Kobi Tsaban Group Chief Financial Officer Joseph Goldberg Gary … · 2019. 11. 15. · Bokormas...

EXECUTIVE SUMMARY Following a corporate restructure and name change in late 2012, South East Asia Resources (‘SXI’ or ‘Company’) intends to progress the development of coal projects (both

coking coal and thermal coal) in Indonesia and Tasmania (Australia).

The flagship project in Indonesia is PT PAR (East Kalimantan Province), under a JV agreement. The project is in production for coking coal and South East Asia Energy Resources (SEAER - SXI: 100%) has secured a 1-year offtake agreement with a Vietnamese coke producer for 120Kt of coking coal from PT PAR, worth over US$14 million in sales. The initial shipment (20Kt) is due in mid October 2013.

A $10 million bond facility agreement entered into over five years (SXI to receive net proceeds from the issue of an initial $0.5 million tranche), together with proceeds from the first 20Kt shipment support i) Short-to-medium term working capital requirements, ii) Expenditure requirements for PT PAR and iii)

Enable the Company to further progress potential coal project acquisitions in Indonesia that are currently under consideration. An exploration program has commenced for the Tasmanian coal projects, with the aim of establishing a JORC measured resource of at least 30 million tonnes (Mt), although the Company has yet to determine any JORC reserves or resources.

As an initial target, SXI are planning to accommodate a 1Mtpa production at the Woodbury Coal Project (open cut), with the latter of sufficient scale to justify the creation of a large in-pit coal exposed inventory of 100Kt. The Company is also in discussions with potential Asian thermal

coal consumers in order to finalise firm offtake and project financing for its Tasmanian coal projects.

INDONESIAN COAL PROJECTS PT PAR Coking Coal Project Independent testing of PT PAR coal by SEAER indicates the presence of high quality coal as both a high quality export coal

product and a coking product. A key achievement for SEAER since securing the PT PAR project has been an offtake agreement entered into with CoalMiDanka Limited a subsidiary of The Ancom Group (Vietnam) for the

SOUTH EAST ASIA RESOURCES (SXI)

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SPECULATIVE

23 September 2013

Important Disclosure Investors should be aware that South East Asia Resources Ltd is a corporate client of Alpha and that Alpha will receive a consultancy fee from South East Asia Resources Ltd for compiling this research report

Share Trading Info

ASX Code SXI

Current Share Price (cps) 2.2

Trading Low /High (Rolling Year) (cps) - $3.981.5 - 3.9

Ordinary Shares on Issue (m) 238.5

Performance Shares (m) 120.0

Total Shares on Issue 358.5

Unlisted Options (m)* 35.0

Mkt Captalisation - undiluted ($m) 5.2

* Out of the money options

In addition, 50 Conv.bonds have been issued ($0.5m)

under a $10m Bond Facility Agreement

Current Board of Directors & Management - SXI

Steven Pynt Non Executive Chairman

Board of Directors - SEAER Pte Ltd (SXI: 100%)

Domenic Martino

Major Shareholders

HSBC Custody Nom (Aust) Ltd 3.7%

JP Morgan Nom (Aust) Ltd 3.4%

Juneday P/L 2.7%

Cintra Holdings P/L 2.3%

Timriki P/L 2.3%

Dr Nico Francken

Kobi Tsaban Group Chief Financial Officer

Michael Scivolo Non Executive Director

Gary Williams Chief Executive Officer

Wayne Knight Non Executive Director

Joseph Goldberg

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SXI 6-month Price Chart

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South East Asia Resources (SXI)

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delivery of 120,000 metric tonnes of coal from PT PAR at a fixed price of US$120 per metric tonne FOB.

Other Indonesian Coal Projects Under Consideration The strong management capability and network of SXI management and the board of its subsidiary, SEAER Pte Ltd provide the Company with a flow of opportunities to add further projects to the current portfolio. This is evident in the range of

Indonesian thermal and coking coal projects currently under assessment by the Company. SXI is in the advanced stages of finalising a number of potential project acquisitions in Indonesia. Two of these include:

1. A strategically located thermal coal project that comprises

two high quality thermal coal concessions requiring relatively low capital expenditure and with all clearances and licenses in place to begin mining. To date, the Company has undertaken preliminary due diligence.

2. A semi-soft coking coal and high grade thermal coal project in Indonesia, on which SEAER is undertaking exploration and due diligence prior to completing the

acquisition of the project. Subject to the completion of the acquisition, SXI is seeking to enter into a joint venture for the development and production of coal from the project, including offtake agreements.

TASMANIAN THERMAL COAL PROJECTS

Quality of Tasmanian Coal Suits Cement Manufacturing Process

The key target market for coal production from the Company’s Tasmanian coal projects is in cement manufacturing. Analysis of borehole samples from the Woodbury project area indicates that the coal quality suits both cement manufacturing and power plants. Tasmanian coal is considered to be an optimal input in the

cement manufacturing process because of the ash characteristics of the coal, which reduce the viabilities and quantities of the raw inputs required. Cement producer Cement Australia already uses locally-sourced Tasmanian coal at its cement facility at Railton in Tasmania. The ash characteristics of the coal at the Woodbury coal project

compares favourably with the typical ash characteristics of coal from Central Tasmania and offers a very consistent delivery of SiO2 at levels at 55%, reducing the need for raw silica input. Projects’ Strategic Significance in Tasmania

Given the under-utilisation of infrastructure and resources within Tasmania, including rail, road, ports, transport, construction and civil contractors with highly competent local workforce, the Company sees its Tasmanian coal projects as having the potential to provide a low cost, low capital, and efficient export coal production; complementing the Company's similarly modeled Indonesian coal projects.


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1.1 Background The Company was previously known as Victory West Metals Ltd and primarily held interests in a range of resources projects in South East Asia and Australia. While trading under the name of Victory West Metals Ltd, the Company completed the 100% acquisition of South East Asia Energy Resources

(SEAER) Pte Ltd on 24 December 2012, which at the time of the acquisition:

i. Had interests in two thermal coal mining assets in East

Kalimantan and a large Molybdenum exploration project in Sulawesi, Indonesia (the Malala Molybdenum Project) and a coking coal projects.

ii. Was undertaking due diligence on the Tasmanian coal projects that were subsequently acquired (see below).

In addition, the Company changed its name from Victory West Metals Ltd to South East Asia Resources Ltd, as approved by shareholders on 30 November 2012.

SXI’s continued strategic focus is:

i. A coking coal project in Indonesia (PT PAR), with an intention to acquire further coal projects in Indonesia,

ii. Contiguous coal projects in the Central Midlands of Tasmania which were acquired in May 2013 by a wholly owned subsidiary

of SXI, South East Asia Energy Resources (SEAER) (Australia)

P/L, with the projects to be operated and managed by SEAER (Tasmania) P/L and

iii. Thermal coal exploration in East Kalimantan.

1.2 Corporate Structure

Figure 1 outlines the current corporate structure for SXI, which reflect the above acquisitions. SEAER is the holding company for SXI’s Indonesian project (PT PAR). SEAER has a mining services agreement with United Asia Energy (UAE)

Pte Ltd in Singapore. SXI also has a mining services agreement with United Mining (a subsidiary of UAE) to operate the Tasmanian coal mines. One potential enhancement to the corporate structure will include the

listed entity (SXI) acquiring UAE Pte Ltd and two companies (PT UMES

and PT UERI) that are well established in mining and engineering services in Indonesian.


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Figure 1: SXI Corporate Structure

1.3 Experienced Management Team

SXI has an experienced management structure, including Gary Williams (Chief Executive Officer) and Kobi Tsaban (Group Chief Financial Officer). Mr Williams has 30 years of international mining experience in Australia, US, Indonesia, India and Africa. His expertise is in resource acquisitions, having held senior Executive positions with Cyprus Amax, Coal & Allied, CSR/Shell, Continental Global Group, BP Coal and others.

He has extensive experience in open pit, underground high-wall mining and processing. His experience in Indonesian coal stretches back to 1998. Mr Tsaban has 20 years experience in international financial and strategic planning and due diligence, including nine years as Chief Financial Officer of 3M Group Israel, where he held responsibility for all

financial control of the IT and logistics servicing mining and aviation industries. He also has experience in mergers and acquisitions with Australian ASX listed companies. The management structure and capability of SXI is augmented by a separate board for the wholly-owned subsidiary SEAER Pte Ltd. The board and management team of SEAER are highly experienced at

identifying resource assets in Indonesia and Australia and have a strong network of local based and expatriate engineers to ensure a steady flow of projects for assessment. The SEAER management team has been working together for the last seven years with a focus in Indonesia and Australia and over the past

three years, have been focus developing projects in Indonesia.


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Key personnel within SEAER Pte Ltd include: Mr Domenic Martino (SEAER Director) – Mr Martino is a Chartered

Accountant and an experienced director of ASX listed companies. Previously CEO of Deloitte Touch Tohmatsu in Australia, he has significant experience in the development of micro-cap companies. Mr Martino has been a key player in the re-birth of a broad grouping of ASX companies including Cokal Limited, Pan Asia Corporation Limited, Clean Global Energy Limited and NuEnergy Capital Limited and has a

strong reputation in China. Mr Martino, a recipient of the Centenary Medal 2003 for his service to Australian society through business and the arts, has a lengthy track record of operating in Indonesia, and has successfully closed key energy and resources deals with key local players. He has a proven

track record in capital raisings across a range of markets.

Dr Nico Francken (SEAER Director) - Dr Francken lived in New Zealand for 23 years where he worked within the legal profession, business and banking. Based in The Netherlands for over 18 years, he possesses strong experience in Dutch law and general corporate banking and offers in-depth knowledge of Singapore Law requirements and regulations.

Danny Josef (Indonesia Project Director) - Mr Josef has 21 years civil & mining engineering experience, which include five years experience in Indonesian based mining, in particular Indonesian JORC exploration and mine planning.

T.L Lie (Indonesia President - Operations) - Mr Lie has 40 years of senior management, leadership and business development experience;

the last nine years including direct mining industry experience. He is a former President Director of PT. Bokormas Wahana Makmur, and held the position of mining contractor for Arutmin mining. Mr Lie also managed an Indonesian & Export coal trading business.

Within SXI’s Australian subsidiary (SEAER Australia Pty Ltd), key personnel include: Greg Cox (Group Engineering Director) – Mr Cox has 25 years Executive management, engineering and mining experience, including General Manager BHP Coal Queensland. He is a Technical coal industry trainer with international accreditation and is an expert consultant and

operator to major mining operations in Botswana, Indonesia, South Africa, New Zealand, & the US. In addition, Mr Cox is a Mining Equipment and Underground Mining Specialist.


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2.1 Overview

In December 2012, SXI entered into a formal joint venture agreement to manage, operate and market 100% of the coking coal from the PT PAR project in East Kalimantan, Indonesia. PT PAR is a 191ha coking coal concession that is currently opened up in a 10ha area. The concession area has previously undergone mining activity, with 7,000 tonnes of coking coal already extracted and stockpiled. A further

10,000 tonnes have been extracted with a large percentage of overburden already removed. The project has secured IUP Production Licensing and has all required

infrastructure in place for immediate mine production, including camp, mining equipment, haul road and processing crush facilities. The hauling road distance from the boundary of the PT PAR concession is 32

kilometres to the jetty facility (which has a port weight bridge and belt loading conveyor capacity of 1000Mt per hour). Loading of coal onto export coal vessels is estimated to take 10 hours. Production is being undertaken by mining contractor Debbia Mining under the mine and project management of United Mining with Indonesian and Australian site management.

2.2 Offtake Agreement for 120Kt of Coking Coal

Over the last 12 months, SEAER has been actively developing business relationships in Vietnam that include potential mining collaborations, offtake opportunities, as well as infrastructure development and

management. The first offspring from SXI’s presence in Vietnam is an offtake

agreement entered into in June 2013, with Vietnamese coking coal producer CoalMiDanka Company JSC (a subsidiary of the energy group Ancom (Vietnam)) for 120,000 metric tonnes of coal from PT PAR at a fixed price of US$120 per metric tonne FOB, to be delivered over a one year period. The first shipment of 20,000 metric tonnes is scheduled to occur in mid October 2013, with proposed monthly shipments thereafter.

The coking coal from PT PAR (supplied under a long term agreement to the newly commissioned Viet Trung Coke Plant in North Vietnam) will be processed at the barge loading port of Telen, which is a short

trucking distance from the PT PAR site.

The coal is then loaded onto barges for 30 kilometre trans-shipment to anchorage of Adang Bay, where the cal will then be loaded onto the Vietnamese chartered ships for direct shipment to the Port of Cai Lan, Quang Ninh Province in North Vietnam.


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2.3 Quality of PT PAR Coking Coal Independent testing of PT PAR coal by SEAER has indicated the presence of high quality coal, based on a Gross Calorific Value of 7,000 kcal/kg, low Volatile Matter (26%-28% range), a high Crucible Swell Number (CSN) of 8-91 and low ash (12-14%) and sulphur content (1.5%-1.7%).

The high energy content, together with the low ash and low sulphur content make coal from PT PAR suitable for a high quality export thermal coal, or a coking coal product. The indicative sample results from PT PAR coal2 compared with Indonesian coal benchmarks are highlighted in Table 1.

Table 1: Indicative PT PAR Coal Specifications vs Benchmarks

Source: SXI, Coalspot.com

The Indonesian Coal Reference Price (HBA) as at August 2013 was US$76.70/Mt, based on coal quality with the following specifications: Calorific value of 6,322 Kcal/kg, a total moisture content of 8%, an ash content of 15% and total sulphur content of 0.8%. The 3-year trend for

the Indonesian Coal Reference Price is shown in Figure 2.

Figure 2: Indonesian Coal Reference Price (US$/Mt) - 3-year Trend

Source: Coalspot.com

1 A high CSN means that the coking coal reacts better to temperature in the blast furnace which will swell to a certain size and still maintain strength to hold the charge in the blast furnace; thereby meaning that the coking coal is more suitable for coke production. 2 These are also in line with the required specifications of coal to be delivered to CoalMiDanka Company JSC as per the offtake agreement.

PT PAR Sample Benchmark Coal

(Indicative Range) Gunung Bayan I Prima Coal

Total Moisture (%) 4.0 - 6.0 10.0 12.0

Ash Content (%) 12.0 - 14.0 15.0 5.0

Total Sulphur (%) 1.5 - 1.7 1.0 0.6

Calorific Value (Kcal/kg) 7000 7000 6700

Benchmark Price (US$/Mt) 87.68 87.61

(Specification figures on adb basis)


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2.4 Significance of Coal to the Indonesian Economy

Coal has a clear importance for Indonesia as the commodity accounts for around 85% of mining revenue. As a whole, the country’s mineral sector (that includes coal mining) contributes about 12% (US$93 billion) to Indonesia’s GDP3. The Indonesian Government is planning to increase the contribution of

the mining industry to national GDP over the coming years by committing to increase spending on ports, roads, airports, power plants and other infrastructure by 15% (US$170.9 billion - much higher than average growth of 7%) in 20134. The commitment by the Indonesia government to addressing the

country’s infrastructure is expected to further increase demand for

domestic thermal coal production.

2.5 Indonesian Coal Fundamentals

Indonesia is the world’s primary exporter of thermal coal. In 2012, Indonesia exported approximately 350 MT accounting for 43% of the seaborne market5. Indonesia currently produces thermal coal from more than 40 different

mines in East Kalimantan, South Kalimantan and Sumatra. International markets have traditionally been the principal destination for Indonesian thermal coals, with more than 80% of the country’s total thermal coal production being exported. Major export markets for Indonesian thermal coals include China, India, Japan and Korea (ICMA, 2012).

Global demand for thermal coal is forecast to increase on average by 3.5% year on year from 2013 to 2017. Of the 989 Mt forecast demand in 2017, Indonesia is forecast to supply approximately 43% of the total global demand for thermal coal6. Indonesia’s coal export growth will be fuelled in large part by China and India, where power demand is expected to lift coal imports significantly

over the next five years. India is set to become the second largest importer by 20147. The sustained import growth by these countries is expected to continue demand for Indonesian thermal coal, producing strong trading conditions in the mining and mining services sector.

3 Chairman of the Indonesian Coal Mining Association (ICMA), 2012 4 PWC “Mining in Indonesia and Taxation Guide, April 2012 5 Chairman of the Indonesian Coal Mining Association (ICMA), 2012 6 GTIS, Macquarie Commodities Research , March 2013

7 GTIS, Macquarie Commodities Research , March 2013


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Figure 3: Historical and Projected Coal Import Growth for China, Japan & India

Source: Customs Statistics, Macquarie Research, March 2013

2.5.1 Indonesia set to lead supply of thermal coal to the seaborne

market The Indonesia Coal Industry has expanded rapidly over the last ten years. Indonesia’s thermal coal exports have increased from 57Mt in 2000 to over 355Mt in 2012 (a 14% average growth rate). Indonesian production growth is set to continue with a forecast 370Mt in 2013 and an increase in production to 420Mt by 2017. This shows average

increasing production of approximately 4% year on year.

Figure 4: Indonesia Thermal Coal Production (Mt) Recent Growth Trends and Forecast Growth

Source: GTIS, Macquarie Research, March 2013

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Indonesian production forecasts position the country to lead growth in thermal coal exports. The country is predicted to supply the bulk of export coals to the Pacific Rim for the next five years, with demand and

supply being roughly equivalent8. The following factors will be the keys to Indonesia making up the largest share of thermal coal export growth: 1. Abundant Reserves of Competitively Priced High Demand

Coal

Indonesia has coal reserves of approximately 28Bt which are

estimated to last 83 years on current production forecasts9. A significant portion (60%) of these reserves consists of a

cheaper medium-quality (between 5100 and 6100 Kcal/kg) and a low quality (below 5100 Kcal/kg) coal which is in large

demand from China and India.

2. Strategic Geographic Location

Indonesia is ideally positioned in close proximity to the major thermal coal importers namely, China and India. Demand for medium to low quality coal from these two countries is increasing as they open many new coal fired power plants to supply

electricity to their increasing urbanising population.

3. Competitively Priced Thermal Coal

The lower quality coals are competitively priced on the international market (partly due to Indonesia’s low labour costs)

4. Indonesian producers forecast to become two of the top

three coal exporting companies worldwide

Underpinning the strong growth in thermal coal exports for Indonesia is the fact that Bumi Resources and Adaro Energy each own mines in the top 10 largest mine expansions for

thermal exports in the world. These two producers are forecast to become two of the top three coal exporting companies worldwide by 201510.

Their production and new domestic investment will be key to Indonesia making up the largest share of thermal coal growth for exports in the next decade.

8 GTIS, Macquarie Commodities Research , March 2013 9 Indonesian Coal Mining Association, 2012 10 Wood Mackenzie, 2012


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2.6 Strong Outlook for Global Coking Coal Demand

Consulting engineering and project management company Hatch Africa predict that demand for coking coal will have increased by 115Mt a year by 2015 as a result of increased consumption from Asia. In particular, the global crude steel industry is growing at a compound

annual growth rate (CAGR) of 5.2%, owing primarily to increases in demand from China and India. The bulk of global crude steel is produced through either blast furnace or basic oxygen furnace technologies, with blast furnace technology being the primary consumer of coking coal – it grew its market share from 58% to 73% between 2000 and 2010.

In addition, forecasts suggest that demand for coking coal will continue

to be driven by the Asia region, while supply will depend primarily on production from Australia and North America. As a key ingredient in the production of crude steel from blast furnaces,

global coking coal production has grown by 5.5%, while coking coal consumption has, over the same period, increased by 5,1%. As a result, the overall production of coking coal is above the amount required to sustain the forecast demand. Indian coking coal imports are expected to increase to 43Mt by 2015 from 30Mt in 2010, as a result of the country’s increase in crude steel

production. In China, coking coal imports are expected to increase; however, this will depend on crude steel production, domestic coking coal production and production costs. Chinese crude steel production has grown at a CAGR of 14.9% from

151.6Mt in 2001 to 607.6Mt in 2010, and given the intensity of crude steel production in China has peaked, and it is expected that steel

consumption will increase at an average of 3% between 2010 and 2015. Hatch Africa believe that globally, long-term growth in crude steel production looks promising owing to the expected production of an additional 300Mt of crude steel every year by 2015, which will increase

the demand for coking coal, with the possibility of a coking coal deficit from 2015 onwards, although the supply of coking coal should remain dependent on exports from Australia, with further export opportunities originating from Mozambique, Indonesia, Mongolia, Russia and North America.


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3.1 Overview

In May 2013, SXI executed an option to acquire two privately-owned companies that were the holders of three coal exploration licenses in the Central Midlands of Tasmania, Australia11.

The three exploration licenses cover an approximate area of 700 km2, with potential for shallow open cut bituminous coal. The Central Midlands project area has previously been the subject of extensive exploration and feasibility studies and is serviced by well-established

infrastructure. These include two nearby large regional towns – Campbell Town which is less than 40 kilometres North of the project area and Oatlands, which is less than 15 kilometres South of the

project area.

The project area is predominantly low rainfall open grazing country with year round access and is less than 150 kilometres to three existing deep water load-out facilities capable of handling Panamax class vessels. Bulk loaders, storage pads and rail spurs are also readily available at these port facilities. In addition, the project area is accessible from Launceston via the Midlands Highway and secondary sealed roads. Tasrail’s Southern Mainline intersects the project area

from South to North.

Figure 5: Map of Tasmanian Coal Projects (Source: SXI) - Approx 80kms N of Tasmania

11 The option, granted to acquire Tiger Coal P/L and Energy Investments P/L, expires on 30 November 2013 whilst technical and legal due diligence is completed and formal legal documentation is finalised.


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Figure 6: Map of Surrounding Established Rail and Port Infrastructure

Source: SXI

3.2 Exploration Undertaken and Planned by SXI

First stage due diligence has been undertaken by SEAER which has included discussions both directly and indirectly with Tasrail, Tasports, Mines Department Consultants, contractors and local stakeholders. The

acquisition is close to being finalised, following the completion of legal and technical due diligence; the latter involving an exploration program

designed to establish a JORC measured resource of at least 30Mt12. In June 2013, SEAER commenced an exploration program comprising a minimum of 31 exploration holes within the Jericho area (EL26/2008 and EL26/2008 licenses). Drilling targets were selected through historical research from exploration previously conducted in the early

1980s and 2011/2012. Initial targets comprised coal seams within 60 metres of surface.

12 An acquisition payment of up to $15 million will be made if a JORC measured resource of at least 30Mt is established.


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Historical exploration was undertaken by CRA in the early 1980s in the targeted Jericho exploration area. CRA noted that Triassic age black coal was discovered principally in three sequences, with at least one

sequence exhibiting thick and continuous coal seams. The exploration plan and schedule includes:

Phase I: A planned 1,320-metre drilling program over 21 holes (15 cored holes; six open holes). As at 23 July 2013, 731

metres were completed over 17 holes (12 cored holes; five open holes). To date, there have been 34 cored intersects and seven open intersects).

Phase II: A planned 600-metre drilling program over 10 holes (six cored holes; four open holes)

Table 2: Drilling Results to date from Four Holes at SEAR’s Tasmania Coal Project (Jericho Area)

Source: SXI

3.3 Attractiveness of Tasmanian Coal

Coal is used in the Australian cement industry as a source of heat to melt the raw materials required to make cement - limestone, silica, iron oxide and alumina. Using coal to heat the high temperature kiln, the materials combine to chemically and physically transform into a substance called “clinker” - a product that gives cement its binding properties. For each 900 grams of

cement produced 450 grams of coal is used.

Tasmanian coal offers consistent properties essential to keep the cement manufacturing process performing at its peak performance. By way of illustration, premier cement producer Cement Australia utilise Tasmania Coal in its cement facility at Railton, located in

Tasmania. Operational since 1923, the Railton cement plant produces in excess of 1Mt of cement per annum, the majority of which is transported to the Victorian and NSW markets. The coal used at the Railton plant is sourced from The Cornwall Coal Company13, which operates underground and open cut coal mines, and

13

A wholly owned subsidiary of Cement Australia

From To % Ash Kcal/Kg From To % Ash Kcal/Kg

OJ001 5.7 5.9 50.6 3086 6.2 7.1 20.3 6322

OJ002 5.58 5.91 60 1808 17.16 18.35 40.8 4460

OJ003 4.2 4.6 39.7 2266 11.66 12.32 24.9 5584

OJ004 12.8 13.94 42.2 4218 28.35 29.12 29.2 5784

From To % Ash Kcal/Kg From To % Ash Kcal/Kg

OJ001 12.98 13.64 57.6 2584 55.4 55.5 40.8 4362

OJ002 31.07 31.6 41.5 4152 31.97 33.7 28.1 5646

OJ003 24.9 25.52 68.5 1504 27.1 27.25 87.2 238

OJ004 - - - - - - - -

Results 3 Coal 4 Results 4Hole ID

Hole IDCoal 1 Results 1 Coal 2 Results 2

Coal 3


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a coal washing and processing plant. Cornwall Coal’s main facilities are located in NE Tasmania, with an additional mine in Southern Tasmania. Cornwall produces in excess of 400,000 tonnes of washed coal each

year, supplying the Cement Australia Railton operation and virtually all of Tasmania's general coal requirements. One of the key benefits of using Tasmanian coal in the cement manufacturing process is the ash characteristics of the coal, which reduce the viabilities and quantities of the raw inputs required. An

indicative analysis of the ash characteristics in coal from Central Tasmania is detailed in the next section (Table 3) as a comparison to the ash mineral analysis for Woodbury coal. The ash characteristics offer a very consistent delivery of SiO2 at levels at 55% reducing the need for raw silica input (which has changing

characteristics due to different suppliers). The AI2O3 is also very

consistent at levels of 24% from the ash which compensate for the increasing difficulties in sourcing this input and reducing also eliminates the variability from multiple suppliers. This also applies to the iron Fe2O3.

3.4 Suitability of Woodbury Coal in Cement Production

SGS Float Sink analysis of borehole samples from the Woodbury project area indicates that the quality of coal suits both power plants and cement manufacturing. Initial laboratory tests indicate four products could be possible:

The SGS analysis also indicates that coal feed with its ash byproduct reduces need for sourcing some raw inputs and maintains a consistent feed essential for minimum variations in clinker production. Further, the different number of products from the plant and the

characteristics of the coal allow for the opportunity for blending. This allows the client to customise the product they require within range. SEAER also has the ability to blend higher energy lower ash (less than 7%) coal for selected markets.

25Mj/kg 0.20 40mm Plant

23Mj/kg 0.25 40mm Plant

21Mj/kg 0.30 40mm Bypass

27Mj/kg 0.18 40mm Blend

Energy Ash Size Max Run


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Table 3: Indicative Ash Analysis of Coal from Central Tasmania compared with Ash Mineral Analysis for Woodbury Coal

Source: SXI

SXI believe that the Woodbury Coal Deposit is ideally suited to open-cut techniques. The coal is shallow, the stripping ratio attractive, and a sufficient resource available for a continuous long-term mining operation. Special advantages of the proposed Woodbury coal project include:

All coal seams greater than 30cm in thickness would be

recovered by mining with excavators.

Coal seam recoveries between 85% and 95% would be achievable through open cut mining at the Woodbury site.

The proposed Woodbury open cut is of sufficient scale to justify the creation of a large “in-pit” coal exposed inventory. A coal exposed inventory in the order of 100,000 tonnes would guarantee the continuity and regularity of coal supply.

Mine plan to accommodate mining up to 1Mt per annum. From an infrastructure viewpoint, the rail line is located immediately to the west of the proposed mine site, representing a major financial and strategic advantage with respect to coal transport between the

proposed mine and power station.

Central

Tasmania

Coal

Ash Content 19.90% 23.30% 21.40%

SiO2 55.70% 55.70% 53.60% 48.10%

AI2O3 24.00% 24.10% 23.80% 26.50%

Fe2O3 3.60% 3.65% 2.42% 3.45%

CaO 10.00% 10.03% 13.95% 14.83%

MgO 2.83% 2.83% 1.61% 2.58%

Na2O 0.21% 0.21% 0.65% 0.37%

K2O 0.67% 0.67% 0.53% 1.18%

TiO2 0.93% 0.93% 0.96% 1.04%

Mn3O4 0.21% 0.21% 0.18% 0.35%

SO3 1.44% 1.44% 2.79% 1.52%

P2O5 0.045% 0.045% 0.028% 0.046%

BaO 0.02% 0.05% 0.03%

W39 W41 W46

Hole Number - Woodbury


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4.1 Balance Sheet and Funding Requirements

In order to improve funding levels, SXI entered into a 5-year bond facility agreement14 to provide up to A$10 million in unsecured bonds, convertible into ordinary shares at a minimum price of 1.5 cents per

share. The first of up to 20 tranches of $0.5 million in convertible bonds has been issued, with the net proceeds from the issue of the initial tranche to be used to retire existing debt/liabilities and to support working capital requirements. Subsequent tranches of a minimum of $0.5

million worth of convertible bonds may be issued for the remaining

$9.5 million balance over the 5-year term. SXI’s consolidated Balance Sheet is illustrated in Table 4. Note that the Figures for 30 June 2013 are on a Pro-forma unaudited basis and incorporate the adjustments to the Balance Sheet resulting from the issue of the initial $0.5 million Tranche of convertible bonds.

Table 4: SEAR Consolidated Balance Sheet ($)

The key asset in the Balance Sheet is the exploration and evaluation expenditure, which was $20.8 million on an unaudited basis as at 30 June 2013. The exploration and evaluation expenditure figure of $18.5 million as at 31 December 2012 is made up of:

$11.34 million for the acquisition of SEAER Pte Limited (announced on 24 December 2012).

$0.51 million in capitalised exploration costs spent by SEAER.

14 Announced on 18 September 2013, the Agreement is with PA Broad Opportunity IV Limited (PABO). PABO is an affiliate of PAG, the Asia-focussed alternative investment fund management group. The financing is subject to appropriate shareholder and regulatory approvals.

30 June 2013 31 Dec 2012 30 June 2012

Assets

Cash 525,082 41,970 481,060

Trade and Other Receivables 531,358 504,744 492,728

Prepayments 85,468 87,061 102,791

Total Current Assets 1,141,908 633,775 1,076,579

Receivables 7,877 7,878 748,178

Property, Plant & Equipment 3,086 3,086 4,272

Exploration and Evaluation Expenditure 20,814,044 18,466,271 7,238,387

Other Financial Assets 11,189 11,189 5,595

Total Non Current Assets 20,836,196 18,488,424 7,996,432

TOTAL ASSETS 21,978,104 19,122,199 9,073,011

Liabilities

Trade & Other Payables 8,630,357 6,799,051 1,584,850

Short-term Borrowings 3,785,179 2,721,138 2,769,018

Long-term Borrowings (1st tranche Bond Issue) 500,000

Other Current Liabilities 279,446 260,320 535,414

TOTAL LIABILITIES 13,194,982 9,780,509 4,889,282

NET ASSETS 8,783,122 9,341,690 4,183,729


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$6.6 million - related to the Malala Moly Project (held through PTSMM (the subsidiary which holds the Malala Moly Project licenses).

In addition, in the SEAER Ltd company accounts, there is a loan from the holding company to the subsidiary PTSMM for $6.5 million, but this is being eliminated in the consolidated Balance Sheet. As at 31 August 2013, the Company had current borrowings totalling

$3.7 million with maturity dates ranging from 31 December 2013 to 30 May 2015. The figure relates to a loan (principal amount $1.9 million) with the remainder comprising convertible notes and interest. The required cash expenditure for the PT PAR project in Indonesia is around $1 million to recommence production at PT PAR and a further

$0.3 million for the Tasmanian projects, including expenses incurred on

exploration to date and further funds required to obtain a JORC resource. Corporate expenses are expected to be between $0.2 million and $0.3 million. The Company has also secured a Letter of Credit from the Commonwealth Bank for US$2.4 million to cover the initial 20Mt shipment, however at the time of writing the Company had not

finalised the drawdown terms for this amount.

4.2 Capital Structure

SXI has a tightly-held share register, with the top 20 shareholders

holding ~40% of the total shares on issue. There are no substantial shareholders.

At present, there are 223.5 million ordinary shares on issue, in addition to 35 million out-of-the money options on issue, of which 33 million unlisted options expire on 24 December 2015 with two million options

expiring on 31 August 2014. There have also been 50 convertible bonds (with a value of A$10,000 each) issued at a face value of $0.5 million, as per the bond facility agreement entered into and announced to the ASX 18 September 2013. Table 5: SXI Capital Structure

Million Expiry

Date

Ordinary Shares 238.5

Performance Shares 120.0

Total Ordinary Shares 358.5

Unlisted Options

- Exercise Price 25c (Milestone A) 1.0 31-Aug-14

- Exercise Price 25c (Milestone B) 1.0 31-Aug-14

- Exercise Price 30c 33.0 24-Dec-15

Total Unlisted Options 35.0

Total Issued Securities 393.5

Shares/Options on Issue


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DIRECTORY – ALPHA SECURITIES Corporate

George Karantzias

[email protected]

0401 670 620

Research Analyst

John Haddad

[email protected] 0407 219 222

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