COKAL LIMITED Ideally placed in a developing basin · solid cash position with $10M in the bank and a project that is ... BBM is one of the only 4 ... Government’s Development Corporation

RESEARCH NOTE – PATERSONS SECURITIES LIMITED 1

All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility

or liability on any account whatsoever on the part of this firm or any member or employee thereof.

RESEARCH NOTE

COKAL LIMITED

Investment highlights

• CKA has done considerable work at Bumi Barito Mineral Coal Project (BBM) in Central Kalimantan, Indonesia. This has strengthened relationships with the local communities, crystallised logistic solutions for transporting coal and a Pre-Feasibility Study (PFS) outlining a 2Mtpa direct ship mining operation. We believe that CKA has considerable scope to expand production beyond the 2Mtpa outlined in the PFS. Accordingly we retain our Buy recommendation with a

revised price target of $0.38/share, down from $0.50/share.

• Well position from a regulatory perspective – Ownership of CKA’s primary project, BBM, has been confirmed through the “Clean and Clear” process conducted by the Indonesian Government. Its holding of 60%, implies the Indonesian ownership laws will not have any impact on the project or CKA for a number of years. And the project will be producing metallurgical coal products with an energy value far exceeding any limit proposed for export bans.

• The Pre-Feasibility Study (PFS) - outlined a low capital ($100M), low cost ($90/t FOB), and 2Mtpa operation. First coal is expected to be produced Q2 2014, mining 18.2Mt from the current Coal

Resource of 7Mt Indicated and 70Mt Inferred, with a life of mine strip ratio of 18:1, recovery rate of 98%, no CHPP and Direct Ship of 2Mtpa of Hard Coking Coal (90%) and PCI (10%).

• Valuation changes - We have adopted the capital and operating figures in the PFS and assumed 100% of the development funds will be raised as equity at a 10% discount to the current share price. This is highly dilutive and at current prices as an additional 460M shares will need to be issued. With these parameters CKA remains attractive and our estimated NAV is $338M or $0.38/share.

• Emerging metallurgical coal province – We believe that Central Kalimantan is developing into a metallurgical coal province as the BHP and Adaro JV, Indomet, has begun development on its Maruwai

Project. There are 2 other Indonesian companies operating in the basin and CKA.

11 January 2013

12mth Rating BUY

Price A$ 0.17

Target Price A$ 0.38

12m Total Return % 121.3

RIC: CKA.AX BBG: CKA AU Shares o/s m 411.0

Free Float % 40.0

Market Cap. A$m 69.9

Net Debt (Cash) A$m -10.0

Net Debt/Equity % na

3m Av. D. T’over A$m 0.05

52wk High/Low A$ 0.59/0.15

2yr adj. beta 0.72

Valuation:

Methodology DCF

Value per share A$ 0.38

Analyst: Matthew Trivett

Phone: (+61 7) 3737 8053

Email: [email protected]

12 Month Share Price Performance

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-60.71 Rel. S&P/ASX 300 -1.0 -21.1

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Ideally placed in a developing basin

Year End June 30 2011A 2012A 2013F 2014F 2015F

Reported NPAT ($m) (2.6) (6.3) (6.4) (7.8) 60.2

Recurrent NPAT ($m) (2.6) (6.3) (6.4) (7.8) 53.3

Recurrent EPS (cents) (0.7) (1.4) (1.5) (0.9) 5.9

EPS Growth (%) na na na na na

PER (x) (24.7) (12.4) (11.7) (19.5) 2.9

EBITDA ($m) (2.6) (6.2) (6.2) (7.6) 82.3

EV/EBITDA (x) (18.2) (7.8) (11.2) (18.7) 1.3

Capex ($m) 0.0 0.0 0.0 46.3 32.4

Free Cashflow (25.7) (19.2) (19.3) (55.8) 34.3

FCFPS (cents) (6.7) (4.2) (4.4) (6.2) 3.8

PFCF (x) (2.5) (4.1) (3.9) (2.7) 4.4

DPS (cents) 0.0 0.0 0.0 0.0 0.0

Yield (%) 0.0 0.0 0.0 0.0 0.0

Franking (%) 100.0 100.0 100.0 100.0 100.0

11 January 2013 Cokal Limited




Investment thesis

Cokal (CKA) has a 60% ownership of the Bumi Barito Mineral Coal Project (BBM) confirmed through the “Clean and Clear” process conducted by the Indonesian Government. Its holding of 60%, implies the Indonesian ownership laws will not have any impact on the project or CKA for a number of years. And the project will be producing metallurgical coal products with an energy value far exceeding any limit proposed for export bans.

In addition to having a project that is well position relative to the political machinations that plagued the Indonesian resource industry last year, CKA has a quality management team, a solid cash position with $10M in the bank and a project that is entering the final stages of feasibility evaluation and regulatory approvals.

BBM is one of the only 4 metallurgical coal operations in Central Kalimantan (figure 1). 2 are Indonesian owned operations currently in production and the other is the extensive BHP and Adaro JV, Indomet, which Adaro paid $350M in 2010 for 25%. Indomet has begun

development of the Maruwai Project, awarding Thiess a $44M contract and a recent Adaro presentation estimated first coal sales in 2014 from a 1Mtpa operation.

CKA released a Pre-Feasibility Study (PFS) on BBM that outlined a low capital ($100M), low cost ($90/t FOB), and 2Mtpa operation. First coal is expected to be produced Q2 2014, mining 18.2Mt from the current Coal Resource of 7Mt Indicated and 70Mt Inferred, with a life of mine strip ratio of around 18:1, recovery rate of 98%, no CHPP and Direct Ship of 2Mtpa of Hard Coking Coal (90%) and PCI (10%).

We have adopted the capital and operating figures in the PFS and assumed 100% of the development funds will be raised as equity at a 10% discount to the current share price. This is highly dilutive and at current prices as an additional 460M shares will need to be issued. With these parameters CKA remains attractive and our estimated NAV is $338M or

$0.38/share. We believe CKA will be a driving force in this emerging metallurgical coal province and production from BBM will exceed the current 2Mtpa, 9year LOM proposal. According we retain our Buy recommendation.

Figure 1: BBM location map

Source: CKA





Relationships and approvals

CKA has spent a number of years developing relationships with the local communities. The latest development was a MoU to develop infrastructure with the Murung Raya Regency Government’s Development Corporation including river ports and two small scale coal-fired power stations. This will benefit the community and place CKA in an ideal place to supply infrastructure solutions to other mines to be developed in the area.

The Ministry of Energy and Mineral Resources (MMER) has included BBM and BBP Projects in Central Kalimantan on the “Clean and Clear” list. The “Clean and Clear” list is issued pursuant to the requirements of Law Number 4, Year 2009 and PP (Government Regulation) No.23 Year 2010. The designation of “Clean and Clear” provides confidence to mining companies that the validity of their mining concession has been confirmed by MMER. The listing also confirms that there are no overlapping or conflicting concessions and that CKA has met its ongoing exploration obligations.

This was followed by Ministry approval for exploration forestry permit (Pinjam Pakai) covering BBM. CKA has done the majority of the work required on the BBM Environmental Impact Statement (EIS). Once this has been received CKA can lodge the IUP and Forestry Exploitation permits, the final regulatory requirements of the project.

Figure 2: Development timeline

Source: CKA

Mine planning and operation

The PFS proposes using mining contractors operating an open-pit mine. The mine will be based upon a direct ship, low cost operation, directly mining from the current Resources of 7Mt Indicated, 70Mt Inferred. The characteristics of the coal are low sulphur, phosphorous, moisture and ash, while high in CSN, fixed carbon, energy and vitrinite, implying it will be a premium coking coal.

Initial mining and ramp-up will deliver up to 2Mtpa ROM of direct ship coal product. No CHPP is required and it is envisaged that production will commence in Q2 2014.

Transport and infrastructure

Coal mined will be transported 774km from the mine site to an ocean going vessel at Taboneo in the Java Sea. Transportation will involve four stages including truck, shallow draft barges, ocean going barges and floating crane trans-shipper to the vessel.

Coal extracted and screened will be transported approximately 53km by truck via a haul road, to a river port on the Barito River. To access the land between the mine and the river port, CKA has a standard compensation agreement with the Forestry Department on land that is classified as Production Forest and acquired the small amount of remaining privately held land. CKA has also completed bathymetric and LIDAR surveys.





Once loaded on shallow draft barges on the Upper Barito River, the coal will be transported 503km down the Barito River to the Intermediate Stockpile Port located upstream of Kelanis on the Barito River. Coal will then be loaded into ocean-going barges and transported approximately 214km to the open sea anchorage at Taboneo in the Java Sea. A crane trans-shipper will transfer the product to the OGV for the customer.

Capital and operating estimates

The estimated development capital required for BBM to deliver Stage 1 is $100M with half to be spent to commission the mine and the remainder to ramp production up to the 2Mtpa. This includes a 55km haulage road and all necessary transport and site infrastructure. It assumes that mining, barging and hauling equipment will be provided by contractors.

Operating costs are based on the mining, hauling and barging contractors supplying the respective equipment and finance costs, FOB operating costs are estimated to be $70/t for the first 5 years and $90/t over the 9 year Life of Mine.

Potential upside

CKA has summarised a Stage 2 expansion case which is outside the current parameters of the PFS. This case would require the investment of further capital on additional facilities such as a CHPP and the successful delineation of additional Mineral Resources. CKA has set an Exploration Target for the BBM East Block of between 200Mt and 350Mt to a depth of 200m. Exploration has been ramping up since receiving the exploration forestry permit

(Pinjam Pakai) for BBM. 3 rigs are currently on site and CKA will add additional rigs once exploration tracks are cleared. We are confident CKA will convert this exploration target into resources and ultimately reserves for a significantly larger and longer operation than the one currently defined in the PFS and our modelling.

Figure 3: BBM resource and exploration target areas

Source: CKA





Cokal Limited 0.17 Year End June 30Valuation A$m A$/sh Commodity Assumptions 2012A 2013F 2014F 2015F

US$/A$ 1.03 1.03 1.00 0.97Bumi Barito Mineral (60%) 363.1 0.40 Hard Coking Coal 300 204 183 177Cash 10.0 0.01 Semi-soft Coking Coal 228 153 128 120

PCI 233 158 133 125FX Hedging 0.0 0.00 Export Thermal Coal 126 110 94 92Corporate (35.2) (0.04) Domestic Thermal Coal (A$/t) 49 50 51 53

Unpaid Capital 0.0 0.00Production Summary 2012A 2013F 2014F 2015F

Debt 0.0 0.00 Attributable Saleable Coal Production

Bumi Barito Mineral (kt) 0 0 911NAV 337.8 0.38 FOB costs (US$/t) 46.30 25.50 70.73Price Target 0.38 Price Received (US$/t) 56.80 49.49 168.78

Summary of Assets Other Indonesian Assets (kt) 0

FOB costs (US$/t) 67.64

Price Received (US$/t) 84.89

All Mines (Kt) 911Cash costs (US$/t) 70.73

Price Received (US$/t) 168.78

Profit & Loss (A$m) 2012A 2013F 2014F 2015FSales Revenue 0.0 0.0 0.0 159.4

Coal Production Summary Other Income 1.1 1.0 0.8 0.5Operating Costs 0.0 0.0 0.0 66.8Exploration Exp. 0.6 0.0 2.3 4.6Corporate/Admin 6.8 7.2 6.1 6.3EBITDA (6.2) (6.2) (7.6) 82.3

Coal Production Summary Depn & Amort 0.1 0.2 0.2 6.1EBIT (6.3) (6.4) (7.8) 76.1Interest 0.0 0.0 0.0 0.0Operating Profit (6.3) (6.4) (7.8) 76.1Tax expense 0.0 0.0 0.0 15.9Abnormals + Minorities 0.0 0.0 0.0 0.0NPAT (6.3) (6.4) (7.8) 60.2

Normalised NPAT (6.3) (6.4) (7.8) 53.3

Cash Flow (A$m) 2012A 2013F 2014F 2015FAdjusted Net Profit (6.3) (6.4) (7.8) 60.2+ Interest/Tax/Expl Exp 0.6 0.0 2.3 20.5- Interest/Tax/Expl Inc 14.2 12.5 4.1 20.1+ Depn/Amort 0.1 0.2 0.2 6.1

+/- Other (Associates) 0.6 (0.6) 0.0 0.0Operating Cashflow (19.2) (19.3) (9.5) 66.7

Resources 100% Basis (Mt) - Capex (+asset sales) 0.0 0.0 46.3 32.4Mine M & I Inferred Total - Working Capital Increase 0.0 0.0 0.0 0.0

Free Cashflow (19.2) (19.3) (55.8) 34.3Bumi Barito Mineral 7.0 70 77 - Dividends (ords & pref) 0.0 0.0 0.0 0.0Other Indonesian Assets + Equity raised 31.6 0.0 70.0 0.0Tanzania + Debt drawdown (repaid) 0.0 0.0 0.0 0.0Mozambique Net Change in Cash 12.4 (24.3) 4.2 34.3

Resources 77 Cash at End Period 29.6 5.3 9.6 43.9Net Cash/(Debt) 29.6 5.3 9.6 43.9

DirectorsName PositionMr. Peter Lynch Executive ChairmanMr. Pat Hanna Executive Director Balance Sheet (A$m) 2012A 2013F 2014F 2015FMr. Jim Middleton Managing Director Cash 29.6 5.3 9.6 43.9

Mr. Domenic Martino Non Executive Director Total Assets 64.7 56.8 123.4 234.3Total Debt 0.0 0.0 0.0 0.0

Significant Shareholders Shares (m) % Total Liabilities 1.7 0.2 4.7 55.3

Peter Lynch 55.0 13.4% Shareholders Funds 63.0 56.6 118.8 179.0

Blackrock Group 47.5 11.5%Domenic & Sandra Martino 37.1 9.0% Ratios

Patrick Hanna 25.4 6.2% Net Debt/Equity (%) na na na na

Norges Bank 16.4 4.0% Interest Cover (x) na na na na

Passport Capital 10.7 2.6% Return on Equity (%) na na na 33.6%

Jim Middleton 10.0 2.4%

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Recommendation History

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16 Jan 12 Indo.Coal Review 1.00 0.45 SB

01 Mar 12 Research Note 1.00 0.58 B 28.9%

15 May 12 Resources Review 0.65 0.33 B -43.1%

10 Oct 12 Event Impact Email 0.65 0.23 B -30.3%

21 Nov 12 Resources Review 0.50 0.17 B -26.1%

Current Share Price 0.17

Stock recommendations: Investment ratings are a function of Patersons expectation of total return (forecast price appreciation plus dividend yield) within the next 12 months. The investment ratings are Buy (expected total return of 10% or more), Hold (-10% to +10%

total return) and Sell (> 10% negative total return). In addition we have a Speculative Buy rating covering higher risk stocks that may not be of investment grade due to low market capitalisation, high debt levels, or significant risks in the business model. Investment ratings are

determined at the time of initiation of coverage, or a change in target price. At other times the expected total return may fall outside of these ranges because of price movements and/or volatility. Such interim deviations from specified ranges will be permitted but will become

subject to review by Research Management. This Document is not to be passed on to any third party without our prior written consent.





Documents

COKAL LIMITED Ideally placed in a developing basin · solid cash position with $10M in the bank and a project that is ... BBM is one of the only 4 ... Government’s Development Corporation