sponsoring brokers to the offer cardrona prospectus.pdf · 2019-04-02 · sterling biofuels...

Sterling Biofuels International Limited ACN 119 880 492

An offer of 35,000,000 Shares at an Offer Price of $1.00 per Share, payable in full on Application. Important Information This is an important

document that you should read in its entirety. If you do not understand it, you should consult your professional advisors.

P R O S P E C T U S

LEAD MANAGER AND CORPORATE ADVISOR

CARDRONA

SPONSORING BROKERS TO THE OFFER

CARDRONA CAPITAL PTY LTD MACQUARIE EQUITIES LIMITED BBY LIMITED

1 HEADING

The cover features the stylised oil drop that symbolises the key biodiesel product and the various stages of the journey from plantation to pump. The dominant yellow and dark green colours of the Sterling Biofuels logo are reminiscent of biofuels and their natural roots. The Sterling name refl ects the commitment of the Group to quality of product and its aspiration to succeed in achieving its corporate objectives.

1 KEY INFORMATION 22 LETTER FROM THE CHAIRMAN 63 INVESTMENT SUMMARY 84 OFFER DETAILS 125 COMPANY AND PROJECT OVERVIEW 166 BOARD OF DIRECTORS AND MANAGEMENT PROFILES 247 CORPORATE GOVERNANCE 288 FINANCIAL INFORMATION 329 INDEPENDENT ACCOUNTANT’S REPORT 4610 EXPERT REPORTS 5211 RISK FACTORS 9212 ADDITIONAL INFORMATION 9813 INTERESTS OF DIRECTORS, ADVISERS AND PROMOTERS 108

SchedulesGlossary of Terms 115Application Forms 117Corporate Directory Inside back cover

TABLE OF CONTENTS

1

Lodgement and listing This Prospectus is dated 11 August 2006 and was lodged with the ASIC on that date. Neither the ASIC nor the ASX take any responsibility for the contents of this Prospectus or the merits of the investment to which this Prospectus relates. The Company will apply to the ASX for listing and quotation of the Shares on the ASX within 7 days after the date of this Prospectus. No securities will be issued on the basis of this Prospectus later than 13 months after the date of this Prospectus.

Note to Applicants The Offer contained in this Prospectus does not take into account the individual investment objectives, financial situation and particular needs of each potential investor.

It is important that you read this Prospectus carefully and in full before deciding to invest in the Company. In particular, in considering the prospects of the Company, you should consider the risk factors that could affect the financial performance of the Company in light of your personal circumstances (including financial and taxation issues) and seek professional advice from your accountant, stockbroker, lawyer or other professional adviser before deciding to invest.

No person named in this Prospectus, nor any other person, guarantees the performance of the Company, the repayment of capital or the payment of a return on the Shares.

No person is authorised to give any information or make any representation in connection with the Offer which is not contained in this Prospectus. Any information or representation not so contained may not be relied on as having been authorised by the Company or the Directors.

No overseas offering This Prospectus does not constitute an offer or invitation in any place in which, or to any person to whom, it would not be lawful to make such an offer or invitation. No action has been taken to register or qualify the Shares or the Offer, or to otherwise permit a public offering of Shares, in any jurisdiction outside Australia. The distribution of this Prospectus outside Australia may be restricted by law and persons who come into possession of this Prospectus outside Australia should seek advice and observe any such restrictions. Any failure to comply with such restrictions may constitute a violation of applicable securities laws.

Electronic Prospectus This Prospectus is available in electronic form via www.sterlingbiofuels.com. The Offer constituted by this Prospectus in electronic form is available only to persons receiving this Prospectus in electronic form within Australia. Applications for Shares may only be made on the Application Form attached to or accompanying this Prospectus or in its paper copy form as downloaded in its entirety from www.sterlingbiofuels.com. Persons having received a copy of this Prospectus in its electronic form may, during the Offer Period, obtain a paper copy of the Prospectus (free of charge) by telephoning the Share Registry on 1300 652 787. The Corporations Act prohibits any person from passing on to another person the Application Form unless it is attached to or accompanies a hard copy of this Prospectus or the complete and unaltered electronic version of this Prospectus.

Exposure Period The Corporations Act prohibits the Company from processing applications in the 7 day period after the date of lodgement of the Prospectus. This period may be extended by ASIC by up to a further 7 days. This period is an exposure period to enable the Prospectus to be examined by market participants prior to the raising of funds. Applications received during the exposure period will not be processed until after the expiry of that period. No preference will be conferred on Applications received during the exposure period.

Photographs Photographs used in this Prospectus which do not have descriptions are for illustration only and should not be interpreted to mean that any person shown endorses the Prospectus or its contents or that the assets shown in them are owned by the Company.

Financial amounts and time Money as expressed in this Prospectus is in Australian dollars unless otherwise indicated. All times stated are Australian Western Standard Time (Perth time).

Glossary Certain terms and abbreviations used in this Prospectus have defined meanings which are explained in the Glossary of Terms in the Schedules.

IMPORTANT NOTICES

STERLING BIOFUELS INTERNATIONAL LIMITED PROSPECTUS 20062

S E C T I O N 1K E Y I N F O R M A T I O N

1 KEY INFORMATION

1.1 Investment Highlights

Opportunity to invest in the production of a Renewable and Environmentally Friendly Fuel

• Biodiesel is a renewable, non toxic, rapidly biodegradable fuel that can be produced from a variety of oilseed crops. Biodiesel helps lower particulate exhaust emissions and in a low percentage blend, can be used without any modifi cation to existing diesel engines.

• Sterling Biofuels is set to become an emerging participant in the biofuels industry, with its planned construction of a 100,000 tonnes per annum Biodiesel Plant on the East Coast of Sabah, Malaysia.

Proven Management and Industry Experience

• Sterling Biofuels’ experienced management team has extensive background in the Palm Oil industry (the intended Biodiesel feedstock), management and completion of greenfi eld projects, supply, logistics and the administering and marketing of commodity products.

Licenses and Approvals in Place and Pioneer Tax Status Granted

• Sterling Biofuels has obtained all primary licences and approvals required to construct and operate a Biodiesel facility in Sabah, Malaysia. All secondary licences have either been obtained or processes put in place for such licences to be obtained throughout the design and construct phases.

• Sterling Biofuels has been granted Malaysian Pioneer Tax Status.

Proven Technology

• Sterling Biofuels has access to proven biofuels technology through its arrangements with one of the largest international oleochemical groups, Desmet Ballestra. Desmet Ballestra has supplied or is currently supplying 20 Biodiesel plants worldwide.

• Under a fi xed lump sum contract, Desmet Ballestra will supply to Sterling Biofuels a Biodiesel production plant capable of producing up to 100,000 tonnes per annum of Biodiesel.

3


Quality Feedstock and Product Offtake Arrangements in Place

• The Company has secured a 3 year long term contract for the supply of RBD Palm Olein as feedstock for the Plant. RBD Palm Olein is preferred because of its premium quality which contributes to production of a high quality Biodiesel output.

• The Company has secured a marketing and offtake arrangement with an international energy trader for the marketing and distribution of 100% of Biodiesel produced from the Plant. The arrangement gives the Company access to a global distribution network and enables it to benefi t from optimal logistics and pricing strategies. For the duration of the arrangement, the international energy trader will be trading exclusively with the Company in respect of Malaysian Biodiesel products.

Access to Existing Infrastructure, Project Management and Construction Contractors

• The Biodiesel facility location is in close proximity to all existing infrastructure including feedstock supply, deep water ports, a dedicated developing State sponsored Palm Oil industrial park and international project management and construction resources.

High Fossil Fuel Prices and Strong European Demand

• Rising fossil fuel prices, potential longer term supply issues and environmental concerns are seeing Biodiesel continue to emerge as a real contributor to the growing list of alternative fuels options.

• Sterling Biofuels’ target market, Europe, is by far the largest Biodiesel market worldwide. This is primarily driven by strong legislative backing for the use of alternative fuels, taxation incentives, high penetration of diesel-powered vehicles, distributor support and end user acceptance.

• The Company is forecasting production for the 2008 fi nancial year of 95,000 tonnes to generate A$99.8 million in revenue and deliver A$24.6 million in NPAT. These forecasts assume production at 95% of nameplate capacity and includes a non-cash expense of A$1.89 million associated with the issue of Performance Rights and Options.

1 KEY INFORMATION (CONTINUED)

5

1.2 Investment Risks

Applicants should be aware that there are risks associated with any investment in the share market. In addition, there are a number of risk factors specifi c to the Company, the industries which the Company operates and the general business environment. Such risk factors may impact on the performance and fi nancial position of the Company. Key areas of risk include (but are not limited to):

• Project construction delay and cost overruns;• failure of the Project to achieve performance specifi cations;• change in regulatory support for biofuels;• downturn in demand for Biodiesel or signifi cant falls in fossil fuel prices;• disruption to feedstock supplies or increase in feedstock pricing; or• changes in Malaysian Pioneer Tax Status requirements.

Applicants should read this Prospectus in full to appreciate the risks associated with an investment in the Company. Details of the key risk factors of which Applicants should be aware are set out in Section 11.

1.3 Key Dates

KEY DATES1 OFFER STATISTICS

Opening Date 21 August 2006 Number of Shares offered 35,000,000

Closing Date 11 September 2006or such later date as determined by the Board

Offer Price $1.00 per Share

Expected despatch of holding statements

25 September 2006 Shares on issue after listing 65,000,000

Expected quotation of Shares on the ASX

28 September 2006 Market capitalisation at Offer Price (undiluted)

$65 million

Notes:1. This timetable is indicative only and Applicants are encouraged to submit their Applications as early as possible. The Company has the right to vary the Closing Date including by closing the Offer early, to accept late Applications, or vary any other date and time without prior notice.

The Offer is not underwritten. The minimum subscription under the Offer is 35,000,000 Shares to raise $35,000,000. No Shares will be allotted or issued until the Offer has reached its minimum subscription.


S E C T I O N 2L E T T E R F R O M T H E C H A I R M A N

7

2 LETTER FROM THE CHAIRMAN

Dear Investor,

On behalf of the Directors of Sterling Biofuels International Limited, I am pleased to present our Company’s Prospectus to you and invite you to invest in the Company.

Sterling Biofuels, through its wholly owned subsidiary SPC Biodiesel Sdn Bhd, is proposing to establish a Biodiesel plant capable of producing 100,000 tonnes of Biodiesel per year.

Biodiesel is a non-toxic, biodegradable fuel that is produced from renewable resources. It helps lower particulate exhaust emissions and is seen as an alternative to mineral diesel fuel.

The proposed feedstock for the Plant will be refined, bleached and deodorized palm olein. It is preferred because of its premium quality which contributes to the production of high quality Biodiesel. The Company has entered into a 3 year long term contract to secure its supply of feedstock.

The Biodiesel Plant will be strategically located in a purpose built industrial park being developed in Lahad Datu in the Malaysian state of Sabah. This will allow the Plant to take advantage of dedicated facilities, a deep water port and established palm oil industry infrastructure. Sabah is the largest palm oil producing state in Malaysia.

The Plant equipment and proven biodiesel production technology will be supplied by an international oleochemical equipment supplier whilst the Balance of Plant will be constructed by an experienced Malaysian contractor. An internationally affiliated consulting engineering company will project manage the entire construction and commissioning of the Plant.

In addition, the Company has secured an Offtake Agreement with an international energy trader who will purchase 100% of the Biodiesel produced by the Plant.

A Board and management team with the requisite balance of skills and experience has been put in place to undertake this Project.

The Offer presented by the Prospectus seeks to raise $35,000,000 to establish the Plant and provide enough working capital for the Company.

The Prospectus contains detailed information about the Company and Project including investment risks. I encourage you to read it carefully and seek appropriate professional advice before committing to invest.

The Directors join me in commending this Offer to you and we look forward to welcoming you as a shareholder in the Company.

Yours sincerely,

ALISTER MAITLANDChairman


S E C T I O N 3I N V E S T M E N T S U M M A R Y

9

3 INVESTMENT SUMMARY

This investment summary is not intended to provide full information on the Shares offered by this Prospectus. In deciding to apply for Shares, you should read this Prospectus carefully in full. If you are in doubt as to the course you should follow, please consult your professional advisers immediately.

3.1 Overview

Sterling Biofuels proposes to construct and operate a Biodiesel plant capable of producing 100,000 tonnes of Biodiesel per year. The Plant will be located in Lahad Datu in the Malaysian state of Sabah. Project implementation has commenced and commercial production is targeted for 1 July 2007.

The Company has a manufacturing licence issued by the Malaysian Government and contracts relating to the construction of the Plant, the purchase of feedstock and the sale of Biodiesel are in place.

3.2 Purpose of Offer and Use of Funds

The purpose of the Offer is to raise funds:

• to provide the Company with sufficient capital to build and commission the Plant;• to provide working capital for the Company; and• to pay the expenses of the Offer.

The Company will use funds received from the Offer for the following:

Use of funds A$Capital costs (Note 1) 21,337,000Working capital (Note 2) 10,463,000Equity raising fees 1,750,000Other costs of the Offer 1,450,000Total 35,000,000

Note 1: Includes contingency of $1,632,000.

Note 2: Working capital such as preliminary expenses for construction and commissioning phase (including repayment of related party payables), initial feedstock supplies and

inventory of finished products.

As part of the Offer, $10.46 million will be raised and set aside as working capital for the purposes of the Project. The Directors are of the opinion that, on completion of the Offer, this will provide the Company with enough working capital to carry out its stated objectives.

3.3 Summary Financial Information

The Directors have prepared forecasts for the financial years ending 30 June 2007 and 30 June 2008.

A summary of key forecast financial data is set out below:

FY 2007 (A$ ‘000) FY 2008 * (A$ ‘000)Revenues - 99,818EBITDA (4,222) 26,143NPAT** (3,817) 24,621

* Applicants are referred to Section 8 for full details on the material assumptions used in the preparation of the financial forecasts, as well as Section 11 setting out the

various risks that may affect the Company’s financial performance.

** Includes non-cash expense of A$1.67 million (FY 2007) and A$1.89 million (FY 2008) associated with the issue of Performance Rights and Options.


3 INVESTMENT SUMMARY (CONTINUED)

3.4 Dividend Policy

The payment and amount of any future dividends will depend upon the availability of distributable earnings, operating results, available cashflow, financial condition, taxation position, future capital requirements and franking credit position as well as general business and financial conditions and any other factors the Directors may consider relevant.

3.5 Description of the Offer

This Prospectus offers up to 35,000,000 Shares at an Offer Price of $1.00 per Share.

Applications from the public must be for a minimum of 2,000 Shares. Full details of the Offer are set out in Section 4.

The Company will apply to the ASX for listing and quotation of the Shares on the ASX within 7 days after the date of this Prospectus. The Offer is conditional on the ASX granting permission for all of the Shares to be listed for quotation within 3 months after the date of this Prospectus.

The Company reserves the right to cancel the Offer or to vary the Closing Date, including by closing the Offer early. Applicants are encouraged to submit their Application Forms as soon as possible.

3.6 Underwriting and Minimum Subscription

The Offer is not underwritten.

The minimum subscription under the Offer is 35,000,000 Shares to raise $35,000,000. No Shares will be allotted or issued until the Offer has reached its minimum subscription. If the minimum subscription of the Offer has not been achieved within 3 months after the date of this Prospectus, all Application Monies will be refunded without interest in accordance with the Corporations Act.

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3.7 Investment Risks

Applicants should be aware that there are risks associated with any investment in the share market. In addition, there are a number of risk factors specific to the Company, the industries in which the Company operates and the general business environment. Such risk factors may impact on the performance and financial position of the Company. Key areas of risk include (but are not limited to):

• Project construction delay and cost overruns;• failure of the Project to achieve performance specifications;• change in regulatory support for biofuels;• downturn in demand for Biodiesel or significant falls in fossil fuel prices;• disruption to feedstock supplies or increase in feedstock pricing; or• changes in Malaysian Pioneer Tax Status requirements.

Applicants should read this Prospectus in full to appreciate the risk factors associated with an investment in the Company. Details of the key risk factors of which Applicants should be aware are set out in Section 11.

3.8 How to Apply for Shares

Details on how to apply for Shares are included in Section 4.4 of this Prospectus. If you have any questions about how to invest in the Company, you should contact your stockbroker, solicitor, accountant or other independent financial adviser.

3.9 Enquiries

All enquiries in relation to this Prospectus should be directed to the Share Registry on 1300 652 787. The shareholder information line will be open from 9:00am to 5:00pm (Perth time), Monday to Friday.


S E C T I O N 4O F F E R D E T A I L S

13

4 OFFER DETAILS

4.1 The Offer

This Prospectus offers 35,000,000 Shares at an Offer Price of $1.00 per Share.

The minimum subscription under the Offer is 35,000,000 Shares at an Offer Price of $1.00 per Share to raise $35,000,000. Applications must be for a minimum of 2,000 Shares and thereafter in multiples of 1,000 Shares.

Payment in respect of the Shares is to be made in full on Application. The rights of Shareholders are detailed in Section 12.2.

4.2 Capital Structure

Existing Shares on issue prior to the Offer 30,000,000Number of Shares available under the Offer 35,000,000Total Shares on issue at completion of the Offer 65,000,000Market capitalisation at the Offer Price A$65,000,000Performance Rights on issue * 11,450,000Options on issue ** 1,550,000

* 5,450,000 Performance Rights issued to Key Employees and 6,000,000 Performance Rights issued to the offtaker. Performance Rights are converted to ordinary shares on achievement of certain performance benchmarks including the Company meeting forecast profits. Refer to Section 12.3 for details.

** 1,550,000 Options issued to Directors and the Company Secretary/Chief Financial Officer and are exercisable over a 5 year period at varying times and prices ranging from A$1.00 to A$1.40. Refer to Section 12.4 for details.

Upon completion of the Offer the shareholding of the Company will be as follows:

Shareholding Structure

Number of Shares (million) %Existing Shareholder 30.00 46.15New Shareholders pursuant to the Offer 35.00 53.85Total at completion of the Offer 65.00 100.00

Effect of Dilution

Number of Shares (million) %Existing Shareholder 30.00 38.46New Shareholders pursuant to the Offer 35.00 44.87Performance Rights on issue 11.45 14.68Options on issue 1.55 1.99Total 78.00 100.00

4.3 Indicative Timetable

Date of Prospectus 11 August 2006Opening Date 21 August 2006Closing Date 11 September 2006 or such later date as determined by the Board Shares expected to be allotted to successful applicants 21 September 2006Expected despatch of holding statements 25 September 2006Expected quotation of Shares on the ASX 28 September 2006

All dates are subject to change and are indicative only. The Company has the right to vary these dates, without prior notice, including the right to close the Offer early, to withdraw the Offer or to accept late Applications.

Applicants are encouraged to submit their Application Forms as early as possible, as the Offer may be closed as soon as the full subscription is reached.


4 OFFER DETAILS (CONTINUED)

4.4 How to Apply for Shares

Application for Shares may only be made on the Application Form attached to and forming part of this Prospectus. Applications must be for a minimum of 2,000 Shares and thereafter in multiples of 1,000 Shares.

Detailed instructions on how to complete the Application Form are set out on the reverse of the Application Form.

An Application must be made by completing a paper copy of the Application Form and must be accompanied by payment in Australian currency of $1.00 per Share. No brokerage or stamp duty is payable by Applicants under the Offer.

Cheques or bank drafts must be made payable to “Sterling Biofuels International Limited Share Offer” and should be crossed and marked “Not Negotiable”. The Company will not accept an Application Form electronically.

Completed Application Forms and Application Monies must be returned prior to the Closing Date to:

Applicants with questions on how to complete the Application Form or who require additional copies of the Prospectus can contact the Share Registry on 1300 652 787 or visit the website www.sterlingbiofuels.com.

4.5 Issue of Shares

The Company reserves the right to issue Shares to Applicants in full, to issue a lesser number of Shares than those for which an Application has been made, to accept a late Application or to decline an Application. Where no allocation is made to a particular Applicant or the number of Shares allocated is less than the number applied for by an Applicant, surplus Application Monies will be returned to that Applicant. No interest will be paid on refunded Application Monies. Any interest earned on Application Monies prior to issue or return will be, and will remain, the property of the Company.

Successful Applicants will be notified in writing of the number of Shares allocated to them as soon as possible following the allocation made after the Closing Date. It is the responsibility of Applicants to confirm the number of Shares allocated to them prior to trading in Shares. Applicants who sell Shares before they receive notice of the Shares allocated to them do so at their own risk.

4.6 Underwriting and Minimum Subscription

The Offer is not underwritten.

The minimum subscription under the Offer is 35,000,000 Shares at an Offer Price of $1.00 per share to raise $35,000,000. No Shares will be allotted or issued until the Offer has reached its minimum subscription. If the minimum subscription of the Offer has not been achieved within 3 months after the date of this Prospectus, all Application Monies will be refunded without interest in accordance with the Corporations Act.

4.7 ASX Listing

An application will be made to the ASX not later than 7 days after the date of this Prospectus for the Company to be admitted to the Official List and for official quotation of the Shares on the ASX.

The fact that the ASX may admit the Company to the Official List is not to be taken as an indication of the merits of the Company or the Shares offered for subscription. Official quotation of Shares, if granted, will commence as soon as practicable after the issue of initial shareholding statements to successful Applicants.

If permission is not granted for the official quotation of the Shares on the ASX within 3 months of the date of this Prospectus, all Application Monies received will be refunded without interest as soon as practicable in accordance with the requirements of the Corporations Act.

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4.8 CHESS

The Company will apply for the Shares to participate in CHESS. Applicants who are issued Shares under this Offer will receive shareholding statements, in lieu of share certificates, that set out the number of Shares issued to each successful Applicant.

The statement will also provide details of the Shareholders’ HIN (in the case of a holding on the CHESS sub-register) or SRN (in the case of a holding on the issuer sponsored sub-register). Shareholders will be required to quote a HIN or SRN, as applicable, in all dealings with a stockbroker or the Share Registry. Further statements will be provided to Shareholders which will reflect any changes in the shareholding in the Company during a particular month. Additional statements may be requested at any time, although the Company reserves the right to charge a fee.

4.9 Overseas Applicants

No action has been taken to register or qualify the Shares, or the Offer, or otherwise to permit the public offering of the Shares, in any jurisdiction outside Australia.

The distribution of this Prospectus within jurisdictions outside Australia may be restricted by law and persons into whose possession this Prospectus comes should inform themselves about and observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of those laws.

This Prospectus does not constitute an offer of Shares in any jurisdiction where, or to any person to whom, it would be unlawful to issue this Prospectus.

It is the responsibility of any overseas Applicant to ensure compliance with all laws of any country relevant to his or her application. The return of a duly completed Application Form will be taken by the Company to constitute a representation and warranty that there has been no breach of such law and that all necessary approvals and consents have been obtained.

4.10 Enquiries in relation to the Offer and Taxation Consequences

This Prospectus provides information for potential investors in Sterling Biofuels and should be read in its entirety.

Australian taxation consequences arising from the Offer will be dependent on the individual Applicant’s circumstances (see also Section 13.7). If, after reading this Prospectus, you have any questions regarding any aspect of an investment in Sterling Biofuels, you should contact your stockbroker, accountant or independent financial adviser immediately.

4.11 Withdrawal

The Company reserves the right not to proceed with the Offer at any time before the issue of Shares to successful Applicants for any reason. If the Offer does not proceed, Application Monies will be refunded. No interest will be paid on any Application Monies refunded as a result of the withdrawal of the Offer.

4.12 Restricted Securities

As a condition of admitting the Company to the Official List, the ASX is likely to classify certain Shares held by the Existing Shareholder and certain Options and Performance Rights as restricted securities.

The Existing Shareholder and the Directors have agreed to enter into Escrow Agreements with the Company. The effect of the Escrow Agreements is that the restricted securities cannot be dealt with for 24 months from the Listing Date, except with ASX’s consent under either:

• an offer under a takeover bid (as defined in the Corporations Act) in respect of the Shares; or• a merger by way of scheme of arrangement under the Corporations Act.

Further details on these Escrow Agreements are set out in Section 12.8.


S E C T I O N 5C O M P A N Y A N D P R O J E C T O V E R V I E W

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5 COMPANY AND PROJECT OVERVIEW

5.1 About Sterling Biofuels

(a) Introduction

Sterling Biofuels International Limited (ACN 119 880 492) is a public company limited by shares incorporated under the Corporations Act.

Through its wholly owned Malaysian subsidiary, SPC Biodiesel, Sterling Biofuels will construct and operate a 100,000 tonne per year Biodiesel Plant in Lahad Datu in the Malaysian state of Sabah.

Project implementation has commenced and commercial production is targeted for 1 July 2007.

(b) Licences and Taxation Benefits

SPC Biodiesel has obtained relevant licences from the Malaysian Government and the Malaysian Palm Oil Board.

In addition, the Malaysian Government has granted SPC Biodiesel pioneer tax status subject to certain conditions, details of which are set out in Section 12.7. The effect of having pioneer tax status is to exempt SPC Biodiesel from income tax for the first 5 years of operations. The benefits of this tax free status flow through to Sterling Biofuels.

SPC Biodiesel is also eligible to apply for tax exemptions in respect of import duties, excise duties and sales tax levied on plant and machinery.

5.2 About Biodiesel

(a) Overview

Biodiesel is a clean burning alternative to mineral diesel fuel. It contains no minerals and can be produced from a variety of edible oils or fats (such as palm oil, rapeseed or soybean oil). It is simple to use, biodegradable, non-toxic and produced from renewable resources. Biodiesel is produced by a process called transesterification in which various oils (triglycerides) are converted into methyl esters through a chemical reaction with methanol in the presence of a catalyst, such as sodium methylate. The conversion process results in pure Biodiesel (B100) being produced as well as glycerine (crude) as a by-product.

Biodiesel can be used in its pure form (B100) or splash-blended (mixed) with mineral diesel. The most common blends currently in use are between B5 and B20. Concentrations at the B5 level can often be used in modern compression-ignition (diesel) engines without any modifications.

Various countries have established their individual standards for Biodiesel. The two major standards are ASTM D-6751 for the United States and the European Committee for Standardisation requirement under EN 14214.

(b) Benefits of Biodiesel

Biodiesel performs similarly to mineral diesel with comparable economy, horsepower and combustion and has the following advantages:

• Biodiesel is a renewable fuel, non-toxic and rapidly biodegradable;• Biodiesel boasts approximately 50 percent less lifecycle CO2 emissions than mineral diesel;• Biodiesel helps lower particulate exhaust emissions;• in a blend with low-sulphur diesel, Biodiesel improves lubricity;• has a higher cetane number than mineral diesel, thus ensuring quick engine start-up in cold climates;• in a low percentage blend, it can often be used without modification to the engine;• in a low percentage blend, it can be supplied using the existing fuel supply infrastructure through standard diesel pump equipment;

and• its high flashpoint makes it a safer fuel to handle than any conventional fuel.


(c) The Biodiesel Market

Europe is by far the largest Biodiesel market worldwide. Growth in the European market is driven by, among other factors:

• Growing penetration of diesel powered cars – in 2004 more than 50% of new cars sold were diesel powered.

• Political and legislative support for biofuels - the European Union, which has ratified the Kyoto Protocol, has issued biofuel targets to member states. As a consequence of these targets some member states have introduced mandatory blending quotas and there is general political backing for the production and sale of biofuels.

• Compatibility with existing fuel infrastructure – the ease of use of Biodiesel in the existing fuel infrastructure and vehicle fleet has been a major driver behind its rapidly expanding use. This gives it a substantial advantage over other “alternative fuels” such as LPG or natural gas.

Other developing markets are the United States and Australia with emerging markets in parts of Asia.

The American National Biodiesel Board estimated that 75 million gallons (around 245,000 tonnes) of Biodiesel were produced in the country in 2005. This figure represents a 150 percent growth over the previous year. Government tax incentives, competitive pricing (vis-à-vis mineral diesel), increased penetration of diesel vehicles and increasing end-user awareness are combining to promote Biodiesel consumption in the US.

The Company has commissioned a report from Frost & Sullivan which provides a detailed assessment of the Biodiesel market with particular focus on the European market as well as the developing market in the United States. This report is contained in Section 10 of this Prospectus.

5.3 About the Project

(a) Strategic Location

SPC Biodiesel has acquired 10 acres of land within a purpose-built industrial park, known as the Lahad Datu Palm Oil Industrial Cluster, for the construction of the Plant. This industrial park is being developed by the Sabah state government on the east coast of Sabah and is dedicated to palm oil related industries.

The location of the Plant within the industrial park in Lahad Datu will allow SPC Biodiesel to take advantage of dedicated facilities, a deep water port and well established refining and oil handling infrastructure.

5 COMPANY AND PROJECT OVERVIEW (CONTINUED)

Lahad Datu

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(b) Feedstock Supply

The location of the Plant in the hub of the Palm Oil region in Sabah will also facilitate the Company’s access to feedstock.

Malaysia is the largest producer of Palm Oil in the world producing approximately 15 million tonnes in 2005. Closing stocks of Palm Oil in Malaysia reached 1.6 million tonnes in 2005. Sabah – where the Plant will be located – accounts for around 30% of the total planted Palm Oil area in Malaysia.

Notwithstanding the availability of Palm Oil in Sabah, SPC Biodiesel has entered into a 3 year feedstock supply contract for RBD Palm Olein with a major refinery, Lahad Datu Edible Oils Sdn Bhd. This contract may be extended by mutual agreement for a further 3 years. Details of this feedstock supply contract are set out in Section12.5(b).

The purchase price of RBD Palm Olein under the feedstock supply contract is based on the monthly average RBD Palm Olein price reported by the Malaysian Palm Oil Board. The annual average price of RBD Palm Olein in 2005 was US$395 per tonne.

By way of comparison, the annual average prices in 2005 of RBD Palm Oil and RBD palm stearin were US$384 and US$343 per tonne respectively. Whilst the Plant is able to use such lower cost palm based feedstock, RBD Palm Olein is preferred because of its premium quality. This is in line with the Company’s focus on ensuring that it consistently produces high quality Biodiesel.

For the purpose of the Forecast, the assumed purchase price of feedstock is RM1,750 per tonne (US$473 per tonne).

The Company has also commissioned a report from Frost & Sullivan in respect of Palm Oil feedstock supply. This report is contained in Section 10 of this Prospectus.

According to Frost & Sullivan, Biodiesel producers in South East Asia using Palm Oil as feedstock enjoy a substantial cost advantage over European based producers using rapeseed oil as feedstock. It estimates this cost advantage to be about US$360 per tonne based on a Palm Oil price of US$403 per tonne.

Based on this estimate, the Company is expected to enjoy a cost advantage over European based producers using rapeseed as feedstock despite using higher cost RBD Palm Olein as feedstock.

(c) Offtake Agreement

SPC Biodiesel has signed an offtake agreement for the sale of its entire production of Biodiesel to an international energy trader for a period of 3 years. This contract may be extended by mutual agreement for a further 2 years.

Under the Offtake Agreement, the energy trader is committed to buy 100,000 tonnes a year of Biodiesel produced by SPC Biodiesel. Biodiesel sold will be on an FOB Lahad Datu basis and secured by a letter of credit.

The Biodiesel offtake price is to be calculated using a formula based on the best available market price of Biodiesel at the relevant time after deducting freight and other selling related costs. By way of example, the following table illustrates this calculation based on a market price of €800 per tonne:

€/tonne Biodiesel market price 800Less freight and other selling related costs 181Net selling price FOB Lahad Datu1 619

Note 1: This is the price used for the purposes of the Forecast, see Section 8.4

Under the Offtake Agreement, the offtaker will provide SPC Biodiesel with opportunities for optimization of freight and storage/blending operations wherever possible. In addition, the offtaker may develop hedging strategies to secure advantageous price mechanisms where appropriate.

Under the Offtake Agreement, SPC Biodiesel will offer any production in excess of 100,000 tonnes to the offtaker. It also has the exclusive right to sell to the offtaker any Biodiesel sourced from other producers in Malaysia. This exclusive right will position SPC Biodiesel to take advantage of the growth outlook for Biodiesel demand. According to Frost & Sullivan, the growth outlook for Biodiesel is substantial.

Details of the Offtake Agreement are set out in Section 12.5(c).

The Company has also comissioned a report from Frost & Sullivan in respect of the Biodiesel market. This report is contained in Section 10 of this Prospectus.


(d) Project Management and Technology

The illustration below depicts the contract and project management structure that has been put in place to ensure timely delivery of the Project.

Project Management

The Company has engaged SMEC (Malaysia) Sdn Bhd (the “Project Manager”) as project manager. The Project Manager is a member of the SMEC International Australia network, an international engineering consulting and project management organisation. The Project Manager will provide technical support and day-to-day coordination of construction activities and will ensure timely implementation of the Project during the construction period. Its scope of responsibility includes:

• supervision, coordination and management of Project implementation;• review basic design of the process engineering;• prepare basic design for the Balance of Plant and utilities;• review and monitor compliance with environmental requirements ;• monitor quality, safety, progress and costs through the engineering, procurement and construction phases;• monitor project financials;• monitor and assist with pre-commissioning, commissioning and test run; and• assist in project handover.

Details of the project management agreement are set out in Section 12.5(f)


Desmet BallestraTECHNOLOGY SUPPLIER

Ikatan InnovasiBALANCE OF PLANT CONTRACTOR

PROJECT OWNER

SMEC MalaysiaPROJECT MANAGER

21

Technology Supplier

SPC Biodiesel will have access to proven biofuels technology through its equipment supply contract with De Smet Engineering (SEA) Pte Ltd, part of the Desmet Ballestra Group, an international supplier of oleochemical equipment.

Desmet Ballestra Group is a world leader in supplying Biodiesel technology. It has supplied or is currently supplying 20 Biodiesel plants in Western Europe, Asia, North America and South America with total current and expected capacity of approximately 2 million tonnes. These include 5 plants in Malaysia (including that to be built for SPC Biodiesel).

There are currently 4 Desmet Ballestra plants already operational in the world. Importantly, Desmet Ballestra has supplied or is supplying Biodiesel plants in Malaysia which use Palm Oil as feedstock.

Key features of the De Smet contract include the following:

• supply of a 100,000 tonnes per annum multi-feedstock Biodiesel plant;• fixed price contract;• delivery of equipment within 7 months of deposit and issuance of letter of credit;• performance guarantees in relation to capacity, yield and Biodiesel quality;• provision of supervisory and technical support during construction, testing and commissioning;• training of operational personnel; and• provision of technical support for minimum 18 months after commissioning.

The Company has commissioned a report by the Austrian Biofuels Institute on the Desmet Ballestra Biodiesel technology. According to the Austrian Biofuels Institute, Biodiesel produced by the Desmet Ballestra technology can achieve quality levels that cannot be attained by many Biodiesel plants in Europe. This report is reproduced in Section 10 of this Prospectus.

In particular, the Desmet Ballestra technology is able to meet European quality standard EN 14214 and American quality standard ASTM D-6751 (in each case, other than specifications for cold filter plugging point or CFPP).

The EN 14214 standard establishes specifications for Biodiesel for diesel engines. Pure Biodiesel (B100) that meets this standard can be used unblended in a diesel engine, or blended with mineral diesel to produce a blend in accordance with EN 590, the diesel fuel specification. This standard allows blends of up to 5 percent to be considered as standard diesel, with no special labelling required.

To be usable in individual markets Biodiesel must also meet CFPP specifications for that market. The CFPP value is a measure of the temperature at which certain fractions in the oil solidify and block the filter, resulting in the engine arresting due to diesel shortage. Biodiesel produced from feedstocks such as tallow and Palm Oil have a relatively high CFPP compared to that derived from rapeseed oil or soybean oil which means it can be used in B100 form or in high proportion blends only in warm climates. In practice Biodiesel produced from high CFPP feedstocks will generally be blended in low proportions (B5 or below) and in these proportions its cold flow properties are generally indistinguishable from mineral diesel.

Details of the equipment supply contract are set out in Section 12.5(d)

The Group has selected a continuous flow process technology. This means that there is a continuous flow of raw material into the Plant which offers the optimum combination of capital, efficiency and operating costs.

The diagram on the following page describes the stages of the continuous production process.


Biodiesel Production Process

Balance of Plant

In addition to the process plant equipment, Sterling Biofuels has contracted a Malaysian contractor, Ikatan Innovasi, to construct the Balance of Plant on a turnkey basis. Ikatan Innovasi’s scope of work includes civil and structural and installation works, mechanical and electrical works, tank farms and utilities. Ikatan Innovasi is an established contractor that has provided construction services in the oil and gas industry for over 10 years. Its core competencies include fabrication and installation of pipelines, installation of industrial plant and equipment, petrochemical storage tank design and construction, and structural steel fabrication and erection works.

The construction contract, which is based on the FIDIC Conditions of Contract, is a fixed price contract and includes liquidated damages for delay.

Details of the Balance of Plant contract are set out in Section 12.5(e).

(e) Other Matters

Methanol

The major raw material other than feedstock is methanol which comprises about 10% of the raw material input in the production process. SPC Biodiesel has entered into a contract to obtain its methanol requirements from Ancom Kimia Sdn Bhd, a major methanol supplier.


OIL DRYING

REFINED OILS

TRANSESTERIFICATION

BIODIESEL GLYCERINE@ 82-85 %

SEPARATION

Water

Water

Sodium Methylate (catalyst)

Methanol

Citric Acid

Fresh Methanol

Water

Dry Methanol

Wet Methanol

Wet Methanol

Crude Glycerine

HCl NaOH

Waste Water

Dry Oil

ReactionMixture

Methylester

GLYCERINE TREATMENT

CITRIC ACID SOLUTION

PREPARATION

FINAL FLASHMETHANOL

DISTILLATION

23

Glycerine

The Biodiesel production process produces crude glycerine as a by-product. The crude glycerine produced will be sold on the open market. It is possible to refine crude glycerine to pharmaceutical grade in order to obtain higher prices. However, SPC Biodiesel does not intend to do so during the early years of operation. This is to allow the Company to remain focussed on ensuring that it consistently produces high quality Biodiesel.

Insurance arrangements

SPC Biodiesel intends to take out appropriate insurances to cover various risks during construction and operations of the Project. These may include contractor’s all risk insurance, advance loss of profits insurance, marine cargo insurance, industrial all risk insurance and business interruption insurance.

5.4 Indicative Project Implementation Schedule

Implementation of the Project has commenced and commercial production is targeted for 1 July 2007. The indicative Project implementation schedule is as follows:

Milestone Target DatePre-Engineering July 2006Mobilisation and commence construction From August 2006Mechanical completion April 2007Commissioning May 2007Start commercial production 1 July 2007

5.5 Growth Opportunities

Sterling Biofuels has positioned itself to take advantage of growth opportunities while remaining focused on its core business of Biodiesel production and marketing.

The projected increase in demand for Biodiesel may provide Sterling Biofuels with the opportunity of expanding its production capacity in the foreseeable future. The Company has taken steps to ensure that it is ready to respond to such opportunities including the following: • Additional land for new facility or expansion of proposed facility

Sterling Biofuels has acquired 10 acres of land for the Project which is in excess of what is required for the Plant. This excess of about 5 acres will allow expansion of production capacity on a timely basis in response to market demand. Should the Plant expand, the Company will benefit from further economies of scale and take advantage of the dedicated infrastructure within the developing Lahad Datu Palm Oil Industrial Cluster.

• Ability to secure supply of feedstock

Sterling Biofuels has harnessed a management team that has an excellent network within the Palm Oil industry in Sabah which positions it well to secure additional supply of feedstock for any expansion in production capacity. The location of the Plant and additional land in the hub of Palm Oil country in Sabah allows geographic access to a large proportion of Palm Oil produced in Sabah as a primary source of feedstock supply.

• Global offtake strategy The Offtake Agreement will give the Group access to a global distribution network and enable it to benefit from optimal logistics and pricing strategies. This agreement will potentially give the Group significant competitive advantages in a fast developing growth industry. These include:

• ability to respond quickly to market developments (such as changing tax structures) so as to optimize market opportunities;• taking advantage of cyclical factors (such as weather) to maximise returns;• ability to market a sizable inventory of Biodiesel without corresponding capital commitments; and• leveraging on a global marketing network to enhance growth opportunities beyond its own production capacity.


S E C T I O N 6B O A R D O F D I R E C T O R S A N D M A N A G E M E N T P R O F I L E S

From left to right.Adam Sierakowski - Non-Executive DirectorShariffuddin Khalid - Non-Executive DirectorCRS Paragash - Group Managing DirectorAlister T Maitland - ChairmanAndrew Phang - Group Executive DirectorTony Walsh - Company Secretary/Chief Financial Officer

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6 BOARD OF DIRECTORS AND MANAGEMENT PROFILES

The Board and management comprise individuals with an appropriate mix of skills and experience.

6.1 Board of Directors

Non-Executive ChairmanAlister T Maitland, FAIM SFFin FAICD BCom

Alister Maitland is a former Executive Director of the ANZ Banking Group Ltd. His long and distinguished banking career enabled him to garner a wealth of banking experience in international markets including Asia, the Middle East, Europe and the United States. His professional experience has included overseeing global business expansion, internal and external consulting and treasury projects.

He has been a member of several Federal Government Advisory Bodies, including the White Paper on Foreign Policy and Trade and a member of the Trade Policy Advisory Council.

He is the Chairman or non-executive director of a number of companies (some are ASX listed) covering a wide range of activities including property services, mining and health. He is an adjunct professor of global sustainability at the Royal Melbourne Institute of Technology.

Group Managing DirectorCRS Paragash, FCA (England & Wales)

CRS Paragash is a Fellow of the Institute of Chartered Accountants (England & Wales) and a member of the Malaysian Institute of Chartered Accountants. He has had a long association with the plantations industry and, in particular, the Palm Oil industry. His considerable experience in dealing with financial, operational and logistical issues while with the plantations division of Sime Darby Bhd (an international conglomerate) in Sabah and in other business ventures enables him to combine sound technical skills with a practical, hands on approach to general management. He has been a successful private equity investor involved in infrastructure and property for over 15 years. He is currently the major shareholder of Sandakan Power Corporation Sdn Bhd, an independent power producer in Sabah that has a 21-year concession from the state utility to supply electricity into the state electricity grid.

As Managing Director, he will be responsible for implementing the policies and strategies approved by the Board. He will have overall responsibility for the management of the Sterling Biofuels group of companies focusing on the strategic direction of the Group and its growth strategies. In addition, he will oversee the development of Sterling Biofuels’ offtake strategy as well as potential expansion of its Biodiesel production operations.

Group Executive DirectorAndrew Phang, FFin LLM (Melb) LLB (Syd)

Andrew Phang is a Fellow of the Financial Services Institute of Australasia. A lawyer by training, he is a member of the Bar in New South Wales, Australia as well as in Malaysia. He practised law in Australia and Malaysia before joining an investment bank in Malaysia. During the 1997-98 Asian financial crisis, he was invited to become a member of the project team that established Danaharta, Malaysia’s national non-performing loans resolution agency, and was subsequently part of the senior management team at Danaharta. He currently sits in a non-executive capacity on the Board of the Credit Management and Counselling Agency, a subsidiary of Bank Negara Malaysia, the Central Bank of Malaysia.

As Executive Director, he will support the Managing Director in the day to day management of the Group’s operations. He will also have responsibility for ensuring compliance with regulatory and exchange requirements both in Australia and in Malaysia, as well as overall responsibility for legal affairs. His legal training and experience in investment banking and with government, as well as his familiarity with corporate restructurings and strategies for business turnarounds while at Danaharta, make him particularly suited for this role.


Non-Executive DirectorShariffuddin Khalid, ACMA (UK)

Shariffuddin Khalid is a member of the Chartered Institute of Management Accountants (UK). A trained accountant, he has obtained significant work experience at senior management level in investment banking, telecommunications and the services sector. He was also part of the project team that established Danaharta and served as a member of its senior management from inception in 1998 to the end of 2005. He currently sits as a non-executive Board Member of the Credit Management and Counselling Agency, a wholly owned subsidiary of Bank Negara Malaysia, the Central Bank of Malaysia.

Non-Executive DirectorAdam Sierakowski

Adam Sierakowski is a lawyer and partner of the Perth based legal firm of Price Sierakowski. He has over 12 years experience in legal practice, much of which he has spent as a corporate lawyer consulting and advising on a range of transactions to a variety of large private and listed public entities. He has advised and guided many companies undertaking fundraising activities in Australia and seeking to list on the ASX. In addition, he has been retained as an advisor to many corporate reconstructions, mergers and acquisitions. He is the co-founder of Perth based corporate advisory business Trident Capital.

In the past Mr Sierakowski has held a number of board positions on ASX listed companies. He is a member of the Australian Institute of Company Directors, and the Association of Mining and Exploration Companies.

The Board is supported by a qualified Company Secretary/ Chief Financial Officer:

Company Secretary/Chief Financial Officer Tony Walsh BCom MBA CA

Tony Walsh has spent the last 14 years at the Australian Stock Exchange providing expert ASX Listing Rule advice to Perth based listed companies and facilitating new listing applications. At the ASX he was responsible for the facilitation of the listing of over 500 IPOs and reinstatement of over 200 “backdoor listings” during this period. During his tenure at the ASX, the number of Perth based listed companies grew from approximately 235 companies in 1992 to approximately 600 today. He was responsible for the introductory education and ongoing provision of advice on the ASX’s corporate governance guidelines to advisors, professional institutes, boards of directors and company secretaries.

Prior to joining the ASX he worked for over 5 years with Ernst & Young Perth and Dublin, Ireland with short assignments in Brussels, Belgium and Douglas, Isle of Man.

6.2 Management

The SPC Biodiesel management team is led by the Group Executive Director, Andrew Phang and comprises the following:

Chief Operating Officer Michael K Thorley, BCom (WA)

Michael K Thorley, qualified as a chartered accountant. His finance background has been the basis on which he has built a career spanning a range of industries from advertising to alternative energy. He has worked on renewable energy projects in Asia and Australia. He was a key member of the project team that studied the feasibility of establishing the Plant. He has travelled extensively throughout Europe and the United States of America to review Biodiesel equipment and markets as well as evaluate and identify offtake partners. As Chief Operating Officer, he will report to the Group Executive Director.

Head, Feedstock and MarketingImran Abdul Hamid

Imran Abdul Hamid has extensive experience in dealing with supply, logistics and marketing aspects within the Palm Oil industry. He has held the post of marketing controller of Sabah Land Development Board as well as senior marketing manager of Sime Darby’s plantations division. His extensive network of contacts within the plantations industry and on the ground in Sabah will facilitate the Company’s logistics and marketing requirements as well as ensure consistency and reliability of supply of raw materials. He will report to the Chief Operating Officer.

6 BOARD OF DIRECTORS AND MANAGEMENT PROFILES (CONTINUED)

27

Head, FinanceJackie Leong Wei Choo, BBus (Accounting)

Jackie Leong Wei Choo is an accountant by training. She obtained audit experience with a leading international accounting firm before continuing her career in corporate finance and investment banking. She has extensive experience in undertaking corporate transactions such as initial public offerings, capital raising on the debt and equity markets, reverse take-overs and mergers and acquisitions. Her corporate finance skills will be an asset as the Group pursues its growth and expansion strategies. She will be responsible for the finance function of SPC Biodiesel and will report to the Chief Operating Officer, and the Chief Financial Officer of the Group.

The management team is able to tap on the expertise and experience of the following board members of SPC Biodiesel:

Board member - Special Projects Oliver Frank Wakefield

Frank Wakefield has spent a lifetime in the plantations industry. A planter at heart, he was Controller of Operations for Sime Darby Bhd’s Palm Oil plantations in the Sandakan-Lahad Datu region. He was Head of Operations Audit for PT Smart Corporation, an Indonesian plantations conglomerate, and plantations consultant for Pontian United Plantations, another Sabah based Palm Oil plantations company. He brings with him a wealth of knowledge and experience in the Palm Oil industry in the region, generally, and in Sabah, in particular. He is well respected within the industry and has excellent relationships with major industry players at the highest levels.

Board member - Engineering Khoo Puay Guan, BEng (Mech) (UK)

Khoo Puay Guan qualified with a first class honours degree in mechanical engineering from the United Kingdom. His excellent technical skills are complemented by solid, practical, hands on experience in project implementation and management as well as operations. He had previously worked at management level at Tractors Malaysia Bhd (a major Malaysian engineering equipment company). He also oversaw the successful construction and subsequent operation of a power generation facility. Like the proposed Plant, the power generation facility was also a greenfield project and has operated successfully since 1999.

Board member - ServicesShariffuddin Khalid

Shariffuddin Khalid is a member of the Chartered Institute of Management Accountants (UK). A trained accountant, he has obtained significant work experience at senior management level in investment banking, telecommunications and the services sector. He was also part of the project team that established Danaharta and served as a member of its senior management from inception in 1998 to the end of 2005. He currently sits as a non-executive Board Member of the Credit Management and Counselling Agency, a wholly owned subsidiary of Bank Negara Malaysia, the Central Bank of Malaysia.


S E C T I O N 7C O R P O R A T E G O V E R N A N C E

29

7 CORPORATE GOVERNANCE

The Company is committed to promoting good corporate governance and ethical practices in its operations.

7.1 Board Responsibilities

The Board is responsible for the overall corporate governance of the Company. The Board’s responsibilities, as set out in the Board Charter, include:

• to develop, review and monitor the Group’s long-term business strategies and provide strategic direction to management;

• to ensure policies and procedures are in place to safeguard the Group’s assets and business and to enable the Group to act ethically and prudently;

• to develop and promote a system of corporate governance which ensures the Group is properly managed and controlled;

• to identify the Group’s principal risks and ensure that it has in place appropriate systems of risk management, internal control, reporting and compliance and that management is taking appropriate action to minimise those risks;

• to review and approve the Group’s financial statements;

• to monitor management’s performance and the Group’s financial results on a regular basis;

• to appoint, appraise and determine the remuneration and benefits of the Group Managing Director;

• to delegate powers to the Group Managing Director as necessary to enable the day-to-day business of the Group to be carried on, and to regularly review those delegations;

• to ensure that the Group has in place appropriate systems to comply with relevant legal and regulatory requirements that impact on its operations;

• to determine the appropriate capital management for the Group including share and loan capital and dividend payments; and

• to determine and regularly review an appropriate remuneration policy for employees of the Group.

7.2 Audit and Risk Committee

The Board is served by an Audit and Risk Committee. The purpose of the Audit and Risk Committee is to review and monitor the control environment of the Group in respect of operational and balance sheet risk, legal/regulatory compliance and financial reporting. The Audit and Risk Committee will be responsible for overseeing:

• the Group’s relationship with the external auditors;

• the adequacy of the control procedures in relation to the preparation of financial statements and reports; and

• the adequacy of the Group’s financial controls and systems.

The external auditor and members of the management team may be invited to Audit and Risk Committee meetings. It is intended that the Audit and Risk Committee will meet at least three times a year.

The current members of the Audit and Risk Committee are:

• Adam Sierakowski (Chair);

• Alister Maitland; and

• Shariffuddin Khalid.


7.3 Ethical Standards

The Board believes that the success of the Company will be enhanced by a strong ethical culture within the organisation. As the Company grows, the need to ensure that ethical standards remain has led the Board to embrace policies to ensure that all Directors, executives and employees act with the utmost integrity and objectivity in their dealings with all people that they come in contact with during their working life.

Employees are required to comply with a code of conduct that sets a benchmark for professional behaviour.

7.4 Corporate Policies

The Board has adopted the following corporate governance policies:

Guidelines for Dealing in Securities

The Company requires that:

• no Director or member of senior management should buy or sell Shares without the prior approval of the Chairman and the Chairman should not buy or sell Shares without the prior approval of the Board or the next most senior Director;

• unless there are unusual circumstances, trades in Shares by Directors and members of senior management are limited to stipulated periods;

• Directors and senior management are generally prohibited from trading in Shares for a short-term gain; and

• Directors and senior management should be aware of and observe their obligations under the Corporations Act not to buy or sell Shares if in possession of price sensitive non-public information and to ensure that they do not communicate price-sensitive non-public information to any person who is likely to buy or sell Shares or communicate such information to another party.

Provided they do not have price sensitive information, Directors and senior management are permitted to deal in Shares only:

• in the period of 60 days commencing 48 hours following the announcement of the half year financial results, announcement of the full year financial results and the holding of the annual general meeting; and

• during the period that the Company has a current prospectus or other form of disclosure document on issue pursuant to which persons may subscribe for Shares.

7 CORPORATE GOVERNANCE (CONTINUED)

31

Information Policy

The Company places a high priority on communication with Shareholders and is aware of the obligations it will have, once listed, under the Corporations Act and the Listing Rules, to keep the market fully informed of information which is not generally available and which may have a material effect on the price or value of the Company’s securities.

The Company also seeks to ensure that its employees, officers and consultants meet their confidentiality obligations to the Company.

The Company has adopted policies and procedures to ensure that Directors and management are aware of and fulfil their obligations in relation to confidentiality and the timely disclosure of material price-sensitive information.

Privacy Policy

The Privacy Policy sets out the Company’s personnel information management practices and reflects the Company’s commitment to respect the privacy of personnel information.

7.5 Independent Professional Advice

In fulfilling their duties, each Director dealing with corporate governance matters may obtain independent professional advice at the expense of the Company, subject to prior approval of the Chairman, whose approval will not be unreasonably withheld.


S E C T I O N 8F I N A N C I A L I N F O R M A T I O N

33

8 FINANCIAL INFORMATION

8.1 Introduction

This Section contains the following financial information for Sterling Biofuels and its subsidiary company as prepared by the Directors:

• Forecast summary consolidated income statements for the Group for the financial years ending 30 June 2007 and 30 June 2008 (Forecast);

• Historical consolidated balance sheet for the Group as at 31 May 2006 (Historical) together with the applicable notes; and• Pro-forma consolidated balance sheet for the Group as at 31 May 2006 (Pro-forma) together with the applicable notes.

This financial information has been reviewed by Ernst & Young and a copy of Ernst & Young’s Independent Accountant’s Report is set out in Section 9.

8.2 Basis of the Preparation of the Financial Information The Historical and Pro-Forma consolidated financial information is presented as at 31 May 2006. Sterling Biofuels was registered on 25 May 2006 and acquired all the ordinary shares of SPC Biodiesel with effect from 31 May 2006. Other than the acquisition of SPC Biodiesel, Sterling Biofuels has undertaken limited transactions since 31 May 2006.

As such, no historical income statements have been presented for the Group.

The Historical consolidated balance sheet of the Group presented in Section 8.6 reflects the financial position of the Group as at the date prior to the proposed pro-forma transactions as set out in Note 1 of Section 8.7.

The Pro-forma consolidated balance sheet for the Group as at 31 May 2006 is based on the Historical consolidated balance sheet of the Group as at 31 May 2006 after adjusting for the pro-forma transactions as set out in Note 1 of Section 8.7.

The Forecast financial information for the Group is for the years ending 30 June 2007 and 30 June 2008.

The financial information set out in the Prospectus has been prepared in accordance with the recognition and measurement principles prescribed in the Australian Accounting Standards. The financial information contained in this Prospectus is presented in an abbreviated form and does not contain all the disclosure required by the Australian Accounting Standards applicable to annual reports prepared in accordance with the Corporations Act.

The Forecast has been prepared by the Directors based on economic and business conditions prevailing at the date the Prospectus was issued. The Directors have prepared the Forecast with due care and attention. The general and specific assumptions upon which the Forecast has been prepared are detailed in Section 8.4 and sensitivity analysis have also been performed to illustrate the responsiveness of the Forecast to material changes to key assumptions.

As the Forecast is prepared based on best estimates of the Directors, which by their nature are subject to uncertainties and contingencies, potential investors should note that the actual results are likely to vary from the Forecast and any variation may have a material impact either positively or negatively on the performance of the Group. Accordingly, neither the Directors nor the Company can give any assurance that the Forecast or any prospective statement contained in the Prospectus can be achieved.

As at the date of the Prospectus, there have not been any events of a material nature or any change in the business operations or financial position of the Group that may have an impact on the Forecast.


8 FINANCIAL INFORMATION (CONTINUED)

8.3 Forecast Financial Information

The table below sets out the forecast summary consolidated income statement for the financial years ending 30 June 2007 and 30 June 2008 (Forecast Period), prepared in accordance with the assumptions set out in Section 8.4 and the accounting policies set out in Section 8.7.

The Group’s proposed Plant will be under construction during the financial year ending 30 June 2007 and commercial production is expected to commence from 1 July 2007. The Plant is forecast to operate at 95,000 tonnes for the financial year ending 30 June 2008.

Summary of forecast financial information

(A$ ‘000) Director’s Forecast12 months ending

30 June 2007

Director’s Forecast12 months ending

30 June 2008Revenue - 99,818Expenses (4,222) (73,675)EBITDA (4,222) 26,143Depreciation and Amortisation - (1,686)Earnings Before Interest and Tax (4,222) 24,457Interest Income 405 164Net Profit/(Loss) Before Tax (3,817) 24,621Tax - -Net Profit After Tax (3,817) 24,621

8.4 Financial Assumptions

The Forecast has been prepared on the basis of the Directors’ best estimate assumptions set out in the following section and must be read in conjunction with the financial assumptions, the sensitivity analysis as set out in Section 8.5 as well as the risk factors set out in Section 11. It should also be read together with Ernst & Young’s report in Section 9.

The assumptions set out below are intended to assist potential investors in assessing the reasonableness and possibility of the Forecast being achieved and is not meant to be a representation that the assumptions will occur.

Potential investors should be aware of the proposed timing of the events and should there be a delay in the timing from that assumed in the Forecast preparation, this may have a material effect on the future financial performance of the Group.

35

General Assumptions

Fund Raising The Offer is fully subscribed and the proceeds are received by September 2006.

Capital Structure There will be no change to the Group’s financial and capital structure as set out in the Prospectus.

Accounting Policies and Reporting Framework

The Group’s accounting policies are consistent with those disclosed in Section 8.7. The financial information presented are in accordance with the Australian Accounting Standards.

There will also not be any changes to the professional reporting requirements that would have a material effect on the Group’s results and disclosure of financial forecast.

Foreign Exchange Risk There will not be material change in the foreign exchange rates between Malaysian, Australian, European and United States currencies during the Forecast Period.

Continuity of Operations There will be no significant disruption to the Group’s operations during the Forecast Period.

Legislation There will be no significant change in the international, federal, state or local government laws, regulations or policies, or in taxation legislation which may have a material impact on the forecast financial information.

Permits, Approvals and Licences

The Group will obtain and maintain all required permits, approvals and licences without undue delay to the performance of the Plant and business of the Group as assumed in the Prospectus.

Loss of Key Management There is no loss of key management personnel.

Material Agreements There will be no material amendments to any of the Group’s material agreements and all parties to these material agreements carry out their respective roles under the terms of the agreements.

Litigation and Contingent Liability

The Group is not a party to any material litigation or exposed to any environmental issues and there is no contingent liability outstanding.

Economic and Political Environment

There will not be any significant change in the prevailing economic and political environment in the markets in which the Group operates during the Forecast Period.

Derivative Financial Instruments and Hedging

The Forecast does not include movements in the market value of any derivatives. At the date of the Prospectus, the Group is not a party to any derivative financial instruments for the purposes of hedging against movements in market prices of Biodiesel or any key production inputs, but may enter into such contracts during the Forecast Period.



Specific Assumptions

Plant Construction Period The Plant is assumed to be constructed during the year ending 30 June 2007. Plant Operations Commencement The Plant is forecast to commence commercial operations from 1 July 2007.Plant Operation and Capacity The Plant has the ability to produce 100,000 tonnes of Biodiesel per annum and is assumed to

operate for 24 hours a day for a total of 330 days a year.

The Plant is assumed to operate at 95% capacity for the financial year ending 30 June 2008.Plant Costs The total cost of the plant is A$21.34 million inclusive of a contingency sum of A$1.63 million.

The material terms of the contracts signed with the process plant manufacturer (De Smet) and Ikatan Innovasi for the Balance of Plant are set out in Section 12.5(d) and Section 12.5(f).

Biodiesel Selling Price The assumed selling price is €619 (A$1,029) per tonne, after deducting freight and other selling related costs of €181 (A$301). Further information on the Biodiesel price is contained in Frost & Sullivan’s Biodiesel Market Report included in Section 10.

Biodiesel Sales Volume The quantity of Biodiesel produced for the financial year ending 30 June 2008 is 95,000 tonnes.Crude Glycerine sales volume and selling price

The assumed selling price of the crude glycerine is US$198 (A$266) per tonne and the Plant will produce 11,020 tonnes for the financial year ending June 2008.

Feedstock Purchase Price and Volume

The assumed purchase price of the feedstock (RBD Palm Olein) is RM1,750 (A$636) per tonne. The quantity of feedstock purchased for the financial year ending 30 June 2008 is assumed at 95,000 tonnes. Further information on the feedstock price and market is contained in Frost & Sullivan’s feedstock report included in Section 10.

Methanol Purchase Price and Volume

The assumed purchase price of methanol is RM1,198 per tonne (A$436) and the volume of methanol consumed for the financial year ending 30 June 2008 is 10,830 tonnes.

Income Tax SPC Biodiesel, the subsidiary of Sterling Biofuels, has been granted pioneer tax status in Malaysia which will exempt 100% of its operating income from taxation in Malaysia for a period of 5 years commencing from the date of commercial operations.

Dividends received by Sterling Biofuels from SPC Biodiesel will be exempted from Australian income tax.

Interest Income It is assumed that surplus cash will be placed in bank deposits in Australia earning interest at a rate of 5% per annum.

Exchange Rates The assumed exchange rates are based on the prevailing exchange rate as follows: RM/USD = 3.700RM/Euro = 4.570RM/AUD = 2.750

The sensitivity analysis on Exchange Rates are included in Section 8.5 below, to illustrate the impact of varying exchange rates on the profitability of the Company.

Depreciation Plant and equipment is depreciated at rates of between 10% to 20% per annum whilst other assets are depreciated at a rate of 20% per annum.

The leasehold land owned by the Group does not carry any depreciation charge.Corporate and Administrative Overheads

The Forecast has been prepared on the basis of anticipated staff levels, on-site expenses, accounting and other administrative expenses.

Performance Rights Performance Rights issued to Key Employees and the offtaker have been valued using an option pricing model and based on the Offer Price of A$1.00.

The terms and conditions for the Performance Rights to Key Employees and offtaker are disclosed in Section 12.3.

Options Options issued to Directors and Company Secretary/Chief Financial Officer have been valued using an option pricing model and based on the Offer Price of A$1.00.

The terms and conditions for the Options to Directors and Company Secretary/Chief Financial Officer are disclosed in Section 12.4.

37

8.5 Sensitivity Analysis

The Plant is forecast to produce 95,000 tonnes of Biodiesel for the financial year ending 30 June 2008 and the Forecast has been formulated based on certain economic and business assumptions for the Forecast Period. The Directors’ best estimates of general and specific assumptions, together with a summary of the Forecast financials are set out in Section 8.4 above.

The tables below illustrate the sensitivity of the Forecast to material changes in key assumptions, in particular the forecast revenue, EBITDA and NPAT for the 12 months ending 30 June 2008, being the year the Plant becomes commercially operational. The sensitivity analysis on the key variables are not intended to be exhaustive but is performed to illustrate the sensitivity of the Forecast to changes in the key variables.

Potential investors should note that the sensitivity analysis below is not meant to be treated as Forecasts and is provided with the intention of illustrating to potential investors the impact of changes to key variables of the Forecast.

The following sensitivity analysis has been prepared to the Directors’ assumptions:

• a 10% increase/decrease in the assumed Biodiesel selling price;• a 10% increase/decrease in the assumed feedstock price;• a 5% movement in the Malaysian Ringgit/ Euro exchange rate;• a 5% movement in the Malaysian Ringgit/ Australian dollar exchange rate;• a one month delay in commissioning of the plant; and• a 5% increase/decrease in assumed Plant production for FY 2008.

Sensitivity analysis - Biodiesel selling price

A$’000 -10% Directors’ Forecast 12 month ending 30 June 2008

+10%

Biodiesel Selling Price €557/tonne €619/tonne €681/tonneTotal Revenue 90,076 99,818 109,629EBITDA 16,402 26,143 35,954NPAT 14,879 24,621 34,432

Sensitivity analysis - feedstock price


+10%

Feedstock Price RM1,575/tonne RM1,750/tonne RM1,925/tonneTotal Revenue 99,818 99,818 99,818EBITDA 32,189 26,143 20,098NPAT 30,667 24,621 18,576

Sensitivity analysis - Malaysian Ringgit/ Euro exchange rate


+5%

RM/Euro 4.341 4.570 4.798Total Revenue 94,947 99,818 104,723EBITDA 21,272 26,143 31,049NPAT 19,750 24,621 29,527


Sensitivity analysis - Malaysian Ringgit/ Australian Dollar exchange rate


+5%

RM/A$ 2.612 2.750 2.887Total Revenue 105,092 99,818 95,081EBITDA 27,524 26,143 24,903NPAT 25,922 24,621 23,453

Sensitivity analysis - one month delay in commissioning of the Plant

A$’000 Directors’ Forecast 12 month ending 30 June 2008

+1 month

Plant Commissioning 1 July 2007 1 August 2007Total Revenue 99,818 91,432EBITDA 26,143 23,493NPAT 24,621 21,971

Sensitivity analysis – a 5% increase/decrease in assumed Plant production for FY 2008


+5%

Plant Production 90,250 tonnes 95,000 tonnes 99,750 tonnesTotal Revenue 94,786 99,818 104,849EBITDA 24,526 26,143 27,761NPAT 23,004 24,621 26,239


39

8.6 Consolidated Historical and Pro-Forma Balance Sheet

The Historical consolidated balance sheet of the Group as at 31 May 2006 together with the Pro-forma consolidated balance sheet of the Group as at 31 May 2006 after incorporating the Pro-forma adjustments have been prepared in accordance with the accounting policies as set out in Section 8.7 below.

Consolidated Historical and Pro-forma Balance Sheet as at 31 May 2006

Notes Unaudited at 31 May 2006 A$

Pro-forma at 31 May 2006 A$

Current Assets

Cash and cash equivalents 3 18,286 30,966,705

Other debtors 10,191 10,191

Total Current Assets 28,477 30,976,896

Non-current assets

Plant and equipment 4 19,194 19,194

Total non-current assets 19,194 19,194

Total Assets 47,671 30,996,090

Current Liabilities

Other payables 5 (851,581) -

Total Current Liabilities (851,581) -

Total Liabilities (851,581) -

Net Assets/(Liabilities) (803,910) 30,996,090

Equity

Issued Capital 6 472,727 32,272,727

Accumulated Losses 7 (1,276,637) (1,276,637)

Total Equity/(Deficit) (803,910) 30,996,090

8.7 Accounting policies and notes to the accounts

(1) Pro-forma Adjustments

The Pro-forma consolidated balance sheet of the Group as at 31 May 2006 has been prepared based on the Historical consolidated balance sheet as at 31 May 2006, based on the assumption that the following proposed pro-forma transactions had occurred as at 31 May 2006:

• The issue of 35,000,000 Shares at $1 each issued under this Prospectus totalling $35,000,000 before deducting costs of issue of Shares of $3,200,000. The impact of the share issue is to increase issued share capital by $31,800,000 (net of costs of $3,200,000) and increasing cash by $31,800,000; and

• The repayment of related party payables amounting to A$851,581 which has the effect of clearing the related party payables by A$851,581 and reducing cash by A$851,581.


(2) Summary of significant accounting policies

The significant accounting policies, which have been adopted in the preparation and presentation of the financial information, including the notes to the financial information are:

(a) Basis of preparation

The Historical and Pro-forma consolidated balance sheets as at 31 May 2006 have been prepared in accordance with the measurement and recognition requirements, but not the disclosure requirements of Australian Accounting Standards and the Corporations Act. Accounting Standards include Australian equivalents to International Financial Reporting Standards (A-IFRS).

(b) Principles of consolidation

The consolidated financial statements comprise the financial statements of Sterling Biofuels and its subsidiary, as defined in Accounting Standards AASB 127 ’Consolidated and Separate Statements’, SPC Biodiesel.

On 31 May 2006, Sterling Biofuels effectively acquired all of the issued capital of SPC Biodiesel. In accordance with the requirements of AASB 3 Business Combinations, SPC Biodiesel was identified as the acquirer in relation to the combination. Accordingly, the combination has been accounted for as a reverse acquisition.

This has resulted in the Historical consolidated balance sheet reflecting the historical assets, liabilities and equity of SPC Biodiesel and the cost of the combination being recognised at the fair value of the equity instruments on issue in Sterling Biofuels at the date of acquisition.

The application of AASB 3 Business Combination does not change the status of Sterling Biofuels as the legal parent entity of the Group.

Controlled entities The financial statements of subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.

The financial statements of controlled entities are included in the consolidated financial statements from the date control commences until the date control ceases.

Transaction eliminated on consolidation

Unrealised gains and losses and inter-company balances resulting from transactions with or between controlled entities are eliminated in full on consolidation.

(c) Foreign currency translation

Both the functional and presentation currency of Sterling Biofuels is Australian dollars (A$). The functional currency of SPC Biodiesel (the parent for consolidation purposes) is Malaysian Ringgits (RM) and its presentation currency for group reporting purposes is Australian dollars (A$).

Transactions

Foreign currency transactions are translated to the relevant functional currency at the rate of exchange ruling at the date of transaction. At balance date all foreign currency monetary items are translated using the exchange ruling on the date. Non-monetary items which are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary items which are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Resulting exchange differences are brought to account as exchange gains or losses in the income statement in the financial year in which the exchange rates change.


41

Consolidation

On consolidation, the assets and liabilities recognised on a functional currency other than Australian dollars are translated into Australian dollars at the exchange rates prevailing at the reporting date. Income and expense items are translated into Australian dollars at the average exchange rates for the period unless exchange rates fluctuate significantly. Exchange differences arising, if any, are recognised in the foreign currency translation reserve.

(d) Cash and cash equivalents

Cash and short-term deposits in the balance sheet comprise cash at bank and on hand short-term deposits with an original maturity of three months or less.

(e) Inventories

Inventories are valued at the lower of cost and net realisable value.

Costs incurred in bringing each product to its present location and condition are accounted for as follows:

• Raw materials - purchase cost on a first-in, first-out basis;• Finished goods and work-in-progress - cost of direct materials and labour and a proportion of manufacturing overheads based on

normal operating capacity but excluding borrowing costs. • Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the

estimated costs necessary to make the sale.

(f) Financial assets

Subsequent to initial recognition, investments in subsidiaries are measured at cost.

Other financial assets are classified as follows: “at fair value through profit or loss”, “held to maturity investments”, “available for sale financial assets” and “loans and receivables”. The classification depends on the nature and purpose of the financial assets as determined at the time of initial recognition. Loans and Receivables

Trade receivables, loans and other receivables are recorded at amortised cost less impairment.

(g) Property, plant and equipment

Plant and equipment is stated at cost less accumulated depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of the item.

Land and buildings are measured at fair value. Fair value is determined on the basis of an annual independent valuation prepared by external valuation experts, based on discounted cash flows. The fair values are recognised in the financial statements of the consolidated entity, and are reviewed at the end of each reporting period to ensure that the carrying value of land and buildings is not materially different from their fair values.

Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. The estimated useful lives, residual values and depreciation method is reviewed at the end of each annual reporting period.

The following estimated useful lives are used in the calculation of depreciation:

• Buildings – over 20 years • Plant and equipment – between 5 to 10 years• Other non-plant equipment – 5 years


(h) Impairment of assets

At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the assets is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. Goodwill, intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually and whenever there is an indication that the assets may be impaired. An impairment of goodwill is not subsequently reversed.

Recoverable amount is the higher of fair value less costs to sell and value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case the reversal of the impairment loss is treated as a revaluation increase.

(i) Leased assets

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

(j) Financial instruments by the Company

Debt equity instruments

Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contractual arrangements. Transaction costs on the issue of equity instruments

Transaction costs arising on the issue of equity instruments are recognised directly in equity as a reduction of the proceeds of the equity instruments to which the cost relate. Transaction costs are the costs that are incurred directly in connection with the issue of those equity instruments and which would not have been incurred had those instruments not been issued.

(k) Trade and Other Payables

Liabilities are recognised for amounts to be paid in the future for goods and services received, whether or not billed to the Company.Payables to related parties are carried at the principal amount. Interest, when charged by the lender, is recognised as an expense in an accrual basis.

(l) Provisions

Provisions are recognised when the consolidated entity has a present obligation, the future sacrifice of future economic benefits is probable, and the amount of the provision can be reliably measured.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those flows. When some or all the economic benefits required to settle a provision are expected to be recovered from a third party, the receivables is recognised as an asset if it is virtually certain that recovery will be received and the amount of the receivable can be measured reliably.


43

(m) Employee benefits

Provision is made for benefit accruing to employees in respect of wages and salaries, annual leave, long service leave, and sick leave when it is probable that settlement will be required and they are capable of being measured reliably. Provisions made in respect of employee benefits expected to be settled within 12 months, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement.

Provisions made in respect of employee benefits which are not expected to be settled within 12 months are measured as the present value of the estimated future cash outflows to be made by the consolidated entity in respect of services provided by employees up to reporting date.

Defined Contribution Plan

Contributions to defined contributions plans are expensed when incurred.

(n) Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:

Sale of Goods

Revenue is recognised when all significant risks and rewards of ownership of the goods have been transferred to the buyer and can be measured reliably.

Interest revenue

Revenue is recognised as the interest accrues (using the effective interest method, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument) to the net carrying amount of the financial asset.

(o) Taxation

Current Tax

Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Current tax for current or prior periods is recognised as liability (or asset) to the extent that it is unpaid (or refundable).

Deferred Tax

Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items. In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business combination) which affects neither taxable income or accounting profit. Furthermore, a deferred tax liability is not recognised in relation to taxable temporary differences arising from goodwill. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, branches, associates and joint ventures except where the consolidated entity is able to control the reversal of the temporary difference and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with these investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. Deferred tax assets and liabilities are measured at the tax rates and are expected to apply to the period(s) when the assets and liabilities giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the consolidated entity expects to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the consolidated entity intends to settle its current tax assets and liabilities on a net basis.



Current and deferred tax for the period

Current and deferred tax is recognised as an expense or income in the income statement, except when it relates to items credited or debited directly to equity, in which case the deferred tax is also recognised directly in equity, or where it arises from the initial accounting for a business combination, in which case it is taken into account in the determination of goodwill or excess.

(p) Other taxes

Revenues, expenses and assets are recognised net of the amount of GST except:

• Where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the assets or as part of the expense item as applicable; and

• Receivables and payables are stated with the amount of GST included.• The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the

balance sheet.

(q) Research and development costs

Expenditure on research activities is recognised as an expense in the period in which it is incurred. Where no internally–generated intangible asset can be recognised, development expenditure is recognised as an expense in the period as incurred. An intangible asset arising from development (or from the development phase of an internal project) is recognised if, and only if, all of the following are demonstrated:

• the technical feasibility of completing the intangible asset so that it will be available for use or sale ;• the intention to complete the intangible asset and use or sell it;• the ability to use or sell the intangible asset;• how the intangible asset will generate probable future economic benefits;• the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible

asset; and • the ability to measure reliably the expenditure attributable to the intangible asset during its development.

(r) Share based payments

Equity settled share-based payments are measured at fair value at the date of grant.

(3) Cash and Cash Equivalents

As at 31 May 2006

A$

Pro-Forma as at 31 May 2006

A$Cash at 31 May 2006 18,286 18,286Issue of Shares pursuant to the Offer - 35,000,000Costs of the issue of shares pursuant to the Offer - (3,200,000)Payment of related party payables - (851,581)Cash Assets – pro-forma 18,286 30,966,705

(4) Plant and Equipment

As at 31 May 2006

A$

Pro-Forma as at 31 May 2006

A$Plant and Equipment at cost 23,992 23,992Accumulated Depreciation (4,798) (4,798)

19,194 19,194

45

(5) Other Payables

As at 31 May 2006 Pro-Forma as at 31 May 2006

Related party payables (851,581) - These represent payments made by the related parties in respect of deposits in relation to the acquisition of assets for the Project and preliminary expenses paid on behalf of the Group.

Related party payables are unsecured, non-interest bearing and have no fixed repayment date. (6) Issued Capital

As at 31 May 2006 Pro-Forma As at 31 May 2006Number of Shares A$ Number of Shares A$

Balance at 31 May 2006 30,000,000 472,727 30,000,000 472,727Issue of Ordinary Shares pursuant to the Offer - - 35,000,000 35,000,000Costs of issue of shares pursuant to the Offer - - - (3,200,000)

30,000,000 472,727 65,000,000 32,272,727

Terms and conditions of issued capital:

Ordinary Shares

Ordinary shares have the right to receive dividends as declared and in the event of winding up of the Company, to participate in the surplus from the sale of all assets in proportion to the number of and amounts paid up on Shares held.

Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of the Company.

The Company has issued Performance Rights to Key Employees and the offtaker and Options to Directors and Company Secretary/CFO. Please refer to Sections 12.3 and 12.4 for details.

(7) Accumulated Losses

As at 31 May 2006 Pro-Forma as at 31 May 2006

Accumulated Losses (1,276,637) (1,276,637)

(8) Subsequent Events

There were no matters that have arisen in the interval between 31 May 2006 and the date of this Prospectus nor any item, transaction or event of a matter or unusual nature that is likely, in the opinion of the Directors of the Company, to affect significantly the operations of the economic entity, the results of those operations, or the state of affairs of the economic entity, in future years.

(9) Commitments for Expenditure

Material capital commitments and other expenditure commitments contracted for as at the date of this Prospectus amounting to $19.27 million have been detailed in Section 12.5 of this Prospectus.

(10) Contingent Liabilities

The Directors are not aware of any material contingent liabilities at the date of this Prospectus.

(11) Subsidiaries

Ownership InterestName of entity Country of incorporation As at 31 May 2006 % Pro-forma as at 31 May 2006 %SPC Biodiesel Sdn Bhd Malaysia 100 100


S E C T I O N 9I N D E P E N D E N T A C C O U N T A N T ’ S R E P O R T

47

PART 1 - Independent Accountant’s Report on Financial Information

11 August 2006

The DirectorsSterling Biofuels International LimitedGround Floor16 Ord StreetWest PerthWA 6055Australia

Dear Directors

Independent Accountant’s Report on Historical, Pro-forma and Forecast Financial Information

1. Introduction

We have prepared this Independent Accountant’s Report (the “Report”) at the request of the Directors Sterling Biofuels International Limited (“Sterling Biofuels” or “the Company”) for inclusion in a Prospectus to be dated on or about 11 August 2006, prepared in respect to the offer by the Company of 35 million Shares at a price of $1.00 per share and the listing of Sterling Biofuels on the Australian Stock Exchange.

Unless otherwise defined, expressions defined in the Prospectus have the same meaning in this Report.

The nature of this Report is such that it can be given only by an entity which holds an Australian Financial Services Licence under the Corporations Act. Ernst & Young Transaction Advisory Services Limited holds the appropriate Australian Financial Services Licence.

2. Background Information

The company was incorporated on 25 May 2006 and acquired SPC Biodiesel Sdn Bhd (“SPC Biodiesel”) on 31 May 2006. SPC Biodiesel was incorporated in Malaysia on 16 December 2005 and has been trading since that date. The financial statements of SPC Biodiesel from the period from 16 December 2005 to 31 March 2006 have been audited by KPMG.

The acquisition of SPC Biodiesel by Sterling Biofuels has been accounted for as a reverse takeover under Australian Accounting Standards and therefore the financial performance of SPC Biodiesel from 16 December 2005 has been incorporated into the financial performance of Sterling Biofuels on acquisition.

3. Scope

We have been requested to prepare an Independent Accountant’s Report covering the following financial information (collectively referred to as “the Financial Information”). Our opinion only extends to the sections of the Prospectus noted in this Report.

Historical Financial Information

The historical financial information (the “Historical Financial Information”), comprising the historical consolidated balance sheet as at 31 May 2006, as set out in section 8.6 of the Prospectus.

Pro-Forma Financial Information

The pro-forma financial information (the “Pro-Forma Financial Information”), comprising the pro-forma consolidated balance sheet as at 31 May 2006, as set out in Section 8.6 of the Prospectus, which assumes completion of the following contemplated transactions (collectively referred as “the Pro-Forma Transactions”) as at that date.


9 INDEPENDENT ACCOUNTANT’S REPORT (CONTINUED)

Initial Public Offering Transactions:

• The issue of 35,000,000 Ordinary Shares of $1 each issued under this Prospectus totalling $35,000,000 before deducting the estimated costs of the share issue of $3,200,000. The impact of the share issue is to increase share capital by $31,800,000 (net of costs of $3,200,000) and cash by $31,800,000.

• The repayment of a shareholder loan of $851,581 from the capital raised from this offer.

Directors’ Forecasts

The Directors’ forecasts (the “Directors’ Forecasts”) comprise the forecast summary income statements for the years ending 30 June 2007 and 30 June 2008 as set out in Section 8.3 of the Prospectus.

Responsibility for the Financial Information

The Directors are responsible for the preparation and presentation of the Financial Information, including the best-estimate assumptions upon which the Directors’ Forecasts are based, including the Pro-Forma Transactions. The Financial Information has been prepared for inclusion in the Prospectus. We disclaim any assumption of responsibility for any reliance on this Report or on the Financial Information to which it relates for any purposes other than for which it was prepared.

Review of the Historical Financial Information

We have conducted an independent review of the Historical Financial Information in order to state whether on the basis of the procedures described, anything has come to our attention that would cause us to believe that the historical consolidated balance sheet of Sterling Biofuels is not presented fairly in accordance with the measurement and recognition requirements (but not all of the disclosure requirements) of applicable Accounting Standards and other mandatory professional reporting requirements in Australia.

In conducting our review, we have relied on the financial statements of SPC Biodiesel for the period from 16 December 2005 to 31 March 2006 which has been audited by KPMG.

Our review has been conducted in accordance with Australian Auditing Standards applicable to review engagements and has been limited to reading of relevant Board minutes, reading of contracts and other legal documents, enquiries of management personnel, analytical procedures applied to the financial data and certain limited verification procedures. These procedures do not provide all the evidence that would be required in an audit, thus the level of assurance provided is less than that given in an audit. We have not performed an audit and, accordingly, we do not express an audit opinion on the Historical Financial Information.

Review of the Pro-Forma Financial Information

We have conducted an independent review of the Pro-Forma Financial Information in order to state whether on the basis of the procedures described, anything has come to our attention that would cause us to believe that the pro-forma consolidated balance sheet of Sterling Biofuels is not presented fairly in accordance with the measurement and recognition requirements (but not all of the disclosure requirements) of applicable Accounting Standards and other mandatory professional reporting requirements in Australia as if the Pro-Forma Transactions set out above had occurred at 31 May 2006.

Our review has been conducted in accordance with Australian Auditing Standards applicable to review engagements and has been limited to reading of relevant Board minutes, reading of contracts and other legal documents, enquiries of management personnel and analytical procedures applied to the financial data. We have also determined whether the Pro-Forma Transactions form a reasonable basis for the preparation of the Pro-Forma Financial Information. These procedures do not provide all the evidence that would be required in an audit, thus the level of assurance provided is less than that given in an audit. We have not performed an audit and, accordingly, we do not express an audit opinion on the Pro-Forma Financial Information.

Review of the Directors’ Forecasts

Our review of the best-estimate assumptions underlying the Directors’ Forecasts as set out in Section 8.3 of the Prospectus was conducted in accordance with the Australian Auditing and Assurance Standard AUS 902 “Review of Financial Reports”. Our procedures consisted primarily of enquiry and comparison, analytical review procedures we considered necessary and consideration of the independent technical reports included in Section 10 of the Prospectus. These procedures included discussion with the Directors and management of the Company and have been undertaken to form an opinion whether anything has come to our attention which causes us to believe that:

49

(a) the best-estimate assumptions do not provide a reasonable basis for the preparation of the Directors’ Forecasts; and(b) in all material respects, the Directors’ Forecasts are not properly prepared on the basis of the best-estimate assumptions; and (c) the Directors’ Forecasts are not presented fairly in accordance with the recognition and measurement principles prescribed

in AIFRS, and the accounting policies of Sterling Biofuels, as disclosed in Note 2 of Section 8.7 of the Prospectus, so as to present a view of the Company which is not inconsistent with our understanding of Sterling Biofuels’ past, current and future operations. It is the nature of forecasts that it is not feasible to present all of the disclosures that would be required by AIFRS and other mandatory professional reporting requirements in Australia.

The Directors’ Forecasts have been prepared by the Directors to provide investors with a guide to the Company’s potential future financial performance based upon the achievement of certain economic, operating, developmental and trading assumptions about future events and actions that have not yet occurred and may not necessarily occur. There is a considerable degree of subjective judgement involved in the preparation of the Directors’ Forecasts. Actual results may vary materially from the Directors’ Forecasts and the variation may be materially positive or negative. Accordingly, investors should have regard to the risk factors set out in Section 11 of the Prospectus and sensitivity analysis set out in Section 8.5 of the Prospectus.

Our review of the Directors’ Forecasts that are based on best-estimate assumptions is substantially less in scope than an audit examination conducted in accordance with Australian Auditing and Assurance Standards. A review of this nature provides less assurance than an audit. We have not performed an audit and we do not express an audit opinion on the Directors’ Forecasts included in the Prospectus.

4. Opinion and Statement

Historical Financial Information

Based on our review, which was not an audit, nothing has come to our attention which would cause us to believe the Historical Financial Information as set out in section 8.6 of the Prospectus does not present fairly the financial position of the Company as at 31 May 2006 (under AIFRS), in accordance with the measurement and recognition requirements (but not all of the disclosure requirements) of Accounting Standards and other mandatory professional reporting requirements in Australia.

Pro-Forma Financial Information

Based on our review, which was not an audit, nothing has come to our attention which would cause us to believe the Pro-Forma Financial Information as set out in section 8.6 of the Prospectus does not present fairly the financial position of the Company as at 31 May 2006 (under AIFRS), in accordance with the measurement and recognition requirements (but not all of the disclosure requirements) of Accounting Standards and other mandatory professional reporting requirements in Australia as if the pro-forma transactions set out in Section 8.7 had occurred on that date.

Directors’ Forecasts

Based on our review of the Directors’ Forecasts as set out in Section 8.3 of the Prospectus, which was not an audit, and based on an investigation of the reasonableness of the Directors’ best-estimate assumptions giving rise to the forecast financial information, nothing has come to our attention which causes us to believe that:

(a) the Directors’ best-estimate assumptions as set out in Section 8.4 of the Prospectus do not provide a reasonable basis for the preparation of the Directors’ Forecasts; and

(b) in all material respects, the Directors’ Forecasts are not properly compiled on the basis of the Directors’ best-estimate assumptions; and

(c) the Directors’ Forecasts are not presented fairly in accordance with the recognition and measurement principles prescribed in AIFRS, and the accounting policies adopted by the Company disclosed in Note 2 of Section 8.7 of the Prospectus as applied in Australia for presenting forecasts in prospectuses.

The underlying assumptions are subject to significant uncertainties and contingencies often outside the control of the Company and the Directors. If events do not occur as assumed, actual results achieved and distributions provided by the Company may vary significantly from the Directors’ Forecasts. Accordingly, we do not confirm or guarantee the achievement of the Directors’ Forecasts, as future events, by their very nature, are not capable of independent substantiation. Investors should have regard to the sensitivity analysis and risk factors detailed in sections 8.5 and 11 of the Prospectus, respectively.


9 INDEPENDENT ACCOUNTANT’S REPORT (CONTINUED)

5. Subsequent Events

Apart from the matters dealt with in this Report and having regard to the scope of our Report, to the best of our knowledge and belief, there have been no material transactions or events outside the ordinary business of Sterling Biofuels subsequent to 31 May 2006 which have come to our attention which require comment on or adjustment to, the information referred to in our Report or that would cause such information to be misleading or deceptive.

6. Disclosures

Ernst & Young Transaction Advisory Services Limited and the firm Ernst & Young does not have any pecuniary interests that could reasonably be regarded as being capable of affecting its ability to give an unbiased opinion in this matter. Ernst & Young provides audit and taxation services to the Company and Ernst & Young Transaction Advisory Services Limited will receive a professional fee for the preparation of this Report.

The Company has agreed to indemnify and hold harmless Ernst & Young, Ernst & Young Transaction Advisory Services Limited and its employees, officers and agents from any claims arising out of misstatement or omission in any material or information supplied by the Company for the purpose of this Report.

Consent to the inclusion of the Independent Accountant’s Report in the Prospectus in the form and context in which it appears, has been given. At the date of this Report, this consent has not been withdrawn.

Yours faithfullyErnst & Young Transaction Advisory Services Limited

Ken PendergastDirector and Representative

THIS FINANCIAL SERVICES GUIDE FORMS PART OF THE INDEPENDENT ACCOUNTANT’S REPORT

PART 2 – Financial Services Guide

Issue date: 15 February 2005 (version 3)

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2. Financial Services Guide

This Financial Services Guide (“FSG”) provides important information to help retail clients make a decision as to their use of the general financial product advice in the Report, information about us, the financial services we offer, our dispute resolution process and how we are remunerated.

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• arranging and dealing in securities.

51

4. General financial product advice

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Contacting Ernst & Young Transaction Advisory Services

Compliance and Legal ManagerErnst & Young680 George StreetSydney NSW 2000Telephone: (02) 9248 5555

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This Financial Services Guide has been issued in accordance with ASIC Class Order CO 04/1572


S E C T I O N 1 0E X P E R T R E P O R T S

The Company has commissioned the following expert reports:

• Biodiesel Market Report by Frost & Sullivan• Technology Report by Austrian Biofuels Institute• Feedstock Supply Report by Frost & Sullivan

The DirectorsSterling Biofuels International LtdGround Floor16 Ord StreetWest PerthWA 6005Australia

July 21, 2006

Dear Directors,

Independent Market Research on the Biodiesel Market

1 Introduction

Sterling Biofuels International Ltd (Sterling) is developing a biodiesel plant in Lahad Datu, Sabah, Malaysia through its wholly-owned subsidiary SPC Biodiesel Sdn Bhd (SPC Bio). We understand that SPC Bio has received regulatory approvals to commence production and that the plant is expected to commence commercial operations on July 1st 2007. We understand that the nominal capacity of the plant will be 100,000 tonnes per annum, and that the plant will be supplied by the Desmet Ballestra Group. The plant will be a multi-feedstock plant, capable of manufacturing biodiesel from a variety of feedstocks including crude palm oil (CPO), Refined, Bleached and Deodorised palm oil (RBD palm oil), RBD palm stearin or RBD palm olein. We understand that initially at least SPC Bio plans to utilize RBD palm olein as the feedstock as this is perceived as producing a higher quality end-product.

Sterling is planning to undertake an Initial Public Offering (IPO) on the Australian Stock Exchange (ASX). Frost & Sullivan has been commissioned by Sterling to undertake an independent market review of the biodiesel market in the EU and USA for the purposes of inclusion in the prospectus relating to the IPO. Frost & Sullivan is an independent market research and consulting firm operating in over 20 countries globally. Founded in New York in 1961, Frost & Sullivan now employs over 1,500 staff. We have undertaken a number of market studies in the biodiesel and related biofuels sectors on behalf of market participants and financial institutions, as well as producing a number of multi-client reports on the biofuels sector.

In undertaking this assessment, Frost & Sullivan has relied on interviews with industry participants and industry experts and secondary information derived from recognized public sources and via Frost & Sullivan’s database and multi-client reports particularly on the biofuels sector. The research was undertaken in the months of May to July 2006. All effort has been made by Frost & Sullivan to ensure that information in this report is accurate and appropriate at the time of writing. Conclusions, and assumptions attached to those conclusions, are based on Frost & Sullivan’s investigations and analyses of the facts as they are known as at July 2006 and Frost & Sullivan is of the opinion that the conclusions and underlying assumptions are reasonable.

2 Biodiesel Market Definition and Structure

Biodiesel has been in commercial production in Europe since 1991 and in the United States since 1998. The substantial increase in mineral oil prices over the past two years, and increased focus on the environmental impacts of mineral oil has seen a substantial increase in interest in biodiesel as an alternate fuel that boasts a number of advantages over conventional mineral diesel and other fuel options:

Intrinsic Benefits

• Biodiesel is a renewable fuel, non-toxic and rapidly biodegradable • Boasts about 50 percent less lifecycle CO2 emissions than mineral diesel • Helps toward lower particulate exhaust emissions and reduces carcinogenic impact • In a blend with low-sulphur diesel, biodiesel improves lubricity • Has a higher cetane number than mineral diesel, thus ensuring quick engine start-up in cold climates• In a low percentage blend, it can be used without modification to the engine • In a low percentage blend, it can be supplied using the existing fuel supply infrastructure through standard diesel

pump equipment • Its high flashpoint makes it a safer fuel to handle than any conventional fuel

Level 9, 189 Kent StreetSydney, NSW 2000Tel 61 2 8247 8900

Fax 61 2 9252 8066www.frost.com

- New York - Silicon Valley - San Antonio – Toronto – Palo Alto - London - Frankfurt - Paris -Oxford -- Tokyo –Seoul- Mumbai - Chennai - Singapore - Kuala Lumpur - Beijing - Shanghai – Sydney - 53

10 EXPERT REPORTS - Biodiesel Market Report

10 EXPERT REPORTS - Biodiesel Market Report (CONTINUED)

The term “biodiesel” refers to the pure or 100per cent biodiesel fuel, also referred to as B100. Although biodiesel is sometimes utilized in its pure form, it is more commonly mixed with mineral diesel in a blend. The blends B5 (i.e. 5 per cent biodiesel, 95 per cent mineral diesel) and B20 are most commonly used. In most jurisdictions blends up to B5 do not need to be labeled as containing biodiesel.

Major Markets

Biodiesel is manufactured by specialist biodiesel producers and generally sold in bulk form either to oil refiners / marketers (who either blend with mineral diesel or in some cases sell in B100 form), or direct (or via distributors) to end-users such as trucking companies and bus fleet operators. In some cases biodiesel producers are blending their own product with mineral diesel to sell a blended product to customers. To date, biodiesel has been considerably more expensive to produce than mineral diesel (although this gap has narrowed significantly with the substantial increase in mineral oil prices, coupled with access to lower cost feedstocks to produce biodiesel). Hence biodiesel has generally relied on taxation incentives such as lower levels of excise duty or taxation credits to make it competitive with mineral diesel. There has been rapid growth in consumption and production of biodiesel, particularly over the past two years. Europe is by far the largest biodiesel market worldwide. This is primarily driven by strong legislative backing and taxation incentives, high penetration of diesel-powered vehicles, distributor support and end user acceptance. Germany, France and Italy are the largest end use markets among the Member States of the EU. Other much smaller (but growing) markets are the United States and parts of Asia Pacific.

The total demand for mineral diesel can be viewed as the total potential available market for biodiesel (since current technologies allow for substitution of diesel by biodiesel across most applications). In both Europe and the USA, despite higher mineral oil prices, diesel demand in the first part of 2006 has been at higher levels than in earlier years and is projected to remain at higher levels than that of previous years for the remainder of 2006.

Feedstock: Biodiesel can be produced from a variety of feedstocks including vegetable oils (such as rapeseed oil, sunflower oil, palm oil, soybean oil, coconut oil, jatropha etc), tallow, fish oil and waste cooking oil.

Blending: Biodiesel may be utilized in a pure form (B100) or blended with mineral diesel in a variety of proportions. B5 (a blend containing 5 percent biodiesel and 95 percent mineral diesel) is commonly supplied in Europe. Most car manufacturers provide engine warranties only up to a 5per cent biodiesel blend.

Byproduct: The production of biodiesel yields glycerine as a byproduct. Glycerine is a bulk commodity chemical with a wide variety of end uses, primarily in the food, healthcare and pharmaceutical industries. Most biodiesel producers refine glycerine to pharma-grade (>99.7 per cent purity) which ensures the highest possible price for this byproduct, since this grade commands a much higher price than food-grade glycerine. However, Sterling proposes to sell technical grade (crude) glycerine at least during the early years of production so as to focus on biodiesel as the core product.

3 Legislative Trends

3.1 Europe

Targets

As part of the Kyoto Agreement, the European Union committed to reducing its emissions of CO2 by 8 percent between 2008 and 2012. The life cycle analysis (LCA) approach to the overall atmospheric CO2 contribution of a fuel suggests that biodiesel produces about 50 percent less CO2 than mineral diesel. This has provided the main incentive in persuading individual governments, and now the European Commission, to support the development of the biofuels market as an important contribution to meeting their overall emission targets.

On 17th May 2003 a new EU directive (2003/30/EC) aimed at promoting the use of biofuels – including biodiesel – in transport came into effect. This was driven by the fact that the transport sector accounts for more than 30per cent of energy consumption in the EU, and CO2 emissions from transportation (mostly road transportation) were expected to rise by 50per cent between 1990 and 2010. The directive required Member States to ensure that a minimum proportion of biofuels and other renewable fuels are placed on their markets by setting indicative targets, which were to be reported to the European Commission by July 1st 2004. The reference value for these targets is set at 2 percent, calculated on the basis of energy content, of all petrol and diesel for transport purposes placed on their markets by December 2005. Further indicative targets are to be set in 2006, with a reference value of 5.75 percent for December 2010. The reference value for these targets refers to biofuels as a class rather than biodiesel specifically.

54 STERLING BIOFUELS INTERNATIONAL LIMITED PROSPECTUS 2006

The targets set out in the directive are non-binding, but Member States will have to explain in their initial reports why their own indicative targets may not match the reference targets set by the Commission.

To accompany the aforementioned directive, a later directive (2003/96/EC) on the restructuring of the Community framework for the taxation of energy products and electricity contains clauses allowing Member States to apply an exemption or a reduced rate of taxation on biofuels; putting into place a vital fiscal tool which can be used to encourage greater market penetration of biofuels. Each state has implemented taxation benefits for biodiesel to varying degrees.

Member States were required to respond in writing to the Commission by July 31st 2004 stating what national indicative biofuels targets they were setting for 2005, how they meant to achieve these targets and any reasons for deviation from the Commission’s indicative target. The response from Member States to date has been uneven. At the time of writing 22 of the 25 Member States had produced reports for 2004, made available on the Commission’s Energy web-site - http://europa.eu.int/comm/energy/res/legislation/biofuels_members_states_en.htm. The 3 Member States which to date have not published reports for 2004 are Italy, Luxembourg and Slovenia. 21 Member States (including Luxembourg and Slovenia) have to date produced updated reports for 2005.

In February 2006 the European Commission issued a Communication on the EU strategy for biofuels. It was recognized that the 2005 reference value of 2 per cent of transportation fuels to be supplied by biofuels had not been achieved, and that a range of actions would need to be taken to further stimulate take-up of biofuels. A more extensive review of the EU biofuels directive is due to occur in December 2006. Consultation has commenced on this review, with a focus on the following questions:

• Is the objective of promoting biofuels still valid?• The directive sets a reference value of 5.75% for the market share of biofuels in 2010. Will this share be achieved with

existing policies and measures? If not, why not?• Looking towards 2010, does the EU system of targets for biofuels need to be adapted? If so, how?• Should a certification system be introduced to avoid using “poor performing” biofuels or give more support to “better

performing” ones?• Looking towards 2015 and 2020, should further measures be adopted to promote biofuels?• A number of more technical issues

Standards and Specifications

In Europe the EN 14214 standard establishes specifications for fatty acid methyl esters for diesel engines. B100 that meets this standard can be used unblended in a diesel engine, or blended with mineral diesel to produce a blend in accordance with EN 590, the diesel fuel specification. This standard allows blends of fatty acids up to 5 per cent to be considered as standard diesel, with no special labeling required.

To be usable in individual markets biodiesel must also meet Cold Filter Plugging Point (CFPP) specifications for that market. The CFPP value is a measure of the temperature at which certain fractions in the oil solidify and block the filter, resulting in the engine arresting due to diesel shortage. Biodiesel produced from feedstocks such as tallow and palm oil has a relatively high CFPP compared to that derived from rapeseed oil or soybean oil which means it can be used in B100 form or in high proportion blends only in warm climates. In practice, biodiesel produced from high CFPP feedstocks will generally be blended in low proportions (B5 or below) and in these proportions its cold flow properties are generally indistinguishable from mineral diesel.

3.2 United States

In the US, biodiesel must meet the ASTM D 6751 standard. Biodiesel that meets ASTM D 6751 and is legally registered with the Environmental Protection Agency is a legal motor fuel for sale and distribution. The ASTM specification is for biodiesel as a blend rather than as a stand-alone fuel (B100). Some states such as Minnesota have transposed this standard into law (Minnesota has mandated the use of B2 in all diesel fuel sold in the state).

The first legislated biodiesel tax incentive in the United States was introduced in October 2004 (as part of H.R. 4520 legislation). This is a federal excise tax credit of one penny per percent of biodiesel in a fuel blend made from agricultural products (such as vegetable oils) and half a penny per percent for biodiesel from recycled oils. The incentive is effective at the blender stage in the supply chain i.e. the petroleum distributors and passed on to the consumer. This credit can be claimed by registered blenders of biodiesel and effectively reduces the cost of B100 (from vegetable oil sources) to them by $1.00 per gallon. At prevailing rack prices for biodiesel and mineral diesel in the US this tax credit is effectively making biodiesel cheaper than mineral diesel.

55


In June 2005, the United States Senate’s Energy Bill extended this tax incentive for biodiesel through to December 31, 2010. There are also tax incentives for farmers engaged in building biodiesel plants and tax incentives for fueling infrastructure (for B20 blends at retail stations).

The bill has a target (Renewable Fuels Standard) of 8 billion gallons of renewable fuels (such as biodiesel and ethanol) by 2012.

Apart from the federal tax incentive, another significant piece of government policy has been the USDA Bioenergy programme, initiated in 2000 that has helped encourage the use of crop surpluses for energy production. However, this programme is due to expire in July 2006 and no extension has been announced as yet.

In addition to federal incentives, several states have legislated tax and infrastructure incentives for biodiesel. For example, Minnesota has legislated that the state’s diesel fuel should have a 2 percent biodiesel component in 2005. In 2006, Washington State passed a similar legislation requiring 2 percent of diesel sales volume to be biodiesel. Iowa has legislated a 3 cents-per-gallon tax credit for biodiesel blends of B2 or higher for retailers who sell biodiesel blended fuel amounting to at least 50 percent of their total sales volume.

In terms of standards, the US has initiated a BQ-9000 certification/accreditation programme for biodiesel producers that combines the existing ASTM (American Society for Testing and Materials) biodiesel specifications with quality parameters for storage, sampling, testing, blending, transportation, distribution and fuel management.

4 Market Drivers and Restraints

4.1 Europe

Market Drivers

Growing penetration of diesel-powered carsIn 2004, petrol-powered cars were overtaken by diesel cars on Europe’s roads – at least in new car sales as the proportion of diesel-powered cars in Europe exceeded 50 percent for the first time ever. The huge increase in the proportion of diesel cars in Europe has taken place since 1998, when common-rail technology was launched on a broad front. This made diesel a serious competitor to petrol power when it comes to drivability and noise levels. In addition, the lower fuel consumption meant that legislators in increasing numbers of countries favoured diesel power through tax incentives.

EU Directive drives Member State uptake of biodieselThe European Union, which has ratified the Kyoto protocol, issued in 2003 biofuel targets for Member States (by 2005, 2 percent of transport-fuel consumption to be biofuel and 5.75 percent by 2010). While the response from Member States has been uneven, the pressure to legislate toward meeting the targets is tangible within each country. For example, mandatory blending quotas have been introduced in some countries which effectively create a guaranteed market for biodiesel.

Rising oil pricesThe main driver for growth in the biodiesel market is the supply of biodiesel at a cheaper price than mineral diesel. In a competitive and low profit margin industry, the transport sector is constantly trying to source cheaper fuels. The market for transport fuels is very price sensitive and rising prices at the pumps, driven by the high mineral oil price, have opened up a market for cheaper alternatives. Depending on the prevailing mineral oil price, however biodiesel may need tax concessions to be price-competitive with mineral diesel.

Long-term demand to be sustained by increasing importance of alternate clean fuelsAs part of the Kyoto Agreement, the European Union committed to reducing its emissions of CO2 by 8 percent between 2008 and 2012. The life cycle analysis (LCA) approach to the overall atmospheric CO2 contribution of a fuel suggests that biodiesel produces about 50 percent less CO2 than mineral diesel. This has provided the main incentive in persuading individual governments, and now the European Commission, to support the development of the biofuels market as an important contribution to meeting their overall emission targets.


The long-term mandate for cleaner alternate fuels is driven by:

• Growing environmental pollution concerns • Depleting non-renewable sources of energy• Rising oil prices

There is therefore significant political backing behind the production and sale of biofuels such as biodiesel in the EU.

Compatibility with existing fuel infrastructure helps grow the marketThe ease of use of biodiesel in the existing fuel infrastructure and vehicle fleet has been a major driver behind its rapidly expanding use in Europe. This gives it a substantial advantage over other ‘alternative’ fuels such as LPG or natural gas, which require expensive changes to the vehicles and completely different dispensing equipment. B5 can be distributed throughout the normal diesel fuel distribution chain without alteration, including transport in pipelines. B100 can be used in existing fuel dispensing equipment and transport tankers with essentially no alteration, although a slight solvent effect on rubber seals may need to be monitored. In low percentage blends, as used in the majority of markets outside Germany, no modifications are necessary to diesel engine vehicles using the fuel.

Market Restraints

Reduction in Taxation Incentives for Biodiesel in GermanyTax exemption has been the main driving force behind the growth of the biodiesel market in Germany (which is the largest consumer of biodiesel in the EU) as it has allowed biodiesel, which can be more expensive to produce than mineral diesel (dependent on the prevailing mineral oil price), to compete in the price-sensitive fuel market. However, in March 2006, the cabinet of the new coalition government in Germany approved the end of tax-free status for biodiesel starting August 2006 (€0.09 per litre on B100 and €0.15 per litre on blended biodiesel). These increased taxes would be borne by the end-user rather than the biodiesel producer. Also, at the beginning of May 2006, the Finance Ministry announced that oil refineries were now mandated to blend biodiesel into mineral diesel. While the compulsory blending provides an assured volume to biodiesel producers, these changes will put increased pressures on production costs and profitability of biodiesel producers.

Slow pace of legislative change in new EU Member States and certain original Member StatesWhile the EU directive remains the overarching driver for the biodiesel industry and has elicited legislative change in most original Member States, some of them (Greece and Belgium, for instance) have not yet put in place legislative support for the biodiesel industry. As for most of the new Member States, the process has only just begun.

Engine warranty fears may limit the market for pure biodieselAs of January 2005, the World-Wide Fuel Charter (WWFC) – (being a compilation of fuel quality requirements endorsed by the Alliance of Automobile Manufacturers, the European Automobile Manufacturers Association (ACEA), the Engine Manufacturers Association, the Japanese Automobile Manufacturers Association and a number of other automobile manufacturer trade associations around the world) – does not endorse fuels that contain more than 5 percent biodiesel for fuels sold in WWFC defined category 1-3 areas (most of the world). We understand that vehicle manufacturers are adopting this as their policy for engine warranties and using blends stronger than B5 biodiesel will be solely at users’ discretion and risk.

In addition, German car manufacturer Volkswagen indicated in 2005 that it would henceforth not issue approval for use of pure biodiesel in its new cars on account of the introduction of the more stringent Euro-4 emission standards. This is not expected to have a major negative impact on biodiesel volumes since compulsory blending introduced in Germany would mean that fuel suppliers will be mandated to supply biodiesel, most likely in a B5 blend.

Unresolved performance issues for higher concentration blendsThere are still areas of concern using higher concentrations of biodiesel blends such as viscosity, storage issues regarding hydroscopicity and the effect of the solvent properties of biodiesel on petrol tanks and paint.

As the market expands, potential ethical questions could ariseWith an estimated 20 percent of all EU rapeseed oil produced used for biodiesel production in 2005, ethical issues could potentially arise about the use of a valuable food commodity for non-food purposes. While excess sugar cane and beet can be grown and used in bioethanol with no harm to the food industry, the same cannot be said of biodiesel and its raw material supply. Competition with the food industry over vegetable oil could also push up the price of raw materials.

As raw material supplies start to shorten, rapeseed production will increase to meet demand. With so many fields potentially devoted to rapeseed production, environmental groups are starting to ask questions on the effect on the biodiversity of wildlife.

57


This could in the long term, potentially put a stain on how eco-friendly biodiesel actually is. This is one of the major drivers behind the exploration of feedstock sources such as jatropha, which produces a non-edible oil that is believed suitable for biodiesel production. Jatropha however can only be grown in sub-tropical regions so does not provide an alternative feedstock in the EU (unless seeds or jatropha oil are imported).

4.2 United States

Market Drivers

Federal tax incentive makes biodiesel more attractive and competitive vis-à-vis mineral dieselThe biodiesel tax incentive, introduced in October 2004, was scheduled to expire in 2006, but has been recently extended to 2010. This incentive helps bridge the gap between the price of biodiesel and mineral diesel. This has resulted in a significant stimulus to the industry in the USA, with the National Biodiesel Board reporting production of 75 million gallons of biodiesel in 2005 (~245,000 tonnes) compared to 30 million gallons (~100,000 tonnes) in 2004.

Reducing the dependence on import of crude oil Imported petroleum accounts for 60 percent of the US requirement for petroleum and this comprises the largest single expenditure in the trade deficit. The increasing trade deficit and the growing dependence on imports for crude oil are of major concern. This has taken on increased significance due to the political volatility in the middle-east (from the Persian Gulf, Iraq is the second-largest provider of crude oil to the US). Total US petroleum consumption was approximately 20.8 million bpd (barrels per day) in 2004 and expected to continue increasing primarily due to increase in consumption of transportation fuel (Source: Energy Information Administration, Annual Energy Outlook 2006). Of this 59.8per cent was derived from imports, 18per cent of which came from the Persian Gulf. This could become a serious long-term challenge to supply enough fuel for the transportation sector. Western states are especially vulnerable to reduced availability of liquid fuels (relatively low production in the West, high transport costs of fuel from other regions, coupled with high demand). Increased production of biodiesel could partially alleviate this increasing shortfall. This issue was reinforced by President Bush in his State of the Union Address in January 2006 where he called for much greater usage of biofuels in reducing the US dependence on imported mineral oil. Such high-profile endorsement has given a significant boost to the US biofuels industry.

Trucking community’s increased uptake of biodieselIn October 2005, the American Trucking Associations (ATA) - the largest national trade association for the trucking industry – endorsed the use of biodiesel up to 5 percent in a blend (B5). Similarly, Sysco Corporation, the largest private truck fleet in the country, also commenced use of B5 in its fleet. Trucking accounts for close to 70 percent of tonnage carried by all modes of domestic freight transportation in the US. Therefore, endorsement and uptake by this sector is expected to a significant driver of biodiesel volumes in the short and long term.

Ultra-low Sulphur Diesel (ULSD) phase-in to boost uptake of biodieselThe US Environment Protection Authority (EPA) has stipulated that as of 1June 2006, 80 percent of diesel produced by US refineries for on-road use should meet the limit of 15 ppm of sulphur (ULSD standard). This would mean a loss of lubricity that biodiesel (when used in a blend with the mineral diesel) can help rectify. The deadline for this ULSD fuel reaching distribution terminals across the country (except for California which has an earlier deadline) is 1 September 2006 and at retail by 15 October 2006. Off-road diesel (non-road, locomotive and marine fuel) will have a 500 ppm sulphur limit by 1 June 2007 and by 1 June 2010 non-road fuel will need to have a cap of 15 ppm sulphur with locomotive and marine fuel meeting this cap by 1 June 2012. Considering the importance of lubricity to diesel fuel injection systems, biodiesel, with its excellent lubricity properties, is expected to gain significantly throughout the phase-in period of ULSD and thereafter. (US manufacturer of diesel fuel injection systems, Stanadyne Automotive Corp. revealed test results showing an improvement in lubricity by around 65 percent through use of a 1 percent biodiesel blend).

Growing penetration of diesel-powered vehicles in the US marketAccording to a study by automotive market research firm R.L. Polk & Co., registration of diesel passenger vehicles in the US has grown 80 percent since 2000. In the light-duty vehicle segment, registrations saw a 31 percent jump in 2005 alone (95 percent growth 2000 to 2005). The greater fuel-efficiency of diesel-powered vehicles is the single biggest driver of this trend toward diesel vehicle purchase. Rising petrol prices are only likely to accentuate the advantage of diesel vehicles and this is expected to be a strong driver for the biodiesel market in the future.

A recent forecast by JD Power and Associates forecast that the diesel share of US light vehicle sales is likely to rise from 3.2 per cent in 2005 to over 10 per cent by 2015.


Success of the USDA Biodiesel Fuel Education ProgrammeInitiated through the 2002 Farm Bill, the USDA Biodiesel Fuel Education Programme has been providing education funding that – as per a recent survey done to gauge effectiveness – has resulted in a rise in public awareness of biodiesel from 27 percent in August 2004 to 41 percent in December 2005.

Abundance of feedstock helps grow the marketThere is large amount of feedstock available for production of biodiesel in the United States. Estimates for 2006 put the total acreage of soybean at a record 76.9 million acres. Also, with advancements in research and technology, the industry has embraced many feedstock options apart from soybean, to produce biodiesel.

New entrants increase industry production capacityThe National Biodiesel Board has estimated that the number of biodiesel plants in the US has grown from 22 in 2004 to 65 currently. It is also estimated that there are an additional 40 plants under construction and around 30 projects at the pre-construction phase. This substantial increase in production capacity will help take biodiesel more mainstream in the US market.

Rising oil pricesThe International Energy Agency (IEA) meeting in Brazil (June 2005) announced that the ceiling at which biofuels become economically competitive with conventional fuel without any tax incentive - an oil price of US$60 a barrel - had been broken, making large-scale commercialization of biofuels more viable. Current oil price levels – around the US$70 a barrel – make biofuels even more attractive.

Long-term demand to be sustained by increasing importance of alternate clean fuelsThe long-term mandate for cleaner alternate fuels is driven by:

• Growing environmental pollution concerns • Depleting non-renewable sources of energy• Rising oil prices

While this has a beneficial effect on all biofuels including ethanol, biodiesel also receives and will continue to receive increasing attention and investment on this account.

EPACT requires government and state motor fleets to purchase alternative-fueled vehiclesThe Energy Conservation Reauthorization Act (EPACT) of 1998 amended EPACT to include biodiesel fuel use credits. The rule, effective January 2001, gave fleet operators one auto flexible fuel credit for using 450 gallons (about 1700L) of biodiesel. The Energy Policy Act of 1992 required federal and state motor fleets to purchase alternative-fueled vehicles (75 percent of new purchases). Alternative fuel providers such as ethanol and biodiesel must also comply (90 percent of new purchases). The Department of Energy (DOE) has the authority to implement a private and local government program if necessary for the promotion of the biodiesel.

Market Restraints

Much higher uptake of ethanol restrains biodiesel uptakeEthanol, a substitute for gasoline, is in higher demand, as the number of vehicles running on diesel is comparably lower than those running on gasoline. In 2005, the United States produced over 4 billion gallons of ethanol. Compared to this volume, biodiesel is a much smaller sector.

Lower penetration of diesel-powered cars as opposed to petrol-poweredUnlike Europe, the United States automotive fuel market is dominated by petrol. Despite the fact the new registrations of diesel vehicles are showing drastic jumps, they are growing off a small base (In 2004, diesel’s share of the new passenger vehicle market in the United States was under 4 percent). While this market is set to grow, it is still a very small proportion of the total automotive fuel market, and is therefore expected to remain a restraint to biodiesel demand in the medium-term.

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5 Market Size and Growth

All market size (biodiesel consumption) estimates have been made using a combination of insights gathered from interviews with biodiesel producers and trade associations, published data and Frost & Sullivan’s in-house databases and multi-client studies on the biofuels sector.

In deriving market estimates for Europe we have relied upon a number of sources including current and historic biodiesel production volumes quoted by individual Member States and posted on the EU web-site: (http://europa.eu.int/comm/energy/res/legislation/biofuels_members_states_en.htm) and production statistics published by the European Biodiesel Board.

EBB gives production volumes from 2000 to 2005. In developing market estimates for the EU for subsequent years to 2007 we have added additional volume supplied by known new plant capacity that will come on-line (based on published sources plus discussions with market participants). The commencement of imports from SE Asia in 2007 has also been assumed. For the period from 2007 to 2011 consumption growth has been based on a continuation of current compound annual growth rates (CAGR) in consumption with a downward adjustment towards the end of the period to factor in an anticipated likely shortage in domestic feedstock which is assumed to restrain domestic EU production. The market estimates for biodiesel consumption therefore rely on a number of assumptions including:

• Continued growth in diesel consumption across EU Member States and a continuing high mineral oil price.• Member States will continue political support for biofuels and will strive to achieve mandated targets. (However political

realities, such as budgetary restraints in certain Member States, may prevent the mandated target from being fully achieved in each Member State).

• Significant additional production capacity will come on stream in various Member States from both new plants and additions to existing plants.

• Likely feedstock shortage in the last few years of the 2007 to 2011 period in Europe (food sector competes with biodiesel for feedstock i.e. vegetable oil such as rapeseed) which will mean mandated targets are unlikely to be met from domestic sources.

• Increased imports of biodiesel particularly from SE Asia with an increasing number of producers targeting the EU market.

It should be noted that we have not assumed that the 5.75 percent target for transport fuels from renewable sources by December 2010 will necessarily be met neither in each Member State nor across the EU as a whole. However, overall it is our opinion that the market drivers outlined above in section 4.2 are likely to drive substantial growth in biodiesel consumption across the period to December 2010.

For the US market we have used historic sales and production volumes and predictive information published by the National Biodiesel Board. These relate to domestic production and sales in the USA. To these we have added known volumes of imports, where these have been announced (although there is uncertainty whether planned import volumes will be realized).


5.1 Europe

In the EU consumption has grown from around 1.07 million tonnes in 2002 to 3.18 million tonnes in 2005. With an average price (ex works) of €0.66 per litre in 2005, total revenues from the sale of biodiesel in 2005 amounted to around €2.43 billion. Based on estimated EU transportation diesel consumption of 178 million tones, this suggests that biodiesel accounted for around 1.7 to 1.8 per cent of overall transportation diesel usage, i.e. the 2 per cent reference target for 2005 has not been met across the EU as a whole.

If the EU directive target of 5.75 percent by December 2010 is to be met then approximately 11.7 million tonnes of biodiesel will be required, based on current mineral diesel consumption in the transport sector with annual growth of 3 percent assumed to 2010. However our market estimates assume that this level will not be reached in its entirety across all Member States. In deriving an overall EU market estimate for biodiesel consumption, we have used a bottom-up approach and aggregated forecast consumption volumes in each Member State. Total forecast consumption for the EU is shown below:

Biodiesel Consumption in the EU, 2002-11

Source: Frost & Sullivan

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5.2 United States

Biodiesel is only just emerging as a viable alternate fuel in the United States. The National Biodiesel Board (NBB) estimated that 75 million gallons (around 245,000 tonnes) of biodiesel were produced in the country in 2005. While this is miniscule when compared to the EU, it represents a 150 percent growth over the previous year. Government tax incentive, a large number of new plants being established, competitive pricing (vis-à-vis mineral diesel), increased penetration of diesel vehicles and increasing end-user awareness are combining to ensure that the US should experience biodiesel consumption growth at a similar pace to the 2005 performance for the near future.

When compared with the total on-road diesel consumption of 37 billion gallons a year, biodiesel appears a very small market, but strong drivers are taking this fuel mainstream.

The NBB estimates that around 500 major fleets use biodiesel in the United States. They are serviced by 1,400 petroleum distributors and 450 retail filling stations that supply biodiesel.

Consumption – according to the NBB - will more than double by 2007 as known new plants come on stream. Additionally, there are likely to be increased imports of biodiesel into the US market. For example, we understand that an American company announced the arrival on November 8, 2005 of the first shipment of palm oil-based biodiesel at the Port of Tampa, FL containing 268,000 gallons of biodiesel and that the same company plans to import 45 million gallons in 2006 and 100 million gallons in 2007. Whether imports into USA on this scale will result in protectionist measures (to protect domestic vegetable oil and biodiesel producers) remains unclear. The American Soybean Association (ASA) has called for imported biodiesel to be exempted from Federal tax benefits.

Biodiesel Consumption in the USA, 2002-07

Source: NBB, Frost & Sullivan

These market estimates are based on projections by the NBB for domestic production plus public announcements of known import volumes over the period (totaling 268,000 gallons of biodiesel in 2005, 45 million gallons in 2006 and 100 million gallons in 2007).

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6 Pricing Trends

Biodiesel is generally sold in bulk form (at a rack or terminal gate price) by biodiesel producers, either direct to oil refiners / marketers or via distributors, although sales direct to end-users such as trucking companies or bus fleet operators are also common. It may be sold to end-users at the pump either in B100 form or more commonly as a blend with mineral diesel. In most cases blends containing up to 5 per cent biodiesel do not need to be labeled as containing biodiesel. In general the cheaper biodiesel is at the rack when compared to mineral diesel, the more attractive it is to customers. Currently rack prices for biodiesel are at around $900 to $1050 per tonne in the German and US and markets, dependent on feedstock, volume and actual location. Although this is higher than the price of mineral diesel, taxation benefits are making biodiesel competitive in these markets.

6.1 European Market

Biodiesel prices vary quite significantly by national market, as a result of different production cost structures in different plants, feedstock used and other factors. In particular biodiesel produced purely from rapeseed oil (RME) is commanding higher prices than that produced from other feedstocks (mainly Fatty Acid Methyl Ester or FAME), reflective of the better cold flow properties of RME and the higher cost of rapeseed oil. In Germany, which is the largest European market, biodiesel prices increased significantly in the first half of 2005, as the mineral oil price continued to climb, and stabilized somewhat in the second half of the year. The price mid-December 2005 for biodiesel (RME) was approximately €0.74 per litre (ex-works, Germany, excluding VAT), equivalent to $1046 per tonne. The current average price in Germany is around €0.72 per litre (equivalent to $1010 per tonne). These prices are still highly competitive with mineral diesel with a current bulk price of around €0.92 per litre ($1352 per tonne). Currently pump prices for B100 in Germany are around €0.96 per litre compared to €1.23 for mineral diesel (inclusive of VAT). This reflects the taxation advantages given to biodiesel in Germany.

There are several pricing strategies in the European market for biodiesel, all of which normally result in biodiesel prices being strongly linked to the price of mineral diesel. Biodiesel is normally priced at a comparative price or at a slight discount to mineral diesel so as to encourage customers to use it. Feedstock prices have not played a part in the pricing model in the European market, although clearly higher feedstock prices means there is less profit-margin for producers. At prevailing ex-works biodiesel prices and with rape oil prices at current levels in Europe, producing biodiesel from rape oil only (i.e. RME), assuming the producer pays the current spot price for rape oil, is not likely to be commercially viable unless the buyer is prepared to pay a premium for RME. Hence European biodiesel producers are increasingly seeking to utilize lower-cost feedstocks such as soybean oil and even palm oil.

In the UK at the time of writing biodiesel (FAME) is selling at around ₤0.73 per litre ($1506 per tonne), and RME ₤0.84 per litre ($1746 per tonne) excluding VAT. Although these prices are very high, they are equivalent to the current bulk mineral diesel price of around ₤0.79 per litre. This is because UK fuel duties are higher than most EU countries, at ₤0.47 per litre for mineral diesel and ₤0.27 for biodiesel (since 2002 there has been a ₤0.20 per litre duty incentive in place for biodiesel). Without the fuel duty, UK bulk biodiesel (FAME) prices are also at the $950 per tonne level prevailing in other countries.

In France the price is formally set so that the fuel refiners do not pay any more for biodiesel than for mineral diesel including excise duty. In other countries there is a less formal relationship between the prices, but biodiesel is generally sold at a discount to mineral diesel including the taxes and this saving is passed onto the end-users. The lower price of biodiesel than mineral diesel was the main driving force behind the growth in the market for the last 5 years and will continue to be in the future.

The price saving however, is not passed onto consumers in other countries where blending occurs. In France and Italy for example, biodiesel is blended anonymously and is sold as standard EN590 diesel at the normal price. In the UK too, B5 Biodiesel is sold through supermarkets as a premium priced product. Sales however in this instance are very slow.

Also there are farming cooperatives in Austria and Germany where the actual price paid for the biodiesel is simply to cover the process of making it.

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6.2 United States

Given the prevailing blending credit (equivalent to $1 per gallon for B100 made from pure vegetable oil), at prevailing high mineral diesel prices, biodiesel (B100) is being sold at the same or even less than mineral diesel. Biodiesel prices vary substantially dependent on location (as delivery costs can be quite high), and volume. Current bulk rack prices for B100 (before the tax credit) are around $3.10 to $3.40 per gallon, but average $3.26 per gallon (equivalent to $976 per tonne). However blenders of biodiesel are able to claim the $1 per gallon blending credit which reduces their effective cost to $676 per tonne on average. This currently makes biodiesel cheaper to the blender than mineral diesel. At the time of writing average rack prices for mineral diesel across the USA are $2.30 per gallon, equivalent to $689 per tonne.

6.3 Comments on Sterling’s Price Assumptions

We understand that Sterling has used a base price of €800 per tonne (RME, rack price, Germany) as the basis of their pricing assumptions. At current exchange rates, this is equivalent to $1000 per tonne. As mentioned above, we estimate the current average ex-works price for RME in Germany to be $1010 per tonne. We therefore believe that at the time of writing Sterling’s price assumptions for biodiesel are reasonable.

7 Competitive Environment

7.1 Europe

In 2005, total production capacity of biodiesel in the EU stood at 4.23 million tonnes per annum, with Germany accounting for around 45 percent, Italy accounting for around 19.5 percent and France accounting for 12.5 percent. For 2006, it is estimated that total production capacity in the EU will cross 6 million tonnes.

Biodiesel Production Capacities in the EU, 2003-06

Source: EBB

Others include Estonia, Slovenia, Hungary, Lithuania, Latvia, Malta, Cyprus and Ireland

Future capacities are not expected to sustain the dramatic growth rate of 2004-05 (88 percent). Also, the source of new capacities remains difficult to confirm especially given the unpredictability and variability of response from the new EU Member States to the EU Biofuels Directive. For example, Poland went from zero capacity in 2004, to 100,000 tonnes in 2005 making it the sixth largest biodiesel producer in the EU.

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Number of Producers

The biodiesel market is quite a fragmented market with now over 50 active market participants. The three largest producers are Diester Industrie, Novaol and Archers-Daniel-Midland (ADM). All three of these companies have the backing of large agricultural concerns, which has given them the financial capability to invest in capacity expansion and a reliable source of large volumes of rapeseed oil.

Competitive Factors

The main competitive factors in the biodiesel market are determined to a certain extent by the legislative situation in each market.

In France and Italy, and any other countries, which have quota systems, obtaining a quota for duty exempt biodiesel production is vital to compete in the market at all. The process for obtaining a quota has been rather opaque, particularly in France, where allocation has been almost entirely to the domestic producer - Diester Industrie. Companies that already have quotas have an advantage when they are calculated, so Diester will remain strong in France for this reason alone, although its large capacity plants would also be competitive on a cost basis. In Italy, Novaol has the largest share of the quota through its own plants in Italy, Austria and France, as well as a number of toll manufacturing agreements.

In Germany, and other countries where the market is unaffected by quotas, a normal competitive situation will develop. The key competitive factors are:

• Quality Management: Consistent product quality, meeting the EN 14214 specifications, is a pre-requisite for competing in the market.

• Production and Delivery Costs: Where pure biodiesel is sold, the transport companies, which are the major customers for this fuel, are buying primarily on price. Hence for this market the lowest cost producers will be most successful.

Blended biodiesel has only been sold in a major free market - Germany - for just under a year. In the French and Italian markets, the refiners can only choose between a limited numbers of suppliers with quotas for tax-exempt production. The pricing mechanism is fixed, so as long as the companies can meet these prices, competition is primarily on having a large quota.

It is not yet clear at what volume of biodiesel the refinery demand will become saturated, but when that is reached, it can be assumed that competition will move more towards a price based system for what is essentially a commodity product.

Where competition depends on cost, there are a number of factors to consider, including:

• Feedstock cost • By-product price• Processing cost• Transport and logistics costs

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7.2 United States

With the introduction (and extension) of the biodiesel tax incentive, there has been a dramatic surge in new production capacity through new entrants in the market. Across the country, the number of biodiesel plants has risen from 22 in 2004 to 65 plants as of May 2006. There are an additional 35 plants under construction and another 30 in pre-construction phase. Capacity as of May 2006 totaled 395 million gallons and the NBB expects another 713 million gallons to be added to that by the end of 2007.

The majority of these plants are using soybean oil as a feedstock, with some using recycled cooking oils, beef tallow, cottonseed oil or multiple feedstocks. Some plants being developed on the Southern Coast are planning to use imported palm oil.

Significantly, Cargill is understood to be completing work on what would be the country’s largest biodiesel production facility (a 37.5 million gallon-a-year (140,000 tonnes per annum) plant at Iowa Falls, Iowa). This project – due to open in May 2006 - is seen as confirmation of the commercial opportunity in biodiesel, which in the United States has traditionally been supplied by farmer-owned biodiesel plants.

Similarly Archer Daniels Midland (ADM), one of the leaders in the EU biodiesel industry, has announced entry into the US market with a plant in Velva, North Dakota, that will produce 50 million gallons (160,000 tonnes) of biodiesel from rapeseed oil per year. 8 Feedstock Options

A variety of feedstocks is currently used for biodiesel production, or are being trialed. These include:

• Rapeseed oil • Sunflower oil • Soya oil • Waste cooking oil • Tallow• Palm oil• Coconut oil• Jatropha

In the EU, around 80 percent of production volume utilised rapeseed oil in 2005. In the US, soybean oil is the main feedstock utilized, whilst most plants in SE Asia plan to utilize palm oil as the feedstock.

Further information on feedstock options is given in a separate report written by Frost & Sullivan (M) Sdn. Bhd.

9 Opportunities for SE Asian Producers

Most current or planned biodiesel projects in SE Asia (together with some in Australia) plan to initially supply the EU market with biodiesel produced from palm oil, and achieve significant cost advantages over EU domestic producers who primarily rely on higher cost feedstocks, and who generally also have higher production costs.

At the time of writing, biodiesel imported into the EU is subject to an ad valorem duty of 6.5 per cent, compared to 3.8 per cent for crude palm oil (Taric code 1511109000) and 9.0 per cent for refined palm oil (Taric code 1511909900). However even given this duty, biodiesel producers located in SE Asia still enjoy substantial cost benefits as a result of being able to readily source a much lower cost feedstock (palm oil). Additionally, for biodiesel from Malaysia the 6.5 per cent import duty can be cancelled if the goods are imported with a “GSP form A” from the supplier. This is a General System Preference form A that shows that a significant amount of work has been done on the product in Malaysia and it is thus truly of Malaysian origin.

Typically palm oil sells in Malaysia for around $260-300 per tonne less than rapeseed oil in Europe (based on average prices in North West Europe since January 2005). Additionally, producers located in SE Asia are expected to enjoy additional cost benefits from lower labour costs, land costs and generally lower utility costs. By illustration, we estimate that conversion costs for a large scale biodiesel plant in the EU are approximately USD$120/tonne (primarily comprised of costs for methanol, KOH and catalysts, utilities and labour, based on present circumstances and current economic, operating and market conditions and subject to variations arising for the applicable Member State), which when added to a rape oil price of USD$813 / tonne as at July 17th 2006 (FOB, Dutch, ex-mill) gives a production cost of approximately USD$933 / tonne for an EU plant using rape oil as a feedstock. Conversely we estimate production costs for a plant located in SE Asia using palm oil as a feedstock


to be approximately USD$503 per tonne based on a palm oil price of USD$403/ tonne as at July 17th 2006 (with assumptions for conversion costs of USD$100, primarily comprising costs for methanol, KOH and catalysts, utilities and labour, based on present circumstances and current economic, operating and market conditions and subject to variations arising for the applicable plant location in SE Asia). With additional shipping costs of approximately USD$60 / tonne to the EU, subject to variations arising for the applicable Member State, and some incremental inland transportation costs, SE Asian producers still enjoy a landed EU cost advantage of approximately USD$360 / tonne over their EU counterparts before import duties. Even with import duties into the EU at the current level of 6.5 percent, the cost advantage is substantial. Importantly, at prevailing price levels, the landed cost of palm-oil based biodiesel in Europe is below the cost of mineral diesel, which at the time of writing is around $634 per tonne (EN 590, FOB Rotterdam).

It should be noted that at prevailing biodiesel and rape oil prices in Europe, production of biodiesel from rape oil is not likely to be commercially viable. Hence EU biodiesel producers are increasingly seeking to source lower cost feedstocks to reduce overall production costs. Hence the overall cost advantage for SE Asian producers is likely to be narrowed somewhat going forward.

The cost advantage compared with US biodiesel producers is less marked as soybean oil (the main feedstock used in the USA) is currently priced at around $530 per tonne in the US market. With similar conversion costs to the EU at around $120 per tonne, estimated production costs in the USA are around $650 per tonne (subject to variation dependent on location and scale of operation). Hence with shipping costs to the US of around $60 per tonne, landed costs in the US for a SE Asian producer are around $90 per tonne lower than typical production costs for a US domestic producer utilising soybean oil as feedstock. 10 Key Risks and Issues for SE Asian Producers

Below we summarize our opinion on some of the key risks and issues that biodiesel producers in SE Asia may face which include:

Palm Oil as Feedstock?

There is little perceivable risk of supplying the European or US markets with biodiesel made from palm oil feedstock. This is because the decisive factor remains the ability of suppliers to meet the EN 14214 or ASTM D 6751 specifications and the relevant CFPP standards in the destination state rather than the type of feedstock used. As long as biodiesel meets the EN 14214 specifications and the relevant CFPP standards for its chosen markets, palm-oil derived biodiesel will be acceptable in the EU and USA, although in many cases it will need to be sold in a low proportion blend due to the high CFPP of palm oil based biodiesel or supplied for summer use.

Taxes on Imported Biodiesel?

In Frost & Sullivan’s assessment, a significant risk factor associated with exporting biodiesel from SE Asia to the EU comes from the possibility of import duties on imported palm oil derived biodiesel from SE Asia being raised from the current 6.5 percent level, or other import barriers (such as quotas) being introduced (when volumes from suppliers outside Europe reach the scale of jeopardizing the EU’s domestic supply chain viability). Considering the fact that the farmer lobby is considerable in impacting political decision-making in many of the EU’s Member States, significantly large volumes of imported biodiesel could prompt the imposition of restrictions or duties on imported biodiesel (to protect the domestic rapeseed growers and biodiesel producers). This could particularly be an issue if production capacity in the EU grows ahead of actual demand, although this appears unlikely with current capacity in the EU of around 6m tones per annum compared to a forecast market of around 10m tonnes per annum by 2011. At a meeting of EU Agriculture Ministers on February 20th 2006 concerns were raised by some countries over the impact on domestic agriculture and biofuels industry of significant imports. However given the significant cost advantages enjoyed by SE Asian producers as a result of lower feedstock costs, duties would have to be raised significantly for this element of cost advantages enjoyed by SE Asian producers to be completely eroded. The imposition of quotas could have a more significant impact, potentially reducing the volume of biodiesel that SEA producers would be able to market within the EU. However it is highly likely that quotas would be in breach of WTO trade rules and would most likely be challenged by Malaysia and other palm oil-derived biodiesel exporting nations.

Similar risks exist in the US market, where the American Soybean Association has already called for imported biodiesel to be exempt from US tax incentives. Ethanol already has an import duty into the USA.

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Environmental Pressure Against Palm Oil?

There is increasing concern amongst environmental groups on the impact of the extensive increase in palm oil cultivation, particularly in Malaysia and Indonesia. For example, the World Wildlife Fund (WWF) has called for mandatory eco-certification of all biofuels used in Europe due to concerns over the impact on bio-diversity of the clearance of tropical rainforests particularly for palm oil cultivation. A report published by Friends of the Earth (FOE) in September 2005 claimed that without urgent intervention, growing cultivation of palm oil would lead to the extinction of the Orang-Utan within 12 years. In its Communication of February 2006 the EC recognized these concerns and specified that investigation and quantification was required, and that biofuels policy will attempt to balance the benefits offered by biofuels whilst addressing environmental concerns most probably through the regulatory framework. Recognizing these concerns, the Malaysian Palm Oil Association (MPOA) signed two Memoranda of Understanding with WWF Malaysia towards sustainable development of the country’s palm oil industry. Under the MoUs, they will develop better management practices for the Malaysian palm oil industry to safeguard high conservation value forests (HCVFs).

Target vs. Actual Uptake?

Thirdly, there also exists the risk of EU Member States not doing enough in terms of tax incentives or proactive support toward meeting the 5.75 percent renewables target. This implies that realistically, the target should not be extrapolated as the potential market for biodiesel in Europe.

Increased Capacities?

There is the possibility that new biodiesel plants and expansions to existing plants in Europe and USA could increase domestic supply and thus reduce the mandate and marketability for imported biodiesel. For example, two new plants being set up in the United Kingdom will add significantly large capacities to the biodiesel industry in the EU (one of the two plants – by Biofuels Corporation – at 250,000 tpa is expected to be the largest biodiesel plant in Europe on completion). Similarly in the USA with over 60 new plants either in construction or planning stage, domestic supply is likely to grow markedly.

EU-15 to EU-25?

At this stage, the impact of the expansion of the EU (from EU-15 to EU-25) on the EU’s biodiesel market is hard to ascertain. While the East European countries will make available more land for non-food rapeseed cultivation, their financial capacity to convert this into a new biodiesel supply option is in some doubt. However, it is likely that existing biodiesel producers in Western Europe will commence sourcing or increase their volumes of feedstock sourced from the East European countries.

EU or US Biodiesel Producers Importing Palm Oil?

There is a risk that EU and US producers may seek to produce biodiesel from imported palm oil rather than more expensive domestic vegetable oil sources. As an example Biofuels Corporation PLC which is building Europe’s largest biodiesel plant in Teesside, UK, is understood to have plans to produce biodiesel from imported palm oil as well as other feedstock using a multi-feedstock plant supplied by Energea. However, not all biodiesel plants are multifeedstock. And not all plants have the logistical support or the plant infrastructure to keep the palm oil heated (to prevent it from solidifying in the cold) during transportation and processing in Europe and Northern USA. However, given the current high rape oil prices in Europe, we believe that EU biodiesel producers will increasingly seek to utilize lower cost feedstocks (including imported vegetable oils), and this is likely to reduce the cost advantage for SE Asian producers. Moreover imports of both crude and refined palm oil currently have import duties into the EU of 3.8 per cent and 9.0 per cent respectively.

In the US market, there is some pressure from the soybean industry to exclude non-domestic virgin vegetable oils (such as palm oil) from the feedstocks that will benefit from the $1.00 per gallon tax credit. The American Soybean Association and the National Biodiesel Board have written to the Inland Revenue Service (IRS) requesting a ruling that palm oil does not qualify for the tax credit. If granted, such a request would significantly reduce the attractiveness of palm oil as a feedstock. However this kind of exception to the tax credit would be unlikely to be compliant with WTO rules.


11 Disclosure

This is an independent report prepared by Frost & Sullivan. Save for the preparation of this report and services rendered in connection with this report for which normal professional fees will be received, Frost & Sullivan has no interest in Sterling and no interest in the outcome of the IPO. Payment of these fees to Frost & Sullivan is not contingent on the outcome of the IPO. Frost & Sullivan has not and will not receive any other benefits (including any commissions) and there are no factors which may reasonably be assumed to have influenced the contents of this report nor which may be assumed to have provided bias or influence. Frost & Sullivan does not hold a dealers license or Financial Services License.

12 Conclusion

Considering all of the above points, it is Frost & Sullivan’s estimation that the near- and medium-term feasibility of exporting palm-oil derived biodiesel to the EU market is relatively assured, assuming the biodiesel meets the required specifications for the individual market in question. Also, the growing demand for biodiesel in the EU is likely to mitigate the long-term risks to an extent. However, non-market forces (influenced by the political climate) are understandably difficult to predict and so is their impact on marketability of imported biodiesel in the EU for the long term. The recognition by the European Commission that a range of actions would be need to be taken to further stimulate take-up of biofuels is positive for the industry. The review of the EU Biofuels Directive by December 2006 is likely to result in further stimulus to the industry. Overall, we estimate that the EU market for biodiesel will grow from around 3m tones in 2005 to around 10m tones by 2011. Likely feedstock shortages in Europe will place a constraint on EU producers meeting this demand, at least from domestic feedstocks, and hence importers who can meet EU specifications should find a readily-available market, particularly since they will enjoy a significant cost advantage over EU producers as a result of lower feedstock and conversion costs. In the largest EU market, Germany, palm-oil based biodiesel producers such as Sterling should find a ready market as oil refiners seek to meet the mandatory blending target placed on them. These refiners are likely to seek the lowest price supply that meets their required technical standards, offering opportunity to palm-oil based producers.

The US market is also showing substantial growth, although in absolute terms it remains much smaller than the EU market, growing from around 400,000 tonnes in 2005 to around 1.4m tones by 2007. The US market is likely to be less accessible for SE Asian producers, as a result of higher transportation costs, lower consumption and the extent of domestic supply, although it still remains a commercially viable market as the cost of domestically produced biodiesel is likely to be higher than that of imported biodiesel from SE Asia. As with the EU (in fact probably more so), political factors which are very hard to predict may limit the marketability of imported biodiesel in the US market to some extent. Yours Sincerely

Mark DouganDirector

69

10 EXPERT REPORTS - Technology Report

Monday, 24th July 2006

The DirectorsSterling Biofuels International LtdGround Floor16 Ord Street,West Perth WA 6005AUSTRALIA

Independent Engineer’s Report on Desmet Ballestra Oleo s.p.a. technology

Executive Summary

Sterling Biofuels International Ltd (Sterling) through its wholly owned subsidiary SPC Biodiesel Sdn. Bhd. (SPC Biodiesel) has commissioned the Austrian Biofuels Institute (ABI) to complete an independent engineers’ report for a 100.000 metric ton (tonne) per annum biodiesel production plant in Malaysia to be built by the process technology and engineering company Desmet Ballestra Oleo s.p.a. The Austrian Biofuels Institute (ABI) has conducted an independent engineering assessment of the Desmet Ballestra biodiesel production technology. The scope of ABI’s work only included a review of the Desmet Ballestra process technology and its suitability for SPC Biodiesel’s project and did not constitute a full technical due diligence.

This report provides a summary of our assessment, which is based on information provided by SPC Biodiesel, information provided during a technical conference and meeting with Desmet Ballestra, our previous analyses of Desmet Ballestra biodiesel facilities, and our experience with various biodiesel process technologies over the past 16 years.

Having screened the process technology and the capability of Desmet Ballestra to supply a suitable biodiesel plant, it is our opinion that Desmet Ballestra’s process design complies with recognized and proven biodiesel manufacturing processes and that Desmet Ballestra has the capability to carry out the construction of such a plant.

The Desmet Ballestra Oleo biodiesel process utilizes the trans-esterification reaction of an oil with methanol to produce biodiesel and glycerine. The process is continuous with a number of reaction and separation steps to achieve the desired conversion.

We have reviewed operating assumptions contained in the project model. Overall we consider these assumptions reasonable and there are a number of utility requirements such as nitrogen supply, steam and electricity, raw water and waste water treatment that would appear to be adequately covered in the body of the proposal.

There are four biodiesel production plants based on Desmet Ballestra’s design and equipment in operation today and an additional 16 are under construction. The plant built by Desmet Ballestra in Livorno, Italy, reports good results as does the plant in Torrejana, Portugal.

Desmet Ballestra is a well known and respected supplier to the global oilseed industry. For these reasons, we believe that Desmet Ballestra has the ability to deliver the equipment, the supporting documentation and the services to meet the delivery milestones according to the schedule offered.

This report represents our professional opinion regarding the points described in the terms of reference below and it is not an invitation or recommendation to invest in Sterling. Any comments on the technical implications of legal documents such as contracts are non-legal in nature and should not in any way be taken as providing legal advice.

I. Introduction

1.1 Context

Sterling engaged ABI to assess and provide an independent expert’s report on the biodiesel process technology of Desmet Ballestra for the purpose of including it in a Prospectus in respect of an initial public offering by Sterling, the parent company of SPC Biodiesel Sdn Bhd of Kuala Lumpur, Malaysia.


Graben 14/3Pf./P.O. Box 97

A-1014 Wien, Austriatel: +43-1-534 56-33fax: +43-1-534 56-38www.biodiesel.at

Österreichisches Biotreibstoff Institut ÖBIAustrian Biofuels Institute ABI

1.2 Qualifications and Disclosure

The Austrian Biofuels Institute (ABI) is an international competence centre for liquid biofuels and was founded in 1995.

The ABI is currently represented by a team of 52 independent experts from 8 countries on 4 continents and has carried out projects in over 27 countries throughout the world. We have lead or participated in several biodiesel projects within European Union programs for Research, Development, Dissemination and Demonstration. Its activities include R&D projects, for instance the suitability of new feedstock sources, engine and emissions testing.

Part of ABI’s support for government organisations includes the development of biodiesel quality standards for ON, CEN (European Committee for Standardisation) and the Australian Ministry for the Environment. This also includes technical support for the European Commission in defining the Directive for the Promotion of Liquid Biofuels, biodiesel process technology evaluations and various studies for the International Energy Agency – Bioenergy. Commercial work includes dissemination and demonstration activities, training and seminars, as well as consulting activities such as feasibility studies and due diligence evaluations for the liquid biofuels industry and financial institutions worldwide.

Industry surveys include “Best Case Studies on Biodiesel Production Plants in Europe” screening 38 plants along defined success criteria for the International Energy Agency-Bioenergy 2004.

1.3 Terms of Reference

The scope of ABI’s analyses was agreed to be the following:

• Review the Desmet Ballestra biodiesel production process.• Provide a statement regarding the technical competence of Desmet Ballestra to build the proposed plant.• Provide a statement regarding the feasibility of the proposed project plan.

These analyses were carried out in June, 2006.

1.4 Approach and Limitations

As indicated above, ABI was retained to provide an independent expert’s opinion regarding the biodiesel process technology of Desmet Ballestra. We did not carry out a full technical due diligence including reviews of the contract and its provisions, compliance with local statutory and environmental regulations, a review of the condition and suitability of the proposed production site, or other such factors. We have not been provided with any technical, legal, or accounting reviews that may have been conducted by others.

The opinions expressed in this report are based on information provided by SPC Biodiesel and Desmet Ballestra, our previous experience with Desmet Ballestra biodiesel production facilities, and on our experience with other biodiesel production technologies over the past 16 years.

Our opinions are provided on the basis that the information supplied to us about the current project was reliable, accurate, and complete. At this stage, detailed engineering designs of the proposed plant are not yet available and many of our comments are therefore limited to the general capability of Desmet Ballestra’s technology. The specific performance of the plant provided to SPC Biodiesel will be dependent on its detailed design.

This report represents our professional opinion regarding the points described in the terms of reference above and is not an invitation or recommendation to invest in Sterling, nor is it a warranty or guarantee. Any comments on the technical implications of legal documents such as contracts are non-legal in nature and should not in any way be taken as providing legal advice. 1.4 Report Structure

This report is divided into 4 sections, including this introduction.

• Section II: discusses the biodiesel process proposed for the project;• Section III: reviews the technical elements of the process;• Section IV: considers the capability of the main process plant contractor

71

II Biodiesel Manufacturing Technology

II.1 Biodiesel Process

The fundamentals of the biodiesel production process were developed in Austria in the late 1980’s. At this time, a rather simple batch process was used in plants with annual capacities between 500 to 2,000 tons. The biodiesel was mainly produced from rapeseed oil, it was of low quality and it was sold to small farmers’ cooperatives.

The first biodiesel fuel standard was then developed in 1990 together with the petroleum industry, diesel engine manufacturers and fuel injection equipment makers. This standard (ON 1190) set demanding quality criteria and gave the vehicle industry increased confidence in biodiesel. Biodiesel fuel standards have continually improved since then and the strictest standards currently in force are the European and the Australian standards. As a result of the increasing fuel quality requirements, process technology has been continuously developed to meet these standards.

In the basic process reaction the oil (triglyceride) reacts with methanol in the presence of an alkaline catalyst (e.g. sodium methylate) and is split into Fatty Acid Methyl Ester (FAME, or biodiesel) and glycerine. Any free fatty acids, if present in the feedstock, are separated and are esterified in an acid environment to produce biodiesel from these as well, thus increasing the overall yield. A wide range of oils has been tested and found suitable for the production of FAME, for example virgin food oils (rapeseed, sunflower, soy, palm oils), fats (beef tallow) and recycled frying oils and fats. After some cleaning steps, the biodiesel achieves the required quality as defined by national fuel standards.

II.2 Desmet Ballestra Biodiesel Process

Ballestra has been involved in biodiesel process technology and biodiesel production since 1993, when they built plants for Estereco in Cittá di Castello, Italy, and for Novaol in Livorno, Italy. Desmet developed a pilot plant for biodiesel production in Belgium in the mid 1990’s and is a major provider of equipment and processes to the oilseed crushing and oil producing industry worldwide. Desmet and Ballestra merged in December 2004 and completed the first Desmet Ballestra Oleo spa biodiesel plant in Torrejana, Portugal in February 2006.

The production process offered for the plant of SPC Biodiesel includes a transesterification process step as well glycerine purification with the following process steps:

• Biodiesel production including transesterification, biodiesel purification and methanol recovery, capable of producing biodiesel conforming to the EN 14214 standard, the strictest currently in force:

Triglycerides and methanol are mixed with sodium-methylate at 55°C and atmospheric pressure leading to a multi-step transesterification (using 3 reactors in series) with a multi-step glycerine separation for improving reaction yield. Sodium-methylate is used as a catalyst for improved reaction yield and lower soap formation. Most of the excess methanol, after being separated from the product streams by both flash and atmospheric distillation, is directly recycled to the transesterification unit.

• Glycerine recovery is carried out including purification and neutralisation, producing 82 – 85% pure glycerine.

Desmet Ballestra are to incorporate centrifugal separation as part of the trans-esterification process which improves recovery compared with the more traditional static or settling separation techniques used by a number of other manufacturers. An additional dryer unit is incorporated into the process to reduce moisture levels in the feedstock oil where necessary.

The various process steps appear to be well tuned to each other, quality controls can be carried out at each critical point and most beneficially, short interruptions for minor repairs can be tolerated.

10 EXPERT REPORTS - Technology Report (CONTINUED)


BIODIESEL PRODUCTION PLANTBASE PLANT CONFIGURATION

73

OIL DRYING

REFINED OILS

TRANSESTERIFICATION

BIODIESEL GLYCERINE@ 82-85 %

SEPARATION

Water

Water

Sodium Methylate (catalyst)

Methanol

Citric Acid

Fresh Methanol

Water

Dry Methanol

Wet Methanol

Wet Methanol

Crude Glycerine

HCl NaOH

Waste Water

Dry Oil

ReactionMixture

Methylester

GLYCERINE TREATMENT

CITRIC ACID SOLUTION

PREPARATION

FINAL FLASHMETHANOL

DISTILLATION

II.3 Technical Competence of Desmet Ballestra

Ballestra technology was firstly evaluated by Mr. Körbitz of the ABI at the occasion of the establishing of a biodiesel plant of Estereco in Cittá di Castello in Italy in 1993 and later on during a visit of the biodiesel plant in Livorno in 2001.

Desmet is known to the Austrian Biofuels Institute since a visit of a biodiesel pilot plant in Belgium earlier.

Since the merger of both companies into Desmet Ballestra in December 2004 the biodiesel business has gained momentum as illustrated by Desmet Ballestra`s reference list with one new plant being in operation (Torrejana, Portugal) and several projects being under construction right now (e.g. Granol/Brazil; Rompetrol/Romania; Greenergy/United Kingdom; Owensboro Grain/USA).

The reference list of Desmet Ballestra mentions 34 projects for which Desmet Ballestra-technology has been selected, of which 13 are located within Europe, 9 in Southeast Asia, 5 in Brazil and 5 in the USA. This achievement within a rather short time is quite impressive. II.4 Feedstock Quality

Different oils will have different chemical and physical properties that affect the trans-esterification process. Among the chemical properties, Free Fatty Acids (FFA) and water content are amongst the most important as these will take part in unwanted side reactions that reduce yield and consume catalyst.

The type and quality of oils available to be used as feedstock in this production are oils with high purity (Refined Bleached Deodorized (RBD) palm oil, palm olein, palm stearin): a level of FFA of less than 0.1 %, a moisture and impurities content of less than 0.10 %. All of these parameters indicate clean and easy to process oils that allow a high quality biodiesel to be produced.

SPC Biodiesel are intending to use RBD Olein as their primary feedstock with the specific intention of maximizing the potential benefit of the alternative palm oil options in meeting the European Unions required fuel specification EN14214. The low sulphur content of this feedstock further enhances these benefits.

The iodine value of RBD Olein is approximately 56 (the European standard sets a maximum of 120 gr I/100 gr), which is an indication of high stability.

RBD Olein has a guaranteed maximum of 10ppm phosphorous but has traditionally shown levels of less than 5ppm. As the transesterification process does not remove phosphorous content, then these low levels of the RBD Olein feedstock, compared with other oil sources, is an additional benefit to the quality of biodiesel produced.

Biodiesel produced from palm oils has a higher stability than biodiesel produced from most other feedstock oils, notably rapeseed and soybean oils.

II.5 Operational Yield

Yield is determined by the conversion efficiency of a process technology. It is measured as the percentage of all triglyceride molecules present in the feedstock that are transformed into FAME, or biodiesel. Any molecule which is not transformed into FAME will most probably enter the waste streams and can create additional expenses there.

The crucial factor in producing the desired production rate will be in ensuring that the plant design accounts for the properties of the feedstock oils used.

The Desmet Ballestra biodiesel process technology is offered with a yield level of approx. 99.8 %, which is the practical maximum conversion level of triglyceride molecules into FAME in the biodiesel industry today.

The conversion efficiency and quality that Desmet Ballestra as listed in its guarantees appear to be both reasonable and attainable and we have every reason to believe that an output of 100,000 metric tonnes per annum is achievable.



II.6 Finished Product Quality

II.6.1 Biodiesel

As the first priority in the evaluation of a biodiesel production process, the level of quality achieved must be evaluated as this determines whether a product is marketable or not and whether it can be sold at market prices. Experience in the rapidly growing biodiesel market in Europe shows that the legally demanded level of quality (EN 14214) is often not achieved due to poor process technology and inadequate production management.

A sample of biodiesel from the Desmet Ballestra biodiesel production plant in Torrejana, Portugal was tested by the independent analytical laboratory ASG in Germany with the following results, which are well within the limits set by the EN 14214 standard with the exception of the cold test Cold Filter Plugging Point (CFPP). The CEN (European Standardisation Committee) has decided that biodiesel for blends of 5% or less of biodiesel with fossil diesel need not comply with this requirement. Diesel sold with 5% biodiesel content (B5) is in commonly available.

The quality parameters for the SPC Biodiesel plant are formulated even more strictly than for the Torrejana plant, for example with a guaranteed maximum water content of 200 mg/kg. This will allow the biodiesel, which is hygroscopic, to be more easily transported long distances over water while still meeting water content requirements when it arrives.

Parameter Test Unit EN 14214 Torrejana Optionalacid value EN 14104 mg KOH/g max. 0.50 0.213 0.213water content EN 12937 mg/kg max. 500 260 145total contamination EN 12662 mg/kg max. 24 10 5free glycerine EN 14105 %(m/m) max. 0.02 0.01 0.001monoglycerides EN 14105 %(m/m) max. 0.80 0.51 0.42diglycerides EN 14105 %(m/m) max. 0.20 0.19 0.15triglycerides EN 14105 %(m/m) max. 0.20 0.05 0.05total glycerine EN 14105 %(m/m) max. 0.25 0.16 0.14Alkali content (Na+K) EN 14108(9) mg/kg max. 5 1.4 0.73*Alkali content (Ca+Mg) prEN 14538 mg/kg max. 5 < 0.5 < 0.93*

* = depending on the quality of water used in the process

Due to ever stricter emissions limits, further increases in fuel quality requirements must be expected. Desmet Ballestra offers process technology today that exceeds EN 14214 requirements in the parameters listed in the column “optional” above. Most biodiesel plants in Europe cannot reach this quality level. Existing Desmet Ballestra plants can be upgraded accordingly when needed.

It should be mentioned that a plant capable of producing biodiesel that meets the European EN 14214 standard can also produce biodiesel meeting less demanding standards, such as those of the US or Australia.

II.6.2 Glycerine:

Purified and concentrated glycerine is produced in the range of 82 – 85 % purity as a standard tradable product for world markets. This appears to be the appropriate level of purity to produce at present. The current prices for the higher purity pharmaceutical grade glycerine would most likely not warrant the expensive processing required to increase the purity levels above 85%.

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III Additional Technical Elements of the Process

III.1 Plant Staffing

In the materials supplied from Desmet Ballestra, the staffing levels of the plant are not discussed. However, today’s modern biodiesel plants are usually almost completely automated, requiring constant supervision by one person in the control room. For security reasons it is recommended to have a second person in place as well.

Additional staff are required for:

• unloading of feedstock and other process chemicals; • quality control through sampling of oil and biodiesel output;• loading of biodiesel and glycerine;• supply of non bulk raw materials to the process plant;• cleaning and maintenance work as required.

Continuous plant operation will require shift workers for each of these areas and it is recommended to have written standard operating policies in place in order to assure safe production procedures.

The staffing levels recommended by SPC Biodiesel for their plant operations consisting of 5 shift supervisors and 9 shift operators supported by 5 general workers would appear adequate.

These personnel will be supported by a mechanical engineer, chemical engineer, chemist, quality controller and chargeman.

III.2 Capacity

Desmet Ballestra offers a capacity of 100,000 tonnes per annum of biodiesel and the corresponding volume of crude or semi-refined glycerine per year with 8,000 hours of operation (i.e. 333 days). This appears to be reasonable and conservative as it leaves a full month per year for unscheduled repairs and maintenance. In practice, this downtime can usually be reduced to 14 days per year by thoroughly planning maintenance in advance and thoroughly planning maintenance in advance and by having a well tuned and experienced team in place.

III.3 Chemical RequirementsWe have reviewed the chemical requirements (e.g. feedstock, methanol, catalyst) provided by Desmet Ballestra for the various process steps and consider them to be reasonable and attainable when comparing to consumption figures with those of similar biodiesel process units in operation.

III.4 Utilities

We have reviewed the utilities assessments for the consumption values for electricity, steam, cooling water and compressed air for the various process steps are reasonable and attainable when comparing to consumption figures with those of similar biodiesel process units in operation.

III.5 Operating Costs

We have not reviewed the operating costs of the SPC Biodiesel facility but can confirm that it would be reasonable to assume that annual maintenance of 3% representing 1% on buildings and 2% on plant and equipment would be considered reasonable for plants of this nature.



IV Contractor Capability

Desmet Ballestra’s process and manufacturing technology is a proven process applying known technologies assuring the required high quality of biodiesel and a state-of-the-art level of yield. Being a well known supplier for both the oilseed crushing industry and the emerging biodiesel industry, Desmet Ballestra has the ability to deliver the equipment and related documentation it has offered, to provide all required services and to complete construction and start-up as described.

V Summary

It is our opinion that Desmet Ballestra Oleo has the capacity and the proven technology to provide SPC Biodiesel Sdn Bhd with a facility for the production of 100,000 metric tonnes of Palm Methyl Ester per annum. We form this opinion based on the following:

1. Biodiesel manufacturing is a proven process and employs known technologies.2. Desmet Ballestra is an internationally known supplier of processing facilities to the global oilseed processing industry. 3. Desmet Ballestra’s process complies with recognised biodiesel manufacturing processes.4. Desmet Ballestra’s contract with SPC provides all of the equipment required for the process and we are confident that they

have the ability to deliver the equipment and supporting documentation. CEN5. The biodiesel produced will meet the requirements of the European Union specification EN 14214 with the exception of cold

test CFPP. However the CEN has decided that the CFPP requirement will not apply to blended diesel fuels consisting of 5% or less biodiesel.

Yours faithfully

Werner KoerbitzAustrian Biofuels Institute

77

10 EXPERT REPORTS - Feedstock Supply Report

The DirectorsSterling Biofuels International LtdGround Floor16 Ord Street,West Perth WA 6005AUSTRALIA

July 21st, 2006

Dear Directors,

Independent Review of the Palm Oil Feedstock Sector

1 Introduction

Sterling Biofuels International Ltd (“Sterling”) is developing a biodiesel plant in Lahad Datu, Sabah, Malaysia through its wholly-owned subsidiary SPC Biodiesel Sdn Bhd (“SPC Bio”). We understand that SPC Bio has received regulatory approvals to commence production and that the plant is expected to commence commercial operations on July 1st 2007. We understand that the nominal capacity of the plant will be 100,000 tonnes per annum, and that the plant will be supplied by the Desmet Ballestra Group. The plant will be a multi-feedstock plant, capable of manufacturing biodiesel from a variety of feedstock including crude palm oil (CPO), Refined, Bleached and Deodorized palm oil (RBD palm oil), RBD palm stearin or RBD palm olein. We understand that initially at least SPC Bio plans to utilize RBD palm olein as the feedstock.

Sterling is planning to undertake an Initial Public Offering (IPO) on the Australian Stock Exchange (ASX). Frost & Sullivan has been commissioned by Sterling to undertake an independent market review of the palm oil feedstock sector for inclusion in their upcoming prospectus.

Frost & Sullivan is an independent market research and consulting firm operating in over 20 countries globally. Founded in New York in 1961, Frost & Sullivan now employs over 1,500 staff. We have undertaken a number of market studies in the biodiesel and related biofuels sectors on behalf of market participants and financial institutions, as well as producing a number of multi-client reports on the biofuels sector.

In undertaking this assessment, Frost & Sullivan has relied on the following;

• Interviews with industry participants and industry experts;• Secondary information derived from public sources and via Frost & Sullivan’s database.

The research was undertaken from May to July 2006. All effort has been made by Frost & Sullivan to ensure that information in this report is accurate and appropriate at the time of writing. Conclusions, and assumptions attached to those conclusions, are based on Frost & Sullivan’s investigations and analyses of the facts as they are known as at July 2006 and Frost & Sullivan is of the opinion that the conclusions and underlying assumptions are reasonable.

2 Current Feedstocks for Biodiesel and Estimated Levels of Usage

2.1 Feedstock Options The main feedstocks that are currently being used for biodiesel production include:

• Vegetable oils (such as rapeseed oil, soybean oil, sunflower oil, palm oil and coconut oil)• Waste cooking oil • Tallow

Some of the other feedstocks that are used or are being explored for potential in biodiesel production include jatropha, marine seaweed, rubber oil, fish oil etc.

Suite E-08-15, Block E, Plaza Mont’ Kiara2 Jalan 1/70C, Mont’ Kiara

50480 Kuala Lumpur, MalaysiaTel 603 6204 5800 Fax 603 6201 7402

www.asiapacifi c.frost.com

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(522293W)

2.2 Vegetable Oils

Vegetable oils are commodities, which are traded globally on major international commodity exchanges such as the Chicago Board of Trade (CBOT) and the Malaysian Derivatives Exchange (MDEX). The interchangeability of oils creates a complex global supply and demand situation, on which the impact of the emergence of a large biodiesel industry in Europe, and potentially in other regions, such as the US, will be difficult to predict.

Soybean oil accounted for 30 percent of world vegetable oil production volumes in 2004-05 followed by palm oil which accounted for 29 percent and rapeseed oil which accounted for 14 percent. However, in terms of traded volumes, palm oil ranks first, accounting for 56 percent of the total volume of vegetable oil exported/imported globally, while soybean oil accounts for 24 percent and rapeseed oil a mere 3 percent of total traded vegetable oil volumes. The larger the export volumes, the greater the availability of feedstock to a biodiesel producer.

The largest producer of soybean oil is the US, followed by Brazil, Argentina, China and India in that order. The largest producer of rapeseed oil is the EU, followed by China, Canada, India and Australia in that order. The largest producers of palm oil are Malaysia and Indonesia. While Malaysia is currently the largest producer of palm oil, Indonesia is expected to surpass it in volumes some time over the next 2 years. However, compared to Indonesia, a larger proportion of palm oil produced in Malaysia is exported. This and the absence of export restrictions mean that much more palm oil is available in Malaysia as feedstock for a biodiesel producer.

The chart below illustrates the global production of vegetable oil between 2000-01 and 2004-05 by type of oil.

World Vegetable Oil Production by Main Types of Oil, 2000-01 – 2004-05

Source: Oil Crops Yearbook 2005, Economic Research Service, USDA

The main region of growth in vegetable oil production has been Asia Pacific, due to large increases in palm oil production. This trend is forecast to continue. Production of vegetable oil in Western Europe has remained essentially constant over the past decade at between 11 and 12 million tonnes per annum. The new EU member states add approximately a further 1 million tonnes, although the potential in these states could be greater. If the target of 5.75 percent set in the directive is to be met, then approximately 11.7 million tonnes of biodiesel per annum will be required. Assuming a 1:1 conversion of vegetable oil to biodiesel by volume, then all the vegetable oil currently produced in Europe would be required for the biodiesel market. Clearly this is an unlikely scenario.

0 .0 0

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P a l m

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2.3 Tallow

Other than vegetable oils, animal fat (tallow) can also be used to produce biodiesel. Biodiesel produced from beef tallow has a very high Cold Filter Plugging Point (CFPP) value and thus can only be used as a blend with mineral diesel that effectively dissolves it, or be used in hot climates.

The first example of a biodiesel plant using purely animal fats was that of SARIA Bio-Industries in Malchin, Germany. Another aiming to use primarily animal fats came on-line in the UK in 2005; the Argent Energy plant is based next to a rendering plant which should provide the required material. Both plants were supplied with technology from BioDiesel International (BDI). Also in 2005, Finland’s Neste Oils announced its intention to produce biodiesel partially using reindeer fat - the plant is envisaged to come on-stream in 2007.

According to the UK Rendering Association (UKRA), the total European production of animal fat is around 2.5 million tonnes each year. This material is classified into 3 categories under European Commission Regulation 1774/2002, also known as the Animal By-Products Regulation (ABPR). Category 1 is ‘high risk’, whilst Category 3 is ‘low risk’. Category 3 material can be used in feed and pet food, as well as by the oleochemical industry. Category 2 material can be used for technical applications by the oleochemical industry. Category 1 material must essentially be disposed of at a waste incineration or landfill facility approved to handle hazardous waste.

However, an amendment published in 2005 (EC/92/2005) allows for the processing of most Category 1 material into biodiesel. If the volumes of this Category material in the rest of Europe mirror that in the UK, then this could release around 700,000 tonnes of material for biodiesel production that would otherwise have to be disposed of. The actual availability of this material will depend on interpretation of the EU regulations at a national level.

The US is the largest producer of tallow globally, accounting for 43 percent of global supply in 2004. Australia and Brazil are the second largest producers (approximately 6 percent of global supply each).

2.4 Waste Vegetable Oil

Another alternative raw material source is waste vegetable oil. The total exploitable volume of this resource in the EU is not clear, but there are some estimates available for individual countries:

• In the UK, the volume available for the biodiesel industry in 2004 is estimated to be 80,000 tonnes (1.4 kg/head) • A report prepared for Sustainable Energy Ireland (SEI) estimates that the volume of recovered vegetable oil potentially

available to the biodiesel industry could be between 10,000 and 11,000 tonnes (2.5 - 2.8 kg/head) • In Austria the total collectible volume has been estimated to be 37,000 tonnes (4.5 kg/head)

These figures provide a large range of values for the EU. The true potential probably lies somewhere between the UK value and that for Austria, which when extrapolated across the whole of the EU would give a value of between 600,000 and 2 million tonnes.

Waste cooking volumes for the USA are roughly estimated at 300 million gallons per annum (just over 1 million tonnes), equivalent to around 3.4kg per head. Estimates of Australian used cooking oil from Natural Fuels Australia are around 50,000 tonnes per year (2.5kg per head).

Although there is considerable uncertainty about available volumes of WCO, it seems unlikely that it can contribute to more than a small proportion of likely biodiesel production.

2.5 Current Feedstock Usage for Biodiesel

In 2005, around 80 percent of biodiesel production volume in the EU utilized rapeseed oil. The second largest feedstock in use is waste cooking oil. There appears to be trend towards palm oil as a feedstock for biodiesel production due to the lower cost compared with rapeseed oil. If no technical problems are found with palm-based biodiesel it will certainly become more prevalent on the European market.

10 EXPERT REPORTS - Feedstock Supply Report (CONTINUED)


In the US, over 50 percent of the existing number of biodiesel plants in 2006 use soybean oil as their sole feedstock. Only one of the existing biodiesel plants in the US is using tallow as their sole feedstock. 5 use recycled oils as sole feedstock.

2.6 Future Usage Trends

It is clear that based on domestic feedstock resources alone in the EU, the target for biofuels consumption as a percentage of transportation fuels by 2010 cannot be met. However, some producers have plans to import vegetable oils from other parts of the world; particularly palm oil from Indonesia and Malaysia.

The production of biodiesel in increasingly large quantities in the EU will affect the global commodity markets for oils and fats. In the short term, if production continues to expand, price rises would seem inevitable. Such rises have in the past acted as a driver for increased production. One of the underlying drivers behind Directive 2003/30 was the potential to provide an alternative market for domestic farmers. Another, more openly stated driver, was security of energy supply. Both of these objectives are compromised if the EU has to import large volumes of either oils and fats or biodiesel itself. This will be a topic of much political discussion in the near future, the results of which it is impossible to predict, but should be closely followed by all concerned with this industry.

In the US and in Australia the ‘food versus fuel’ debate has not yet gathered as much momentum as it has in the EU because biodiesel is still an emerging market in both these countries. Therefore competition for the same feedstock for food use or biodiesel use is not marked as yet. Neither are there visible signs of resistance or lobbying from domestic feedstock suppliers against imported feedstock in both countries. That is why the lower cost of palm oil (when compared to other feedstock options) has resulted in several recent announcements of biodiesel projects in both the US and Australia that intend using imported palm oil as feedstock.

In the long term, the most significant low-cost competitor to palm oil as biodiesel feedstock will be jatropha (a non-food oil crop that boasts long yield life and low production costs). However, we do not have confirmed values of CFPP (Cold Filter Plugging Point) for jatropha and therefore its viability in low temperature regions cannot be confirmed.

3 Palm oil Industry Definitions and Structure

The palm tree requires around 30 months from planting before it bears fruit. The active fruit bearing period is then 20 to 30 years. Typically each palm tree produces fresh fruit bunches (FFBs) anywhere in the range of 10 to 25 kilograms (with 1,000 to 3,000 fruitlets per bunch) per year.

Oil derived from the mesocarp (the fleshy portion of the palm FFB) is called crude palm oil (CPO). Oil derived from the kernel is called crude palm kernel oil (CPKO). The basic first step of processing at the mills involves having FFBs sterilized and the fruitlets stripped, digested and pressed to extract CPO. CPO can be then refined to produce different quality and grades in output. The liquid fraction derived by the fractionation of palm oil is called palm olein. Palm olein finds a variety of end-use especially as cooking oil or frying oil and as part of oil blends. The solid fraction derived by the fractionation of palm oil is called palm stearin. Its primary end-use is for solid fat ingredients such as shortenings and bakery margarines.

Main End use: Palm oil’s primary food end-use is for the manufacture of cooking oils, margarines and spreads, deep frying oils and specialty fats such as shortenings, confectionery fats, ice cream fats, infant nutrition fats etc. The primary non-food end-use is for the manufacture of soaps, surfactants and lubricants, cosmetics, wax products and biofuels.

Major Stakeholders: The chart below outlines the main stakeholders in the palm oil industry. In Malaysia, there were 392 mills, 40 palm kernel crushers and 49 refineries as of April 2006. The industry employs approximately half a million people. Sabah – where Sterling intends to locate its biodiesel plant – had 110 mills, 9 palm kernel crushers and 9 refineries as of April 2006. Companies such as IOI Corporation and Golden Hope straddle several parts of the value chain for palm oil, through a strong presence in plantations and oleochemicals (and new ventures downstream into biodiesel production). The Malaysian Palm Oil Board (MPOB) is the government agency - established in 2000 - that is the registration and licensing authority for the palm oil industry in the country as well as an active promoter of the sector internationally and a provider of R&D and market information on the palm oil sector. The Malaysian Palm Oil Council (MPOC) - an industry-funded body - provides information and R&D as well as promotes the palm oil sector globally.

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Major Producers: Malaysia is currently the largest producer of palm oil globally, followed closely by Indonesia. Other producers of significant volumes are Nigeria, Columbia and Thailand.

Trade: Palm oil contracts are traded daily by dealers in Kuala Lumpur, Singapore, New York, Rotterdam and London. Contracts can be traded up to 6 months ahead. The Malaysian spot and forward market is the most decisive in influencing trading of palm oil worldwide. Bursa Malaysia Derivatives Bhd. is the world’s largest palm oil futures market, with around 1.16 million CPO futures contracts cleared in 2005.

Major Stakeholders in the Palm Oil Sector

Source: Frost & Sullivan


Plantations(owned by

Pr ivate Estates ,Government,Smallholders)

Mills

Refineries

DownstreamProducers

(Oleochemical product

manufacturers,palm kernel

crushers, fat andfood product

manufacturers,biodiesel producers,

etc)

Exports / Imports

DomesticCustomers

(Retail, Insti tutional, Investors)

GovernmentBodies, R& D Institutions,

Associations

Brokers&

Dealers


4 Advantages and Disadvantages of Palm Oil vs Other Main Feedstocks

4.1 Advantages

Higher productivity per hectare

Palm oil is the highest yielding edible oil crop. In Malaysia, the average palm yield in 2005 was 18.88 tonnes of fresh fruit bunches (FFB) per hectare of plantation (Source: MPOB). In comparison, average rapeseed yield in the EU for 2005 was 2.7 tonnes of seed per hectare and average soybean yield in the US for 2004-05 was 2.84 tonnes per hectare (Source: USDA).

Lower price

Producers utilising palm oil as a feedstock enjoy a significant cost advantage over producers utilising rapeseed, sunflower or soybean oil. In the European market for example, the average price of a tonne of CPO (Jan-05 to Apr-06) was US$263 lower than that of their main feedstock, rapeseed oil.

Ready availabilityAs volumes of rapeseed in the EU and soybean in the US come under pressure from competing end-use sectors (food, oleochemicals and biodiesel), the doubling of Malaysia’s palm oil production over the last 20 years and the tripling of Indonesia’s palm oil production over the same period is ensuring the ready availability of palm oil as a feedstock for biodiesel production. Over the 10-year period 1995 to 2004, global palm oil production grew at the highest CAGR for any vegetable oil (7.3 percent), while soybean oil grew at 4.17 percent and rapeseed at 3.1 percent (Source: Oil World).

4.2 Disadvantages

Unfavourable CFPP value of palm-biodiesel Palm oil based biodiesel has a higher CFPP (Cold Filter Plugging Point) value than other feedstock, which makes it unsuitable in cold climates - especially in markets such as Europe, during winter, without significant additives or unless blended with mineral diesel in a low proportion. Rapeseed methyl ester would typically have a CFPP = -15°C, Soybean methyl ester CFPP = -3°C, Palm methyl ester CFPP = +12°C and Beef tallow methyl ester CFPP = +16°C. This could reduce the attractiveness of palm oil based biodiesel in cold climates as it cannot be used in B100 form.

Negative publicity over alleged environmental damage through palm oil plantations in Southeast Asia Although biodiesel is generally promoted as an environmentally-friendly solution, there is growing pressure against palm-oil based production from certain environmental groups in Europe due to the perception that tropical rainforests are being cleared to increase palm oil cultivation. The European Commission has stated that it will review the biodiesel supply situation later in 2006 and hopes to introduce a system that will guarantee biodiesel crops are not damaging sensitive environments. Partially in response to these ecological concerns, the Roundtable on Sustainable Palm Oil (RSPO) - a group of oil palm growers, processors, traders, end-users and NGOs - was established in Malaysia in 2003 to promote sustainable palm oil growth and use. Also, in May of 2006, the Malaysian Palm Oil Council (MPOC) announced the launch of a RM20 million wildlife conservation fund.

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5 Pricing: Palm Oil versus Other Main Feedstocks

The chart below outlines the price trend for major oils and fats in the Northwest European market for the period Jan-05 to May-06. The average price of CPO over this period was US$426.5 per tonne while the average price of the EU’s preferred feedstock for biodiesel - rapeseed oil was US$697.6 per tonne.

Price of Major Feedstocks (Northwest Europe), Jan-05 – May-06

Source: Oil World

6 Pricing: Historic, Current and Anticipated Price Trends for Palm Oil

Palm oil prices are impacted by several variables which are either market-driven or trade-driven. These include:

Supply Factors

• Yield cycle (high yield at the time of maturation or low yield during the period of biological stress)• Climate (especially rainfall and prolonged hot/dry conditions)• Area under plantation• Oil Extraction Rate• Plantation management and productivity levels• Labour for harvest• Closing stock (and market concerns over excess stock)

Demand Factors

• Competing demand from oleochemical, food and other industrial end-use • Export uptake• Level of imports• Supply of other vegetable oils (especially soybean oil)• Pricing of other vegetable oils (especially soybean oil)• Import duties set by export destination markets• Export duties • Currency fluctuations


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The chart below outlines the 10-year historic price trend for the major types of palm oil in Malaysia.

Price Trend for Palm Oil Products in Malaysia, 1995–2005

Source: Malaysian Palm Oil Board (MPOB)

The spike in prices in 1998 resulted from a combination of factors including lower yields (based on biological stress that is a part of the regular palm plantation yield cycles), unfavourable climate in the second half of 1997 and labour shortages for harvesting.

The price trough in 2001 – on account of strong global vegetable oil volumes – was followed by 3 years of price growth up to 2005, when prices declined again.

The marked price decline for Malaysian palm oil in 2005 occurred on account of large closing stocks at the start of the year, slower exports in the latter half of the year, the removal of the currency peg of the Malaysian ringgit to the US dollar and more competitive soybean prices globally (see table below).

Average Prices for Palm Oil Products in Malaysia, 2004, 2005 & 6 months in 2006

Palm Oil Product Average Price 2004

(RM per tonne)

Average Price 2005

(RM per tonne)

% Diff. (2004 to 2005)

Average PriceJan – June 2006(RM per tonne)

% Diff. (Full yr 2005 to 6 months

of 2006)Crude Palm Oil (Local Delivered) 1,610.00 1,394.00 -13.4 1408.42 +1.03RBD Palm Oil (FOB) 1,676.00 1,454.00 -13.2 1472.33 +1.26RBD Palm Olein (FOB) 1,752.00 1,497.00 -14.6 1502.00 +0.33RBD Palm Stearin (FOB) 1,541.00 1,298.00 -15.8 1430.83 +10.23


However, as the last two columns in the table above indicate, compared to the price decline trend of 2005, average prices in 2006 have so far shown marginal improvement over 2005 (except for RBD Palm Stearin which has shown significant improvement). It is expected that prices still have considerable room to climb in 2006, driven by the rise in crude oil prices (that touched a record US$78 a barrel on 14 July, 2006) and strong demand from European, Chinese and Indian markets. Monthly average forward prices for CPO (local delivered) are at RM1412.00 per tonne (July 06), RM1453.50 per tonne (Aug 06) and RM1464.00 per tonne (Sep 06) indicating a steady rise that some market observers say will cross the RM1500 mark shortly. Monthly average forward prices for RBD Palm Olein (FOB) are at RM1540.50 per tonne (July 06) and RM1538.00 per tonne (Aug 06).

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The price of RBD Palm Olein (which Sterling intends to use as feedstock) is typically higher than that of CPO, RBD Palm oil and RBD Stearin (see chart below). Across the period Jan-05 to Jun-06, the average price of RBD Palm Olein (FOB) in Malaysia was around RM1496.58 per tonne. That represents RM100.42 over the average price per tonne of CPO over the same period and RM40.44 over the average price per tonne of RBD Palm Oil and RM154.94 over RBD Palm Stearin. Price Trend for Palm Oil Products in Malaysia, Variation by Month, Jan-05 – Jun-06


Suitability of Sterling’s Feedstock Price Assumption

Over the 25 years (1980 to 2005), the average annual price of RBD Palm Olein (FOB) price has varied from RM715.5 per tonne in 1986 to RM2,614 per tonne in 1998. The average annual price over the period 1999 to 2005 was RM1440.2 per tonne. The average price in 2005 was RM1,497 and in the first 6 months of 2006, it averaged RM1,502 per tonne. The highest forward price of RBD Palm Olein (FOB) July 06 is RM1540.50 per tonne.

Frost & Sullivan has been advised by Sterling that it will use RM1,750 per tonne as its feedstock price assumption in its financial forecasts. Given the historical and current price trends, this appears a reasonable assumption.


C ru d e P a l m O i l (L o c a l D e l i ve r e d ) R B D P a lm O i l ( F O B )

R B D P a l m O l e i n ( F O B ) R B D P a lm S te a r in ( F O B )

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e


7 Current and forecast availability of Palm Oil

Malaysia has for long been the largest producer of palm oil in the world. However, that status is challenged by Indonesia which had launched a successful planting initiative and is now seeing substantial areas of plantations reaching maturity. Productivity gains and increased investments in Indonesia are likely see it surpass Malaysia in production volume by 2007. However the extent of domestic consumption of palm oil in Indonesia means less is likely to be available for biodiesel consumption than in Malaysia.

7.1 Planted Area

According to the Malaysian Palm Oil Board, planted area for palm in Malaysia rose 4.5 percent from 3.88 million hectares in 2004 to 4.05 million hectares in 2005. Sabah - where Sterling intends to locate its plant - accounted for the largest area of planted palm (1.2 million hectares or around 30 percent of total planted area in Malaysia).

7.2 Productivity

The table below outlines the growth trend in both yield and in oil extraction rate in Malaysia. As can be seen, Malaysia has realised significant improvements in yield of oil per hectare as well as in the OER.

Yield and Oil Extraction Rate in Malaysia, 2001-2005

Parameter 2001 2002 2003 2004 2005Yield FFB Tonne/hectare 19.14 17.97 18.99 18.60 18.88Yield Oil Tonne/hectare 3.66 3.59 3.75 3.73 3.80Oil Extraction Rate (OER) % 19.22 19.91 19.75 20.03 20.15


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7.3 Production Volumes: Historic and Current

Malaysian CPO production volumes have grown at a CAGR of 7.3 percent over a 25 year period from 1980 (2.57 million tonnes) to 2005 (14.96 million tonnes) (see chart below).

There are several drivers that were responsible for sustained production volume growth in Malaysia. These include:

• Maturation of planted area• Improved plantation management• Improvement in fresh fruit bunch (FFB) yield per hectare • Improvement in the oil extraction rate (OER)

The 7.1 percent increase in volume of CPO produced (2004 to 2005) marks the seventh consecutive year of volume increase.

Production of CPO in Malaysia, 1980-2005


7.4 Available Volumes

It cannot be assumed that all palm oil feedstock production would be available for biodiesel because of competing end-use sectors and the extent of exports. Malaysia exports around 90 percent of palm oil produced in the country (see chart below).

Malaysian Palm Oil Exports, Imports and Closing Stocks, 2004-2005



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The main export destinations for Malaysian palm oil are China, the EU and Pakistan (see chart below). While exports to India fell drastically in 2005 (owing to high import duty), those to the US, Egypt and Bangladesh rose significantly. Malaysian Palm Oil Exports, Leading Destination Markets, 2005

Leading Destination Markets 2005 Export Volume (Million Tonnes) % Difference (2004 to 2005)China 2.96 +5.5EU 2.27 +15.6Pakistan 0.96 +0.3India 0.64 -32.6Egypt 0.61 +81.6US 0.56 +62.8Bangladesh 0.51 +40.0


In addition, new capacities coming up in oleochemical sector would also lead to increased domestic consumption in the country.

However, the country has managed to build up its closing stocks of total palm oil (reaching 1.6 million tones in 2005) - a CAGR of 10.31 percent in closing stock volume over a 22-year period to 2005. This ensures that the availability of palm oil for biodiesel (and its competing end-uses) is unlikely to be an issue in the medium-term.

Closing Stocks for Total Palm Oil in Malaysia, 1983-2005


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7.5 Production Volumes: Forecast

Over the medium term, production in Malaysia is forecast to rise to reach approximately 18 million tonnes by 2010 (see chart below):

Palm Oil Production in Malaysia, 1998-2010

Source: Oilworld

For the immediate-term however, the palm oil production growth rate is expected to decline in Malaysia and total production in 2006 could be around 15.8 million tones (lower year-on-year growth for 2005 to 2006 than the 7.3 percent CAGR over the past 25 years to 2005). This is mainly due to strong production in recent years leading to biological stress and the lack of rainfall in 2005.

7.6 Future Available Volumes

Export demand is expected to grow in the next few years as a result of many factors including:

• Abolition of palm oil input quota by China (Starting 2006, China’s tariff rate quota (TRQ) was removed, allowing for easier export of palm oil into China).

• Trans-fat labeling in the US (In the US, as of 1 January 2006, food product manufacturers are required to list the amount of trans-fatty acids in a serving on a separate line under saturated fat on the Nutrition Facts panel. This is leading food product suppliers toward the use of more suitable oil replacements such as palm oil and its derivatives).

• Increasing demand for palm oil as feedstock for biodiesel.

Large carry over stocks have softened palm oil prices in Malaysia which had negative impact on the revenue from this sector. Closing stocks of palm oil in Malaysia was around 1.6 million tonnes in 2005. The Government expects that biodiesel projects would help in reducing the palm oil stocks and stabilize palm oil prices. If 5 percent of biodiesel consumption becomes mandatory in Malaysia (according to the National Biofuel Policy announced by the government), domestic biodiesel demand could lead to an estimated consumption of 500,000 tonnes of palm oil stocks as biodiesel feedstock - considering that the current diesel consumption is around 10 million tonnes per annum.

Based on the stocks available at present, feedstock availability would not be an immediate concern in Malaysia. However, based on the biodiesel and oleochemical capacities expected to be commissioned by end of 2006, and the rising export demand for palm oil, closing stocks of palm oil could drop to 1 million tonnes by end of 2006. As more biodiesel projects get commissioned by the end of 2007 – totaling around 1.5-2.0 million tonnes – pressure on feedstock availability could emerge by 2008. However we understand that Sterling have a supply contract with a palm oil refiner that guarantees feedstock supply for 3 years, so feedstock availability will not be an issue in the medium term. Moreover the Malaysian Government has recently announced a suspension of further biodiesel production licenses which will also reduce pressure on feedstock availability.

Alternate feedstocks such as jatropha have recently been receiving attention in the country but any significant volumes of this feedstock would be at least 3 to 4 years away.


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8 Disclosure

This is an independent report prepared by Frost & Sullivan. Save for the preparation of this report and services rendered in connection with this report for which normal professional fees will be received, Frost & Sullivan has no interest in Sterling and no interest in the outcome of the IPO. Payment of these fees to Frost & Sullivan is not contingent on the outcome of the IPO. Frost & Sullivan has not and will not receive any other benefits (including any commissions) and there are no factors which may reasonably be assumed to have influenced the contents of this report nor which may be assumed to have provided bias or influence. Frost & Sullivan does not hold a dealers license or Financial Services License. 9 Conclusion

Palm oil’s lower cost (vis-à-vis other feedstock options) and current availability help confer a cost and logistic advantage to biodiesel producers located in Malaysia.

As far standards are concerned, as long as the biodiesel meets the EN 14214 specifications in the EU and the relevant CFPP standards for its chosen markets, palm oil derived biodiesel will be acceptable in the EU.

While palm oil production in Malaysia is forecast to reach 18 million tonnes by 2010, competing demands (from oleochemical, food and other industrial sectors) as well as demand through exports is expected to grow. However, based on closing stock levels, palm oil availability as a feedstock for biodiesel is not an immediate concern. In addition, considering the proposed capacity of Sterling’s biodiesel plant (100,000 tonnes per annum), feedstock availability for its operations even in the medium to long term is unlikely to be a significant issue. The plant’s location (in Sabah) confers several logistic advantages on the project considering that Sabah accounts for around 30 percent of total planted palm plantation area in Malaysia, around 28 percent of the total number of mills in the country and around 30 percent of total milling capacity.

While the future palm oil price trend – being subject to several market and trade forces – is difficult to predict, forward prices show a steady increase over 2006. However, the significant price differential vis-à-vis other feedstock options will continue to keep palm oil attractive to biodiesel producers in the medium to long term.

Yours Sincerely

Mark DouganDirector

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S E C T I O N 1 1R I S K F A C T O R S

93

11 RISK FACTORS

The business activities of the Company are subject to risks and there are many factors which may impact the future performance of the Company. These risks are both specific to the Company and also relate to the general business and economic climate. These risks should be considered carefully by investors before making a decision to apply for Shares as they may adversely affect the value of the Company’s assets and Shares. Some of these risks can be mitigated by the use of safeguards and appropriate systems and actions, but some are outside the control of the Company and cannot be mitigated.

The principal risks include, but are not limited to, those detailed below. Prior to making an investment decision, prospective investors should consider the following risk factors, as well as the other information in this Prospectus.

11.1 Risks specific to the Company and the Project

In addition to the market risks noted in Section 11.2 and the general risks noted in Section 11.3, investors should be aware of the specific risks in respect of an investment in the Company. These specific risks include but are not limited to those risks referred to below.

(a) Project construction delay and cost overruns

The Company has based the Forecasts in the Prospectus on assumptions that the Project will commence commercial operations from 1 July 2007 and within the expected cost to the Company of $21.34 million.

The planned construction of the Plant, as detailed in Section 5.3, may be delayed or the costs of construction may be more than the Company anticipates. Such delays or cost overruns may significantly affect the Company’s profitability.

The Company intends to carefully manage these construction risks by engaging reputable contractors, obtaining appropriate insurance and entering, where possible, into fixed-priced contracts.

(b) Design and technology

The Company has based its Forecasts in the Prospectus on the assumption that the equipment and technology to be supplied by Desmet Ballestra will be suitable for the Project and achieve the Plant’s performance specifications.

If, however, the equipment and technology supplied is not suitable for the Project or does not achieve the Plant’s performance specifications, the Company’s financial performance and the value of the Shares are likely to be adversely affected.

The Company has mitigated this risk by obtaining the Plant from a reputable supplier and contracting with the Project Manager to review the design and construction of the Plant. In addition the Company has obtained an independent review of the technology. The independent engineer’s report is set out in Section 10.

(c) Production risks

The Company is exposed to a number of operational risks in relation to its Plant including reduced operating capacity, reduced quality of outputs, equipment failure, extended and unscheduled interruptions to production, accidents, damage to equipment and disaster whether arising due to the actions or omissions of the Company or its employees or from external factors.

The operation of the Company’s Plant requires substantial quantities of suitable quality feedstock and methanol to be sourced from external suppliers. Any interruption to the supply of suitable quality feedstock or methanol, for whatever reasons, may result in interruptions to production.

Disruption to production for any reason may materially and adversely affect the Company’s financial performance.

The Company has mitigated the risk from unavailable feedstock by entering into a contract with the feedstock supplier for a period of 3 years, with an option to extend the term for a further 3 years.


(d) Material contract risk

There is a risk that the Company, or a third party that the Company has contracted with, will be unable or unwilling to perform its obligations under the Company’s material contracts. If this occurs, the Project may be delayed and further costs of making alternate arrangements are likely to be incurred by the Company.

The Company may or may not be able to recover damages or other amounts from third parties if they do not uphold the terms of their contracts with in the Company. In addition, limitation and capping of liability under these contracts may result in the amounts that the Company may recover not being sufficient to cover the Company’s actual loss or damage. The material contracts are described in Section 12.5.

There is also a risk that a material contract may not be renewed or recontracted upon expiry or may be terminated early.

These risks may adversely affect the Company’s financial performance and the value and price of Shares.

(e) Licences

The Company is required to hold or obtain a number of licences and permits in order to implement and operate the Project. There is a risk that the Company does not have, may not obtain, or might lose any or all of the licences and permits required for the implementation or operation of the Project or that the Company will not comply with the ongoing requirements imposed under those licences or permits. There is also a risk that the licences and permits required, or the conditions imposed on the Company under them, will change from time to time. The Company’s ongoing compliance costs may increase as a result.

Either of the above may adversely affect the Company’s financial performance.

(f) Environmental risks

The Company intends to conduct its activities in an environmentally responsible manner, in accordance with all applicable laws and at a level which represents sound environmental management.

The Company may incur liabilities for damages, clean-up costs, or penalties in the event of unintended discharges into the environment from the construction or operation of the Plant or of any of its products. Any such liability may adversely affect the Company’s financial performance.

(g) Intellectual property

De Smet has granted a limited licence to SPC Biodiesel for the use of intellectual property relevant to the operation of the Plant. The law relating to the use of intellectual property is complex. There can be no assurance that the licence granted by De Smet protects the Company from all claims relating to the ownership or unlawful use of the intellectual property either in its current or any modified form. SPC Biodiesel agrees to keep confidential the intellectual property supplied under the Biodiesel Plant Supply and Services Agreement. No assurance can be given that employees or third parties will not breach confidentiality agreements. The unauthorised use or disclosure of the intellectual property may adversely affect the Company’s financial performance.

(h) Key personnel and management

The Company is reliant on a number of key personnel. Loss of such personnel may have a materially adverse impact on the performance of the Company.

The Company has mitigated this risk by ensuring that contracts with key personnel are for a period of 3 years and includes incentives, the receipt of which is linked to achievement of results by the Company.

(i) Capital requirements

In the opinion of the Board, the proceeds of the Offer will provide enough capital resources to enable the Company to achieve its short-term business objectives. However, the Directors can give no assurances that such objectives will in fact be met without future borrowings or further capital raisings and if such borrowings or capital raisings are required, that they can be obtained on terms favourable to the Company.

11 RISK FACTORS (CONTINUED)

95

In particular, borrowings may be required in the future in order to fund any intended capital expansion. Although the Directors are confident that they will be able source debt finance, there can be no guarantee that debt finance will be available or available on appropriate terms. If the Company is unable to obtain debt or equity capital in the future on appropriate terms, the Company may be required to reduce the size of any expansion, which could adversely affect its business, operating results and financial condition.

(j) Future Financial Performance

The Company has set out its Forecasts in Section 8.3. These Forecasts are based on the assumptions detailed in Section 8.4. There can be no assurance that the assumptions will prove to be correct and that the Forecasts will be achieved. The failure to achieve the Company’s Forecasts may have a material and adverse effect on the value of the Shares.

(k) Taxation risk

SPC Biodiesel’s pioneer tax free status is conditional upon SPC Biodiesel operating in Sabah, Malaysia and attaining a margin on its product of at least 25%. The margin is calculated by subtracting raw material cost from gross sales. The margin on SPC Biodiesel’s product is dictated by external market forces. Therefore, SPC Biodiesel has limited ability to manage the margin on its product to ensure the tax free status is retained. The failure to meet the 25% added value condition will result in tax being payable in Malaysia.

SPC Biodiesel must apply for a certificate confirming its pioneer tax free status by 2 October 2007. Delays in commencement of the operation of the Plant may jeopardise SPC Biodiesel’s ability to apply for the certificate in the time specified. Failure to apply for this certificate may result in tax being payable in Malaysia.

(l) Competition

The Company will operate in a developing market. There can be no assurance that the actions of competitors or changes in consumption of biofuels will not adversely affect the Company’s performance. It is also possible that new competitors will enter the biofuels market and this may also adversely affect the Company’s performance.

(m) Liability and insurance risk

Sterling Biofuels intends to have in place a level of insurance considered suitable for its current business undertakings. However, these insurance arrangements may not adequately protect it against liability for all losses, including but not limited to environmental losses, property damage, public liability or losses arising from business interruption and product liability risk.

Should the Company fail to maintain sufficient insurance cover in the future or experience losses in excess of the scope of its insurance cover, its financial performance may be adversely affected.

(n) Litigation risk

From time to time, the Company may be involved in litigation. This litigation may include, but is not limited to, contractual claims, personal injury claims, employee claims and environmental claims. If a successful claim is pursued against the Company, the litigation may adversely impact the sales, profits or financial performance of the Company. Any claim, whether successful or not, may adversely impact on the Company’s Share price.

(o) Concentration of shareholding

Following completion of the Offer, the Existing Shareholder will hold 46.15% of the Shares and the voting rights in the Company (undiluted). The exercise of its votes may result in the ability to exercise a controlling influence over the business and affairs of the Company and may have the power to prevent or cause a change in control of the Company.

(p) Compliance risk

The operation of the Company’s business in the manufacturing industry is governed by a number of laws and regulations in Malaysia. Any material non-compliance with relevant laws and regulations may adversely impact on the Company’s financial performance, the Share price and the Company’s ability to operate in Malaysia.

In addition to the risks specific to an investment in the Company noted in Section 11.1 and the general risks noted in Section 11.3, investors should be aware of the risks in respect of investing in the Biodiesel industry generally. These risks include but are not limited to those risks referred to on the next page.


11 RISK FACTORS (CONTINUED)

11.2 Market Risks

Sterling Biofuels’ operations may be impacted by changes in the market for Biodiesel. The Company’s financial performance may be adversely affected by factors influencing the Biodiesel industry, including changes in the demand for vehicles and other plant designed to run on diesel, changes in consumer and regulatory sentiment towards Biodiesel produced from palm based feedstock and Biodiesel as a diesel substitute.

(a) Legislative or regulatory changes

Legislative or regulatory changes, including environmental, import and export and property regulations or regulatory changes in relation to the products sold by the Company, could have an adverse impact on the Company.

New standards may be introduced and existing standards may be amended or repealed from time to time. A change to the standards for Biodiesel (such as EN 14214) in any market in which the Company sells its Biodiesel may result in the Company needing to modify its production process, obtain different quality feedstock or limit the markets into which Biodiesel can be sold. Changes in European Biodiesel standards may reduce the demand for Biodiesel produced from palm based feedstock which may limit the markets into which the Company’s Biodiesel can be sold.

These changes may affect revenue and expenditure of the Company and adversely affect the Company’s Share price.

(b) Price of Biodiesel and other products

The profitability of the Company is subject to an extent to the fluctuations in the international market price of Biodiesel and the Company’s other products as the Offtake Agreement does not provide for a minimum sale price. A fall in the sale price of any of these products is likely to adversely affect the Company’s financial performance and the value of the Shares.

A change in any of the taxation incentives available in Europe or other relevant markets for the Company’s products may have a material and adverse impact on the sale price of the Company’s products and therefore on the Company’s financial performance.

(c) Costs and availability of raw materials

The Company will need to procure various raw materials in order to operate the Project on an ongoing basis. There is a risk that the costs of these raw materials may increase or that the amount and quality of raw materials that Sterling Biofuels will require to operate its Plant will not be available. Such events may have a material and adverse impact on Sterling Biofuels’ financial performance.

(d) Introduction of new or alternate technologies

Technologies may be developed or implemented that could affect the demand for Biodiesel, such as the availability and costs of alternative energy sources. The introduction, increase in the availability or reduction in costs of alternative energy sources may materially and adversely affect the demand for the Company’s products and the Company’s financial performance.

11.3 General Risks

In addition to the risks specific to an investment in the Company noted in Section 11.1 and the risks relating to investing in the Biodiesel industry noted in Section 11.2, investors should be aware of the general risks in respect of investing. These risks include but are not limited to those risks referred to below.

(a) Share market variations

The Shares are to be quoted on the ASX, where their price may rise or fall in relation to the Offer Price. The Shares issued under this Prospectus carry no guarantee in respect of profitability, dividends, return of capital, or the price at which they may trade on the ASX. The value of the Shares will be determined by the stock market and will be subject to a range of factors beyond the control of the Company, and the Directors and officers of the Company. Such factors include, but are not limited to, the demand for and availability of Shares, movements in domestic interest rates, exchange rates, fluctuations in the Australian and international stock markets and general domestic and economic activity. Returns from an investment in the Shares may also depend on general stock market conditions as well as the performance of the Company. There can be no guarantee that an active market in the Shares will develop or that the market price of the Shares will not decline below the Offer Price.

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(b) General economic, business and social conditions

Changes in world economic and business conditions or government policies, particularly in Malaysia, Europe and Australia, may impact the fundamentals upon which the performance of the Company will rely.

Adverse changes in such things as the level of inflation, interest rates, exchange rates, government policy (including fiscal, monetary and regulatory policies), consumer spending, employment rates, social upheaval or war in Malaysia, its immediate proximity, or elsewhere, amongst others, are outside the control of the Company and may result in material adverse impacts on the business or its operating results.

(c) Taxation and regulatory risks

Changes in relevant taxes (including the GST), legal and administrative regimes and government policies both in Australia and overseas may adversely affect the financial performance of the Company. Any change to the current rate of company income tax in Malaysia or Australia may impact on shareholder returns. Any change to the current rates of income tax applying to individuals and trusts may similarly impact on Shareholder returns. In addition, any change in tax arrangements between Australia and other jurisdictions could have an adverse impact on profit margins and the level of franking credits available to frank any future dividends.

The Forecasts are based on taxation exemptions granted by the Malaysian Government and in particular, the Company’s Pioneer Tax Status. The revocation or amendment of these exemptions could also have a material and adverse impact on the Company’s financial performance.

(d) Currency and commodity price movements

Foreign exchange currency movements may have an adverse effect upon the financial position of the Company.

The revenues generated by the Company are expected to be denominated in Euro, US dollars, Malaysian Ringgit or Australian dollars. However, the income and expenditure of the Company are and will be accounted for and reported in Malaysian and Australian currency, exposing the Company to the fluctuations and volatility of the rates of exchange between the Malaysian Ringgit, the Euro, the US dollar and the Australian dollar. These exchange rates are determined in international markets.

Although the Board will assess the situation on a periodic basis, it does not presently intend to undertake currency hedging.

The purchase price payable under the Biodiesel Plant Supply and Services Agreement is denominated in US dollars however the funds raised pursuant to the Offer will be denominated in Australian dollars. Accordingly, the value of the amount raised pursuant to the Offer which may be applied towards the purchase price will be affected by fluctuations in A$/US$ exchange rate prior to the close of the Offer.

The Board considers that the amount of funds raised pursuant to the Offer will be sufficient to cover the capital costs of the Project and the costs of the Offer under the reasonably foreseeable range of exchange rates. However, if there is an adverse change in exchange rates (i.e. a strengthening of the Malaysian Ringgit or US dollar relative to the Australian dollar), the funds otherwise available to meet the working capital requirements of the Company may be reduced.

(e) Insurance risks

Insurance against all risks associated with the Company’s operations is not always available or, if it is available, affordable.

The Company intends to maintain insurance where it is considered appropriate for its needs. However, there are likely to be some risks, in particular those relating to wilful damage and political risks, for which it will not be insured either because appropriate cover is not available or because the Board consider the required premiums to be excessive having regard to the benefits provided.

(f) Third party risks

The operations of the Company will require involvement with a number of third parties, including suppliers, contractors and customers. Financial failure, default or contractual non-compliance on the part of such third parties may materially harm the performance of the Company. It is not possible for the Company to predict or protect itself against all such risks.

11.4 Other risks

The above risks are not exhaustive of the risks faced by Shareholders. The risks outlined above and other risks may materially affect the future performance of Sterling Biofuels. Accordingly, no assurances or guarantees of future performance, profitability, distributions, payments of dividends, or return of capital are given by Sterling Biofuels.


S E C T I O N 1 2A D D I T I O N A L I N F O R M A T I O N

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12.1 Registration and accounts

The Company was registered as a public company in Australia on 25 May 2006.

The Company has adopted a financial year end of 30 June and the first financial year will end on 30 June 2007.

12.2 Rights attaching to Shares

The rights attaching to the Shares are:

• set out in the Constitution of the Company; and• in certain circumstances, regulated by the Corporations Act, the Listing Rules, the SCH Business Rules and the general law.

The principal rights, liabilities and obligations of the Shareholders are summarised below.

Voting

At a general meeting, every member present in person or by proxy, attorney or representative has one vote on a show of hands and one vote on a poll for each fully paid Share held (with adjusted voting rights for partly paid shares). Voting at any meeting of Shareholders is by a show of hands unless a poll is demanded. A poll may be demanded by at least five Shareholders entitled to vote on the resolution, Shareholders with at least 5% of the votes that may be cast on the resolution of the poll, or the chairperson. The chairperson has a casting vote on a show of hands or on a poll.

Dividends

The profits of the Company, which the Directors may from time to time determine to distribute by way of dividend, are divisible amongst the members in proportion to the number of Shares held by them, subject to the rights attaching to the shares with special dividend rights. No Shares with special dividend rights are currently on issue.

Issue of further Shares

The Directors may (subject to the restrictions on the issue of Shares imposed by the Constitution, the Listing Rules and the Corporations Act) issue, grant options in respect of, or otherwise dispose of further Shares on terms and conditions (including preferential, deferred or special rights, privileges or conditions, or restrictions) as they see fit.

Variation of class rights

The procedure set out in sub-section 246B(2) of the Corporations Act must be followed for any variation of rights attached to the Shares. Under that sub-section, with the consent in writing of the holders of at least three quarters of the issued shares in the particular class, or the sanction of a special resolution passed at a meeting of the holders of shares in that class, the rights attached to a class of shares may be varied or cancelled. In either case, the holders of not less than 10% of the votes in the class of shares whose rights have been varied or cancelled may apply to a court of competent jurisdiction to exercise its discretion to set aside such variation or cancellation.

Transfer of Shares

Shareholders may transfer Shares by a written transfer instrument in the usual form or by a proper transfer effected in accordance with the Business Rules of the Securities Clearing House and ASX requirements. All transfers must comply with the Constitution, the Listing Rules, the SCH Business Rules and the Corporations Act. The Directors may refuse to register a transfer of Shares in circumstances permitted by the Listing Rules or ASX. The Directors must refuse to register a transfer of Shares where required to do so by the Listing Rules.

General meetings and notices

Each Shareholder is entitled to receive notice of, attend and vote at general meetings of the Company and to receive all notices, accounts and other documents required to be sent to Shareholders under the Constitution of the Company or the Corporations Act.

12 ADDITIONAL INFORMATION


Winding up

Subject to any special resolution or preferential rights attaching to any class or classes of shares, members will be entitled on a winding up to a share in any surplus assets of the Company in proportion to the Shares held by them.

Directors - Appointment & Removal

The minimum number of Directors is 4 and the maximum is fixed by the Directors but may not be more than 7 unless the Shareholders of the Company pass a resolution varying that number. Directors are elected at annual general meetings of the Company. Retirement will occur on a rotational basis so that one third of the Directors plus any Director who has held office for 3 or more years or 3 or more annual general meetings (excluding the Managing Director) retire at each annual general meeting of the Company. The Directors may also appoint a Director to fill a casual vacancy on the Board or in addition to the existing Directors, who will then hold office until the next annual general meeting of the Company.

Directors - Voting

Questions arising at a meeting of Directors will be decided by a majority of votes of the Directors present at the meeting and entitled to vote on the matter. In the case of a tied vote, the chairman of the Board has a second or casting vote, unless there are only two Directors present or qualified to vote, in which case the proposed resolution is taken as having been lost.

Directors - Remuneration

The Directors, other than the Managing Director and an executive Director, shall be paid by way of fees for services the maximum aggregate sum as may be approved from time to time by the Company in general meeting. The current maximum aggregate sum fixed by the Company’s Constitution is $250,000. Any change to that aggregate sum needs to be approved by Shareholders. The Constitution also makes provision for the Company to pay all reasonable expenses of Directors in attending meetings and carrying out their duties.

Directors’ and officers’ indemnity

The Company, to the extent permitted by law, indemnifies each officer of the Company on a full indemnity basis against any liability (including costs and expenses) incurred by that person as an officer of the Company or a related body corporate of the Company.

The Company, to the extent permitted by law, may insure a Director, company secretary, or any officer of the Company or its subsidiaries against a liability incurred by such person in the person’s relevant capacity, in the course of acting in connection with the affairs of the Company or a subsidiary or arising out of the person holding office, unless the liability arises out of conduct involving wilful breach of duty in relation to the Company or a contravention of the Corporations Act. The Company may also insure such person for costs and expenses incurred by that person in defending or resisting proceedings whatever the outcome.

The Company proposes to enter into deeds of access, indemnity and insurance with each Director which confirm the Director’s right of access to Board papers and require the Company to indemnify the Director for liability incurred as a director of the Company or any subsidiary of the Company of which the Director is appointed as a director after the date of the deed, subject to the restrictions imposed by the Corporations Act and the Constitution. Under the deeds, the Company would also be required to use its best endeavours to maintain insurance cover for each Director (including for a run-off period), subject to the terms of the deeds.

Amendment

The Constitution may be amended only by a special resolution passed by at least three quarters of the votes cast by Shareholders entitled to vote on the resolution. At least 28 days written notice specifying the intention to propose the resolution must be given.

12 ADDITIONAL INFORMATION (CONTINUED)

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12.3 Performance Rights

The Company has issued Performance Rights to Key Employees and the offtaker. The terms of the Performance Rights are set out in the Performance Rights Plan Rules. The material provisions of the Performance Rights are set out below. This summary is not exhaustive and does not constitute a definitive statement of the rights and liabilities of the holders of the Performance Rights. A copy of the Performance Rights Plan Rules is available for inspection during normal business hours at the Company’s registered office during the Offer Period.

Each Performance Right entitles the holder to one Share in the Company upon satisfaction of the following performance conditions:

Performance conditions applicable to Key Employees

Performance condition Maximum number of Performance Rights held by the Key Employee that vest on satisfaction

of the performance condition

Proportion of total Number of Performance Rights

For the financial year ending 30 June 2008 the Company achieves forecast NPAT. 1/2 2,725,000

For the financial year ending 30 June 2009 the Company achieves forecast NPAT of an amount to be determined by the Board by 30 June 2008 being not less than the forecast NPAT for the financial year ending 30 June 2008. 1/2 2,725,000

5,450,000

Performance conditions applicable to the offtaker

Performance condition Maximum number of Performance Rights held by the offtaker that vest on satisfaction of the performance condition

Proportion of total Number of Performance Rights

For the financial year ending 30 June 2008 the Company achieves forecast NPAT. 1/6th 1,000,000

For the financial year ending 30 June 2008 the Company achieves 120% of forecast revenue. 1/6th 1,000,000

For the financial year ending 30 June 2009 the Company achieves forecast NPAT of an amount to be determined by the Board by 30 June 2008 being not less than the forecast NPAT for the financial year ending 30 June 2008. 1/6th 1,000,000

For the financial year ending 30 June 2009 the Company achieves 120% forecast revenue of an amount to be determined by the Board by 30 June 2008 being not less than the forecast revenue for the financial year ending 30 June 2008. 1/6th 1,000,000

For the financial year ending 30 June 2010 the Company achieves forecast NPAT of an amount to be determined by the Board by 30 June 2009 being not less than the forecast NPAT for the financial year ending 30 June 2008. 1/6th 1,000,000

For the financial year ending 30 June 2010 the Company achieves 120% forecast revenue of an amount to be determined by the Board by 30 June 2009 being not less than the forecast revenue for the financial year ending 30 June 2008. 1/6th 1,000,000

6,000,000


No amount is payable by the holder of the Performance Right for the issue of the Share on satisfaction of the performance condition. All Shares issued on conversion of the Performance Right will rank equally in all respects with all existing Shares on issue. The Company will apply for quotation of all Shares issued upon conversion of the Performance Right on the ASX.

Unless required by law, a Performance Right is not transferable. A Performance Right gives no entitlements to the holder to participate or vote at general meetings of the Company, to receive dividends or to participate in any distribution of profit or capital or surplus assets of the Company.

A Performance Right lapses if the performance condition remains unsatisfied for the prescribed period.

12.4 Terms of Options

As part of their remuneration for providing services to the Company, the Directors (including the Company Secretary) will each be issued with Options on the material terms of which are set out below. Details of the number of Options to be issued are set out in Section 13.2.

This summary is not exhaustive and does not constitute a definitive statement of the rights and liabilities of the holders of the Options. A copy of the terms of the Options is available for inspection during normal business hours at the Company’s registered office during the Offer Period.

Director (including Company Secretary) Options

Each Option issued to a Director or the Company Secretary entitles the holder to subscribe for and be allotted one Share at an exercise price of:

• $1.00 for no more than 30% of the Options held by the holder;• $1.20 for no more than 40% of the Options held by the holder; and• $1.40 for the remaining Options.

The earliest the Options are able to be exercised is 12 calendar months from the date of listing of the Company. 30% of the Options may be exercised on or after this time. 40% may be exercised 24 months from listing and the remaining 30% 36 months after listing. The Options lapse after 24 months from the date on which the relevant options are first able to be exercised.

In the event of resignation or removal of the Director or the Company Secretary prior to the date on which the Options can be exercised, the Options shall automatically lapse.

The Options may not be transferred except to (a) any body corporate which is wholly owned and controlled by the Director or a spouse of the Director; (b) the trustee of any trust of which the Director, the Director’s spouse or the Director’s children are directly or indirectly the only beneficiaries; or (c) the trustee of any superannuation fund of the Director (Associate). If the transferee ceases to be an Associate, the Options must immediately be transferred to an Associate.

The Options will not be quoted on the ASX.

All Shares issued on exercise of the Options will rank equally in all respects with all existing Shares on issue. The Company will apply for quotation of all Shares issued upon exercise of the Options on the ASX.

There are no participating rights or entitlements inherent in the Options and the holder will not be entitled (unless the Options are first exercised) to participate in new issues or transfers of capital offered to Shareholders during the currency of the Options.

If, prior to expiry of the Options, the Company makes an issue of Shares by way of capitalisation of profits or reserves (a bonus issue), then upon exercise of its Options, the holder will be entitled to have issued to it the additional Shares to which the holder would have been entitled if a holder of Shares at the relevant time.

There is generally no right to a change in the exercise price of the Options (or to the number of Shares issued on exercise) in the event of a new issue or transfer of capital (other than a bonus issue or a pro rata issue) during the currency of the Options.

In the event of any pro rata issue (other than a bonus issue) or reorganisation of issued capital of Shares prior to expiry of the Options, the exercise price or other rights of the Options shall be changed in accordance with the applicable ASX Listing Rules in force at the time of the pro rata issue or reorganisation.


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12.5 Material contracts

The Directors consider that there are a number of contracts which are significant or material to the Company or of such a nature that an investor may wish to have particulars of them when making an assessment of whether to apply for Shares. The main provisions of each such contract are summarised below. These summaries do not purport to be complete and are qualified in their entirety by reference to the text of the contracts themselves.

(a) Land Sale and Purchase Agreement

SPC Biodiesel has entered into an agreement dated 28 July 2006 with POIC Sabah Sdn Bhd for the purchase of 10 acres of land (“Lot”) within an industrial park known as POIC Lahad Datu Phase 1. The industrial park is currently being developed by the Sabah state government through POIC Sabah.

The purchase price for the Lot is payable in 6 instalments. The instalments are due on the completion of certain infrastructure works to be constructed by POIC Sabah, at its own cost, including earthworks, roads, drains, electricity lines and water and sewerage mains. SPC Biodiesel must pay interest at the rate of 10% per annum for any late payment calculated on a daily basis for the period the payment is overdue. SPC Biodiesel is entitled to possession of the Lot on practical completion of the infrastructure works servicing the Lot.

POIC Sabah must at its own cost and as soon as possible obtain a separate title for the Lot. The title shall be transferred to SPC Biodiesel provided it has paid the full purchase price.

SPC Biodiesel must prepare and submit to the relevant authority and POIC Sabah the development and building plans for the Lot. SPC Biodiesel must complete building on the Lot within 24 months of the date of possession of the Lot.

SPC Biodiesel must comply with all statutory and written laws relating to the development and use of the Lot and unless POIC Sabah gives written consent, SPC Biodiesel must not sell, transfer or assign the Lot or any rights or duties under this agreement until the title to the Lot has been issued and SPC Biodiesel has completed construction on the Lot.

If SPC Biodiesel wishes to sell the Lot before completion of construction on the Lot, POIC Sabah has the right to acquire the Lot for the purchase price plus an amount assessed as the value of any development on that Lot by a registered valuer.

The agreement is governed by the laws of Malaysia and is subject to the non-exclusive jurisdiction of the Malaysian Courts.

(b) Feedstock Supply Agreement

SPC Biodiesel has entered into an agreement dated 2 June 2006 with Lahad Datu Edible Oils Sdn Bhd for the supply of RBD Palm Olein.

Lahad Datu Edible Oils Sdn Bhd will supply the plant with between 6,000 and 9,000 tonnes of RBD Palm Olein per month.

The agreement is for a term of 3 years with an option to extend for another 3 years by mutual agreement.

The price of the RBD Palm Olein will be based on the price of RBD Palm Olein reported by the Malaysia Palm Oil Board for the corresponding month. SPC Biodiesel must provide a bank guarantee of RM500,000 before commencement of collection of the RBD Palm Olein.

The agreement is governed by the laws of Malaysia and subject to arbitration in Malaysia under the PORAM (Palm Oil Refiners Association of Malaysia) Rules of Arbitration.


(c) Offtake Agreement

SPC Biodiesel has entered into a Co-operation and Offtake Agreement dated 6 June 2006 with Masefield AG, an international energy trading company registered in Switzerland.

Under this agreement the offtaker agrees to purchase 100,000 tonnes of Biodiesel per year from SPC Biodiesel. The agreement has a term of 3 years commencing from the date of commencement of operations of the Plant. The agreement may be extended for a further 2 year period by mutual agreement of the parties.

Under the agreement, SPC Biodiesel will offer any increases in production to the offtaker. It also has the exclusive right to sell to the offtaker any Biodiesel sourced from other producers in Malaysia. The offtaker agrees not to enter into any other such arrangement in the Malaysian Biodiesel industry.

The purchase price will be based upon the best available market price of Biodiesel at the time of purchase. The offtaker will develop hedging strategies on behalf of SPC Biodiesel to secure advantageous price mechanisms where appropriate.

The offtaker will be reimbursed for all transaction related costs (e.g. freight and insurance) and will receive a fixed handling and marketing fee based on quantities of biodiesel delivered from the Plant.

The offtaker will also share in any price and freight optimisation according to an agreed scale.

The agreement is subject to the laws of England. All disputes under the agreement shall be submitted to arbitration in London before the London Court of International Arbitration according to its rules.

(d) Biodiesel Plant Supply and Services Agreement

SPC Biodiesel has entered into an agreement dated 16 June 2006 with De Smet for the supply and delivery of equipment for a Biodiesel production plant and the provision of services in connection with the construction and commissioning of the Plant.

The equipment supplied must be capable of producing 100,000 tonnes per year of Biodiesel that meets European quality standard EN 14214 and American standard ASTM D-6751.

The agreement is a fixed price contract payable in US dollars by way of instalment. The final instalment equal to 75% of the purchase price is due on shipping of the Plant to Malaysia. De Smet will provide training services as well as personnel to supervise the erection and start-up of the Plant, including supervising the checking and testing of the Plant before operation. It will also provide technical advisory services for at least 18 months after commissioning of the Plant at agreed rates.

The equipment for the Plant will be delivered not later than 7 months from the date on which De Smet receives the initial instalments and letter of credit for the final instalment of the purchase price. Customs duties and levies and import tariffs relating to the import of the equipment to Malaysia are the responsibility of SPC Biodiesel. Title to the Plant equipment passes to SPC Biodiesel on delivery.

De Smet retains ownership of all designs, specifications, technical information, documents, analysis and data and grants to SPC Biodiesel a licence to use all intellectual property for the life of the Plant.

De Smet indemnifies SPC Biodiesel against all claims which may be made against SPC Biodiesel in relation to any infringement of any intellectual property right resulting from the use of the equipment or technical information supplied by De Smet.

De Smet has provided warranties in relation to the quality of the equipment supplied and the performance of that equipment. The equipment warranty covers any breaches in the quality of the equipment supplied in the 12 months following start-up of the Plant. Under the performance warranty, De Smet will perform all appropriate services to correct any defect in performance that is caused by De Smet. De Smet’s maximum liability under the contract is limited to 10% of the value of the contract.

Any dispute relating to the agreement must be settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by one or more arbitrators appointed under those rules. Arbitration will take place in Singapore and will be decided under the laws of the United Kingdom.


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(e) Construction Contract

SPC Biodiesel has entered into an agreement (Construction Contract) dated 27 July 2006 with Ikatan Innovasi for the design and construction of the Balance of Plant.

The contract is an EPC (engineering, procurement and construction) turnkey arrangement and the conditions of contract are based on the FIDIC Conditions of Contract for EPC/Turnkey Projects.

Under the Construction Contract the works are to be completed by 31 May 2007. Ikatan Innovasi must ensure that the design is in accordance with best engineering practices and meets the performance requirements.

The contract is a fixed price lump sum contract with payment by way of instalment based upon agreed milestones or purchases. In addition, the contractor will receive an incentive bonus if it achieves mechanical completion by 30 April 2007. Ikatan Innovasi must provide a performance bond for 10% of the EPC price (being the total contract price less provisional sums) by 30 September 2006.

From the date of completion of the works, SPC Biodiesel has 12 months to notify the contractor to remedy any defects in the works. Ikatan Innovasi must pay damages to SPC Biodiesel for:

• delay in completion of the works by the completion date; and• delay in completion of the relevant works by the mechanical completion date which is 30 April 2007, subject to a 14 day grace period.

Damages for delay are payable at the rate of 0.1% of the EPC price per day to a maximum of 10% of the EPC price.

The maximum liability of Ikatan Innovasi to SPC Biodiesel under the Construction Contract shall not exceed 10% of the EPC price except in certain cases relating to:

• the use of electricity, water and gas;• the use of certain materials and equipment supplied by SPC Biodiesel;• losses arising from any injury, death or damage to property arising out of the design, execution or completion of the works; and• claims arising out of the design, manufacture, construction or execution of the works, the use of equipment or the proper use

of the works.

Ikatan Innovasi must take out insurance in the joint name of Ikatan Innovasi and SPC Biodiesel to cover specified loss and damage relating to the conduct of the works including a policy insuring, on a full reinstatement basis, the works, plant, material and Ikatan Innovasi’s documents.

The contract can be terminated in a variety of circumstances including where the contractor fails to comply with a notice to correct any breach of its obligations, becomes insolvent or goes into liquidation or abandons the works.

Either party is entitled to terminate the contract if execution of substantially all of the works is prevented for a continuous period of 84 days or more by reason of Force Majeure.

The contract is governed by Malaysian law.


(f) Consultancy Services Agreement

SPC Biodiesel has entered into an agreement dated 30 May 2006 with SMEC (Malaysia) Sdn Bhd for the provision of project management and engineering services relating to the construction and commissioning of the Plant.

Under the agreement SMEC will provide services relating to the management of the Project. The agreed services include:

• supervision, coordination and management of Project implementation;• review basic design of the process engineering;• prepare basic design for the Balance of Plant and utilities;• review and monitor compliance with environmental requirements;• monitor quality, safety, progress and costs through the engineering, procurement and construction phases;• monitor project financials;• monitor and assist with pre-commissioning, commissioning and test run; and• assist in project handover.

The agreement can be terminated by SPC Biodiesel on 30 days notice and by SMEC on 56 days notice.

The agreement is subject to the laws of Malaysia and subject to arbitration at the Regional Centre for Arbitration in Malaysia.

(g) Share Sale Agreement

The Existing Shareholder and the Company have entered into an agreement dated 31 July 2006 for the sale and purchase of all the issued shares in SPC Biodiesel. The consideration for the purchase of the shares in SPC Biodiesel is the issue of 29,999,996 shares in the Company to the Existing Shareholder. The shareholders of the Existing Shareholder are CRS Paragash, Shanthene Kunaratnam (who is the wife of CRS Paragash) and Andrew Phang. Under the agreement, the Existing Shareholder is prevented from owning or operating any competing business to that of SPC Biodiesel.

12.6 Key employment contracts

The Sterling Biofuels Group has the following Key Employees:

• CRS Paragash;• Andrew Phang;• Shariffuddin Khalid;• Oliver Frank Wakefield;• Khoo Puay Guan;• Michael K. Thorley;• Imran Abdul Hamid;• Jackie Leong Wei Choo; and• Prasad Subramaniam.

The Key Employees are subject to terms and conditions of employment which include the following:

• fixed term employment of 3 years with either the employer or the employee able to terminate prior to the end of term on giving 3 months notice;

• the employer retains the rights to summary dismissal;• no provision for payments on redundancy;• payment of any bonus to be at the discretion of the employer;• no probationary periods;• annual leave of 24 days per annum plus sick leave, compassionate leave and maternity leave entitlements; and• medical, including dental insurance for the Key Employee, their spouse and dependent children.

In addition to the above terms and conditions of employment, the Group Managing Director, CRS Paragash and Group Executive Director, Andrew Phang will receive total remuneration of $240,440 and $201,200 respectively.


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12.7 Pioneer Tax Status

SPC Biodiesel has approval for pioneer tax status from the Malaysian Government on the conditions that:

• SPC Biodiesel operates from a location in Sabah, Malaysia; and• the gross sales of the product must exceed the cost of raw materials by 25%.

A certificate confirming approval can be applied for once production of Biodiesel commences. The effect of issue of the certificate confirming pioneer tax status is that SPC Biodiesel will be exempt from income tax for a period of 5 years from the date specified on the certificate.

12.8 Escrow Agreements

In accordance with the ASX Listing Rules the Shares held by the Existing Shareholder are expected to be restricted securities, and held in escrow for 24 months (or such other term as the ASX shall apply under the ASX listing Rules).

During the relevant escrow period, the holder is not permitted to do any of the following:

• dispose of, or agree or offer to dispose of, the restricted securities;• create, or agree or offer to create, any security interest in the restricted securities; or• do, or omit to do, any act if the act or omission would have the effect of transferring effective ownership or control of the restricted securities.

The parties specified below have each entered into Escrow Agreements with the Company where they have agreed not to sell, transfer or otherwise dispose of their interests in the securities referred to below (“Escrowed Securities”) during the period up to 24 months from Listing (“Escrow Period”), except, with ASX’s consent under either:

• an offer under a takeover bid (as defined in the Corporations Act) in respect of the Shares; or• a merger by way of scheme of arrangement under the Corporations Act.

The Escrow Agreements provide that the Company may apply holding locks in respect of the holdings of the Escrowed Securities for the duration of the Escrow Period.

Person affected Fully paid Shares in escrow Performance Rights in escrow Options in escrowExisting Shareholder 30,000,000 - -

Directors:Alister Maitland - - 500,000Adam Sierakowski - - 400,000Shariffuddin Khalid - 550,000 400,000

As a condition of admitting the Company to the Official List, the ASX may classify Options and Performance Rights held by parties other than Directors as restricted securities.


S E C T I O N 1 3I N T E R E S T S O F D I R E C T O R S , A D V I S E R S A N D P R O M O T E R S

109

13 INTERESTS OF DIRECTORS, ADVISERS AND PROMOTERS

13.1 Disclosure of interests

Other than as stated in Sections 12.4, and this Section 13 and elsewhere in this Prospectus:

• no amount has been paid or agreed to be paid and no benefit has been given or agreed to be given to a Director, or proposed Director to induce them to become, or to qualify as, a director of Sterling Biofuels;

• none of the following persons:

(1) a Director or proposed Director of Sterling Biofuels;(2) each person named in the Prospectus as performing a function in a professional, advisory or other capacity in connection with

the preparation or distribution of the Prospectus;(3) a promoter of Sterling Biofuels; or(4) a stockbroker to the issue of the Shares,

holds or held at any time during the last two years an interest in:

(a) the formation or promotion of Sterling Biofuels;(b) property acquired or proposed to be acquired by Sterling Biofuels in connection with its formation or promotion or the Offer of the

Shares; or(c) the Offer of the Shares,

or was paid or given or agreed to be paid or given any amount or benefit for services provided by such persons in connection with the formation or promotion of Sterling Biofuels or the Offer of the Shares.

13.2 Interests of Directors

The Directors are not required to hold any Shares under the provisions of the Company’s Constitution.

Set out below are details of the interests of the Directors in Shares immediately before the lodgement of the Prospectus with the ASIC. Interests include those held directly or otherwise.

Director and associated entities Shares OptionsAlister Maitland Nil NilCRS Paragash 30,000,0001 NilAndrew Phang 30,000,0002 NilAdam Sierakowski Nil NilShariffuddin Khalid Nil Nil

Notes:1 CRS Paragash, together with his wife, holds a 70% interest in the Existing Shareholder. Therefore, CRS Paragash has an economic interest in 70% of the existing shares in

the Company.2 Andrew Phang holds a 30% interest in the Existing Shareholder. Therefore, Andrew Phang has an economic interest in 30% of the existing shares in the Company.

On admission of the Company to the ASX the Directors and Company Secretary (or entities associated with them), with the exception of CRS Paragash and Andrew Phang, will be issued Options and in some cases Performance Rights in the Company. The terms of the Options and Performance Rights are set out in Section 12.4 and Section 12.3.

Director /Company Secretary Performance Rights OptionsDirectors:

Alister Maitland Nil 500,000Adam Sierakowski Nil 400,000Shariffuddin Khalid 550,000 400,000Company Secretary:Tony Walsh Nil 250,000Total 550,000 1,550,000


The Constitution of the Company provides that the non-executive Directors of the Company are entitled to such remuneration as determined by the Directors which remuneration must not exceed in aggregate the maximum amount determined by the Company in general meeting. Currently it has been determined that such remuneration will not exceed $250,000 per annum, to be apportioned among the non-executive Directors as they determine in their absolute discretion. The Directors acknowledge that as the Company grows, the demands on the Directors may increase and the Directors’ fees may be increased commensurate with their responsibilities and workload, as determined by the Board and approved by the Shareholders.

13.3 Interests of advisers

Cardrona Capital Pty Ltd has acted as the corporate adviser and the lead manager in relation to the Offer. Cardrona is entitled to receive $150,000 (exclusive of GST) in fees as corporate adviser and $525,000 (exclusive of GST) in fees for acting as lead manager for the Offer.

Macquarie Equities Limited and BBY Limited have agreed to act as Sponsoring Brokers to the Offer and are entitled to a fee of $1,750,000 (exclusive of GST) for these services.

Frost & Sullivan (Australia) Pty Ltd has acted as Independent Market Researcher and Frost & Sullivan Malaysia Sdn Bhd has acted as Independent Feedstock Researcher to the Company in connection with the Offer and have prepared the reports contained in Section 10. The Company has paid $19,000 for their services to the date of this Prospectus.

The Austrian Biofuels Institute has acted as Independent Engineer to the Company in connection with the Offer and has prepared the report contained in Section 10. The Company has paid or agreed to pay €5960 (approximately A$9,900) for such services to the date of this Prospectus.

Zul Rafique & Partners has acted as Malaysian legal adviser to the Company in connection with the Offer and has performed work in relation to Malaysian due diligence enquiries on legal matters. The Company has paid or agreed to pay RM50,000 (approximately A$18,200) for such services to the date of this Prospectus. Further amounts may be paid to Zul Rafique & Partners in accordance with its time-based charge-out rates.

Freehills has acted as Australian legal adviser to the Company in connection with the acquisition of SPC Biodiesel and the Offer and has performed work in relation to the Australian due diligence enquiries on legal matters. The Company has paid or agreed to pay $200,000 (exclusive of GST) for such services to the date of this Prospectus. Further amounts may be paid to Freehills in accordance with its time-based charge-out rates and a further 25% of the amount paid may be payable as an incentive fee.

Ernst & Young has prepared the Independent Accountant’s Report included in this Prospectus. Ernst & Young has also performed due diligence enquiries in relation to financial accounting matters. The Company has paid or agreed to pay between $105,000 and $135,000 for such services to the date of this Prospectus. Further amounts may be paid to Ernst & Young in accordance with their time-based charge out rates.

Unless stated otherwise, all such payments have been paid or are payable in cash. The Company is also generally obligated to pay the out-of-pocket expenses of the advisers listed above which are excluded in the amounts stated.

13.4 Advisers’ consents and disclaimers of responsibility

Written consents to the issue of this Prospectus have been given and, at the time of lodgement of this Prospectus with the ASIC, had not been withdrawn by the following parties:

(a) Cardrona Capital Pty Ltd has given, and not withdrawn prior to the lodgement of this Prospectus with the ASIC, its written consent to be named in this Prospectus as Lead Manager and corporate adviser to the Company in the form and context it is so named. Cardrona takes no responsibility for any part of this Prospectus other than any reference to its name.

(b) Macquarie Equities Limited has given, and not withdrawn prior to the lodgement of this Prospectus with the ASIC, its written consent to be named in this Prospectus as Sponsoring Broker to the Offer in the form and context it is so named. Macquarie takes no responsibility for any part of this Prospectus other than any reference to its name.

(c) BBY Limited has given, and not withdrawn prior to the lodgement of this Prospectus with the ASIC, its written consent to be named in this Prospectus as Sponsoring Broker to the Offer in the form and context it is so named. BBY Limited takes no responsibility for any part of this Prospectus other than any reference to its name.

(d) The Austrian Biofuels Institute has given, and not withdrawn prior to the lodgement of this Prospectus with the ASIC, its written consent to be named in this Prospectus as Independent Engineer to the Company in the form and context it is so named and to the inclusion in this Prospectus of its Independent Engineer’s Report, and references to that report, in the form and context in which they are included. The Austrian Biodiesel Institute takes no responsibility for any part of this Prospectus other than any reference to its name, its Independent Engineer’s Report and references to that report.

13 INTERESTS OF DIRECTORS, ADVISERS AND PROMOTERS (CONTINUED)

111

(e) Frost & Sullivan (Australia) Pty Ltd and Frost & Sullivan Malaysia Sdn Bhd have each given, and not withdrawn prior to the lodgement of this Prospectus with the ASIC, its written consent to be named in this Prospectus as Independent Market Researcher and Independent Feedstock Researcher to the Company, respectively, in the form and context it is so named and to the inclusion in this Prospectus of its Independent Market Researcher’s Report and Independent Feedstock Researcher’s Report, and references to those reports, in the form and context in which they are included. Frost & Sullivan (Australia) Pty Ltd and Frost & Sullivan Malaysia Sdn Bhd take no responsibility for any part of this Prospectus other than any reference to its name, its Independent Market Researcher’s Report and Independent Feedstock Researcher’s Report and references to those reports.

(f) Freehills has given, and not withdrawn prior to the lodgement of this Prospectus with the ASIC, its written consent to be named in this Prospectus as the Company’s Australian legal advisers in the form and context it is so named. Freehills takes no responsibility for any part of this Prospectus other than any reference to its name.

(g) Ernst & Young Transaction Advisory Services Limited and Ernst & Young have given, and not withdrawn prior to the lodgement of this Prospectus with the ASIC, their written consent to be named in this Prospectus as Independent Accountant and Auditors to the Company, respectively, in the form and context they are so named. Ernst & Young Transaction Advisory Services Limited has given and not withdrawn its consent to the inclusion in this Prospectus of the Independent Accountant’s Report in the form and context in which it is included. Ernst & Young Transaction Advisory Services Limited and Ernst & Young take no responsibility for any part of this Prospectus other than any reference to their name and the Independent Accountant’s Report.

(h) Computershare Investor Services Pty Ltd has given, and not withdrawn prior to the lodgement of this Prospectus with the ASIC, its consent to be named in this Prospectus as the Share Registry in the form and context in which it is so named. Computershare takes no responsibility for any part of this Prospectus other than any reference to its name.

13.5 Costs of the Offer

The expenses connected with the Offer, which are payable by the Company, are estimated to be approximately $3.2 million. Details of these expenses are set out in Sections 3.2 and 13.3.

13.6 Litigation and Claims

So far as the Directors are aware, there is no current or threatened civil ligation, arbitration proceedings or administrative appeals, or criminal or governmental prosecutions of a material nature in which the Company is directly or indirectly concerned which is likely to have a material adverse effect on the business or financial position of the Company.

13.7 Taxation

The following is a general description of the Australian income taxation consequences and Malaysian income taxation consequences of holding Shares and is intended only for investors who are residents of Australia for tax purposes and who will hold their Shares on capital account.

This section does not constitute taxation advice and investors should seek independent taxation advice in relation to their own particular circumstances.

Australian income tax

The following is a general description of the Australian income taxation consequences of holding Shares and is intended only for investors who are residents of Australia for tax purposes and who will hold their Shares on capital account. The following description is based upon the Australian income tax law and administrative practice in effect at 9 August 2006. It is general in nature and is not intended to be an authoritative or complete statement of the income tax laws applicable to the particular circumstances of every Shareholder.

This section does not address the Australian taxation consequences for non-Australian resident shareholders of holding Shares. All non-Australian resident investors should seek independent Australian taxation advice in relation to their own particular circumstances.

Taxation of dividends

Dividends paid by the Company to Australian resident Shareholders will be included in the assessable income of the Shareholder in Australia. The dividends paid are expected to be unfranked, therefore, no tax offset is likely to be available to offset the tax payable on the dividend.


Disposal of Shares

The disposal of Shares by an investor who is a resident of Australia for tax purposes will generally be subject to Australian capital gains tax (CGT). You will make a capital gain if the proceeds received from the sale of the Shares exceeds the cost base of the Shares.

For CGT purposes, the cost base of the Shares would generally include the amount paid to acquire those Shares plus any incidental costs of the acquisition (for example, brokerage fees and stamp duty).

A Shareholder will make a capital loss if the capital proceeds received are less than the reduced cost base of the Shares sold. A capital loss may be used to offset capital gains derived in the same or subsequent years of income. A capital loss cannot be offset against ordinary income.

If the investor is an individual, trust or complying superannuation fund that has held their Shares for twelve months or longer at the time of sale of the Shares, the capital gain derived will be subject to the CGT discount so that only half of the gain for an individual or trust, or two-thirds of the gain for a complying superannuation fund, is included in assessable income.

If the investor is a company or has not held the Shares for at least 12 months at the date of sale, then they will not be eligible to claim a discount on the capital gain.

Malaysian income tax

The Company may also be considered a resident of Malaysia for tax purposes under certain circumstances. If the Company is considered a Malaysian tax resident the following implications would apply. The following is a general description of the Malaysian income taxation consequences of holding Shares and is intended only for investors who are residents of Australia for tax purposes and who will hold their Shares on capital account. The following description is based upon the Malaysian law and administrative practice in effect at 9 August 2006. It is general in nature and is not intended to be an authoritative or complete statement of the laws applicable to the particular circumstances of every Shareholder.

This section does not address the Malaysian taxation consequences for non-Australian resident shareholders of holding Shares. All non-Australian resident investors should seek independent Malaysian taxation advice in relation to their own particular circumstances.

Taxation of Dividends

If the Company is considered a resident of Malaysia, fully franked or tax exempt dividends paid to Australian resident Shareholders will not be subject to further tax in Malaysia. Unfranked dividends would be subject to Malaysian withholding tax at 28%.

Disposal of Shares

Generally, a gain derived by an investor who is an Australian tax resident and holds their Shares on capital account will not be taxable in Malaysia.

13.8 Documents Available for Inspection

Copies of the Constitution, the full Terms of the Options, Performance Rights Plan and the consents referred to in Section 13.4 will be made available for inspection free of charge between 9:00am and 5:00pm Perth time, Monday to Friday, at the Company’s registered office during the Offer Period.

13.9 Governing Law

This Prospectus, the Offer and the contracts formed on Acceptance of Applications are governed by the law applicable in Western Australia. Each Applicant submits to the exclusive jurisdiction of the courts of Western Australia.

13.10 ASIC and ASX relief

Pursuant to Class Order 00/44 the ASIC has exempted compliance with certain provisions of the Corporations Act to allow distribution of an electronic Prospectus on the basis of a paper prospectus lodged with the ASIC and the publication of notices referring to an electronic Prospectus, subject to compliance with certain provisions.

If you have received this Prospectus as an electronic Prospectus, please ensure that you have received the entire Prospectus accompanied by the Application Form. If you have not, please contact the Share Registry and the Company will send you either a hard copy of the Prospectus or a further electronic copy of the Prospectus or both, free of charge.

13 INTERESTS OF DIRECTORS, ADVISERS AND PROMOTERS (CONTINUED)

113

Alternatively, you may obtain a copy of the Prospectus from the Company’s website at www.sterlingbiofuels.com

The Company reserves the right not to accept an Application Form from a person if it has reason to believe that when that person was given access to the electronic Application Form, it was not provided together with the electronic Prospectus (and any relevant supplementary or replacement prospectus) or any of those documents were incomplete or altered.

13.11 Privacy

By filling out the Application Form to apply for Shares, you are providing personal information to the Company through the Company’s service provider, the Share Registry, which is contracted by the Company to manage Applications. The Company, and the Share Registry on its behalf, collect, hold and use that personal information in order to process your Application, service your needs as a Shareholder, provide facilities and services that you request and carry out appropriate administration.

If you do not provide the information requested in the Application Form, the Company and the Share Registry may not be able to process or accept your Application.

Your personal information may also be used from time to time to inform you about other products and services offered by the Company which it considers may be of interest to you.

Your personal information may also be provided to the Company’s agents and service providers on the basis that they deal with such information in accordance with the Company’s privacy policy. The Company’s agents and service providers may be located outside Australia where your personal information may not receive the same level of protection as that afforded under Australian law. The types of agents and service providers that may be provided with your personal information and the circumstances in which your personal information may be shared are:

• the Share Registry for ongoing administration of the shareholder register;• printers and other companies for the purpose of preparation and distribution of statements and for handling mail;• market research companies for the purpose of analysing the Company’s shareholder base and for product development and planning;

and• legal and accounting firms, auditors, contractors, consultants and other advisers for the purpose of administering, and advising on,

the Shares and for associated actions.

You may request access to your personal information held by (or on behalf of) the Company. You may be required to pay a reasonable charge to the Share Registry in order to access your personal information. You can request access to your personal information by writing to or telephoning the Share Registry as follows:

Computershare Investor Services Pty LtdLevel 245 St George’s TerracePerth WA 6000

Telephone: 1300 652 787 (within Australia) +613 9415 4111 (outside Australia)

13.12 Statement of Directors

The Directors report that after due enquiries by them, in their opinion, since the date of the financial statements in the financial information in Section 8, there have not been any circumstances that have arisen or that have materially affected or will materially affect the assets and liabilities, financial position, profits or losses or prospects of the Company, other than as disclosed in this Prospectus.

13.13 Prospectus Authorisation

This Prospectus is authorised by each Director of the Company who consents to its lodgement with the ASIC and its issue.Signed on behalf of the Directors of the Company.

CRS ParagashDirectorSterling Biofuels International Limited (ACN 119 880 492 )

Dated: 11 August 2006


S C H E D U L E S

Glossary of Terms 115Application Form 117Corporate Directory INSIDE BACK COVER

115

GLOSSARY OF TERMS

The meanings of the terms used in this document are set out below.

Term Meaning

A$ or $ Australian dollars

Applicant a person applying for Shares under this Prospectus

Application the lodgement of an Application Form

Application Form the form of application for Shares attached to this Prospectus

Application Monies the Offer Price multiplied by the number of Shares applied for

ASIC Australian Securities & Investments Commission

ASX Australian Stock Exchange Limited

Balance of Plant the part of the Plant excluding the plant and equipment to be supplied and installed by De Smet under the Biodiesel Plant and Supply Services Agreement.

Biodiesel fatty acid methyl esther

Board the board of Directors

Business Rules the SCH Business Rules and any other rules of ASX Settlement and Transfer Corporation Pty Ltd which apply while the Company is an issuer of CHESS Approved Securities, each as amended or replaced from time to time

CFPP cold filter plugging point which is the temperature at which fuel will no longer pass through a standard filter

CHESS the Clearing House Electronic Subregister System

Closing Date the date by which valid Applications must be received by the Share Registry being 5:00pm Perth time on 11 September 2006 or such later date as determined by the Board subject to the right of the Company to close the Offer early

Company, Group or Sterling Biofuels

Sterling Biofuels International Limited (ACN 119 880 492) and any of its subsidiaries, as the case requires

Constitution the constitution of the Company

Corporations Act the Corporations Act 2001 (Cth)

De Smet De Smet Engineering (SEA) Pte Ltd a company incorporated in Singapore; part of the Desmet Ballestra Group

Directors the directors of the Company

€ Euro

EBITDA earnings before interest, taxation, depreciation and amortisation

Ernst & Young Ernst & Young Transaction Advisory Services Ltd or Ernst & Young

Escrow Agreements the agreements referred to in section 12.8 imposing restrictions on the sale of certain securities held by the Existing Shareholder and the Directors

Escrowed Securities the securities held by the Existing Shareholder and the Directors and subject to the Escrow Agreements

Existing Shareholder Duplex Fame Sdn Bhd (Malaysian Company No. 707746-H)

FIDIC Conditions of Contract the conditions of contract for EPC/Turnkey Contracts (first edition 1999) prepared by the International Federation of Consulting Engineers

FOB a trade term requiring the seller to deliver goods on board a vessel at a port designated by the buyer


Term Meaning

Forecast forecast summary consolidated income statement for the Group for the years ending 30 June 2007 and 30 June 2008 set out in Section 8.3

Force Majeure any event or circumstance beyond the control or not attributable to a party affected by the event. These include acts of God, fire, flood, earthquakes, war, terrorism, sabotage, strikes, riots and insurrection

FY 2008 the financial year ending 30 June 2008

HIN Holder Identification Number

IFRS International Financial Reporting Standards

Ikatan Innovasi Ikatan Innovasi Sdn Bhd (Malaysian Company No. 330024-A)

Key Employees the employees identified in Section 12.6

Listing Date the first day on which the Shares trade on ASX, anticipated to be 28 September 2006

Listing Rules the official listing rules of the ASX

NPAT net profit after tax

Offer invitation by the Company to subscribe for Shares under the Prospectus

Offer Period the Period commencing on the Opening Date and ending on the Closing Date

Offer Price $1.00 per Share

Official List the official list of entities that ASX has admitted and not removed

Offtake Agreement the agreement between SPC Biodiesel and the offtaker

Opening Date the date the Offer opens being 21 August 2006, or such other date determined by the Board

Options the options issued to the Directors and the Company Secretary and described at Section 12.4

Palm Oil edible oil produced from the fruit of the oil palm tree

Performance Rights the rights issued to Key Employees and offtaker described in Section 12.3

Perth time Australian Western Standard Time, Perth, Western Australia

Plant the Biodiesel plant to be constructed and commissioned by Sterling Biofuels in Lahad Datu in Sabah, Malaysia

POIC Sabah POIC Sabah Sdn Bhd (Malaysian Company No. 677686-U)

Project the project to be undertaken by the Company to construct, commission and operate a Biodiesel Plant in Sabah, Malaysia

Prospectus this document

RBD Palm Olein a refined, bleached and deodorised derivative of crude Palm Oil

RM Malaysian Ringgit

Restriction Agreements the agreements to be entered into with certain persons as referred to in Section 12.8

Share an ordinary share in the Company

Shareholder a shareholder of the Company

Share Registry Computershare Investor Services Pty Limited ABN 48 078 279 277

SPC Biodiesel SPC Biodiesel Sdn Bhd (Malaysian Company No 718398-D)

SRN Shareholder Reference Number

tonne metric tonne

US$ US dollars

GLOSSARY OF TERMS (CONTINUED)

1 HEADING

117

Application Form

Unit Street Number Street Name or PO Box /Other Information

I/we apply forA

Cheque details - Make your cheque or bank draft payable to ‘Sterling Biofuels International Limited Share Offer’

G

BSB Number Account NumberDrawer Amount of cheque

A$

Cheque Number


A$

Cheque Number

Number of Shares in Sterling Biofuels International Limited at $1.00 per Share or such lessernumber of Shares which may be allocated to me/us

Enter your postal address - Include State and Postcode

City / Suburb / Town State Postcode

D

ACN 119 880 492

I/we lodge full Application Money

.

C Individual/Joint applications - refer to naming standards overleaf for correct forms of registrable title(s)Title or Company Name Given Name(s) Surname

Joint Applicant 2 or Account Designation


E

F

B

Enter your contact details

Holder Identification Number (HIN)

CHESS Participant

By submitting this Application Form, I/we declare that this application is completed and lodged according to the Prospectus and the declarations/statements on the reverse of thisApplication form and I/we declare that all details and statements made by me/us (including the declaration on the reverse of this Application Form) are complete and accurate.I/we agree to be bound by the Constitution of the Company.

Broker Code Adviser CodeThis Application Form is important. If you are in doubt as to how to deal with it, pleasecontact your stockbroker or professional adviser without delay. You should read theentire prospectus carefully before completing this form. To meet the requirements ofthe Corporations Act, this Application Form must not be distributed unlessincluded in, or accompanied by, the prospectus.

I P O

Registry Use Only

A$

Contact Name Telephone Number - Business Hours / After Hours

( )

X

See back of form for completion guidelines

Please note that if you supply a CHESS HIN but the name and address details on your form do notcorrespond exactly with the registration details held at CHESS, your application will be deemed to be made without the CHESS HIN, and any securities issued as a result of the IPO will be held on the Issuer Sponsored subregister.

S B I A


xBefore completing the Application Form the applicant(s) should read this prospectus to which this application relates. By lodging the Application Form, the applicantagrees that this application for Shares in Sterling Biofuels International Limited is upon and subject to the terms of the prospectus and the Constitution of Sterling Biofuels International Limited, agrees to take any number of Shares that may be allotted to the Applicant(s) pursuant to the prospectus and declares that all details and statements made are complete and accurate. It is not necessary to sign the Application Form.

Lodgement of ApplicationApplication Forms must be received at any of the following offices by no later than 5pm Perth time on 11 September 2006. .Return the Application Form with cheque(s) attached to:

Computershare Investor Services Pty Limited OR ORLevel 245 St. George’s TerracePERTH WA 6840

BBY LimitedLevel 17, MetCentre60 Margaret StreetSYDNEY NSW 2000

Macquarie Equities LimitedLevel 18, 20 Bond StreetSYDNEY NSW 2000

Privacy StatementPersonal information is collected on this form by Computershare Investor Services Pty Limited ("CIS"), as registrar for securities issuers ("the issuer"), for the purpose ofmaintaining registers of securityholders, facilitating distribution payments and other corporate actions and communications. Your personal information may be disclosed to ourrelated bodies corporate, to external service companies such as print or mail service providers, or as otherwise required or permitted by law. If you would like details of yourpersonal information held by CIS, or you would like to correct information that is inaccurate, incorrect or out of date, please contact CIS. In accordance with the Corporations Act2001, you may be sent material (including marketing material) approved by the issuer in addition to general corporate communications. You may elect not to receive marketingmaterial by contacting CIS. You can contact CIS using the details provided on the front of this form or E-mail [email protected]

If you have any enquiries concerning your application, please contact the Computershare Investor Services Pty Limited on 1300 652 787.

Correct forms of registrable title(s)Note that ONLY legal entities are allowed to hold Shares. Applications must be made in the name(s) of natural persons, companies or other legal entities in accordance withthe Corporations Act. At least one full given name and the surname is required for each natural person. The name of the beneficial owner or any other registrable name may beincluded by way of an account designation if completed exactly as described in the examples of correct forms of registrable title(s) below.

How to complete this form

A Shares Applied for

Enter the number of Shares you wish to apply for. The application must be for a minimum of 2000 Shares. Applications for greater than 2000 Shares must be in multiples of 1000 Shares.

Application Monies

Enter the amount of Application Monies. To calculate the amount, multiplythe number of Shares by the price per Share.

Applicant Name(s)

Enter the full name you wish to appear on the statement of share holding.This must be either your own name or the name of a company. Up to 3joint Applicants may register. You should refer to the table below for thecorrect forms of registrable title. Applications using the wrong form ofnames may be rejected. Clearing House Electronic Subregister System(CHESS) participants should complete their name identically to thatpresently registered in the CHESS system.

Postal Address

Enter your postal address for all correspondence. All communications toyou from the Registry will be mailed to the person(s) and address asshown. For joint Applicants, only one address can be entered.

Contact Details

Enter your contact details. These are not compulsory but will assist us ifwe need to contact you.

B

C

D

E

CHESS

Sterling Biofuels International Limited (the Company) will apply to the ASX to participate in CHESS, operated by ASX Settlement and Transfer Corporation Pty Ltd, a wholly owned subsidiary of Australian Stock Exchange Limited. In CHESS, the company will operate an electronic CHESS Subregister of security holdings and an electronic Issuer Sponsored Subregister of security holdings. Together the two Subregisters will make up the Company’s principal register of securities. The Company will not be issuing certificates to applicants in respect of Shares allotted. If you are a CHESSparticipant (or are sponsored by a CHESS participant) and you wish to holdShares allotted to you under this Application on the CHESS Subregister, enter your CHESS HIN. Otherwise, leave this section blank and on allotment, you will be sponsored by the Company and allocated aSecurityholder Reference Number (SRN).

Payment

Make your cheque or bank draft payable to ‘Sterling Biofuels International Limited Share Offer’ in Australian currency and cross it “Not Negotiable”. Your cheque or bank draft must be drawn on an Australian Bank.

Complete the cheque details in the boxes provided. The total amount mustagree with the amount shown in box B.

Cheques will be processed on the day of receipt and as such,sufficient cleared funds must be held in your account as chequesreturned unpaid may not be re-presented and may result in yourApplication being rejected. Pin (do not staple) your cheque(s) to theApplication Form where indicated. Cash will not be accepted.Receipt for payment will not be forwarded.

F

G

Type of Investor noitartsigeR fo mroF tcerrocnInoitartsigeR fo mroF tcerroC

Trusts- Use trustee(s) personal name(s)- Do not use the name of the trust

Individual- Use given name(s) in full, not initials

Joint- Use given name(s) in full, not initials

Company- Use company title, not abbreviations

Deceased Estates- Use executor(s) personal name(s)- Do not use the name of the deceased

Minor (a person under the age of 18)- Use the name of a responsible adult with an appropriate designation

Partnerships- Use partners personal name(s)- Do not use the name of the partnership

Clubs/Unincorporated Bodies/Business Names- Use office bearer(s) personal name(s)- Do not use the name of the club etc

Superannuation Funds- Use the name of trustee of the fund- Do not use the name of the fund

Mr John Alfred Smith

Mr John Alfred Smith & Mrs Janet Marie Smith

ABC Pty Ltd

Ms Penny Smith<Penny Smith Family A/C>

Mr Michael Smith<Est John Smith A/C>

Mr John Alfred Smith<Peter Smith A/C>

Mr John Smith &Mr Michael Smith<John Smith & Son A/C>

Mrs Janet Smith<ABC Tennis Association A/C>

John Smith Pty Ltd<Super Fund A/C>

J.A Smith

ABC P/LABC Co

Penny Smith Family Trust

Estate of Late John Smith

Peter Smith

John Smith & Son

ABC Tennis Association

John Smith Pty Ltd Superannuation Fund

John Alfred &Janet Marie Smith

IPO

SBIA

1 HEADING

119

Application Form

Unit Street Number Street Name or PO Box /Other Information

I/we apply forA

Cheque details - Make your cheque or bank draft payable to ‘Sterling Biofuels International Limited Share Offer’

G


A$

Cheque Number


A$

Cheque Number

Number of Shares in Sterling Biofuels International Limited at $1.00 per Share or such lessernumber of Shares which may be allocated to me/us

Enter your postal address - Include State and Postcode

City / Suburb / Town State Postcode

D

ACN 119 880 492

I/we lodge full Application Money

.

C Individual/Joint applications - refer to naming standards overleaf for correct forms of registrable title(s)Title or Company Name Given Name(s) Surname



E

F

B

Enter your contact details

Holder Identification Number (HIN)

CHESS Participant

By submitting this Application Form, I/we declare that this application is completed and lodged according to the Prospectus and the declarations/statements on the reverse of thisApplication form and I/we declare that all details and statements made by me/us (including the declaration on the reverse of this Application Form) are complete and accurate.I/we agree to be bound by the Constitution of the Company.

Broker Code Adviser CodeThis Application Form is important. If you are in doubt as to how to deal with it, pleasecontact your stockbroker or professional adviser without delay. You should read theentire prospectus carefully before completing this form. To meet the requirements ofthe Corporations Act, this Application Form must not be distributed unlessincluded in, or accompanied by, the prospectus.

I P O

Registry Use Only

A$

Contact Name Telephone Number - Business Hours / After Hours

( )

X

See back of form for completion guidelines

Please note that if you supply a CHESS HIN but the name and address details on your form do notcorrespond exactly with the registration details held at CHESS, your application will be deemed to be made without the CHESS HIN, and any securities issued as a result of the IPO will be held on the Issuer Sponsored subregister.

S B I A


1 HEADING

xBefore completing the Application Form the applicant(s) should read this prospectus to which this application relates. By lodging the Application Form, the applicantagrees that this application for Shares in Sterling Biofuels International Limited is upon and subject to the terms of the prospectus and the Constitution of Sterling Biofuels International Limited, agrees to take any number of Shares that may be allotted to the Applicant(s) pursuant to the prospectus and declares that all details and statements made are complete and accurate. It is not necessary to sign the Application Form.

Lodgement of ApplicationApplication Forms must be received at any of the following offices by no later than 5pm Perth time on 11 September 2006. .Return the Application Form with cheque(s) attached to:

Computershare Investor Services Pty Limited OR ORLevel 245 St. George’s TerracePERTH WA 6840

BBY LimitedLevel 17, MetCentre60 Margaret StreetSYDNEY NSW 2000

Macquarie Equities LimitedLevel 18, 20 Bond StreetSYDNEY NSW 2000

Privacy StatementPersonal information is collected on this form by Computershare Investor Services Pty Limited ("CIS"), as registrar for securities issuers ("the issuer"), for the purpose ofmaintaining registers of securityholders, facilitating distribution payments and other corporate actions and communications. Your personal information may be disclosed to ourrelated bodies corporate, to external service companies such as print or mail service providers, or as otherwise required or permitted by law. If you would like details of yourpersonal information held by CIS, or you would like to correct information that is inaccurate, incorrect or out of date, please contact CIS. In accordance with the Corporations Act2001, you may be sent material (including marketing material) approved by the issuer in addition to general corporate communications. You may elect not to receive marketingmaterial by contacting CIS. You can contact CIS using the details provided on the front of this form or E-mail [email protected]

If you have any enquiries concerning your application, please contact the Computershare Investor Services Pty Limited on 1300 652 787.

Correct forms of registrable title(s)Note that ONLY legal entities are allowed to hold Shares. Applications must be made in the name(s) of natural persons, companies or other legal entities in accordance withthe Corporations Act. At least one full given name and the surname is required for each natural person. The name of the beneficial owner or any other registrable name may beincluded by way of an account designation if completed exactly as described in the examples of correct forms of registrable title(s) below.

How to complete this form

A Shares Applied for

Enter the number of Shares you wish to apply for. The application must be for a minimum of 2000 Shares. Applications for greater than 2000 Shares must be in multiples of 1000 Shares.

Application Monies

Enter the amount of Application Monies. To calculate the amount, multiplythe number of Shares by the price per Share.

Applicant Name(s)

Enter the full name you wish to appear on the statement of share holding.This must be either your own name or the name of a company. Up to 3joint Applicants may register. You should refer to the table below for thecorrect forms of registrable title. Applications using the wrong form ofnames may be rejected. Clearing House Electronic Subregister System(CHESS) participants should complete their name identically to thatpresently registered in the CHESS system.

Postal Address

Enter your postal address for all correspondence. All communications toyou from the Registry will be mailed to the person(s) and address asshown. For joint Applicants, only one address can be entered.

Contact Details

Enter your contact details. These are not compulsory but will assist us ifwe need to contact you.

B

C

D

E

CHESS

Sterling Biofuels International Limited (the Company) will apply to the ASX to participate in CHESS, operated by ASX Settlement and Transfer Corporation Pty Ltd, a wholly owned subsidiary of Australian Stock Exchange Limited. In CHESS, the company will operate an electronic CHESS Subregister of security holdings and an electronic Issuer Sponsored Subregister of security holdings. Together the two Subregisters will make up the Company’s principal register of securities. The Company will not be issuing certificates to applicants in respect of Shares allotted. If you are a CHESSparticipant (or are sponsored by a CHESS participant) and you wish to holdShares allotted to you under this Application on the CHESS Subregister, enter your CHESS HIN. Otherwise, leave this section blank and on allotment, you will be sponsored by the Company and allocated aSecurityholder Reference Number (SRN).

Payment

Make your cheque or bank draft payable to ‘Sterling Biofuels International Limited Share Offer’ in Australian currency and cross it “Not Negotiable”. Your cheque or bank draft must be drawn on an Australian Bank.

Complete the cheque details in the boxes provided. The total amount mustagree with the amount shown in box B.

Cheques will be processed on the day of receipt and as such,sufficient cleared funds must be held in your account as chequesreturned unpaid may not be re-presented and may result in yourApplication being rejected. Pin (do not staple) your cheque(s) to theApplication Form where indicated. Cash will not be accepted.Receipt for payment will not be forwarded.

F

G

Type of Investor noitartsigeR fo mroF tcerrocnInoitartsigeR fo mroF tcerroC

Trusts- Use trustee(s) personal name(s)- Do not use the name of the trust

Individual- Use given name(s) in full, not initials

Joint- Use given name(s) in full, not initials

Company- Use company title, not abbreviations

Deceased Estates- Use executor(s) personal name(s)- Do not use the name of the deceased

Minor (a person under the age of 18)- Use the name of a responsible adult with an appropriate designation

Partnerships- Use partners personal name(s)- Do not use the name of the partnership

Clubs/Unincorporated Bodies/Business Names- Use office bearer(s) personal name(s)- Do not use the name of the club etc

Superannuation Funds- Use the name of trustee of the fund- Do not use the name of the fund

Mr John Alfred Smith

Mr John Alfred Smith & Mrs Janet Marie Smith

ABC Pty Ltd

Ms Penny Smith<Penny Smith Family A/C>

Mr Michael Smith<Est John Smith A/C>

Mr John Alfred Smith<Peter Smith A/C>

Mr John Smith &Mr Michael Smith<John Smith & Son A/C>

Mrs Janet Smith<ABC Tennis Association A/C>

John Smith Pty Ltd<Super Fund A/C>

J.A Smith

ABC P/LABC Co

Penny Smith Family Trust

Estate of Late John Smith

Peter Smith

John Smith & Son

ABC Tennis Association

John Smith Pty Ltd Superannuation Fund

John Alfred &Janet Marie Smith

IPO

SBIA

CORPORATE DIRECTORY

Sterling Biofuels International LimitedACN 119 880 492

DIRECTORS Alister Maitland CRS ParagashAndrew PhangShariffuddin KhalidAdam Sierakowski

COMPANY SECRETARY Tony Walsh

REGISTERED OFFICE OF STERLING BIOFUELS Ground Floor16 Ord StreetWest Perth WA 6005AUSTRALIA

WEBSITE www.sterlingbiofuels.com

LEAD MANAGER AND CORPORATE ADVISOR Cardrona Capital Pty LtdLevel 5, 33 York StreetSydney NSW 2000AUSTRALIA

SPONSORING BROKERS TO THE OFFER Macquarie Equities LimitedLevel 1820 Bond StreetSydney NSW 2000

BBY LimitedLevel 17, MetCentre60 Margaret StreetSydney NSW 2000

INDEPENDENT ACCOUNTANT Ernst & Young Transaction Advisory Services Ltd11 Mounts Bay RoadPerth WA 6000AUSTRALIA

AUDITOR Ernst & Young11 Mounts Bay RoadPerth WA 6000AUSTRALIA

INDEPENDENT ENGINEER Austrian Biofuels InstituteGraben 14/3Pf./P.O. Box 97A-1014 Wien, Austria

INDEPENDENT MARKET RESEARCHER Frost & SullivanLevel 9, 189 Kent StreetSydney NSW 2000

INDEPENDENT FEEDSTOCK RESEARCHER Frost & SullivanSuite E-08-15, Block E, Plaza Mont’ Kiara2 Jalan 1/70C, Mont’ Kiara50480 Kuala Lumpur, Malaysia

SHARE REGISTRY Computershare Investor Services Pty LtdLevel 245 St George’s TerracePerth WA 6000

AUSTRALIAN LEGAL ADVISER TO THE COMPANY FreehillsQV.1 Building250 St Georges TerracePerth WA 6000w

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Sterling Biofuels International Ltd (ACN 119 880 492)

Head Offi ce: Ground Floor, 16 Ord Street, West Perth, WA 6005 Australia PO Box 541, West Perth, WA 6872 t +618 9324 8583 f +618 9324 8586

Malaysian Offi ce: Unit 607 Block C, Pusat Phileo Damansara 1, 9 Jalan 16/11, 46350 Petaling Jaya, Selangor, Malaysia t +603 7954 5020 f +603 7954 5023

www.sterlingbiofuels.com