south african coal 10-25-10 gmp rpt a4 format

Metals & Minerals

Prepared by GMP Securities Europe LLP Please see important disclosures on the last page of this report.

October 25, 2010

010-129

Matt Fernley +44-20-7647 2806 [email protected]

Vishal Drolia +44-20-7647 2812 [email protected]

South African coal Initiating coverage on three emerging mid-tier miners

South Africa a major coal producer and thermal coal exporter

South Africa is the world’s sixth largest coal producer and fifth largest exporter. In 2009 it produced 247Mt of hard coal of which 27% was exported. 99% of its exports were thermal coal. Historically the country has hosted world-class export mines with Anglo American, BHP Billiton and Xstrata all owning major coal export operations. Richards Bay Coal Terminal was once the world’s largest coal export terminal.

Declining industry with mining conditions, weak infrastructure and strong rand impacting

In recent years South Africa has struggled to increase its coal production in line with the global increase in demand. While Indonesia and Australia increased exports by 45% and 25% between 2005 and 2009, South Africa’s exports fell by 15%. There are a number of reasons for this, including ageing mines and declining geological conditions, but poor performance by Transnet Freight Rail has also impacted. The strong rand has been a structural issue, making South Africa’s coal exporters less competitive.

Big miners moving out; consolidation opportunities for an emerging mid-tier

Over the past five years we have seen South Africa’s share of global coal production for Anglo American, BHP Billiton and Xstrata decline. Given the issues outlined above, we expect this trend to continue. This means that, in our view, there are likely to be significant opportunities for mid tier coal producers to form by consolidation of the sector, particularly in the Witbank-Ermelo area. While there are a number of world-class coal basins in the north of the country, the absence of large scale transportation infrastructure makes it unlikely that these will be developed in the near-term. We see considerable opportunities in the long-term but believe that it will likely take in excess of five years to build the required infrastructure. We believe that miners with existing rail and port allocations should therefore trade at a premium to those without.

Initiating coverage on three emerging mid-tier coal producers

Continental Coal is an emerging coal producer in the Witbank-Ermelo-Highveld coalfield. It started production at its Vlakvarkfontein mine in 2010 and plans to start production at its Penumbra underground project in 2011. We forecast that coal production will reach 2.5Mtpa by FY13E and could reach up to 10Mtpa by FY15E. We believe that Continental Coal has skated under the radar screens of institutional investors and is an exciting value opportunity. We initiate coverage on Continental Coal with a Buy rating and A$0.12 price target. Coal of Africa has had a difficult few years as it has transitioned from a coal developer to a producer but new CEO John Wallington seems to be in the process of turning it round. While uncertainties remain about environmental approval for the Vele project, it looks likely that Mooiplaats is starting to turn the corner and the Wollasteen operation, acquired with NuCoal, looks likely to be a major cash generator. The crown jewel is the Makhado coking coal project. We initiate coverage on Coal of Africa with a Buy rating and 120p price target. To call Petmin a coal company is a misnomer. In fact it is a diversified mining company but currently it derives over 80% of its EBITDA from the Somkhele anthracite colliery. It also produces high grade silica and owns part of a pig iron project, but we are expecting new Executive Chairman Ian Cockerill to make use of the company’s balance sheet to grow it by acquisition as well as to embrace an exciting organic growth opportunity at Somkhele. We initiate on Petmin with a Buy rating and 38p price target.

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TABLE OF CONTENTS

Investment summary 3

SA coal industry suffering from under-investment 4

Introduction to the South African coal industry 4

Occurrence of coal in South Africa 6

Supply issues impacting 8

Transportation infrastructure the key 9

New focus on northern coalfields but infrastructure is vital 10

Domestic pricing structure may need to change 10

Export destinations likely to change 11

Global coal prices set to take off 12

Continental Coal Ltd 15

Company description 17

Projects 19

Earnings and cash flow 23

Valuation 24

Catalysts and risks 25

Reserves and resources 25

Board & Management 26

Coal of Africa Ltd 29


Projects 33

Logistics allocations 37

Nimag 37


Valuation 38




Petmin Ltd 43


Operations 46


Valuation 51




Priced as of 25 October 2010.

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INVESTMENT SUMMARY South Africa is the world’s sixth largest hard coal producer and fifth largest exporter, with exports of c.67Mt in 2009, 99% of which was thermal coal. South Africa’s traditional export coal mining area of the Witbank-Ermelo-Highveld coalfield is suffering from ageing mines, higher costs and lower production as many of the big resources of yesteryear are mined out. Continued issues with rail infrastructure, coupled with the strong rand, are lowering the appeal of South Africa for the major producers which seem to be investing less and less in the region.

Many of the assets that are left are smaller projects, and are often underground, which is of less interest to the majors, in our view. We believe that this leaves the opportunity for major consolidation among the small and mid-tier miners to form new South African coal “champions”.

While there are significant opportunities to develop exciting coal resources further to the north, the absence of rail infrastructure at this time mitigates against large scale development, although we believe that these resources will be developed over time.

We are initiating coverage on three South African coal producers. Continental Coal is an emerging consolidator in the Witbank-Ermelo-Highveld coalfields, with two producing mines and six major organic growth projects. We forecast its production to reach 2.5Mtpa of thermal coal by FY13E and it could reach c.10Mtpa by FY15-16E. The company has offtake agreements with EDF trading, one of the largest buyers of coal exports from Richards Bay. We initiate on Continental Coal with a Buy rating and A$0.12 price target.

Coal of Africa has had a rocky few years as it has transitioned from a developer to producer but new CEO John Wallington looks to be in the process of turning the company into a proper operating company. While some of its projects are marginal, the jewel in the crown is certainly the company’s Makhado metallurgical coal project in the Soutpansberg coal field, which we believe is world class. While uncertainties remain about the Vele project, we believe that value exists in Coal of Africa. We initiate coverage with a Buy rating and 120p price target.

To call Petmin a coal company is perhaps a misnomer. It is in fact a diversified mining company that is set to become South Africa’s next mining house, in our view. However, currently it derives over 80% of its EBITDA from the Somkhele anthracite operation in Kwazulu Natal. We expect new Executive Chairman Ian Cockerill to make use of the company’s strong balance sheet to grow it by acquisition and also embrace an exciting organic growth profile at Somkhele. We initiate on Petmin with a Buy rating and 38p price target.

Summary of new ratings/price targets

Company Name Ticker Mkt cap US$m Curr. Rating Price Target Upside (%) NAV P/NAV (x)

Continental Coal CCC AU 202 A$ Buy 0.08 0.12 46% 0.12 0.68

Coal of Africa CZA LN 723 GBp Buy 87 120 39% 121 0.72

Petmin PTMN LN 266 GBp Buy 29 38 30% 38 0.77

Source: GMP estimates

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SA COAL INDUSTRY SUFFERING FROM UNDER-INVESTMENT Coal is an important commodity to South Africa, both as a source of power (World Coal Institute estimates that it supplied 93% of electricity generation capacity in 2008), and as a contributor to export revenue. South Africa has the largest coal reserves in Africa with c 31Bt of resources at the end of 2007 and was the world’s fifth largest coal exporter.

The coal industry in South Africa has experienced many changes in the past few years. Throughout the mid-2000s South Africa was the world’s fourth or fifth largest coal exporter from world-class mines operated by world-class companies, but low coal prices led to under-investment in both rail and port infrastructure as well as in mines, and supply in recent years has struggled to keep up with demand.

With strong export demand for coal from emerging economies such as China and India, South Africa has the resources to step up to the plate but is unable to do so because of creaky transportation infrastructure and ageing operations. With export demand forcing prices higher there is also renewed focus on Eskom pricing contracts and it is possible that there could be some renegotiation of the Eskom pricing mechanism in coming years, in our view.

With the backdrop of major coal suppliers unable to fulfil supply contracts, we believe that there is significant potential for junior producers to step in and re-consolidate the industry, but only if they can source sufficient transportation allocations.

Introduction to the South African coal industry

South Africa has a number of coal basins, generally located in the east of the country. Its most important producing basin lies in a roughly north/south orientation and stretches from just north-east of Johannesburg into Kwazulu Natal. There are also potentially interesting hard coal resources in the north of the country which have been relatively undeveloped because of the lack of infrastructure, and small basins elsewhere.

90% of South Africa’s coal resources are thermal coal, although it also has reserves of anthracite and some metallurgical grade coal in the north of the country. Much of the domestic coal production is low quality brown coal although there is some higher grade bituminous coal which may be upgraded by washing to make higher CV material of 25-28MJ/kg (6000-6700lcal/kg) which is suitable for the export market. The process used for separation is dense media separation which removes impurities such as magnetite and ash.

South Africa’s primary coal export port is Richards Bay, located on the east coast. It boasts the Richards Bay Coal Terminal, a JV between the major South African coal producers (of which 69% is held by Anglo American, BHP Billiton and Xstrata) which currently boasts a designed capacity of 91Mtpa, as well as the Richards Bay dry bulk terminal which can also handle small amounts of coal. The port of Durban also handles small amounts of coal exports, and some producers are looking into developing Maputo (in Mozambique) as a major coal export terminal.

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Location of South African coal basins

Source: Exxaro, SRK Consulting

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Occurrence of coal in South Africa

South Africa’s coalfields are generally contained within the late Carboniferous and early Permian sediments of the Karoo Sequence. In general the coal bearing horizons were formed by the accumulation of peat at discrete intervals during the evolution of the Karoo Sequence. There are three major regions: Witbank Coalfields, Waterberg Coalfield and the Soutpansberg Coalfield.

Witbank-Ermelo-Highveld coalfield1

Witbank coalfield

The Witbank coalfield is a basin-like feature that extends from Brakpan in the West through to Belfast in the East. It was formed in a shallow environment with slow but consistent subsidence during the late Carboniferous and early Permian (over 200 million years ago).

There are five major coal seams in the basin of which the primary economic seams have been the No. 2 seam, the No. 4 and No. 4 lower seam, and in places the No. 5 seam.

Structurally the coal horizons are undeformed with each displaying a very slight dip to the south east of less than a degree. Minor discrete faulting events and dolerite intrusions of various ages and thicknesses have impacted the quality of the coal in some areas.

Dolerite intrusions tend to burn or drive volatiles off coal in close proximity. Large areas of coal associated with intrusions are completely destroyed (burnt) or devolatilised. Dolerite intrusions not only sterilise available resources but also disrupt mining activities.

Mining first took place in the 19th century and the large amount of mining in the region has resulted in the development of an efficient coal transportation infrastructure (based primarily on rail) that is now resulting in previously uneconomic coal seams such as the No. 1 and No. 2 lower seams becoming economic propositions.

Ermelo coalfield

The Ermelo coalfield is situated in south east Mpumalanga Province between Carolina in the north and Dirkiesdorp in the south, Morgenzon in the west and Amsterdam in the east. All of the coal seams occur within the Vryheid Formation of the Ecca Group

There are five major coals developed in the Ermelo Coalfield, named from the base up, of which the D and E Seams are thin to absent over much of the area and the E Seam only reaches mineable thicknesses in isolated patches in the northern parts of the field. The B and C Seams are mineable throughout most of the area (but have been removed by erosion in some areas) while the A Seam has been removed by erosion in northern and central areas.

1 Geological content based on CPR on the Mining assets of Exxaro Resources, http://www.exxaro.com/pdf/icpr/a/geology/coal.htm

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The seams are generally flat-lying to gently undulating with a regional dip to the south-west. They are relatively unaffected by folding although faulting and associated dolerite intrusions are common.

Soutpansberg coalfield2

The Soutpansberg coalfield is situated north of the Soutpansberg mountain range in the Limpopo Province. It has a length of c.190km and extends from Waterpoort in the west to the Kruger National Park in the east.

The Karoo Sequence rocks sit in a very complex structural setting, unconformably overlying the Soutpansberg Group and with significant associated faulting and folding. Generally the Karoo Sequence dips to the north at 3-20° and almost always terminates against east/west trending faults on the northern margins. The Soutpansberg coal seams are thick interbedded seam coal and mudstones in the west and grade to a multiple seam type consisting of two discrete seams in the Tshikondeni area. The coal, where developed, is generally bright and high in vitrinite and the coal rank increases to the east.

In the Eastern area two major coal seams are developed, the Main Coal Seam and the Lower Coal Seam. The Main Seam has been the only economic seam due to its coking properties and medium phosphorous content. The lower coal seam also has coking properties but the high phosphorus content is not acceptable to the steel industry.

Waterberg coalfield3

The Waterberg coalfield is situated some 400km north west of Johannesburg and was discovered by water drilling in the 1920s. Exploration was initially undertaken in 1955 in a joint program by both Iscor and Sasol with Iscor (Kumba) opening the Grootegeluk Mine in 1980.

This is a fault bounded basin with dimensions of approximately 90km east-west by 40km north-south. The faulting plays a distinct role in the preservation and depositional characteristics of the coal occurrences in the region.

The major coal bearing horizons of the Ecca Group are the Volksrust Formation (55m of intercalated mudstones and coal) and the Vryheid Formation (three major discrete seams of approximately 3m, 9m and 4m, respectively).

The vitrinite content of the coal to the top of the Volksrust Formation results in the upper zones having a semi-soft coking coal yield as well as coal for thermal use. The remainder of the Volksrust Formation yields low grade thermal coal for power station consumption. The Vryheid Formation coal seams are composed of predominantly dull coal with minor carbonaceous mudstone intercalations again supplied as thermal coals, mostly for domestic use.

2,3 Geological content based on CPR on the Mining assets of Exxaro Resources, http://www.exxaro.com/pdf/icpr/a/geology/coal.htm

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Supply issues impacting

Most of South Africa’s export coal industry has been in the Witbank-Ermelo coalfields due to its location closer to the coast, good transportation infrastructure and the relatively shallow lying, thick coal seams.

However many of the mines which were flagship operations in the mid-2000s are now ageing. As up dip resources have become exhausted, operations are now going deeper and deeper and some seams are pinching out. Many operations are now starting to move underground. Some of the world-class mining operations of yesteryear such as Anglo American’s Kriel mine, Xstrata/BHP Billiton’s Douglas/Middelburg collieries and the Optimum colliery seem to have seen their peak production years.

South African thermal coal production as a percentage of total by Majors

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008 2009

BHP XTA AAL

Source: Company data, GMP estimates

With the main coal producing areas of Witbank, Ermelo and Secunda so well explored we see little likelihood of new world-scale export capable discoveries in these areas which means that increasingly the central/eastern coal area will be of less and less interest to the majors, which are likely to go elsewhere (within Africa or offshore) to pursue large-scale, low-cost operations. Xstrata has recently started to sell some of its smaller non-core operations and we believe that this is likely to be an ongoing trend among all three companies in coming years.

Low domestic coal selling prices, rising capital costs and relatively weak export prices in rand terms in recent years have also impacted investment in new supply. A number of smaller producers (particularly BEE companies) got into trouble during the GFC and went out of business.

We believe that a substantial opportunity now exists for significant consolidation among smaller producers, which could lead to the formation of new mid-tier “coal champions” in the traditional producing areas.

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Another option for new supply is to move north. Northern coal basins are relatively under-explored and a number of interesting deposits have been identified in the Waterberg basin on the South Africa/Botswana border and also in the Soutpansberg basin in southern Zimbabwe. These deposits also seem to have a higher proportion of metallurgical grade coal, which could also make them of more interest for development. However, the key factor that mitigates against development of these areas is a lack of rail infrastructure, so at this point these areas are still a work in progress.

Transportation infrastructure the key

In recent times South Africa’s transportation infrastructure, for so long a major selling point of the region, has become one of its major drawbacks. In the late-1990s South Africa’s rail network was world-class and the Richards Bay Coal Terminal was the world’s largest coal export port. Now Transnet Freight Rail (TFR) struggles to ship coal to port and Richards Bay, despite an ongoing expansion to 91Mtpa, struggles to reach its full capacity.

As the table below shows capacity utilisation at Richards Bay has fallen below 80% in 2010 and South Africa’s coal shipments have been declining for the past four years. While the GFC is responsible for some of this, there is no excuse for the low shipments in 2010, which have been impacted by a strike in the northern hemisphere summer. However, even without this strike Transnet is struggling to supply enough capacity to move even the depressed shipments that we are currently seeing.

RBCT capacity, actual shipments and capacity utilization, 2006-10E

2006 2007 2008 2009 2010E

RBCT port capacity Mtpa 72 72 76 76 76

RBCT actual shipments Mtpa 66 66 62 61 60

Capacity utilisation % 92% 92% 81% 80% 78%

Source: RBCT, GMP estimates

The transportation issue led Coal of Africa to target the Maputo coal terminal for its development projects, although the high cost of rail can still not be avoided, and even Maputo is exposed to strike issues. Other producers have sought to truck material to Richards Bay and/or use the Richards Bay Dry Bulk Terminal to get around this bottleneck but that is only viable for small-scale production, in our view.

While the Transnet problem persists we expect South Africa’s coal exports to remain constrained, and we do expect this problem to last for at least another few years.

However with major producers impacted by ageing mines and seemingly not able to use their entire export allocations there is scope for smaller producers to source port allocations through Richards Bay. This is particularly possible for operations that are close to rail loading areas. Mashala Resources (now owned by Continental Coal) is a company that has been able to export significantly more coal than its allocation by having an operation close to a rail freight loading location and being able to supply when others have been unable to.

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New focus on northern coalfields but infrastructure is vital

Many producers are now exploring the northern coalfields and a number of interesting discoveries have been made in these regions. However the lack of transportation and power infrastructure in these regions is a drawback. While there seem to be some significant resources in these regions, until there are coal-fired power stations or some way to ship the coal out economically, it is difficult to get too excited, in our view.

The Waterberg coalfield contains c.50% of South Africa’s coal resources and currently hosts one power station, Eskom’s 6.39GW Matimba power station which is supplied by Exxaro’s 19Mtpa Grootegeluk mine. Eskom is also building the 4.8GW Medupi power project and CIC Energy, which is developing the Serrorome project in SE Botswana is hoping to build the 1.2GW Mmamabula Energy Project to supply South Africa.

The company is also looking at producing export quality coal but this would be dependent on an approximately 1,500km Trans Kalahari rail line (TKR. Currently, the preferred rail route is to the west coast of southern Africa, through Botswana and to a Namibian port. If this rail project did go ahead it could conceivably open up the whole Waterberg field to exports, but currently such a development is a long way away).

In the Soutpansberg coalfield Coal of Africa is looking to develop the Vele and Makhado projects while Rio Tinto also has significant prospecting acreage. CoAL has targeted exports via Maputo in Mozambique but with the current terminal only having capacity of 2Mtpa this is not an ideal solution. CoAL and the terminal are pursuing a FS to increase capacity to over 10Mtpa but this is still not really enough to support large-scale development of the area, in our view.

Domestic pricing structure may need to change

South Africa’s power woes have become well-known in recent years. Power shortages in 2007/08 led to brown outs, power rationing and industrial shutdowns and brought concerns over under-investment in power capacity to the fore. While power shortages have not been too much of an issue since the GFC we expect them to become so again as economic activity recovers in South Africa.

Eskom, the South African power utility, has announced a major program of development projects, including the reopening of closed capacity. This should see coal-fired generating capacity increase 35% between 2007 and 2015E, which could increase domestic coal demand by c.40Mtpa by 2015E.

This is likely to throw domestic coal supply contract prices into focus over the next few years. With higher export prices likely, Eskom may very well find itself having to pay higher prices to secure domestic coal, in our view. Current Eskom coal pricing falls into one of three categories:

Cost-plus contracts where Eskom has contributed to the cost of building a mine or agrees to pay a set return to a miner that invests in a project on its

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own, and also pays a management fee based on a percentage of the original cost.

Inflation linked/commercial mines are where the miner agrees a base price with Eskom that is escalated by an inflation rate over time. These contracts seem to produce a return of 15-18% over the life of the mine.

Spot sales. At times of hardship Eskom has been known to buy material at spot prices.

With a global shortage of coal on the horizon, and domestic supply creaky, it is possible (in our view) that Eskom may have to revise its pricing structure in order to secure enough coal to supply its growing number of power stations. It is likely that Eskom may have to pay a few percentage points above inflation if it plans to stick with inflation linked contracts, or alternatively commit to a greater proportion of spot sales.

This is not included in our forecasts currently, but we flag that it is a possibility for the future which could improve profitability for South African coal producers.

Export destinations likely to change

In the recent past the bulk of South Africa’s thermal coal exports went to Europe. Now, with the rise of Asia, that seems to be changing as India becomes a major destination of South African coal. While European coal demand is relatively weak this has not created much of an issue for global coal supply/demand balances, but as European economic activity recovers, we believe it will become more and more important.

South African bituminous coal exports by region as a percentage of total exports

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

YTD

India China Europe

Source: South African trade statistics, GMP estimates

Traditionally c.70% of South Africa’s coal exports have been delivered into the Atlantic Basin (mostly to Europe). In coming years we expect over 70% of the country’s exports to go into the Pacific Basin.

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Global coal prices set to take off

Thermal coal

Thermal coal prices have underperformed industrial metal prices (and in fact metallurgical coal prices) since the GFC due to the fact that power production, while better in y/y terms in most Western World economies, has not recovered so significantly in absolute terms. As a result power demand for coal throughout Europe and North America has been relatively subdued. This has been offset by higher import demand for coal in the key emerging Asian economies of China and India.

In the future we expect Western World coal demand to start to recover and Asian import demand for coal to grow at faster rates. The significant growth in coal-fired power generating capacity in key coal supply regions, such as China, Indonesia, Vietnam and Russia should constrain long- and medium-term supply and the significant generating capacity build in India, and Coal India’s inability to keep up with greater demand, should continue to keep the market tight.

We analysed global thermal coal markets in December 2008 in Thermal coal: long-term opportunities, short-term pain concluding that global coal-fired power capacity additions and supply issues were likely to be positive for coal prices in the medium to longer term. Not much has changed from our initial thesis (except perhaps that Chinese import demand has been better than we expected) and so we remain positive on the medium- and long-term outlook for the sector.

We note that infrastructure remains the key bottleneck to coal supply growth and that, as industrial production starts to recover, we expect both developed and developing regions’ coal demand to continue to recover, further tightening coal supply markets and causing prices to increase significantly.

Global coal fired power capacity and utilisation, 2003-14E Global seaborne traded thermal coal supply/demand balance

1,000

1,200

1,400

1,600

1,800

2,000

2003

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

2014

E

60%

62%

64%

66%

68%

70%

72%

74%Coal-fired pow er capacity LHSCapacity utilisation RHS

GW

400

500

600

700

800

900

1000

2003

2004

2005

2006

2007

2008

2009

E

2010

E

2011

E

2012

E

2013

E

2014

EEx ports (possible)Ex ports (porbable)Base case ex portsSeaborne traded imports

Mt

Source: AME, EIA, IEA, GMP estimates Source: AME, company data, GMP estimates

In our price forecasts we explicitly forecast for the CY10-12E period, then we include a two year plateau, before prices fall to our long-term price in 2015E.

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GMP thermal coal price forecasts

Current forecastUnit CY09 Q1/10 Q2/10 Q3/10 Q4/10E CY10E CY11E CY12E LT

Thermal coal - JFY US$/tonne 85 72 98 98 98 92 137 180 50

Thermal coal - RB spot US$/tonne 64 84 90 88 93 89 160 200 50


Metallurgical coal

Metallurgical coal prices have recovered extremely strongly off the trough of the GFC, given the tight supply situation and structural increase in China’s net imports. A key point in our view is the breakdown of usage of coal by region, as shown in the charts below. Metallurgical coal, with its usage dominated by steel, is much more an emerging market commodity than thermal coal at this point which makes it likely to continue to outperform thermal coal in the near-term, in our view

Seaborne traded thermal coal imports by region, 2009 Seaborne traded metallurgical coal imports by region, 2009

China

9%

Japan

17%

Korea

12%

Taiw an

8%

Europe

26%

Other

28%

China

15%

Japan

24%

Korea

9%Taiw an

2%

Europe

17%

Other

33%

Source: AME, GMP estimates Source: McCloskey, GMP estimates

We believe that, notwithstanding the currently slightly weaker pricing environment, metallurgical coal prices are set to improve further in coming years as supply remains constrained (particularly for hard coking coal but also to some extent for other grades) and demand, buoyed by strong Chinese and Indian steel production growth, remains at high levels.

GMP metallurgical coal price forecasts

Current forecastUnit CY09 Q1/10 Q2/10 Q3/10 Q4/10E CY10E CY11E CY12E LT

Hard coking coal US$/tonne 169 125 200 225 209 190 325 375 100PCI US$/tonne 130 90 175 180 150 149 283 335 75Semi-soft coking coal US$/tonne 76 56 165 172 160 138 268 295 43


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Continental Coal Ltd Moving from development to production – time for a re-rating

BUY CCC - ASX A$0.079 Target A$0.12

What's changed

New Old

Rating Buy

Target A$0.12

EPS FY11E (A$) 0.01

EPS FY12E (A$) 0.02

NAV/share (A$) 0.12

Share Data

Shares - m (basic/fully diluted) 2,575.2m/2,703.2m

52-week high/low A$0.09/A$0.03

Free float 84%

3M average daily volume 54.9m

3M average daily value A$3.8m

Market capitalisation A$203m

Enterprise value A$203.2m

Dividend yield 0.0%

Total projected return 52%

Key financials 12/10 12/11E 12/12E

Revenue (A$m) 0 91 159

EBIT (A$m) -12 22 78

Net income adj. (A$m) -23 14 54

EPS adj./dil. (A$) -0.02 0.01 0.02

CEPS adj./dil (A$) -0.02 0.01 0.02

Net DPS (A$) 0.00 0.00 0.00

Summary metrics 12/10 12/11E 12/12E

EBIT margin % NM 24% 49%

ROIC (EBIT) % NM 20% 71%

EV/EBITDA x NM 8.7 2.4

PE x NM 14.8 5.1

P/CF x NM 13.3 4.6

Company-specific data 12/10 12/11E 12/12E

Equity thermal coal prod'n, Mt 63 1,822 1,980

GMP thermal coal f/c (US$/t) 76 118 186

GMP USDAUD f/c 1.13 1.06 1.08

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CY)

Continental Coal is an Australian listed coal developer and producer that owns a number of thermal coal projects in South Africa. Following the acquisition of Mashala Resources in September 2010 the company owns two producing mines (Vlakvarkfontein and Ferreira) and a near-term development project (Penumbra). It also has another four projects that could be developed in the short to medium term. The company is fully BEE compliant.

By FY12E we forecast that the company should be producing up to 2.0Mtpa of coal of which 1.4Mtpa will go to domestic users and 0.6Mtpa will be exported. The company has 1.8Mtpa worth of rail allocations and is looking to secure enough port allocation for its expansion projects. It has an offtake agreement and innovative coal loan agreement with EDF Trading, one of the largest global coal traders and one of the largest buyers of South African export coal.

We believe that there is significant further potential for the company to grow both organically and by acquisition. Bearing in mind our view that thermal coal prices will continue to improve in coming years, we believe that Continental Coal is one of the most leveraged producers to increases in thermal coal prices.

We value the company using a sum of the parts valuation based on DCFs (10% discount rate) for the company’s operating projects at Vlakvarkfontein and Ferreira and for its near-term development project at Penumbra. We use EV/resource multiples to value the company’s other projects. This yields a valuation of A$315m or A$0.12 per fully diluted share for the company.

We set our price target at A$0.12 and initiate coverage on Continental Coal with a BUY rating.

25 October, 2010

16

Valuation A$m A$/sh Forecast assumptions 2009 2010 2011E 2012E 2013EVlakvarkfontein O/C (DCF) 57 0.02 RB spot (US$/t) 98 76 118 186 205Ferreira O/C (DCF) 38 0.01 Blended local coal price (R/t) 260 320 352 385

Penumbra U/G (DCF) 127 0.05 USDZAR 9.0 7.6 8.0 8.0 8.0DeWittekrans (multiple) 35 0.01 AUDZAR 6.7 6.7 7.6 7.4 7.2Project X (multiple) 6 0.00 Production summary Ktpa 2009 2010 2011E 2012E 2013EVaalbank (multiple) 18 0.01 Vlakvarkfontein O/C 0 63 1,176 1,176 1,176Other assets 31 0.01 Ferreira O/C 0 0 646 570 540Net Debt 0 0.00 Penumbra U/G 0 0 0 234 781NAV 313 0.12 All projects (Equity share) 0 63 1,822 1,980 2,497Price target 0.12

PROFIT & LOSS (A$m) 2009 2010 2011E 2012E 2013EAsset valuation summary Revenues 0 0 91 159 276

Cost of sales - 3 63 68 101EBITDA -4 -12 23 83 161 D&A 0 0 2 6 5EBIT plus inv't income & pension items -4 -12 22 78 156Net interest income/(expense) - -1 -1 -1 -4Other financials income/(expense) -4 -10 - - -Adjusted PTP* -8 -23 21 77 152Taxation - - -7 -25 -46Post-tax income -15 -25 14 52 107Minority interests - - - - -Net income (adjusted earnings*) -8 -23 14 54 107Per share data (AS$)EPS (adjusted, basic) -0.03 -0.02 0.01 0.02 0.04

Coal production summary (company EPS (adjusted, diluted) -0.01 -0.02 0.01 0.02 0.03Shares outstanding (period avge, basic) 281 1,013 1,821 2,575 2,575Shares outstanding (fully diluted) 1,126 1,013 2,703 3,458 3,458BALANCE SHEET (A$m) 2009 2010 2011E 2012E 2013EAssetsCash & equivalents 0 0 7 52 144Net tangible fixed assets 24 57 95 100 101Total assets 53 79 138 195 303LiabilitiesInterest bearing debt 21 20 65 65 58Total liabilitiesShareholders equity 25 40 48 96 193Minority interests - - - - -

Reserves & resources (Mt) M&I Inf. Total Net debt 22 30 68 23 -77Vlakvarkfontein 17 - 17 CASH FLOW (A$m) 2009 2010 2011E 2012E 2013EFerreira 3 - 3 Pre-tax profit -15 -25 21 77 152Penumbra 22 3 25 Depreciation & amortisation 0 0 2 6 5Project X 33 - 33 Net change in working capital 4 5 -9 3 3Vaalbank 88 - 88 Total cash from operating activities -8 -5 8 57 105De Wittekraans 49 157 206 Net capital expenditure -7 -26 -39 -11 -5Knapdaar (Mashala) - 139 139 Net (acquisitions)/disposals -10 - -37 - -Leiden (Mashala) 6 12 18 Cash from investing activities -12 -26 -76 -11 -5Mooifontein (Mashala) 3 - 3 Cash from financing activities 19 31 75 -1 -7Wesselton II (Mashala) 9 11 20 Net cash flow -1 -0 7 45 93Company (attributable) 158 206 365 PROFITABILITY & VALUATION 2009 2010 2011E 2012E 2013E

EBIT margin, % NM 24% 49% 57%ROIC (EBIT), % NM 20% 71% 146%EV/EBITDA, x NM 8.7 2.4 1.3PE (adj.), x NM 14.8 5.1 2.6* excluding non-recurring itemsSource: Company data, GMP estimates

0%

2%

11%

12%

41%

18%6% 10%Vlakvarkfontein O/C (DCF)

Ferreira O/C (DCF)

Penumbra U/G (DCF)

DeWittekrans (multiple)

Project X (multiple)

Vaalbank (multiple)

Other assets

Net Debt

0400800

1,2001,6002,0002,400

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

0

50

100

150

200

Production LHS Cash cost RHSRB spot RHS

US$/tKtpa

25 October, 2010

17

Company description

Continental Coal is an Australian listed coal developer and producer that owns a number of projects based in South Africa. Following the acquisition of Mashala in September 2010 the company owns two producing projects (Vlakvarkfontein and Ferreira) and a near-term development project (Penumbra). It also has another four projects that could be developed in the short to medium term. The company is fully BEE compliant.

All of the company’s operations and projects are focused on thermal coal with a near-term weighting for domestic over export coal, but a 50/50 split in the medium to longer term. The company has access to a 1.8Mtpa rail and port allocation at RBCT. Management has stated that it has options to acquire further port allocations. In our view one of the differentiating factors for Continental Coal is its offtake agreement with EDF Energy, one of the largest buyers of export coal from South Africa.

The company is targeting production of 7.2Mtpa RoM coal by 2015, an impressive goal bearing in mind that it only brought its first project into production in early-2010. We believe that growth will be significant over the next few years.

Company history

October 2004: The company was listed as Continental Goldfields, a holding company with interests in South African gold assets.

October 2007: Renamed Continental Capital.

October 2008: Continental Capital signs HoA to acquire 74% of Continental Coal with Masawu Investments, a BEE company, retaining 26%. Continental Coal at that time had interests in four projects. Acquisition completed in January 2009.

July 2009: Starts selling process for Vanmag iron project.

March 2010: Announces that it has secured a US$20m funding package with EDF Trading for supply of coal from Vaalbank, Project X and Vlakvarkfontein projects. The “coal loan” will be repaid from production of coal over five years.

April 2010: Signs second agreement with EDF Trading whereby EDF can provide an additional US$20m for the Vlakplaats project which will be repaid from coal production.

May 2010: Appoints Don Turvey, formerly of BHP Billiton and Ingwe, as CEO.

June 2010: Reports first coal sales from Vlakvarkfontein.

August 2010: Announces planned acquisition of Mashala Resources providing CCC with immediate export coal production via the Ferreira mine as well as a near-term development project (Penumbra) and RBCT port allocation and rail contracts. CCC’s in situ resource increases by 290% to 631Mt.

September 2010: Reports that key Mashala acquisition agreements have been signed and the company now owns 64.1%. It will acquire the balance within the next 12 months.

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October 2010: Reports completion of US$30m equity placing, A$10m convertible note and third US$20m coal loan facility with EDF Trading. Enters offtake agreement with EDF Trading over export coal from Ferreira mine and Penumbra and De Wittekrans projects.

Shareholder base

Continental Coal has an extremely fragmented shareholder base and, up to now, it has mostly been owned by retail shareholders. Following the recent placing, the company’s largest shareholder is Och-Ziff Management which owns 6.1% of issued equity. There are c.2.6bn shares in issue with 520.7m listed options, 332m unlisted options and 180m shares related to the company’s convertible notes, giving 3.5bn fully diluted shares.

Structure

Continental Coal’s operational holdings structure is relatively complicated. The listed company Continental Coal Ltd (CCC) holds a 76% share in the South African subsidiary, Continental Coal Ltd (CCL) which is also held 24% by Black Economic Empowerment investors. CCL then has various holdings in the different projects and operations.

Continental Coal holding structure


The company has an option to take its interest in Mashala Resources to 100% within 12 months of 15 September 2010. It can settle either in cash or, upon a listing on the JSE, by the issue of shares.

The company is looking to take out some of the minority shareholders in its existing projects to enable it to take CCL’s holdings in all of its projects to 100%.

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19

The company notes that it has an agreement with its BEE partner that 100% of cash flow from all of its operations for the first seven years will be attributable to CCC in order to cover the cost of capital investments.

Projects

Following the Mashala acquisition Continental Coal has two operating mines and nine projects, as well as significant prospecting rights in Botswana. Its stated strategy is to look to consolidate the highly fragmented South African coal industry and the Mashala acquisition should certainly help with that. Mashala has two projects, De Wittekrans and Knapdaar, which are contiguous with Continental Coal’s Project X and Vaalbank projects. The company is now considering developing the four projects around a central washing plant to increase synergies. Full feasibility studies are expected to commence soon.

Location of Continental Coal operations

Source: Company data

The bulk of Continental Coal’s projects are located in the Witbank-Ermelo area c.150km east of Johannesburg, although the Ferreira and Penumbra projects are located to the south of Ermelo. Rail distances to Richards Bay vary but would be c.550km from the Project X/Vaalbank/De Wittekrans area and c.500km from Penumbra/Ferreira.

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Vlakvarkfontein O/C mine (CCC 60% share)

Vlakvarkfontein is Continental’s first coal mine into production and produces only domestic thermal coal. It is located to the east of the Kendal power station and is close to the N12 highway as well as within 2km of a coal railway. First coal was produced in May 2010 and the company announced in September that the operation has achieved production of over 100Kt per month RoM.

Vlakvarkfontein mobile crushing plant Vlakvarkfontein mine with Kendal power station in background

Source: Continental Coal Source: GMP

The open cast operation has a resource of 17Mt, sufficient for a 10+ year mine life at the intended production rate of 1.2Mtpa RoM. The project mines from two seams, each of approximately 5m width. The first seam is at a depth of c.23m and there is a c.7m parting between seams. A mining contractor, Trollope Mining Services, is responsible for mining and Warthog Carriers is the crushing and screening contractor. Continental Coal has appointed a mine manager for the project. The coal is crushed at a mobile beneficiation plant (although eventually a fixed plant is envisaged) and sorted into fractions.

Initial mining costs are higher than forecast due to the higher strip ratio in the box cut phase and a restricted mining area. However the company expects that costs will be reduced following the impending acquisition of a farm to the east, and mining should move to a steady state by the end of 2010.

Vlakvarkfontein coal production and op costs, FY11-FY15E Vlakvarkfontein EBIT vs capex and cash flow, FY11-15E

0200

400600

8001,000

1,2001,400

1,6001,800

2,000

2011

E

2012

E

2013

E

2014

E

2015

E

0

50

100

150

200

250

300Coal production Ktpa LHSBlended selling price R/t RHSMining cost R/t RHS

-10

-5

0

5

10

15

20

25

2011

E

2012

E

2013

E

2014

E

2015

E

EBIT Capex Cashflow

A$m

Source: GMP estimates Source: GMP estimates

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21

Ferreira O/C mine (CCC 64.1%)

The Ferreira mine was acquired with the Mashala acquisition. It is an open cast mine producing primarily export grade coal, located just south of Ermelo. The current open pit is close to exhaustion and open pit mining will be moved across the road within the next three months. There is a further 18-30 months mine life on the existing resource base.

The mine is located close to the Delta loading point for the main rail line to Richards Bay. This gives significant flexibility for the company to export more material than it necessarily has an allocation for since it can fill in capacity when other producers are constrained.

The Penumbra underground project is located adjacent to the existing mine and would utilise the existing processing facilities and loading area.

The current open cast operation is high cost due to the high stripping ratio and thin seams. As with Vlakvarkfontein the mining is outsourced to a contractor.

Because Mashala was cash poor in recent years and could not afford a processing plant it outsourced the processing plant construction and operation. A Fraser Alexander BOOM (Build, Own, Operate and Maintain) plant was built in close proximity to Ferreira, which will also be the plant for the Penumbra operation less than 5km away. This type of project is a popular low capital scenario for cash-poor miners. Coal is crushed, screened and washed on site. Both an export (yield of c.70%) and domestic fraction (yield c.15%) are produced.

Ferreira coal production and op costs, FY11-FY15E Ferreira EBIT vs capex and cash flow, FY11-15E

0200

400600

8001,000

1,2001,400

1,6001,800

2,000

2011

E

2012

E

2013

E

2014

E

2015

E

0200

400600

8001000

12001400

16001800

2000Domestic coal production Ltpa LHSEx port coal production Ktpa LHSBlended selling price R/t RHSMining cost R/t RHS

-10

0

10

20

30

40

50

60

2011

E

2012

E

2013

E

2014

E

2015

E

EBIT Capex Cashflow

A$m


Penumbra U/G project (CCC 64.1%)

The Penumbra project, located adjacent to the Ferreira mine, has a full feasibility study but, owing to Mashala’s poor cash position had not been developed. Continental Coal now expects that the project could come into production in mid-2011 for a capital cost of as little as A$40m.

The project is planned to have RoM capacity of c1Mtpa. While the feasibility only accounts for a 10 year mine life, there is a further section of resource not included in the

25 October, 2010

22

FS which could extend the production life further, although with a lower grade product which would be marketable as domestic thermal coal.

The mine is located c.5km from the Delta wash plant and production is expected to be trucked to the plant. Because of more focused mining the operating costs are forecast to be significantly lower for the Penumbra underground project than for the existing Ferreira opencast mine.

Penumbra coal production and op costs, FY11-FY15E Penumbra EBIT vs capex and cash flow, FY11-15E

0200

400600

8001,000

1,2001,400

1,6001,800

2,000

2011

E

2012

E

2013

E

2014

E

2015

E

0200

400600

8001000

12001400

16001800

2000Domestic coal production Ltpa LHSEx port coal production Ktpa LHSBlended selling price R/t RHSMining cost R/t RHS

-60

-40

-20

0

20

40

60

80

100

120

2011

E

2012

E

2013

E

2014

E

2015

E

EBIT Capex Cashflow

A$m


Project X/Vaalbank/De Wittekrans/Knapdaar projects

Prior to the Mashala acquisition Continental had indicated that Project X and Vaalbank would likely be the next projects to be developed. However the acquisition of Mashala adds the De Wittekrans and Knapdaar projects which are in the same area. We believe that it is likely that the company will now look to alter its development schedule to take advantage of the potential synergies of the acquisition; for instance it would now likely make sense to develop a centralised wash plant for the four projects rather than four separate plants.

Because of our uncertainty over which project is likely to be developed first we have opted not to include DCFs for these projects in our model but instead value them using an EV/resource multiple approach. Once the company has given some guidance on the likely timing of development we will look to include the projects in our model which would likely result in a significant valuation uplift.

All of the projects are likely to be underground developments with the exception of de Wittekrans which has some early stage opencast potential. A feasibility study is expected to be completed for the project in mid-2011. Mining is likely to focus on two seams with a potential yield of c.30% for export material and c.40% for Eskom material.

We estimate that the De Wittekrans resource could support production of over 3Mtpa, Project X could support 1.8Mtpa and Vaalbank 1.7Mtpa. We note that it is possible that Vaalbank could be developed as a JV with an adjacent operation owned by another company. At this stage it is not possible to estimate possible production at Knapdaar as

25 October, 2010

23

the project needs further investment in exploration before it will be possible to delineate a measured resource.

Wesselton II lean coal project (CCC 64.1%)

This is a low volatile coal project located to the northwest of Ermelo and could support a mine life of 8 years at 500Ktpa RoM production. Because of the nature of the coal the decision to mine will be extremely market dependent, but the project has a relatively low capital requirement and would be opencast so it would be possible to take a relatively quick development decision.

Other projects

The company holds a number of other licences with defined resources. It also has an option to buy a 100% share in the Vlakplaats project located to the southwest of Vlakvarkfontein, which has an inferred resource of 122Mt.

The company acquired significant prospecting licences in Botswana with the Mashala acquisition and has recently announced a 21 hole drilling program over the prospects which together comprise a 6-7Bt exploration target.

Production potential

We note that while our base case is for production to rise to 2.0Mtpa by 2015, when the company has reached a development decision on Project X/Vaalbank and De Wittekrans there is the likelihood that the company could be producing c.8.5Mtpa by 2015, surpassing its stated production target.

We believe that the company should be fully capable of ramping up production on these projects over a three year period as soon as feasibility work is completed.

Earnings and cash flow

We expect Penumbra to be the major cash generator for the company in the next three years but we wait for guidance on the timing of the next few projects as we believe there is significant potential in the De Wittekrans/Project X/Vaalbank area.

Coal loan and offtake

On 30 March 2010 Continental reported that it had secured a funding package of US$20m from EDF Trading, one of the world’s largest energy traders. Under the terms of the deal the company will repay the loan via the sale of coal over a period of five years. While the loan was initially secured on sale of coal from Vaalbank, Project X and Vlakvarkfontein, we understand that the coal from any of the company’s operations may be used to pay off the loan.

On 19 April 2010 the company announced that an option had been granted for EDF Trading to provide a further US$20m of funding for the Vlakplaats project in exchange for coal. It also announced offtake agreements with EDF.

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On 19 October 2010 the company reported that it had agreed a further US$20m coal loan facility with EDF Trading, this time over the operations acquired from Mashala. US$15m will be drawn down on the completion of the Mashala acquisition with a further US$5m to be drawn down on completion of certain development milestones.

Continental Coal EBITDA by division, FY11-FY15E Continental Coal EBIT vs capex and cash flow, FY11-15E

0

2040

6080

100

120140

160180

200

2011

E

2012

E

2013

E

2014

E

2015

E

Vlakv arkfontein Ferreira PenumbraA$m

-50

-

50

100

150

200

2011

E

2012

E

2013

E

2014

E

2015

E

EBIT Capex Cashflow

A$m


Valuation

We value Continental Coal using a sum of the parts (SotP) valuation. We use DCFs (10% discount rate) to value the first three projects into production (Vlakvarkfontein, Ferreira and Penumbra) and a valuation based on EV/resource multiples to value the less advanced projects. We use the current global explorer/developer sector average for thermal coal stocks, which is currently US$0.27/tonne, as our multiple.

We note the company’s agreement with its BEE shareholder that 100% of cash flows will be attributable to CCC for the first seven years of production. Hence we do not discount the parent company’s holding in the projects at this stage.

Continental Coal sum of the parts valuation

Methodology DCF DCF DCF Multiple Multiple Multiple

Total PV A$m 96 62 198 356

Net debt / (Net cash) A$m 0 0

Minority interests A$m 38 22 71 132

PV of Equity A$m 57 40 127 35 6 18 31 0 315

No. of shares in issue (fd) m 2703.2 2703.2 2703.2 2703.2 2703.2 2703.2 2703.2 2703.2 2703.2

Value per share A$ 0.02 0.01 0.05 0.01 0.00 0.01 0.01 0.00 0.12

Continental Coal interest % 60% 64% 64% 64% 70% 70% 100%

Discount rate % 10% 10% 10%

GroupProject X Other assetsDe

Wittekrans VaalbankVlakvark-

fontein O/C OtherFerreira O/CPenumbra

U/G


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Our calculations yield a valuation of A$0.12 per fully diluted share for Continental Coal. We initiate coverage on Continental Coal with a Buy rating and A$0.12 price target.

Catalysts and risks

Catalysts

Start-up of Vlakvarkfontein continues on schedule and costs continue to ameliorate.

Start-up of Penumbra underground project.

Decision on development timeline and procedure for Project X, Vaalbank, De Witterkrans projects. Completion of FS.

Continued increases in thermal coal prices.

Successfully securing further port allocation.

Closure of the Mashala acquisition which should give Continental a 100% share of its projects.

Risks

Further strengthening in the South African Rand which could erode profitability for export operations.

High South African inflation rate which will continue to compress margins.

Development issues impacting start-up at Penumbra.

Operational issues impacting Ferreira or Vlakvarkfontein.

Reserves and resources

Continental Coal has total coal resources of 552Mt on a 100% basis and attributable resources of 365Mt. 42% of resources are in the Measured & Indicated categories. In situ calorific values range from 20-24MJ/kg, giving total resources in energy terms of c.11,500PJ.

25 October, 2010

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Continental Coal reserves and resources

Equity share ShareJORC or Non-JORC P&P reserves

Measured resources

Indicated resources

Inferred resources

Total resources

Vlakvarkfontein 60% SAMREC 10 0 0 10

Ferreira O/C (Mashala) 64% SAMREC 2 0 0 2

Penumbra U/G (Mashala) 64% SAMREC 5 9 2 16

Project X 70% SAMREC 23 0 0 23

Vaalbank 75% SAMREC 66 0 0 66

De Wittekrans (Mashala) 64% SAMREC 8 24 101 132

Knapdaar (Mashala) 64% SAMREC 0 0 89 89

Leiden (Mashala) 64% SAMREC 3 1 8 12

Mooifontein (Mashala) 64% SAMREC 2 0 0 2

Wesselton II (Mashala) 64% SAMREC 3 3 7 13

Continental Coal 0 121 37 206 365


Board & Management

Andrew Macaulay, Executive Chairman, has been involved in the African oil & gas and natural resource sector since the 1980’s. He was previously an executive with HSBC Bank. He is a founding Director of Continental Coal Ltd.

Bruce Buthelezi, Managing Director, has held Senior management positions in the oil & gas and financial services sectors. He was strategic advisor to TSX listed coal junior, Homeland Energy Group with coal operations in South Africa. He is a founding director of Continental Coal Ltd.

Peter Landau, Executive Director, is a corporate lawyer and corporate advisor providing general corporate, capital raising, transaction and strategic advice to numerous ASX listed and unlisted companies. He has project managed a significant number of mining exploration and development transactions around the world and is a Director of a number of ASX-listed companies with particular focus on mining resource and oil and gas exploration and development on the African Continent.

Jason Brewer, Executive Director, has over 18 years of international experience in the natural resources sector and in investment banking. He is currently an Executive Director of Okap Ventures (an African focused resources advisory group) and has previously been the General Manager of the LinQ Resources Fund. He has also undertaken numerous advisory assignments for resources companies, encompassing acquisitions and disposals, debt advisory and project advisory. He is a mining engineer with a master’s degree in mining engineering from the Royal School of Mines.

Lodewyk ‘Don’ Turvey, CEO, has more than 25 years experience in the mining industry, having held several senior management and operational roles within the South African Coal Industry with BHP Billiton Energy Coal SA, INGWE and the Delmas and Koornfontein Mines. He has a Batchelors in Mining Engineering and a Masters in Business Leadership and is a member of the South African Institute of Mining and Metallurgy, a member of the Minerals Education Trust Fund and also serves on the

25 October, 2010

27

Pretoria University Mining Advisory Council. He is also a past President of the South African Colliery Managers Association.

Johan Heystek, COO, is a mining executive with more than 25 years experience in the coal industry. He is a registered professional engineer and served as a director on the boards of Mine Rescue Services and Ingwe Collieries. His career includes senior management roles in production, project execution, business development and minerals resource management at Trans-Natal and Ingwe Collieries. Since September 2006 he has held the position of CEO at Mashala Resources.

Rachel Hebron, CFO, graduated from Rand Afrikaans University in 1992, qualifying as a Chartered Accountant in 1995. She has held various financial management positions in the Security, Retail, Electronics and IT Businesses of Unihold Limited, joining the board in 2003. She was appointed Chief Financial Officer of Mashala Resources in 2006.

Mike Nell, Senior Operations Manager, is a professional mining engineer with more than 28 years experience in underground and opencast coal exploration, development and the mining industry in South Africa. His career includes mine and operation management experience with major coal mining companies such as Anglo Coal and senior executive positions with a number of emerging South African focussed coal mining companies, including Injula Mining and Homeland Energy.

Eugene de Villiers, Project Manager, has served in various operational and management roles on mines of leading international mining companies in South Africa. He has a B.Eng Mining (Mining Engineering) from the University of Pretoria, gained his Mine Manager’s Certificate of Competency in 1996 from the Department of Minerals and Energy is a registered Professional Engineer. He has vast experience as a consultant in mine design and project management with leading mining engineering and project management consultancies, with over 15 years experience in the mining industry.

Ken Hodge, Project Manager, is a professional mining engineer, registered with ECSA and has more than 35 years experience in the underground and opencast coal exploration, development and mining industry in South Africa. His career includes senior management and technical appointments in mining and operations with major coal mining companies such as BHP Billiton and Xstrata. His speciality is integrated mine planning.

Manuel Lamboley, Non-Executive Director, has 20 years of experience with investment banking firms in the US and Europe. He was a director of UBS AG, head of the Geneva office of Williams de Broe, as well as holding senior positions at Bank Julius Bar, Kidder Peabody, Paine Webber International and Prudential-Bache Securities. He was founder of Eastern Capital Fund and Ocean Finance. He is a non-executive director of UK based African Aura Resourced Limited.

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25 October, 2010

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Coal of Africa Ltd Turnaround story on New Management

BUY CZA - AIM 86.75p CZA - JSE R9.44 Target 120p

What's changed

New Old

Rating Buy

Target 120p

EPS FY11E (A$) 0.00

EPS FY12E (A$) 0.34

NAV/share (p) 121

Share Data

Shares - m (basic/fully diluted) 530.5m/597.2m

52-week high/low A$156.3/A$71.8

Free float 100%


3M average daily value A$193.5m

Market capitalisation A$459m

Enterprise value A$722.3m

Dividend yield 0.0%



Revenue (A$m) 111 418 835

EBIT (A$m) -18 2 285

Net income adj. (A$m) -53 2 205

EPS adj./dil. (A$) -0.11 0.00 0.34

CEPS adj./dil (A$) -0.05 0.11 0.45

Net DPS (A$) 0.00 0.00 0.00


EBIT margin % 1% 34% 42%

ROIC (EBIT) % 1% 161% 184%

EV/EBITDA x 12.5 2.4 1.4

PE x 519.1 4.2 2.2

P/CF x NM 12.9 3.2


Thermal coal prod'n, Ktpa 1,624 3,949 4,296

Met coal prod'n, Ktpa 0 75 500

RB spot (US$/t) 76 118 186

HCC (US$/t) 144 265 356

0.0

5.0

10.0

15.0

20.0

25.0


Avge

dai

ly v

olum

e (m

)

0

50

100

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Clo

sing

pric

e (lo

cal C

CY)

Coal of Africa is a South Africa focused coal developer and producer with four operating thermal coal mines (Mooiplaats, Zonnebloem, Hartogshoop and Klipbank). It also owns the Woestalleen coal processing facility and several metallurgical coal projects (of which the most advanced are Vele and Makhado). It also has a small alloys business.

After being the darling of the London investment community in 2006-08 Coal of Africa experienced a substantial fall from grace in 2008-10 as project development issues at the company’s Mooiplaats mine and environmental issues at its Vele project suggested that management’s operational planning had not been as good as expected.

However, with the acquisition of NuCoal in the early part of the year and new CEO John Wallington coming aboard in May 2010, the company’s fortunes seem to be turning around.

The company’s experienced new management team is focusing on in depth operational planning and is already starting to make an impact on the underperforming Mooiplaats mine. It is also focusing on bringing the exciting Makhado development project to fruition and expects to complete a DFS over the project in FQ2/11 with construction expected to be completed in 18 months for a FY13E start.

With a positive mix of both export and domestic production and both thermal and metallurgical coal projects we believe that Coal of Africa is highly-leveraged to improving coal prices in the short to medium term and is an interesting turnaround story.

We value the stock using a DCF-derived sum of the parts valuation on the company’s coal projects which yields a value of A$1.1bn or 121p per share.

We initiate coverage on Coal of Africa with a BUY rating and 120p price target.

25 October, 2010

30

Coal of Africa financial summary Year-end 30 Jun

Valuation A$m p/sh Forecast assumptions 2009 2010E 2011E 2012E 2013EMooiplaats (DCF) 368 39Woestalleen (DCF) 316 33 RB spot thermal coal (US$/t) 98 76 118 186 205Vele (50% discount; DCF) 133 14 HCC (US$/t) 256 144 265 356 363Makhado (DCF) 276 29 USDZAR 9.0 7.6 8.0 8.0 8.0Other 26 3 Production summary 2009 2010E 2011E 2012E 2013ENet cash (debt) 26 3NAV 1,145 121 Mooiplaats (Ktpa) 445 1,342 1,656 2,070Price target 120 Woestalleen thermal (Ktpa) 1,179 2,607 2,640 2,640

Vele (Ktpa) 75 500 1,000Asset valuation summary Makhado (Ktpa) 350

Total Production (Ktpa) 1,624 4,024 4,796 6,060

PROFIT & LOSS (A$m) 2009 2010E 2011E 2012E 2013ERevenues 22 111 418 835 1,289Cost of sales 21 80 267 321 429EBITDA -10 13 67 347 603 D&A 4 31 65 62 64EBIT plus inv't income & pension items -14 -18 2 285 539Net interest income/(expense) 13 3 -0 -0 5Other financials income/(expense) -5 -19 0 - -Adjusted PTP* -13 -60 2 284 544Taxation -0 12 -11 -80 -152Post-tax income -15 -100 -9 205 392Minority interests - - - - -Net income (adjusted earnings*) -13 -53 2 205 392Per share data (US$)EPS (adjusted, basic) -0.03 -0.12 0.00 0.39 0.74EPS (adjusted, diluted) -0.03 -0.11 0.00 0.34 0.66Shares outstanding (period avge, basic) 409.1 456.8 530.5 530.5 530.5Shares outstanding (fully diluted) 429.5 482.3 597.2 597.2 597.2BALANCE SHEET (A$m) 2009 2010E 2011E 2012E 2013EAssetsCash & equivalents 87 101 86 324 642Net tangible fixed assets 363 562 578 641 713Total assets 538 779 924 1,308 1,753

Reserves & resources (Mt) LiabilitiesMooiplaats Interest bearing debt - 26 26 26 26Reserves 79 Total liabilities 14 152 301 447 458M&I resource 55 Shareholders equity 516 621 617 856 1,290Total resource 56 Minority interests 8 5 5 5 5Vele Net debt -87 -42 -26 -264 -583Reserves 0 CASH FLOW (A$m) 2009 2010E 2011E 2012E 2013EM&I resource 624 Pre-tax profit -14 -60 -0 284 544Total resource 813 Depreciation & amortisation 4 31 65 62 64Makhado Net change in working capital -9 39 4 63 -44Reserves 0 Total cash from operating activities -5 12 66 409 570M&I resource 311 Net capital expenditure -151 -129 -80 -125 -136Total resource 311 Net (acquisitions)/disposals - -67 - - -

Cash from investing activities -189 -194 -80 -125 -136Cash from financing activities 34 203 - - -Net cash flow -165 14 -15 238 318PROFITABILITY & VALUATION 2009 2010E 2011E 2012E 2013E

Total resource EBIT margin, % - 1% 34% 42%Reserves 79 ROIC (EBIT), % - 1% 161% 184%M&I resource 1,058 EV/EBITDA, x 72.7 12.5 2.4 1.4Total resource 1,303 PE (adj.), x - 519.1 4.2 2.2

* excluding non-recurring items

Coal production summary (company average)


2%

32%

12%

28%

24%

2%Mooiplaats (DCF)

Woestalleen (DCF)

Vele (50% discount; DCF)

Makhado (DCF)

Other

0

2,000

4,000

6,000

8,000

10,000

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

Mooiplaats Woestalleen Vele Makhado

25 October, 2010

31

Company description

Coal of Africa (CoAL) is currently a tri-listed company with listings in London (AIM), Perth (ASX) and Johannesburg (JSE), but it plans to de-list from the ASX around the time it finalises its move from AIM to the LSE main board. Its main operations are located in South Africa and include four operating thermal coal mines (Mooiplaats, Zonnebloem, Hartogshoop and Klipbank) as well as a stand-alone coal processing facility (Woestalleen) and several metallurgical coal projects (Vele, Makhado, Mt Stuart, Voorburg and Jutland). It also owns a small alloys unit, Nimag.

Following the closure of its acquisition of NuCoal early this year, CoAL now owns four producing thermal coal assets which are in close proximity to each other. In FY10 the company produced 1.6Mt of thermal coal, but by FY13E we expect production to reach 6.1Mt.

CoAL is currently emerging from a sticky period as it transitions from being a development company into an operating coal miner and as new operational management beds down. In 2007-08 CoAL was the darling of the London mining investment community as its management sorted out significant logistical options, but as it emerged into production in 2008-09 it became clear that management had not focused enough on mine planning issues. Development issues initially with Mooiplaats, but latterly at Vele, have led to a significant share price correction and now the stock is trading at less than half of its peak level of over 200p per share.

New management, led by respected CEO John Wallington, is focused on operational matters and has already effected a major production turnaround. The company’s focus is now much more on bringing its major Makhado metallurgical coal project into production. We expect the project to be a major driver of value in coming years. The company has signed a letter of intent with ArcelorMittal South Africa (AMSA) for offtake of 2.5Mtpa of metallurgical coal which AMSA can increase to 5Mtpa.

Company history

1980: GVM Metals Ltd incorporated in Western Australia and listed on the ASX.

December 2005: GVM listed on AIM.

April 2006: GVM acquired 74% interest in mining permit for open cut coal mining in the Limpopo province which became the Vele metallurgical coal project.

November 2006: GVM listed on JSE.

February 2007: GVM agreed to acquire the Mooiplaats coal project for £30m.

May 2007: GVM acquired a 50% interest in Baobab Mining and Exploration (Pty) Ltd, the owner of the Makhado coal project, from Petmin.

December 2007: GVM changed its name to Coal of Africa Limited (CoAL).

April 2008: ArcelorMittal subscribed to 60m shares of CoAL @ £1.11/sh raising £66.7m and representing approximately 16% of CoAL’s issued capital. ArcelorMittal

25 October, 2010

32

also signed a letter of intent to secure a minimum 2.5Mtpa of metallurgical coal via an offtake agreement. ArcelorMittal has an option to increase the offtake to 5Mtpa. This stake was transferred to ArcelorMittal South Africa in April 2009.

July 2008: Makhado resource upgraded to 1Bt.

July 2008: Signed MoU with Rio Tinto on farm swap near Makhado.

August 2008: CoAL secured long-term port allocation for Makhado and Vele to Maputo and Richards Bay.

October 2008: Commenced production at Mooiplaats. By March 2009 had encountered geological features that impacted production and coal quality.

January 2009: Secures rail allocation with Transnet for 1Mtpa to the Matola dry bulk terminal in Mozambique. Reaches agreement to provide funding to expand the Matola Terminal securing additional 2Mtpa port allocation from 1 January 2011.

October 2009: Announces cash placing to raise £59.6m via the placing of 59.9m shares representing 14.52% of the company’s share capital at the time in order to acquire NuCoal for R650m.

February 2010: CoAL raises holding in the Vele project to 100% by issuing 5.625m shares to Tranter Holdings at 40p.

May 2010: Appointment of John Wallington as CEO. Simon Farrell moves to Deputy Executive Chairman.

June 2010: Announces cash placing to raise £55m via the placing of 50m shares at 110p.

August 2010: Receives interdict application regarding the Vele project after appeals against the granting of a New Order Mining Right for the Vele project.

September 2010: Receives approval for farm swap with Rio Tinto which results in a rationalisation of ownership structures around the Makhado coal project allowing permit applications for that project to go ahead.

Shareholder base

ArcelorMittal South Africa is CoAL’s largest shareholder with a 16% shareholding in the company. The remainder of the top five holders are long term institutional investors.

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33

CoAL shareholder base

49%

16%

12%

14%

5%

4%

ArcelorMittal SA

Africa Mgmt Ltd

M&G

Capital Group

Ax a

Others


Projects

All of CoAL’s wholly-owned projects are located in South Africa with its thermal coal projects situated in Mpumalanga province and the metallurgical coal assets located in Limpopo. The map below outlines CoAL’s assets in the region and the distance of the assets from two major ports of Matola (Maputo, Mozambique) and Richards Bay.

Location of CoAL projects


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34

Woestalleen (CoAL 100% share)

Woestalleen is one of the assets CoAL acquired through the NuCoal acquisition in October 2009. It is a coal washing plant which is expected to have capacity of 4.5Mtpa by end-FY11E. It is currently fed by the Zonnebloem, Hartogshoop and Klipbank coal mines but CoAL is looking to add additional coal reserves and is actively drilling sites in the area.

The plant supplies both export and domestic grades. c.2Mtpa of export thermal coal is shipped through RBCT , Matola and the Dry Bulk Terminal at Richards Bay, with c.200Ktpa supplied via its own Quattro allocation through RBCT, c.500Ktpa via Maputo and the remainder under FOR (free on rail) export contracts with strategic partners. Domestic coal is supplied primarily to Eskom’s nearby Hendrina and Camden power stations (360Ktpa) while a further 180Ktpa is supplied to other domestic users.

The operation has had depressed revenues in CY10 because of greater sales into the lowest prices contract, but we expect the situation to improve throughout FY11E.

We forecast on-site costs at Woestalleen of R316/tonne in FY11E, with additional transportation and logistics costs of R210/tonne resulting in FOB cash costs for export material of c.US$66/tonne in FY11E. We assume in our model that there is sufficient feed to take production to FY29E. We expect Woestalleen to be CoAL’s major cash flow generator in the next few years.

Woestalleen coal production and op costs, FY10-15E Woestalleen EBIT vs capex and cash flow, FY10-15E

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

0

250

500

750

1,000

1,250

1,500

1,750

2,000Domestic coal production Ktpa LHSEx port coal production Ktpa LHSBlended selling price R/t RHSMining cost R/t RHS

-100

-50

0

50

100

150

200

250

300

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

EBIT Capex Cashflow

A$m


Mooiplaats (CoAL 100% share)

Mooiplaats is CoAL’s second producing operation and started production in 2008. It is an underground thermal coal mine with JORC reserves of 79Mt. The company has had problems since commissioning the operation due to insufficient exploration and planning at the development stage which meant that a number of geological features that have impacted coal quality and production were not detected. Management believes that it will have got over these problems by end-FY11E.

25 October, 2010

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The operation’s coal handling plant commenced production in FQ1/10 with an initial capacity of 1.3Mtpa and ramped up to 2.64Mtpa in November 2009. The plant is currently under utilised because of limited production from the mine, but CoAL has processed third party coal during FY/10 and we expect it to continue to do so for few more quarters before mine production can replace this material. We forecast that RoM production from the mine should reach 3Mtpa by FY/13E.

Mooiplaats produces both domestic and export quality coal but its production is shipped to Maputo rather than Richards Bay which means that transportation costs are significantly higher than for many other South African producers. The company is currently looking to source Richards Bay coal allocation.

The mine is located just 1.7km from Eskom’s new Camden power station meaning that it has a ready market for domestic coal grades and middlings coal produced at Mooiplaats is already being sold.

We forecast on site costs for Mooiplaats to be c.R268/t in FY11E (although these should fall to c.R250/tonne as production ramps up) with logistics and transport cost estimated to be c.R210/t.

Mooiplaats coal production and op costs, FY10-15E Mooiplaats EBIT vs capex and cash flow, FY10-15E

0

500

1,000

1,500

2,000

2,500

3,000

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

0

200400

600800

1,000

1,2001,400

1,6001,800

2,000Domestic coal production Ktpa LHSEx port coal production Ktpa LHSBlended selling price R/t RHSMining cost R/t RHS

-50

0

50

100

150

200

250

300

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

EBIT Capex CashflowA$m


Vele (CoAL 100% share)

Vele is a soft coking coal project located in the Limpopo province of South Africa. The project has a total JORC resource of 813Mt. It will initially be an open cast operation but has potential to expand to up to 5Mtpa with underground mining. It was planned to start production by CQ1/11E with an initial capacity of 1Mtpa saleable coal, with the option of ramping up to 2Mtpa by 2012E or alternatively 5Mtpa depending on market conditions.

The company was granted a new order mining right for the project in February 2010, but development has subsequently been suspended due to environmental issues. As a result there is likely to be a delay in starting up the project (it is expected to take 2-3 months to start up the project once approval is received) and it is difficult to quantify

25 October, 2010

36

how long the delay is likely to be. As a result of this uncertainty we apply a 50% discount to our Vele valuation in our sum of the parts model.

The soft coking coal produced from Vele is expected to sell at a discount to hard coking coal but at a premium to PCI coal, because of its good swelling properties.

CoAL has signed a letter of intent with Arcelor Mittal South Africa (AMSA) for an offtake agreement under which 2.5Mtpa of coking coal would be supplied to its Vanderbijilpark steel plant from Vele and/or Makhado. AMSA has an option to raise the offtake to 5Mtpa. We expect CoAL to deliver 100% production from Vele into the offtake initially until Makhado comes into production. We would expect AMSA to exercise its option to increase the offtake to 5Mtpa once both Vele and Makhado are in full production, but currently we have not modelled that.

Coal will be sold to AMSA on a free on rail (FOR) basis and hence selling prices are likely to be at a further discount to imported coal prices. We forecast that material sold to AMSA from Vele will sell at a 20% discount to HCC prices and that the balance of coal supplies will receive c.90% of HCC contract prices.

We forecast onsite costs for Vele of c.R560/t initially, with transportation costs estimated at c.R300/t. Over time we would expect costs to fall slightly before starting to increase in line with inflation.

Vele coal production and op costs, FY11-15E Vele EBIT vs capex and cash flow, FY11-15E

0

300

600

900

1,200

1,500

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

0

600

1,200

1,800

2,400

3,000

Sales to others Ktpa LHSSales to Arcelor Ktpa LHSBlended selling price R/t RHSMining cost R/t RHS

-100

-50

0

50

100

150

200

250

300

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

EBIT Capex Cashflow

A$m


Makhado (CoAL 100% share)

Makhado is also a coking coal project and is located in the Limpopo province. It is a higher quality project and boasts an open cast JORC resource of 311Mt. The company expects to complete a DFS by FQ2/11 and with an 18 month construction period expected we forecast that production could start in FY/13E.

Initial production is estimated at 2Mtpa but output could be expanded to 5Mtpa pending the results of the DFS. At this point, we choose not to include such an increase in our model. The company plans to send a bulk sample to AMSA for metallurgical testing in Q1/11.

25 October, 2010

37

Coal will also be sold to AMSA on a free on rail (FOR) basis meaning that selling prices are likely to be at a discount to imported coal prices. We forecast that material sold to AMSA will sell at a 10% discount to HCC prices.

We forecast onsite costs at Makhado at c.R630/tonne in FY13E with transportation costs slightly lower than Vele at R280/tonne.

Makhado coal production and op costs, FY10-15E Makhado EBIT vs capex and cash flow, FY10-15E

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

0

500

1,000

1,500

2,000

2,500

3,000

3,500Sales to others Ktpa LHSSales to Arcelor Ktpa LHSBlended selling price R/t RHSMining cost R/t RHS

-150

-100

-50

0

50100

150

200

250

300

350

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

Capex

EBIT

Cashflow

A$m


Logistics allocations

Port

CoAL currently has a port allocation of 1Mtpa from the Matola terminal at Maputo. This is expected to increase to 3Mtpa post the expansion underway at Matola which is expected to be completed in January 2011. Further in 2008 CoAL agreed to pay US$20m for the option to provide funding for additional expansion at the port in return for allocation. Phase 4 expansion has the potential to increase total capacity to 16Mtpa which would give CoAL 13Mtpa of capacity. CoAL has an allocation of 200Ktpa at Richard’s Bay but hopes to acquire further Richards Bay allocation.

Rail

CoAL has an agreement with Transnet Freight Rail (“TFR”) for supply of 1Mtpa to the Matola terminal. It is in talks with TFR to explore the possibilities of a public private partnership (“PPP”) on the Maputo rail corridor and ensure the availability of rail capacity to match the Matola port capacity.

Nimag

Coal of Africa owns 100% of the Nimag group of companies, a manufacturer of nickel and magnesium alloys. While Nimag has been a major contributor to revenues in recent years, we expect it to be dwarfed by coal earnings going forward.

25 October, 2010

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While we believe that the company’s Woestalleen operation and Makhado project are of high quality, we note that, based on our long-term price forecasts, the Vele and Mooiplaats operations are cash flow negative beyond 2015E. If coal selling prices continue to improve then these projects will be highly leveraged to this improvement, but if there is a correction in coal prices there is a risk that it could result in development or production being halted at either of these operations, in our view.

As noted above we expect the Woestalleen thermal coal project to be the main contributor of cash flow in the near-term and we expect that with the impact of the NuCoal acquisition the company is likely to remain cash generative over the next few years, based on our forecasts.

CoAL EBITDA by division, FY10-15E CoAL EBITDA vs capex and cash flow, FY10-20E

0

200

400

600

800

1,000

1,200

1,400

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

Mooiplaats Woestalleen Vele

Makhado OtherA$m

-400

-200

0

200

400

600

800

1,000

1,200

1,400

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

EBITDA Capex Cashflow

A$m


Valuation

We value CoAL on a sum of parts (SotP) basis using DCFs at a discount rate of 10%. Our valuation of A$1.1bn equates to a per share value of 121p. We initiate on CoAL with a BUY rating and a target price of 120p/sh.

Coal of Africa sum of the parts valuation

Total PV A$m 368 316 133 276 26 1119

Net debt / (Net cash) A$m -26 -26

Minority interests A$m 0 0 0 0 0

PV of Equity A$m 368 316 133 276 52 1145

No. of shares in issue m 597.2 597.2 597.2 597.2 597.2 597.2

Value per share A$ 0.62 0.53 0.22 0.46 0.09 1.92

Value per share p 39 34 14 29 6 121

Coal of Africa interest % 100% 100% 100% 100%

Discount rate % 10% 10% 10% 10%

Vele @ 50% discountMooiplaats

Other (incl. Nimag) GroupWoestalleen Makhado


25 October, 2010

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Catalysts and risks

Catalysts

Final approval for Vele operation from South African Environment Ministry which would allow us to remove the discount we apply to our valuation and also give us more certainty on the start-up timing.

Completion of the DFS for Makhado project which would enable us to firm up our assumptions.

Evidence that Mooiplaats production is proceeding as planned.

Continued increase in thermal and metallurgical coal prices.

Risks

Further strengthening in the South African rand which could erode profitability for export operations.

High South African inflation rate which will continue to compress margins.

Further uncertainty over environmental clearance for Vele which could result in costly changes to the project or potentially cancellation.

Development and operational risks.

Negative bulk sample test results from Makhado and failure to establish either metallurgical coal product in the market.

Further infrastructure issues with respect to Transnet and further delays to Maputo port expansion.


Coal of Africa boasts a current total thermal coal resource of 178Mt and a metallurgical coal resource of 1.1Bt split between its Vele and Makhado projects.

25 October, 2010

40

CoAL reserve and resource statement

100% basis ShareJORC or Non-JORC P&P reserves

Measured resources

Indicated resources

Inferred resources

Total resources

Mooiplaats 100% JORC 79 54 1 1 56

Vele 100% JORC 171 453 189 813

Makhado 100% JORC 284 27 311

Holfontein 100% JORC 55 55

Zonnebloem 100% JORC 19 19

Hartogshoop 100% JORC 1 1

Vuna 100% UNK 12 12

Klipbank 100% UNK 8 8

Opgoedenhoop 100% UNK 10 17 27

JORC 0

Coal of Africa 79 552 505 245 1303


Board & Management

Richard J Linnell, Chairman, has been active in the resources and metals fields for over forty years and has significant global experience in the development and marketing of resources and commodities. He was the originator of the Bakubang Initiative, a Forum designed to revive the South African Mining Industry and which led to the establishment of the New Africa Mining Fund, of which he is Chairman of Trustees. He currently holds a number of other Directorships.

Simon J Farrell, Executive Deputy Chairman, has a Bachelor of Commerce from the University of Western Australia and an MBA from the Wharton School of the University of Pennsylvania. He has held a number of senior management and Board positions in the resources sector over the last twenty years. He is a Director of LSE listed Kenmare Resources and AIM listed Ncondezi Coal.

John Wallington, CEO, holds a BSc in Mining Engineering from the University of the Witwatersrand in Johannesburg, South Africa and has participated in executive programmes with both the London Business School and Harvard Business School. He has 30 years experience in the coal exploration and mining industry. Prior to joining Coal of Africa, Mr Wallington was CEO of Anglo Coal. He has also held Board positions with Firestone Energy Ltd and Keaton Energy Holdings Limited.

Riaan van der Merwe, COO, is a Mining Engineering graduate of the University of Pretoria and began his career in South Africa’s deep-level gold mining industry. He has spent the last 19 years of his career in the South African coal industry with Anglo American Group holding senior management positions in both opencast and underground mines and heading up Anglo Coal South Africa’s Eskom and Export operations. His latest role was to lead that company’s growth projects and mining services, involving a project pipeline in excess of R15bn. He also holds an MBA from the North-West University and attended the Senior Executive Programme at Columbia Business School.

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Blair Sergeant, Finance Director, graduated with a Bachelor of Business and a Post Graduate Diploma in Corporate Administration, both from Curtin University, WA. His experience includes senior management and executive positions with a number of publicly listed companies. He is a member of the Chartered Institute of Company Secretaries and an Associate of the Australian Society of Certified Practising Accountants.

Professor Alfred Nevhutanda, Executive Director, holds two PhDs (Educational Environment and Arts Culture), a Diploma in Management Studies and an MBA. He has been actively involved in a number of diversified businesses. His areas of competency include corporate governance, strategic planning and leadership. He has acted as an advisor to the King of Vha Venda, Government Ministers and Members of Executive Council of the ruling party (ANC).

David Murray, Senior Non-Executive Director, holds a BSC in Civil Engineering from the University of KwaZulu-Natal and a Postgraduate Diploma in Mining Engineering from the University of South Africa. He has held a number of senior positions in the global coal industry including Managing Director of Ingwe Coal Corporation, CEO of BHP Billiton Mitsubishi Alliance and President of the Energy Coal Sector Group at BHP Billiton, a position he held until December 2009.

Steve Bywater, Non-Executive Director, has a B.Sc. in Engineering Geology and Geotechnics from Portsmouth University and a M.Sc. in Rock Mechanics and Excavation Engineering from Newcastle-upon-Tyne. He has a distinguished career in the resources industry developing and operating a total of 14 large-scale open pit mining operations. He was COO of Rio Tinto Coal Australia, overseeing seven mining operations. He is also Chief Executive of Global Coal Management.

Peter Cordin, Non-Executive Director, has a Bachelor of Engineering from the University of Western Australia and is well experienced in the evaluation, development and operation of resource projects within Australia and overseas. He is the Managing Director of ASX listed Dragon Mining Limited.

25 October, 2010

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25 October, 2010

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Petmin Ltd Mining house in the making – watch this space

BUY PTMN - AIM 29.25p PET - JSE R3.00 Target 38p

What's changed

New Old

Rating Buy

Target 38p

EPS FY11E (R) 0.26

EPS FY12E (R) 0.51

NAV/share (p) 38

Share Data

Shares - m (basic/fully diluted) 576.9m/570.5m

52-week high/low 30p/15p

Free float 82%


3M average daily value US$0.0m

Market capitalisation US$266m

Enterprise value US$235m

Dividend yield 2.1%



Revenue (Rm) 489 635 943

EBIT (Rm) 149 215 350

Net income adj. (Rm) 108 152 296

EPS adj./dil. (R) 0.19 0.26 0.51

CEPS adj./dil (R) 0.40 0.52 0.92

Net DPS (R) 0.04 0.05 0.11


EBIT margin % 31% 34% 37%

ROIC (EBIT) % 22% 33% 55%

EV/EBITDA x 3.8 4.5 2.8

PE x 21.4 11.6 11.3

P/CF x 7.5 5.7 3.3


Coal prod'n, Ktpa 468 509 757

GMP PCI f/c (US$/t) 111 216 316

GMP USDZAR f/c 7.6 8.0 8.0

0.0

0.2

0.4

0.6

0.8

1.0

1.2


Avge

dai

ly v

olum

e (m

)

0

5

10

15

20

25

30

35

Clo

sing

pric

e (lo

cal C

CY)

Petmin is a diversified mining company and is dual-listed in South Africa and on the LSE. It currently has two major operating businesses, the Somkhele anthracite operation in Kwazulu Natal and the SamQuarz silica operation in Mpumalanga, as well as a holding in the Veremo pig iron project.

To term Petmin a coal company is a misnomer, what it is in fact is a nascent mining house, but at the current time 78% of the company’s profits are derived from its Somkhele Anthracite operation, and this is the main engine for organic growth by the company which, in our view, justifies its inclusion in this piece.

Following the appointment of Ian Cockerill, formerly CEO of GoldFields Ltd and Anglo Coal, it looks like this is a company that is “going places”. While the company is relatively small at the moment, we would expect it to make acquisitions to diversify its operations both geographically and by commodity over the next few years. With an existing net cash position and strong cash flow generation, we believe that the company is well placed to make a significant acquisition in the near future.

We value the company using a sum of the parts valuation based on DCFs for the company’s Somkhele anthracite mine and SamQuarz operation, and a multiple-based approach for the Veremo pig iron project. Our calculation yields a valuation of R2.4bn or 38p per share.

We set our price target at 38p and initiate coverage on Petmin with a Buy rating.

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Petmin financial summary Year-end 30 June

Valuation Rm R/sh p/sh Forecast assumptions 2009 2010 2011E 2012E 2013ESomkhele (DCF) 1,131 1.96 18SamQuartz (DCF) 366 0.63 6 PCI (US$/t) 209 111 216 316 323Veremo (multiple-based) 426 0.74 7 USDZAR 9.0 7.6 8.0 8.0 8.0Net Debt 471 0.82 7

NAV 2,393 4.15 38 Production summary Ktpa 2009 2010 2011E 2012E 2013EPrice target 38 Somkhele 454 468 509 757 1,170

SamQuartz 1,512 1,171 1,370 1,400 1,400

PROFIT & LOSS (Rm) 2009 2010 2011E 2012E 2013EAsset valuation summary Revenues 789 489 635 943 1,382

Cost of sales 444 192 251 325 464EBITDA 317 268 364 589 834 D&A 134 118 149 239 101EBIT plus inv't income & pension items 252 149 215 350 733Net interest income/(expense) -1 4 2 7 13Other financials income/(expense) - - - 65 65Adjusted PTP* 90 154 217 422 811Taxation -53 -46 -65 -107 -242Post-tax income 118 108 152 315 569Minority interests -0 - - - -Net income (adjusted earnings*) 62 108 152 296 569Per share data (US$)EPS (adjusted, basic) 0.11 0.19 0.27 0.51 0.99

Sales summary EPS (adjusted, diluted) 0.11 0.19 0.26 0.51 0.98Shares outstanding (period avge, basic) 541 564 571 577 577Shares outstanding (fully diluted) 572 568 576 582 582BALANCE SHEET (Rm) 2009 2010 2011E 2012E 2013EAssetsCash & equivalents 91 283 513 855 1,439Net tangible fixed assets 629 631 577 442 417Total assets 1,473 1,596 1,836 2,311 2,869LiabilitiesInterest bearing debt 58 42 42 42 42Total liabilitiesShareholders equity 1,119 1,241 1,456 1,781 2,339Minority interests - - - - -

Reserves & resources (Mt) M&I Inf. Total Net debt -33 -241 -471 -813 -1,397Coal CASH FLOW (Rm) 2009 2010 2011E 2012E 2013ESomkhele 30 9 39 EBIT 174 149 215 350 733Luhlanga 15 0 15 Depreciation & amortisation 134 118 149 239 101KwaQubuka 0 3 3 Net change in working capital -62 51 -39 -117 -Emalehlene 0 6 6 Total cash from operating activities 225 321 230 342 584Petmin (attributable) 45 17 63 Net capital expenditure -291 -123 -95 -105 -76

Net (acquisitions)/disposals 78 - - - -Quartzite Cash from investing activities -260 -125 - - -Quartzite 81 - 81 Cash from financing activities 37 -4 - - -Chert 11 48 60 Net cash flow 2 192 230 342 584Petmin (attributable) 92 48 140 PROFITABILITY & VALUATION 2009 2010 2011E 2012E 2013E

EBIT margin, % 32% 31% 34% 37% 53%Veremo ROIC (EBIT), % 35% 22% 33% 55% 121%Weathered resource 100% basis 73 13 86 EV/EBITDA, x 4.1 3.8 4.5 2.8 1.9Petmin (attributable) 18 3 22 PE (adj.), x 5.0 21.4 11.6 11.3 5.9Source: Company data, GMP estimates * excluding non-recurring items

47%18%

15%

20%Somkhele (DCF)

SamQuartz (DCF)

Veremo (multiple-based)

Net Debt

0

500

1,000

1,500

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

Somkhele SamQuartz Other

R'000

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Company description

To term Petmin a coal company is a misnomer, what it is in fact is a nascent mining house, but at the current time 78% of the company’s profits are derived from its Somkhele Anthracite operation which, in our view, justifies its inclusion in this piece.

Petmin is a well-managed South Africa-based diversified resources company which operates the Somkhele anthracite mine near Richards Bay, and SamQuarz, a high quality silica mining operation. The company also has a 25% share in the Veremo iron ore project, which is being developed by Kermas and MCC.

We believe that the appointment of Ian Cockerill as Executive Chairman in March 2010 will be a transformational one for the company. We expect him to leverage his excellent track record at Gold Fields Ltd and his strong reputation with institutional investors to help take Petmin to the next level through acquisitions outside South Africa, and outside its existing business areas.

The company has a net cash position of R241m and is cash flow positive, making it well-placed to grow by acquisition, in our view. Its criteria for evaluating investments are:

A project must have a life of mine in excess of 20 years.

An acquisition must have the potential to go into production within three years.

The project must yield in excess of US$30m pa in pre-tax profit and must have an IRR greater than 15%.

Company history

1972: Petmin was incorporated and listed on the JSE in 1986 as Petra Granite.

1990: Name changes to Petra Mining and granite assets sold.

1990-2002: Company acquires numerous gold mining interests which were sold by 2002. A capital distribution was made to shareholders in 2003 and Petra Mining remained a cash shell.

February 2004: Midnight Storm Holdings (Pty) Ltd acquired an interest in the company with a view of establishing a BEE multi-commodity mining business. Name changed to Petmin.

September 2004: Acquisition of SamQuarz silica mine.

December 2005: Acquisition of Springlake Holdings making Petmin the largest producer of silica and anthracite in South Africa.

December 2006: Secondary listing on AIM.

June 2007: Somkhele commissioning.

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May 2008: Petmin acquired 25% interest in Veremo pig iron project for R73m. Its partner Framework Investment Ltd (Kermas) holds the balance.

October 2008: Sold Springlake Colliery for R85m in cash.

March 2010: Appointed Ian Cockerill as Executive Chairman Designate, effective 1 July 2010. He had been a non-executive director since 2007.

Shareholder base

Petmin’s BEE partner Dark Capital holds 23% of the shares with other BEE shareholders contributing a further 5%. c.44% of the shares are held by South African institutional shareholders while board & management hold c.28% of the share capital (some of which is included in the BEE shareholding).

Petmin shareholder base

Mgmt & Board

17%

Dark Capital

23%

Ax iam Holdings

9%

Other BEE

shareholders

5%Qarto Nominees

5%

Others

41%


Operations

Somkhele Anthracite Mine (Petmin 100%)

Petmin acquired the Somkhele anthracite project in KwaZulu Natal as part of its acquisition of Springlake Holdings in 2005. The area had previously been explored by a number of majors but drilling had failed to intercept its steeply dipping coal seams. The mine was commissioned in June 2007.

The operation consists of three open pit mines (of which one mining has finished in one, one is in operation and one is being developed) in an area of 1,400ha located within a wider prospecting area of 23,000ha, which the company is continuing to explore. It is located only 85km to the northeast of Richards Bay.

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Location of Somkhele anthracite mine New mining area at Somkhele anthracite mine

Source: Petmin Source: Petmin

The main orebody consists of four coal seams with the main seam (B) c.15m thick. The seams dip quite steeply at 20-30° across most of the property and while all of the mining so far has been accomplished using open pits, there is significant potential for mining to go underground when open pit resources in the current mining area are exhausted.

Somkhele mining and exploration areas


Mining is contracted out and is conducted using a conventional truck and shovel method. The RoM coal is taken to the mill where it undergoes a simple washing procedure. The washing plant currently has a capacity of 1.4Mtpa but is expected to be expanded to 2.8Mtpa. The coal undergoes a three stage crushing procedure followed by dense medium separation (DMS) using a WEMCO drum for +10mm sizes and cyclones for coal of less than 10mm. Coal yields are generally around 45-50% although they have been improving in recent months due to better operation of the plant.

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Products fall into three major categories:

Sized products (large and small nuts and peas; 33% of production) with typical 16-18% ash content, volatiles under 8.5% and sulphur under 1%.

Prime duff (13% of production) with typical 15.5% ash, volatiles under 8.5% and sulphur under 1%.

Export duff (54% of production) with typical 18% ash, volatiles under 8.5% and sulphur under 1.1%.

The operation’s customer base is highly consolidated with three customers representing 96% of sales. 50% of the company’s sales go to the local market, with ferrochrome furnaces taking the bulk of that (Xstrata and Samancor are major customers). The remaining 50% of production goes to the export market and is mostly transported to Brazil to be used in iron pellet manufacture. The company has a 200Ktpa take or pay agreement, which exports product through the Richards Bay Dry Bulk Terminal. Product is sold FOB and is shipped to Richards Bay by truck. Domestic product is generally sold FOT at the mine gate. Domestic anthracite demand has increased significantly recently and save for the take or pay export sales, contract sales are likely to be weighted to the domestic market in FY11E.

The company has recently approved an expansion of the operation to 2.1Mtpa RoM production by FY12E from a level of c.1.1Mtpa previously. The new plant is expected to have a significantly higher yield than the old one.

The operation has a SAMREC compliant proven & probable resource of 23.3Mt in Areas One and Two which should be sufficient for another 10 years of mining at the accelerated rate, and the company has identified a further 24.0Mt of reserve in an area contiguous to the mining area. Its current exploration program is targeting a 100Mt resource.

Somkhele coal production and op costs, FY11-FY15E Somkhele EBIT vs capex and cash flow, FY11-15E

0

200

400

600

800

1,000

1,200

1,400

2009

2010

2011

E

2012

E

2013

E

2014

E

2015

E

0

200

400

600

800

1,000

1,200

1,400Anthracite production Ktpa LHSSelling price R/t RHSMining cost R/t RHS

-200

-100

0100

200

300

400

500600

700

800

2009

2010

2011

E

2012

E

2013

E

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E

2015

E

EBIT Capex CashflowRm


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SamQuarz (Petmin 100%)

The SamQuarz operation, which was acquired by the company is 2004, is South Africa’s largest operation producing highest quality silica and is located 10km east of Delmas in Mpumalanga province.

The mine and processing plant sit on an orebody which was formed as a mega sinkhole which collected a silica core surrounded by chert. The final pit is forecast to extend to an area of c.46ha and a depth of 230m. The mine has capacity of c.1.5Mtpa of RoM silica and 0.75Mtpa of RoM chert. Current resources support a 30 year mine life. The operation uses contract mining but in-house processing.

In order to expand in the medium term the existing processing operations and some of the site offices will need to be moved as they are currently sterilising approximately 2.5 million tonnes of silica reserves. This will increase costs in the near-term.

Metallurgical uses dominate South Africa’s silica demand, with steel dominating those end uses (70%), silicon and ferrosilicon 15%, refractories 7% and non-ferrous applications the remaining percentage. Glass is the second highest consumer with c.20% of demand and construction has c.19%.

South African silica market by volume SamQuarz sales by volume and value

3%

4%

20%

19%

53%

1% 0% Metallurgical

Glass

Construction

Filter media

Golf/recreation

Ceramics

Other

0%

10%

20%

30%

40%

50%

60%

Met

allu

rgic

al

Gla

ss

Con

stru

ctio

n

Oth

er

Volume split

Rev enue split

Source: Petmin Source: Petmin

50% of SamQuarz’s production goes to the metallurgical market, but glass accounts for 35.2% of its sales volumes and 43.1% of its sales value reflecting the high quality nature of the company’s production. Within that there is a high weighting to colourless bottles and auto windscreens. Key customers include:

Silica rock for metallurgical applications: Samancor, Xstrata.

Silica sand for glass: PFG, Consol Glass, Nampak.

80% of the mine’s product is shipped by road with the bulk of sales priced at the delivery point, giving Petmin responsibility for arranging transport.

Silica is generally sold on a long-term contract basis with contracts being multi-year in duration. Contract prices generally inflate in line with the manufacturers’ inflation

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index, but this means that the business is actually seeing some margin erosion as mining costs are inflating faster than selling prices. The company is keen to renegotiate its price contracts and negotiations on key contracts are due to take place over the next few years.

The company believes it is in a relatively strong negotiating position as this is the only mine in South Africa that can produce high enough grade silica to produce colourless glass.

The nature of the pricing structure for the silica market effectively makes this a margin business, in our view. As such the silica business is a handy cash flow generator for the company but currently is producing significantly less than the company’s preferred US$30m pa for its businesses. As such, in our view, SamQuarz must be regarded as non-core and we would not be surprised to see the company exiting the business.

SamQuarz coal production and op costs, FY11-FY15E SamQuarz EBIT vs capex and cash flow, FY11-15E

0200

400600

8001,000

1,2001,400

1,6001,800

2,000

2009

2010

2011

E

2012

E

2013

E

2014

E

2015

E

0

20

40

60

80

100

120

140

160

180Quartzite production Ktpa LHSSelling price R/t RHSMining cost R/t RHS

-40

-20

0

20

40

60

80

2009

2010

2011

E

2012

E

2013

E

2014

E

2015

E



Veremo iron project (Petmin 25%)

The Veremo iron project is located in the eastern Bushveld, also in Mpumalanga province and is focused on developing a titaniferous magnetite orebody into an iron ore/pig iron project. Petmin owns 25% of the project with the balance being owned by Framework Investments, a subsidiary of investment company Kermas Ltd.

The initial plan is to build a 1.2Mtpa pig iron operation at a capital cost of US$500-600m, although we understand that there is additional potential to produce iron ore. Petmin has an agreement with Kermas whereby all operating and development capital will be provided by Kermas without any dilution to Petmin. Petmin will also receive a guaranteed dividend from Veremo, underwritten by Kermas, of R65m in 2012-14E.

We are wary about the project as the metallurgy could be difficult, although management believes that a new metallurgical process developed to the pilot plant stage by MinTek can be effective. There is also the possibility of producing a titanium slag which could yield by product credits. Initial work suggests that cash costs for the pig iron would be c.US$200/tonne FOB Richards Bay.

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With no feasibility study in place we have chosen to calculate a valuation for the project based on an EV/ferrous resource multiple technique. While this likely understates the value of the project we believe it is a reasonable approach given the uncertainties of the project.

We note that Petmin’s minority holding in the project likely makes this a non-core in our view.


We expect Somkhele to continue to contribute the bulk of Petmin’s cash flow in the near-term; we forecast it to contribute 84% of FY11E EBITDA. We would expect the company to grow by acquisition in the near term and, given its acquisition focus, we would expect any new acquisition to be yielding cash flow by 2015, which could see Somkhele’s importance to the business somewhat diluted. For the mean time, however, it remains the jewel in Petmin’s crown.

We expect the company to remain cash generative at the operating level over the next few years, and expect dividends to increase. The company declared a maiden dividend in September 2010 with a payout ratio of 20% for ordinary dividends. We would not be surprised to see this increase over time.

Petmin EBITDA by division, FY09-FY15E Petmin EBIT vs capex and cash flow, FY10-15E

0

100200

300400

500

600700

800900

1000

2009

2010

2011

E

2012

E

2013

E

2014

E

2015

E

Somkhele SamQuartzRm

-200

-100

0

100

200300

400

500

600

700

800

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E



Valuation

We use a sum of the parts valuation to value Petmin. We use DCFs for Somkhele and SamQuarz and a valuation based on an EV/ferrous resource multiple for Veremo. Key issues are:

We use a 10% discount rate for Somkhele to reflect the fact that anthracite is a cyclical business, but that the risks are slightly lower than for other emerging markets.

We use an 8% discount rate for SamQuarz to reflect the lower cyclicality of the business and the fact that it is effectively a margin business.

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For Veremo we use an EV/ferrous resource multiple. We apply a value of US$0.66/ferrous resource tonne, a discount to the current ex-Australia sector average to reflect our concerns regarding the metallurgy of the deposit.

Petmin sum of the parts valuation

Total PV Rm 1,085 358 1,443

Net debt / (Net cash) Rm -498 -498

Minority interests Rm 0 0 0

PV of Equity Rm 1,085 358 426 498 2,367

No. of shares in issue m 576.0 576.0 576.0 576.0 576.0

Value per share R 1.88 0.62 0.74 0.87 4.11

Value per share p 17 6 7 8 38

Petmin interest % 100% 100% 25%

Discount rate % 10% 8%

Veremo (multiple-based)Somkhele (DCF) Other GroupSamQuartz (DCF)


Our calculations yield a value of 38p. We initiate coverage on Petmin with a Buy rating and 38p price target.

Catalysts and risks

Catalysts

Bolt-on or major acquisition which could add a further string to the company’s bow. Diversification away from South Africa would be positive for the company in our view

Renegotiation of SamQuarz selling price contracts.

Continuing improvement in anthracite prices.

Risks

Further strengthening in the South African Rand which could erode profitability for export coal operations.

High South African inflation rate which will continue to compress margins. Higher cost inflation than price inflation an issue for SamQuarz.

Operational and development risks as for any mining company.

Geopolitical risks. There has been much talk in recent months by the ANC youth league of nationalisation of mining assets. While we do not believe this will happen, it could depress stock price performance in our view.

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Petmin coal reserve and resource statement


Measured resources

Indicated resources

Inferred resources

Somkhele 100% SAMREC 25 14 17 9

Luhlanga 100% SAMREC 12 3 0

KwaQubuka 100% SAMREC 2.5

Emalehlene 100% SAMREC 6

Petmin 25 25 20 17


SamQuarz reserve and resource statement


Measured resources

Indicated resources

Inferred resources

Quartzite SAMREC 60.6 60.6 20.0 0.0

Chert SAMREC 11.5 7.9 3.5 48.3

Petmin 72.1 68.6 23.5 48.3


Veremo reserve and resource statement

100% basis ShareJORC or Non-JORC Fe grade P&P reserves

Measured resources

Indicated resources

Inferred resources

Fresh SAMREC 42% 797.5

Weathered SAMREC 43% 44.3 29.1 12.8

Total 44.3 826.6 12.8

Petmin share 25% SAMREC 43% 0.0 11.1 206.7 3.2


Board & Management

Ian Cockerill, Executive Chairman, acceded to this role in July 2010 and previously was a non-executive director from October 2007. He began his career as a geologist in 1975 and commenced working for Anglo American Corporation in 1979 and managed Elandsrand and Western Deep Levels West Mines before being promoted to technical director AAC Gold Division in 1996. In 1998 he became Executive Director – Business Development, and was responsible for global growth through exploration and acquisition for AngloGold Ltd. In 1999 he held the position of Executive Officer, African International Operations. Later that year he joined Gold Fields Ltd as Managing Director and Chief Operating Officer, responsible for all global operations, before his appointment in 2002 as Chief Executive Officer of Gold Fields Limited. He also held the position of Chief Executive Officer of Anglo Coal Limited from June 2008 to December 2009.

Lebo Mogotsi, Deputy Chairman, joined Petmin as a non-executive director in 2004 and became Deputy Chairman in November 2005. She gained experience in gold beneficiation at AngloGold Ashanti Limited where she held two portfolios: Marketing Manager: Beneficiation and Executive Assistant to the Executive Director: Marketing.

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For three years until February 2008, she was an independent non-executive director of Merafe Resources Limited (formerly SA Chrome Limited), a junior mining company listed on the JSE, where she also chaired the Transformation Committee.

Jan du Preez, CEO, has been part of the Petmin management team since 1992 and was appointed CEO in February 2006. He has been involved as an entrepreneur in various aspects of the mining industry and, among other positions, was an executive director of JIC Mining (Pty) Ltd (JIC) for approximately eight years. Employing some 20 000 people, JIC was the largest mining services company in South Africa during that time.

Bradley Doig, COO, joined Petmin as a non-executive director in November 2005 and became COO in February 2006. He was previously an executive director and Chief Investment Officer of Decorum Capital Partners, the fund manager for the New Africa Mining Fund (NAMF). During a 10-year stint with BHP Billiton Limited, his experience included international business development and strategy for Samancor Manganese. He also spent time at Dresdner Kleinwort Benson in the United Kingdom and was an executive with the IQ Business Group.

Bruce Tanner, Financial Director, joined Petmin in 2005. He has a wealth of experience in mining finance and administration, including five years' involvement in the marketing of coal and copper. From June 2002 to November 2004, he was CFO of AfriOre Ltd (a TSX listed miner and explorer) and COO of its coal operations.

John Gloy, CEO Somkhele, was appointed CEO of Somkhele from 1 July 2009. Before being promoted and relocated to this operation, he was Managing Director of SamQuarz for five years. Prior to joining SamQuarz, he was employed by AngloGold Ashanti. He holds Bachelor of Technology degrees in Extractive Metallurgy and Environmental Management. He has a Master of Business Leadership from the University of Stellenbosch during 2000. He has 18 years of operational experience in the mining, extraction and processing of various metals and minerals.

Andre Knopjes, GM SamQuarz, was Plant Manager at SamQuarz before being promoted to General Manager. He holds a National Higher Diploma in Extraction Metallurgy which he completed at Technikon Witwatersrand. Before joining SamQuarz in 2006, he was employed for 18 years as a metallurgist by AngloGold Ashanti. During that time he not only gained experience in gold, uranium and sulphuric acid production, but acquired expertise in operations management.

Enrico Greyling, Non-Executive Director, joined Petmin in February 2004. He is also a non-executive director of a number of PSG Group Limited subsidiaries as well as various private companies, and a director of Venmyn. Prior to becoming active at PSG, he was a director of FBC Fidelity Bank which is now part of Nedcor Limited. He also served on the board of RMB Holdings Limited as an executive prior to its merger with First Rand Limited. During his career as a banker he was, for a time, a board member of the Banking Council of South Africa.

Alwyn Martin, Non-Executive Director, joined Petmin in November 2005. He represents Dark Capital (Pty) Ltd and is the former chairman of Vodacom Group (Pty)

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Ltd and a former Chief Executive of Siemens Telecommunications in South Africa. He currently holds a number of directorships in the private health and financial industries, and is also an independent non-executive director of Trans Hex Group Limited and Northan Platinum Ltd.

Johan Strijdom, Non-Executive Director, joined Petmin in February 2004. A businessman and farmer, he was a founding shareholder and director of JIC. He was also a director of Petrex until its sale to EAGC Ventures Limited. He is a director of a number of private companies.

John Taylor, Non-Executive Director, joined Petmin in September 2006. He has 29 years’ experience with BHP Billiton as a senior metallurgist. His production experience includes gold, uranium, copper, iron ore, sulphuric acid production, lead and alloys, ferromanganese, silicon metal, zinc and manganese metals. He has extensive experience (as a project director) ranging from feasibility studies (including research and development management) to design, construction, commissioning and operations. He is a director of Decorum Capital Partners, the fund manager for NAMF.

Companies mentioned Company name Bloomberg code Required disclosures Continental Coal Ltd CCC AU 7 Coal of Africa Ltd CZA LN, CZA SJ Petmin Ltd PTMN LN, PET SJ 7

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Key The GMP research recommendation structure consists of the following categories: FOCUS BUY. Small cap stocks (defined as stocks with less than $500 million market capitalization) in this category have a total return potential (including dividends payable) of greater than 25% and large cap stocks a greater than 20% total return potential, as well as superior qualitative and timing characteristics. BUY. These stocks will have 15% or greater (small cap) or 10% or greater (large cap) total return potential. SPECULATIVE BUY. These stocks will have a 30% or greater total potential return and they will have a speculative component which could be material to the return expectations. HOLD. Small cap stocks ranked Hold will have a total return potential of 0% to 15%; large cap stocks ranked Hold will have a total return potential of 0 to 10%; and stocks that have a speculative component which could be material to the return expectations ranked HOLD will have a total return potential of 0% to 30%. REDUCE. Companies ranked Reduce have a negative potential total return. FOCUS REDUCE. Companies ranked Focus Reduce have a significant negative potential total return and materially compromised qualitative and timing characteristics. Note: Analysts have discretion within 500 basis points of the upper and lower limit of each rating to determine the recommendation.

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United Kingdom: this information is issued for the benefit of persons who qualify as eligible counterparties or professional clients and should be made available only to such persons and is exempt from the restriction on financial promotion in s21 of the Financial Services and Markets Act 2000 in reliance on provision in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 particularly Article 19(5) for Investment Professionals and Article 49(2) for entities of prescribed net worth.

Other countries: circulation of this report may be restricted by laws and regulations in other countries and persons in receipt of this document must satisfy legal requirements in that country.

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GMP Securities Europe LLP 4 Albemarle Street

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Research Alternative Energy Marko Pencak (416) 943-6677 David Taylor, Associate (416) 943-6114

Financial Services Stephen Boland, CFA (416) 941-0897 Jon Chow, Associate (416) 943-6146

Gold & Precious Metals Craig West (416) 943-6121 Andrew Mikitchook, P. Eng., CFA (416) 943-6651 George Albino (416) 943-6187 Rohinie Bisesar, Associate (416) 943-6111 Mark Raguz, Associate (416) 943-6631 Matt Sheppard, Associate (416) 943-6118

Healthcare Cosme Ordoñez, MD, PhD (Montréal) (514) 288-9279

Industrial Products Justin Wu, CFA (416) 943-6679 Anoop Prihar (416) 943-6127 Otto Cheung, CFA, Associate (416) 943-6620 Dana Merber, CFA, Associate (416) 943-6674

Industrial Technology Marko Pencak (416) 943-6677 David Taylor, Associate (416) 943-6114

Metals & Minerals David Charles, CFA (Montréal) (514) 288-0318 David Wargo (416) 943-6115 Mathew Fernley (London) 44 207 647 2806 Joseph Gallucci, MBA, Associate (Mtl) (514) 288-1516 Krystal Nagel, Associate (416) 941-0833 Vishal Drolia, Associate (London) 44 207 647 2812

Oil & Gas Sean Barr, CFA (Calgary) (403) 543-3587 Peter Doig, CFA (Calgary) (403) 543-3035 Ryan Savage (Calgary) (403) 543-3584 Stacey McDonald (Calgary) (403) 543-3042 Toby Pierce (London) 44 207 647 2822 Peter Nicol (London) 44 207 647 2819 Cassandra Berard, Associate (Calgary) (403) 543-3561 Nick Corcoran, Associate (Calgary) (403) 695-1401 Allison Morley, Associate (Calgary) (403) 543-3565 Jessica Lindskog, Associate (London) 44 207 647 2826 Jamal Orazbayeva, Assoc. (London) 44 207 647 2821

Special Situations Anoop Prihar (416) 943-6127 Greg McLeish, CFA (416) 943-6123 Jelena Neylan, CFA (Montréal) (514) 288-4818 Dana Merber, CFA, Associate (416) 943-6674 Chris Lalor, Associate (416) 943-6108

Telecommunications, Cable & Media Peter MacDonald, P. Eng., CFA (416) 943-6658 Akash Kapoor, CA, MBA, Associate (416) 941-0808

Technology Michael Urlocker, CFA (416) 943-6128 Sera Kim, CFA (416) 943-6639 Deepak Kaushal, Associate (416) 943-6686 Chris Lee, Associate (416) 943-6664

Technical/Quantitative Analysis Joseph Farrell, CFA, CMT (416) 943-6615 Tony Popowich (416) 941-6781

Research Assistants Barbara Cooke (416) 943-6131 Michelle Teslia (416) 943-6148

Trading Michael Wekerle (416) 367-8008 Nick Bradbrook (416) 367-8008 Chris Bond (416) 367-8008 Jason Currie (416) 367-8008 David Fox (416) 367-8008 Mark Hawkins (416) 367-8008 Bruce Minns (416) 367-8008 Anne Nelson (416) 367-8008 Conor O’Brien (416) 367-8008 Mike Wilson (416) 367-8008 Michael Young (416) 367-8008 Tom Kehoe (416) 367-8008 Juhan Laur (416) 941-0812 Darren Molloy (416) 941-0812 Cameron Baker, CFA (Montréal) (514) 286-4942 Eric Fafard (Montréal) (514) 288-7901 Marco Ottoni (Montréal) (514) 288-0069 Myles Wesetvik (Montréal) (514) 288-1893 Simon Tremblay (Montréal) (514) 286-4949 Benjamin Perlman (Montréal) (514) 288-6688 Mark Head (London) 44 207 459 5703 Luke Alexander (London) 44 207 647 8455 Toll Free Toronto 1-800-735-1463 Toll Free Montreal 1-877-622-6256

Trading Assistants Christopher Montgomery (416) 367-8008 Ken Paisley (416) 367-8008 Gordon Rafferty (416) 941-0812 Natasha Morris (Montréal) (514) 286-4941 Audrey Frischknect (Montréal) (514) 288-7986

Sales Kevin Sullivan, CFA (416) 367-1250 Kevin Overstrom, CFA (416) 943-6192 Shawn Aspden, CFA (416) 941-0854 Mark Christensen (416) 367-1254 Derek Ham (416) 367-1256 Peter Rockandel (416) 367-1252 Rob Weir, CFA (416) 943-6619 Tim Williams (416) 943-6630 Sapna Murthy (416) 941-0877 Kenrick Sylvestre, CFA (416) 941-6758 Patrick Gagnon (Montréal) (514) 288-7418 Rachel Goldman (Montréal) (514) 288-2330 Jean-François Lemonde (Montréal) (514) 286-4943 Jim Shannon (Montréal) (514) 288-7985 Alex Tyszkiewicz (Montréal) (514) 288-4019 Simon Catt (London) 44 207 459 5701 Marc Lustig (London) 44 207 647 8452

Sales Assistants Leanne Hanshall (416) 943-6194 Alison Gurd (Montréal) (514) 288-2687 Carole Champion (London) 44 207 647 8451

GMP Securities L.P.

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