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30 September 2009

Australian Securities Exchange

Company Announcements

Level 4

20 Bridge Street

Sydney NSW 2000

INDEPENDENT EXPERT SAYS YANZHOU OFFER IS FAIR AND REASONABLE

Felix Resources ( “Felix” ASX:FLX) today announced the Independent Expert, Deloitte,

has concluded the Offer by Yanzhou to acquire all the outstanding shares in Felix, is

fair and reasonable and therefore in the best interests of Shareholders. The full version

of the Independent Expert Report (“IER”) is attached. A concise version of the IER will

be provided within the Scheme documentation.

The IER estimated the fair market value of Felix to be in the range of A$16.70 to

A$18.70 per share (an equity value of approximately A$3.3 billion to A$3.7 billion). This

compares with the total proceeds being received by Felix shareholders which have a

value of A$18.05 per share.

The IER concluded:

“Based on the foregoing, we are of the opinion that the Proposed Scheme is fair and

reasonable to Shareholders. It is therefore in the best interests of Shareholders. An

individual shareholder’s decision in relation to the Proposed Scheme may be

influenced by his or her particular circumstances. If in doubt the Shareholder should

consult an independent adviser.”

In the absence of a superior offer, all Felix Directors who hold Felix Shares intend to

vote in favour of the Scheme and continue to unanimously recommend shareholders

do the same.

Contact details for further information

Brian Flannery Craig Smith

Managing Director CFO & Company Secretary

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Felix Resources Limited Independent expert’s report 30 September 2009

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Financial services guide30 September 2009

Deloitte: Felix Resources Limited independent expert’s report

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Financial services guide

lix Resources Limited independent expert’s report

Deloitte Corporate Finance Pty Limited

What is a Financial Services Guide?

This Financial Services Guide (FSG) provides important

information to assist you in deciding whether to use any

advice provided by

Deloitte Corporate Finance Pty Limited (Deloitte

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Financial Services Licence (AFSL) No. 241457. The

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We have been engaged by Felix Resources Limited to

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proposed acquisition of Felix Resources Limited via a

. You are not the party or parties

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g provided to you. You may

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Information about the general financial product advice we provide

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potential acquisition of a financial

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purpose of the offer document is to help you make an

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Member of Deloitte Touche Tohmatsu

Deloitte Corporate Finance Pty Limited A.B.N. 19 003 833 127

AFSL No. 241457

Riverside Centre

Level 25 & 26, 123 Eagle Street

Brisbane QLD 4001

GPO Box 1463

Brisbane QLD 4001 Australia

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www.deloitte.com.au

The Directors

Felix Resources Limited

Level 6 Flight Centre Building

315 Adelaide Street

Brisbane QLD 4000

30 September 2009

Dear Directors

Independent expert’s report

Introduction

On 13 August 2009, Felix Resources Limited (Felix or the Company) announced a proposal

under which Yanzhou Coal Mining Company (Yanzhou) would acquire 100% of the issued

shares in Felix via a scheme of arrangement (the Proposed Scheme). As a condition of the

Proposed Scheme Felix will spin-off its subsidiary, South Australian Coal Limited (SAC), which

holds the Phillipson Basin coal and mineral exploration tenements in South Australia.

On completion of the Proposed Scheme, holders of Felix shares (Shareholders) will have received

(assuming they are Felix Shareholders at all relevant times including the Dividend Record Date

and the SAC Record Date1 and the Scheme Record Date

2) the following for every Felix share

(collectively the Total Proceeds):

• a cash payment of AUD 16.95 (the Scheme Consideration)

• dividend payments of AUD 1.00 per share. The first AUD 0.50 dividend was declared on

13 August 2009, will be fully franked, and is scheduled to be paid on 30 October 2009 (First

AUD 0.50 Dividend) and further dividends of up to AUD 0.50 for each Felix share, expected

to be fully franked, yet to be declared, and payable no later than three months after the

Implementation Date3 (Second AUD 0.50 Dividend)

• an in-specie distribution of shares in SAC on 30 October 2009, which is not contingent upon

approval of the Proposed Scheme (SAC Dividend).

Upon completion of the Proposed Scheme, Felix will become a wholly owned subsidiary of

Austar Coal Mine Pty Limited (Austar), which is in turn a wholly owned subsidiary of Yanzhou.

Felix will subsequently be delisted from the Australian Securities Exchange (ASX). The board of

Felix has prepared a scheme booklet containing the detailed terms of the Proposed Scheme (the

Scheme Booklet) and an overview of the Proposed Scheme is provided in Section 1 of our

detailed report.

1 The Dividend Record Date and SAC Record Date is 7pm on 15 October 2009

2 The Scheme Record Date means 7pm on the fifth business day following the date on which the Proposed

Scheme becomes effective, or such other date as Felix and Yanzhou may agree in writing 3 Implementation Date means the third business day following the Scheme Record Date

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Purpose of the report Whilst an independent expert’s report in respect of the Proposed Scheme is not required to meet

any statutory obligations, the directors of Felix (the Directors) have requested that Deloitte

Corporate Finance Pty Limited (Deloitte) provide an independent expert’s report advising

whether, in our opinion, the Proposed Scheme is in the best interests of Shareholders.

This independent expert’s report has been prepared in a manner consistent with Part 3 of

Schedule 8 of the Corporations Regulations 2001 (Cwlth) (Part 3) to assist Shareholders in their

consideration of the Proposed Scheme. We have prepared this report having regard to Part 3 and

the relevant Australian Securities and Investments Commission (ASIC) Regulatory Guides.

This independent expert’s report has been prepared for the exclusive purpose of assisting

Shareholders in their consideration of the Proposed Scheme, and will be available on the Felix’s

website at www.felixresources.com.au. Deloitte has prepared a concise independent expert’s

report, which will be included in the Scheme Booklet to be sent to Shareholders. We are not

responsible to you, or anyone else, whether for our negligence or otherwise, if the report is used

by any other person for any other purpose.

Basis of evaluation

Schemes of arrangement can include many different types of transactions, including being used as

an alternative to a Chapter 6 takeover bid. The basis of evaluation selected by the expert must be

appropriate for the nature of each specific transaction.

Section 640 of the Corporations Act 2001 (Section 640) requires an independent expert’s report

in connection with a takeover offer to state whether, in the expert’s opinion, the takeover offer is

fair and reasonable. Where the scheme of arrangement has the same effect as a takeover, the form

of analysis used by the expert should be substantially the same as for a takeover bid, however, the

opinion reached should be whether the proposed scheme is ‘in the best interests of the members

of the company’. Accordingly, if an expert were to conclude that a proposal was ‘fair and

reasonable’ if it was in the form of a takeover bid, it will also be able to conclude that the

proposed scheme is in the best interests of the members of the company.

Under ASIC Regulatory Guide 111, which provides guidance in respect of the content of expert

reports, a control transaction such as the Proposed Scheme is:

• fair, when the value of the consideration is equal to or greater than the value of the shares

subject to the proposed scheme. The comparison must be made assuming 100% ownership

of the target company

• reasonable, if it is fair, or despite not being fair, after considering other significant factors,

Shareholders should accept the offer under the proposed scheme, in the absence of any

higher bids. Our analysis of these reasonableness factors is set out in Section 9.

To assess whether the Proposed Scheme is in the best interests of Shareholders, we have adopted

the test of whether the Proposed Scheme is either fair and reasonable, not fair but reasonable, or

neither fair nor reasonable, as set out in ASIC Regulatory Guide 111.

Summary and conclusion In our opinion the Proposed Scheme is fair and reasonable and therefore in the best interests of

Shareholders. In arriving at this opinion, we have had regard to the following factors: For

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The Proposed Scheme is fair

Set out in the table below is a comparison of our assessment of the fair market value of a Felix

share with the Total Proceeds.

Table 1: Evaluation of fairness

Low

(AUD) High

(AUD)

Estimated fair market value of a Felix share (Section 7.8) 16.70 18.70

Estimated fair market value of the Total Proceeds (Section 9.1) 18.05 18.05

Source: Deloitte analysis

We have estimated the fair market value of a Felix share, using the sum of the parts methodology,

to be in the range of AUD 16.70 to AUD 18.70. We have valued the Total Proceeds, including the

Scheme Consideration, the First AUD 0.50 Dividend, the Second AUD 0.50 Dividend and the

SAC Dividend, at AUD 18.05 per Felix share.

The Total Proceeds is within the range of our estimate of the fair market value of a Felix share.

ASIC Regulatory Guide 111.10 provides that ‘an offer is fair if the value of the offer price or

consideration is equal to or greater than the value of securities the subject of the offer’. ASIC

Regulatory Guide 111.62 provides that ‘an expert should usually give a range of values’ for the

securities that are subject to the offer.

The high end of our assessed value of a Felix share is above the value of the Total Proceeds, and

the value of the Total Proceeds falls within the valuation range of a Felix share. In relation to the

Proposed Scheme we consider that, if the value of the Total Proceeds is within the range of the

value of a Felix share, the offer is fair. It is therefore our opinion that the Proposed Scheme is fair.

Valuation of a Felix share

We have estimated the fair market value of a Felix share to be in the range of AUD 16.70 to AUD

18.70.

We have estimated the fair market value of a Felix share using the sum of the parts methodology,

including the following:

• Felix’s operating assets, including the Yarrabee mine (Yarrabee), Ashton open cut and

underground mines (Ashton) and the Minerva mine (Minerva) (Operating Assets) and the

Moolarben open cut and underground development projects (Moolarben Development

Projects)

• the exploration assets including Athena, Harrybrandt, Wilpeena and the Phillipson Basin

• other assets, including Felix’s 15.4% interest in Newcastle Coal Infrastructure Group (NCIG)

and the Ultra Clean Coal (UCC) patented technology

• Felix’s corporate cash flows

• net cash position.

The Operating Assets and Moolarben Development Projects have been valued using the

discounted cash flow method, which discounts the estimated future cash flows derived from these

assets to their net present value.

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The discounted cash flow method requires the determination of an appropriate discount rate and

the projection of future cash flows. We have selected the following nominal after tax discount

rate ranges to discount the future cash flows of Felix’s Operating Assets and the Moolarben

Development Projects to their present value:

• a discount rate range of 11.5% to 12.5% to discount the future cash flows of the Operating

Assets

• a discount rate range of 12.5% to 13.5% to discount the future cash flows of the Moolarben

Development Projects.

A detailed financial model prepared by the management of Felix (the Model) formed the basis of

our estimated future cash flows.

Deloitte engaged Behre Dolbear Australia (BDA), an independent mining expert, to provide a

technical assessment of certain key assumptions underpinning the Model for the Operating Assets

and the Moolarben Development Projects. We also engaged BDA to undertake a valuation of

Felix’s exploration assets. Based on our analysis, we consider the assumptions underlying the

financial projections to be appropriate for the purpose of our valuation.

The following table summarises the net present value of the Operating Assets and the Moolarben

Development Projects based on our discounted cash flow valuation.

Table 2: Valuation of the Operating Assets and the Moolarben Development Projects

Low value (AUD million)

High value (AUD million)

Operating Assets 871 925

Moolarben Development Projects 1,645 1,797

Total 2,516 2,722


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In the following table we set out the sensitivity of the fair market value of the Operating Assets

and Moolarben Development Projects derived from the discounted cash flow method using our

selected long term real coal price, long term exchange rate and discount rate assumptions.

Table 3: Sensitivity analysis of the Operating Assets and the Moolarben Development Projects (AUD million)

Discount rate

Operating Assets 13.5% 12.5% 11.5% 10.5%

Moolarben Development Projects 14.5% 13.5% 12.5% 11.5%

Long term coal price (real per tonne)

- USD 5.0 2,037 2,196 2,373 2,571

Selected long term export prices1 2,332 2,516 2,722 2,953

+ USD 5.0 2,631 2,841 3,076 3,340

Long term exchange rate assumption

USD 0.72 2,498 2,699 2,923 3,174

USD 0.75 2,332 2,516 2,722 2,953

USD 0.78 2,178 2,348 2,537 2,749


Note:

1. Selected long term export prices for each type of coal per tonne: export thermal coal USD 70.0; semi-soft coking coal (SSCC)

USD 80.0; and pulverised coal injection (PCI) coal USD 90.0

As demonstrated by the above, the values of the Operating Assets and the Moolarben

Development Projects are sensitive to the long term real coal price assumption.

We have selected a fair market value of the Operating Assets and the Moolarben Development

Projects in the range of AUD 2,500 million to AUD 2,700 million (refer to Section 7.2).

There are a number of items which may contribute to Felix’s future cash flows that are not

included in the Model (refer to Section 7.3). To reflect the value of these assets, we have added a

premium of 10% to 15% to the net present value of the Operating Assets and the Moolarben

Development Projects. After applying this premium, our valuation of the Operating Assets and

Moolarben Development Projects is in the range of AUD 2,750 million to AUD 3,105 million.

BDA has assessed the value of Felix’s exploration assets to be in the range of AUD 95 million to

AUD 125 million, having considered the past expenditure method and value per tonne of in situ

reserve/resource method. Having regard to the risk associated with gaining access to the

Woomera Prohibited Area, in which the Phillipson Basin is located, we have selected a range of

AUD 95 million to AUD 115 million for Felix’s exploration assets.

Felix’s other assets have been valued as follow:

• a 15.4% interest in NCIG – Felix’s decision to participate in the construction of the NCIG

Coal Terminal was a strategic decision to secure long term export capacity. The asset is

therefore an integral part of Felix’s operations and is not expected to be a separate profit

generating investment for Felix. In effect, we consider the investment in the NCIG Coal

Terminal underpins our valuation of the Moolarben Development Projects and we have not

identified a separate value for Felix’s interest in NCIG

• the UCC patented technology – we have estimated the fair market value of this asset to equal

to the investment to date of AUD 45 million

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• Felix’s corporate cash flows – Felix manages and operates Ashton, Minerva and the

Moolarben Development Projects on behalf of the other Joint Venture (JV) participants in the

assets/projects. Management fees earned for these services are corporate revenue to Felix.

Felix’s corporate cash flows therefore include management fees received by Felix and

corporate overhead costs. The projected management fees receivable by Felix are greater than

actual corporate overhead costs. We have estimated the fair market value of Felix’s corporate

cash flows to be in the range of AUD 135 million to AUD 145 million

• net cash position – Felix’s net cash balance is AUD 272 million, including the

AUD 0.50 per share dividend declared on 13 August 2009 but not yet paid.

The following table summarises our valuation of Felix.

Table 4: Value of Felix based on sum of the parts method

Section Low value

(AUD million) High value

(AUD million)

Value of the Operating Assets and the Moolarben

Development Projects

2,500 2,700

Premium to discounted cash flow value 7.3 10% 15%

Total value of Felix’s assets including premium 2,750 3,105

Exploration assets 7.4 95 115

UCC 7.5 45 45

Corporate cash flows 7.6 135 145

Net cash 7.7 272 272

Equity value (on a control basis) 3,297 3,682

Number of shares on issue1 4.9 196.6 196.6

Value of a Felix share 16.74 18.70

Deloitte assessed value of a Felix share 16.70 18.70


Note:

1. Includes 170,000 share options outstanding, which will vest and be exercised prior to the issuance of the Scheme Booklet

To provide additional support for our assessed value, we have also considered recent share market

trading activity. In addition, we cross checked our valuation of Felix with reference to the

enterprise value to resources multiple implied by our valuation compared to those observed for

comparable companies and comparable transactions. These cross checks provide support for our

assessed value of Felix.

Valuation of the Total Proceeds

We have valued the Total Proceeds at AUD 18.05 per Felix share. This includes the Scheme

Consideration, the First AUD 0.50 Dividend, the Second AUD 0.50 Dividend and the SAC

Dividend.

On completion of the Proposed Scheme, SAC will have a cash balance of AUD 10 million and

own the Phillipson Basin coal and mineral exploration tenements in South Australia. Based on the

low end of BDA’s valuation of the Phillipson Basin at AUD 15 million, the cash balance and the

number of shares to be issued to Shareholders (equal to Felix’s current number of shares on

issue), we estimate the fair market value of a share in SAC will be AUD 0.10.

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The Proposed Scheme is reasonable

In accordance with ASIC Regulatory Guide 111 an offer is reasonable if it is fair. On this basis, in

our opinion the Proposed Scheme is reasonable. We have also considered the following factors in

assessing the reasonableness of the Proposed Scheme:

Advantages of the Proposed Scheme

The likely advantages to Shareholders if the Proposed Scheme is approved include:

In the absence of the Proposed Scheme Felix’s shares may trade below current levels

In the absence of the Proposed Scheme or another alternative proposal, Felix’s shares may trade

at prices below the value of the Total Proceeds and those achieved in recent trading. Since the

Proposed Scheme was announced on 13 August 2009 no other offers for Felix have been

received.

The Total Proceeds represents a premium of 11% to Felix’s one month volume weighted average

price (VWAP) of AUD 16.34 prior to the announcement of the Proposed Scheme. We consider

that the one month VWAP already substantially incorporates a control premium, on the basis that

Felix’s share prices are likely to have been influenced by the press releases and the market

speculation around potential change of control activity prior to the announcement of the Proposed

Scheme.

The Total Proceeds represents a premium of 29% to Felix’s three month VWAP prior to the

announcement of the Proposed Scheme, and a premium of 56% to Felix’s six month VWAP.

The Proposed Scheme represents an opportunity for Shareholders to realise their investments in

Felix with the certainty of the predominately cash consideration offered under the Proposed

Scheme.

Directors intend to vote in favour of the Proposed Scheme

Felix’s directors hold or control in aggregate approximately 30.3% of Felix’s shares. The

Directors have indicated their intention to vote in favour of the Proposed Scheme in respect of

their own shares, if no superior offer is received. This is a strong signal that the Proposed Scheme

is considered attractive by the Felix directors.

Greater focus on exploring and developing the Phillipson Basin

On completion of the Proposed Scheme, Shareholders will receive an in-specie distribution of

shares in SAC in proportion to their existing shareholdings in Felix. SAC will own the Phillipson

Basin, and will have an initial cash balance of AUD 10 million. SAC will be an independent

company with its own management team. This will enable SAC to focus on exploration and

development activity in the Phillipson Basin.

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Disadvantages of the Proposed Scheme

The likely disadvantages to Shareholders if the Proposed Scheme is approved include:

Inability to participate in possible future growth potential of Felix

Shareholders will no longer collectively control or hold a direct interest in Felix and accordingly

will not participate in the future growth of Felix to the extent that it may generate a future value

above the Total Proceeds. For example, increases in coal prices substantially above those

currently assumed in our valuation may result in additional future value not fully factored into the

Total Proceeds.

Tax implication

If the Proposed Scheme is approved, Shareholders may incur a tax expense. Individual investors

should consult their tax advisor in relation to their personal circumstances. Further details in

respect of the potential taxation implications are provided in Section 9 of the Scheme Booklet.

Conclusion on reasonableness

As the Proposed Scheme is fair, it is also reasonable.

Opinion

In our opinion, the Proposed Scheme is fair and reasonable to Shareholders. It is therefore in the

best interests of Shareholders. An individual Shareholder’s decision in relation to the Proposed

Scheme may be influenced by his or her particular circumstances. If in doubt the Shareholder

should consult an independent adviser.

This opinion should be read in conjunction with our detailed report which sets out our scope and

findings.

Yours faithfully

DELOITTE CORPORATE FINANCE PTY LIMITED

Robin Polson Stephen Reid

Director Director

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Contents

1 Terms of the Proposed Scheme 12

1.1 Summary 12

1.2 Yanzhou’s intentions 12

1.3 Key conditions of the Proposed Scheme 13

2 Scope of the report 14

2.1 Purpose of the report 14

2.2 Basis of evaluation 14

2.3 Limitations and reliance on information 16

3 Coal mining industry 17

3.1 Overview 17

3.2 Coal resources in Australia 18

3.3 Thermal coal 18

3.4 Coking coal 21

3.5 Pricing 23

3.6 Other considerations 24

4 Profile of Felix 26

4.1 Company history 26

4.2 Major assets 27

4.3 Operating Assets 29

4.4 Moolarben Development Projects 31

4.5 Exploration assets 32

4.6 Reserves and resources 33

4.7 Other assets 34

4.8 Key personnel 35

4.9 Capital structure and shareholders 36

4.10 Share price performance 37

4.11 Financial performance 39

4.12 Financial position 40

5 Valuation methodology 42

5.1 Valuation methodologies 42

5.2 Selection of valuation methodologies 43

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5.3 Appointment and role of the technical expert 44

6 Future cash flows 45

6.1 The Model 45

6.2 Revenue assumptions 46

6.3 Operating costs 49

6.4 Capital costs 49

6.5 Corporate assumptions 50

6.6 Other assumptions 50

7 Valuation of Felix 51

7.1 Valuation of Felix before the Proposed Scheme 51

7.2 Value of the Operating Assets and Moolarben Development Projects 51

7.3 Premium to discounted cash flow value 55

7.4 Value of the exploration assets 55

7.5 Value of surplus assets 57

7.6 Value of corporate cash flows 57

7.7 Net cash 58

7.8 Valuation: sum of the parts method 58

7.9 Analysis of recent Felix share trading 59

7.10 Industry rules of thumb 60

8 Valuation of SAC 63

8.1 Introduction 63

8.2 Valuation of the Phillipson Basin 63

8.3 Discount for minority interest 64

8.4 Value of SAC 65

9 Evaluation and conclusion 66

9.1 Valuation of Total Proceeds 66

9.2 Fairness 66

9.3 Reasonableness 67

9.4 Conclusion 68

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Appendices

Appendix 1: Glossary 69

Appendix 2: Discount rate 73

Appendix 3: Comparable entities 85

Appendix 4: Comparable transactions 89

Appendix 5: Independent technical expert’s report 94

Appendix 6: Sources of information 131

Appendix 7: Qualifications, declarations and consents 132

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1 Terms of the Proposed Scheme

1.1 Summary

On 13 August 2009, Felix announced the Proposed Scheme under which Yanzhou will acquire

100% of the issued shares in Felix.

On completion of the Proposed Scheme, Shareholders will have received (assuming they are

Felix Shareholders at all relevant times including the Dividend Record Date and the SAC Record

Date and the Scheme Record Date) the following for every Felix share:

• the Scheme Consideration consisting of a cash payment of AUD 16.95

• dividend payments of AUD 1.00 per share consisting of the First AUD 0.50 Dividend and the

Second AUD 0.50 Dividend

• the SAC Dividend consisting of an in-specie distribution of shares in SAC on 30 October

2009, which is not contingent upon approval of the Proposed Scheme.

The acquisition of Felix by Yanzhou is contingent on the spin-off of SAC.

Subject to obtaining the necessary approvals, the Proposed Scheme is expected to be completed

by mid-December 2009. Full details of the Proposed Scheme are provided in the Scheme Booklet.

1.2 Yanzhou’s intentions

Upon completion of the Proposed Scheme, Felix will become a wholly-owned subsidiary of

Austar, which is in turn a wholly owned subsidiary of Yanzhou. Felix will subsequently be

delisted from the ASX.

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1.3 Key conditions of the Proposed Scheme

The Proposed Scheme is subject to conditions, which are set out in Section 2.5 of the Scheme

Booklet and can be summarised as follows:

• approvals from ASIC and ASX and all other necessary Australian government agency

approvals

• approval by the Foreign Investment Review Board (FIRB)

• approval by the government agencies of the People’s Republic of China

• approval by the Federal Court of Australia

• no material adverse change (as defined in the Scheme Booklet) occurring to Felix

• no prescribed occurrence (as defined in the Scheme Booklet) by Felix

• no material transaction (as defined in the Scheme Booklet) occurs with respect to Felix, with

the exception of the spin-off of SAC

• approval by two-thirds of Yanzhou’s shareholders

• the independent expert concluding that the Proposed Scheme is in the best interests of

Shareholders

• the divestment of SAC becomes effective

• approval by Shareholders

• the representations and warranties given by Felix are materially correct.

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2 Scope of the report

2.1 Purpose of the report

The Directors have requested that Deloitte provide an independent expert’s report advising

whether, in our opinion, the Proposed Scheme is in the best interests of Shareholders. This

independent expert’s report has been prepared in a manner consistent with Part 3 and the relevant

ASIC Regulatory Guides to assist Shareholders in their consideration of the Proposed Scheme.

This report has been prepared for the exclusive purpose of assisting Shareholders in their

consideration of the Proposed Scheme, and will be available on Felix’s website at

www.felixresources.com.au. Deloitte has prepared a concise independent expert’s report, which

will be included in the Scheme Booklet to be sent to Shareholders. We are not responsible to you,

or anyone else, whether for our negligence or otherwise, if the report is used by any other person

for any other purpose.

2.2 Basis of evaluation

2.2.1 Guidance

Schemes of arrangement can include many different types of transactions, including being used as

an alternative to a Chapter 6 takeover bid. The basis of evaluation selected by the expert must be

appropriate for the nature of each specific transaction.

Section 640 requires an independent expert’s report in connection with a takeover offer to state

whether, in the expert’s opinion, the takeover offer is fair and reasonable. Where the scheme of

arrangement has the same effect as a takeover, the form of analysis used by the expert should be

substantially the same as for a takeover bid, however, the opinion reached should be whether the

proposed scheme is ‘in the best interests of the members of the company’. Accordingly, if an

expert were to conclude that a proposal was ‘fair and reasonable’ if it was in the form of a

takeover bid, it will also be able to conclude that the proposed scheme is in the best interests of

the members of the company.

In our determination as to whether the Proposed Scheme is fair and reasonable and therefore in

the best interests of Shareholders, we have had regard to common market practice and to ASIC

Regulatory Guide 111 issued by ASIC in relation to the content of independent expert’s reports.

ASIC Regulatory Guide 111

This regulatory guide provides guidance in relation to the content of independent expert’s reports

prepared for transactions under Chapters 5, 6 and 6A of the Corporations Act, in relation to:

• takeover bids

• schemes of arrangement

• compulsory acquisitions or buy-outs

• acquisitions approved by security holders under item 7 of Section 611 of the Corporations

Act

• selective capital reductions

• related party transactions

• transactions with persons in a position of influence

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• demergers and demutualisations of financial institutions

• buy-backs.

ASIC Regulatory Guide 111 refers to a ‘control transaction’ as being the acquisition (or increase)

of a controlling stake in a company that could be achieved, for example, by way of a takeover

offer, scheme of arrangement, approval of an issue of shares using item 7 of Section 611 of the

Corporations Act, a selective capital reduction or selective buy back under Ch 2J of the

Corporations Act.

In respect of control transactions, under ASIC Regulatory Guide 111 an offer is:

• fair, when the value of the consideration is equal to or greater than the value of the shares

subject to the proposed scheme. The comparison must be made assuming 100% ownership of

the target company (i.e. including a control premium)

• reasonable, if it is fair, or, despite not being fair, after considering other significant factors,

shareholders should accept the offer under the proposed scheme, in the absence of any higher

bids before the close of the offer.

To assess whether the Proposed Scheme is in the best interests of Shareholders, we have adopted

the tests of whether the Proposed Scheme is either fair and reasonable, not fair but reasonable, or

neither fair nor reasonable, as set out in ASIC Regulatory Guide 111.

2.2.2 Fairness

ASIC Regulatory Guide 111 defines an offer as being fair if the value of the offer price is equal to

or greater than the value of the securities the subject of the offer. The comparison must be made

assuming 100% ownership of the target company. Accordingly we have assessed whether the

Proposed Scheme is fair by comparing the Proposed Scheme with the value of a Felix share.

The Felix shares have been valued at fair market value, which we have defined as the amount at

which the shares would be expected to change hands between a knowledgeable willing buyer and

a knowledgeable willing seller, neither of whom is under any compulsion to buy or sell. Special

purchasers may be willing to pay higher prices to reduce or eliminate competition, to ensure a

source of material supply or sales, or to achieve cost savings or other synergies arising on

business combinations, which could only be enjoyed by the special purchaser. Our valuation of a

Felix share has not been premised on the existence of a special purchaser.

We have assessed whether the Proposed Scheme is fair by comparing the value of a Felix share

with the value of the Total Proceeds. We have assessed the value of each Felix share by

estimating the current value of Felix on a control basis and dividing this value by the number of

shares on issue.

2.2.3 Reasonableness

ASIC Regulatory Guide 111 considers an offer in respect of a control transaction, to be

reasonable if either:

• the offer is fair

• despite not being fair, but considering other significant factors, shareholders should accept the

offer in the absence of any higher bid before the close of the offer. For

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To assess the reasonableness of the Proposed Scheme we considered the following significant

factors in addition to determining whether the Proposed Scheme is fair:

• any significant shareholdings in Felix

• the likely market price and liquidity of Felix shares in the absence of the Proposed Scheme

• taxation losses, cash flows or other benefits available to Yanzhou upon achieving 100%

ownership of Felix

• any special value of Felix to Yanzhou

• the value to an alternative bidder and the likelihood of an alternative offer being made

• other implications associated with Shareholders rejecting the Proposed Scheme.

2.2.4 Individual circumstances

We have evaluated the Proposed Scheme for Shareholders as a whole and have not considered the

effect of the Proposed Scheme on the particular circumstances of individual investors. Due to

their particular circumstances, individual investors may place a different emphasis on various

aspects of the Proposed Scheme from the one adopted in this report. Accordingly, individuals

may reach different conclusions to ours on whether the Proposed Scheme is fair and reasonable

and therefore in the best interests of Shareholders. If in doubt investors should consult an

independent adviser.

2.3 Limitations and reliance on information

The opinion of Deloitte is based on economic, market and other conditions prevailing at the date

of this report. Such conditions can change significantly over relatively short periods of time. This

report should be read in conjunction with the declarations outlined in Appendix 6.

We specifically draw to the attention of Shareholders that recent volatility in capital markets and

the current economic outlook has created significant uncertainty with respect to the valuation of

assets. Recognising these factors, we consider that our opinions may be more susceptible to

change than would normally be the case.

This engagement has been conducted in accordance with professional standard APES 225

Valuation Services issued by the Accounting Professional and Ethical Standards Board Limited

(APESB).

Our procedures and enquiries do not include verification work nor constitute an audit or a review

engagement in accordance with standards issued by the Auditing and Assurance Standards Board

(AUASB).

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3 Coal mining industry

Coal is Australia’s largest commodity export, which generated approximately AUD 24 billion of

revenue for Australia in the financial year (FY) 2008. Australia’s coal production consists

primarily of thermal coal and metallurgical or coking coal, which includes hard coking coal

(HCC), SSCC and PCI coal.

The principal activities of Felix are the production and exploration of thermal coal, SSCC and

PCI coal from mining activities carried out in New South Wales (NSW) and Queensland.

Accordingly, we have provided an overview of the Australian coal mining industry, focussing on

thermal and coking coal.

3.1 Overview

Coal is a fossil fuel composed primarily of carbon and hydrogen, formed through the natural

application of high temperatures and pressure to biological matter over extended periods of time.

Coal is mined by both open cut and underground mining methods.

Open cut mining involves using a dragline, truck/shovel fleet, or a combination of these methods

to remove waste rock (overburden). The uncovered coal is then removed using excavators and

trucks.

Underground mines in Australia predominantly use the longwall method of mining. This method

involves underground roadways being cut into the coal seam to expose blocks of coal that can be

up to several hundred metres wide and several kilometres long. Hydraulic roof supports then

allow an automated shearer and conveyor to cut coal from the face (width) of the block. As a cut

is made, the supports move forward and the roof is allowed to collapse behind the supports.

Under consistent mining conditions, the longwall can typically recover over 75% of the coal

within the area of mining.

Coal may be classified as either thermal coal or coking coal depending on its chemical and

physical properties. Thermal coal and coking coal have different uses and therefore are subject to

different supply and demand considerations, however a degree of substitution can occur between

SSCC and thermal coal.

The majority of world coal production is consumed in the country in which it is produced. While

exports represent a relatively small amount of total world coal production, more than three

quarters of Australia’s total coal production is exported. Australia’s contribution to the global

export market for thermal and coking coal are discussed in Section 3.3.2 and 3.4.2 respectively.

Over 90% of the world’s imported thermal and coking coal is represented by seaborne trade. As a

result, the costs associated with ocean freight represent a significant portion of the cost of

delivering coal to the end user.

Demand for thermal and coking coal from developing economies in Asia has increased

considerably in the last few years. However, increases in exported volumes from Australia have

been restricted by the capacity of rail systems and coal loading terminals (coal supply chain) both

in Queensland and NSW. These infrastructure limitations are currently being addressed through

the expansion of coal loading terminals and rail systems (refer Section 3.6.1).

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3.2 Coal resources in Australia

Australia is rich in coal with proved reserves4 of approximately 76.2 billion tonnes of coal as at

31 December 20085. NSW and Queensland produced approximately 97% of Australia’s saleable

output of black coal, as well as 100% of Australia’s black coal exports in the year ended

30 June 20086. The location of coal resources in Queensland and in NSW are illustrated in Figure

1 and 2 below.

Figure 1: Queensland coal resources Figure 2: NSW coal resources

Source: Australian Coal Association Source: Australian Coal Association

3.3 Thermal coal

Thermal coal is primarily used as an energy source for coal fired power plants, which generate

approximately 40% of the world’s electricity output. Thermal coal is also used in cement

manufacturing and other major energy intensive industries which use heat and/or steam in their

production processes. As a result, thermal coal is generally sold at prices which reflect its energy

content.

A wide range of thermal coals are available from Australian coal producers with coal

characteristics varying from mine to mine. Australian thermal coal typically has high energy

content, moderate ash levels and is generally low in contaminants such as sulphur and other

heavy metals, that reduce the value of the coal.

4 Proved reserves are generally taken to be those quantities that geological and engineering information

indicates with reasonable certainty can be recovered in the future from known deposits under existing

economic and operating conditions 5 BP statistical review of world energy, June 2009

6 Australian Coal Resources

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3.3.1 Demand

The key drivers of demand for Australian thermal coal are world energy demand, the

competitiveness of coal relative to alternative sources of energy in the production of electricity

and the accessibility and competitiveness of thermal coal suppliers to the key export markets of

the Asia Pacific region. The most important driver of global thermal coal demand is economic

growth in Asia which is expected to drive a sustained increase in the demand for electricity.

Demand for thermal coal has increased significantly in recent years as growth in the Chinese and

Indian economies increased their energy needs, a growing share of which is required to be

imported. There has also been increased demand for thermal coal by some European countries

following a decline in domestic coal production in Europe. In particular, Germany and the

United Kingdom, which were once net coal exporters, now rely on imported coal, while France

ceased domestic coal production from 2004. Japan and the European Union are the largest

importers of thermal coal.

The International Energy Agency forecasts a continued dominance of coal and other fossil fuels

in the energy mix, and a rising share of energy mix of emerging economies, in global energy

consumption. Figure 3 illustrates the forecast growth in global demand for imported thermal coal

between 2009 and 2025 and the significance of Asia to forecast demand growth. The majority of

this growth in Asia (approximately 64% of total growth) is expected to come from Japan,

South Korea, India, Taiwan and China. Demand for imports in Europe is expected to remain

relatively stable due to low population growth, carbon trading regulations (introduced in 2006)

and competition from alternative sources of energy.

Figure 3: Actual and forecast global demand for imported thermal coal (2008 to 2025)

Source: Wood Mackenzie, August 2009

Note:

1. Mt – million tonnes

3.3.2 Supply

Approximately 90% of the world’s imported thermal coal is represented by seaborne trade. In

2009, Indonesia is forecast to be the largest exporter of thermal coal, followed by Australia,

0

200

400

600

800

1,000

1,200

2008 2010 2012 2014 2016 2018 2020 2022 2024

mt

Africa Oceania Asia Europe North America South America

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Columbia and South Africa. Australia contributes approximately one fifth of global exports in

thermal coal.

Figure 4: World seaborne thermal coal trade

Source: Energy in Australia 2009, Australia Bureau of Agricultural and Resource Economics (ABARE)

A number of factors affected the availability of global thermal coal for the export market in 2008:

• rail and port infrastructure constraints in NSW and Queensland, discussed further in

Section 3.6.1

• reallocation of export supply to meet domestic needs in Indonesia and South Africa as a result

of supply disruptions caused by adverse weather events

• infrastructure constraints and low stockpiles contributed to supply reductions from

South Africa

• changes to export and import tariffs in China in 2008 have shifted Chinese demand for

thermal coal towards the import market. China has been a significant exporter of thermal

coal, however the government imposed a freeze on all coal exports in February 2008 and

increased the export tax to 13% to encourage retention of coal production for domestic use

• Indonesia, the largest thermal coal exporter in the world, has announced a cap on thermal coal

exports to ensure sufficient supply for domestic consumption.

Australia’s thermal coal exports from FY 2004 to FY 2008 are summarised in the following table:

Table 5: Australian thermal coal exports

2004 2005 2006 2007 2008

Volume (Mt) 106.69 106.40 110.82 111.68 114.85

Value (AUD million) 4,919 6,958 7,668 6,987 8.336

Implied price (AUD/tonne) 46.10 65.40 69.19 62.60 72.58

Source: Energy in Australia 2009, ABARE

Australia, 20%

Colombia, 11%

Indonesia, 32%

China, 10%

Rusian Federation, 11%

South Africa, 12%

Other, 4%

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With the planned resolution of existing infrastructure constraints, Australia will be well placed to

compete for expanding demand forecast in the Asia Pacific region due to its proximity to Asia.

The relatively low cost and high supply security of Australian thermal coal is expected to

continue to make it an attractive fuel source.

3.4 Coking coal

HCC is essential for the production of a strong coke which is used primarily in the steel making

process. SSCC does not have all the properties necessary for making hard coke, but can be

blended with HCC to produce coke. SSCC is generally washed to achieve the coking properties

required in the steel making process. SSCC is often blended with HCC to reduce the overall cost

of coal for steel production. SSCC can also be used as a substitute for thermal coal. PCI is washed

into fine powder and injected into blast furnaces as a replacement for coke in steel making.

Australian coking coals, particularly HCC and SSCC, are known for their high quality coking

characteristics and are generally low in contaminants such as sulphur and phosphorous. There has

been a trend towards using PCI in steel making as a partial substitute for coking coal in recent

years. The stimulus behind this has been the spread between PCI and HCC prices.

3.4.1 Demand

Global demand for steel is the ultimate driver of demand for coking coal, as approximately 90%

of coking coal produced worldwide is used in steel production. There is currently no viable

substitute for HCC in the production of steel.

An important issue in the coking coal market is the relative demand for the different types of

coking coal. HCC tends to be less plentiful and has inherent properties that allow producers to

demand a premium for it relative to PCI and SSCC.

Global steel demand has increased substantially in recent years due mainly to the urbanisation

and industrialisation of China and to a lesser degree, India. Figure 5 illustrates forecast world

demand for coking coal imports from 2008, which is expected to grow at a compound annual

growth rate of 3.9% to 2025, and the significance of Asia to forecast demand growth. Significant

steel production growth is forecast in China, India, Brazil and South Korea, with potential

increases in steel production in the Russian Federation. The United States of America (US),

European and Japanese demand is projected to remain relatively flat due to expected low gross

domestic product (GDP) growth, aging populations, mature steel industries and increasing

regulations on carbon emissions. Japan is the largest importer of coking coal.

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Figure 5: Actual and forecast global demand for imported coking coal (2008 to 2025)

Source: Wood Mackenzie, August 2009

Recent volatility in global markets and the expected downturn in worldwide economies have

affected the global demand for steel. Steel production declined suddenly in the fourth quarter of

2008 and the first quarter of 2009, resulting in an unprecedented decline in coking coal demand.

Sustained recovery is not expected in Western European and US steel production until 2011, and

a number of idle blast furnaces in these regions will remain closed in the medium term.

3.4.2 Supply

Over 90% of the world’s imported coking coal is represented by seaborne trade. Australia is not a

significant producer or consumer of steel, however it is the largest exporter of coking coal in the

world, contributing to nearly 60% of the world export market. The volume of coking coal

exported from Australia in recent times has been restricted by infrastructure constraints (refer

Section 3.6.1) and heavy rainfall impacting operations.

Figure 6: World seaborne coking coal trade


0

50

100

150

200

250

300

350

400

2008 2010 2012 2014 2016 2018 2020 2022 2024

mt

Europe Africa South America North America Asia

Australia58%

Canada12%

China2%

Russian Federation5%

United States10%

Other13%

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Australia’s proximity to Asian markets relative to the other major producers provides it with a

significant competitive advantage for the export of coking coal to Asian customers.

Australia’s coking coal exports from FY 2004 to FY 2008 are summarised in the following table:

Table 6: Australian coking coal exports

2004 2005 2006 2007 2008

Volume (Mt) 111.73 124.92 120.48 131.97 137.08

Value (AUD million) 7,323 11,814 18,094 15,550 15,794

Implied price (AUD/tonne) 65.54 94.58 150.18 117.83 115.22


There have been supply constraints for coking coal in Australia, particularly due to infrastructure

constraints in NSW and Queensland.

3.5 Pricing

The effect of strong demand and supply limitations on thermal, HCC and SSCC in the Asia

Pacific market has placed upward pressure on prices in recent years, however the recent economic

slowdown has impacted negatively on the price, as shown in the figure below.

Figure 7: Historical coal pricing (1986 to 2009) (nominal)

Source: Wood Mackenzie

Note:

1. FOB – free on board

2. Kcal/kg gar – thousand calories per kilogram gross as received

Coal has traditionally been sold as a cost-plus commodity, with prices falling above or below the

marginal cost of production for high cost producers. Thermal coal prices are dependent on the

energy level that the coal can provide, with the base price set for an energy level of

6,322 kcal/kg gar and then adjusted pro rata, whereas coking coal prices are dependent on the

coking characteristics of the coal.

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The international coal market can be divided between the Asia Pacific and the Atlantic market

regions, where significantly different market forces influence coal prices.

The Asia Pacific market is characterised by a lack of natural resources, resulting in a high

dependence on imported fuels and raw materials and reliance on trading partners for energy

supply. Asian customers have traditionally been prepared to maintain an annual reference price to

ensure security of supply. In addition, Asian market participants continue to invest in overseas

coal projects. Asian customers have historically contracted the majority of their tonnage

requirements and supplement these with limited purchases on the spot market.

The Atlantic market is highly competitive with numerous coal suppliers from a large number of

supplier countries. In addition, thermal coal competes against established gas, hydroelectric and

nuclear power sectors in this region.

In the Asia Pacific market, coal is predominantly purchased and sold pursuant to term contracts,

with volumes and prices renegotiated each year. The contracts generally specify factors such as

coal quality, tonnages, cargo sizes, delivery arrangements and prices agreed between the

purchaser and the supplier.

Historically, Japan has been the world’s largest coal importer and coal price settlements between

Japanese steel mills and the Australian coal mines tend to represent overall market conditions

within the coal industry, with prices becoming market reference prices for the Asia Pacific region.

Prices are set on an annual basis during negotiations that generally take place in advance of the

Japanese Financial Year (JFY), which commences on 1 April. Because of their relative

dominance in their respective markets, Xstrata plc (Xstrata) generally sets the benchmark-prices

for thermal coal, while the BHP Billiton Mitsubishi Alliance (BMA) tends to lead price setting

for HCC.

SSCC prices have historically been set at an 11% to 14% premium to the thermal coal price,

which reflects the higher relative costs of production. However, in the 2008-09 JFY, coal

producers successfully negotiated higher SSCC prices by linking this type of coal with HCC

prices. PCI and SSCC coal prices generally trade in correlation to each other.

3.6 Other considerations

3.6.1 Infrastructure

As Australia exports the majority of its coal production, access to port infrastructure is critical for

producers in the coal industry. Since 2005 there has been insufficient capacity in the coal loading

terminals and rail systems to match demand, resulting in large queues forming at coal loading

terminals. Large queues attract significant demurrage costs for miners. These infrastructure

constraints have contributed to coal prices reaching historically high levels in recent years.

NSW

The Port of Newcastle currently has a capacity system in place to manage the coal supply. The

capacity balancing system is designed to provide coal producers with a proportionate share of the

available capacity of the coal export infrastructure supply chain. As a result, there is little

incentive for coal producers to introduce new production capacity (by developing new mines)

until port capacity is expanded.

There are currently two coal loading terminal operators serving the NSW coal export market; Port

Waratah Coal Services Limited (PWCS) operating at the Port of Newcastle and Port Kembla Coal

Terminal Limited (PKCT) operating at Port Kembla. Infrastructure constraints in NSW are most

evident at the Port of Newcastle which, together with Dalrymple Bay Coal Terminal in

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Queensland, represents in excess of 55% of the total coal exporting capacity of the east coast of

Australia. To alleviate the infrastructure constraints in the long term, the participants in the

Hunter Valley coal supply chain have recently taken measures to:

• expand capacity at existing coal loading terminals at the Port of Newcastle

• establish a new operator, the NCIG, to construct a new terminal at the Port of Newcastle,

expected to commence operations in early 2010.

Queensland

Infrastructure constraints in Queensland primarily relate to a lack of rail rolling stock capacity.

The expansion of rail capacity in Queensland has generally lagged the capacity expansion at

ports, especially on Queensland’s Goonyella supply chain, which carries coal from mines from

the Bowen Basin to the Port of Hay Point. As a result, growth in export volumes from the Port of

Hay Point, which accounts for at least one third of Australia’s coal exports, has slowed

considerably over recent years.

To ease the rail capacity bottleneck in Queensland, the participants in the Goonyella supply chain

are currently working toward:

• the commencement of a business improvement program with the focus of optimising

operational throughput

• increased transport capacity on the Goonyella supply chain by procuring additional electric

locomotives for Queensland Rail

• establishing a central coordination role to oversee and if necessary, coordinate the activities

across the whole supply chan.

3.6.2 Carbon Pollution Reduction Scheme

The Australian government is in the process of establishing an emissions trading scheme which

aims to reduce greenhouse gases and enable Australia to meet its obligations under the Kyoto

protocol. The scheme, known as the Carbon Pollution Reduction Scheme, will be part of a

framework for meeting Australia’s protocol requirements. As part of the scheme, the government

is expected to set a cap on the total amount of carbon pollution allowed to be emitted by certain

industry sectors. The government will issue permits up to the annual cap each year and industries

that generate greenhouse gases will need to acquire a permit for every tonne of carbon pollution

produced each year.

The Australian coal industry will fall under the fugitive emissions sector because of the waste

methane that is produced during the coal mining process. The coal industry is likely to be affected

by the introduction of the Carbon Pollution Reduction Scheme. The price of permits will not be

set by the government. Permits will be traded and prices set by participants within the industry.

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4 Profile of Felix

Felix is a Queensland based company listed on the ASX with a focus on coal mining production,

development and exploration. Felix currently has four operating coal mines, producing thermal,

PCI and SSCC for export consumption. Felix also has Moolarben Development Projects and four

exploration assets in its portfolio.

In addition, Felix owns a 15.4% interest in the NCIG Coal Terminal and 100% of UCC patented

technology.

4.1 Company history

An overview of the company history is provided in Figure 8 below.

Figure 8: Company history

1970 • listed on the ASX in August 1970

2003 • underwent a company restructure, shifting its strategy from exploration and iron

smelting technology projects to owning, developing and operating coal mines

• acquired Yarrabee Coal Company Pty Limited, which owned and operated the

Yarrabee open cut coal mine in October 2003

2004 • acquired a 70% interest in the Minerva coal mine

2005 • acquired White Mining Limited in April 2005, which owned an 80% interest in

the Ashton open cut mine and Ashton underground project, 100% of the

Moolarben Development Project, 100% of the Harrybrandt deposit and 100% of

UCC

• raised AUD 61.4 million via a share placement and share purchase plan in April

2005

• offered a one for ten share consolidation

• the Minerva coal mine began operations in July 2005

• sold a 20% interest in the Ashton project to IMC Group

• submitted a development application for the Moolarben Development Projects

2006 • sold a 15.0% interest in the Minerva and Athena projects to Sojitz Corporation

(Sojitz)

• sold a 4.0% interest in the Minerva and Athena projects to Korea Resources

Corporation (KORES)

2007 • exploration at Athena and Harrybrandt began

• sold a 10% interest in the Moolarben Development Projects to Sojitz

• received approval for the Moolarben Development Projects in September 2007

2008 • sold a 10% interest in the Moolarben Development Projects to KORES

• construction of a new coal terminal commenced at the Hunter River at Newcastle

by NCIG with an estimated project cost of AUD 1 billion in January 2008. Felix

has a 15.4% interest in NCIG, which was established in 2004 to address

fundamental capacity issues associated with coal handling for regional coal

exporters

• commenced the development of the Moolarben open cut project

• announced that the Company was in discussion with third parties in relation to a

potential change of control transaction

2009

• on 13 August, the Proposed Scheme was announced whereby Yanzhou would

acquire 100% of issued shares in Felix.

Source: Felix and ASX

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4.2 Major assets

The following table summarises the major assets held by Felix.

Table 7: Summary of the interest held in the major assets held by Felix

Asset Operator Ownership entity1

Ownership interest

Type of coal

2

Mine type

2

Operational Assets

Yarrabee Felix Yarrabee Coal Company Pty Limited 100.0% TC/PCI OC

Ashton open cut Felix White Mining (NSW) Pty Limited 60.0% TC/SSCC OC

Ashton underground Felix White Mining (NSW) Pty Limited 60.0% SSCC UG

Minerva Felix Proserpina Coal Pty Limited 51.0% TC OC

Moolarben Development Projects

Moolarben open

cut/underground

Felix Moolarben Coal Mines Pty Limited 80.0% TC OC/UG

Source: Felix

Notes:

1. All of the entities are 100% wholly owned subsidiaries of Felix

2. TC - thermal coal; OC - open cut; UG – underground

The following figures show the location of the major assets owned by Felix in Queensland and

NSW.

Figure 9: Queensland assets

Source: Felix

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Figure 10: NSW assets

Source: Felix

In addition, Felix owns a number of exploration assets in Australia, holds a 15.4% interest in a

new coal terminal at Port of Newcastle (NCIG Coal Terminal) and owns the UCC patented

technology.

Further information regarding each of the assets is set out below.

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4.3 Operating Assets

The Operating Assets consist of Yarrabee, Ashton and Minerva, which are located in Queensland

and NSW. The following table outlines the total production and sales for the FY 2007 to FY 2009

for each of the Operating Assets.

Table 8: Total production and sales from FY 2007 to FY 2009 (on a 100% basis)

Production (tonnes) FY 2007

(‘000) FY 2008

(‘000) FY 2009

(‘000)

Yarrabee 1,585 1,642 1,506

Ashton 1,852 2,881 3,234

Minerva 1,964 2,595 2,571

Total production 5,401 7,118 7,311

Total coal sales 5,277 7,005 7,254

Source: Felix

Yarrabee

Yarrabee is wholly owned and operated by Felix and is located in Central Queensland’s Bowen

Basin, approximately 150 kilometres (km) west of Rockhampton and 280 km north-west of the

Port of Gladstone.

Production commenced in 1994 at Yarrabee and it is a mature open cut mining operation. It

primarily produces low volatile, high energy PCI coal with a small tonnage of thermal coal. In

FY 2009 production was approximately 1.5 Mt with an average strip ratio of 11:1 and coal sales

were 1.6 Mt. The following table summarises the specification of coal produced from Yarrabee:

Table 9: Yarrabee coal quality

Unit Thermal coal PCI coal

Specific energy Kcal/kg 6,200 - 7,000 7,450

Ash % 15 - 18 10.5

Volatile matter % 8.5 - 11.0 9.5

Total Sulphur % 0.70 0.65

% Source: Felix, BDA report

Yarrabee’s production is transported by rail to the Port of Gladstone for export to Asian markets.

The coal produced is primarily exported to steelmakers, power generators and general industries

in Japan, Korea, China and Taiwan.

Production decreased by 8% in FY 2009 from the previous year as a result of several periods of

heavy rain. Production during the quarter ended 30 June 2009 has however increased by 48%

compared to the previous quarter. A new 2.5 MT per annum (Mtpa) coal preparation plant was

commissioned in July 2009. It is expected that saleable production capacity will increase to 2.8

Mtpa over the next two years.

Yarrabee has 27.5 Mt of reserves and 117.2 Mt of resources. The remaining life is expected to be

a minimum of 10 years, with the ability of further exploration to extend to at least 20 years.

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Ashton

The Ashton coal mines are located in the Hunter Valley in NSW about 15 km north-west of

Singleton. The project comprises three main mining areas, the existing North East open cut mine,

the underground longwall operation and the proposed South East open cut mine.

Ashton is an unincorporated JV between Felix 60%, International Marine Corporation Group of

Singapore 30% and Itochu Corporation of Japan 10%.

Construction of Ashton open cut commenced in September 2003 and mining in the North East

open cut commenced in January 2004 with first coal production in May 2004. The North East

open cut mine has been operating for four years and the reserves are expected to be depleted by

mid 2010. The average strip ratio from Ashton open cut to date is approximately 5.7:1.

It is planned to develop and operate a new open cut mine (South East open cut) approximately

two kilometres to the south of the North East pit, commencing in mid FY2010 after cessation of

current mining. Estimated total proven and probable reserves at Ashton open cut are

approximately 49.1 Mt, with a strip ratio around 5.8:1. Ashton open cut resources are 118.9 Mt.

The South East open cut mine is expected to have a life of mine of seven years. A further open

cut opportunity exists in the area above the current underground mine, known as the West Pit,

extending the life of Ashton open cut to approximately 17 years. The coal production from the

open cut is expected to be sold as SSCC and thermal coal to export markets.

The development of the Ashton underground longwall operation commenced in late 2005 with

first coal production in early 2007. The longwall operation and underground mine design consists

of nine long wall and miniwall panels at depths varying from 35 metres (m) to 270 m, accessing

four seams. Ashton underground has 47.4 Mt of reserves and 322.7 Mt of resources. The

underground operation is expected to have around 14 years of remaining life. The coal production

from Ashton underground is expected to be sold as SSCC to export markets.

Ashton generally has good quality thermal and SSCC properties, high energy and low sulphur.

The following table summarises the specification of coal produced from Ashton.

Table 10: Ashton coal quality

Unit Thermal coal SSCC

Specific energy Kcal/kg 7,000 7,250

Ash % 12.0 9.5

Volatile matter % 35.0 35.0


% Source: Felix, BDA

Ashton’s total production capacity from both the open cut and underground mines is currently

3.9 Mtpa, which is more than Ashton’s 3.4 Mtpa export allowance at the Port of Newcastle in

calendar year 2009. This allowance has been determined by a capacity balancing system that has

been put in place due to capacity constraints at the Port of Newcastle and is expected to remain in

force until the end of 2010. The constraint on port capacity is expected to be alleviated once the

expansion at the Hunter Valley coal supply chain is completed. Production from the regional coal

mines is also expected to increase with additional port capacity coming on line. Production from

Ashton is primarily exported to Asian steelmakers.

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Minerva

Minerva is an open cut mine located 25 km north of Springsure and 45 km south of Emerald in

the Bowen Basin in Queensland. Minerva is owned by Felix (51%), Sojitz (45%) and KORES

(4%) through an unincorporated JV.

Minerva’s production consists of standard and premium thermal coal products, which are sold

primarily to Japanese and Korean power generators. Minerva has 28.8 Mt of reserves and 78.5 Mt

of resources. Minerva produces up to 2.7 Mtpa with an average strip ratio of 7.6:1 and, at the

current production rate, has an economic life of 11 years remaining. In FY 2009 coal production

was 2.6 Mt and coal sales were 2.5 Mt.

The following table summarises the specification of coal produced from Minerva.

Table 11: Minerva coal quality

Unit Thermal coal Premium

thermal Coal

Specific energy Kcal/kg 6,210 6,688

Ash % 17.0 13.5

Volatile matter % 30.0 30.0

Total Sulphur % <0.6% <0.6%


Production in FY 2009 decreased by 1% from the previous year, mainly due to Felix

management’s decision to reduce its current coal stockpile during the quarter ended 30 June 2009.

Exploration of underground resources at Minerva is ongoing.

Minerva’s thermal product is exported through the Gladstone RG Tanna Coal Terminal.

4.4 Moolarben Development Projects

Felix’s development assets are the Moolarben open cut and Moolarben underground projects

(collectively, the Moolarben Development Projects or Moolarben).

The proposed development plan for Moolarben consists of four open cut mines extracting up to

12.0 Mtpa of thermal coal and three underground mines extracting up to 4.0 Mtpa of thermal coal.

Moolarben is located in the Upper Hunter Valley region in NSW, 40 km north east of Mudgee.

In September 2007, Felix received approval from the NSW Department of Planning for the first

stage of development of the Moolarben site, comprising three open cut mines and one

underground mine, with a combined saleable production capacity of 10.0 Mtpa. The mining

leases covering the approved stage one area were granted to Felix between December 2007 and

March 2009.

In July 2008, Felix sought approval for stage two comprising an additional open cut mine and an

additional two underground mines. The mining lease applications for the stage two mines were

lodged by Felix with the Department of Primary Industry during April 2009 and May 2009.

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Moolarben has 357 Mt of reserves and 706 Mt of resources, with a mine life exceeding 20 years.

The following table summarises the specification of coal expected to be produced for domestic

sales and export from the Moolarben Development Projects.

Table 12: Moolarben coal quality

Unit Domestic

thermal coal Export

thermal Coal

Specific energy Kcal/kg 5,613 6,400 - 6,800

Ash % 28 14.5 - 17.5

Volatile matter % 26.0 30.2 – 30.8



Construction of the first open cut mine is currently proceeding according to schedule. The design

and procurement for the coal handling plant, preparation plant and rail loop was substantially

completed in June 2009, and mining is expected to commence in late 2009. Both the open cut and

underground are expected to operate concurrently from 2012, and at full production will

collectively produce 16 Mtpa of run-of-mine (ROM) coal and 13 Mtpa of saleable coal.

Felix has recently finalised a rail freight contract with Queensland Rail (QR) National for the

transport of coal from Moolarben to the NCIG Coal Terminal for export (refer to Section 4.7.1).

The majority of Moolarben thermal coal will be sold to South East Asian customers, with the

potential for some domestic sales to local power generators.

Moolarben is owned by Felix (80.0%), Sojitz (10.0%) and a consortium consisting of Hanwha

Corporation Limited (Hanwha), KORES, Korea Electric Power Company (KEPCO) and four of

KEPCO’s power generating subsidiaries (10.0%), through an unincorporated JV. Sojitz will

market the coal in Japan, while Hanwha will market the coal in Korea.

4.5 Exploration assets

The following section provides a brief outline of Felix’s current exploration assets.

Athena

The Athena exploration project, which is adjacent to and north of Minerva, is owned by Felix

(51%), Sojitz (45%) and KORES (4%), through an unincorporated JV.

Felix has undertaken initial exploration work at Athena which indicates the presence of coal

resources, however, information on coal quality remains limited. The current inferred resource

with coal intervals greater than two metres is approximately 560 Mt. Felix estimates that

substantial drilling would be required to convert this inferred resource to measured resources

status.

Harrybrandt

Felix holds a 100% interest in the Harrybrandt exploration project, which it acquired in 2005.

Harrybrandt is located in Queensland’s Bowen Basin and has a current inferred resource of

approximately 102.5 Mt of low volatile PCI coal and anthracite coal. It may be developed as an

open cut project.

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Phillipson Basin

Felix holds a 100% interest in the Phillipson Basin coal tenements. To date, two deposits have

been identified (Ingomar and Corner Gate), both potentially suitable for open cut mining and the

production of sub-bituminous coal, which can be used in local power generation. The Phillipson

Basin coal tenements have total resources of 514 Mt, inclusive of 160.3 Mt of measured and

indicated resources.

The asset is located in the prohibited area near Leigh Creek in South Australia. Access to the

tenements is restricted due to concerns over the Australia’s national security interests.

The Phillipson Basin tenements are held by SAC which is expected to be spun-off by an in-specie

distribution of shares in SAC to Shareholders in proportion to the existing shareholding in Felix.

Wilpeena

Felix holds a 100% interest in the Wilpeena exploration project, which is located adjacent to

Yarrabee. This deposit contains low volatile PCI coal and may be suitable for open cut mining

and further exploration is underway.

4.6 Reserves and resources

A summary of Felix’s reserve and resource estimates by asset are set out in Table 13 and

Table 14.

Table 13: Coal reserves (in Mt)

Asset Date

assessed Ownership Proved

reserves Probable reserves

Total reserves

Yarrabee OC Dec 2008 100% 26.1 1.4 27.5

Ashton OC Dec 2008 60% 29.2 19.9 49.1

Ashton UG Dec 2008 60% 23.5 23.9 47.4

Moolarben OC Jun 2008 80% 40.4 237.3 277.7

Moolarben UG Jun 2008 80% 44.1 35.0 79.1

Minerva OC Jun 2008 51% 13.6 15.2 28.8

Total (100% basis) 176.9 332.7 509.6

Total attributable to Felix 132.3 253.3 385.6

Source: Felix

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Table 14: Coal resources (in Mt) 1

Asset Date assessed Ownership

Measured resources

(M) 2

Indicated resources

(I) 2

Inferred resources

(In) 2

Total resources (M+I+In)

Yarrabee OC Dec 2008 100% 54.6 5.3 57.3 117.2

Ashton OC Dec 2008 60% 84.9 25.9 8.1 118.9

Ashton UG Dec 2008 60% 163.6 112.7 46.4 322.7

Harrybrandt OC Mar 2008 100% - - 102.5 102.5

Minerva OC Jun 2008 51% 17.4 36.1 25.0 78.5

Athena UG Oct 2004 51% - - 560.0 560.0

Moolarben OC May 2008 80% 257.4 96.5 52.7 406.6

Moolarben UG May 2008 80% 88.8 114.6 96.4 299.8

Total (100% basis) 666.7 391.1 948.4 2,006.2

Total attributable to Felix 489.5 275.8 610.1 1,375.4

Source: Felix

Notes:

1. Resources stated in the above table include reserves and excludes Phillipson Basin open cut resources

2. M - measured resources; I - indicated resources; In - inferred resources

4.7 Other assets

4.7.1 NCIG Coal Terminal

Felix is one of six companies (member companies) involved in the construction of the NCIG Coal

Terminal, which will be the third coal terminal located at the Port of Newcastle.

Table 15: Ownership interest in NCIG Coal Terminal

Member company Ownership

Interest

Felix 15.40%

BHP Billiton Limited 35.47%

Peabody Pacific Pty Limited (Peabody) 17.68%

Donaldson Coal Pty Limited 11.61%

Whitehaven Coal Limited (Whitehaven Coal) 11.06%

Centennial Coal Company Limited (Centennial Coal) 8.79%

Source: Felix

Construction of the NCIG Coal Terminal started in February 2008 and is expected to be

completed in various stages. Stage one expected capacity is 30 Mtpa, with the first shipment

scheduled for March 2010. The feasibility study and design of Stage two has commenced, which

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Upon completion of the construction, each of the member companies will be allocated a capacity

allowance based on their equity interests in the NCIG Coal Terminal.

will have the first right to any excess capacity at the term

4.7.2 Ultra Clean Coal

Felix acquired beneficial ownership of the UCC patented technology in January 2005. UCC is a

process for producing a high purity, chemically cleaned coal that can be fed directly

electricity generation plant with

cost alternative to natural gas.

UCC Energy Pty Limited (UCC Energy), a wholly owned subsidiary of Felix, owns a pilot plant

at Cessnock, located in the Hunter Valley region of NSW. Approximately

been invested in UCC research and development to date, funded by both UCC Energy and

government grants.

4.8 Key personnel

Felix’s board of directors is

Figure 11: Board of Directors

Source: Felix

Other key personnel at Felix include the Chief Operating Officer, Michael Chapman

Financial Officer and Company Secretary, Craig Smith and the General Manager of Marketing,

Goran Stamenkovic.

Felix Resources Limited independent expert’s report


allowance based on their equity interests in the NCIG Coal Terminal. The member companies

will have the first right to any excess capacity at the terminal.

oal


process for producing a high purity, chemically cleaned coal that can be fed directly

with high efficiency. UCC is an environmentally acceptable and lower

cost alternative to natural gas.


at Cessnock, located in the Hunter Valley region of NSW. Approximately AUD


Key personnel

shown in the following figure.

Other key personnel at Felix include the Chief Operating Officer, Michael Chapman


35


The member companies


process for producing a high purity, chemically cleaned coal that can be fed directly into

. UCC is an environmentally acceptable and lower


AUD 45 million has


Other key personnel at Felix include the Chief Operating Officer, Michael Chapman, the Chief


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4.9 Capital structure and shareholders

As at the date of this report, Felix had 196.5 million shares on issue. The following table lists the

top ten shareholders of Felix as at 31 July 2009.

Table 16: Top ten fully paid ordinary shareholders as at 31 July 2009

Fully paid ordinary shareholder Volume held % outstanding

AMCI Capital LP 37,601,724 19.1%

Gaffwick Pty Limited 29,948,706 15.2%

Ilwella Pty Limited 29,450,000 15.0%

Fibora Pty Limited 14,550,000 7.4%

National Nominees Limited 12,410,173 6.3%

JP Morgan Nominees Australia Limited 10,781,392 5.5%

HSBC Custody Nominees (Australia) Limited 10,766,189 5.5%

Leopold Station Pty Ltd 9,700,000 4.9%

Remond Holdings Pty Limited 9,700,000 4.9%

ANZ Nominees Limited 4,180,761 2.1%

Total 169,088,945 86.1%

Other 27,366,093 13.9%

Total shareholdings as at 31 July 2009 196,455,038 100.0%

Source: Felix

The combined interest of shares held or controlled by directors is 30.3%.

The following table summarises the share options on issue as at 28 August 2009.

Table 17: Share options outstanding

Issue date

Number of options

outstanding Vesting date Exercise price

(AUD) Expiry date

11 December 2006 40,000 11 December 2009 0.001 11 December 2010

1 January 2008 65,000 1 January 2010 0.001 1 January 2012

65,000 1 January 2011 0.001 1 January 2012

Source: Felix

Under the Proposed Scheme, these options will vest and be exercised prior to the issuance of the

Scheme Booklet

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4.10 Share price performance

A summary of share price performance of Felix is provided in Table 18 below.

Table 18: Felix quarterly share price information

Quarter end date High

(AUD) Low

(AUD) Last Trade

(AUD) Volume (‘000)

30 March 2007 5.24 3.81 4.86 44,386

29 June 2007 5.74 4.42 4.96 30,174

28 September 2007 6.02 4.40 5.58 20,949

31 December 2007 8.59 5.51 7.83 25,409

31 March 2008 12.36 4.93 12.05 25,694

30 June 2008 22.64 11.18 16.53 37,658

30 September 2008 21.49 14.64 16.51 44,559

31 December 2008 17.68 4.68 8.56 43,453

31 March 2009 9.84 6.22 8.75 32,118

30 June 2009 15.21 8.63 14.20 29,332

31 August 2009 18.03 13.37 17.26 25,447

Source: Bloomberg

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These share price movements and trading volumes are presented graphically in the figure below.

Figure 12: Felix stock activity on ASX

Source: Felix, Deloitte analysis, Bloomberg

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

0.00

5.00

10.00

15.00

20.00

25.00

Jan 2007 Apr 2007 Jul 2007 Oct 2007 Jan 2008 Apr 2008 Jul 2008 Oct 2008 Jan 2009 Apr 2009 Jul 2009

Vo

lum

e (

'00

0)

Sh

are

pri

ce (

AU

D)

Volume Daily VWAP

22 October 2007:Felix announced record coal sales

21 March 2007:AMCIbecame a substantial shareholder by acquiring Resources Management and Mining Pty Limited's 19.2% interest in Felix

November 2007:Legal proceedings by XstrataCoal and Mitsubishi to prevent the grant of a mining lease regarding Moolarben dismissed by Supreme Court of NSW

23 January 2008:Construction of the NCIG Coal Terminal at the Port of Newcastle commenced following completion of finance arrangements

March-April 2008:Record contract coal prices achieved for the Japanese Financial Year

28 July 2008:Felix announces several parties have expressed interest in relation to a potential change of control transaction

8 August 2008:NSW Court of appeal upheld decision by the Supreme Court,resulting in no change to the mining lease applications for Moolarben

14 October 2008:The Company announceddiscussions with third parties in relation to the potential change of control transaction were incomplete

25 September 2008:Received clearance to develop the Moorlaben project

29 September 2008:Company announced that it remains in discussions with interested parties however no binding proposal received as yet

5 December 2008: Felix clarified press speculation that the Company has not received a binding proposal

21 January 2009: Company issued shares by exercising previous unquoted options

27 April 2009 and 24 June 2009: Felix advised no change to continued pressspeculation regarding potential change of control

13 August 2009:Felix announced the Proposed Scheme

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4.11 Financial performance

The audited income statement of Felix for FY 2007 to FY 2009 is summarised in the table below.

Table 19: Financial performance

Actual FY 2007

(AUD’000)

Actual FY 2008

(AUD’000)

Actual FY 2009

(AUD’000)

Trading revenue 241,469 440,552 731,491

Other revenue 2,521 3,914 7,831

Total revenue 243,990 444,466 739,322

Other income 48,638 124,331 18,269

Expenses (222,219) (284,762) (369,300)

EBITDA2 70,409 284,035 388,291

EBITDA margin (%) 28.9% 63.9% 52.5%

Depreciation and amortisation (17,469) (28,639) (31,374)

EBIT3 52,940 255,396 356,917

EBIT margin (%) 21.7% 57.5% 48.3%

Net interest income/(expense) (3,182) (1,117) 11,923

Profit before tax 49,758 254,279 368,840

Source: Felix

Notes:

1. FY 2009 cost of sales includes expenses

2. EBITDA - earnings before interest, tax, depreciation and amortisation

3. EBIT - earnings before interest and tax

We note the following in relation to the historical financial performance of Felix:

• revenue from the sale of coal has increased year on year since FY 2007. This is mostly due to

record sales volume achieved and the high contracted coal prices achieved since June 2007

• FY 2009 was Felix’s most profitable year, primarily as a result of high coal prices and a 3%

increase in sales tonnage achieved during the year

• other income primarily relates to the following:

- in FY 2007 Felix sold a 28.7% interest in Minerva and Athena JVs and a 10% interest

in the Moolarben Development Projects, resulting in a gain of AUD 46.2 million

- in FY 2008, the Company completed the FY 2007 sell down of Moolarben and then

disposed a further 10% interest in Moolarben, resulting in a gain of AUD 123.7 million

- in FY 2009, profit relating to foreign exchange gains was AUD 13.2 million

• EBIT margin increased from 21.7% in FY 2007 to 57.5% in FY 2008, primarily as a result of

profits made from the partial disposal of Felix’s interest in Minerva, Athena and Moolarben.

Excluding the effect of the sales of interests in Moolarben, the adjusted EBIT margin is

approximately 30.0%

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4.12 Financial position

The audited balance sheets of Felix as at 30 June 2008 and 30 June 2009 are summarised in the

table below.

Table 20: Financial position

June 2008 Audited

(AUD’000)

June 2009 Audited

(AUD’000)

Cash 237,093 338,626

Trade and other receivables 72,779 61,162

Inventory 31,812 45,071

Derivative financial assets 3,546 -

Other 47,614 51,640

Total current assets 392,844 496,499

Trade and other receivables 10,435 11,669

Investments accounted for using the equity method 187 208

Property, plant and equipment 197,864 270,244

Exploration and evaluation assets 17,908 25,694

Deferred tax assets 27,597 13,953

Intangible assets 194,519 189,263

Derivative financial assets 70 -

Total non-current assets 448,580 511,031

Total assets 841,424 1,007,530

Trade and other payables 55,759 65,994

Interest bearing liabilities 20,856 19,921

Derivative financial liabilities 16,416 4,504

Current tax liabilities 19,134 83,852

Provisions 608 566

Total current liabilities 112,773 174,837

Trade and other payables 4,372 5,419

Interest bearing liabilities 70,367 31,506

Derivative financial liabilities 21,804 -

Deferred tax liabilities 77,454 76,688

Provisions 7,163 7,042

Total non-current liabilities 181,160 120,655

Total liabilities 293,933 295,492

Net assets 547,491 712,038

Source: Felix

We note the following in relation to Felix’s financial position as at 30 June 2009:

• inventory of AUD 45.1 million is largely comprised of coal held at cost. Other inventory

items include fuel, spare parts and tyres, all of which are held at cost

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• other assets at 30 June 2009 of AUD 51.6 million mostly related to overburden removal costs

incurred in advance by Felix in order to gain access to the coal seams. The capitalised costs

are amortised in line with run-of-mine (ROM) production

• intangible assets of AUD 189.3 million are comprised of mining tenements for Yarrabee,

Minerva, Ashton and Moolarben, computer software, and rail access rights. These intangible

assets have finite useful lives and are carried at cost less any accumulated amortisation and

impairment losses

• Felix entered into forward exchange contracts with various parties which are classified as

derivative financial liabilities on the Company’s balance sheet. As at 30 June 2009, the

Company had a liability of AUD 4.5 million for these contracts.

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5 Valuation methodology

5.1 Valuation methodologies

To estimate the fair market value of the shares in Felix, we have considered common market

practice and the valuation methodologies recommended by ASIC Regulatory Guide 111, which

deals with the content of independent expert’s reports. These are discussed below.

5.1.1 Market based methods

Market based methods estimate a company’s fair market value by considering the market price of

transactions in its shares or the market value of comparable companies. Market based methods

include:

• capitalisation of maintainable earnings

• analysis of a company’s recent share trading history

• industry specific methods.

The capitalisation of maintainable earnings method estimates fair market value based on the

company’s future maintainable earnings and an appropriate earnings multiple. An appropriate

earnings multiple is derived from market transactions involving comparable companies. The

capitalisation of maintainable earnings method is appropriate where the company’s earnings are

relatively stable.

The most recent share trading history provides evidence of the fair market value of the shares in a

company where they are publicly traded in an informed and liquid market.

Industry specific methods estimate market value using rules of thumb for a particular industry.

Generally rules of thumb provide less persuasive evidence of the market value of a company than

other valuation methods because they may not account for company specific factors.

5.1.2 Discounted cash flow methods

Discounted cash flow methods estimate market value by discounting a company’s future cash

flows to a net present value. These methods are appropriate where a projection of future cash

flows can be made with a reasonable degree of confidence. Discounted cash flow methods are

commonly used to value early stage companies or projects with a finite life.

5.1.3 Asset based methods

Asset based methods estimate the market value of a company’s shares based on the realisable

value of its identifiable net assets. Asset based methods include:

• orderly realisation of assets method

• liquidation of assets method

• net assets on a going concern basis.

The orderly realisation of assets method estimates fair market value by determining the amount

that would be distributed to shareholders, after payment of all liabilities including realisation

costs and taxation charges that arise, assuming the company is wound up in an orderly manner.

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The liquidation method is similar to the orderly realisation of assets method except the liquidation

method assumes the assets are sold in a shorter time frame. Since wind up or liquidation of the

company may not be contemplated, these methods in their strictest form may not necessarily be

appropriate. The net assets on a going concern basis method estimates the market values of the

net assets of a company but does not take account of realisation costs.

These asset based methods ignore the possibility that the company’s value could exceed the

realisable value of its assets as they ignore the value of intangible assets such as customer lists,

management, supply arrangements and goodwill. Asset based methods are appropriate when

companies are not profitable, a significant proportion of a company’s assets are liquid, or for asset

holding companies.

5.2 Selection of valuation methodologies

We have applied a sum of the parts methodology to determine the value of a Felix share,

including the following assets and valuation methodologies:

• Operating Assets and Moolarben Development Projects – we have selected the discounted

cash flow method to value the Operating Assets and Moolarben Development Projects, due to

the following factors:

o Felix’s management has prepared long term cash flow projections for the Operating

Assets and the Moolarben Development Projects

o Operating Assets and the Moolarben Development Projects have a finite life and thus

it is not possible to use a capitalisation of maintainable earnings approach

o significant capital expenditure will be required for the Moolarben Development

Projects

• exploration assets – we engaged BDA to assess the value of Felix’s exploration assets

• interest in NCIG Coal Terminal – as the project is under construction we have used a cost

approach

• UCC – using a cost approach

• corporate cash flows – we have used the discounted cash flow method to determine the

present value of Felix’s corporate cash flows

• cash and debt position – balance of cash and interest bearing liabilities as at 31 August 2009.

To provide additional evidence of the fair market value a Felix share we have considered the

following:

• recent share market trading activity in Felix shares

• resources multiples implied by our valuation of Felix compared with the resource multiples

observed for comparable transactions and comparable listed companies.

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5.3 Appointment and role of the technical expert

BDA, an independent mining expert, was engaged to prepare a report providing a technical

assessment of certain key assumptions underpinning the Model for the Operating Assets and

Moolarben Development Projects. In particular, BDA reviewed, in respect of each asset/project,

the volumes incorporated in the Model, expected life of the mines, production profiles, operating

costs, capital costs and potential extensions to mine lives or expansion of production capacity.

BDA was also engaged to provide an assessment of the value of Felix’s exploration assets.

BDA prepared its technical review having regard to the code for Technical Assessment and

Valuation of Minerals and Petroleum Assets and Securities for Independent Expert Reports (the

VALMIN code). The scope of BDA’s work was controlled by Deloitte. A copy of BDA’s report

is provided as Appendix 5.

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6 Future cash flows

6.1 The Model

Felix management has prepared the Model, which estimates the future cash flows of the

Operating Assets and Moolarben Development Projects. The Model includes projections of real,

after-tax cash flows in AUD for each asset/project. The Model was prepared based on:

• the current budget for FY 2010

• the latest reserves statement, which is certified based on the Joint Ore Reserves Committee

(JORC) code

• the life of mine plans for the Operating Assets and the development concept for the

Moolarben Development Projects.

The analysis we have undertaken on the Model has included:

• limited analytical procedures regarding the mathematical accuracy of the Model (our work

did not constitute an audit or review of the projections in accordance with the AUASB

Standards)

• engaging a technical expert, BDA, to review the technical assumptions underlying the Model

• holding discussions with Felix management concerning the preparation of the projections and

their views regarding the assumptions on which they are based.

As mentioned in Section 5.3, Deloitte engaged BDA, an independent mining expert, to prepare a

report providing a technical review of certain assumptions underpinning the future cash flows of

each mine/project. In undertaking this scope of work, BDA has held discussions with Felix

management and reviewed data, reports and other information made available to them by Felix.

Deloitte has made some adjustments to the cash flow projections in the Model where it was

considered appropriate. These adjustments included, but were not limited to, pricing, foreign

exchange rates and inflation assumptions. Deloitte has also included an estimate of costs

associated with fugitive gas (carbon emission costs) arising from a potential emissions trading

scheme.

We have valued the Operating Assets and the Moolarben Development Projects based on the

technical assumptions reviewed by BDA and our assessment of coal prices, foreign exchange

rates and the discount rate applicable to the future cash flows associated with these assets.

Our work did not constitute an audit or review of the projections in accordance with the AUASB

Standards and accordingly we do not express any opinion as to the reliability of the projections or

the reasonableness of the underlying assumptions. However, nothing has come to our attention as

a result of our limited work that suggests that the assumptions on which the projections are based

have not been prepared on a reasonable basis unless specified otherwise.

Since projections relate to the future, they may be affected by unforeseen events and they depend,

in part, on the effectiveness of management’s actions in implementing the plans on which the

projections are based. Accordingly, actual results are likely to be different from those projected

because events and circumstances frequently do not occur as expected, and those differences may

be material.

Key assumptions are described in the following sections. All figures are quoted on a total mine

basis. Refer to Table 5 for Felix’s equity interest in each asset/project.

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6.2 Revenue assumptions

Revenue is a function of commodity prices and estimated saleable production volumes.

Saleable production volumes

The figure below outlines the projected saleable coal production volumes from the Operating

Assets and the Moolarben Development Projects on a 100% basis until 30 June 2033. By

FY 2027, the Moolarben open cut and underground mines are expected to be the only remaining

operating mines. The current certified reserves from Moolarben are expected to be mostly

depleted by FY2033.

Figure 13: Projected saleable coal production by mine

Source: the Model

Note:

1. NE - north east; SE - south east

We note the following in relation to the projected saleable production volumes for Felix:

• the saleable production volumes are projected based on the proven and probable reserves,

with the exception of Yarrabee open cut mine

• the Model incorporates 23 Mt of resources in addition to Yarrabee’s current reserves, on the

basis that Yarrabee’s LOM is expected to be extended by some currently measured resources

successfully converting to reserves

• annual saleable production volumes take account of coal handling and preparation and

infrastructure capacity constraints.

Moolarben is projected to account for the majority of the production from FY 2013 onward. Over

the total period covered by the projections, approximately 86% of Felix’s total production is

projected to be exported.

Felix has approximately 357 Mt of measured and indicated resources associated with the

Operating Assets and Moolarben Development Projects which are not included in the Model.

With additional drilling, these measured and indicated resources could potentially be converted to

reserves in the future and therefore could underpin the extension of LOM (refer to Section 7.3 for

further discussion).

0.00

5.00

10.00

15.00

20.00

25.00

2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032

Mil

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s

Ashton NE OC Ashton SE OC Ashton UG Minerva OC Moolarben OC Moolarben UG Yarrabee

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Coal pricing assumptions

The majority of the coal produced by Felix is exported to overseas markets. Annual price

negotiations with Japanese electricity utilities, under long term coal supply contracts, in general,

set the benchmark level for other thermal coal price settlements in Asia.

Export thermal coal, SSCC and PCI coal pricing

In selecting appropriate pricing assumptions for export thermal coal, SSCC and PCI coal, we

have had regard to the following:

• recent broker forecasts for Australian thermal coal, SSCC and PCI coal

• historical export contract prices into Asia, as set out in Section 3.5

• the FY 2010 budget prepared by Felix management

• other publicly available price estimates and commentary including, but not limited to,

industry research and announcements released by comparable companies

• the historical pricing relationship between SSCC and thermal coal. SSCC prices are generally

10% to 14% higher than thermal coal prices due to the higher costs of production of SSCC.

PCI prices are approximately 10% higher than SSCC prices

• infrastructure capacity constraints are likely to result in pricing pressure in the near to

medium term. However, the infrastructure constraints are expected to be alleviated once

additional capacity comes on line by approximately FY 2013.

Based on our analysis, we have adopted real export pricing assumptions as set out in the table

below.

Table 21: Selected real export pricing assumptions for thermal coal, SSCC and PCI Coal

USD per tonne FY 2010 FY 2011 FY 2012 FY 2013 Long term

Export thermal coal 73.0 75.0 75.0 72.0 70.0

SSCC 84.0 85.0 85.0 81.0 80.0

PCI coal 97.0 97.0 95.0 92.0 90.0


The selected pricing assumptions refer to price expectations for coal of standard quality,

depending on each type of coal. The Model applies quality and energy content adjustments to

these prices to account for the specific qualities of the coal produced by Felix.

It should be noted that our valuation is highly sensitive to changes in the export coal price

projections. Coal prices are subject to volatility resulting from factors such as perceived shortages

and leading economic indicators.

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Domestic thermal coal

Felix does not currently supply the Australian domestic market, however, in the future a

proportion of the production from Moolarben is expected to be sold to domestic electricity

generators. Felix has not yet secured domestic supply contracts, and pricing for domestic supply

is not typically publicly available. In forming a view on the domestic thermal coal pricing we

have had regard to the following:

• discussions with Felix management

• publicly available price estimates and commentary including, but not limited to, industry

research and announcements released by comparable companies

• domestic prices achieved under long term contracts implied by the recent operating results of

the comparable companies.

Inflation

The future cash flows in the Model are presented in real terms. We have therefore adopted an

inflation rate assumption for the US to escalate the projected revenues and an inflation rate

assumption for Australia to escalate the projected costs, which are denominated in AUD. In

selecting our inflation rate assumptions, we have considered the following:

• the monetary policy adopted by the Reserve Bank of Australia (RBA) is to maintain inflation

within a target range of 2.0% to 3.0%

• US monetary policy does not have a specific inflation target, but a general objective to

maintain stable price levels

• forecasts prepared by economic analysts and other publicly available information including

broker consensus.

Based on our analysis, we have selected the following inflation rate assumptions for the US and

Australia.

Table 22: Selected inflation rate assumptions

2010 2011 2012 2013 Long term

US 0.9% 1.3% 1.6% 1.9% 2.5%

Australia 2.1% 2.7% 2.5% 2.5% 2.5%


Foreign exchange rate

To convert the USD denominated revenue in the Model to AUD, we have had regard to the

following:

• historical and the current USD to AUD exchange rates

• the USD to AUD exchange rate forward curve

• forecasts prepared by economic analysts and other publicly available information including

broker consensus.

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We have adopted the following foreign exchange rate assumptions:

Table 23: Selected exchange rates (AUD to USD)

Current June 2010 June 2011 June 2012 June 2013 Long term

Deloitte selected 0.84 0.82 0.80 0.78 0.76 0.75


6.3 Operating costs

The Model includes projections of operating costs in real terms, which are summarised as

follows:

• overburden removal costs for open cut mining operations are projected on a fixed cost per

bank cubic metre. This cost fluctuates over the life of open cut mines as a result of changes to

strip ratios

• processing costs including mining, coal handling and preparation and site administration costs

are projected on a fixed cost per ROM tonne

• transport costs including freight and port charges, and demurrage costs are projected on a

fixed cost per FOB tonne of coal

• other operating costs include management and marketing fees payable to the mine operators,

costs associated with fugitive gas from the mines, and levies.

With the potential introduction of emission trading scheme in the near term, costs associated

with fugitive gas from the mines are determined based on guidelines set out under the

National Greenhouse and Energy Reporting Act 2007.

The levies primarily relate to a voluntary contribution to the Coal 21 Fund, which was

established by the Australian Coal Association, to provide funding for on-going research into

low emission technologies for the power generation industry

• state government royalty payments, which are charged based on a royalty rate on revenue

earned less the demurrage costs, port charges and levies. The royalty rate is 8.2% for open cut

mines in NSW and 7.2% for underground mines in NSW. With respect to open cut mines in

Queensland, the royalty payment is determined based on 7%, if the average net revenue per

tonne is less than AUD 100, or 10%, if the average net revenue per tonne is equal to or

greater than AUD 100.

We have escalated operating costs in real terms to nominal terms using our selected Australian

inflation assumptions (refer to Section 6.2).

6.4 Capital costs

The Model incorporates capital costs of over AUD 1 billion over the six year period ending

30 June 2015, which represents approximately 67% of the total projected capital costs over the

entire projection period.

The projected capital costs are mainly associated with developing the Moolarben Development

Projects and the Ashton underground mine.

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6.5 Corporate assumptions

The Model includes projections of corporate cash flows in real terms, which are summarised as

follows:

• management fees payable to Felix for operating and managing the assets. Management fees

are determined based on the revenue earned from the mine during the period or a fixed fee

per ROM tonne mined. Management fees are corporate revenue to Felix

• corporate overheads at AUD 5.0 million per annum

• revenue of AUD 5.0 million from Sojitz on commencement of mining at the Moolarben

underground project

• a AUD 0.5 million royalty payment to New Hope Coal Limited (New Hope), which relates to

Felix’s purchase of a 70% interest in Minerva from New Hope in June 2004. This royalty

payment is expected to continue for a period of eight years from FY 2009, with the total

maximum amount payable being AUD 4.0 million, over the whole period.

6.6 Other assumptions

In addition to the above assumptions, the Model assumes the following:

• a corporate tax rate of 30%

• the Model has assumed Felix maintains a constant level of working capital and hence no

adjustments have been made for working capital movements.

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7 Valuation of Felix

7.1 Valuation of Felix before the Proposed Scheme

For the purpose of our opinion fair market value is defined as the amount at which the shares

would be expected to change hands between a knowledgeable willing buyer and a knowledgeable

willing seller, neither being under a compulsion to buy or sell. We have not considered special

value in this assessment.

Deloitte has estimated the fair market value of Felix using the sum of the parts methodology,

which estimates the market value of a company by valuing each asset of the company. The value

of each asset may be determined using different valuation methods.

To value Felix requires an estimate of the following:

• the value of the Operating Assets (including Yarrabee, Ashton and Minerva) and the


• a premium to the discounted cash flow valuation to account for a number of factors which

may contribute to the future cash flows of Felix’s Operating Assets and Moolarben

Development Projects, which are not included in the Model

• value of the exploration assets

• value of Felix’s surplus assets including its 15.4% interest in the NCIG Coal Terminal and its

investment in the UCC

• a value of Felix’s corporate cash flows

• net cash as at 31 August 2009.

Our considerations on each of the above are set out in Section 7.2 to Section 7.3.

In addition, we have cross checked our valuation using the following methods:

• the recent share market trading activity in Felix shares

• the resource multiples implied by our valuation of Felix compared with the resource multiples

observed for comparable transactions and comparable listed companies.

Carrying values of certain of the above assets or parts of the above assets are recorded in

accordance with relevant accounting standards and Felix’s accounting policies in the balance

sheet of Felix as at 30 June 2009. We have referred to the carrying values of the above assets or

parts of the above assets below where relevant.

7.2 Value of the Operating Assets and Moolarben

Development Projects

The value of the Operating Assets and Moolarben Development Projects has been estimated using

the discounted cash flow methodology, which estimates the market value of an asset by

discounting the asset’s future cash flows to its net present value. To value the Operating Assets

and Moolarben Development Projects requires the determination of the following:

• future cash flows

• an appropriate discount rate to be applied to the future cash flows

• an estimate of the terminal value.

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Our consideration of each of these factors is presented below.

Future cash flows

The future cash flows relied on for the purposes of the valuation have been described in

Section 6.

Discount rates

The discount rate used to equate the future cash flows to a present value reflects the risk adjusted

rate of return demanded by a hypothetical investor. We have selected the following nominal after

tax discount rate ranges to discount the future cash flows of the Operating Assets and the

Moolarben Development Projects to their present value:

• a discount rate range of 11.5% to 12.5% to discount the future cash flows of the Operating

Assets

• a discount rate range of 12.5% to 13.5% to discount the future cash flows of the Moolarben

Development Projects.

In selecting the above discount rate ranges we considered the following:

• the required rates of return for comparable listed Australian and international coal mining and

exploration companies

• the debt to equity ratios of comparable listed Australian and international coal mining and

exploration companies

• asset specific issues with respect to the Moolarben Development Projects

• the specific business and financing risks of Felix

• Felix’s current cost of debt and level of financial gearing.

A detailed consideration of these matters is provided in Appendix 2.

Terminal value

The Model incorporates all of Felix’s proven and probable reserves for the Operating Assets and

the Moolarben Development Projects, plus 23 Mt of measured resources for Yarrabee. The

reserves and the additional resources for Yarrabee included in the Model are expected to be

depleted by 30 June 2033.

In addition to its reserves, Felix has extensive measured, indicated and inferred resources

associated with the Operating Assets and the Moolarben Development Projects, which have not

been included in the Model. The extent to which these resources can be converted into reserves

depends on the outcomes of future exploration and drilling, further analysis of the geology of the

deposits, the availability of downstream infrastructure and future coal prices. As discussed in

Section 7.3 below, we have incorporated a premium to our discounted cash flow value of the

Operating Assets and the Moolarben Development Projects, which recognises the possible upside

potential relating to successful conversion of resources to reserves. This effectively incorporates a

terminal value.

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The discounted cash flow value

The fair market values of the Operating Assets and Moolarben Development Projects derived

from the discounted cash flow methodology are summarised in the table below.

Table 24: Valuation of the Operating Assets and Moolarben Development Projects

Low value (AUD million)

High value (AUD million)

Operating Assets 871 925

Moolarben Development Projects 1,645 1,797

Total 2,516 2,722


The above values are highly sensitive to the discount rate, coal prices, and foreign exchange rate

assumptions. We have performed sensitivity analysis applying:

• a discount rate range of 10.5% to 13.5% for the Operating Assets and a discount rate range of

11.5% to 14.5% for the Moolarben Development Projects

• +/- USD 5.0 per tonne of the selected long term export coal prices. This results in the

following long term real price ranges for each coal product:

o export thermal coal prices in the range of USD 65.0 to USD 75.0 per tonne

o SSCC prices in the range of USD 75.0 to USD 85.0 per tonne

o PCI coal prices in the range of USD 85.0 to USD 95.0 per tonne

• a long term exchange rate in the range of USD 0.72 to USD 0.78.

In the following table we set out the fair market value of the Operating Assets and Moolarben

Development Projects derived from the discounted cash flow method using the above long term

coal price and discount rate assumptions.

Table 25: Sensitivity analysis to changes in long term coal price and discount rate assumptions (AUD million)

Long term coal price (real per tonne) Discount rate

Value per tonne of reserves

Operating Assets 13.5% 12.5% 11.5% 10.5% 12.5% 11.5%

Moolarben Development Project 14.5% 13.5% 12.5% 11.5% 13.5% 12.5%

- USD 5.0 2,037 2,196 2,373 2,571 5.5 5.9

Selected long term export prices1 2,332 2,516 2,722 2,953 6.3 6.8

+ USD 5.0 2,631 2,841 3,076 3,340 7.1 7.7


Note:

1. Selected long term export prices for each type of coal per tonne: export thermal coal USD 70.0, SSCC USD 80.0; PCI USD 90.0

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In the following table we set out the fair market value of the Operating Assets and Moolarben

Development Projects derived from the discounted cash flow method using the above long term

exchange rate and discount rate assumptions.

Table 26: Sensitivity analysis to changes in exchange rate and discount rate assumptions (AUD million)

Long term exchange rate assumption Discount rate

Value per tonne of reserves

Operating Assets 13.5% 12.5% 11.5% 10.5% 12.5% 11.5%

Moolarben Development Project 14.5% 13.5% 12.5% 11.5% 13.5% 12.5%

USD 0.72 2,498 2,699 2,923 3,174 6.7 7.3

USD 0.75 2,332 2,516 2,722 2,953 6.3 6.8

USD 0.78 2,178 2,348 2,537 2,749 5.9 6.3


The values of the Operating Assets and Moolarben Development Projects are most sensitive to

the long term real coal price assumption. A change to the long term real coal price assumption of

USD 5.0 per tonne results in a change of approximately 13% to the value of the Operating Assets

and Moolarben Development Projects.

The value of the Operating Assets and Moolarben Development Projects is sensitive to the

discount rate assumption. A 1.0% change to the discount rate assumption results in a change of

approximately 8% to the value of the Operating Assets and Moolarben Development Projects.

The values of the Operating Assets and Moolarben Development Projects are sensitive to the long

term exchange rate assumption, but to a lesser extent than the long term coal price and the

discount rate assumptions. An appreciation of the USD against the AUD in the long term from

USD 0.75 to USD 0.78 increases the value of the Operating Assets and Moolarben Development

Projects by approximately 7%.

Based on the above analysis, we have selected a fair market value of the Operating Assets and the

Moolarben Development Projects in the range of AUD 2,500 million to AUD 2,700 million.

We note that the carrying values of exploration, evaluation and intangible assets (totalling

AUD 202.9 million as at 30 June 2009) relating to the Operating Assets and Moolarben

Development Projects are recorded in the financial statements of Felix at cost less, where

applicable, any accumulated amortisation and accumulated impairment losses. In addition, other

assets which relate to the Operating Assets and Moolarben Development Projects are included in

the financial statements under property, plant and equipment and various working capital items.

Our valuation of the Operating Assets and Moolarben Development Projects using the discounted

cash flow methodology is based on the expected future cash flows of the Operating Assets and

Moolarben Development Projects, including cash flows generated by these exploration,

evaluation, intangible and other assets.

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7.3 Premium to discounted cash flow value

The Model incorporates Felix’s current proven and probable reserves and 23 Mt of measured

resources at Yarrabee.

However, there are a number of items which may contribute to the future cash flows of Felix

which are not included in the Model. These items include:

• LOM greater than that captured in the Model – actual reserves over the life of mines are

generally greater than the original estimates. In addition to the 23 Mt of measured resources

at Yarrabee, which have already been incorporated in the Model, there is still a significant

amount of measured, indicated and inferred resources at the Operating Assets and Moolarben

Development Projects, which may be converted to reserves.

The extent to which resources can be converted into reserves depends on the outcomes of

further exploration drilling, analysis of the geology of the reserves, the capacity of the

Company’s plant, availability of downstream infrastructure capacity and future coal prices.

Any reserve upgrades may result in an extension of mine life. These resources therefore

represent additional upside potential for Felix which is not reflected in the discounted cash

flows

• potential increase in production due to easing of infrastructure constraints in the medium

to long term – current production levels are restricted by infrastructure capacity, despite the

fact that coal producers may be capable of producing at higher rates. The expected easing of

these constraints over time has been recognised in the Model, however it may be possible that

infrastructure capacity in excess of that recognised in the Model becomes available over time

and Felix is able to expand capacity beyond that currently anticipated in the Model

• exploration and discovery of further resources from existing tenements – additional

resource discoveries in the existing lease areas, beyond those valued as part of the exploration

assets

• potential strategic value – a potential purchaser of Felix may also be willing to pay a

premium in excess of the discounted cash flow value for the strategic value offered by Felix

and its assets. This strategic value may relate to Felix’s large potential resource base, equity

ownership in the NCIG Coal Terminal and demonstrated production capacity.

While all of the above factors cannot be precisely estimated, we have had regard to the potential

value impact of each factor including the possible upside potential of successful conversion of

resources to reserves, and exercised our professional judgement to estimate the overall impact on

the value of the Operating Assets and Moolarben Development Projects.

Based on the above and on our professional judgement, we have added a premium of 10.0% to

15.0% to the value of the Operating Assets and Moolarben Development Projects.

7.4 Value of the exploration assets

Deloitte has engaged BDA to provide an assessment of the value of Felix’s exploration assets. In

estimating a value of Felix’s exploration assets, BDA has had regard to the following

methodologies:

• past expenditure, or the amount spent on exploration of a tenement is commonly used as a

guide in determining the value of exploration tenements. BDA has applied a prospectivity

enhancement multiplier (PEM) approach, which assesses the stage of exploration and then

applies a multiple to the past and future committed expenditure of the project

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• the rule of thumb method assigns a value per tonne of in situ resource/reserve. Given the

early status of the projects, the fact that the drilling is limited and the resources are relatively

poorly defined, combined with the infrastructure issues associated with development, BDA

has adopted a value of AUD 0.03 per tonne to AUD 0.05 per tonne for identified but

undefined coal resources, whereas for inferred resources or those ready for scoping study

analysis, BDA has adopted a value of AUD 0.20 per tonne up to AUD 0.60 per tonne.

The following table sets out the estimated fair market value of Felix’s exploration assets,

including Athena, Harrybrandt and the Phillipson Basin.

Table 27: Valuation of Felix’s exploration assets

Exploration asset Resources status Level of knowledge

Past expenditure valuation

(AUD million)

Value per tonne of in situ reserves/resources

(AUD million)

Harrybrandt Defined deposit Preliminary feasibility 15 40 – 50

Athena Defined deposit Scoping study 5 – 6 40 – 50

Phillipson Basin Undefined deposit Conceptual only 21 – 25 15 – 25

Total 31 – 36 95 – 125

Source: BDA

Note:

1. Wilpeena is located adjacent to Yarrabee and no specific value has been assigned to this exploration asset, given that to date

only 20 holes have been drilled and no resource estimates have been prepared. It has been assumed that any resources identified

in the future could be used to extend Yarrabee’s LOM

BDA notes that the past expenditure and rule of thumb methods return similar valuations for

Phillipson Basin, however the values are considerably different for the Harrybrandt and Athena

projects. BDA considers the combined values of the Harrybrandt, Athena and the Phillipson

Basin exploration properties are best represented to be in the range of AUD 95 million to

AUD 125 million.

We note that the Phillipson Basin exploration tenement is wholly within the Woomera Prohibited

Area. A deed of access which expired on 28 June 2009 is under re-negotiation with approximately

75% of the area presently excluded from exploration activity. BDA’s assessment of the Phillipson

Basin did not specifically consider the risk associated with gaining access to mine the tenements

within the Woomera Prohibited Area. Recognising this additional risk, we have adopted a value

at the low end of the BDA’s range of AUD 15 million.

Based on the above, we have adopted a range of AUD 95 million to AUD 115 million in relation

to Felix’s exploration assets. Refer to Appendix 5 for BDA’s technical expert’s report.

We note that the carrying values of exploration and evaluation assets (totalling AUD 4.5 million

as at 30 June 2009) relating to the Athena, Harrybrandt and the Phillipson Basin are recorded in

the financial statements of Felix at cost less, where applicable, any accumulated amortisation and

accumulated impairment losses. BDA’s has valued Athena, Harrybrandt and the Phillipson Basin

on the past expenditure and rule of thumb methods as discussed above.

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7.5 Value of surplus assets

Felix has the following surplus assets:

• Felix has a 15.4% interest in the NCIG Coal Terminal (refer to Section 4.7.1). Capital costs

involved in the stage one of the NCIG Coal Terminal construction are approximately

AUD 90.9 million, and Felix’s share of the capital cost is AUD 14.0 million. Stage one

development of the NCIG Coal Terminal is currently fully funded by external debt. Felix’s

decision to participate in the construction of the NCIG Coal Terminal was a strategic decision

to secure its long term export capacity. The asset is therefore an integral part of Felix’s

operations and is not expected to be a separate profit generating investment for Felix. On this

basis, the investment in the NCIG Coal Terminal underpins our valuation of the Moolarben

Development Projects and we have not identified a separate value for Felix’s interest in the

NCIG Coal Terminal

• Felix owns a 100% interest in the UCC patented technology (refer to Section 4.7.2).

Approximately AUD 45.0 million has been invested in UCC research and development to

date funded by both UCC Energy and government grants. Given that the UCC patented

technology remains at a very early stage of its development, we have estimated the fair

market value of this asset is equal to the investment to date of AUD 45.0 million.

The following table summarises the values attributed to these assets.

Table 28: Summary of valuation of Felix’s surplus assets

AUD million

Felix’s 15.4% interest in the NCIG Coal Terminal 0.0

UCC 45.0


7.6 Value of corporate cash flows

The Model includes a projection of management fees payable to Felix for operating and

managing the assets. Felix bears actual corporate overhead costs and a royalty payment paid to

New Hope which is expected to continue for a period of eight years (refer to Section 6.5).

The management fees received by Felix from the Operating Assets are greater than the corporate

overhead costs incurred and the royalty payment to New Hope.

We have assessed the present value of these future cash flows to be in the range of

AUD 135.0 million to AUD 145.0 million.

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7.7 Net cash

Felix’s net cash position at 31 August 2009 is set out in the following table.

Table 29: Net cash

AUD million

Total cash 322

Total debt (50)

Net cash position 272


7.8 Valuation: sum of the parts method

The value of Felix derived from the discounted cash flow method is summarised below.

Table 30: Value of Felix based on sum of the parts method

Section Low value

(AUD million) High value

(AUD million)

Total value of Felix’s Operating Assets and


7.2 2,500 2,700

Premium to discounted cash flow value 7.3 10% 15%

Total value of Felix’s assets including

premium

2,750 3,105

Exploration assets 7.4 95 115

UCC 7.5 45 45

Corporate cash flows 7.6 135 145

Net cash 7.7 272 272

Equity value (on a control basis) 3,297 3,682

Number of shares on issue1 4.9 196.6 196.6

Value of a Felix share 16.74 18.70

Deloitte assessed value of a Felix share 16.70 18.70


Note:

1. Includes 170,000 shares options outstanding, which will vest and be exercised prior to the issuance of the Scheme Booklet

We have selected a valuation range for a Felix share to be in the range of AUD 16.70 and

AUD 18.70.

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7.9 Analysis of recent Felix share trading

The market can be expected to provide an objective assessment of the fair market value of a listed

entity, where the market is well informed and liquid. Market prices incorporate the influence of

all publicly known information relevant to the value of an entity’s securities. We believe that the

share price is an appropriate measure of the fair market value of Felix’s shares for the following

reasons:

• in the six months prior to the date of the announcement of the Proposed Scheme, the average

volume of trading in Felix shares was 0.3% of the issued capital per day, or 32.2% for the

entire period

• Felix’s audited financial statements for the year ended 30 June 2009 were released to the

market on 31 August 2009 and the audited financial statements for the half year ended

31 December 2008 were released on the 27 February 2009, providing a recent update

regarding Felix’s financial performance

• Felix releases quarterly activities reports to the market, outlining operating results and

performance for the period

• Felix is followed by a number of equities analysts including Macquarie Brokers, UBS,

Merrill Lynch, RBS, Goldman Sachs and Wilson HTM.

7.9.1 Recent share market trading

The Proposed Scheme was announced on the 13 August 2009. From 13 August 2009 to

4 September 2009, Felix’s shares have traded in the range of AUD 17.00 to AUD 18.03, with a

VWAP of AUD 17.52. The following table sets out the share market trading in Felix shares prior

to and since the announcement of the Proposed Scheme.

Table 31: Summary – analysis of recent share trading

Low value

(AUD) High value

(AUD)

Premium implied by our valuation

Deloitte valuation range 16.70 18.70

VWAP post the announcement of the Proposed

Scheme

VWAP (up to the 1 September 2009) 17.52 17.52

1 day VWAP 17.78 17.78

VWAP pre the announcement of the Proposed

Scheme

1 day VWAP 17.14 17.14 (2.6%) - 9.1%

1 month VWAP 16.34 16.34 2.2% - 14.5%

3 month VWAP 14.01 14.01 19.2% - 33.5%

6 month VWAP 11.54 11.54 44.7% - 62.1%

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In July 2008, Felix announced that several parties had approached Felix management expressing

interest in relation to a potential change of control transaction. As a result, Felix’s share price

increased significantly, reaching a high of AUD 22.6 per share in June 2008. Subsequently,

Felix’s share price fell progressively reaching AUD 4.68 per share in early December 2008. The

global financial crisis severely affected share prices for most Australian listed companies for the

first six months of calendar year 2009.

The recovery in Felix’s share price since March 2009 was likely driven by:

• the general recovery in the value of securities on the ASX

• positive announcements regarding the development of the Moolarben Development Project

• on-going media speculation regarding a potential change of control transaction involving

Felix.

Felix’s VWAP one day prior to the announcement of the Proposed Scheme was AUD 17.14,

which is close to the low end of our valuation range for a Felix share, on a control basis. In

general, share prices from market trading do not reflect the market value for control of a company

(control premium) as they are for portfolio holdings. However, in this case the share price for

Felix prior to the announcement of the Proposed Scheme is likely to already have incorporated a

control premium, given that in the period between 1 January 2009 and 30 June 2009, Felix

received a number of price queries from the ASX and there was on-going press speculation

regarding a potential change of control transaction.

7.10 Industry rules of thumb

We have cross checked the value of Felix with reference to the reserves and resource multiples

(resource multiple) implied by our valuation of a Felix share.

We note that a resource multiple is only intended to provide a high level cross check for our

valuation of Felix. The resource multiples implied by comparable transactions may vary

significantly due to various issues including different cost structures, different geotechnical /

geomechanical issues, different stages of development, different ratios of reserves to total

resources plus reserves and different mine lives.

The following table sets out the resource multiples implied by our selected valuation range of

AUD 16.70 to AUD 18.70 per Felix share.

Table 32: Resource multiple implied by Deloitte valuation of Felix

Units Low value High value

Equity value (on a control basis) AUD million 3,297 3,682

(Net cash)/net debt AUD million (272) (272)

Enterprise value of Felix AUD million 3,025 3,410

Felix resources1 Mt 765.3 765.3

Resource multiple times 4.0 4.5


Note:

1. Includes measured and indicated resources and is inclusive of reserves (excludes Phillipson Basin)

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The following chart sets out the resource multiple implied by our valuation per Felix share and

the resource multiples implied by comparable transactions since 2007 (refer to Appendix 4 for

further details on the comparable transactions).

Figure 14: Resource multiples of comparable transactions

Source: Deloitte analysis; Bloomberg, various company announcements, Mergermarket

Note:

1. Resources included are measured and indicated resources and are inclusive of reserves

We note that the average resource multiples implied by the comparable transactions is 5.3 times,

which is higher than the resource multiple implied by our valuation of Felix. This could be due to

the fact that the average resource multiple implied by the comparable transactions have

significant weighting towards the transactions which occurred in 2008. Coal prices reached a

record level in March 2008 and have since then declined to a level comparable to that in 2007.

We consider the transactions which occurred during 2007 and 2009 to be more comparable than

those that occurred in 2008. The average resource multiples implied by the comparable

transactions in 2007 and 2009 was 4.1 times. Accordingly, the resource multiple implied by our

valuation of Felix is broadly consistent with the resource multiples implied by the comparable

transactions.

Our valuation of the Moolarben Development Projects is substantially higher than the value

suggested by the transactions in the Moolarben Development Projects set out in Figure 14. This

increase recognises the substantial advancement of the Moolarben Development Projects,

including resolution of title issues, in the interim period.

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

EV

/R

eso

urc

es

(tim

es)

2007 2008 2009

Average resource multiple of the

comparable transactions - 5.3 times

Resource multiple implied by Deloitte's valuation

range of a Felix share - 4.0 times to 4.5 times

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The following chart sets out the resource multiple implied by our valuation per share and the

share trading resource multiples (enterprise value, implied by the company share price, to

resources multiple) observed for the selected comparable companies (refer to Appendix 3 for

further details on the comparable companies).

Figure 15: Share trading resource multiples of comparable companies

Source: Deloitte analysis, Bloomberg, various company announcements

Note:

1. Resources consist of measured and indicated resources and includes reserves

2. Centennial Coal Company reported its resources level inclusive of inferred resources as at 30 June 2009, therefore we have not

included it in the average calculation

3. International comparable companies have different reporting requirements regarding measured and indicated resources, therefore we

do not consider them to be comparable

As outlined in the chart above, the resource multiple implied by our valuation per Felix share is

generally greater than the average share trading resource multiples observed for the selected

comparable companies. The share trading resource multiples of the selected comparable

companies are based on market trading share prices, which do not reflect a control premium of a

company (refer to Section 7.9). We would therefore expect the resource multiple implied by our

valuation to be greater than that of the comparable companies.

We note that Gloucester Coal Limited’s (Gloucester) share trading resource multiple is greater

than the average of the share trading resource multiples observed for the selected comparable

companies. Noble Group Limited recently increased its shareholding in Gloucester to 87.7% in

June 2009 via an off market takeover bid at AUD 7.00 per Gloucester share.

Based on the above, we consider the share trading resource multiples and the comparable

transaction multiples broadly support our valuation of a share in Felix.

-

1.0

2.0

3.0

4.0

5.0

6.0

EV

/R

eso

urc

es

(tim

es)

Average resource multiple of the Australian

comparable companies (excluding Cenntennial

Coal Company) - 3.0 times

Resource multiple range implied by

Deloitte valuation - 4.0 times to 4.5 times

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8 Valuation of SAC

8.1 Introduction

As discussed in Section 1.3, the Proposed Scheme is contingent upon Shareholder approval of

Felix’s divestment of SAC.

Under the Proposed Scheme Shareholders will receive an in-specie distribution of shares in SAC

on 30 October 2009. SAC will have a cash balance of approximately AUD 10 million (or

approximately AUD 0.05 per share), which will be funded by Felix’s current cash balance, and

will own the Phillipson Basin tenements in South Australia.

In this section we have estimated the fair market value of a share in SAC, which forms part of the

Total Proceeds.

8.2 Valuation of the Phillipson Basin

As discussed in Section 5.3, we engaged BDA to prepare an assessment of the value of Felix’s

exploration assets, which include Athena, Harrybrandt, Wilpeena and the Phillipson Basin. In

determining a value for the Phillipson Basin, BDA had regard to the following:

• there are limited valuation methods available to assess exploration tenements

• BDA has considered the past expenditure, or the amount spent on exploration of the

tenement as an estimation of value. BDA has applied a PEM to the effective expenditure in

the range of 2.0 times to 2.4 times

• the rule of thumb method assigns a value per tonne of in situ resource/reserve. Given the

early status of the projects, the fact that the drilling is limited and the resources are relatively

poorly defined, combined with the infrastructure issues associated with development, BDA

has adopted a value of AUD 0.03 per tonne to AUD 0.05 per tonne to apply to the resources.

Refer to Appendix 5 for BDA’s technical expert’s report for further details on the valuation

methodology of the Phillipson Basin.

The following table summarises BDA’s assessment of the value of the Phillipson Basin

exploration assets.

Table 33: BDA’s assessment of the Phillipson Basin

Expenditure to date methodology Value per tonne of in situ resource/reserve

methodology

Expenditure to date

(AUD million) PEM value

(times) Valuation

(AUD million)

Estimated resources

(Mt) Resources

multiple (times) Valuation

(AUD million)

Phillipson

Basin 10.3 2.0 – 2.4 21 - 25 500 0.03 – 0.05 15 - 25

Source: Deloitte analysis, BDA

BDA’s assessed value of the Phillipson Basin is in the range of AUD 15 to AUD 25 million.

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In addition to the above, we note that the Phillipson Basin exploration tenement is wholly within

the Woomera Prohibited Area. A deed of access which expired on 28 June 2009 is under re-

negotiation with approximately 75% of the area presently excluded from exploration activity.

BDA’s assessment of the Phillipson Basin did not specifically consider the risk associated with

gaining access to mine the tenements within the Woomera Prohibited Area. Recognising this

additional risk, we have adopted a value at the low end of the BDA’s range of AUD 15 million to

derive the fair market value of a SAC share.

8.3 Discount for minority interest

A valuation of a company based on the value of its assets provides the market value for control of

the company. The difference between the market value of a controlling interest and a minority

interest is referred to as the premium for control. Australian studies indicate the premiums

required to obtain control of companies range between 20% and 40% of the portfolio holding

values. A minority interest discount is the inverse of a premium for control (minority interest

discount = 1-(1/(1+control premium))) and generally ranges between 15% and 30%.

The owner of a controlling interest has the ability to do many things that the owner of a minority

interest does not. These include:

• control the cash flows of the company, such as dividends, capital expenditure and

compensation for directors

• determine the strategy and policy of the company

• make acquisitions or divest operations

• control the composition of the board of directors.

If the Proposed Scheme is approved and implemented, Shareholders will receive SAC shares and

will become minority shareholders in SAC. Our valuation of a share in SAC, based on the value

of its assets, has therefore been adjusted to reflect a minority interest basis.

The following factors have been taken into consideration in determining an appropriate minority

interest discount for SAC:

• the average control premiums observed for recent transactions for companies in Australia

range between 20% and 40%. This implies a minority interest discount in the range from 15%

to 30%

• the SAC demerger will be effective on 30 October 2009. It is the intention for SAC to seek

admission to the ASX by early 2010. Between the date of the demerger and the ASX listing

SAC’s shares will not be traded on a public market

• SAC will have no debt.

Based on the above, we believe that a discount for minority interest towards the high end of the

observed range is appropriate. On this basis we have selected a minority interest discount to apply

to the valuation of SAC of 25%.

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8.4 Value of SAC

In the following table we have set out the fair market value of a share in SAC.

Table 34: Summary of value of SAC

Unit

(AUD million)

Assessed value of the Phillipson Basin (100%) AUD million 15

Cash AUD million 10

Equity value of SAC AUD million 25

Number of shares million 196.5

Value per SAC share (control basis) AUD 0.127

Discount for minority interest 25%

Value per SAC share (minority interest) AUD 0.095

Assessed fair market value per SAC share AUD 0.10

Source: Deloitte analysis, BDA

Based on the above analysis, we estimate the value of a SAC share will be AUD 0.10.

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9 Evaluation and conclusion

9.1 Valuation of Total Proceeds

On completion of the Proposed Scheme, Shareholders will have received the Scheme

Consideration of AUD 16.95 in cash, the First AUD 0.50 Dividend, the Second AUD 0.50

Dividend and the SAC Dividend. The First AUD 0.50 Dividend will be fully franked and is

scheduled to be paid on 30 October 2009. The Second AUD 0.50 Dividend, is expected to be

fully franked, yet to be declared, and is payable no later than three months after the

Implementation Date. The SAC Dividend will consist of an in-specie distribution of shares in

SAC in proportion to the existing shareholding in Felix. Completion of the Proposed Scheme is

expected to be in mid-December 2009.

The following table sets out the value of the Total Proceeds.

Table 35: Evaluation of Total Proceeds

Offered Total Proceeds

per share

Scheme Consideration 16.95

First AUD 0.50 Dividend and Second AUD 0.50 Dividend 1.00

SAC Dividend 0.10

Total value of the Total Proceeds 18.05


9.2 Fairness

ASIC Regulatory Guide 111 defines an offer as being fair if the value of the offer price is equal to

or greater than the value of the securities being the subject of the offer. Set out in the table below

is a comparison of our assessment of the fair market value of a Felix share with the Total

Proceeds.

Table 36: Evaluation of fairness

Low value per

share High value per

share

Estimated fair market value of a Felix share 16.70 18.70

Estimated fair market value of the Total Proceeds 18.05 18.05


We have estimated the fair market value of a Felix share, using the sum of the parts methodology,

to be in the range of AUD 16.70 to AUD 18.70. We have valued the Total Proceeds at

AUD 18.05 per Felix share.

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The Total Proceeds is within the range of our estimate of the fair market value of a Felix share.

ASIC Regulatory Guide 111.10 provides that ‘an offer is fair if the value of the offer price or

consideration is equal to or great than the value of securities the subject of the offer’. ASIC

Regulatory Guide 111.62 provides that ‘an expert should usually give a range of values’ for the

securities that are subject to the offer.

The high end of our assessed value of a Felix share is above the value of the Total Proceeds, and

the value of the Total Proceeds falls within the valuation range of a Felix share. In relation to the

Proposed Scheme we consider that, if the value of the Total Proceeds is within the range of the

value of a Felix share, the offer is fair. It is therefore our opinion that the Proposed Scheme is fair.

9.3 Reasonableness

In accordance with ASIC Regulatory Guide 111 an offer is reasonable if it is fair. On this basis, in

our opinion the Proposed Scheme is reasonable. We have also considered the following factors in

assessing the reasonableness of the Proposed Scheme:

Advantages of the Proposed Scheme

The likely advantages to Shareholders if the Proposed Scheme is approved include:

In the absence of the Proposed Scheme Felix’s shares may trade below current levels

In the absence of the Proposed Scheme or another alternative proposal, Felix’s shares may trade

at prices below the value of the Total Proceeds and those achieved in recent trading. Since the

Proposed Scheme was announced on 13 August 2009 no other offers for Felix have been

received.

The Total Proceeds represents a premium of 11% to Felix’s one month VWAP of AUD 16.34

prior to the announcement of the Proposed Scheme. We consider that the one month VWAP

already substantially incorporates a control premium, on the basis that Felix’s share prices are

likely to have been influenced by the press releases and the market speculation around potential

change of control activity prior to the announcement of the Proposed Scheme.

The Total Proceeds represents a premium of 29% to Felix’s three month VWAP prior to the

announcement of the Proposed Scheme, and a premium of 56% to Felix’s six month VWAP.

The Proposed Scheme represents an opportunity for Shareholders to realise their investments in

Felix with certainty of cash consideration offered under the Proposed Scheme.

Directors intend to vote in favour of the Proposed Scheme

Felix’s directors hold or control in aggregate approximately 30.3% of Felix’s shares. The

Directors have indicated their intention to vote in favour of the Proposed Scheme in respect of

their own shares, if no superior offer is received. This is a strong signal that the Proposed Scheme

is considered attractive by the Felix directors.

Greater focus on exploring and developing the Phillipson Basin

On completion of the Proposed Scheme, Shareholders will receive an in-specie distribution of

shares in SAC in proportion to their existing shareholdings in Felix. SAC will own the Phillipson

Basin, and will have an initial cash balance of AUD 10 million. SAC will be an independent

company with its own management team. This will enable SAC to focus on exploration and

development activity in the Phillipson Basin.

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Disadvantages of the Proposed Scheme

The likely disadvantages to Shareholders if the Proposed Scheme is approved include:

Inability to participate in possible future growth potential of Felix

Shareholders will no longer collectively control or hold a direct interest in Felix and accordingly

will not participate in the future growth of Felix to the extent that it may generate a future value

above the Total Proceeds. For example, increases in coal prices substantially above those

currently assumed in our valuation may result in additional future value not fully factored into the

Total Proceeds.

Tax implication

If the Proposed Scheme is approved, Shareholders may incur a tax expense. Individual investors

should consult their tax advisor in relation to their personal circumstances. Further details in

respect of the potential taxation implications are provided in Section 9 of the Scheme Booklet.

Conclusion on reasonableness

As the Proposed Scheme is fair, it is also reasonable.

9.4 Conclusion

Based on the foregoing, we are of the opinion that the Proposed Scheme is fair and reasonable to

Shareholders. It is therefore in the best interests of Shareholders.

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Appendix 1: Glossary

Reference Definition

ABARE Australia Bureau of Agricultural and Resource Economics

AFSL Australian Financial Services Licence

AGSM Australian Graduate School of Management

Alpha Natural Alpha Natural Resources Corporation

AMCI AMCI Capital LP

APESB Accounting Professional and Ethical Standards Board Limited

Ashton Ashton open cut and underground mines

ASIC Australian Securities and Investments Commission

ASX Australian Securities Exchange

AUASB Auditing and Assurance Standards Board

AUD Australian dollars

Austar Austar Coal Mine Pty Limited

β Beta

BDA Behre Dolbear Australia

BMA BHP Billiton Mitsubishi Alliance

CAPM Capital Asset Pricing model

Centennial Coal Centennial Coal Company Limited

Coal & Allied Coal & Allied Industries Limited

Cockatoo Coal Cockatoo Coal Limited

Company, the Felix Resources Limited

CSEC China Shenhua Energy Company Limited

Damodaran Aswath Damodaran

Deloitte Deloitte Corporate Finance Pty Limited

Directors, the The directors of Felix

Dividend Record Date 7pm on 15 October 2009

EBIT Earnings before interest and tax

EBITDA Earnings before interest, tax, depreciation and amortisation

EMRP Equity Market Risk Premium

Felix Felix Resources Limited

FICS Financial Industry Complaints Service

FIRB Foreign Investment Review Board

First AUD 0.50 Dividend First AUD 0.50 dividend was declared on 13 August 2009, which will

be fully franked and is scheduled to be paid on 30 October 2009

FOB Free on board

FOS Financial Ombudsman Service

FSG Financial Services Guide

FY Financial year

gar Gross as received

GDP Gross domestic product

Gloucester Gloucester Coal Limited

Hanwha Hanwha Corporation Limited

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HCC Hard coking coal

I Indicated resources

Implementation Date The third business day following the Scheme Record Date

In Inferred resources

JFY Japanese financial year

JV Joint Venture

JORC Joint Ore Reserves Committee

Kcal Thousand calories per kilogram

Kd Cost of debt capital

Ke Cost of equity capital

KEPCO Korea Electric Power Company

Kg Kilogram

Km Kilometre

KORES Korea Resources Corporation

LOM Life of mine

m Metre

M Measured resources

Macarthur Coal Macarthur Coal Limited

MBI Management buy in

MBO Management buy out

Minerva Minerva

Moolarben Development

Projects

Moolarben open cut and underground development projects

Model, the A detailed financial model prepared by the management of Felix

Morningstar Morningstar Inc

MSCI Morgan Stanley Capital International World Accumulation Index

Mt Million tonnes

Mtpa Million tonnes per annum

NCIG Newcastle Coal Infrastructure Group

NE North east

New Hope New Hope Corporation Limited

NSW New South Wales

OC Open cut

Operating Assets Yarrabee mine, Ashton open cut and underground mines and the

Minerva mine

Part 3 Part 3 of Schedule 8 of the Corporations Regulations 2001 (Cth)

PCI Pulverised coal injection

PDS Product Disclosure Statement

Peabody Peabody Pacific Pty Limited

PEM Prospectivity enhancement multiplier

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PKCT Port Kembla Coal Terminal Limited

Proposed Scheme, the Felix announced a proposal under which Yanzhou would acquire

100% of the issued shares in Felix via a scheme of arrangement

PWCS Port Waratah Coal Services Limited

QR Queensland Rail

RBA Reserve Bank of Australia

Rf Risk free rate of return

Rm Expected return on the market portfolio

ROM Run of mine

SAC South Australian Coal Limited

SAC Dividend An in-specie distribution of shares in SAC on 30 October 2009,

which is not contingent upon approval of the Proposed Scheme

SAC Record Date 7pm on 15 October 2009

Scheme Booklet, the Board of directors of Felix have prepared a scheme booklet

containing the detailed terms of the Proposed Scheme

Scheme Consideration Cash payment of AUD 16.95

Scheme Record Date 7pm on the fifth business day following the date on which the

Proposed Scheme becomes effective, or such other date as Felix and

Yanzhou may agree in writing

SE South East

Second AUD 0.50 Dividend Further dividends of up to AUD 0.50 for each Felix share, expected to

be fully franked, yet to be declared, and payable no later than three

months after the Implementation Date

Section 640 Section 640 of the Corporations Act 2001 (Cth)

Shareholders Holders of Felix shares

Sojitz Sojitz Corporation

SSCC Semi-soft coking coal

TC Thermal coal

Total Proceeds On completion, of the Proposed Scheme, Shareholders will have

received the following for every Felix share:

• a cash payment of AUD 16.95

• a dividend payment of AUD 1.00 per share

an in-specie distribution of shares in SAC on 30 October 2009, which

is not contingent upon approval of the Proposed Scheme.

UCC Ultra Clean Coal

UCC Energy UCC Energy Pty Limited

UG Underground

US The United States of America

USD United States dollar

VALMIN Code, the The code for Technical Assessment and Valuation of Minerals and

Petroleum Assets and Securities for independent expert’s reports

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VWAP Volume weighted average price

WACC Weighted average cost of capital

Whitehaven Whitehaven Coal Limited

Xstrata Xstrata plc

Yanzhou Yanzhou Coal Mining Company

Yarrabee Yarrabee mine

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( ) ( )WACCE

VKe

D

VKd

= + −* * ( )1 tc( ) ( )WACCE

VKe

D

VKd

= + −* * ( )1 tc( ) ( )WACCE

VKe

D

VKd

= + −* * ( )1 tc

Appendix 2: Discount rate

The discount rate used to equate the future cash flows to their present value reflects the

risk adjusted rate of return demanded by a hypothetical investor for the asset or business

being valued.

Selecting an appropriate discount rate is a matter of judgement having regard to relevant

available market pricing data and the risks and circumstances specific to the asset or

business being valued.

Whilst the discount rate is in practice normally estimated based on a fundamental ground

up analysis using one of the available models for estimating the cost of capital (such as

the Capital Asset Pricing Model (CAPM)), market participants often use less precise

methods for determining the cost of capital such as hurdle rates or target internal rates of

return and often do not distinguish between investment type or region or vary over

economic cycles.

Since our definition of fair market value is premised on the estimated value that a

knowledgeable willing buyer would attribute to the asset or business, our selection of an

appropriate discount rate needs to consider that buyers incorporate other alternatives to

the typical CAPM approach in estimating the cost of capital.

For ungeared cash flows, discount rates are determined based on the cost of an entity’s

debt and equity weighted by the proportion of debt and equity used. This is commonly

referred to as the weighted average cost of capital (WACC).

The WACC can be derived using the following formula:

The components of the formula are:

Ke = cost of equity capital

Kd = cost of debt

tc = corporate tax rate

E/V = proportion of enterprise funded by equity

D/V = proportion of enterprise funded by debt

The adjustment of Kd by (1- tc) reflects the tax deductibility of interest payments on debt

funding. The corporate tax rate has been assumed to be 30%, in line with the Australian

corporate tax rate.

Cost of equity capital (Ke)

The cost of equity, Ke, is the rate of return that investors require to make an equity

investment in a firm.

We have used the CAPM to estimate the Ke for Felix. CAPM calculates the minimum

rate of return that the company must earn on the equity-financed portion of its capital to

leave the market price of its shares unchanged. The CAPM is the most widely accepted

and used methodology for determining the cost of equity capital.

The cost of equity capital under CAPM is determined using the following formula:

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aRRRK fmfe ++= − )(β

The components of the formula are:

Ke = required return on equity

Rf = the risk free rate of return

Rm = the expected return on the market portfolio

β = beta, the systematic risk of a stock

α = specific company risk premium

Each of the components in the above equation is discussed below.

Risk free rate (Rf)

The risk free rate compensates the investor for the time value of money and the expected

inflation rate over the investment period. The frequently adopted proxy for the risk free

rate is the long-term government bond rate.

In determining Rf we have taken the 10-year Australian Government Bond yield on

28 August 2009 of 5.44%. The 10-year bond rate is a widely used and accepted

benchmark for the risk free rate in Australia. This rate represents a nominal rate and thus

includes inflation.

Equity market risk premium (EMRP)

The EMRP (Rm – Rf) represents the risk associated with holding a market portfolio of

investments, that is, the excess return a shareholder can expect to receive for the

uncertainty of investing in equities as opposed to investing in a risk free alternative. The

size of the EMRP is dictated by the risk aversion of investors, the lower (higher) an

investor’s risk aversion, the smaller (larger) the equity risk premium.

The EMRP is not readily observable in the market and therefore represents an estimate

based on available data. There are generally two main approaches used to estimate the

EMRP, the historical approach and the prospective approach, neither of which is

theoretically more correct or without limitations. The former approach relies on historical

share market returns relative to the returns on a risk free security; the latter is a forward

looking approach which derives an estimated EMRP based on current share market

values and assumptions regarding future dividends and growth.

In evaluating the EMRP, we have considered both the historically observed and

prospective estimates of EMRP.

Historical approach

The historical approach is applied by comparing the historical returns on equities against

the returns on risk free assets such as Government bonds, or in some cases, Treasury bills.

The historical EMRP has the benefit of being capable of estimation from reliable data;

however, it is possible that historical returns achieved on stocks were different from those

that were expected by investors when making investment decisions in the past and thus

the use of historical market returns to estimate the EMRP would be inappropriate.

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It is also likely that the EMRP is not constant over time as investors’ perceptions of the

relative riskiness of investing in equities change. Investor perceptions will be influenced

by several factors such as current economic conditions, inflation, interest rates and market

trends. The historical risk premium assumes the EMRP is unaffected by any variation in

these factors in the short to medium term.

Historical estimates are sensitive to the following:

• the time period chosen for measuring the average

• the use of arithmetic or geometric averaging for historical data

• selection of an appropriate benchmark risk free rate

• the impact of franking tax credits

• exclusion or inclusion of extreme observations.

The EMRP is highly sensitive to the different choices associated with the measurement

period, risk free rate and averaging approach used and as a result estimated of the EMRP

can vary substantially.

We have considered the most recent studies undertaken by the Centre for Research in

Finance at the Australian Graduate School of Management (AGSM), Morningstar Inc

(Morningstar), ABN AMRO/London Business School and Aswath Damodaran

(Damodaran). These studies generally calculate the EMRP to be in the range of 5% to

8%.

Prospective approach

The prospective approach is a forward looking approach that is current, market driven

and does not rely on historical information. It attempts to estimate a forward looking

premium based on either surveys or an implied premium approach.

The survey approach is based on investors, managers and academics providing their long

term expectations of equity returns. Survey evidence suggests that the EMRP is generally

expected to be in the range of 6% to 8%.

The implied approach is based on either expected future cash flows or observed bond

default spreads and therefore changes over time as share prices, earnings, inflation and

interest rates change. The implied premium may be calculated from the markets total

capitalisation and the level of expected future earnings and growth.

Selected EMRP

We have considered both the historically observed EMRP and the prospective approaches

as a guideline in determining the appropriate EMRP to use in this report. Australian

studies on the historical risk premium approach generally indicate that the EMRP would

be in the range of 5% to 8%.

In recent years it has been common market practice in Australia in expert’s reports and

regulatory decisions to adopt an EMRP of 6%.

The recent severe decline worldwide in equity values and the difficulty companies are

experiencing in raising equity capital may be indicative of investors demanding a greater

risk premium. In addition, current prospective measures appear to indicate an increase in

the EMRP.

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Having considered the various approaches and their limitations, we consider an EMRP of

6.5% to be appropriate.

Beta estimate (β)

Description

The beta coefficient measures the systematic risk or non-diversifiable risk of a company

in comparison to the market as a whole. Systematic risk, separate from specific risk

discussed below, measures the extent to which the return on the business or investment is

correlated to market returns. A beta of one indicates that an equity investor can expect to

earn the market return (i.e. the risk free rate plus the EMRP) from this investment

(assuming no specific risks). A beta of greater than one indicates greater market related

risk than average (and therefore higher required returns), while a beta of less than one

indicates less risk than average (and therefore lower required returns).

Betas will primarily be affected by three factors which include:

• the degree of operating leverage employed by the firm, in that companies with a

relatively high fixed cost base will be more exposed to economic cycles and

therefore have higher systematic risk compared to those with a more variable cost

base

• the degree of financial leverage employed by a firm, in that as additional debt is

employed by a firm, equity investors will demand a higher return to compensate for

the increased systematic risk associated with higher levels of debt

• correlation of revenues and cash flows to economic cycles, in companies that are

more exposed to economic cycles (such as retailers), will generally have higher

levels of systemic risk (i.e. higher betas) relative to companies that are less exposed

to economic cycles (such as regulated utilities).

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The betas of various Australian industries listed on the ASX are reproduced below and

provide an example of the relative industry betas for a developed market.

Figure 16: Betas for various industries (as at 31 March 2009)

Source: AGSM Risk Management Service

The differences are related to the business risks associated with the industry. For

example, the above diagram indicates transportation companies are more correlated to

overall market returns with a beta close to one, whereas telecommunications and other

infrastructure companies (in particularly those that are regulated) typically have betas

lower than one.

The geared or equity beta can be estimated by regressing the returns of the business or

investment against the returns of an index representing the market portfolio, over a

reasonable time period. However, there are a number of issues that arise in measuring

historical betas that can result in differences, sometimes significant, in the betas observed

depending on the time period utilised, the benchmark index and the source of the beta

estimate. For unlisted companies it is often preferable to have regard to sector averages or

a pool of comparable companies rather than any single company’s beta estimate due to

the above measurement difficulties.

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Market evidence

In estimating an appropriate beta for Felix we have considered the betas of listed

companies that are comparable to Felix. These betas, which are presented below, have

been calculated based on weekly returns, over a two year period, compared to a relevant

domestic accumulation index and the Morgan Stanley Capital International World

Accumulation Index (MSCI Index).

Table 37: Analysis of betas for listed companies with comparable operations to Felix

Enterprise

value1

Debt to enterprise

value Domestic index MSCI Index

Company name (AUD

million)

(%) Levered

Beta Unlevered

Beta Levered

Beta Unlevered

Beta

Felix 3,166 (7.8%) 1.31 1.31 1.23 1.23

Australian coal companies

Coal & Allied 6,930 (5.2)% 0.62 0.62 0.55 0.55

New Hope 1,691 (155.5)% 0.94 0.94 0.83 0.83

Macarthur Coal Limited 2,076 (7.7)% 1.52 1.52 1.24 1.24

Whitehaven Coal 1,550 (3.3)% 1.36 1.35 1.12 1.12

Centennial Coal 1,429 9.5% 1.14 1.02 1.05 0.94

Gloucester 487 (5.1)% 1.38 1.38 1.25 1.25

Cockatoo Coal 209 15.2% 0.97 0.94 0.93 0.91

Average – Australia 2,192 (20.0)% 1.16 1.14 1.03 1.01

Median - Australia 1,918 (5.2)% 1.23 1.16 1.09 1.03

International coal companies

Domestic/export markets

Alpha Natural Resources

Incorporation 2,650 (10.4)% 1.66 1.58 1.73 1.65

Patriot Coal Corporation 1,180 16.3% 1.78 1.53 1.92 1.64

Domestic markets

China Shenhua Energy

Company Limited 110,887 1.2% 1.37 1.34 1.39 1.36

Yanzhou 10,160 (20.4)% 1.57 1.57 1.60 1.60

Peabody 13,642 21.2% 1.36 1.16 1.47 1.26

CONSOL Energy Inc. 9,665 10.6% 1.44 1.37 1.54 1.46

Bumi Resources 9,630 23.1% 1.74 1.51 1.63 1.42

Arch Coal Inc. 5,152 33.3% 1.41 1.16 1.52 1.24

Massey Energy Corp. 3,752 22.9% 1.62 1.29 1.73 1.38

Average – International 18,524 10.9% 1.55 1.39 1.61 1.45

Median – International 9,630 16.3% 1.57 1.37 1.60 1.42

Average – overall 11,318 (3.4)% 1.37 1.27 1.34 1.24

Median – overall 3,201 5.4% 1.39 1.34 1.43 1.26

Low – overall 209 (155.5)% 0.62 0.62 0.55 0.55

High - overall 110,887 33.3% 1.78 1.58 1.92 1.65

Source: Bloomberg and Deloitte analysis

Notes:

1. Enterprise value as at 28 August 2009

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Descriptions for each of the above companies are provided in Appendix 3.

The observed beta is a function of the underlying risk of the cash flows of the company, together with

the capital structure and tax position of that company. This is described as the levered beta.

The capital structure and tax position of the entities in the table above may not be the same as those of

Felix. The levered beta is often adjusted for the effect of the capital structure and tax position. This

adjusted beta is referred to as the unlevered beta. The unlevered beta is a reflection of the underlying

risk of the pre-financing cash flows of the entity.

Selected beta (β)

In selecting an appropriate beta for Felix we have considered the following:

• coal mining and exploration assets have varying risk profiles depending on the maturity of the

asset and the stage of its development. Therefore, we have placed more emphasis on companies

that are in the production phase in developed economies, particularly Australia

• the majority of Australian comparable companies produce both thermal and coking coal.

Thermal coal producers achieve much lower margins than coking coal producers due to the

lower sales prices achieved for thermal coal

• the majority of the international comparable companies derive sales from domestic coal sales,

with the exception of Alpha Natural Resources Incorporation (Alpha Natural) and Patriot Coal

Corporation, compared to Felix that predominately exports the coal produced

• the average unlevered beta for Australian comparable companies based on the domestic

accumulation index is 1.1 and based on the MSCI is 1.0

• current debt to equity levels are below historical levels due to the strong earnings generated by

high coal prices achieved in the past two years

• despite Whitehaven being smaller than Felix, we consider Whitehaven to be the most

comparable company to Felix and particularly Felix’s NSW operations, on the following basis:

o similar to Felix, Whitehaven produces thermal coal, SSCC and PCI coal from its NSW coal

mines and the majority of its production is exported to the Asian markets. Accordingly,

Whitehaven’s coal export capacity is constrained by the current limited port infrastructure

capacity in NSW. Whitehaven also has an equity interest in the NCIG Coal Terminal

o Whitehaven has a portfolio of operating coal mines in NSW, including the Canyon,

Tarrawonga and Rocglen open cut mines near Boggabri, the Sunnyside mine near Gunnedah

and the Werris Creek mine north of Quirindi, and is currently developing its Narrabri

project, which is a major underground coal mine

• to a lesser extent, we consider Macarthur Coal Limited (Macarthur Coal) to be comparable to

Felix and particularly Felix’s Queensland operations, given that it produces thermal coal, SSCC

and PCI coal from the Bowen Basin in Queensland, with the majority of its production exported.

However, Macarthur Coal currently only has two operating coal mines and a larger portfolio of

exploration assets, and therefore can be expected to have a higher risk profile than Felix

• the average levered beta for Whitehaven and Macarthur Coal is 1.4 based on the domestic

accumulation index and is 1.2 based on the MSCI

• assuming an unlevered beta of 1.0 to 1.1, a corporate tax rate of 30% and the target debt to equity

mix of Felix of 25.0% gives a relevered beta of 1.25 to 1.35.

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On this basis we have selected a levered beta of 1.25 and 1.35 for Felix.

Specific company risk premium (α)

The specific company risk premium adjusts the cost of equity for company specific factors, including

unsystematic risk factors such as:

• company size (which we discuss in detail below)

• depth and quality of management

• reliance on one key individual or a few key members of management

• reliance on key customers

• reliance on key suppliers

• product diversity (limits on potential customers)

• geographic diversity

• labour relations, quality of personnel (union/non-union)

• capital structure, amount of leverage

• existence of contingent liabilities.

The CAPM assumes, amongst other things, that rational investors seek to hold efficient portfolios,

that is, portfolios that are fully diversified. One of the major conclusions of the CAPM is that

investors do not have regard to specific company risks (often referred to as unsystematic risk).

There are several empirical studies that demonstrate that the investment market does not ignore

specific company risks. In particular, studies show that on average, smaller companies have higher

rates of return than larger companies (often referred to as the size premium), and investors in early

stage companies often require higher rates of return than investors in mature companies.

These are discussed separately below.

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Size premium

The following table summarises the returns for different size categories from 1926 to 2008 for

companies on the New York Stock Exchange, the American Stock Exchange and the National

Association of Securities Dealers Automated Quotation System.

Table 38: Evidence of size premium

Summary statistics of annual returns

Decile

Market capitalisation of largest company in group

2 (US $ million)

Arithmetic mean return

3

(%)

Size premium (return in excess of CAPM)

1

(%)

Largest (1st decile) 465,652 10.75 (0.36)

Large (2nd decile) 18,503 12.51 0.62

Mid-cap (3rd – 5th decile) 7,360 13.37 0.94

Low-cap (6th – 8th decile) 1,849 14.86 1.74

Micro-cap (9th – 10th decile) 453 17.72 3.74

Smallest (10th decile)4 219 20.13 5.81

Source: Market Results for Stocks, Bonds, Bills, and Inflation 2009 Yearbook, Ibbotson SBBI

Notes:

1. Size premium was calculated as the difference between the actual return and the return calculated using the CAPM

2. Market capitalisation was calculated as at 31 December 2008

3. Ibbotson use the 20 year government bond rate in determining the risk free rate

4. Ibbotson provide a further breakdown of the 10th decile, noting that the size premium for the upper half of the 10th decile (decile 10a)

was 4.11%, whereas the size premium for the lower half of the 10th decile (decile 10b) was 9.53%. However care must be taken in

considering decile 10b due to the volatility of companies in this segment of the market

Having regard to the current market capitalisation of Felix and the market capitalisation of the

Australian comparable companies considered when selecting the appropriate beta for Felix, we do not

consider a size premium is required for Felix.

Early stage assets

The Moolarben Development Projects are at an advanced stage but has not yet commenced

production. Generally, investors in early stage companies/projects often require higher rates of return

than investors in mature companies/projects. Venture capitalists are a common source of equity

capital for early stage investments. The Australian Venture Capital Guide provides the following

indicative guidelines for their required rate of return.

Table 39: Venture capital required rates of return

Methodology Required rate of return

Starting a new business 30.0% to 40.0%

Expanding a business, MBOs or MBIs 20.0% to 30.0%

Source: Australian Venture Capital Guide 2006

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These rates of return are significantly higher than those required for mature listed companies. The

reason that the discount rate required for an early stage company is different to that required for a

mature company is because the relationship between business risks, finance risks and the cost of

equity changes as a company progresses from an early stage company to a mature company. The

relationship between business risk, finance risk and cost of equity is illustrated in the following figure.

Figure 17: Business risks, finance risks and cost of equity

Phase Funding

requirements Business

risk Finance

risk Cost of equity

Pre-build Low/Zero High High (but low

debt)

High

Build Peak High High

Consolidation Medium

Stabilise Low Low Low Low

Source: Adapted from The Valuation of Businesses, Shares and Other Equity, 3rd edition, W Lonergan

Selection of specific company risk premium

We have not selected a specific company risk premium for the Operating Assets of Felix.

In determining an appropriate specific risk premium to apply to the Moolarben Development Projects,

we have had regard to the following:

• site construction works are progressing as planned and production is scheduled to commence in

September 2009

• development and execution risks associated with the underground mine at Moolarben, given that

a detailed subsidence study is yet to be undertaken. However, this risk is partly mitigated by

completion of the feasibility studies, which considered several conceptual long wall mine plans

• Felix is still in the process of obtaining certain statutory and management approvals required for

Moolarben’s stage two and three underground mine development

• Moolarben is located in close proximity to the Ulan coal mine, which is a mature coal mining

operation and is expected to produce coal of similar quality.

On this basis, we have selected a specific company risk premium in the range of 1.0% to 1.5% for the

Moolarben Development Projects.

Dividend imputation

Dividends paid by Australian corporations may be franked, unfranked, or partly franked. A franked

dividend is one that is paid out of company profits which have borne tax at the company rate,

currently 30%. Where the shareholder is an Australian resident individual or complying

superannuation fund, it will generally be entitled to a tax credit (called an imputation credit) in respect

of the tax paid by the company on the profits out of which the dividend was paid. If the recipient of

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the dividend is another company, the dividend will give rise to a credit in that company’s franking

account thereby increasing the potential of the company to pay a franked dividend at a later stage.

We have not adjusted the cost of capital or the projected cash flows for the impact of dividend

imputation due to the diverse views as to the value of imputation credits and the appropriate method

that should be employed to calculate this value. Determining the value of franking credits requires an

understanding of shareholders’ personal tax profiles to determine the ability of shareholders to use

franking credits to offset personal income. Furthermore, the observed EMRP already includes the

value that shareholders ascribe to franking credits in the market as a whole. In our view, the evidence

relating to the value that the market ascribes to imputation credits is inconclusive.

Conclusion on cost of equity

Based on the above analysis we arrive at a cost of equity, Ke, as follows:

Table 40: Ke applied to valuation of Felix

Operating Assets Development Assets

Input Low High Low High

Risk free rate (%) 5.4 5.4 5.4 5.4

EMRP (%) 6.5 6.5 6.5 6.5

Relevered beta 1.25 1.35 1.25 1.35

Specific company risk premium (%) - - 1.0 1.5

Ke – calculated (%) 13.6 14.2 14.6 15.7


Cost of debt capital (Kd)

We have selected a pre tax cost of debt of 8.5% as a reasonable estimate for Felix. This has been

estimated after consideration of the following:

• Felix currently has a minimal level of debt

• as at 30 June 2008, Felix’s long term weighted average cost of debt was 8.9%

• a margin of 3.0% above the current risk free rate appears reasonable, based on the rates currently

payable by companies with comparable risk profiles.

Debt and equity mix

Current gearing levels of coal mining companies have been distorted compared to long-term historical

trends due to the very strong cash flow positions driven by the recent high commodity prices.

We have adopted a target debt to enterprise value ratio of 25.0%.

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Calculation of WACC

Based on the above, we have assessed the nominal post-tax WACC for Felix to be:

Table 41: WACC applied to valuation of Felix

Operating Assets Development asset

Low High Low High

Cost of equity capital (%) 13.6 14.2 14.6 15.7

Cost of debt capital (%) 8.5 8.5 8.5 8.5

Debt to enterprise value ratio (%) 25.0 25.0 25.0 25.0

Tax rate (%) 30.0 30.0 30.0 30.0

WACC after tax nominal (%) 11.7 12.2 12.4 13.3

Selected WACC (%) 11.5 12.5 12.5 13.5


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Appendix 3: Comparable entities

The following table provides analysis of companies with comparable activities to Felix.

Table 42: Comparable companies earnings multiples – market trading

Company Enterprise value

1

(AUD million) EBITDA

1

(AUD million)

Attributable resource

(including reserves) (Mt)

6

EV/ Resources

(times)

Felix5,7 3,218 388 765 4.2

Coal and Allied Industries Limited3 6,930 1,178 3,141 2.2

New Hope4 1,691 142 720 2.3

Macarthur Coal5 2,076 281 626 3.3

Whitehaven Coal5 1,550 174 408 3.8

Centennial Coal5 1,429 219 1,957 0.7

Gloucester5 487 120 102 4.8

Cockatoo Coal2 209 (4) 164 1.3

Average 2.6

International coal companies

Domestic/export markets

Alpha Natural3 2,650 518.2 2,300 1.2

Patriot Coal Corporation3 1,180 343.3 1,800 0.7

Domestic markets

China Shenhua Energy Company Limited3 110,887 8,738.6 180,240 0.6

Yanzhou3 10,159 1,759.6 2,048 5.0

Peabody3 13,642 2,124.3 9,200 1.5

Consol Energy3 9,665 1,112.7 4,500 2.1

Bumi Resources3 9,630 1,430.3 9,489 1.0

Arch Coal Incorporation3 5,152 835.8 2,837 1.8

Massey Energy Corporation3 3,752 793.9 2,283.4 1.6

Average 1.7

Source: Bloomberg as at 28 August 2009, Company announcements

Notes:

1. Enterprise values and EBITDA converted to AUD as at 28 August 2009

2. EBITDA as at 30 June 2008

3. EBITDA as at 31 December 2008

4. EBITDA as at 31 July 2008

5. EBITDA as at 30 June 2009

6. Attributable JORC measured and indicated resources (including reserves)

7. Enterprise value of Felix is the mid-point of Deloitte’s assessed valuation range

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We provide descriptions for each of the above companies with comparable activities as follows:

Coal & Allied

Coal & Allied operates underground coal mines and open cut mines in NSW. Coal & Allied’s

producing assets include the Mount Thorley Warkworth mines, the Hunter Valley Operations and the

Bengalla Mine. In addition, Coal & Allied also owns several development and exploration projects in

NSW. Coal & Allied produces thermal coal, SSCC and PCI coal and exports to the international

markets (Japan, Asia and Europe) and the domestic market.

New Hope

New Hope is a thermal coal producing company based in Brisbane, Queensland. The company

operates two coal mines, the New Acland mine and the New Oakleigh mine and owns the Queensland

Bulk Handling Pty Limited export coal terminal at the Port of Brisbane. New Hope also owns various

coal exploration tenements in South East and Central Queensland. New Hope’s exports its coal to a

number of countries in the Asia-Pacific region and to the Australian domestic market.

Macarthur Coal

Macarthur Coal is a coal mining, production and exploration company operating in Australia.

Macarthur Coal operates the Coppabella, Moorvale and Middlemount mines in the Bowen Basin,

Queensland. Coppabella produces low ash PCI coal, Moorvale produces PCI coal, coking coal and

thermal coal and Middlemount produces PCI coal and semi-hard coking coal. Macarthur Coal also

owns several exploration projects in Queensland, which have reported JORC compliant resources.

Whitehaven

Whitehaven is a coal production company operating in the Gunnedah Region, NSW. Whitehaven’s

producing assets include the Canyon, Tarrawonga and the Rocglen open cut mines near Boggabri, the

Sunnyside mine near Gunnedah and the Werris Creek mine north of Quirindi. Whitehaven sells

SSCC, PCI and thermal coal to the global steel, power generation and metallurgical industries.

Centennial Coal

Centennial Coal is a thermal and coking coal producer with operations in the western and southern

coalfields of NSW and in central Queensland. The company’s coal mines include Charbon, Airly,

Ivanhoe North, Lumbert’s Gully, Angus Place, Springvale, Clarence, Berrima, Awaba, Myuna and

Mannering mines. The company mainly produces coal for the domestic thermal coal market, however

the company also exports some of its products in the overseas markets.

Gloucester

Gloucester mines and explores for coal throughout Eastern Australia. Its projects include the Duralie

Coal Project located in the Gloucester Basin. The company, though the Stratford JV, produces coking

coal and thermal coal for the use in the production of steel.

Cockatoo Coal

Cockatoo Coal explores for and mines coal in Queensland. Cockatoo Coal’s key assets include the

Baralaba Coal Mine in the Bowen Basin and the Woori Coal project (currently in pre-feasibility

stage). Cockatoo Coal produces PCI and thermal coal, which is exported to the global markets. In

addition Cockatoo Coal manages a number of coal exploration rights in the Bowen and Surat Basins,

Queensland.

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International

Alpha Natural

Alpha Natural extracts, processes and sells steam and metallurgical coal. The company operates from

more than 60 surface and underground mines and owns 14 coal preparation plants in the northern and

central Appalachian regions and Colorado, US. The company sells its coal to electric generators, steel

and other industrial producers.

Patriot Coal Corporation

Patriot Coal Corporation is a producer and marketer of thermal and coking coal in the eastern US,

with 14 current mining operations in the Appalachia region and the Illinois Basin in the Rocky

Mountains. The company exports and supplies domestic electric utilities, industrial users and

metallurgical coal customers and has approximately 1.8 billion tonnes of proven and probable coal

reserves.

China Shenhua Energy Company (CSEC)

CSEC is an integrated coal-based energy company, focusing on thermal coal production and power

generation businesses in China. The company operates several underground and open cut mines

throughout China The company also owns and operates an integrated coal transportation network,

consisting of rail lines and port facilities. The company sells most of its coal to the domestic market.

Yanzhou

Yanzhou operates underground mines and coal preparation plants in China. The company’s coal

production is sold in domestic and international markets. The company also provides railway

transportation services.

Peabody

Peabody mines and markets coal in the US and Australia and has a minority interest in Venezuela's

largest mine. The company owns 10 operations in Australia through its wholly owned subsidiary

Peabody Pacific Pty Limited. Peabody produces low-sulphur coal, primarily for use by electric

utilities. The company also trades coal and emission allowances.

CONSOL Energy Incorporation

CONSOL Energy Incorporation produces high-bituminous coal and coal bed methane. The company

operates 18 active mining complexes across six states in the US. The company sells its coal primarily

to the electric power generators in the US. The majority of the company’s mines are underground

operations using longwall mining systems.

PT Bumi Resources Tbk

PT Bumi Resources Tbk operates several coal mines throughout Africa, the Middle East and

Indonesia, producing predominantly thermal coal. The company is the largest thermal coal producer

in Indonesia, accounting for approximately a third of Indonesia’s total coal production and is one of

the largest thermal coal exporters in the world. For

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Arch Coal Incorporation

Arch Coal Incorporation mines, processes and markets low-sulphur coal from surface, underground

and open cut mines located in the northern and central Appalachian regions and Colorado, in the US.

The company sells its coal primarily to electric generators. The company also owns a coal terminal

dock on the Big Sandy River.

Massey Energy Corporation

Massey Energy Corporation produces, processes and sells bituminous, low-sulphur steam and

metallurgical coal through its processing and shipping centres. The company currently operates coal

mines at 23 locations in West Virginia, Kentucky and Virginia in the US. Massey Energy Corporation

provides its coal to electricity generators, industrial and metallurgical customers.

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Appendix 4: Comparable transactions

Below are the details of comparable market transactions, listed by target company.

Table 43: Comparable merger and acquisition multiples in Australia

Announcement

date Target Company/Project Bidding Company

Deal value

(AUD million)1 Coal type

%

acquired

Type of

mine

Operating

mine?

EV/

Resources2

06/08/09 Whitehaven Coal/ Narrabri project Korean Consortium 136 TC 7.5 UG No 6.0

27/02/09 Gloucester Noble Group Limited 383 TC, Coking 66.0 OC Yes 5.5

26/11/08 Peabody/Baralaba mine Cockatoo Coal 53 TC, PCI 62.5 OC Yes n/a

19/11/08 Resource Pacific Holdings Pty

Limited/Ravensworth Underground

mine

Marubeni Corporation 188 SSCC 12.0 UG Yes 8.3

01/08/08 Whitehaven Coal/ Narrabri project Electric Power Development

Company Limited

125 TC 7.5 UG No 5.7

01/08/08 Whitehaven Coal/ Narrabri project EDF Trading 129 TC 7.5 UG No 5.5

17/07/08 New Hope/New Saraji project BMA 2,450 MC 100.0 UG No 15.7

01/07/08 Macarthur Coal POSCO Company Limited 424 HCC, SHCC,

PCI, TC

10.0 OC Yes 6.9

30/06/08 Macarthur Coal ArcelorMittal NV 212 HCC, SHCC,

PCI, TC

5.0 OC Yes 6.9

21/05/08 Macarthur Coal ArcelorMittal NV 631 HCC, SHCC,

PCI, TC

14.9 OC Yes 6.9

27/02/08 Whitehaven Coal/ Narrabri project Upper Horn Investment

Limited

68 TC 7.5 UG No 3.0

2/01/08 Felix/Moolarben Coal Project Consortium of companies 90 TC 10.0 UG/OC No 1.5

21/12/07 JV - POSCO, Itochu/ Foxleigh Coal

Mine

Anglo Coal Australia 712 PCI 70.0 OC Yes 3.5

10/12/07 Custom Mining Ltd Macarthur Coal 275 PCI, Coking 100.0 OC No 4.0

5/12/07 Resource Pacific Holdings Ltd Xstrata 1,082 SSC, TC 100.0 UG Yes 7.0 For

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Announcement

date Target Company/Project Bidding Company

Deal value

(AUD million)1 Coal type

%

acquired

Type of

mine

Operating

mine?

EV/

Resources2

17/09/07 Austral Coal Limited/Tahmoor Mine Xstrata 542 HCC 100.0 UG Yes 3.0

17/09/07 Centennial Coal /Anvil Hill Project Xstrata 425 TC 100.0 OC No 2.9

7/08/07 Iluka Resources Ltd/Narama Mine Xstrata 54 TC 50.0 OC Yes 8.8

2/07/07 Macarthur Coal CITIC Resources Australia Pty

Limited

113 PCI, TC 8.4 OC Yes 2.2

27/06/07 Gloucester AMCI 40 Coking, TC 10.0 OC Yes 4.5

7/06/07 Felix/Moolarben Coal Project Sojitz 90 TC 10.0 UG No 1.7

21/03/07 Felix AMCI 188 MC, TC 19.2 UG Yes 2.0

Source: Mergermarket, Capital IQ, ASX announcements, Deloitte analysis

Notes:

1. Deal value converted to AUD on announcement date of the transaction

2. EV/Resources = enterprise value/resources, where resources are based on measured and indicated resources and are inclusive of reserves for the mine/project/company

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Whitehaven Coal/Korean Consortium

A Korean consortium consisting of Daewoo International Corporation and Kores Co Limited signed a

heads of agreement to acquire 7.5% stake in Narrabri Coal Project from Whitehaven Coal for

AUD 136 million. The Narrabi coal project had 303.3 Mt of measured and indicated resources at the

time of the transaction. The Narrabri coal project is located in NSW and construction of the mine

commenced in January 2008. Production is expected to commence in the second half of 2009.

Gloucester/Noble Group Limited

Noble Group Limited acquired an 87.7% stake (including the 21.7% already owned) in Gloucester

from AMCI, ITOCHU Minerals & Energy of Australia Pty Limited, Barclays Global Investors

Australia Limited, BT Investment Management Ltd and other shareholders for AUD 7.0 per share

plus approximately AUD 6 million to option holders. At the time of the transaction Gloucester had

102 Mt of measured and indicated resource.

Peabody/Cockatoo Coal

Peabody sold its 62.5% interest in the Baralaba mine, located in the southern Bowen Basin of

Queensland, for AUD 52.5 million to Cockatoo Coal. The Baralaba mine has been operational since

July 2005 and produces both PCI and thermal coal. The Baralaba mine has synergistic value to

Cockatoo Coal as it is located adjacent to existing exploration tenements.

Resource Pacific Holdings Pty Limited/Marubeni Corporation

Marubeni Corporation increased its shareholding in Resource Pacific Holdings Pty Limited, a

subsidiary of Xstrata, from 10.24% to 22.22% in November 2008. As a result, Marubeni Corporation

acquired an 11.98% interest in the company for Japanese Yen 13 billion. The resource level of

Resource Pacific Holding Pty Limited at the time of the transaction was 189 Mt.

Whitehaven Coal/Electric Power Development Company Limited

On 1 August 2008, Whitehaven Coal accepted an offer from Electric Power Development Company

Limited to acquire 7.5% of the Narrabri Coal Project for AUD 125 million. The Narrabi coal project

had 303.3 Mt of measured and indicated resources at the time of the transaction. The Narrabri coal

project is located in NSW and construction of the mine commenced in January 2008.

Whitehaven Coal/EDF Trading

On 1 August 2008, Whitehaven Coal accepted an offer from EDF Trading to acquire 7.5% of the

Narrabri coal project for USD120 million. The Narrabi Coal Project had 303.3 Mt of measured and

indicated resources at the time of the transaction. EDF Trading is a wholly owned subsidiary of the

EDF group, one of Europe’s largest utility companies.

New Hope/BMA

BMA, a JV between BHP Billiton Limited and Mitsubishi Corporation, agreed to acquire the New

Saraji coal project from New Hope for AUD 2.45 billion in cash. The New Saraji coal project

contains a large high quality metallurgical coal measured and indicated resource, which was estimated

to be 156.3 Mt at the time of the transaction. The project is located in the Bowen Basin in central

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Macarthur Coal/POSCO

POSCO became a substantial shareholder of Macarthur Coal in July 2008 when it acquired a

10% interest, or 21.2 million shares, in Macarthur Coal at AUD 20.0 per share. POSCO is one of the

world’s largest steel producers and has a long term customer relationship with Macarthur Coal. At the

time of the transaction, Macarthur Coal measured and indicated resources were estimated to be

618.1 Mt.

Macarthur Coal/ArcelorMittal NV

ArcelorMittal NV, the world’s largest steel making company, acquired a 14.9% interest in Macarthur

Coal in May 2008, by purchasing 31.6 million ordinary shares in Macarthur Coal at AUD 20.00 per

share. ArcelorMittal NV acquired a further 5% interest in Macarthur Coal in June 2008, for the same

price of AUD 20.0 per share, or a deal value of AUD 212.2 million. At the time of the transactions,

Macarthur Coal measured and indicated resources were estimated to be 618.1 Mt.

Whitehaven Coal/Upper Horn Investments Limited

Whitehaven Coal signed an agreement with Upper Horn Investments Limited, a wholly owned

subsidiary of China's Guangdong Yudean Group Company Limited for a 7.5% stake in the Narrabi

Coal Project, for AUD 67.5 million. The Narrabri Coal Project had measured and indicated resources

of 303.2 Mt.

Felix/Consortium of companies

A consortium of companies, consisting of Korea Electric Power Company and four of its generator

subsidiaries, Kosep, Komipo, Kowep and Kospo plus Korea Resource Corporation and Hanwha

Corporation Limited signed an agreement with Felix in January 2008 to purchase a 10% equity

shareholding in the Moolarben Coal Project. The consortium paid Felix AUD 90 million plus 10% of

development costs. At the time of the transaction the Moolarben Coal Project had planning approval

for up to 10 Mtpa of saleable production and 595.8 Mt of measured and indicated resources.

POSCO and Itochu/Anglo Coal Australia

Anglo American plc acquired a 70% interest in the Foxleigh coal mine JV in Queensland for AUD

712 million from the POSCO and Itochu JV. At the time of the transaction, Foxleigh was producing

2.5 Mtpa of PCI coal for the steelmaking industry and had measured and indicated resources of

290 Mt.

Custom Mining Limited/Macarthur Coal

Macarthur Coal completed the acquisition of Custom Mining Pty Limited in January 2008 for a total

consideration of AUD 275 million. The interest of Custom Mining Limited included 70% of the

Middlemount project and a farm-in agreement for up to 70% of the Dingo West prospect. Custom

Mining Pty Limited had total measured and indicated resources of 68.4 Mt.

Resource Pacific Holding Limited/Xstrata

Titan Holdings Finance Pty Limited, a subsidiary of Xstrata, acquired Resource Pacific Holdings

Limited, for AUD 3.20 per share. Resource Pacific Holdings Limited measured and indicated

resources are made up of six coal seams for a total of 153.2 Mt. For

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Centennial Coal/ Xstrata

Centennial Coal accepted a takeover offer from Helios Australia Pty Limited (a subsidiary of Xstrata),

with respect to Centennial Coal’s interest in Austral Coal Limited for a total consideration of

AUD 542 million in October 2007. At the time of the transaction, Austral Coal Limited had

measured and indicated resources of 227.1 Mt.

Centennial Coal/Xstrata

Centennial sold its Anvil Hill Project to Xstrata in October 2007. Centennial received

AUD 425 million cash. At the time of the sale, the Anvill Hill Project had 146.3 Mt of measured and

indicated resources.

Iluka Resources Limited/Xstrata

Iluka Resources Limited divested a 50% non-operating interest in the Narama thermal coal mine,

located in the Hunter Valley, to Xstrata in January 2008. The sale consideration was approximately

AUD 54.4 million. The Narama thermal coal mine had approximately 12.3 Mt of measured and

indicated resources at the time of the transaction.

Macarthur Coal/CITIC Resources Australia Pty Limited

CITIC Resources Australia Pty Limited increased its shareholding in Macarthur Coal from 11.62% to

19.99% in July 2007, for a total purchase consideration of approximately AUD112.9 million from the

Talbot Group. At the time of the announcement, Macarthur Coal had measured and indicated

resources of 579.2 Mt.

Gloucester/AMCI

AMCI acquired a 10% interest in Gloucester in June 2007 for a total consideration of

AUD 40.2 million. At the time of the transaction, Gloucester had reserves of 21.9 Mt and measured

and indicated resources of 91.0 Mt.

Felix (Moolarben Coal Project)/Sojitz

Sojitz acquired a 10% stake in the Moolarben Coal Project from Felix for AUD 90 million, plus its

pro-rata share of the capital cost to develop the Moolarben mine. At the time of the transaction, the

Moolarben mine had measured and indicated resources of 532 Mt.

Felix/AMCI

AMCI acquired the interest of Resources Management and Mining Pty Limited in Felix, which

represented 19.2% of the company in May 2007. At the time of the transaction, Felix had 524.4 Mt of

measured and indicated resources.

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Appendix 5: Independent technical expert’s report

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BDA

B E H R E D O L B E A R A U S T R A L I A

ACN No . 065 713 724

Minerals Industry Consultants

Level 9, 80 Mount Street North Sydney, NSW 2060

Australia

Tel: 612 9954 4988 Fax: 612 9929 2549

Email: [email protected]

ABN 62 065 713 724

Denver New York Toronto London Guadalajara Santiago Sydney

03 September 2009 Mr Robin Polson Director Deloitte Corporate Finance Pty Limited Riverside Centre Level 26 123 Eagle Street Brisbane Queensland 4000

The Board of Directors Felix Resources Limited PO Box 10470 BRISBANE Queensland 4000

Dear Sir,

REPORT FO R DELOITTE CORPORATE FINANCE PTY LIMITED

INDEPENDENT TECHNICAL REVIEW OF FELIX RESOURCES MINING PROJECTS

1.0 EXECUTIVE SUMMARY

1.1 Introduction

Deloitte Corporate Finance Pty Limited (“Deloitte”) has been appointed by Felix Resources Limited (“Felix”), to provide an independent expert’s report (“IER”) advising whether the proposed offer from Yanzhou Coal Mining Company Limited to acquire all of the fully paid ordinary shares in Felix, by way of a scheme of arrangement (“the Scheme”), is in the best interests of Felix’s shareholders. Deloitte has commissioned Behre Dolbear Australia Pty Limited (“BDA”) to provide an independent specialist report and to provide an independent technical review of the Felix operations and certain assumptions that have been used in arriving at a valuation of the Felix assets. This report sets out the conclusions that BDA has reached in the assessment of the following mining assets:

• Ashton open cut and underground mining and processing operations, Hunter Valley, NSW • Yarrabee open cut mining and processing operations, Central Queensland • Minerva open cut mining operations, Central Queensland • Moolarben underground longwall and open cut mining Project near Mudgee, NSW

and the basis of valuation for the following exploration properties: • Harrybrandt exploration tenements, , Central Queensland • Athena exploration tenements , Central Queensland • Wilpeena exploration tenements, Central Queensland • Lake Phillipson exploration tenements, South Australia.

It is understood that the BDA report will be referred to in the Deloitte’s assessment and may be reproduced as an appendix to the IER.

With respect to estimates of resources and reserves, BDA has conducted its review in recognition of the requirements of the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves, prepared by the Joint Ore Reserve Committee of the Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and Minerals Council of Australia (JORC) – Effective December 2004 (“the JORC Code”). BDA has neither undertaken an audit of the Felix data nor re-estimated the resources, but has reviewed the resource and reserve estimating methodology and comparative estimates carried out by Felix personnel and/or consultants.

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Report to Deloitte – Felix Mining Operations Review September 2009 Behre Dolbear Australia Pty Limited Page 2

BEHRE DOLBEAR

This report has been prepared in accordance with the relevant requirements under the Listing Rules of the ASX and the practice notes and policy statements issued by the Australian Securities and Investment Commission (“ASIC”) as they apply to the preparation of independent expert reports and valuations. It contains forecasts and projections based on information provided by Felix. BDA’s assessment of the projected production schedules and capital and operating costs are based on technical reviews of project data and site visits. However, these forecasts and projections cannot be assured and factors both within and beyond the control of Felix could cause the actual results to be materially different from the assessments and projections contained in this report. 1.2 BDA Capability and Independence

This report has been prepared as advisory information to Deloitte by the signatories, whose qualifications and experience are summarised in Annexure A to this report. The review of Mineral Resources and Ore Reserves estimates and methodology has been conducted by Competent Persons, as defined under the JORC Code. Each of the Competent Persons listed in Annexure A has consented to the presentation of the findings in the form and context in which it is presented in this report. BDA provides a range of technical advisory services to the mineral resource industry, to mining operators, investors and financiers. The principal areas of activity include the management and preparation of technical due diligence studies and “fatal flaw” and project analyses. The company is well established in the areas of operational management review/technical audit and project valuation and evaluation, commonly for third party financing arrangements and our clients include banks, financial institutions and mining companies. The parent company, Behre Dolbear and Company Inc., has operated continuously as a mineral industry consultancy since 1911 and has offices in Beijing, Denver, Guadalajara, London, New York, Santiago, Toronto and Vancouver, and as well as Sydney. Internationally, Behre Dolbear has worldwide coal experience spanning a broad spectrum of exploration, management, resource and reserve analysis, metallurgical studies, surface and underground mine design, technical due diligence, operations optimization and total project feasibility BDA has previously independently reviewed the Felix operations as part of assignments for potential financiers, as well as conducting a comprehensive independent review on all of Felix’s mining assets as part of a previous possible sale process. We have considered the matter of potential conflict of interest concerning former reviews and have concluded that we would not be conflicted to prepare the requested report, on the basis that it is being prepared as an independent third party report, BDA has not provided Felix with technical advice, BDA will be paid professional fees (on a fixed fee basis) and expenses only for the work and payment will not be dependent on the outcome of the BDA report. None of the BDA Directors, Principals, Associates or Consultants who contributed to this report has any material interest or entitlement, direct or indirect, in:

• Felix Resources, its subsidiaries, securities or any companies associated with Felix; or • the Relevant Assets being considered; or • the outcome of the acquisition.

BDA has independently assessed the Relevant Assets of Felix on the basis of both specific information provided by Felix and individual experience in relation to the estimation of resources and reserves, life of mine plans, production and productivity estimates, operating and capital cost projections, coal quality assessments, manpower estimates, environmental requirements and compliance, workforce and community issues and Health, Safety and Environmental standards and compliance. A draft copy of this report has been provided to Felix for review the accuracy of the data used and for the correction of any material errors of fact, omissions of relevant information, or inclusion of incorrect or unreasonable assumptions that have been relied upon in this Report. 1.3 Scope of Work/Materiality/Limitations and Exclusions

BDA has reviewed the Felix Relevant Assets in accordance with the Scope of Work provided and the limitations and exclusions specified and set out in Annexure B to this Report.

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1.4 Methodology of Assessment

BDA has been provided with a financial model that incorporates recent cost data, but BDA notes that, as a routine matter, Felix is currently reviewing the plans and projections and that some figures may be subject to revision. The BDA brief excludes commentary on commodity prices, exchange rates or economic viability and the review has been confined to assessing the technical issues relating to the various Felix projects. BDA reserves the right to change its opinions on the Felix coal mining studies expressed in this report should any of the fundamental information provided by Felix be significantly or materially revised. The assumptions adopted in the financial model, and their accuracy and reliability, are largely the subject of this Report. The parameters considered include annual mining rates (coal and waste), strip ratios (in opencuts), development rates and longwall productivity (for underground operations), washery yields and product coal quality, materials handling and logistics, product transport, operating and capital costs. BDA did not consider financial issues such as loan funding aspects, cashflows, profit and loss, balance sheet, non-cash items and the valuation of the operating mines and defined projects. BDA has examined the exploration assets and has provided valuation of those where appropriate and as specified. The BDA review has focussed on the technical inputs to the financial model and has sought to validate the raw data that constitutes the mine plans and drives the financial model. It specifically excludes review of commodity price and exchange rate forecasts. In particular, the BDA review covered the following areas:

• Operations: BDA has conducted site visits to the principal Felix operations and projects, held discussions with Felix head office and site management personnel and carried out inspections of the mining, processing and transport operations in the opencuts and underground operations. BDA has inspected the sites for environmental compliance and has reviewed the plans for the development of mining activities.

• Resources and Reserves: BDA conducted check calculations of the resource estimates and satisfied themselves that the Felix statements were JORC compliant. The JORC-defined tonnages were checked against the sales tonnages in the financial model.

• Budgets and Life of Mine Plans: BDA checked the projected annual and life of mine production tonnages and yields against the resource base and the financial model inputs.

• Environmental Approvals and Compliance: BDA checked the environmental, statutory and regulatory licensing and compliance requirements and reviewed environmental management, annual audits, and returns.

• Capital and Operating Cost Estimates: BDA checked the projected annual and life of mine operating cost projections and capital expenditure allowances. Operating costs were checked on the basis of first principles estimates, contract conditions and quotations, as well as in comparison with historical performance. Felix has a comprehensive and detailed operations history at most sites and the estimates are considered to be soundly based and compatible with performances.

• Key Potential Risk Issues: BDA has reviewed each operation from the perspective of material potential issues that could jeopardise the projected cash flows or the product tonnages and has provided comment on the potential risk areas where discounts may need to be applied.

All material revisions that BDA considers should be applied in the financial model have been provided to Deloitte for incorporation in the valuation. 1.5 Inherent Mining Risks

When compared with many industrial and commercial operations, coal mining, and in particular underground coal mining, carries a relatively higher risk, conducted in an environment where not all events are predictable. Each coal deposit is unique. The nature of the coal deposit, the occurrence and quality of the coal, and its behaviour during mining and processing can never be wholly predicted. Estimations of the tonnes, quality and characteristics of a coal deposit are not precise calculations but are based on interpretation and on samples from drilling which, even at close drill hole spacing, provides a very small

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sample of the whole coal deposit. Reconciliations of past production and reserves can confirm the reasonableness of past estimates, but cannot categorically confirm the accuracy of future predictions.

An experienced management team can identify the known risks and put in place measures to mitigate the potential for interruptions consequent to such risks. However, the extent of knowledge is limited and there is always the possibility that unexpected or unpredicted events may occur, to the extent that it is considered not possible to remove all risks or to state categorically that events that may have a material impact on the operation will not occur. Detailed planning and experienced management should mitigate the risks to a reasonable extent. 2.0 OVERVIEW

2.1 Summary

BDA considers that Felix management team is experienced and capable, with a demonstrated capacity to operate the existing mines and to construct, implement and commission the planned developments reasonably within the projected budgets and timeframes. Felix management has adopted practical, realistic and not overly conservative assumptions and understands the operational and risk constraints that drive the projects. While there will be variances from the projected production and unit cost performances, the short- and long-term forecasts are considered to be based on realistic reserves and resources, proven technology and equipment, reliable historic costs and productivities, sound environmental and regulatory management and practice, appropriate infrastructure and established markets with a broad customer base. 2.2 Description of Assets

Felix operations comprise three open cut mines and one underground longwall; plans for the establishment of four opencut and four underground operations at Moolarben are well advanced and under development.

Table 2.1 Felix Mining Operations and Developments

Mine Felix Equity %

Type Method Operator

Existing Mines Ashton NE 60 Opencut Truck & shovel Ashton Mining Pty Limited Ashton 60 Underground Longwall Ashton Mining Pty Limited Minerva 51 Opencut Truck & shovel Minerva Coal Pty Ltd Yarrabee 100 Opencut Truck & shovel Yarrabee Coal Co Pty Ltd Planned Mines Moolarben 80 Opencut Truck & shovel Moolarben Coal Mines Pty Ltd Moolarben 80 Underground Longwall Moolarben Coal Mines Pty Ltd Ashton SE 60 Opencut Truck & shovel Ashton Mining Pty Limited

Section 3 of this report contains more detailed descriptions of each of the Felix projects.

2.3 Summary of Resources and Reserves

Felix has used Competent Persons for the preparation of JORC Code-compliant resources and reserves estimates for all operations and developing projects. Resource categories are Measured, Indicated and Inferred to reflect decreasing levels of confidence due to drill-hole spacing, availability of geological data, geological and geometric constraints.

Reserve categories are Proved and Probable, having been converted from Measured and Indicated resources respectively, after the application of appropriate mining designs, with provisions for dilution and coal losses from mining activities and coal left in pillars, pit walls and ramps and around infrastructure. Inferred resources do not convert to reserves due to the lower level of confidence in the estimates.

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Table 2.2 Felix Operations Summary Resources and Reserves* June 30 2009

Measured & Reserves Mine Indicated* Proved Probable Recoverable Yarrabee Opencut 59.9 26.1 1.4 27.5 Ashton Opencut 110.8 29.2 19.9 49.1 Ashton Underground 276.3 23.5 23.9 47.4 Minerva Opencut 53.5 13.6 15.2 28.8 Moolarben Opencut 353.9 40.4 237.3 277.7 Moolarben Underground 203.4 44.1 35.0 79.1 Total 1,057.8 176.9 332.7 509.6

* Source: Felix Statement of Resources and Reserves – excludes Harrybrandt, Athena, Phillipson exploration BDA notes that appropriate levels of mine planning and design layouts have been developed within the identified Measured and Indicated resources to allow a suitable basis for the estimation of reserves. 2.4 Saleable Coal Projections

Felix has provided forecasts of saleable coal tonnages for each operation and project. Felix is a well-established coal exporter, with current coal production from the Ashton, Minerva and Yarrabee mines and planned additions from the Moolarben opencut and underground mines.

In Fiscal Year 2007/08 (“FY08”, financial year ending 30 June), the group produced around 7.0 million tonnes (“Mt”), of which the Felix equity component was approximately 4.6Mt of thermal, semi-soft and PCI coal for export. For FY09, the equity production was is 4.8Mtpa.

Over the next three years, the target is to increase total Felix mines production from 6.7Mtpa in FY10 to a range of from 16.1 to 16.5Mtpa (depending on longwall moves) from FY12, of which Felix’s equity share will be 12.7-13Mtpa of sales. For the financial model, the production forecast from each of the operations is considered reasonable and achievable and the estimates are set out in summary in Table 2.3.

Table 2.3 Annual Total & Felix Equity Coal Production (Mt)*

FY10 FY11 FY12 FY13 FY14 Mine 100% Felix 100% Felix 100% Felix 100% Felix 100% Felix Ashton NE Opencut 0.9 0.5 0.2 0.1 - - - - - - Ashton SE Opencut - - 0.8 0.5 1.1 0.7 1.1 0.7 1.1 0.7 Ashton Underground 1.2 0.7 1.2 0.7 1.2 0.7 1.2 0.7 1.2 0.7 Minerva Opencut 1.3 0.7 1.3 0.7 1.3 0.7 1.3 0.7 1.3 0.7 Moolarben Opencuts 1.4 1.1 5.9 4.7 6.8 5.4 7.1 5.7 7.1 5.7 Moolarben Undergrounds - - 0.8 0.6 3.1 2.5 2.6 2.1 3.0 2.4 Yarrabee Opencut 1.8 1.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 Total Product Sales 6.6 4.8 13.0 10.1 16.3 12.8 16.1 12.7 16.5 13.0

* Felix equity shares are Ashton 60%, Minerva 51%, Moolarben 80% and Yarrabee 100%

As seen in Table 2.3 and reflected in Figure 2.1, the planned total output is forecast to increase to approximately 16Mtpa from FY12, with the Felix equity component being approximately 13Mtpa, with over 60% of that coming from the new Moolarben mines.

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Figure 2.1

Felix Forecast Production Ramp-Up

It is important to recognise that, while there would appear to be substantial resources available at some of the Felix operations and that expansions could be considered, the major constraint on all operations at this stage is the limitations of the available off-site product coal transport infrastructure. Similar constraints apply to the ports of Newcastle in New South Wales and Gladstone and Dalry mple Bay in Queensland, as all are at or near their handling capacity as multi-user facilities. Felix is a participant in the construction of the new NCIG loading facilities in Newcastle and, through that association, has secured export shipping and railing capacity for the Moolarben Project. Similarly in Queensland, Felix has secured capacity for the imminent expansion of Yarrabee, but such opportunities are limited. These circumstances will obviously change at some point in the future and additional capacity may become available through a variety of channels, but the current limitations have been applied in the financial model.

2.5 Operating Costs

BDA has reviewed the forecast operating costs in comparison with historical figures and is satisfied that the estimates contained in the financial model are reasonable and realistic.

For FY09, the average cost of production for all coal produced was A$71/t sold. Over the next three years, Felix’s stated objective is to reduce the average mine operating costs from A$67/t in FY10 to A$57/t FOB in FY12. For the financial model, operating cost estimates are considered representative of the anticipated conditions and accurate within ±10% over the long term, although there will be variances experienced as a result of encountering unexpected conditions from time to time.

2.6 Capital Costs

Felix has provided capital cost estimates for all operations and for the construction of Moolarben. BDA has reviewed the estimates and considers that appropriate levels of feasibility study have been used to provide realistic estimates, including adequate contingency provisions of around 15% on the Moolarben capital. There will be variations in the forecast capital expenditures over time, but BDA considers the allowances reasonable for the projected requirements. Given the Felix track record in the timely construction of the Ashton and Yarrabee washeries and the construction and development of the Ashton underground longwall operation, all completed within the past four years and within 10% of Budget estimates, BDA considers the ongoing capital provisions in the financial model are appropriate and compatible with industry trends.

2.7 Risks

BDA has reviewed the potential risks for the various Felix operations and projects and considers that, in the short term, the principal risk to projected cash flows would be the slower than planned development and ramp up to full production in the Moolarben project. This would have the effect of delaying revenue from export coal sales and increasing working capital until full production was achieved. BDA has suggested it

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would be prudent to have a capital overrun facility of around 10% of the uncommitted capital, or $15M, to allow for possible delays that would increase the initial working capital during ramp -up.

In the longer term, BDA considers that the development of the second, third and fourth underlying seams for longwall production at Ashton present progressively increasing risk to production from that operation and potential reserve loss. In terms of coal production, any shortfall may be able to be supplemented by additional opencut production from resources/reserves in the adjacent operations, but there may well be a reduction in the currently estimated underground reserves as a consequence of increasingly difficult conditions with the successively lower mining horizons. While the projected coal recoveries appear to have been reasonably conservatively estimated, there is clearly an element of material uncertainty, as the planned approach involving the extraction of three underlying longwall horizons has not previously been attempted. BDA would suggest that this progressive risk profile should be reflected in the treatment of the Ashton underground revenues in the financial model.

Other than the foregoing identified risks, BDA considers the inherent risks associated with mining have been adequately addressed in the Felix operations plans and there is no evidence of any additional material risks to the ongoing operations. While underground operations (in particular) invariably pose some specific risks, BDA considers that Felix management has demonstrated its awareness of these potential issues and has taken or planned established measures of good mining practice to mitigate such potential conditions.

2.8 Financial Model Inputs

Reserve tonnes, yields, washery throughput, capital and operating costs are all estimates, and in practice will be subject to variations when compared with the projections in the LOM Plan and the financial model. It is appropriate therefore that, in providing Deloitte with advice on the technical aspects of the valuation, BDA has reviewed all the technical physical inputs, as well as giving consideration to the impact of the more sensitive parameters. BDA has commented in the report on risk areas where appropriate and particularly on the Moolarben underground production plans and schedules, as summarised in Table 2.4.

BDA has held detailed discussions with Felix executive management and site operators and has reviewed the technical inputs to the financial model. In some cases, Felix has been convinced that some changes needed to be considered and, where that has occurred, the financial model has been adjusted to reflect those views. As a consequence, with the exception of the aspects specifically identified in this report, BDA is satisfied that the technical inputs to the financial model are appropriate, realistic, reflective of historical experience and accurate within the normal limits expected for resource projects. These levels of accuracy are reflected in the sensitivities suggested.

2.9 Sensitivity Analysis

BDA has examined the potential risks and possible operational variations to the various projects and has provided a guide to test the range of valuations that may be derived. This does not address the longer-term aspects of the Ashton underground production forecasts, where the reserve risks may be addressed through discounting.

Table 2.4

PROJECT SENSITIVITY STUDIES RECOMMENDATIONS . Item Range Comment Production levels –O/C ±7.5% Low risk of not achieving forecast Production levels –U/G ±12.5% Medium risk of not achieving Felix forecast Operating costs ±10% Test the sensitivity to operating costs. Yield ±5% Forecast CPP yields may be affected by sales mix changes Capital costs ±10% Test the sensitivity to capital forecasts. Start ups +3 months Moolarben –sensitivity of possible delayed start-up due to either CPP

or port developments for export sales, and BDA has recommended a $15M overrun facility to address this aspect.

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2.10 Exploration Property Valuations

BDA has reviewed the available data on the exploration properties, comprising Harrybrandt, Athena, Phillipson Basin and Wilpeena, and has determined the valuations based primarily on notes the “yardstick” and “past expenditure” methods, although the latter undervalues the more advanced projects. However, BDA considers that the Wilpeena deposit, which is adjacent to Yarrabee and on which there is very limited expenditure or information to date, should be valued as a 5-10 year extension to the life of that operation. Based on experience with similar transactions and the use of the “yardstick” method which involves the assignment of value per tonne of coal indicated by preliminary exploration, BDA considers the combined values of the Harrybrandt, Athena and Phillipson Basin exploration properties are best represented to be in the range of from A$95-125M, with a most likely value of A$110M. 3.0 SUMMARY OF COAL OPERATIONS AND PROJECTS

BDA has prepared a summary overview of each operation and project in the Felix portfolio, to review the key technical aspects of each. These are a condensation of more extensive reports previously prepared as part of the comprehensive independent assessment of the Felix assets. 3.1 ASHTON PROJECT – OPEN CUTS AND UNDERGROUND

Project Outline The Ashton coal mining leases are located approximately 15km northwest of Singleton near the village of Camberwell and adjacent to the Glennies Creek mine. The project comprises two main mining areas, being the existing NE opencut mine (“NEOC”), which has been operating for over 4 years, and the Ashton underground longwall operation in the southern section of the leases. As the NEOC reserves near depletion (in 2010-11), opencut mining will continue in the proposed SEOC, which is designed to overlap NEOC. Subsequent to that, opencut mining would continue on adjacent Coal and Allied leases or in the West opencut (“WOC”), where additional reserves have been identified. The washery, which takes coal simultaneously from both the opencut and underground operations, has two modules with a combined capacity of up to 6.3Mtpa of ROM coal. At yields of 60-63%, this can produce up to 3.8Mtpa of product coal. Site facilities include ROM and product coal stockpiles, as well as a train loading facility adjacent to the product stockpiles. The mine is 95kms by rail to the Port of Newcastle.

Based on the defined opencut reserves and resources, Ashton surface operations will continue for many years, with additional coal being sourced from the underground longwall operations.

Recoverable underground reserves are quoted as 47.4Mt, based on longwall mining in each of four seams, sequentially and in descending order, with panels stacked below each other in the lower seams. The interseam interval is of the order of 30-40m which, from a stress and displacement perspective, may allow considerable interaction between seams. BDA considers there are some material risks regarding longwall operations and coal recovery from the lower (underlying) seams; there are uncertainties as to whether the progressive underlying longwall panels can be successfully and economically extracted and the extent to which the production estimates over the life of the operation can be relied upon. As a result of these factors, BDA considers that there is a material risk of loss of reserves in the lower seams and a reasonable likelihood that the longwall will perform less well than projected in the lower seams. The move to miniwall mining adds to the complexity of mining in the lower seams. Regional and Local Geology The seams being mined within the Ashton leases are within the Singleton Super-Group, compris ing the Late Permian Wollombi Coal Measures and Wittingham Coal Measures. The Ashton Coal Project is mining within the Wittingham Coal Measures, which include, in ascending order, the Barrett, Liddell, Arties and Pikes Gully seams.

The Ashton tenements, ML1533, ML1623, EL4918 and EL5860, contain the bulk of the Ashton economic seams. Coal quality analyses and yield projections indicated the semi -soft coking characteristics of the coals, now confirmed from shipping and sales quality certificates.

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Coal Resource and Reserve Estimates Both the JORC-compliant Resource and Reserve estimates have each been signed off by Competent Persons and are summarised as shown in Table 3.1. BDA considers the methodology used for preparation of the Resource and Reserve estimates appropriate and the open cut reserves in the various pits are considered reasonable estimates of the mining recoverable coal. However, BDA has reservations about the quantum of the underground reserves that will be recoverable, given the uncertainties around the ability to extract full projected tonnages from the lower seams with a “stacked” pillar configuration.

Table 3.1

Ashton Open Cut and Underground Resources and Reserves Estimates June 2009

Seams M & I Resources* (Mt)

Proven Reserves (Mt)

Probable Reserves (Mt)

Total Reserves Mt

Open cut NEOC, SEOC, West 110.8 29.2 19.9 49.1 Underground Resources 193.1 0 0 0 Pikes Gully 10.3 2.4 5.4 7.8 Upper Liddell 23.9 7.8 6.5 14.3 Upper Lower Liddell 22.2 5.7 5.6 11.3 Lower Barrett 26.8 7.6 6.4 14.0 Total Underground 276.3 23.5 23.9 47.4 TOTAL 387.1 52.7 43.8 97.3

* M & I: Measured &Indicated Ashton Underground Reserve Estimates

The underground reserve estimate of 47.4Mt includes estimates of all in-situ “reserves” of the Pikes Gully, Upper Liddell, Upper Lower Liddell and Lower Barrett Seams and includes allowances for losses and dilution. Thus it could be regarded as the “recoverable” ROM tonnage, so saleable tonnage would be about 28.4Mt at a CHPP recovery of 60%, as adopted in the financial model.

Since the original reserve estimates, potential subsidence under Bowman’s Creek has resulted in only partial extraction of the seams in that area. This has resulted in the adoption of “mini-walls” rather than longwalls under the affected area, involving wider pillars than previously, but with little coal loss in the estimated reserve figures due to an additional mining panel in the underground area. BDA considers that there are two key issues that potentially influence the underground Reserves estimate, as follows:

• to BDA’s knowledge, “stacked” longwall mining in descending seams has not been conducted over three seams on any other sites previously and the proposal to adopt the method over four seams is considered to be geotechnically uncertain; in particular, the ground weight transfer through the stacked pillars may generate difficult geotechnical conditions in the deeper underlying workings;

• the adoption of “mini-walls” for the effected area under Bowman’s Creek involve wider pillars with narrower mining panels; this is considered to make the “stacked” seams issue somewhat more complex, due to no experience of this configuration on underlying ground stress conditions and the mineable coal tonnages.

Given the geotechnical uncertainties on stacked longwalls and information still to be collected to establish a reasonable level of technical confidence, BDA has reservations about the quantities projected to be recovered from mining in the lower seams. This may call into question the quantum in the estimate and, as a consequence, BDA considers the current reserve estimate may be optimis tic. However, the validity of that view will not be resolved until further geotechnical information becomes available the lower seams .

While the recovery for the lower seams (Upper Liddell, Upper Lower Liddell and Lower Barrett) ranges from 70% for the Upper Liddell to 53% for the Upper Lower Liddell, mining conditions may make those recoveries difficult to achieve in practice. In theory certainly, the “stacked longwalls” concept is technically possible, but there are no known examples of the proposed methodology in practice. Thus it may be prudent to model lower recoveries on the underlying seams.

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BDA concludes that the resources and reserves estimates reviewed for the Ashton open pits have been competently and professionally prepared and are reasonable representations of the coal available for mining as at December 2008. BDA notes that the resource and reserve estimates have been prepared by Competent Persons and considers that the open cut estimates are compliant with the JORC Code. However, BDA has some reservations, as discussed elsewhere, regarding the underground Reserves estimates. For BDA, these issues specifically relate to the mining assumptions used in determining the reserves and it is considered there are some uncertainties in the longer term that may reduce the final reserve tonnages.

Washplant recovery is currently running in line with budget at approximately 63% for current open cut operations and around 59% for the underground.

Ashton Opencut Mining - North East Open Cut Mining is conducted by Felix as owner-operator and has involved the development of the NE Opencut which comprised two box-cuts, one in the Barrett and one in the Arties pit. From project start to June 2009, approximately 10Mt has been extracted at an effective strip ratio of 5.7:1.

Table 3.2 NEOC Mine Operating Performance since Commencement

Month Overburden* bcm

Coal ROM tonnes

Strip Ratio BCM/ROM t

2003/04 4,200,000 128,000 32.8 2004/05 9,120,000 1,670,000 5.5 2005/06 11,600,000 2,144,000 5.4 2006/07 11,855,000 2,214,000 5.4 2007/08 11,100,000 2,004,500 5.5 2008/09 9,486,000 2,000,500 4.7 Total Job to Date 57,361,000 10,161,000 5.7

* excludes capitalised pre-strip The NEOC has 2.8Mt of coal remaining, at a reduced strip ratio of 4.3:1 bcm waste per ROM tonne because most of the waste has now been stripped. Planned mining from the SE Opencut is planned to start so it “overlaps” with the last of the NE Opencut mining. The planned methodology is consistent with the established practices and productivities can be expected to be similar. In the longer term, Felix plans to mine either south of SEOC on leases yet to be secured, or in West pit, that overlies the longwall sections.

Ashton Underground Mining The Ashton Underground area is in production and the initial longwall panels have been successfully extracted at rates in excess of projections. The exposures of the Pikes Gully (“PG”) seam roof show an intermediate roof of competent, blocky well-jointed sandstone. Immediate roof and floor in the PG seam is a fairly weak, fissile shale/mudstone, so roof bolting techniques and rib bolting have been used fairly extensively. In descending order, the seams conceptually designed to be longwall-mined from the Arties pit portal construction are:

Pikes Gully Seam: 2.1m to 2.7m thick; 19% to 31% raw ash Upper Liddell Seam: 1.8m to 2.8m thick; 25% to 33% raw ash Upper Lower Liddell Seam: 2.0m to 2.4m thick; 17% to 32% raw ash Lower Barrett Seam: 2.2m to 2.8m thick; 19% to 25% raw ash

The two top-lying seams in the Foybrook Formation, the Bayswater and Lemington Seams, are about 175m above the PG seam. There is a surface strip noted in the CCB report as “preserved for Bayswater Lemington open cut mining”. Plans for the underground mine are based on 46Mt of remaining reserves as at 30 June 2009 and an annual mining rate of 3.3Mtpa ROM, giving a mine life of around fourteen years.

Coal Preparation and Handling The Ashton washery plant is designed to process all UG and OC mine production. It has achieved 95% availability and a combined (module 1 and 2) feed rate of 1,070 tph, with a utilisation of 75% to 82%. To achieve the throughputs required when the SEOC is operating at 3.0Mtpa and the underground at 3.3Mtpa, the CPP will need to be operated on 6 or 7 days per week.

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The plant has two modules with a nominal combined capacity in excess of 1,100 tonnes per hour (“tph”) or a maximum annual throughput of the order of 6.5Mtpa of ROM coal. At average yields, this will produce up to 4Mtpa of product coal. Site Infrastructure includes established ROM and product coal stockpiles and facilities for the disposal of plant coarse rejects, tailings and overburden, as well as a train loader and bin adjacent to the product stockpiles. Capital and Operating Costs

Detailed capital cost estimates have been prepared for sustaining capital for existing operations as well as estimates for development of the SE Opencut. The major forecast expenditures relate to land purchases , mobile equipment, infrastructure, dump station and conveyors, and include a contingency provision of 10%; the minor expenses include environmental monitoring, exploration and associated activities. BDA considers these estimates reasonable and, at this stage, accurate within ±10% for sustaining capital and ±15% for the SEOC Project.

For Ashton NE Open Cut, the average site cash operating costs, excluding rail, port, royalties, levies, marketing and Management Fees, have been A$32/t and A$33/t ROM for FY08 and FY09 respectively. Ashton SE Open Cut operating costs are expected to be similar, with the FOR cash operating costs, excluding all off-site costs , forecast to also average A$32/t ROM coal. In terms of, the average FOB cash operating costs, excluding royalties, levies, marketing and Management Fees, these have been A$60.30/t and A$62.60/t for FY08 and FY09 respectively. In the financial model, forward cost projections are estimated at around A$63.20/t product coal. When Royalties and Levies are added, the open cut LOM average FOB cash operating costs become $75.00/t product coal.

For Ashton Underground, the average site cash operating costs have ranged from A$22 to A$24/t ROM in FY08 and FY09 respectively. The average FOB cash operating costs , excluding rail, port, royalties, levies, marketing and Management Fees, are estimated at A$56.40/t product coal in the financial model. With Royalties and Levies added, the underground average FOB cash operating costs are $67.20/t product coal.

The projected mine operating costs in the financial model are compatible with the historical performance and are considered accurate within ±10%. The estimates reasonably reflect the projected mining schedules and strip ratios.

Environment From the approvals information provided by Ashton Coal, BDA is of the opinion that all the necessary development consent and licensing requirements under NSW planning legislation have been obtained or are in the process of being obtained. Based on the Mining Operations Plan and associated EMPs, the environmental risks associated with operating the open cut and underground coal mines appear acceptable, provided that all proposed environmental management strategies are applied diligently and commitments implemented. The main environmental risk to the project is the issue of impacts on the nearby Village of Camberwell. Ashton appears to be managing this issue diligently, including acquisition of village residences, but it will remain a significant challenge until open cut mining is complete. Independent Environmental Audits have identified some non-compliances of low-significance and generally of an administrative nature. Rehabilitation of the NE Opencut dumps has commenced and will continue to completion. BDA is not aware of any material issues that pose a threat to the ongoing operations.

Infrastructure Capacity

Rail to Port of Newcastle The Ashton Mine Project is located adjacent to the main Hunter Valley rail line and has a purpose built rail siding for loading coal trains. ARTC, the rail-track company, has plans to continue to increase capacity of the Hunter Valley rail system to levels well above the current capacity. It is reasonably expected that there will sufficient capacity in the rail system to meet the future requirements of the Ashton Mine Project.

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Shiploading Capacity The Port of Newcastle currently has a capacity shortfall for coal loading into export ships. PWCS, the coal loader company, currently has capacity for about 102Mtpa, and is in the process of expanding to 116Mtpa. A new 30Mtpa coal export terminal is being constructed by NCIG, a consortium of which Felix is a member. This terminal is planned to commence shiploading in early 2010 and be fully operational from late 2010. Both NCIG and PWCS are moving to expand further, PWCS to 145Mtpa and NCIG to 66Mtpa. It is likely that Ashton coal will continue being shipped through the PWCS facility.

Ashton Coal Marketability Ashton coal is typical of Hunter Valley coals, and should be readily marketable, especially in the current market. The typical product coal specifications have good quality thermal and semi -soft coking coal properties. The seams being mined are well known in the market, and sales of the coal qualities planned to be produced have already commenced.

3.2 YARRABEE MINE

Project Outline The Yarrabee coal mine is located in Central Queensland’s Bowen Basin approximately 47km north-east of Blackwater, 150km west of Rockhampton and 280km north-west of the Port of Gladstone. Yarrabee Coal Company Pty Ltd (“YCC”) has conducted open-cut mining of semi-anthracite coal on the leases since 1989 and has been owned 100% by Felix since July 2003. YCC produces a direct shipping low volatile, high energy PCI product and small tonnage of export thermal coal. Coal travels by road to a rail siding, railed to the Port of Gladstone and shipped to steel makers in Asia. Strong demand for YCC coal in the PCI market prompted an expansion in 2008, with construction of a new 2.5Mtpa washplant that was commissioned in July 2009. The introduction of additional mining equipment in 2010 will facilitate an increase in PCI coal production. Geological Description The target seams at Yarrabee lie within the Rangal Coal Measures within the Jellinbah/Yarrabee Thrust Zones off the Mimosa Syncline. The core structural geology is a series of thrust faults and overfolds which limit strike length for individual pits but yield strip ratios enhanced by doubling and tripling of seams in many areas. Seams within the Yarrabee area, in descending order, are:

• Cancer • Aries • Castor • Pollux • Orion • Pisces

Mining and exploration activities have identified the Pollux seam as the primary economic coal measure that comprises the bulk of the resource, with a mean thickness of 3.6m, although in some areas the Pollux seam has recorded thicknesses of up to 30m. Exploration carried out to date is reasonably extensive and primarily comprises both open hole and part-core drilling, as seam splitting and faulting is common and seam correlation can be problematic, even with a full record of geophysical logging.

Coal Resources and Reserves Felix has provided JORC compliant resource and reserve estimates, signed off by Competent Persons, as at December 2008, after a 500 hole drill ing programme . F

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Table 3.3

Yarrabee JORC Resources and Reserves at June 30 2009

Area Resources Reserves Measured Indicated Inferred Proved Probable Strip Ratio Mt Mt Mt ROM Mt ROM Mt bcm/ROM t Opencut 54.6 5.2 57.3 26.1 1.4 12.1

BDA has examined the drillhole data, geological mapping and pit mine records from which these estimates were prepared and considers that the methodology adopted and the interpretations used are appropriate and in accordance with industry and JORC compliance standards. BDA is satisfied that the estimate is a reasonable approximation of the identified coal resources and, with the application of appropriate mine designs and operating parameters, mineable reserves.

Exploration The Yarrabee MDL and associated EPCs contain economically valuable coal, suitable for both the PCI and export thermal markets. The area is structurally complex and BDA is confident that continuing exploration, primarily through drilling, will delineate additional economic mining reserves,

Mining Operations YCC uses open cut mining methods, with conventional truck and shovel operations. Production has increased from 177,000t in 1983 up to over 1.7Mt in FY09. The design capacity of the mine is currently 2Mtpa ROM and 1.8Mtpa product, expanding to 3.1Mtpa ROM and 2.8Mtpa of product in FY2012. The economic life of the project, assuming conversion of additional resources to reserves as a result of current drilling, is currently forecast as 2026, as reflected in the financial model.

All digging equipment is owned by YCC, whereas all trucks are held under a “dry hire with maintenance” arrangement. BDA considers that the latter will need to be reviewed and provision should be made for replacement of the fleet within about three years.

Historical Yarrabee Mine Production - Overburden and Coal YCC coal production and coal sales have been consistent over the last five years, but will increase to 2.8Mtpa of product coal in 2012.

Table 3.4

Yarrabee Historical Overburden and Coal Sales

Year Overburden Removal Mbcm Coal Sales Mt 2005 18.72 1.56 2006 18.75 1.66 2007 19.22 1.67 2008 20.13 1.58 2009 23.38 1.60

The actual timing of the expansion will be dependent on the recovery of the PCI market and can be delayed or accelerated accordingly. Based on current planning, the overburden and coal mining capacities will be ramped up using contractors and the commissioning of a third PC4000 excavator in H1 of FY10.

Based on these criteria, the production forecast for Yarrabee is as indicated in Table 3.5, with the financial model showing coal production from FY2012 through FY2026 at an annualised rate of 2.8Mtpa of product until the depletion of the current reserves and around 15% of the current resources. F

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Table 3.5 Yarrabee Production Forecast

Cost Component Units Actual FY08

Actual FY09

Budget FY10

Model FY11

Model FY12-25

Model FY26

Overburden Removed Mbcm 20.13 23.38 20.91 21.20 32.86 29.00 Coal Mined Mt ROM 1.63 1.71 1.86 2.00 3.10 2.74 Strip Ratio (bcm waste/t ROM coal) bcm/t 12.3 13.6 10.4 10.6 10.6 10.6 Yield % 90 90 90 90 Thermal Coal 7000 kCal Mt 0.4 0.4 0.4 0.6 0.5 PCI Coal Mt 1.4 1.4 1.4 2.2 2.1 Total Product Coal Sold Mt 1.57 1.42 1.8 1.8 2.8 2.6

Coal Preparation and Handling Until the recent commissioning of the new CHPP at Yarrabee, there have been no washing facilities on site and historically, YCC has toll-treated limited tonnages of high ash ROM coal in campaigns at the neighbouring Jellinbah washery to produce a saleable export PCI product, blended with PCI by-pass. Based on performances there and additional testwork, the new YCC 2.5Mtpa CHPP has been completed and was commissioned July 2009, $1.5M under budget. The plant process involves desliming on multi-slope screens, primary/secondary dense medium washing, spirals and a Jameson Cell to upgrade fines.

The strategy behind the construction of the CHPP was that YCC would be capable of producing up to 95% of its product as a 9.5% ash PCI coal when the market improves and thus open up many more potential markets. In the short term, the mine can continue to service both PCI and thermal customers, as well as being able to participate in the spot market where there are offtake shortfalls. Capital and Operating Costs BDA has reviewed the YCC sustaining capital estimates in the financial model of around $5M per year, being primarily replacement of various small items of equipment; given the addition of the washery and the increased mining fleet requirements in the future, this may need to be revised. Excluding the possibility of mining truck fleet additions, the accuracy of the capital cost estimates is considered to be of the order of ±10% and BDA considers that sensitivities should be run at that level. Yarrabee site cash operating costs in FY08 were A$42/t and A$58/t ROM in FY09, with the latter being due to a marked short-term increase in overburden stripping. The site cash operating costs adopted in the financial model are projected generally at around A$45/t ROM, except for FY2012, where the expansion of overburden inventory (stripping in advance) commensurate with the expanded production plans increases the site cash cost to A$57/t ROM. Similarly, the unit FOB cash cost, including all off-site costs, royalties and levies was A$67/t product in FY08 and A$91/t product in FY09. The financial model projects the FOB cash costs as around A$75.40 for all years except FY12, when it will be A$88/t product FOB.

Product Coal Transport Yarrabee product coal is transported by road train approximately 36kms south by road to the Boonal railway siding where it is loaded into rail wagons for the 280km journey to the Port of Gladstone. Train availability is currently running at approximately 95% of contracted rate and shipping through the Port of Gladstone has continued to be a bottleneck, although demurrage has recently been significantly reduced with some ships leaving in despatch.

Yarrabee Coal Marketability Yarrabee coal from the Bowen Basin is readily marketable with an established product specification and demand, particularly in the current market. Coal quality is expected to remain consistent with historical coal specifications. The seams being mined are well known in the market, and sales of the coal qualities planned to be produced are already accepted.

Environmental Compliance From the licensing and environmental approvals information provided to BDA by YCC, BDA considers that all the necessary development consent and licensing requirements under Queensland environmental planning legislation have been obtained. Based on the Plan of Operations and Environmental Management

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Plan, the environmental risks associated with operating this open cut coal mine are acceptable, provided that all environmental management strategies are applied diligently and commitments implemented. The EPA audit conducted in May 2007 ra ised a number of issues which YCC dealt with promptly and the rehabilitation of mined areas progresses on an ongoing basis. 3.3 MINERVA MINE

Project Outline The Minerva coal mine is an open cut operation located 25km north of Springsure and 45km south of Emerald in Central Queensland. The Gregory highway and Emerald-Springsure railway run parallel to each other 6km east of the deposit. The mine is located on Mining Lease ML70145 and ML70376 which straddles the headwaters of Sandhurst Creek within Exploration lease EPC553. Minerva produces two coal products, Thermal and Premium by open cut mining methods and the product coal is railed 420km to RG Tanna Coal Terminal at the Port of Gladstone. Production has continued without break since the commencement of operations, with annual sales of 2.7Mtpa. Based on current reserves, the economic life of the project is 11 years, taking the project out until 2020. Geological Description The Minerva tenements contain Early Permian coal-bearing strata within the eastern section of the recognised Reids Dome structure, which is a relatively shallow elongated east-west anticline in one of a series of small, fault-bounded basins formed early in the geological history of the Bowen Basin and infilled with volcanics and sediments (including coal seams). Later compressional tectonics resulted in gentle folding within the area.

Stratigraphically, six seams with eighteen splits are recognised from drilling and the associated geophysical logs, with seam thicknesses ranging from 0.2m to 2.0m. Interburdens are typically medium-grained sandstones and siltstones , with overburden and interburden from 2m to about 25m, giving a vertical strip ratio range from about 1:7 to 1:9.

Minerva Coal Resource Estimates Felix provided JORC-compliant Resource and Reserve Statements, signed off by a Competent Person, in June 2008. This included coal to a depth of about 80m, which encompassed the bulk of the economic resource, with a vertical mean strip ratio of approximately 7:1. The resource estimate stated the Measured and Indicated resources as 53.5Mt, which converted to a JORC-compliant Reserve of 28.8Mt. Since the mine has produced around 2.7Mt in the intervening year, BDA notes that the Reserve estimate would now be approximately 26.1Mt and that is consistent with previous estimates and modeled quantities.

Table 3.6

Minerva JORC Resources and Reserves at June 30 2009

Area Resources Reserves Measured Indicated Inferred Proved Probable Strip Ratio Mt Mt Mt ROM Mt ROM Mt bcm/ROM t Opencut 17.4 36.1 25.0 13.6 15.2 7.1

BDA has examined the data that validate this figure and considers that the resource and reserve estimates have been prepared generally in accordance with JORC standards, although the ore reserves statement needs to be updated to reflect the depletions since the last published estimate to be fully compliant; BDA understands this is currently being prepared. Mining Operations Coal mining uses conventional fleets of rear-dump trucks and hydraulic excavators and operations are conducted within a structurally-bounded multi-seamed deposit. Overburden removal is carried out at a rate

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of 20Mbcm/year with two 34m3 excavators and a fleet of 180-220t rear dump trucks. Coal mining is carried out by a contractor using excavators and a truck fleet.

The historic production since start-up is shown in Table 3.7 below.

Table 3.7 Minerva Production History

Year Overburden Mbcm

Coal Mtpa

Strip Ratio bcm/ROM tonne

FY05 0.56 FY06 12.86 0.96 13.4 FY07 20.07 1.97 10.2 FY08 20.63 2.74 7.5 FY09 18.41 2.63 7.0 Total 72.53 8.30 8.7

BDA is satisfied that the operation will be able to achieve the projected rates of production and the indicative levels of productivity as forecast in the financial model.

Coal Processing and Haulage Apart from sizing, the Minerva coal does not require conventional processing and is effectively direct shipment coal. The raw coal is hauled from the mine to the nearby 600tph crusher, where it is crushed and screened to -50mm. Some coal is then blended, after which no further processing is required.

From the crusher stockpiles, product coal is hauled in triple trailer road trains over a 4km haul road to the Wurba Road train loadout station, which has a 2,800tph feed system and a 250t over-rail bin. The product coal is then railed 420km to the RG Tanna Coal Terminal at the Port of Gladstone.

Environmental Aspects Minerva has plans and protocols in place to manage water, dust, noise and rehabilitation as part of the site licensing conditions. BDA considers that all the necessary consent and licensing requirements under Queensland environmental planning legislation have been obtained. The environmental risks associated with operating this open cut coal mine appear low, provided that all environmental management strategies are applied diligently and commitments implemented. The Qld EPA audit conducted in October 2008 raised some minor issues that were dealt with promptly. Capital and Operating Costs The Minerva mine is effectively at full planned production levels ; sustaining capital expenditure has been estimated for the life of mine, including provisions for additional/replacement equipment. The financial model has A$3M of capital expenditure annually from FY10, which may need review if cost benefit analysis shows that replacing the dry hired fleet is advantageous.

The Minerva site cash operating costs were A$29.30/t and A$33.70/t ROM for FY08 and FY09 respectively, while the estimates used in the financial model were in the range A$38-A$39.30/t ROM, reflecting higher stripping costs with depth of mining. The cash FOB costs, including all off-site costs, levies and royalties, drop from around A$65/t product FOB in FY10 to around A$62/t product FOB thereafter. Costs are considered realistic and compatible with historic trends and performance to date. Cost estimates are considered accurate within ±10%.

Coal Transport and Marketing Two dedicated 5,000t trains run eleven trips per week hauling the coal the 420kms to the R G Tanna coal export terminal at Gladstone. This is sufficient to maintain the production levels and additional rail capacity would be available if required. The two thermal coal products are sold primarily to the Japanese and Korean power generation and general industry markets. The MJV partners Sojitz and Kores are both active in marketing.

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3.4 MOOLARBEN PROJECT

Project Outline The Moolarben coal exploration area is located approximately 40km northeast of the town of Mudgee in New South Wales, immediately to the east of the Ulan Coal Mine and to the west of the Wilpinjong Coal Mine. Moolarben Coal Mines (“MCM”) is a joint venture managed by and 80% owned by Felix. Sojitz holds 10%, whilst a Korean consortium, including Hanwha Corporation Limited, Korea Resource Corporation (KORES), Korea Electric Power Company (KEPCO) and four of its generator subsidiaries (Kosep, Komipo, Kowepo and Kospo) hold the remaining 10%. MCM proposes to develop four open cut mines extracting up to 12Mtpa ROM coal, and an underground mine extracting up to 4Mtpa ROM coal (collectively Stages 1 and 2). The project includes the construction and operation of a range of associated infrastructure, including a washery and handling plant, rail loop and coal loader. The project is based on coal reserves of approximately 357Mt. Favourable overburden to coal ratios exist in the licence areas and the opencuts collectively host Measured, Indicated and Inferred resources of approximately 407Mt at stripping ratios less than 3:1. Significant underground resources have also been identified and total Measured, Indicated and Inferred resources for the underground have been estimated at 300Mt. Raw coal from the open cuts and a portion of the undergrounds will require beneficiation to produce a suitable feed for power generation. Three export and domestic products have been identified. The open cut production will target a 14.5% and 17.5% ash export product as well as a secondary 30% ash middlings product for domestic power generation. The underground production will recover a 14.5% ash product for export with a secondary 28-30% ash middlings product for domestic power generation. Test work indicates overall clean coal recoveries of around 72% for open cut coal and 90% for underground coal. Due largely to the combination of low stripping ratios for the open pits and longwall mining underground, Moolarben will be a low cost operation with FOB cash costs (excluding Government Royalties, Management & Marketing Fees) estimated at less than $40/t Product for the life of the operations. Mining will be from the Ulan Seam, which ranges from approximately 11m to 13m thick, with the full seam recovered in the open cut mines and a partial high quality section in the underground mines. It has been successfully mined in the adjoining north and northwestern tenements by Ulan Coal using open cut and underground methods (bord and pillar and longwall operations) for over a decade. Reliable geological and operational criteria and characteristics are available.

Sojitz will market the coal in Japan and Hanwha will market the coal in Korea. The Korean consortium and Hanwha will collectively purchase a minimum of 2.8Mtpa of thermal coal at 17% ash for the life of the mine based on market prices.

Geological Description The Moolarben license area is located in the Western Coalfield, which occupies the northwest margin of the Sydney-Gunnedah Basin in NSW. This coalfield contains coal measures of mid to late Permian age which are known as the Illawarra Coal Measures. Triassic sandstones and conglomerates overlie the coal measures, which in turn overlie either marine sediments in the east, or in the west, granite basement (Ulan Granite) and Rylstone Volcanics. The coal measures contain a number of coal seams. The major coal unit is known as Ulan Coal, which occurs at the base of the coal measures and is between 5 and 13m thick. The structural setting of the area is relatively simple. A gently (1.5 to 2°) northeast inclined surface with some superimposed rolling dips and undulations, defines the roof of the Ulan seam. Structure contours reveal a uniformity of dip and continuity of strike throughout most of the license area. Ulan Coal is located near the base of the Illawarra Coal Measures and is present throughout the license area at depths ranging from 0-120m in the south and 70-250m in the north. The seam ranges in thickness from around 6m to about 15m.

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The Ulan seam has an in-situ ash content of between 34 and 35%, and can be washed to produce export (14-18% ash) and domestic thermal (28% ash) coal products. The product is a medium to high volatile bituminous coal with low sulphur and phosphorus levels . Coal Resources and Reserves The resources and reserves in the Moolarben areas have recently been estimated as indicated in Table 3.8.

Table 3.8

Moolarben JORC Resources and Reserves at June 30 2009

Area Resources Reserves Measured Indicated Inferred Proved Probable Strip Ratio Mt Mt Mt ROM Mt ROM Mt bcm/ROM t Opencut 257.4 96.5 52.7 40.4 237.3 3.1 Underground 88.8 114.6 96.4 44.1 35.0 na Total 346.2 211.1 149.1 84.5 272.3

MCM has provided JORC-compliant Resources and Reserves Statements for the Moolarben deposit. The Reserves estimates contain both detailed and conceptual mine plans, developed to take account of the known geological conditions. These include the varied seam thicknesses, coal qualities, working seam sections, geological structures, possible faulting/intrusions, depth of cover, topographical factors, in-situ stress and groundwater. As part of that exercise, consideration has been given to estimating the extent of coal losses and dilution that would be expected in both opencut and underground mining. BDA considers the estimates JORC-compliant, and include an appropriate Competent Person sign off.

Open Cut Mine Plans The opencut mining operation will comprise three consecutive opencut operations (Opencuts 1, 2 and 4) with overlap between them to ensure continuity. For the overburden stripping, MCM will purchase and operate a fleet of conventional rear-dump trucks matched to hydraulic excavators, with support and service units sufficient to maintain the fleet. Mine plans include initial out-of-pit dumping for all box cuts and to establish the mining benches, with a haulback system for the overburden once there is sufficient void space to maximise in-pit backfill of waste. Mining methods will use standard bench waste stripping and coal mining, with throw blasting and dozer push to be used as and where applicable to reduce costs. BDA considers these proposals are appropriate to the deposits. It is planned that the opencut mines will initially operate 24 hours per day, 5 days per week. The opencut limits will be based on a strip ratio cut-off of 3:1, with consideration given to surface constraints. Geotechnical conditions have been taken into account and BDA considers the pit designs reasonable and practical. It has been assumed that each mining section would have a loss of coal at its upper boundary of 7.5cm and a dilution gain at its floor of 7.5cm. BDA considers this may be optimistic as a long-term average and would expect to encounter some areas where the dilution incurred is significantly greater than that, given the size of the equipment and the rates at which the pits will be mined. BDA considers that because of the shallow dip of the coal seam, there is a low to medium risk of greater coal losses along the line of oxidation, particularly for O/C1 and possibly O/C2. This has the potential increase early overburden volumes (and hence operating costs) and delay initial ROM coal production. A separate fleet of hydraulic excavators and rear dump trucks will load and transport coal to the ROM dump station, either for direct dumping or to be placed on the ROM stockpile. These trucks will also periodically collect reject material returned from the CPP to be dumped in the pit. Coal from different areas will be stockpiled and processed separately through the CHPP.

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For rehabilitation purposes, the out of pit dumps will serve as screening between mining operations and public areas and will be shaped to provide a self draining stable landform. While also not being adversely different from the surrounding landscape, the final height of the emplacements will generally range from 10-15m height. The majority of the open cut excavations will be filled, and overburden will be pushed up to the level of cut providing continuity with the existing hill side.

Typically, the final landform surface for backfilled open pits will be shaped to be slightly below the original topography, with the final void being up to approximately 30m below the original surface. Where possible, internally draining landscapes will be created to minimise out of pit runoff. The voids are designed with gentle gradients into the final pit voids, with steeper slopes where possible against the existing escarpments or ridges.

There will be two sections of highwall left exposed to allow access to the U/G1 and U/G4 mines which are located under deeper cover. The final voids will be left open to provide the option of future access to water storage or tailings emplacement.

Underground Mine Plans The Moolarben underground area contains resource blocks where the cover generally exceeds 70m and that are therefore considered underground mining areas. The first underground mine, designated U/G1, has been identified as the area most suitable for initial development as early access is available from the open cut highwall and part of the open cut coal clearance system can be utilised to transport the coal to the CHPP area. It is proposed to mine the 3.0m D section of the Ulan seam in this mining block.

A second underground block is scheduled for development as U/G4 and it is proposed to mine a 4.2m composite section of the Ulan seam in this mining block. Other underground blocks have been included as concepts and will be the subject of the Stage 3 Major Project Application.

The underground mine plans have also taken into consideration ventilation and identified mining hazards including spontaneous combustion and ground water inflows. Access to the underground operations will be from the exposed seam in the highwalls of O/Cs 1 & 2, with the longwall panels oriented in an approximate north east-south west direction and the direction of extraction towards a rising grade.

For the mine design, the nominal pillar dimensions for longwall development are 30m wide and 100m in length. Longwall panels will be developed using a single travelling roadway, with a single conveyor return during development that can be used as a second intake during extraction.

The longwall panels have been designed to maximise the recovery within the defined mining area. The width of the longwall has been selected at 300m for U/G1 and 250m for U/G4. The panel lengths vary from 1,100m to 4,400m for U/G1 and from 750 to 2,500m for U/G4. The average development ratio for U/G1 is 5.5%.

Two fully cored holes have been drilled in each underground mine area to provide a suite of rock mechanics data suitable for roof characterisation and subsidence studies. Test results indicate good strata properties and low potential for periodic loading.

BDA recognises the potential risk of unidentified intrusions due to igneous activity in the new underground domains and recommends follow up in-seam drilling to limit the risk to underground longwall planning.

Gas composition and yield results indicate levels of gas generally less than 0.5m3/t (0.1 – 0.4m3/t). Carbon dioxide and methane are the principal constituents at between 43% – 80% CO2 and 8.7% – 80% CH4.

The Ulan seam has had a history of spontaneous combustion events with closures at the adjacent Ulan Mine following significant fires at the longwall goaf edge. The upper section of the Ulan seam will collapse within the goaf following longwall extraction creating a fuel source for heating. The spontaneous combustion risk rating is considered to be within the medium risk category. The mine design has taken into consideration the risk that a heating can develop within the longwall goaf. A comprehensive goaf atmospheric monitoring system and a detailed Spontaneous Combustion Management Plan will be incorporated in the mine operating and management controls.

The total nominal annual ROM output of 4Mt has been scheduled for both underground operations. This estimate is based on a five day production week with overlapping shifts, planned maintenance of one shift

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per week, with the majority of maintenance carried out over the week end by dedicated week end personnel and the potential for producing over week ends if required. The nominal overall average weekly production rate is approximately 76,000t and the average cutting hours per week are estimated at 63 hours. Moolarben Open Cut Mine Production Schedule Coal operations have been planned in reasonable detail, although at this stage, the mining schedules have not been optimised. MCM will develop O/C1 pit during construction, with first production sourced from there for the first two years of operation. Production from the open cut is planned to start at 3.1Mtpa of ROM coal, ramping up to 12Mtpa by 2013. Open cut production is planned to stay at that level for the life of the operation, with the underground production being added later. It is planned to develop the first underground longwall operation off a highwall access in O/C1, with underground longwall production scheduled to commence in 2012 at 3.9Mtpa, varying annually thereafter, depending on longwall cycles, in the range from 3.3-3.8Mtpa ROM coal. The combined production from Moolarben, based on these assumptions, is shown in Table 3.9.

Table 3.9

Moolarben ROM Coal Production by Year

Area Units FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Waste Mined Total Mbcm 5.1 14.0 25.3 33.6 33.6 31.2 33.6 28.8 33.6 33.4 Coal Mined O/C ROM t 3.1 10.0 11.5 12.0 12.0 12.0 12.0 12.0 12.0 12.0 U/G ROM t 0 0 1.0 3.8 3.3 3.8 3.5 3.3 3.8 3.5 Total ROM t 3.1 10.0 12.5 15.8 15.3 15.8 15.5 15.3 15.8 15.5 Product Sales O/C Mt 2.0 7.1 8.5 8.9 8.9 8.9 8.9 8.9 8.9 8.9 U/G Mt 0 0 1.0 3.8 3.3 3.8 3.5 3.3 3.8 3.5 Total Mt 2.0 7.1 9.5 12.7 12.2 12.7 12.4 12.2 12.7 12.4

* Domestic Thermal, Export Thermal 1 @ 6,800kcal, Export Thermal 2 @ 6,400kcal

In reviewing the production forecasts, BDA considers that the ramp -up to full production is reasonable, with lower production performances in the early years of operation. The open cut operations are projected to reach full production in the fourth year, coinciding with the first longwall underground. BDA considers these forecasts are appropriate and suitably recognise the difficulties invariably experienced by companies developing greenfield operations. The projected longwall production outputs are well within the capacity of the selected equipment and less that the existing Ulan operation next door.

In the financial model, the coal sales figures based on the ROM tonnage estimates have universally adopted a 74% yield for all open cut operations and full by-pass for all underground operations. A provision has been made for a third washery module, if required. BDA considers that the open cut yields may on occasions be less than the 74% adopted, as the reality is that there will be significant differences in yield, due both to the inherent coal quality between different areas and to the degree of dilution incurred during mining. However, the relatively thick seams should mitigate that effect so that the average projected yield is considered reasonable and any variations are not regarded as material in the long term. BDA considers that, as a sensitivity, financial modelling should examine a washed coal yield of around 70%. While this project is clearly robust at current prices, it is important to recognise that the product tonnages may be lower that projected in the financial model and the net effect of such a sensitivity will be a marginal increase in open cut unit costs. Moolarben Coal Handling and Processing The CHPP is designed to process approximately 16Mtpa of ROM coal to produce up to 13Mtpa of product coal. At full capacity, approximately 12Mt of open cut coal will be washed and up to 4Mt of underground coal will be bypassed to produce export and domestic thermal coals for market.

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The plant process will consist of desliming on multi-slope screens, primary and secondary dense medium washing, and the use of spirals and a Jameson Cell to upgrade fines. A deep cone thickener will be used to concentrate the tailings to a paste like consistency for disposal with the coarse rejects. The ROM coal system will be designed to handle 16Mtpa of raw coal feed, with open cut and underground coal trucked to the dual 500t capacity dump hoppers using 190t rear dump trucks. Coal from the ROM stockpile will be rehandled into the hoppers using a front end loader and there will be provision for raw coal, particularly from underground, to be by-passed directly to the product coal stockpile. The dual streams will allow coal from both opencut sections and underground, to be processed simultaneously. The plant is designed to process 1,600tph nominal through two 800tph modules, operating for a nominal 7,300 hours per year. The mining schedule indicates that almost 16Mt of ROM will be produced each year, once the underground operations commence. The CHPP will operate twenty four hours per day, seven days per week and plant control will be by latest technology control systems, with distributed displays and a The product coal stockpile will have a nominal capacity of 400,000t, with provision for push-out for additional capacity if required. The storage area will be divided into different product coal type stockpiles. The coal will be reclaimed using feeders discharging to the reclaim conveyor feeding the 1,000t train loading bin. Dozers will be used to push the coal into the feeders and the 4,500tph train loading system will be fully automatic. Coal Quality and Plant Simulations The Ulan seam contains medium to high volatile bituminous coal, with low mois ture, low sulphur, moderate Hardgrove Grindability Index and high ash fusion temperatures. The target ash for export coal is 14.5% and 17.5% (ad), which equates to a calorific value of 6,800 and 6,400kcal/kg (ad) respectively. The domestic coal is expected to be delivered to a specification of 28% ash and 23MJ/kg. Environmental Impact Issues, Management and Monitoring The NSW DoP Environmental Assessment Report for Stage 1 found that the project would have a number of environmental impacts, most notably the noise, dust, vegetation clearing of the proposed open cut mining operations and the subsidence and associated water impacts of the proposed underground mining operations. Subsequently the Minister has imposed conditions within the Project Approval for Stage 1 which require that MCM to manage and mitigate the impacts of the MCP.

It is expected that the assessment for Stage 2 will raise similar issues and that a likely conditional approval will require MCM to manage impacts across the MCP (both Stages 1 and 2 combined) in an integrated manner. Based on the Environmental Assessment and conditional approval for Stage 1, the environmental risks associated with operating the open cut coal mine appear acceptable, provided that all environmental management and monitoring strategies are applied diligently and commitments implemented.

Capital Costs The Moolarben capital cost estimates have been prepared over the life of the project to include both the initial capital for establishment of the first open cut, the infrastructure and CHPP components, as well as the subsequent capital estimates for the development of the underground operations. In addition, it includes an annual schedule of sustaining capital.

Of the $440M original estimate for construction of the open cut, infrastructure and CHPP, the June 2009 Moolarben Construction Monthly Report indicates a latest estimate to complete of $450M, or an increase of approximately 2%. To 30 June, $47.5M had been spent and $260M was committed in forward purchases and contracts , leaving around $142M still to be committed to match the latest estimate to complete. The estimates include contingency provisions of 15% and are considered accurate within ±10% at this stage. BDA considers the estimates reasonable and appropriate, provided a $15M capital overrun allowance is added to cover increased working capital arising from possible delays to the ramp -up to production. Further to this, capital estimate for the underground operation is approximately $200M.

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Operating Costs The mine operating costs for the Feasibility Study were prepared from first principles and have now been updated to reflect recent changes. In the financial model, the costs have been prepared as “generic” unit costs which have been experienced in similar Felix operations elsewhere and have been applied for the life of the operation. While BDA agrees that the order of magnitude of the selected unit rates is within the known actual cost envelopes of comparable operations, variations will be experienced on an annual basis, depending on operating parameters.

BDA notes that the unit costs in the financial model have recently been revised to reflect more closely recent increases noted in other operations. The unit costs applied in the financial model have used the assumed costs for each separable area, with Royalties and Management/Marketing Fees being calculated against different bases. While there are variances from year to year, the Moolarben open cut cash operating costs are expected to be around A$29.20/t product FOB and the underground is forecast around A$30.20/t product FOB. With the addition of Government Royalties, Management and Marketing Fees, these figures become A$40.70/t FOB for the open cuts and A$44.40/t product FOB for the underground operations.

The financial model estimate covers 20 full years of operation from 2011 to 2030 inclusive. BDA considers the ramp -ups in both the open cut and underground operations are reasonable, taking place over three years of operation to reach full production rate, with the first year at approximately 60%, the second year at around 90% and the third around 95% of nameplate capacity.

BDA considers that the projected operating costs are reasonable, but will certainly vary from pit to pit and from different areas in the underground, so there may be some annual variations compared to the model projections. However, the order of magnitude of the estimates is considered correct and any such annual variances should not be material to project economics.

In terms of achieving target unit operating costs, the ramp -up should be achieved within the schedule and BDA considers that the projected total annual expenditure on operating costs would be accurate within ±10%. The greatest risk, as far as unit operating costs are concerned, will be in relation to the yield achieved through the CHPP. If yields are not achieved as projected, the unit costs will accordingly be higher than projected.

Rail to Port of Newcastle The MCP is located adjacent to the Ulan – Sandy Hollow Railway Line which connects to the Port of Newcastle and also allows access west to Wallerawang. The Hunter Valley rail network is now leased by the Australian Rail Track Corporation (“ARTC”) and they are implementing a strategy to upgrade the capacity of the network including the Muswellbrook to Ulan section. Demand on this section will increase rapidly due to the Wilpinjong mine coming on line as well as the proposed Mangoola mine and Moolarben. The capacity is proposed to be increased initially by the installation of a Centralised Train Control (“CTC”) signalling and train control system, modifications to the Muswellbrook yard and the provision of two additional passing loops. The annual capacity would then be in excess of 20Mt by 2009. The capacity of the track between Muswellbrook and Newcastle is also being increased to meet the projected demand and further improvements in the future would increase the capacity to 36Mt with an additional four passing loops. The rail network will have sufficient capacity to transport the MCP production when it comes on line. The rail distance to the Port of Newcastle is appro ximately 270km. A separate feasibility study on upgrading this line has been carried out and up to 2Mtpa could be railed to the power stations at Wallerawang with a minimal upgrade estimated at costing approximately $30M. This work has not been included in the current feasibility study. The rail distance to Wallerawang and Mt. Piper power stations is approximately 195km. Moolarben Rail Loop A rail loading loop will be constructed adjacent to the main line. The loop will accommodate trains up to 1,600m in length, with one train on either side of the loading bin, thereby allowing the coal to be exported

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or delivered locally to Hunter Valley power stations. Provision will be made in the design of the loop so that future modifications will allow trains to also arrive from and depart in the direction of Wallerawang. Port of Newcastle Port Waratah Coal Services (PWCS) is currently the sole operator of the coal export terminal(s) at Newcastle providing a common user service to the entire Hunter Valley Coal industry. Current ownership is spread over a mixture of coal exporters, end users and Japanese trading companies. A management agreement is in place with Rio Tinto to manage the facilities on behalf of the owners. The port operates on a cargo assembly basis with loading sequence being determined by turn of arrival of vessels. Technically, PWCS has a shiploading capacity of 102Mtpa increasing to 113Mtpa by the final quarter of 2009. Depending on the level of demand, PWCS has sufficient land to expand its operations to 140Mtpa. A commitment to expand to this level is yet to be made by the directors of PWCS. In recent years, events have highlighted shortages in the coal chain which has resulted in the introduction of a capacity balancing scheme (“CBS”) to ensure that excessive queuing is avoided. The CBS is in place until mid 2009, subject to certain conditions being triggered for it to become applicable, with the main trigger point related to the level of demand exceeding the capacity, which is set at 3Mt of excess demand. The CBS requires all coal exporters to forecast their demand on a rolling 3 year take-or-pay basis , which is then reconciled to the capacity of the coal chain. The imbalance is then adjusted on a pro rata basis for each coal exporter’s forecast and a quarterly allocation is issued. The system provides the ability for users to exchange allocation, provided that the overall total capacity of the system is not exceeded. Newcastle Coal Infrastructure Group – NCIG In September 2005, the New South Wales State Government, through is wholly owned subsidiary, Regional Land & Management Company (“RLMC”), awarded the NCIG group land adjacent to Kooragang Island Coal Terminal in Newcastle to build a coal handling and loading facility. Felix Resources’ share in NCIG is 15.4%. The initial stage will have a capacity of 30Mtpa. Construction commenced in November 2007, first coal is scheduled to be loaded in early 2010, and the full 30Mtpa capacity should be realised in late 2010. Additional one or two stage expansion provisions will ultimately increase the NCIG facility capacity to 66Mtpa, currently planned to be in operation by late 2012. Project Development Schedule The proposed development of the Moolarben operation has been planned as a staged process, with initial pre-strip on O/C1 having commenced during construction in FY09, with the waste material being used to form the bund wall, shielding the operation from the nearby village of Ulan. Construction is scheduled to be complete early 2010 and OC1 will commence production shortly thereafter, with OC4 starting in 2011. The first longwall operation will be developed in 2011 and will start production the following year. Total site production should reach 15Mtpa ROM coal by the fourth year 2013.

BDA considers the development plan to be a reasonable assessment of the project, although there remain several uncertainties in the development schedule at this stage. BDA would anticipate that these will be resolved as the level of engineering improves and additional data, particularly for the planned underground operations, becomes available. Project Execution Felix is managing the construction of the Moolarben CHPP, CHF and mine infrastructure with an in-house team led by an experienced site manager and construction manager. The construction manager was involved in the recent Felix Yarrabee CPP construction and previously with the Ashton CPP construction. Felix senior management has also in the past been involved in the development of the Ulan and North Goonyella mine developments, both of which were of a similar scale to Moolarben. The Felix site management is directly overseeing and coordinating a number of contractors carrying out the work. Felix management has used this approach successfully in the past.

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Moolarben site construction works are proceeding on schedule for a March 2010 commissioning and BDA considers the schedule achievable and realistic.

4.0 VALUATION OF EXPLORATION PROPERTIES

4.1 Valuation Methodologies

As part of the brief, BDA has been requested to estimate the value of the Felix exploration assets (Athena, Harrybrandt, Wilpeena, Phillipson Basin) to provide a guide as to their contribution to the overall value of the company. BDA has examined each of these properties and has considered the valuation methods that would be most appropriate, given the level of exploration to date, the extent and degree of definition of any identified resources and the stage of development of each. BDA has explained the methodologies available under the Valmin Code for the Technical Assessment and Valuation of Mineral Assets and Securities for Independent Expert Reports as adopted by the Australasian Institute of Mining and Metallurgy in 1995 and as amended and updated in 2005 (the “Valmin Code”) and has then discussed each of the projects in terms of their status and valuation. Effective Date

The effective date for the valuation is 1 September 2009. Standards and Procedures

This report has been prepared in keeping with the Valmin Code. Resource and reserve estimation procedures and categorisations have been reviewed in terms of the JORC Code, December 2004. Valuation Principles

As a general principle, the fair market value of a property as stated in the Valmin Code (Definition 43) is the amount a willing buyer would pay a willing seller in an arms length transaction, wherein each party acted knowledgeably, prudently and without compulsion. Valuation Methods

There is no single method of valuation which is appropriate for all situations. Rather, there are several valuation methods, each of which has some merit and is more or less applicable depending on the circumstances. The following are appropriate items to be considered:

• discounted cash flow • amount an alternative acquirer might be willing to offer • the amount which could be distributed in an orderly realisation of assets • the most recent quoted price of listed securities • the current market price of the asset, securities or company.

The discounted cash flow or net present value method is generally regarded as the most appropriate primary valuation tool for operating mines or mining projects close to development. Valuing properties at an earlier stage of exploration where ore reserves, mining and processing methods, and capital and operating costs, are yet to be fully defined, involves the application of alternative methods. The methods generally applied to exploration properties are the related transaction or real estate method, the value indicated by alternative offers or by joint venture terms, and the past expenditure method. Rules of thumb or yardstick values based on certain industry ratios can be used for both mining and exploration properties. Under appropriate circumstances values indicated by stock market valuation should be taken into account as should any previous independent valuations of the property. The valuation methods considered are briefly described below.

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Net Present Value (NPV) Method

If a project is in operation, under development, or at a final feasibility study stage and reserves, mining and processing recoveries, and capital and operating costs are well defined, it is generally accepted that the NPV of the project cash flows is a primary component of any valuation study. This does not imply that the fair market value of the project necessarily is the NPV, but rather that the value should bear some defined relationship to the NPV.

If a project is at the feasibility study stage, additional weight has to be given to the risks related to uncertainties in costs and operational performance, risks related to the ability to achieve the necessary finance for the project and sometimes a lower degree of confidence in the reserves and recoveries. In an ongoing operation many of these items are relatively well defined.

The NPV provides a technical value as defined by the Valmin Code (Definition 36). The fair market value could be determined to be at a discount or a premium to the NPV due to other market or risk factors. BDA considers the NPV or DCF method is not an appropriate method for valuing the Felix exploration properties as there are insufficient technical details to derive reliable projections.

In certain circumstances, the NPV method can be applied to the valuation of exploration properties, where those properties are adjacent to an existing or planned mining operation, and there is a reasonable likelihood that mineralisation delineated within the exploration properties could provide a future source of feed to the existing plant. In purchasing such a property, a willing and knowledgeable buyer would be mindful of the opportunity of exploiting mineralisation which may otherwise not be viable and would pay a higher price where this potential was considered high. BDA has considered this approach in assessing a value for the future exploration potential of the Wilpeena lease by suggesting to Deloitte that these resources would ultimately be treated by the Yarrabee washery, thereby extending the life of the project and providing additional potential cash flows. Alternative Valuation Methods

Related Transactions Recent comparable transactions can be relevant to the valuation of projects and tenements. While it is acknowledged that it can be difficult to determine to what extent the properties and transactions are indeed comparable, unless the transactions involve the specific parties, projects or tenements under review, this method can provide a useful benchmark for valuation purposes. The timing of such transactions must be considered as there can be substantial change in value with time.

BDA has considered whether any comparable relevant transactions have taken place in recent years which can be used as a basis for estimation of value of the mining assets assessed herein. Alternative Offers and Joint Venture Terms If discussions have been held with other parties and offers have been made on the project or tenements under review, then these values are certainly relevant and worthy of consideration. Similarly, joint venture terms where one party pays to acquire an interest in a project, or spends exploration funds in order to earn an interest, provide an indication of value. Rules of Thumb or Yardsticks Certain industry ratios are commonly applied to coal mining projects to derive an approximate indication of value. The most commonly used ratios are dollars per tonne of coal in resources, dollars per tonne of coal in reserves, and dollars per tonne of annual production. The ratios used commonly cover a substantial range which is generally attributed to the ‘quality’ of the coal, the infrastructure to reach markets and the status of the tonnes estimates. Low cost of production tonnes are clearly worth more than high cost tonnes . Where a project has substantial future potential not yet reflected in the quoted resources or reserves a ratio towards the high end of the range may be justified. Past Expenditure Past expenditure, or the amount spent on exploration of a tenement is commonly used as a guide in determining the value of exploration tenements, and ‘deemed expenditure’ is frequently the basis of joint

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venture agreements. The assumption is that well directed exploration has added value to the property. This is not always the case and exploration can also downgrade a property and therefore a ‘prospectivity enhancement multiplier’ (“PEM”), which commonly ranges from 0.5-3.0, is applied to the effective expenditure. The selection of the appropriate multiplier is a matter of experience and judgement. To eliminate some of the subjectivity with respect to this method, BDA applies a scale of PEM ranges as follows to the exploration expenditure:

• PEM 0.5 - 0.9 Previous exploration indicates the area has limited potential • PEM 1.0 - 1.4 The existing (historical and/or current) data consists of pre-drilling exploration and

the results are sufficiently encouraging to warrant further exploration. • PEM 1.5 - 1.9 The prospect contains one or more defined significant targets warranting additional

exploration. • PEM 2.0 - 2.4 The prospect has one or more targets with significant drill hole intersections. • PEM 2.5 - 2.9 Exploration is well advanced and infill drilling is required to define a resource. • PEM 3.0 A resource has been defined but a (recent) pre-feasibility study has not yet been

completed. Felix has provided records of past expenditure and BDA has considered whether past expenditure on the various tenements and projects provides a useful guide to value. Prospectivity Over-riding any mechanical or technical valuation method for exploration ground must be recognition of prospectivity and potential, which is the fundamental value in relation to exploration properties. Market Valuation On the fundamental definition of value, as being the amount a knowledgeable and willing buyer would pay a knowledgeable and willing seller in an arms length transaction, it is clear that due consideration has to be given to market capitalisation. In the case of a one project company or a company with one major asset, the market capitalisation gives some guide to the value that the market places on that asset at that point in time, although certain sectors may trade at premiums or discounts to net assets, reflecting a view of future risk or earnings potential. Commonly however a company has several projects at various stages of development, together with a range of assets and liabilities, and in such cases it is difficult to define the value of individual projects in terms of the share price and market capitalisation.

BDA has considered whether the market capitalisation of Felix provides a useful guide to the value of the Project. Other Expert Valuations Where other independent experts or analysts have made recent valuations of the same or comparable properties these opinions clearly need to be reviewed and to be taken into consideration. We have inquired of Felix whether any other recent valuations of the company or its assets have been undertaken and have been advised that the only other recent assessments have been various brokers’ reports. Special Circumstances Special circumstances of relevance to mining projects or properties can have a significant impact on value and modify valuations which might otherwise apply. Examples could be: • environmental risks - which can result in a project being subject to extensive opposition, delays and

possibly refusal of development approvals

• indigenous peoples/land rights issues - projects in areas subject to claims from indigenous peoples can experience prolonged delays, extended negotiations or veto

• country issues - the location of a project can significantly impact on the cost of development and operating costs and has a major impact on perceived risk and sovereign risk

• technical - issues peculiar to an area or orebody such as geotechnical or hydrological conditions, or metallurgical difficulties could affect a project’s economics.

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We have considered, and have inquired of Felix, whether any such factors apply to the projects and prospects under review.

The BDA valuation does not include any adjustment for the potential future impact of any Carbon Pollution Reduction Scheme. 4.2 Harrybrandt Project

Background MDL8 is a large E-W trending area located along Harrybrandt Creek parallel to the Peak Downs Highway and about 20km south of Coppabella in Central Queensland. Moorvale, Millenium and Poitrel Collieries are located 25-35km west and Kemmis Creek is directly north about 15km. It measures about 8km x 2km and contains coal-bearing strata within the well-recognised Moranbah Coal Measures of the Bowen Basin. Topography is typical of the region, with minor relief ranging from about 230-260m across gentle slopes and flat land. Drainage trends east into Bee Creek off the Great Dividing Range. The Norwich Park Branch railway line traverses NE on the west of MDL8 to Coppabella to join the Goonyella branch of the rail grid. A split EPC1176 covers smaller areas directly adjacent north and south of MDL8. Coal Geology - Exploration Model Felix Resources MDL8 and EPC1176 contain coal-bearing strata within the eastern section of the Moranbah Coal Measures. Strata dip quite steeply from about 350 – 500 to the north and north-west.

Exploration carried out to date is reasonably extensive and is primarily composed of both open hole and part-core drilling. Although part-core hole spacing is within the primary JORC require ment for Measured Status for a significant portion of the MDL, seam splitting and faulting is common, so seam correlation is still problematic, despite a full record of geophysical logging.

The project has a JORC compliant Inferred Resource of 102.5Mt and additional resources of 27.5Mt have been estimated, but the latter are not JORC compliant at this stage, due to the use of a cumulative cut-off in the pit outline currently adopted. BDA has inspected the geological database and regards the methodology adopted as reasonable.

A total of 405 drillholes are recorded in the Felix geological database, of which 16 part-core holes contain assays of all known coal horizons.

To date, 16 coal horizons from 7 seams have been identified, ranging in thickness from 0.8m to 4.9m. Interburden thicknesses range from 5m to 40m. BDA regards the classification of correlated coal horizons as adequate for the current state of geological data. Structure Model Seam correlation has proved problematic from splitting and faulting. The area is on the eastern side of the NNW-trending Jellinbah Thrust Zone and five thrust fault zones within MDL8 have been mapped through drillhole data. Three areas of intrusion (coal loss from coking) have also been marked.

Structure contour maps modelled from the drillhole data show the state of the geological model in relation to both faulting and intrusion interpretations. Faults are interpreted as thrust zones, with throws ranging from 5m to over 100m. BDA regards these cross-sectional interpretations as adequate for the existing data. Seam correlations, dips and faults are accounted for, although as yet not to JORC Indicated or Measured status.

Modelling has been done from the coal quality bore-core analyses (completed at the ACIRL laboratories, laboratory sheets reviewed by BDA) for a washability perspective with a view to defining a market strategy. The coals are of a washable export quality thermal class, with the possibility of a two product process to produce an export PCI fraction.

Without JORC-compliant Resource status, reserves cannot be reported, although work to date has demonstrated a potential economic yield under 2008 market conditions of a 15.7% ash product at a 71.9% yield. From the laboratory work, the mean specific energy was calculated as 26.5Mj/kg, inherent moisture

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as 2.5% and the mean relative density was 1.65. There is potential for maximising revenue from a two product process of PCI and export thermal coals . Non-JORC Resource Estimate Table 4.1 shows an estimate of resource to nominated depths, with calculated strip ratios. The estimate is not regarded as JORC-compliant at this point, because although the majority of part-core drillholes are within a 250m gridded radius, seam correlation remains uncertain due to the perceived splitting and faulting – this is a not an unusual situation for the Moranbah Coal Measures. The estimates indicate a marginal resource above about 100m depth, reflecting the pattern of thicker seams at depth.

Table 4.1

Harrybrandt - Total Estimated Coal Tonnages* to Nominal Base Levels

Reduced Estimated Coal Total Strip Base Level Depth to Base Mt IM% Ash VM% Waste Mbcm Ratio

150m 50m 18.9 2.5 28.4 7.0 638.8 33.7 100m 100m 61.2 2.5 29.2 7.1 1,127.8 18.4 50m 150m 98.9 2.5 29.3 7.1 1,519.8 15.4 0m 200m 130.3 2.5 29.3 7.1 1,826.9 14.0

* Note: Not JORC compliant Indicative Pit Designs An indicative model for pit design has been prepared by Felix (March 2008), based on the non-JORC resource modelling and estimate. This conceptual design is taken to a depth of 150m, for a potentially mineable tonnage of around 100Mt.

As a conceptual or scoping study rather than a Reserve definition, BDA considers it as an adequate first step in defining an economic mine plan. Allowances for estimated seam dips, faulting and intrusions as well as thicknesses and interburden ratios have been included.

Further Geological Exploration Felix has supplied BDA with a progressive exploration drilling programme for FY08-09. The stated aim is to reach Indicated Resource status by June 2009. BDA regards the exploration plan as adequate in intent and purpose. It has been suggested, however, that consideration be given to a trial mini-SOSIE surface seismic program. This may well result in more accurate data for seam correlation across splits and faults to aid the drillhole model interpretation and so give a sharper definition for JORC classification. At this point, drillhole spacing for the most part is sufficient if confidence in seam correlation and faulting is increased. Expenditure to date Felix has provided an account of expenditure to date, including commitments for the current year. For the Harrybrandt project, this amounts to $4.71M spent to date.

Conclusions There is a substantial tonnage of thermal quality coal and/or PCI available at relatively high strip ratios and the definition of this resource is not yet at a JORC-compliant stage. BDA considers that the most recent JORC amendment to the definition of Inferred Resource (2007) has been met for the 102.5Mt delineated in the above conceptual pit plan.

Indicative coal quality is acceptable for export thermal sale, with the potential for an additional PCI product from a two-product washing process.

Expenditure to date Felix has provided an account of expenditure to date, including commitments for the current year. For the Wilpeena project, this amounts to $4.71M spent to date.

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4.3 Athena Prospect

Athena comprises EPCs 553 and 1116, both of which are prospective, especially to the west. To this end, Felix is continuing exploration, primarily through drilling. Felix has conducted an initial exploration on EPC553 (Gindie), adjacent to and north of Minerva, with a twelve drillhole program. The drill-hole logging to date indicates that the coal resources in EPC533 occur in relatively deep measures, characterised by multiple seams within a down-faulted block, with numerous seams at depths ranging from 100-500m and thicknesses ranging from 2.5-11m. This programme was reported in October 2004, and the drill-logs in the northernmost area indicated that the top of the Reids Dome beds are at a depth in excess of 320m. About 25% of attempted drillholes terminated in the overlying thick Tertiary basalt, which presents difficult drilling conditions. Information on coal quality is relatively limited, but a non-JORC compliant Inferred Resource estimate was prepared as follows in Table 4.2.

Table 4.2 Preliminary Resource Estimates* at Athena

Resource Category Area (Ha) Average Thickness (m)

Estimated Tonnage* Mt

Inferred – all seams 2,400 23 770 Inferred >2m thick 2,400 17 560 Inferred – Underground Horizon >2.5m 2,400 13 430

* not JORC compliant From the perspective of a scoping study, the depths to coal would indicate that any development on this prospect would likely be an underground operation and that conversion would be relatively low. For the purpose of valuation, it is assumed that possibly 100Mt would be recoverable through mining. BDA has examined the drillhole records that validate the estimate and considers it was prepared generally in accordance with JORC standards, although it now is out of compliance with the JORC Inferred Resource definition. BDA understands it is being updated. Expenditure to date Felix has provided an account of expenditure to date, including commitments for the current year. For the Athena project, this amounts to $2.1M spent to date.

4.4 Phillipson Basin Coal

EL3386 Coal Resources EL3386 is a large NW-SE trending area centred in the Phillipson Basin about 70km SSW of Coober Pedy in South Australia. The Olympic Dam mine is located about 280km to the south-east. The EL boundary roughly covers the overlying remnant Permian sediments of the Arkaringa Basin. These coal-bearing strata sub-crop in an elongated NW-SE “horseshoe” shape along a synclinal axis (the Phillipson Trough). Host basement geology is complex, typical of the region, with underlying Archaean granites and cross-cutting palaeochannels suggesting potential mineralisation of copper-gold-iron ore -uranium on the basin margins. Topography is typical of the region, with minor relief ranging from 220m to 150m and arid conditions. Drainage in the region trends towards the north-east, with minor lakes as collection areas and Lake Eyre further to the north-east. Phillipson Basin is central within EL3386. The southern section of the Adelaide-Darwin railway line traverses N-S through the centre of EL3386.

As noted, a number of existing metalliferous mines in the region (notably Challenger Gold Mine, Prominent Hill Gold Mine and Olympic Dam) exploit the mineralisation of the underlying basement complex, which is considered prospective for further discoveries.

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Coal Geology The Arkaringa Basin is an intracratonic Permian basin characterised by deep marginal grabens or half-grabens and a large central area of relatively shallow basement. The sediments are more than 1,500m at their thickest and comprise, in ascending order, coarse clastics, dark grey shales and siltstones and finer-grained sandstones interbedded with coal seams.

The Phillipson Trough, with Phillipson Basin coal deposit located centrally within it, contains the Permian coal resource covered by EL3386 and is elongated NW in a “horseshoe” shape. It is reportedly about 50km by 6km with a sequence of about 1,000m of Lower Permian sediments overlain by 35-50m of shales and sandstones. The Phillipson Basin deposit is very large, estimated to be greater than 4 billion tonnes of inferred resources (non-JORC compliant), including approximately 500Mt estimated in two deposits adjacent to the Adelaide-Darwin rail link. The coal is sub-bituminous and the deposit comprises shallow seams to 7m thickness, with cumulative coal seams of up to 25m thickness. The top of the uppermost seam is typically 30-70m below surface and the deposits have been subject to limited exploration.

Corner Gate and Ingomar deposits have in the past been drilled to Inferred status, although some drillhole data is over 40 years old and would not qualify for JORC compliance under recent changes to the Code. More drilling in 1995 and 1996 at both deposits appears to confirm the earlier data, and some further work was conducted in 2002. Resources at Corner Gate are stated at 450Mt and Ingomar at 50Mt Inferred status, although these figures are not JORC-compliant, with wide spacing and poor data quality in the older holes.

Typical insitu coal qualities have been quoted as around 30% moisture, 13% ash and energy of approximately 17MJ/kg. Due to the groundwater regime, the ash is high in sodium and chlorine and may present difficulties for power generation, although test-work has indicated that the NaCl content can be reduced by 90-95%. To satisfy project economics, this would need to be demonstrated at a commercial scale, but results have been encouraging. It is considered that further exploration is likely to identify areas of superior quality and lower contaminants that would be suitable as power generation thermal coal.

Surface and some geophysical mapping (a broad aeromagnetic survey) have delineated potential faulting structure in the NW bend of the “horseshoe”. Such faulting would be likely present through the breadth of the deposit and agrees with the regional graben faulting model.

Quality data is sparse but potentially fits a domestic thermal market with the obvious exception of the salt (NaCl) content. It was stated by Felix Resources (June 2008) that an R&D program was current within the CSIRO to examine possible salt content mitigation techniques, although detail was not available.

Other Lake Phillipson Mineralisation Prospects The host basement granite suites and basin margins may be prospective to metallic deposits. Known deposits in the region include iron ore, iron oxide-copper-gold, uranium and Archaean gold deposits. The Garfield Palaeochannel trending west across the northern section of EL3386 is regarded as a potential sedimentary host uranium system.

Discussions with the Felix Resources geologist for EL3386 resulted in a number of geophysical surveys being regarded as supplying geological data as part of an exploration program for the mineralisation potential. Aeromagnetic surveys of high resolution, gravity surveys of some prospective areas across the Phillipson Trough to try and delineate gravity anomaly for IOCG (Iron Oxide Copper Go ld) and palaeochannels and organized data exchange with adjacent mining companies will materially aid in this respect. Expenditure to date Felix has provided an account of expenditure to date, including commitments for the current year. For the Phillipson project, this amounts to $10.3M spent to date.

Conclusions Although there is potentially a large tonnage of thermal quality coal available at low strip ratios, the definition of the resource is not yet at a JORC-compliant stage. BDA considers that the 2007 JORC amendment to definitions of Inferred Resources makes the Inferred classification of this resource marginal.

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Coal quality is acceptable for domestic thermal use if salt content parameters are adequately dealt with, but a drilling pattern of part-core drillholes across the Phillipson Trough, spaced at 1-2km with accompanying geophysical logs and laboratory analyses is required. The Corner Gate area is the most potentially useful area to initiate exploration, as existing geological data indicates a large in-situ tonnage at acceptable qualities (again, with the caveat of NaCl content).

Other mineralisation, although seemingly peripheral to the Permian coal deposits, seems likely to offer real prospects. To this end, an organized geophysical exploration programme, including further aerial survey work to identify drillhole targets, is supported as the most efficient way to proceed.

4.5 Wilpeena - EPC 1177

The Wilpeena leases are adjoining and immediately to the north of Yarrabee and are considered highly prospective for additional resources. Only 20 holes have been drilled to date, with coal intersections indicating the presence of economic coal measures; no resource estimate has been prepared at this point. While there is a known presence of coal, Felix possibly considers this property as a potential addition to the Yarrabee project and has committed limited funds to exploration at this stage. The preferred method of valuation would be as a strategic resource addition to Yarrabee, providing an extension of operations for possibly 5-10 years beyond the currently projected life of mine. 4.6 Valuation Methodology

BDA has not attempted to value the Felix exploration interests based on the net present value (“NPV”) of the anticipated after tax project cashflows, as it is considered that there is too little information at this stage to make reliable estimates. The discounted cash flow or NPV method is generally regarded as the most appropriate technical primary valuation tool for valuation of future cash flows. After due consideration of the alternatives, BDA has elected to compare values for the projects based on both the “Past Expenditure” and “Rule of Thumb or Yardstick”’ methods. BDA considers that the “past expenditure” approach will tend to undervalue the better defined deposits in this case, but it has been included to provide a comparison. In the case of Wilpeena, it has been assumed that this resource will, if anything, be used to extend the operating life of the adjacent Yarrabee mine and so would fall under Deloitte valuation of operations rather than being treated purely as an exploration property. BDA considered the use of “Related Transactions” but could not find projects and tenements that could be truly regarded as comparable transactions. The difficulty with this method is commonly determining to what extent the property or transaction is indeed comparable, unless the transactions involve the specific parties, projects or tenements under review. Similarly, with regard to the “Alternative Offers and Joint Venture Terms ”, there did not appear to be any relevant discussions with other parties where offers had been made on the project or tenements under review. As a consequence, BDA did not use either of these as a method of deriving a valuation.

BDA has independently assumed long-term commodity prices and discount rates used in the valuation. The integrity of the valuation is clearly time -dependent in relation to the independent calculation of discount rates and derivation of commodity prices. “Past Expenditure” Valuations As a method of valuation, the “past expenditure” method of assigning a value to the tenements may be applied to the Felix properties after assigning an appropriate prospectivity enhancement multiplier (PEM) to each property. These are summarised as follows in Table 4.3:

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Table 4.3 Valuation Methodology

Property Expenditure to Date A$M

Resources Status Level of Knowledge PEM Value Valuation A$M

Harrybrandt 4.7 Defined deposit Preliminary FS 3.0 15 Athena* 2.1 Defined deposit Scoping Study 2.5-2.9 5-6 Phillipson Basin 10.3 Undefined deposit Conceptual only 2.0-2.4 21-25 Total 31-36

* underground – expected low conversion to mineable tonnes

BDA considers that, in this case, the “past expenditure” method significantly undervalues the better defined deposits of Harrybrandt and Athena and concludes they would be better valued by other methods.

“Yardstick” Valuations

As an alternative method of valuation, the “yardstick”’ method of assigning a value per tonne of in situ resource/reserve has been adopted. Given the early status of these projects, the fact that the drilling is limited and the resources are relatively poorly defined, combined with the infrastructure issues associated with their development, a value of $0.03-05/t may be used for identified but undefined coal resources, whereas Inferred resources or those ready for scoping study analysis would carry a higher value in the range of $0.20-$0.60/t.

At this point, none of the properties carries JORC-compliant resource estimates, but Harrybrandt and Athena are reasonably well-defined and close to satisfying the requirements. However, the Phillipson Basin resources are much less well-defined and have significant challenges, including low energy and high moisture, presence of contaminant elements (NaCl), quality, remote location and very little infrastructure. These would thus fall at the lower end of the scale while Harrybrandt in particular and Athena (to a lesser extent), both of which have readily marketable coal quality and access to infrastructure, would be towards the upper limits.

These valuation ranges are based on coal prices existing at September 2009. If buyers have a positive view about coal pricing returning to 2008 price levels, they may well place a higher value on these deposits, possibly by a factor of 2 to 3 times. If however they have a view that coal prices will return to the low prices which prevailed until 5 years ago, then they would value these deposits at a lower level.

Table 4.4

Valuation Methodology Property Estimated

Resources* Mt Resources Status Level of Knowledge Yardstick

Value A$/t Valuation

A$M Harrybrandt 100 Defined deposit Preliminary Feasibility 0.30-0.60 30-60 Athena** 430 Defined deposit Scoping Study 0.30-0.60 30-60 Phillipson Basin 500 Undefined deposit Conceptual only 0.03-0.05 15-25 Total 75-145

* not JORC-compliant ** Athena mineable tonnage likely to be of the order of 25% of resource 4.7 Valuation Based on the foregoing, BDA notes that the past expenditure and yardstick methods return similar valuations for Phillipson Basin, but that the values are considerably different for the Harrybrandt and Athena properties. Based on experience with similar transactions, BDA considers the combined values of the Harrybrandt, Athena and Phillipson Basin exploration properties are best represented to be in the range of from A$75-145M, with a most likely value of A$120M. Wider ranges are possible, depending on a buyer’s view of likely future coal price trends. 5.0 Conclusions

BDA has reviewed the Felix Relevant Assets to confirm whether the designated technical assumptions and inputs to the financial model are appropriate. BDA concludes that the mine plans and projected schedules of tonnages are supported by reserves that comply with the JORC Code and that the projected costs and

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productivities are backed up by detailed estimates and historical performances. BDA considers that the estimates have been diligently prepared, are compatible with experience to date and present reasonable and achievable projections for future operations. Yours faithfully BEHRE DOLBEAR AUSTRALIA PTY LIMITED

John McIntyre - Managing Director – BDA

BEHRE BOLBEAR AUSTRALIA PTY LIMITED

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ANNEXURE A Report to Deloitte – Felix Mining Operations Review September 2009 Behre Dolbear Australia Pty Limited Page 1

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ANNEXURE A – QUALIFICATIONS AND EXPERIENCE

This report has been prepared by Behre Dolbear Australia Pty Ltd, a subsidiary of Behre Dolbear & Company Inc. Behre Dolbear has offices in Denver, New York, Toronto, Guadalajara, Santiago, Sydney, Vancouver and London. The parent company was founded in 1911 and is the oldest continuously operating mineral industry consulting firm in North America. The firm specialises in mineral evaluations, due diligence assessments, independent expert reports and strategic planning as well as technical geological, mining and process consulting. BDA has undertaken site visits and has reviewed the technical and engineering data. The principal consultants engaged in the review are as follows: Mr John McIntyre (BE (Min) Hon., FAusIMM, MMICA) is Managing Director of BDA. He is a qualified mining engineer, with over 35 years experience in engineering, operations and management of mines and mining projects, in Australia, New Zealand, the Philippines and Ghana. His principal fields of expertise include technical audits, project feasibility, mine and project evaluation, mine development, open pit and underground operations in base and precious metals and coal, management reviews and operations optimisation. He has held senior management positions, including General Manager of Operations and has been a professional consultant for 18 years. Dr Rob Yeates (BE (Min) Hon., PhD (Mining), MBA, FAusIMM, MMICA) is a Senior Associate of BDA. He is a qualified mining engineer, with over 35 years experience in engineering, operations and management of mines and mining projects, primarily in Australia and New Zealand. His principal fields of expertise include technical audit, project feasibility and development, mine and project evaluation, operating experience in the open pit and underground mining of coal, coal haulage and transport, ship-loading, management review and operations optimisation. He has held senior management positions, including Managing Director and General Manager of Oakbridge Coal. He is currently Project Director for the NCIG port construction in Newcastle. Mr Ian Poppitt (DipTech. (Geology), MSc. (Geology), Assoc.AusIMM, MGSA) is a Senior Associate of BDA. He is a qualified coal geologist, with over 18 years experience in coal mine geology and exploration in Australia. His principal fields of expertise include technical audit, resource and reserve estimation and assessment, operating experience in the underground mining of coal and resource evaluation. He has held senior management positions, including Group General Manager of Cyprus Australia Coal. He is familiar with the latest ore reserve terminology under the Australasian Code for Reporting of Identified Mineral Resources and Ore Reserves (“the JORC Code”) prepared by the Joint Ore Reserves Committee of the Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and Minerals Council of Australia, effective as at December 2004. Mr Adrian Brett (BSc Hons (Geology), MSc (Geotech), MEnvir.Law, MAusIMM) is a Senior Associate of BDA with more than 25 years experience in environmental and geo-science, including the fields of environmental planning and impact assessment, site contamination assessments, environmental audit, environmental law and policy analysis and the development of environmental guidelines and training manuals. He has worked in an advisory capacity with several United Nations and Australian government agencies. He has completed assignments in Australia, Indonesia, Thailand, the Philippines, Africa and South America and has reviewed the environmental aspects of the projects. F

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ANNEXURE B Report to Deloitte – Felix Mining Operations Review September 2009 Behre Dolbear Australia Pty Limited Page 1

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ANNEXURE B

SCOPE OF WORK

SCOPE OF WORK

Deloitte has defined the scope of the services and has requested that BDA provides:

• A brief technical overview of the operating, development and exploration assets in which Felix has an interest, including: – approvals and licenses to operate the mine – geology and exploration including – coal quality and market specifications – progress and status of exploration and – operating and transport arrangements

• Comment identifying and verifying the following technical assumptions contained in the financial model prepared by Felix (the Model) in relation to Felix’s operating and development assets, being the Ashton open cut and underground mines, Minerva mine, Yarrabee mine and the Moolarben development project: – quantum of reserves and resources and production profiles – expected life of mine – operating costs estimates, including comparison with historical performance – transport costs estimates (freight, demurrage, etc) – the quantum and timing of capital cost estimates – rehabilitation and closure costs – any other technical assumptions considered relevant

• views on: – potential mineralisation outside of what is considered to be reserves (as reflected in the Model),

including expected conversion rates to reserves and possible development profile (timing and capital cost)

– alternative technical assumptions, where considered appropriate – estimate the value of the exploration assets (Athena, Harrybrandt, Wilpeena, Phillipson Basin).

collectively, “the Services”.

The Services specifically exclude any work in relation to: – marketing, commodity price and exchange rate assumptions adopted in the Model – financial and/or corporate taxation analysis.

BDA will provide its findings in the form of a report summarising the key findings of the Services. To the extent that BDA identifies alternative assumptions to those contained in the Model, BDA will also provide Excel spreadsheets containing revised technical assumptions.

BDA understands that Deloitte will refer to BDA in the IER and the report may be reproduced as an appendix to the IER. . Subject to review of the form and context of the use of the document, BDA consents to Deloitte reproducing the report and referring to BDA and the Services in the IER. Deloitte will obtain BDA’s consent to the manner in which Deloitte refers to BDA within the IER.

BDA confirms that it is able to act independently in regard to the Services and is competent in the areas covered by the scope of the Services.

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ANNEXURE B Report to Deloitte – Felix Mining Operations Review September 2009 Behre Dolbear Australia Pty Limited Page 2

BEHRE DOLBEAR

LIMITATIONS AND CONSENT

BDA consents to making the Report available to Deloitte on the understanding that Deloitte is aware of and understands the scope of BDA’s engagement as set out. Neither the whole nor any part of this report nor any reference thereto may be included in or with or attached to any document or used for any other purpose without written consent from BDA as to the form and context in which it appears.

This report does not constitute a technical or legal audit. This assessment in this report has been based on data, reports and other information made available to BDA by Felix and their advisors and referred to in this report. Felix has advised BDA that all relevant documentation relating to the project has been provided, that the information is complete as to material details and is not misleading. A draft copy of this report has been provided to Felix for review as to any material errors of fact, omissions or incorrect or unreasonable assumptions.

BDA has reviewed the data, reports and information provided and has used consultants with appropriate experience and expertise relevant to the various aspects of the project. The opinions stated herein are given in good faith. BDA believes that the basic assumptions are factual and correct and the interpretations are reasonable. This BDA report contains forecasts and projections based on information provided by Felix. BDA’s assessment of the mine plans, projected production schedules and capital and operating costs are based on technical reviews of project data and site visits. However, these forecasts and projections cannot be assured and factors both within and beyond the control of Felix could cause the actual results to be materially different from the assessments and projections contained in this report.

BDA has independently analysed Felix’s data, but the accuracy of the conclusions of the review largely relies on the accuracy of the supplied data. BDA does not accept responsibility for any errors or omissions in the supplied information and does not accept any consequential liability arising from third party use of it . BDA reserves the right to change its opinions on the Felix coal mining studies expressed in this report should any of the fundamental information provided by Felix be significantly or materially revised.

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Appendix 6: Sources of information

In preparing this report we have had access to the following principal sources of information:

• draft Scheme Booklet, dated 24 September 2009

• audited financial statements for Felix for the years ended 30 June 2007 to 30 June 2009

• Felix Quarterly Report for June 2009, March 2009, December 2008 and September 2008

• Half year Financial Report Investor Presentation, dated 27 February 2009

• financial model prepared by the management of Felix

• Independent technical review of Felix Resources mining projects prepared by BDA

• National Greenhouse and Energy Reporting (measurement) Determination 2008

• the economic impact of the CPRS and modifications to the Carbon Pollution Reduction Scheme

August 2009 prepared by Frontier Economics

• FY 2010 budget for Felix’s Operating Assets and the Moolarben Development Projects

• annual reports for comparable companies

• company websites for Felix, Yanzhou and comparable companies

• publicly available information on comparable companies and market transactions published by

ASIC, Bloomberg Financial markets, Mergermarket, ABARE and the Australian Coal

Association

• IBIS company and industry reports

• other publicly available information, media releases and brokers reports on Felix, Yanzhou,

comparable companies and the coal mining industry/sectors.

In addition, we have had discussions and correspondence with certain directors and executives,

including Matthew Knappick, Treasurer, Felix; David Knappick, Finance Consultant; Brian Flannery,

Managing Director, Felix; and John McIntyre, Managing Director, BDA in relation to the above

information and to current operations and prospects.

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Appendix 7: Qualifications, declarations and

consents

The report has been prepared at the request of the Directors of Felix and is to be made available on

Felix’s website at www.felixresources.com.au. Deloitte has prepared a concise report, which will be

included in the Scheme Booklet, to be given to Shareholders for approval of the Proposed Scheme in

accordance with Section 640. Accordingly, it has been prepared only for the benefit of the Directors

and those persons entitled to receive the Scheme Booklet in their assessment of the Proposed Scheme

outlined in the report and should not be used for any other purpose. We are not responsible to you, or

anyone else, whether for our negligence or otherwise, if the report is used by any other person for any

other purpose. Further, recipients of this report should be aware that it has been prepared without

taking account of their individual objectives, financial situation or needs. Accordingly, each recipient

should consider these factors before acting on the Proposed Scheme. This engagement has been

conducted in accordance with professional standard APES 225 Valuation Services issued by the

APESB.

The report represents solely the expression by Deloitte of its opinion as to whether the Proposed

Scheme is in the best interests of the Shareholders as a whole. Deloitte consents to this report being

included in the Scheme Booklet in the form and context in which it is to be included in the Scheme

Booklet.

Statements and opinions contained in this report are given in good faith but, in the preparation of this

report, Deloitte has relied upon the completeness of the information provided by Felix and its officers,

employees, agents or advisors which Deloitte believes, on reasonable grounds, to be reliable,

complete and not misleading. Deloitte does not imply, nor should it be construed, that it has carried

out any form of audit or verification on the information and records supplied to us. Drafts of our

report were issued to Felix management for confirmation of factual accuracy.

In recognition that Deloitte may rely on information provided by Felix and its officers, employees,

agents or advisors, Felix has agreed that it will not make any claim against Deloitte to recover any

loss or damage which Felix may suffer as a result of that reliance and that it will indemnify Deloitte

against any liability that arises out of either Deloitte’s reliance on the information provided by Felix

and its officers, employees, agents or advisors or the failure by Felix and its officers, employees,

agents or advisors to provide Deloitte with any material information relating to the Proposed Scheme.

Deloitte also relies on the independent technical review reports prepared by BDA. Deloitte has

received consent from BDA for reliance in the preparation of the report prepared by BDA.

To the extent that this report refers to prospective financial information we have considered the

prospective financial information and the basis of the underlying assumptions. The procedures

involved in Deloitte’s consideration of this information consisted of enquiries of Felix personnel and

analytical procedures applied to the financial data. These procedures and enquiries did not include

verification work nor constitute an audit or a review engagement in accordance with standards issued

by the Auditing and Assurance Standards Board.

Based on these procedures and enquiries, Deloitte considers that there are reasonable grounds to

believe that the prospective financial information for Felix included in this report has been prepared

on a reasonable basis. In relation to the prospective financial information, actual results may be

different from the prospective financial information of Felix referred to in this report since anticipated

events frequently do not occur as expected and the variation may be material. The achievement of the

prospective financial information is dependent on the outcome of the assumptions. Accordingly, we

express no opinion as to whether the prospective financial information will be achieved.

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Deloitte holds the appropriate Australian Financial Services licence to issue this report and is owned

by the Australian Partnership Deloitte Touche Tohmatsu. The employees of Deloitte principally

involved in the preparation of this report were Robin Polson, B.Comm, Grad.Dip.App.Fin;

Stephen Reid, M.App.Fin, BEc, F Fin, CA; Jennifer Liu, CFA, BCom (Hons); Michel Brun, BA,

MBA and Odette Linnett, M.App.Fin, BCom. Robin and Stephen are Director’s of Deloitte. Each

have many years experience in the provision of corporate financial advice, including specific advice

on valuations, mergers and acquisitions, as well as the preparation of expert reports.

Neither Deloitte, Deloitte Touche Tohmatsu, nor any partner or executive or employee thereof has

any financial interest in the outcome of the proposed transaction which could be considered to affect

our ability to render an unbiased opinion in this report. Deloitte will receive a fee of AUD200,000

exclusive of GST in relation to the preparation of this report. This fee is based upon time spent at our

normal hourly rates and is not contingent upon the success or otherwise of the Proposed Scheme.

Consent to being named in disclosure document

Deloitte Corporate Finance Pty Limited (ACN 003 833 127) of 123 Eagle Street, Brisbane, QLD,

4001 acknowledges that:

• Felix proposes to issue a disclosure document in respect of the Proposed Scheme between Felix

and the holders of Felix shares (the Scheme Booklet)

• the Scheme Booklet will be issued in hard copy and be available in electronic format

• it has previously received a copy of the draft Scheme Booklet for review

• it is named in the Scheme Booklet as the ‘independent expert’ and the Scheme Booklet includes

the concise version of its independent expert’s report in Section 8 of the Scheme Booklet.

On the basis that the Scheme Booklet is consistent in all material respects with the draft Scheme

Booklet received, Deloitte Corporate Finance Pty Limited consents to it being named in the Scheme

Booklet in the form and context in which it is so named, to the inclusion of the concise version of its

independent expert’s report in Section 8 of the Scheme Booklet and to all references to its

independent expert’s report in the form and context in which they are included, whether the Scheme

Booklet is issued in hard copy or electronic format or both.

Deloitte Corporate Finance Pty Limited has not authorised or caused the issue of the Scheme Booklet

and takes no responsibility for any part of the Scheme Booklet, other than any references to its name

and the independent expert’s report as included in Section 8.

About Deloitte

In Australia, Deloitte has 12 offices and over 4,500 people and provides audit, tax, consulting, and financial advisory services to

public and private clients across the country. Known as an employer of choice for innovative human resources programs, we are

committed to helping our clients and our people excel. Deloitte's professionals are dedicated to strengthening corporate

responsibility, building public trust, and making a positive impact in their communities.

For more information, please visit Deloitte’s web site at www.deloitte.com.au

Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a

legally separate and independent entity. Please see www.deloitte.com/au/about for a detailed description of the legal structure of

Deloitte Touche Tohmatsu and its member firms.

© Deloitte Touche Tohmatsu. September, 2009. All rights reserved.

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