report considers the full Fair Value of the coal assets of the contributing properties of the Sekoko Coal-Firestone JV Waterberg Coal Project at the effective date (31st July 2010). The valuation is therefore only valid for this date and may change over time in response to economic, market, legal or political factors, in addition to changes in the Coal Resources and their classification as a result of further exploration.

11


All monetary values included in this report are expressed in South African Rands (ZAR), unless otherwise denoted. This Valuation Report has been compiled based on information available up to and including the effective date of this report. Consent has been given for the distribution of this report in the form and content in which it appears.

3. COMPETENT PERSONS’ DECLARATION Venmyn is an independent advisory company. Its consultants have extensive experience in preparing competent persons’, technical advisors’ and valuation reports for mining and exploration companies. Venmyn’s advisors have, collectively, more than 75 years of experience in the assessment and evaluation of mining projects and are members in good standing of appropriate professional institutions. The signatories to this report are qualified to express their professional opinions on the values of the mineral assets described. Neither Venmyn nor its staff have, or have had, any interest in this project capable of affecting their capacity to give an unbiased opinion, and, have not and will not, receive any pecuniary or other benefits in connection with this assignment, other than normal consulting fees.

4. EFFECTIVE OWNERSHIP OF THE WATERBERG COAL PROJECT

Sekoko Coal, a wholly-owned subsidiary of Sekoko Resources (Pty) Limited (Sekoko Resources), holds the New Order prospecting Rights to the contributing properties. Firestone, through various wholly owned South African subsidiary companies, have entered into three separate Joint Venture and ’Farm-In’ (Earn-In) agreements (Table 1) with Sekoko Coal, in which their participation interest increases as various milestones are reached. At the effective date of this Valuation Report, the effective participation interest of Sekoko Coal in the T3 properties was 40% (Figure 3).

5. LEGAL TENURE 5.1. Mineral Rights Summary

The contributing properties are tabulated Table 2 and illustrated in Figure 1, respectively:- Table 2: Legal Tenure Summary for the Contributing Properties

FARM NAME

SURFACE AREA (ha)

PROSPECTING RIGHTS HOLDER

STATUS OF PROSPECTING

RIGHT EXPIRY DATE

T3 Duikerfontein 263LQ 501.1

Sekoko Coal (Pty) Ltd

Granted New Order Prospecting Right No.

681/2007(All Minerals), on 13/10/05

12/10/2010 Swanepoelpan 262LQ 910.8

TOTAL 1,411.9 The prospecting rights were granted under the terms and conditions of the South African Mineral and Petroleum Resources Development Act, 2004 (MPRDA), which grants the owner exclusive prospecting rights as well as the exclusive right to apply for a Mining Right.

13


6. THE COAL MARKET Coal is mined commercially in over 50 countries and used in more than 70 countries worldwide. Coal is readily available from a wide variety of sources in a well-supplied worldwide market and it can be transported to demand centres quickly, safely and easily by ship and rail. A large number of suppliers are active in the international coal market, ensuring competitive behaviour and efficient functioning. 6.1. Global Coal Reserves

Total global coal reserves are estimated at 826Bt, according to British Petroleum (BP) (BP, 2010). Historically, estimates of world recoverable coal reserves have reduced from 1,174Bt in 1990 to 1,083Bt in 2000 and to 826Bt in 2009 (Figure 4 and Table 3). However, some believe that even these latest estimates may be high, and are mindful of the fact that national and global coal reserves have been grossly overestimated in the past, and suggest that world reserves may be significantly lower than estimated (Low, 2008; Hartnady, 2009; IEE, 2010).

Figure 4: Global Coal Reserves (end 2009)

Although coal deposits are widely distributed, 78.1% of the world’s recoverable reserves are located in five countries: the United States (28.9%), Russia (19.0%), China (13.9%), Australia (9.2%) and India (7.1%). Anthracite and bituminous coal accounted for 49.8% of the world’s estimated recoverable coal reserves (on tonnage basis) in 2009, while sub-bituminous and lignite accounted for 50.2% in 2009. Regionally, Europe and Eurasia, with 33% of recoverable coal reserves, accounted for the largest quantity of proved coal. The Middle East, with the world’s largest oil deposit, contains the least coal reserves in the world (0.2%). Africa accounts for 3.9% of recoverable coal reserves, with South Africa accounting for 95% of the total African coal reserves. (Table 3).

1.39 6.96

31.84

113.28

155.81

102.04 8.04

132.82

103.44 170.20

-

50

100

150

200

250

300

Middle East South & Central America

Africa North America Asia Pacific Europe & Eurasia

CO

AL R

ESER

VES

(Bt)

REGION

Sub-bituminous and Lignite Anthracite and Bituminous

14


Table 3: Global Coal Reserves (end 2009)

REGION/COUNTRY ANTHRACITE &

BITUMINOUS (Mt)

SUB-BITUMINOUS

& LIGNITE (Mt)

TOTAL (Mt)

SHARE OF

TOTAL

R/P

RATIO

US 108,950 129,358 238,308 28.9% 224 Canada 3,471 3,107 6,578 0.8% 97 Mexico 860 351 1,211 0.1% 106

TOTAL NORTH AMERICA 116,592 133,918 250,510 29.6% 224 Brazil - 7,059 7,059 0.9% >500 Colombia 6,434 380 6,814 0.8% 93 Venezuela 479 - 479 0.1% 74 Other S. & Cent. America 51 603 654 0.1% >500

TOTAL S. & C AMERICA 6,964 8,042 15,006 1.8% 172 Bulgaria 5 1,991 1,996 0.2% 70 Czech Republic 1,673 2,828 4,501 0.5% 75 Germany 152 6,556 6,708 0.8% 33 Greece - 3,900 3,900 0.5% 58 Hungary 199 3,103 3,302 0.4% 351 Kazakhstan 28,170 3,130 31,300 3.8% 273 Poland 6,012 1,490 7,502 0.9% 52 Romania 12 410 422 <0.05% 12 Russian Federation 49,088 107,922 157,010 19.0% 481 Spain 200 330 530 0.1% 32 Turkey - 1,814 1,814 0.2% 21 Ukraine 15,351 18,522 33,873 4.1% 438 United Kingdom 155 - 155 <0.05% 9 Other Europe & Eurasia 1,025 18,208 19,233 2.3% 268

TOTAL EUROPE & EURASIA 102,042 170,204 272,246 33.0% 218 South Africa 30,408 - 30,408 3.7% 121 Zimbabwe 502 - 502 0.1% 287 Other Africa 929 174 1,103 0.1% >500 Middle East 1,386 - 1,386 0.2% >500

TOTAL MIDDLE EAST & AFRICA 33,225 174 33,399 4.0% 131 Australia 36,800 39,400 76,200 9.2% 190 China 62,200 52,300 114,500 13.9% 41 India 54,000 4,600 58,600 7.1% 114 Indonesia 1,721 2,607 4,328 0.5% 19 Japan 355 - 355 <0.05% 289 New Zealand 33 538 571 0.1% 111 North Korea 300 300 600 0.1% 17 Pakistan 1 2,069 2,070 0.3% 496 South Korea 133 133 <0.05% 48 Thailand - 1,354 1,354 0.2% 75 Vietnam 150 - 150 <0.05% 4 Other Asia Pacific 115 276 391 <0.05% 26

TOTAL ASIA PACIFIC 155,809 103,444 259,253 31.4% 64 TOTAL WORLD 411,321 414,680 826,001 100.0% 122

Source: BP Statistical Review of World Energy June 2010 Notes: Proved reserves of coal - Generally taken to be those quantities that geological and engineering information indicates with reasonable certainty can be recovered in the future from known deposits under existing economic and operating conditions. Reserves-to-production (R/P) ratio - If the reserves remaining at the end of the year are divided by the production in that year, the result is the length of time that those remaining reserves would last if production were to continue at that rate.

6.2. Supply The Asia Pacific region, which accounted for 4,070.2Mt of coal produced, or ~60% of coal produced, in 2008, continued to be the largest producer of coal in the world, in terms of tonnes and energy value, in 2009 (Figure 5 and Figure 6), with China, Australia and India accounting for 90% of the coal produced in this region in 2009. North America produces the next highest amount of coal by energy value, although it produces less coal in volume terms than Europe and Eurasia. Africa, South and Central America and the Middle East are the next largest coal producers by volume and energy values. The most significant producers of coal in 2009 are shown in Table 4, which shows that China was the largest coal producer in 2009, by tonnages and energy values, followed by the US. South Africa is ranked as the 7th-largest producer of coal volumes, and the combined 6th-largest producer of coal in energy terms.

15


Table 4: Selected Coal Producers (2009)

COUNTRY PRODUCTION (Mtoe) WORLD PRODUCTION

PRODUCTION (Mt)

WORLD PRODUCTION

China 1552.9 45.5% 3,050 43.6% US 539.9 15.8% 973.2 14.0% India 211.5 6.2% 557.6 8% Australia 228.0 6.6% 409.2 5.9% Russia 140.7 4.1% 298.1 4.2% Indonesia 155.3 4.6% 252.5 3.6% South 140.9 4.1% 250.0 3.6%

Source: BP Statistical Review of World Energy 2010 Coal production quantities in North America and Africa had not significantly changed between 1981 and 2008, but production dropped in 2009 in every region, except in the Asia Pacific and Middle East regions, in 2009, reducing by 9.1% in North America, 7.1% in Central and South America, 6.9% in Europe and Eurasia, and 0.7% in Africa. Figure 5 : Coal Global Production 1999 – 2009 (Mtoe)

Source: BP Statistical Review of World Energy 2010

0

500

1,000

1,500

2,000

2,500

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

GLO

BAL

PRO

DU

CTIO

N (M

toe)

YEAR

Middle East South & Central AmericaAfrica North AmericaAsia Pacific Europe & Eurasia

16


Figure 6: Coal Global Production 1999 – 2009 (Mt)

Source: BP Statistical Review of World Energy 2010 6.2.1. Exports

The country production rankings are considerably different to the coal export rankings. Australia was the world’s largest coking coal exporter in 2008, and continues to control 55% to 60% of the coking coal market. Australia exported over 137Mt of coking coal in 2008, and 135Mt in 2009. Indonesia, meanwhile, was the largest exporter of steam coal, exporting 173Mt of steam coal in 2008 and 234Mt in 2009. Global consolidated export figures (including a breakdown of steam and coking coal components) for 2009 were not available at the time of compiling this report, but available statistics for selected exporters were captured in Table 5, which provides steam and coking coal exporting statistics for seven countries. What is significant about Table 5 is that China, despite being the largest producer on coal, was not a significant exporter of coal in 2009. Instead, for the first time, China became a net importer of coal in 2009, as a result of high demand and domestic Chinese prices being higher than import prices. Table 5: Selected Exporters of Steam and Coking Coal (2008/2009)

COUNTRY TOTAL (2008e)

(Mt)

STEAM (2008e)

(Mt))

COKING (2008e)

(Mt)

TOTAL (2009) (Mt)

STEAM (2009) (Mt))

COKING (2009) (Mt)

Australia 252 115 137 274 139 135 Indonesia 203 173 30 (not available) 234 (not available) Russia 101 86 15 109 92 17 Colombia 74 74 - (not available) 63 (not available) US 74 35 39 52 19 33 South Africa 62 61 1 61 61 0 PR China 47 43 4

Source: Wong (2010), SourceWatch (2010)

0

1,000

2,000

3,000

4,000

5,000

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

GLO

BAL

PRO

DU

CTIO

N (M

t)

YEAR


17


6.3. Demand The Asia Pacific region accounted for the bulk of coal demand by energy value in 2009, with 65.6%, or 2151.6Mtoe, of global consumption stemming from this region in 2009 (Figure 7). North America was the next largest contributor to consumption by region, at 16.2%, or 531.3Mtoe, of global demand, followed by Europe and Eurasia, at 13.9% of global demand, or 456.4Mtoe, in 2009. All regions, with the exception of the Middle East and Asia Pacific, experienced a drop in coal consumption, in energy terms, in 2009. China’s coal consumption was the world’s largest in energy terms in 2009, totalling 46.9% of global consumption, or 1537.4Mtoe, followed by the US, with 15.2% of global consumption, or 498.0Mtoe. However, the former showed strong signs of growth in 2009, increasing coal consumption by 9.6% between 2008 and 2009, while the latter reduced its consumption by 11.5% over the same period. The world 2009 consumption figures, in tonnages, when they become available, are expected to show a similar drop in tonnages consumed. It is expected that Europe and Eurasia will continue to be the second-largest regional consumer after the Asia Pacific region in tonnage terms (Figure 6), even while it remains the third largest in energy terms.

Figure 7: Coal Consumption 2001-2009 (Mtoe)

Source: BP Statistical Review of World Energy 2010

0

500

1,000

1,500

2,000

2,500

2001

2002

2003

2004

2005

2006

2007

2008

2009

CO

AL C

ON

SUM

PTIO

N (M

toe)

YEAR


18


Figure 8 : Coal Consumption 2001-2008 (Mt)

Source: EIA 6.3.1. Exports

While some of this consumption can be met by domestic production, some countries are unable to supply domestic coal requirements. As far as seaborne coal trade, the following coal flows apply (Neumann, 2009):-

South Africa’s main export destination is Europe, with a smaller quantity of coal supplied primarily to India;

Australia’s main export destination is Asia, with a smaller quantity of coal supplied to Europe and the US;

Russia’s main export destination is Eastern Europe, with a smaller quantity of coal supplied to the East;

Indonesia mainly supplies the East, but also supplies a small quantity of coal to Europe;

Colombia mainly supplies the US and Europe; and the US supplies its internal market and Europe.

Japan has tended to be the leading importer of steam and coking coal, and imported 128Mt of steam coal in 2008 and 58Mt of coking coal in 2008. This decreased to 117Mt of steam coal and 46Mt of coking coal in 2009 (Table 6). China’s net coal imports grew in 2009, and it increased its steam coal imports to 92.1Mt and its coking coal imports to 34.0Mt.

Table 6: Selected Importers of Steam and Coking Coal (2008/2009)

COUNTRY TOTAL (2008e)

(Mt)

STEAM (2008e)

(Mt))

COKING (2008e)

(Mt)

TOTAL (2009) (Mt)

STEAM (2009) (Mt))

COKING (2009) (Mt)

Japan 186 128 58 163 117 46 Korea 100 76 24 97 81 16 Chinese Taipei 66 60 6 64 59 5 India 60 31 29 75 54 21 Germany 46 37 9 (not available) (not available) (not available) PR China 46 35 11 126 92 34 UK 44 37 7 (not available) (not available) (not available)


0

1,000

2,000

3,000

4,000

5,000

2001

2002

2003

2004

2005

2006

2007

2008

CO

AL C

ON

SUM

PTIO

N (M

t)

YEAR

Middle East South & Central AmericaAfrica North AmericaAsia & Oceania Europe & Eurasia

19


Over the last twenty years seaborne trade in steam coal has increased by about 7% on average each year. Over the last twenty years seaborne coking coal trade has increased by 1.6% a year.

6.4. Global Outlook

6.4.1. Demand The demand for steam coal in the future will largely depend on the extent of global reliance on coal for electricity production, while the demand for coking coal will depend on the growth in steel production. Coal demand is expected to increase significantly, especially on the back of increases in power and industrial production. Coal demand is expected to increase from 2010, and this increase is likely to be more dramatic than for many other energy commodities. Figure 9: Projected Demand for Coal (Mtoe)

Source:EIA 6.4.1.1. Steam Coal

The steam coal market has been growing, as a result of coal’s share of world electricity generation. This stands at 40% globally (Eskom, 2008). However, electricity demand in Asia is increasing, and coal, as a fuel source, contributes a much larger percentage to electricity generation in this region – two factors which bode well for the continued growth of the steam coal market. Some 220GW of coal powered generation capacity is expected to come on line in the next five years, including 79GW in China and 69GW in India (PSQ Analytics, 2010). Coal’s share of global electricity generation capacity is expected to grow in most regions, although in some regions, notably Europe and Japan, there will be a reduction in its share, because of environmental concerns. The predicted coal-fired generating capacity by region is shown in Table 7.

0

1,000

2,000

3,000

4,000

5,000

6,000

2010 2015 2025 2035

DEM

AND

(Mto

e)

YEAR

Liquids Natural Gas Coal Nuclear Renewables

20


Table 7: Predicted World Coal-fired Generating Capacity by Country and Region (GW)

REGION/COUNTRY HISTORY PROJECTIONS

AVERAGE ANNUAL

PERCENT CHANGE

2007 2015 2020 2025 2030 2035 2007-2035 North America 340 345 346 347 352 363 0.2

United States 313 325 326 327 330 337 0.3 Canada 21 14 14 14 15 16 -0.8 Mexico 7 6 6 6 7 10 1.4

OECD Europe 200 189 182 176 174 177 -0.4 Non-OECD Europe and Eurasia 98 97 95 96 103 118 0.7

Russia 44 44 44 44 50 61 1.1 Other 54 52 51 51 53 57 0.2

Asia 729 859 990 1,170 1,381 1,622 3.7 Japan 45 42 41 40 39 39 -0.5

South Korea 23 22 23 27 33 41 2.1 Australia/New Zealand 31 30 31 31 32 33 0.3

China 496 625 750 901 1,062 1,233 3.3 India 84 86 89 98 113 135 1.7

Other Asia 50 53 57 72 102 141 3.8

Middle East 6 5 5 5 5 5 -0.4 Africa 41 41 43 47 56 70 1.9 Central and South America 10 10 9 9 9 11 0.1

Brazil 2 2 2 2 2 3 0.8 Other Central and

South America 8 8 7 7 7 8 -0.1

Total World 1,425 1,545 1,671 1,849 2,080 2,366 1.8 Note: Totals may not equal sum of components due to independent rounding. Sources: History: Derived from U.S. Energy Information Administration (EIA), International Energy Statistics database (as of November 2009), web site www.eia.doe.gov/emeu/international. Projections: EIA, Annual Energy Outlook 2010, DOE/EIA-0383 (2010) (Washington, DC, April 2010), AEO2010 National Energy Modeling System, run AEO2010R.D111809A, web site www.eia. doe.gov/oiaf/aeo; and World Energy Projection System Plus (2010).

Unsurprisingly, given many of the Asian countries’ high future coal-fired electricity consumption levels (Table 7) and limited domestic supplies of coal, many of the top importers of steam coal for 2010 and 2011 will be from the continent (Table 8). Table 8: Selected Importers of Steam Coal (2009-2015)

COUNTRY 2009 (Mt))

2015 (Mt)

Japan 116 122 Korea 84 95 Malaysia 16 20 India 45 90 PR China 84 100 Europe 212 221 World 730 872

Source: Wong (2010), SourceWatch (2010) 6.4.1.2. Coking Coal

Those that have been traditionally large consumers of coking coal, including Japan, EU and Korea, will continue to be so, and the growth in their year-on-year imports are expected to grow significantly as will India and China’s imports (Metalreal, 2010). Abare’s conservative estimates of what the coking coal market will grow to are shown in Table 9. However, it should be noted that several analysts are predicting much more significant coal import and consumption growth for China and India. Reuters (2010b) notes that coking coal consumption will grow by 11% in China in 2010, to about 600Mt.

21


The country’s coking coal production is likely to grow by 9% in 2010, to about 500Mt, with imports supplying the remaining necessary coking coal, believe Metalreal (2010) and Reuters (2010b). Alim (2010), meanwhile, notes that India will also be a significant consumer of coking coal, and is estimated to require 84Mt in imports as early as 2011/2012. Table 9: Selected Importers of Coking Coal (2009-2015)

COUNTRY 2009 (Mt))

2015 (Mt)

Europe 42 53 Japan 46 57 China 34 47 India 21 44 Korea 16 30 Taiwan 5 7 Brazil 9 18 World 211 304


6.4.2. Supply According to the United States Energy Statistics Department, from 2010 to 2030, coal production in China, the US and India, driven by growing coal consumption, is projected to increase by 897Mtoe, 93Mtoe and 98.2Mtoe respectively (Table 10). It is assumed that much of the demand for coal in China, the United States, and India will continue to be met by domestic production. Table 10: World Coal Forecast Production by Region (2010 – 2030)

REGION 2010 2015 2020 2025 2030

Mtoe North America 624.9 642.6 655.2 667.8 725.7

United States 577.1 594.7 604.8 614.9 670.3 Canada 37.8 37.8 37.8 40.3 40.3 Mexico 10.1 10.1 10.1 12.6 15.1

OECD Europe 327.6 322.6 312.5 307.4 302.4 Non-OECD Europe and Eurasia 231.8 239.4 239.4 241.9 247.0

Russia 126.0 131.0 128.5 128.5 131.0 Other 105.8 108.4 105.8 103.3 105.8

Asia 2217.6 2446.9 2716.5 3041.6 3344.0 Japan 113.4 113.4 108.4 105.8 100.8

South Korea 60.5 60.5 63.0 68.0 73.1 Australia/New Zealand 65.5 65.5 68.0 68.0 73.1

China 1580.0 1771.5 2003.4 2270.5 2477.1 India 259.6 282.2 304.9 325.1 357.8

Other Non OECD Asia 138.6 153.7 168.8 204.1 262.1 Middle East 10.1 10.1 10.1 10.1 10.1 Africa 105.8 110.9 115.9 121.0 133.6 Central and South America 22.7 25.2 30.2 32.8 40.3

Brazil 12.6 15.1 17.6 22.7 25.2 Other 10.1 10.1 10.1 12.6 15.1

TOTAL WORLD 3543.1 3797.6 4074.8 4415.0 4793.0 Source: Energy Information Administration

The increase in coal production for Australia/New Zealand is expected to be used primarily for export from Australia. Production growth in Asia is attributable to both rising levels of coal consumption and a desire to export. Rising international trade is also expected to support production increases in Russia, Africa, and Central and South America (excluding Brazil). Selected future exporters of steam coal and coking coal are shown in Table 11 and Table 12. It is expected that Australia will continue to dominate the coking coal market and have a large share of the export steam coal market, while Indonesia will continue to dominate the steam coal market.

22


Table 11: Selected Exporters of Steam Coal (2009-2015)

COUNTRY 2009 (Mt)

2015 (Mt)

Australia 139 207 China 22 15 Colombia 70 109 Indonesia 200 250 Russia 90 102 South Africa 65 88 United States 20 35

Source: Wong (2010), SourceWatch (2010) Table 12: Selected Exporters of Coking Coal (2009-2015)

COUNTRY 2009 (Mt)

2015 (Mt)

Australia 135 183 Canada 20 36 USA 33 40 Russia 17 26


6.5. Prices The price of coal varies based on its specifications. Figure 10 shows some of the more common coal prices in the world. All of the international coal price graphs demonstrate a similar peak that was experienced in the coal price in 2008. This is not surprising since, as Neumann (2009) indicates, different coal prices are co-integrated with each other. Although there is not a linear relationship between the different prices, there is a strong relationship with each other. Figure 10 :Coal Prices (1987-2009)

Source: BP Statistical Review of World Energy 2010 † Source: McCloskey Coal Information Service. Prices for 1990-2000 are the average of the monthly marker, 2001-2009 the average of weekly prices. ‡ Source: Platts. Prices are for CAPP 12,500 Btu, 1.2 SO2 coal, fob. Prices for 1990-2000 are by coal price publication date, 2001-2009 by coal price assessment date. Note: CAPP = Central Appalachian; cif = cost+insurance+freight (average prices); fob = free on board.

0

20

40

60

80

100

120

140

160

180

200

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

CO

AL P

RIC

E (U

SD/t)

YEAR

Northwest Europe marker price †US Central Appalachian coal spot price index ‡Japan coking coal import cif price

23


6.5.1. Steam Coal Coal prices have historically been lower and more stable than oil and gas prices; in spite of the almost 200% increase in the price of coal between 2007 and 2008 (Figure 10). However, this increase was corrected in the recent global financial crisis and economic slowdown. The general increase in coal price was attributable to the increase in demand for the most affordable form of fuel for power generation. In view of the dramatic increase in coal prices, the focus on coal resources has intensified worldwide.

6.5.2. Coking coal Internationally, coking coal demand has remained stagnant since the early 1980s, but this changed in 2003, when coking coal prices rose markedly, as a result of increased demand in the steel manufacturing industry.

6.6. South African Coal Mining Industry South Africa has a well-established, low-risk coal mining industry, which has reputable participants, including Anglo Coal, Ingwe/BHP Billiton, Xstrata Coal, Exxaro Resources, and Sasol Mining. Coal is one of South Africa’s most important export minerals. The bulk of the exports have traditionally been destined for Europe (Neumann, 2009) although an increasing percentage of coal exports, particularly when freight charges are low, is believed to be going to Asia. South Africa is the world’s sixth largest producer of hard coal with a world share of 3.6% and a total production of 250Mt. South Africa’s coal reserves rank seventh in the world with a reported 30Bt of economically recoverable coal reserves. The country is known for its low-cost, readily-available coal, which makes it a very competitive industry.

6.6.1. Reserves

The country is currently implementing a review of the national resources and reserves and hopes to have a firmer foundation for estimates of coal resources and reserves. This should assist in reducing the doubt that surrounds estimates of South Africa’s coal reserves. In the current South African Minerals Industry (DMRI, 2008) Handbook, the Department of Mineral Resources states that the 2007 South African reserves total 27.9Bt. This contrasts with a higher estimate, given by BP in its 2010 Statistical Review of World Energy, of 30.4Bt of reserves, and the much lower estimate implied by US geologist M King Hubert, who estimates that the whole continent of Africa has ~15Bt (Hartnady, 2009). Ndaba (2008) notes that some believe that the Waterberg has 50Bt on resources and, when there is a need for more coal in the Waterberg, these resources might become reserves. The Waterberg Coalfield is estimated to contain 15.4Bt of reserves by Venter (quoted in Jeffrey (2005)) – an estimate that would be clearly problematic if one believes Hubert’s estimate that the whole African continent has that magnitude of reserves. The Waterberg’s reserves, according to Jeffreys (2005), consist of 13.1Bt of low-grade bitumous coal (CV# =25.5MJ/kg), 1.7Bt of high-grade bitumous coal (CV>1.7Mt) and 0.7Bt of coking coal.

6.6.2. Supply The South African coal-mining industry is highly concentrated, with three companies, namely Ingwe Coal (BHP Billiton plc), Anglo Coal and Exxaro Resources Limited, accounting for 85% of the saleable coal production in 2008. South Africa’s coal production accounted for 98.6% of Africa’s coal production in 2009 (BP, 2010).

24


South Africa’s coal sales have been increasing since 1900, but this pattern was broken in 2009, when South Africa’s production dropped from 252.6Mt to 250Mt between 2008 and 2009. South Africa’s export tonnages, similarly, dropped in 2009, to 61.1Mt as a result of shortfalls in delivery from Transnet Freight Rail (Ryan 2010). In total, there are eighteen coalfields, with the Witbank-Highveld Coalfield being the most economically important. The Witbank-Highveld Coalfield produces the highest percentage of South Africa’s saleable coal. South Africa sold 245.2mt of coal in 2009, totalling ZAR65,397m. The country had ZAR30,934m worth of exports, comprising 60.4mt. It also had local sales of ZAR34,463m, comprising 184.7mt. There has been a general trend of increasing coal sales, although 2009’s sales volumes are lower than 2007’s, which totalled 247,7mt (DMR, 2010b and 2010a). Figure 11 : South African Coal Sales (1885 - 2009)

Source: DMR * No annual data.

6.6.3. Demand

According to the 2005/2006 South Africa Yearbook (DMR, 2010), the main markets for South African coal are:-

the export market, which took up ~24% of total production in 2009; and

the domestic market, which consists of:- electricity generation, which consumes ~62% of coal in

the domestic market; petrochemical companies, primarily Sasol, which

consume ~23% of coal in the domestic market; general industry, which consumes ~8% of coal in the

domestic market; metallurgical industry, primarily ArcelorMittal, Highveld

Steel and Columbus Steel, which consumes ~4% of coal in the domestic market; and

about ~4% of coal for the domestic market which is purchased by merchants, and sold locally for the household market or exported.

0

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6.6.3.1. The Export Market As is noted in Section 8.7.1.1, South African coal exports have slumped. The country does have the capacity to export 91Mt of coal from RBCT, but it is exporting significantly lower volumes, having exported slightly more than 60Mt in 2009. Infrastructure difficulties were blamed for the export shortfall in 2009, and marketing problems have been blamed for the shortfalls in the first half of 2010.

6.6.3.2. The Domestic Market The average quality specification requirements for domestic consumers are shown in Table 13:- Table 13: Weighted Coal Qualities by Sector

SECTOR COAL TYPE CV (MJ/kg)

Ash (%)

VOLATILE MATTER

(%) Electricity generation Bituminous 20.7 30.1 22.5

Tutuka Power Station Bituminous 22 - 25 < 30 > 20 Majuba Power Station Bituminous 19 - 23 20 - 35 20 - 24

Synfuels Bituminous 21.3 25.8 22.3 Small Industry and Household

Anthracite 29.4 15.2 7.0 Bituminous 27.3 14.2 26.6

Source:- DME Minerals Bureau, Eskom Eskom’s power stations have been specifically designed to burn low-grade coals which are abundant in South Africa. Every year Eskom consumes ~60% (112Mt) of domestically-sold coal from which it provides ~90% of the country’s electricity. Sasol consumes approximately 23% of South Africa’s annual domestically-consumed coal and operates coal mines to provide feedstock for synthetic fuels and chemical plants. The company primarily uses most of the coal mined by Sasol Mining to produce petrol, diesel and petrochemicals and power generation at the chemical plants. Approximately 4% of local consumption goes to the household market. The suppliers are largely coal traders in formal and informal residential areas. The metallurgical sector also consumes about 4% of the local coal production. The major players in the industry include ArcelorMittal, Columbus Stainless and Highveld Steel. Cement manufacturers are likely to emerge as significant consumers in the medium-term as infrastructure developments in southern Africa gain momentum, creating demand for cement-based products. Coking coal has historically played a minor role in the South African coal industry. In 2006, less than 4Mt of coking coal was produced by Exxaro’s Grootegeluk and Tshikondeni Collieries, the former for export and the latter for ArcelorMittal’s steel works in Vanderbijlpark. The lack of development has largely been a function of the Witbank/Highveld Coalfields’ lower qualities which have been better suited to thermal applications.

6.6.4. Prices 6.6.4.1. Steam Coal

The South African export prices of steam coal are determined by their calorific value, and are described as Coal 59CL, Coal 60CL and Coal 62CL. The number in the label refers to the number of kcal/kg, with Coal 60CL referring to a coal with a calorific value of 6,000kcal/kg or 25MJ/kg. Figure 12 shows the three coal export products.

26


There is a 4.6% average price difference between the cheapest and most expensive grades of coal. In 2009, bituminous steam coal sold for an average export price of ZAR506/t. The March 2010 average price is ZAR554/t (DMR 2010b). The dramatic coal price increases during 2008 (coal prices effectively doubled within 12 months), and subsequent correction in the wake of the 2008/2009 financial crisis and economic slowdown has led to increased speculation regarding future prices. South African coal exports are very dependent on freight charges in addition to coal prices. In June 2010, coal freight rates fell to below USD16/t from South African ports to China, leading to an ‘arbitrage window’ that resulted in 720,000t of coal being shipped from RBCT to China, compared to none in April and May (Reuters, 2010c). In addition, in May 2010, utilities in South Korea were already indicating that they might turn to South Africa or Colombia because these countries’ coal was cheaper than Australian coal, even with the shipping costs. Although Australian coal tends to be favoured because of its close proximity to the East, Chinese and Indian buyers have been eager to buy South African coal delivered for USD100 in June 2010 (Reuters, 2010c).

Figure 12: Coal Price History from January 1990 to April 2010

Source: INet Bridge South African domestically-traded steam coal is priced much lower than the export coal prices shown in Figure 10. The DMR (2010b) reports that the average price for domestically-traded steam coal was ZAR174/t in March 2010, as compared to an average of ZAR177/t for 2009. However, the bulk of South African steam coal for the domestic market is sold to Eskom, which has its own formula for calculating prices. It pays mining costs (plus a percentage, believed to be calculated on a mine-to-mine basis) to contractors which supply it. In addition, it pays for all capital costs of the mines that it has long-term supply agreements with (White, 2010).

6.6.4.2. Coking coal South Africa did not export coking coal in 2009, but did sell ~1.9Mt in 2009 domestically at an average local coking coal price of ZAR871/t (DMR 2010b). ZAR603/t was the local coking coal price in March 2010, so it appears that the domestic coking coal price appears to be dropping.

0255075

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COAL59 (CL) COAL60 (CL) COAL62 (CL)

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The country’s coal producers have also exported coking coal in the past, so this could potentially be an additional marketing avenue for any newcomer to the coking coal sector with some coking coal production.

6.6.5. Outlook

Export sales and sales to Eskom are the most important sources of demand, and the outlook for these sales avenues are the most important to consider for any new entrant into the coal sector. 6.6.5.1. Export sales

6.6.5.1.1. Infrastructure Abare (2010) forecast that South African exports would grow to 67Mt in 2010 and to 71Mt in 2011. However, based on exports so far this year, an annualised total of 55.9Mt of exports is possible in 2010, and this low export total is being blamed on marketing and demand issues (Ryan, 2010). A general lag in infrastructural development in remote areas has hamstrung meaningful industrial development, and this is particularly important for the Waterberg for any potential new mining company that wishes to establish itself there and export its product. The relative lack of industrial development in the Limpopo Province is, in part, a result of inadequate transport infrastructure. However, the South African rail utility, Transnet, is considering large infrastructure projects in the Limpopo Province to increase rail capacity for coal produced in the Waterberg and Limpopo regions. It is undertaking a ZAR8bn pre-feasibility study for the upgrade of the line between Groenbult (60km north-east of Polokwane), the Mozambican port of Maputo, and the RBCT. From Groenbult, the rail distance to Maputo is approximately 100km less than to RBCT. These projects, if they are completed, bode well for the exporting of coal from the Waterberg.

6.6.5.1.2. Changing Product Emphasis There have been reports that coal producers want to start exporting coal with a lower calorific value. Dubbed RB3, it is likely to have a specification of 5,600kcal/kg. This low calorific value is in demand from India, and could be supplied from the Waterberg, which has an abundance of low-quality coal. However, while this presents an opportunity for coal firms in the Waterberg which have not got established ties to Eskom, it is likely that Eskom will oppose the exporting of coal grades which it requires (Ryan, 2010b)

6.6.5.1.3. Coal as a Strategic Mineral Those in the coal sector have become wary of political interference in coal exports. As indicated in the previous discussion, it is possible that Eskom may oppose the exporting of low-calorific value coal (Ryan 2010b). In addition, Minister of Public Enterprises Alec Erwin is on record as saying that government could intervene in the coal sector if government’s needs are not met (Wakeford 2008).

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6.6.5.1.4. Environmental Issues Globally, there have been increasing concerns about the prevalence of coal-fired power stations. This will result in a reduction of electricity being produced from these power stations in Europe and, because this has been South Africa’s traditional steam coal market, it is possible that South African steam coal exports to this destination will be harmed.

6.6.5.1.5. Costs Rising freight costs will narrow any cost advantage that South Africa has and its future export success to destinations such as Asia is largely dependent on freight costs remaining low (Section 8.7). Its traditional market, of Europe, continues to be a market for South African coal, but its demand for coal is dropping (Ryan, 2010b).

6.6.5.2. Sales to Eskom South Africa’s energy resource base is dominated by coal. Approximately 93% of South Africa’s primary energy needs are provided by coal. This is unlikely to change significantly in the next two decades, owing to the relative lack of suitable alternatives to coal as an energy source. The utility plans to re-commission three mothballed power stations during the next six years and is also constructing and planning to construct additional power stations. Eskom predicts a requirement of 141Mt of coal to feed its power stations by 2018. Some analysts believe that there is not enough coal in South Africa to meet this demand while others believe that the industry is still growing and has not reached peak coal growth. The Waterberg is key to many of Eskom’s plans. It is currently constructing the Medupi power station, which is to become operational in 2012. Medupi Phase 2 is intended to expand the new power station by an additional 2100MW, and this power is expected to come on stream by around 2016.

6.6.5.3. Environmental issues Eskom was concerned that it would not receive World Bank funding, because it still relies heavily on coal-fired power stations and many of its future generation plans depend on these power stations. While it was granted the funding, it is clear that multinational funding of coal-fired power stations is not endorsed by many. The environmental impact of coal mining and energy production in the Waterberg is also a future potential source of conflict that may delay or scupper plans to develop the coalfield. There are already concerns about the illegal mining of sand for the Medupi coal plant; the altering of water courses; acid mine drainage; insufficient water for the Waterberg’s development; and air pollution standards for sulphur dioxide and particulate matter that have been exceeded in areas surrounding Eskom’ Mathimba power station (Peek, 2010).

6.6.5.4. Sales to Sasol Sasol has traditionally operated its own mines, and has not been a significant buyer of coal from non-Sasol mines. However, it is possible that it may begin to buy coal as a result of its plant-developing plans in the Waterberg. The company had mooted the possibility of building Sasol Four, known as Project Mafutha, in the Free State or the Waterberg.

29


Exarro has already indicated its interest in getting involved in coal-to-liquid projects, and it is likely that Sasol will be a suitable customer for the high-ash coal that is present in the Waterberg.

6.6.5.5. Coking Coal South Africa does not have significant quantities of mined coking coal, and even imports coking coal (IEA 2007, DMR 2010). Any producer of coking coal would probably be supplying ArcelorMittal, Highveld Steel or Columbus Steel, and the outlook for its coking coal would depend on these three companies’ plans (IEA 2007, DMR 2010). Developments in the international coking coal market have led to a renewed interest in South Africa’s northern coal fields. However, in June 2010, there were concerns that the domestic coking coal market could be affected by reduced steel production. This is because ArcelorMittal has warned of job losses and a potential review of steel production if it cannot get iron ore from Kumba Resources at below market costs (de Lange, 2010).

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7. THE WATERBERG COAL PROJECT DESCRIPTION AND LOCATION 7.1. Location

The contributing properties are situated less than 5km west of Exxaro’s Grootegeluk Mine boundary, 240km northwest of Pretoria (South Africa’s capital) and 70km south of the border with Botswana..

7.2. Accessibility The properties are well placed with regards to the local infrastructure, located approximately 20km from the railway line that runs from Lephalale to Pretoria, and extends to Maputu, Richards Bay and Saldana Bay (Figure 1). The railway line terminates immediately north of the Grootegeluk Mine. The road network in the area is well established, with the tarred D1675 within 10km from the contributing properties.

7.3. Climate and Vegetation The climate of the area is warm, which is ensures that exploration and mining can take place throughout the year. Summers are hot (averaging highs of 35ºC) with occasional thunder storm activity. The winters are mild (averaging highs of approximately 20ºC) and generally dry. The Waterberg is generally dry, with an annual average rainfall of 450mm, and prone to drought. The vegetation of the area consists of sparse Bushveld, with the main land use being for game farming. The properties are all currently being utilised as game farms.

7.4. Local Resources The nearest town is that of Lephalale (Figure 2), which is located approximately 40km east of the Waterberg Coal Project properties. The town is a regional centre and provides modern conveniences, including accommodation and services. The town is also a source of fuel and labour. The town services Eskom’s Matimba Power Station as well as Exxaro’s Grootegeluk Coal Mine among other industries. Lephahale is approximately 3.5 hours drive from Pretoria (South Africa’s capital) and Johannesburg (South Africa’s economic hub) on good tarred roads and is also connected by a well established rail system.

7.5. Infrastructure National infrastructure, including Transnet’s Railway line (which terminates at the Grootegeluk Mine) and Eskom’s power distribution network lie within 20km southwest of the properties (Figure 1). Eskom’s existing 3,900MW Matimba Power Station is located adjacent to the Grootegeluk Mine, approximately 15km west of the Waterberg Coal Project properties. Eskom’s planned 4,800MW Medupi Power Station is located approximately 10km south of the Waterberg Coal Project properties, and is expected to be commissioned in 2012. Eskom plans to build at least one additional power station in the Waterberg. This together with Medupi will require an additional 30mtpa of coal. Transnet are currently in the process of finalising a pre-feasibility study to improve the Waterberg rail link.

7.6. Topography The topography is generally a flat plain, with small undulations over the project area. The elevation varies between ~860m above mean sea level (amsl) to ~900mamsl. The topography dips gently to the north and west towards the Limpopo River valley. The Limpopo River, which forms the border between South Africa and Botswana in this area, is a perennial river, and is located approximately 15km from the Waterberg Coal Project properties.

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8. GEOLOGICAL SETTING 8.1. Regional Geological Setting

The Waterberg Coalfield reportedly accounts for over 45% of South Africa’s unmined coal inventory. It is considered a strategic coalfield in light of South Africa’s (and southern Africa’s) current energy crisis, with Eskom as well as mining and exploration companies presently investing heavily in this coalfield. The Waterberg Coalfield is rapidly becoming as important as the better known Witbank, Highveld and Ermelo Coalfields which currently supply the vast majority of Eskom’s coal power stations. It’s importance is set to surpass these other coalfields within the next 20 to 30 years as many of the more established coalfields become progressively more depleted, and as Eskom begins to increase its footprint in the Waterberg, away from the concentration of power stations in Mpumalanga in a bid to redistribute their impact on the environment and to satisfy the developmental needs of the Limpopo Province. The Waterberg Coalfield is currently host to (Figure 1):-

Exxaro Resources Limited’s (Exxaro) 19mtpa Grootegeluk Coal Mine; Eskom’s 3,700MW Matimba Power Station; and Eskoms planned Medupi Power Station which is currently under construction.

The Waterberg Coalfield is currently being explored and developed by a number of exploration and mining companies (Figure 1):-, including inter alia:-

Sekoko Coal, Firestone Energy, Resource Generation and Namane Resources for steam coal and coking coal;

Sasol and PetroSA for various coal-to-liquids and gas-to liquids projects; and Anglo Coal and for Iscor Ltd (Iscor) with Batepro Limited for coal bed methane

gas.

The Waterberg Coalfield extends for approximately 85km in a westerly direction from Lephalale and has a 40km north-south extent. The coalfield extends westward into Botswana where it is known as the Mmamabula Coalfield. The coalfield is fault-bounded along the southern and northern margins by the Eenzaamheid and Zoetfontein faults respectively (Figure 13), creating a ‘horst’ structure. The Daarby fault, with a displacement of between 250m and 400m, divides the coalfield into a shallow opencastable western area and a deep northeastern area, where coal occurs at a depth of between 200m and 400m below surface and may only be extracted by underground mining. The major coal bearing horizons of the Ecca Group of the Karoo Supergroup, in the Waterberg are:-

the Volksrust Formation, which consists of 55m of intercalated mudstones and coal, and

the Vryheid Formation, which incorporates four major discrete seams of approximately 1.5m, 3m, 9m and 4m, respectively.

Coal measures occur over a strarigraphic interval between 90m – 110m thick, characterised by 11 discrete coal zones, with the upper zones (Zone 6 – Zone 11) holding the highest commercial value (semi-soft coking coals). The Waterberg Coalfield does not exhibit a noticeable increase in rank (carbon/energy content) with increasing depth. The air dried volatile content of the coal remains at 35% – 36% from the sub-outcrop to a depth of 400m. Only a few dolerite dykes outcrop in the southeastern portion of the Waterberg Coalfield and no sill features have, to-date, been encountered in any exploration borehole.

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8.1.1. The Volksrust Formation The Volksrust Formation differs from that of the main Karoo Basin by being dominantly carbonaceous where it is represented by intercalated carbonaceous shale and mudstone, and bright coal. The Volksrust Formation consists of cyclical repetitions of mudstone and coal with an average thickness of approximately 60m, and comprise the upper seven zones (identified as Zones 5 to 11) that can be correlated across the coalfield. The Volksrust Formation coals are classified as a thick interbedded seam deposit type in terms of the SANS 10320:2004 guidelines. There is a decreasing ratio of bright to dull coal from the top to the bottom of the succession, with the proportion of semi-soft coking coal greatest in Zones 6 to 11. The best quality coals are within Zones 8 to 11 over the majority of the coalfield. These Zones are characterised by the highest yields and the presence of both bright and vitrinite coals. The vitrinite content of the coal towards the top of the Volksrust Formation leads to the upper zones having a semi-soft coking coal yield as well as thermal coal. The remainder of the Volksrust Formation yields low grade thermal coal for power station consumption. Each zone is typically characterised with bright coal at its base, with the ratio of coal to shale decreasing from the base in an upward direction. It follows therefore that the ash content of the zones increases upwards from approximately 20% to 45%. The coal succession requires beneficiation or up-grading, to produce an acceptable coal quantity for the market, which varies from semi-soft coking coals to internationally traded and local power station coals.

8.1.2. The Vryheid Formation The Vryheid Formation coal seams are composed of predominantly dull coal with minor carbonaceous mudstone intercalations, mined as thermal coals. The coal seams are identified as Zones 1 to 4 from the base of the Formation. These coals occur over a stratigraphic interval of approximately 40m. The coal seams vary in thickness between 1.5m and 9m. The Vryheid Formation coals are classified a multiple seam deposit type according to the SANS 10320:2004 guidelines. These are not unlike the coalfileds in Mpumalanga. While the majority of the coal seams or zones consist mainly of dull coal or inertinite-rich coal, some bright coal is developed at the base of zones 2, 3 and 4. This coal is suitable for steam-raising, gasification or as a direct-injection coal in the metallurgical industry. It requires limited or no beneficiation to up-grade the coal quality parameters. Due to lateral facies changes and changes in the depositional environment, these zones are characterized by a large variation in thickness and quality. Zone 3 is the best-developed dull coal zone and reaches a maximum thickness of 9m. The basal portion yields a small fraction with semi-soft coking coal properties. Zone 2 is on average 4m thick and reaches a maximum thickness of 6m in the Grootegeluk lease area. The basal portion also yields a fraction with semi-soft coking coal properties. Zone 1, the basal Vryheid coal zone, has an average thickness of 1.5m.

8.1.3. Grootegeluk Colliery Exxaro’s Grootegeluk Colliery is the only presently operating mine in the Waterberg Coalfield. This opencast mine commenced production in 1980 primarily as a source of coking coal for Iscor’s steel works with a middlings fraction from the beneficiation process suited to power station consumption.

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Saleable products currently include semi-soft coking coal, metallurgical coal and thermal coal, with the latter predominating as a dedicated supply to the Matimba Power Station. Metallurgical coal is primarily supplied to ArcelorMittal Steel, with semi-soft coking coal exported via the Durban and Richards Bay ports. Grootegeluk currently has a 14Mtpa supply agreement with Eskom’s neighbouring Matimba Power Station. The coal strata extracted at Grootegeluk is roughly 110m thick (Figure 14). The upper 60m consists of intercalated bright coal and carbonaceous shale of the Volksrust Formation, whilst the bottom 50m consists of well-defined dull coal seams separated by shale and sandstone interburden of the Volksrust Formation. The overburden thickness varies due to weathering but averages approximately 22m at the Grootegeluk Colliery. The deposit is mined selectively using a parallel bench advance approach, with benches extracted individually or in planned combination to satisfy specific end-product specifications. In addition, run-of-mine (ROM) from the various benches is blended to allow the washing plants, in turn, to supply a consistent product to the end-user. Grootegeluk’s export coal is railed via Thabazimbi to Rustenburg and on to the Gauteng area. From there it is railed on the general-freight lines to destinations such as Saldanha or Durban. Some export coal is railed via general freight to Middelburg and onto the coal link line to the Richards Bay Coal Terminal (RBCT). Exxaro’s Grootegeluk Coal Mine is a 19Mtpa operation. In 2009 the mine had the following product split:-

Eskom sales of approximately 15.5Mtpa; soft coking coal of approximately 1.2Mtpa; and export steam coal of approximately 1.8Mpta

8.2. Local Geology

The contributing properties are superimposed over the regional geology of the western half of the Limpopo Province (Figure 13). The Goedgedacht/Swartrand, Endragtpan and Greenwich Formations form part of the Karoo Sequence and consist of shales, sandstones, mudstones and coal occurrences. Both the Upper and Lower Coal Sequences are present within the Sekoko Coal-Firestone JV Waterberg Project area. Understanding the structural-geological environment is, arguably, more important than understanding the distribution of the coal quality characteristics. The presence of the various coal zones is directly related to the faulting and subsequent erosion of the upper zones in the southern properties. Duikerfontein 263LQ and Swanepoelpan 262LQ both comprise all the coal zones (Zones 1 – 11), but the depth to Zone 11 is relatively deep (~50m), in comparison with the prime properties of T2. It is generally believed that the geological and structural environment, due to its relatively close proximity to Grootegeluk, should be similar to the geological and mining-geological conditions encountered at that mine. However, since Grootegeluk was established in the most favourable mining-geological environment, areas in close proximity to the mine may not necessarily experience such favourable conditions, due to the presence of fault structures.

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9. GEOLOGICAL MODELLING Sound Mining Solutions (Pty) Ltd (SMS) undertook the modelling under the direct guidance of Venmyn. Orebody modelling was carried out using recent boreholes to derive the 3D geological and structural model. Coal zone roof and floor surfaces were constructed on an inverse distance method. Coal zone roofs and floors were constructed on an inverse distance method using Micromine Version 11.0.5 Build 1134. The zone surfaces were cut on fault boundaries, received from Lexshell and also based on interpretations from the data where there were sudden changes in zone elevations. Where holes were drilled short the zones were extrapolated using surrounding holes and fitting within the interpreted fault blocks. A wireframe for each zone was created separately per farm. A wireframe for each zone was created and in-filled in Datamine to form a block model. The block size was set at a maximum of 100m x 100m x zone height. The volumes, densities (at a wash of RD=1.9t/m3) and quality data (at a wash of RD=1.9t/m3) was modelled over the properties. A cut-off of 0.5mm minimum thickness limit was applied.

10. RESOURCE STATEMENT As described in Section 8 above, the coal zones are extensively interlaminated with shales and mudstones. Therefore, in order to identify the Coal Resource only within the zone, a wash at an RD=1.9t/m3 was carried out on the samples. This effectively removes the rock fraction from the coal. All Coal Resources have been categorised using the SAMREC and JORC Code and the SANS 10320:2004 (SANS) method of classification (stipulated in the SAMREC Code) for thick interbedded coal deposits. The SANS scheme utilises the distance between boreholes as the primary defining factor between the classification of Measured, Indicated and Inferred resources and Reconnaissance/Exploration Target occurrences, as per Table 14 below:- Table 14: SANS Classification of Coal Resources.

FOR THICK INTERBEDDED SEAM DEPOSIT (<65% Ash) FOR MULTIPLE SEAM DEPOSIT (<50% Ash)

CATEGORY MAX

DISTANCE BETWEEN

B/H (m)

NO. B/H PER AREA

MAX DISTANCE BETWEEN B/H (m) NO. B/H PER Ha

Measured Resource 350 8 b/h per 100ha 350 8 b/h per 100ha Indicated Resource 1,000 1 b/h per 100ha 500 4 b/h per 100ha Inferred Resource 3,000 1 b/h per 1,000ha 1,000 1 b/h per 100ha Reconnaissance/ Exploration Target 4,000 1 b/h per 1,600ha 2,000 1 b/h per 400ha

NB. Boreholes are required to have quality data. It is important to note, that classification into any category, requires that boreholes have associated quality data. Boreholes that do not have associated quality data, have been specifically excluded from any volume estimates and have not been classified into any Coal Resource category, and have not been considered as representing a Reconnaissance/Exploration Target. According to SANS, coal is to be quoted according to the following definitions:-

each coal zone was ‘washed’ at an RD=1.9 to ‘remove’ the rock fraction from the coal fraction and to calculate the volume of coal in the interlaminated sequence;

the zone tonnage was multiplied by the percent yield (by mass) to derive the coal tonnage. Note that the coal tonnage has a lower RD than the zone tonnage.

this coal tonnage is then reduced by the geological losses to obtain Total Tonnes In-Situ (TTIS);

geological losses are selected based on the density of the drilling and the structures in the area; and

the classification is based strictly on the radii from boreholes according to the SANS specifications.

37


10.1. Coal Resource Classification of the T3 Properties Table 15 summarises the Coal Resources of the T3 properties, defined by Venmyn using the assumptions detailed in Section 10. On this basis ~294.8 million TTIS of coal has been classified into the Indicated and Inferred categories for the T3 properties. These JORC compliant Coal Resources form the basis of the Valuation of these properties, reported herein (Section 11).

38

Val

uatio

n of

the

T3 P

rope

rties

of t

he W

ater

berg

Coa

l Pro

ject

Ju

ly 2

010V

enm

yn R

and

(Pty

) Ltd

Ta

ble

15: C

oal R

esou

rces

of t

he T

3 Pr

oper

ties

(Ven

myn

, Jun

e 20

09)

AIR

DR

IED

QU

ALIT

IES

AT R

D =

1.9

FAR

M N

AME

& N

O.

RES

OU

RC

E /

OC

CU

REN

CE

CAT

EGO

RY

ZON

E C

OAL

GR

OSS

TO

NN

ES IN

SI

TU

CO

AL T

OTA

L TO

NN

ES IN

SIT

U

C

V (M

Jkg)

AS

H

(%)

VOL.

(%

) SU

LPH

. (%

) M

OIS

T.

(%)

Sw

anep

oelp

an 2

62 L

Q

Mea

sure

d A

ll

Indi

cate

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ll 1,

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21.4

9 29

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2 0.

82

3.34

In

ferre

d A

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7,00

0 28

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1.14

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35

TOTA

L / A

VE S

WAN

EPO

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N

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299,

000

284,

519,

000

21.6

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kerfo

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M

easu

red

All

In

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ted

All

In

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ll 13

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10

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,000

21

.98

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0.78

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TOTA

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UIK

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NTE

IN

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00

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00

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78

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TO

TAL

/ AVE

RES

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RC

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PER

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39

3,24

8,00

0 29

4,97

6,00

0 21

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8 26

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1.13

3.

38

NO

TES:

- B

oreh

oles

requ

ired

to h

ave

qual

ity d

ata

for c

onsi

dera

tion

of th

e bo

reho

le d

ensi

ties

for c

lass

ifica

tion

purp

oses

. M

inim

um s

eam

hei

ght o

f 0.5

m a

pplie

d fo

r GTI

S.

The

Wat

erbe

rg c

oal t

ypic

ally

occ

urs

inte

rlam

inat

ed w

ith s

hale

, w

hich

is d

iffic

ult

to s

epar

ate

durin

g th

e lo

ggin

g an

d sa

mpl

ing

proc

ess.

The

refo

re, i

n or

der

to c

alcu

late

the

tonn

age

of c

oal i

n ea

ch z

one,

rat

her

than

the

tonn

age

of th

e zo

ne in

clud

ing

the

rock

, eac

h zo

ne w

as w

ashe

d at

an

RD

=1.9

to re

mov

e th

e ro

ck.

The

zone

tonn

age

was

mul

tiplie

d by

the

perc

ent y

ield

(by

mas

s) to

der

ive

the

coal

tonn

age.

Not

e th

at th

e co

al to

nnag

e ha

s a

low

er R

D th

an th

e zo

ne to

nnag

e, in

mos

t ins

tanc

es.

Rou

ndin

g to

2 s

igni

fican

t fig

ures

for M

easu

red.

R

ound

ing

to 3

sig

nific

ant f

igur

es fo

r Ind

icat

ed a

nd In

ferre

d.

Rou

ndin

g to

4 s

igni

fican

t fig

ures

for R

econ

nais

sanc

e.

Geo

logi

cal l

oss

perc

enta

ges

are

a fu

nctio

n of

bor

ehol

e an

d fa

ult d

ensi

ty.

For s

tock

exc

hang

e re

porti

ng p

urpo

ses,

no

Rec

onna

issa

nce

occu

rrenc

es c

an b

e in

clud

ed.

39


11. THE WATERBERG COAL MINERAL ASSET VALUATION At the early exploration phase, coal projects are valued dependent upon prospects for eventual economic extraction. A seller’s view may not necessarily match that of a potential buyer’s, and the transaction price is usually a compromise. The objective of this valuation was the assessment of the economic prospectivity of the contributing coal properties and their relation to the attributable mineral asset value. International mineral asset valuation codes set out clear methodologies for the valuation of mineral assets, with confidence in the mineral resource estimates being the primary value driver. In the South African context, the SAMREC Code, 2007 (and SANS) guides mineral resource and ore reserve classifications based upon geological confidence in the estimates through the exploration process. With respect to the contributing properties, the coal resources have been classified by Venmyn in compliance with both the SAMREC and JORC codes. Consistent with this approach, Venmyn has valued the contributing properties in compliance with the SAMVAL Code, 2007 and VALMIN Code, 2004. The selection of an appropriate valuation method depends on such factors as:

the nature of the Valuation; the development status of the Mineral Assets; and the extent and reliability of available information.

In conducting mineral asset valuations, Venmyn consider the following categories of Mineral Assets:-

Exploration Areas – properties where mineralisation may or may not have been identified, but where a Mineral or Petroleum Resource has not been identified;

Advanced Exploration Areas – properties where considerable exploration has been undertaken and specific targets have been identified that warrant further detailed evaluation, usually by drill testing, trenching or some other form of detailed geological sampling. A resource estimate may or may not have been made but sufficient work will have been undertaken on at least one prospect to provide both a good understanding of the type of mineralisation present and encouragement that further work will elevate one or more of the prospects to the resource category;

Pre-Development Projects – properties where Mineral or Petroleum Resources have been identified and their extent estimated (possibly incompletely) but where a decision to proceed with development has not been made. Properties at the early assessment stage, properties for which a decision has been made not to proceed with development, properties on care and maintenance and properties held on retention titles are included in this category if Mineral or Petroleum Resources have been identified, even if no further Valuation, Technical Assessment, delineation or advanced exploration is being undertaken.

Development Projects – properties for which a decision has been made to proceed with construction and/or production, but which are not yet commissioned or are not yet operating at design levels; and

Operating Mines – mineral properties, particularly mines and processing plants that, have been commissioned and are in production.

As the confidence in mineral resource estimates is increased, i.e. from Inferred Mineral Resources to Indicated Mineral Resources and Measured Mineral Resource, so is the veracity of the valuation. Table 16 and Figure 15 illustrate the link between a project’s development status and the most appropriate valuation methodology.

41


Table 16: Valuation Approaches and Methodologies.

VALUATION APPROACH

VALUATION METHODOLOGY

EXPLORATION AREAS

DEVELOPMENT PROPERTIES

MINING PROPERTIES

DORMANT PROPERTIES DEFUNCT PROPERTIES ECONOMICALLY

VIABLE UNVIABLE

Cash Flow Various DCF methods N/A P1 P1 P1 NA NA

Sales Comparative

Comparable transactions P1 P3 P2 P2 P1 P1

Historical Cost

Asset Recognition and Impairment Test

P2 NA NA NA P3 P2

P1 = Most acceptable method and widely used P3 = Less acceptable approach, less widely used and poorly understood. P2 = Acceptable approach and quite widely used

11.1. Valuation Methodologies Where insufficient confidence exists in the technical parameters of a mineral deposit, or mineral asset, to classify resources, valuation methods mainly rely on the principle of historical cost. This implies that a mineral asset’s value is related to the money spent on its acquisition, plus a multiple of the exploration expenditure, depending upon the degree to which its prospectivity has been enhanced by exploration. Once resources have been classified, then market comparisons are made on a monetary value per unit of mineralisation (ZAR/t). Once technical studies establishing the basis for future economic exploitation have been carried out, discounted cash flow (DCF) methods are applicable and all the methods used to identify a reasonable transaction value. The contributing coal assets can be defined as early to advanced stage exploration areas, with SAMREC and JORC code compliant Indicated and Inferred Coal Resources. Therefore, the contributing properties were valued using both the historical cost method and comparative sales transaction valuation method. It is important to note that this valuation has utilised the Venmyn July 2010 Coal Resource Statement (Table 15), as this is the current compliant resources estimate for the Waterberg Coal Project. The effective date of the valuation is 31st July 2010. 11.1.1. MEE

This method is based upon the principal of past, preferably audited, exploration expenditures where some expenditures may have added value, and others may not. Through the introduction of a prospectivity enhancement multiplier (PEM), a premium (or discount) multiplier can be applied to the total cost of exploration to date, depending on whether the exploration expenses being considered have relatively enhanced the prospectivity of the target or not. The subjectivity of the method is reduced by addressing specific expenditures with reference to the relevance to the type of mineralisation being considered and the effectiveness of the exploration. A measure of the effectiveness of a historical exploration programme is the confidence that can be ascribed to the resultant coal resource estimate.

11.1.2. Comparable Transaction Value Method The comparable transaction value method is based upon other, preferably recent, arm’s length transactions of a similar nature, which determines a monetary value per unit of resource (ZAR/t). Venmyn has graphically plotted recent transactions of a similar nature in relation to their specific stage of exploration (Figure 16) in order to make the necessary comparisons.

11.2. The Waterberg Coal Project MEE Valuation The Waterberg Coal Project can be considered as an early to advanced stage exploration project with varying degrees of historic and recent exploration and analytical data available on the various properties. Lexshell provided Venmyn with all available acquisition and exploration cost data for the contributing properties and, where historical exploration data was available, Venmyn assessed its relevance and effectiveness and estimated the cost of replicating that data.

42


Venmyn have considered the prospectivity of the respective coal properties according to the classification of exploration phases illustrated in Table 17. This table represents Venmyn’s standard PEM schedule for coal deposits. In Venmyn’s opinion, these PEM values reflect fair and reasonable multipliers based upon on the amount of work associated with and/or development status of any particular project. In order to establish an appropriate PEM, each property was classified with respect to Table 17 knowing that each new exploration phase was carried out contingent upon the successful outcome of the preceding phase. In addition, the PEM selected, was reviewed taking into consideration proximity to well understood resource areas, drillhole density and a qualitative assessment of the prospects for eventual extraction. Table 17: Venmyn’s Coal Prospect Exploration Phase Classification.

PHASE COMPLETED

EXPLORATION PHASE

PEM EXPLORATION ACTIVITY

FAIR UPPER LOWER

0 Exploration Concept 0 0.2 0 Project about which nothing is known, but

which has potential on a conceptual basis.

1 Desktop study 0 0.5 0.2 Historical and literature study, records or evidence of coal findings in the area. Historical artisanal mining data if any.

2 Reconnaissance 0.8 1.0 0.5 Geological mapping if terrain suitable. Palaeo topographical mapping. Historical drilling with intercept data, no laboratory assay.

3 Ground Follow-up 1.0 1.0 0.8

Detailed outcrop mapping, identification of coal hosting strata, coal seam outcrop mapping. Sampling of exposed coal seams where available. Historical drilling data with intercept and analyses, but of questionable authenticity.

4 Ground Follow-up 2.0 2.0 1.0

Ground geophysics, remote sensing techniques (e.g. seismics). Reliable historical drilling, but correlations difficult due to density of drilling.

5 First-phase drilling 4.0 5.0 2.0

Large diameter core drilling, widely spaced grid with preliminary coal analysis. First-pass tonnage estimate. Inferred coal resource.

6 Resource drilling and laboratory testwork

8.0 11.0 5.0

In-fill drilling, detailed coal analyses and washability testwork. Establish coal qualities, market potential, detailed resource tonnage estimation, washabilities. Advanced inferred and indicated coal resource classification.

7 Historic Mining 16.0 20.0 11.0 Previous commercial production, establishing reliable and well documented quality, tonnage, washability etc. Measured coal resource.

8 Reserve Classification 20.0 >20 20

Complete feasibility assessment, establish economics, and design a mine of an appropriate nature. Classification of coal reserves.

The MEE valuation process is shown in Table 18. The technique accounts for recent and historical expenditure and multiplies the various expenditures by appropriate PEMs based upon the value enhancement from such expenditure. Venmyn has based the MEE valuation of the contributing properties upon information provided by Lexshell, along with other relevant published and unpublished data. A desktop evaluation of all the contributing exploration properties was carried out. All reasonable enquiries were made to confirm the authenticity and completeness of the technical data upon which this report is based. To-date a total of ~ZAR2.75m has been spent on acquiring the prospecting rights and initiating the resource delineation drilling on the contributing properties of their Waterberg Coal Project. These costs include geological modelling and resource definition, as well as other project related expenditures. Since this delineation drilling has been the principle value driver to-date, these costs have been multiplied by the following PEM’s:

PEM’s of 5.0 – 11.0 for Swanepoelpan 262LQ; and PEM’s of 2.0 – 5.0 for Duikerfontein 263LQ.

43


Swanepoelpan 262LQ has received higher PEM’s since an Indicated Coal Resource has been defined on the property and as a result of its proximity to the highly prospective Smitspan 306LQ property of T2. Duikerfontein 263LQ has received lower PEM’s due to the absence of Indicated Resources, the limited extent of the resource and its distance from Smitspan 306LQ. Venmyn have analysed and rated the contributing properties according to the results achieved from historical and recent exploration activities as well as the success these activities have had on the classification of coal resources over the various properties. Based on the principles discussed above, PEM values of between 2.0 – 11.0 were allocated to the various properties, with respect to the present value estimates of historical exploration expenditure. This reflects the relative enhancement in the prospectivity that has been achieved on each property as a result of the historical exploration. The various costs, multiplied by their allocated PEM’s have then been added to derive the Fair MEE valuation for each property. This methodology has resulted in a Fair MEE valuation of ZAR21.98m for the contributing properties of the Waterberg Coal Project. Table 18: MEE Valuation

THE COST APPROACH

FARM TOTAL


(ZARm)

LOWER PEM

UPPER PEM

FAIR PEM

MIN PROJECT

VALUE (ZARm)

MAX PROJECT

VALUE (ZARm)

FAIR PROJECT

VALUE (ZARm)

Swanepoelpan 262LQ 2.75 5 11 8 13.74 30.22 21.98 Duikerfontein 263LQ - 2 5 4 - - -

TOTAL/ WT. AVE 2.75 5 11 8 13.74 30.22 21.98

11.3. The Waterberg Coal Project Comparable Transaction Valuation Since Coal Resources have been classified for the Waterberg Coal Project, Venmyn were able to carry out a comparable transaction valuation on the basis that recent market valuations of a similar nature provide the proxy for value. In order to arrive at a reasonable market value with which to compare the respective projects, appropriate recent and historical transactions must form the basis. Figure 16 summarises Venmyn’s database of recent unit market valuations within the context of the South African coal market with reference to the respective resource and reserve classifications. While Venmyn has considered the entire transaction database to derive an appropriate comparable transaction value, the valuation took into account the following recent transactions/valuations within the Waterberg Coalfield:-

the valuation by SRK Consulting (South Africa) (Pty) Ltd (SRK) in June 2006, of the Grootegeluk Colliery ahead of the merger of Eyesizwe and Kumba (now Exxaro) Eyesizwe/Kumba Grootegeluk transaction;

the proposed transaction between Gleneagle Gold Limited and Namane Resources, in December 2008. Although this transaction did not take effect, the proposed transaction does indicate the value that Geleneagle were prepared to pay for an interest in a project in the Waterberg at the time;

the valuation by Venmyn, in July 2009, of Sekoko’s project in the Waterberg ahead of Firestone Energy’s joint venture with Sekoko on four of their properties; and

RSV Enco’s valuation of Resource Generation’s project in the Waterberg in July 2010.

These transactions represent recent transactions of a similar nature, and have been used to define a Waterberg Coal Valuation Curve.

44


It is clear, in Figure 16, that the Waterberg Coal Valuation Curve, informed by the above transactions/valuations define a significantly less variable range of values than that defined by the entire dataset, and falls within the middle-lower portion of the greater coal curve. As discussed in Section 8, the presence of the various coal seams differs across the various properties of the Waterberg Coal Project. At Swanepoelpan 262LQ and Duikerfontein, all coal zones are represented, however these occur relatively deep in comparison to the highly prospective Smitspan 306LQ property. In addition the resources on these properties are limited, due to the small aerial extent of the prospecting right boundaries. As a result, Venmyn considers these properties of lower prospectivity than Smitspan 306LQ specifically and the T2 properties in general, and has allocated unit values that are significantly lower than that associated with T2 transaction. The comparable transaction value range selected for the valuation of the contributing properties of the Sekoko Coal-Firestone JV Waterberg Coal Project has considered the nature of this valuation and the risk factors. Venmyn are of the opinion that the ranges defined are reasonable in light of transactions of a similar nature and consideration of the following:-

the opencastability of the resources; the presence of commercially valuable coal zones; the range of potential coal qualities; the magnitude of the classified Coal Resource; availability of infrastructure and logistics; and the timing of potential exploitation.

The range of values generated based upon all TTIS coal quantified for the contributing properties of the Sekoko Coal-Firestone JV Waterberg Coal Project, are summarized in Table 19 and illustrated in Figure 16. Venmyn has presented a range of values, derived from the Comparative Valuation method, for the contributing properties of the Sekoko Coal-Firestone JV Waterberg Coal Project. The full Comparable Transaction Value range of the contributing properties of the Sekoko Coal-Firestone JV Waterberg Project is between ZAR44.80m (low valuation) and ZAR89.26m (high valuation). This valuation range was calculated from the range of unit values as defined by the Comparative Transaction Valuation method. The value range reflects the level of confidence attached to the respective Coal Resources and the probability of their being brought to account. The population of historic market transactions provides an indication of reasonability. Venmyn’s preferred value is the mean value derived from the unit value ranges per category. This results in a preferred full Comparable Transaction Value of ZAR67.03m for the contributing properties of the Sekoko Coal-Firestone JV Waterberg Coal Project, and equates to a unit value of ZAR0.23/TTIS. The reader should note that a transaction involving the assets in question will rely on a willing-buyer willing-seller arms length transaction which will need to consider other strategic considerations, such as the relative scarcity of South African coal projects.

45

Val

uatio

n of

the

T3 P

rope

rties

of t

he W

ater

berg

Coa

l Pro

ject

Ju

ly 2

010V

enm

yn R

and

(Pty

) Ltd

Ta

ble

19: C

ompa

rativ

e Va

luat

ion

THE

MAR

KET

APP

RO

ACH

FAR

M

INFE

RR

ED C

OAL

RES

OU

RC

E IN

DIC

ATED

CO

AL R

ESO

UR

CE

MEA

SUR

ED C

OAL

RES

OU

RC

E PR

OJE

CT

MAR

KET

VAL

UE

TOTA

L IN

FER

RED

R

ESO

UR

CE

(Tot

al

Tonn

es in

-si

tu) (

Mt)

LOW

ER

UN

IT

VALU

E (Z

AR/t)

UPP

ER

UN

IT

VALU

E (Z

AR/t)

MEA

N

VALU

E

(ZAR

m)

TOTA

L IN

DIC

ATED

R

ESO

UR

CE

(Tot

al

Tonn

es in

-si

tu) (

Mt)

LOW

ER

UN

IT

VALU

E (Z

AR/t)

UPP

ER

UN

IT

VALU

E (Z

AR/t)

MEA

N

VALU

E

(ZAR

m)

TOTA

L M

EASU

RED

R

ESO

UR

CE

(Tot

al

Tonn

es in

-si

tu) (

Mt)

LOW

ER

UN

IT

VALU

E (Z

AR/t)

UPP

ER

UN

IT

VALU

E (Z

AR/t)

MEA

N

VALU

E

(ZAR

m)

MIN

PR

OJE

CT

VALU

E (Z

ARm

)

MAX

PR

OJE

CT

VALU

E (Z

ARm

)

FAIR

PR

OJE

CT

VALU

E

(ZAR

m)

Sw

anep

oelp

an

262L

Q

283.

67

0.15

0.

30

63.8

2 0.

85

0.80

1.

20

0.85

-

1.

5 2.

5

-

43.2

3

86.1

2

64.6

8

Dui

kerfo

ntei

n 26

3LQ

10

.457

0.

15

0.30

2.

35

-

0.80

1.

20

0.00

-

1.

5 2.

5

-

1.57

3.

14

2.35

TOTA

L/ W

T. A

VE

294.

12

0.23

66

.18

0.

85

1.00

0.

85

-

2.00

-

44.8

0

89.2

6

67.0

3

47


11.4. Valuation Summary The results of the valuations carried out by Venmyn are given in Table 20:- Table 20: Summary of Valuation Results

FARM COST

APPROACH (ZARm)

MARKET APPROACH

(ZARm)

CASH FLOW

APPROACH (ZARm)


Swanepoelpan 262LQ 21.98 64.68 n/a 64.68 Duikerfontein 263LQ 0.00 2.35 n/a 2.35

TOTAL 21.98 67.03 n/a 67.03 The table above demonstrates a very poor agreement between the values derived from the Cost Approach and Market approach respectively. The Cost Approach results in a value far lower than those derived using the Market Approach. This difference can be explained by the fact that the Coal Mineral Resources defined on the Contributing Properties have been defined from borehole information on these properties as well as other properties comprising the Greater Waterberg Coal Project. There has also been an intangible benefit from Venmyn’s experience and prior knowledge of the coal on the neighbouring properties. As a consequence, Venmyn does not consider the cost approach an appropriate valuation technique in this instance. Venmyn considers the comparative transaction method a more appropriate valuation technique as it considers more fully the actual transactions and market values, and allows for a thorough review of the logistical, infrastructural and strategic merits of projects. In Venmyns’ opinion the Fair Value of the Contributing Properties of the Waterberg Coal Project, given their current state of development is represented by the mean of the Market Approach. This suggests a current Fair Value of ZAR67.03m for the Contributing Properties.

12. CONCLUSIONS This report has investigated the techno-economic merits of the contributing properties of the Sekoko Coal-Firestone JV Waterberg Coal Project. A full range of values was calculated, but this report fully describes each coal asset so as not to be misleading. Venmyn has defined a Fair Value of ZAR67.03m for the contributing properties of the Sekoko Coal-Firestone JV Waterberg Coal Project. The prospectivity of the Sekoko Coal-Firestone JV Waterberg Coal Project is enhanced by its proximity to the operating Grootegeluk Colliery as well as its proximity to water, electrical, road and rail infrastructure. Furthermore the coal is thick, relatively shallow and is considered opencastable. Notably, the Waterberg Coal Project is also within 40km of Eskom’s Matimba Power Station. Venmyn has provided this opinion, having taken into account the information that was provided in order to assist in providing a basis on which to negotiate a settlement of value in any potential transaction. This valuation has been carried out as an indicative assessment of values that could reasonably be expected in view of recent market comparisons and valuations placed on the coal resources by the market. Venmyn has its view on the unit comparisons having performed a high level review of the Contributing Properties. Valuations that consider the timing of extraction, exchange rate fluctuations, and views on the copper markets may, therefore, arrive at different values depending on the purpose of the valuation and prevailing market conditions. This valuation is dated to the extent that it is valid at that time and will change if more information is made available or market conditions change. The valuation of exploration assets is, by nature, both subjective and uncertain. The reader is advised to consider the ranges in which each property has been evaluated, and to further consider the technical merits of each project area and form an opinion regarding its prospectivity on the basis of the data presented in this report.

48


Yours Faithfully

N. Mc KENNA A N CLAY M.Sc (Geol), Pr. Sci. Nat. M.Sc. (Geol.), M.Sc. (Min. Eng.), Dip. Bus. M MGSSA , MSAIMM, MIASSA, M.Inst.D. Pr Sci Nat, MSAIMM, FAusIMM, FGSSA, MAIMA DIRECTOR MANAGING DIRECTOR