For personal use only - Australian Securities Exchange
Transcription
For personal use only - Australian Securities Exchange
For personal use only DELECTA LIMITED ACN 009 147 924 NOTICE OF GENERAL MEETING TIME: 10 am DATE: 28 January 2015 PLACE: 9 Foundry Street, Maylands, Perth, Western Australia This Notice of Meeting should be read in its entirety. If Shareholders are in doubt as to how they should vote, they should seek advice from their professional advisers prior to voting. Should you wish to discuss the matters in this Notice of Meeting please do not hesitate to contact the Company Secretary on +61 3 9695 5858. For personal use only CONTENTS Business of the Meeting (setting out the proposed Resolution 1) 3 Explanatory Statement (explaining the proposed Resolution 1) 4 Glossary 13 Annexure 1 – Financial services guide and Independent Expert’s Report Attached Proxy Form Attached IMPORTANT INFORMATION Time and place of Meeting Notice is given that the Meeting will be held at 10 am on 28 January 2015 at: 9 Foundry Street, Maylands, Perth, Western Australia. Your vote is important The business of the Meeting affects your shareholding and your vote is important. Voting eligibility The Directors have determined pursuant to Regulation 7.11.37 of the Corporations Regulations 2001 (Cth) that the persons eligible to vote at the Meeting are those who are registered Shareholders at 5 pm on 26 January 2015. Voting in person To vote in person, attend the Meeting at the time, date and place set out above. Voting by proxy To vote by proxy, please complete and sign the enclosed Proxy Form and return by the time and in accordance with the instructions set out on the Proxy Form. In accordance with section 249L of the Corporations Act, Shareholders are advised that: • each Shareholder has a right to appoint a proxy; • the proxy need not be a Shareholder of the Company; and • a Shareholder who is entitled to cast 2 or more votes may appoint 2 proxies and may specify the proportion or number of votes each proxy is appointed to exercise. If the member appoints 2 proxies and the appointment does not specify the proportion or number of the member’s votes, then in accordance with section 249X(3) of the Corporations Act, each proxy may exercise one-half of the votes. Shareholders and their proxies should be aware that changes to the Corporations Act made in 2011 mean that: • if proxy holders vote, they must cast all directed proxies as directed; and Notice of Meeting (Canadian River transaction) - ASX excl proxy.docx 1 • any directed proxies which are not voted will automatically default to the Chair, who must vote the proxies as directed. Further details on these changes are set out below. For personal use only Proxy vote if appointment specifies way to vote Section 250BB(1) of the Corporations Act provides that an appointment of a proxy may specify the way the proxy is to vote on a particular resolution and, if it does: • the proxy need not vote on a show of hands, but if the proxy does so, the proxy must vote that way (i.e. as directed); and • if the proxy has 2 or more appointments that specify different ways to vote on the resolution, the proxy must not vote on a show of hands; and • if the proxy is the chair of the meeting at which the resolution is voted on, the proxy must vote on a poll, and must vote that way (ie as directed); and • if the proxy is not the chair, the proxy need not vote on the poll, but if the proxy does so, the proxy must vote that way (ie as directed). Transfer of non-chair proxy to chair in certain circumstances Section 250BC of the Corporations Act provides that, if: • an appointment of a proxy specifies the way the proxy is to vote on a particular resolution at a meeting of the Company's members; and • the appointed proxy is not the chair of the meeting; and • at the meeting, a poll is duly demanded on the resolution; and • either of the following applies: the proxy is not recorded as attending the meeting; or the proxy does not vote on the resolution, the chair of the meeting is taken, before voting on the resolution closes, to have been appointed as the proxy for the purposes of voting on the resolution at the meeting. 2 BUSINESS OF THE MEETING AGENDA For personal use only 1. RESOLUTION 1 – GRANT OF CANADIAN RIVER OPTION To consider and, if thought fit, to pass, with or without amendment, the following resolution as an ordinary resolution: “That, for the purposes of ASX Listing Rules 10.1 and 10.5 and for all other purposes, approval is given for the Company to grant the Canadian River Option and, subject to satisfaction of conditions set out in the PNE Option Agreement, transfer the Canadian River Shares to PNE on the terms and conditions set out in the Explanatory Statement.” Voting Exclusion: The Company will disregard any votes cast on this Resolution by a party to the transaction and any associates of those persons. However, the Company need not disregard a vote if it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form, or, it is cast by the person chairing the meeting as proxy for a person who is entitled to vote, in accordance with a direction on the Proxy Form to vote as the proxy decides. Independent Expert’s Report: Shareholders should carefully consider the Independent Expert’s Report prepared for the purpose of the Shareholder approval required under ASX Listing Rule 10.1. The Independent Expert’s Report comments on the fairness and reasonableness of the transactions the subject of this Resolution to the non-associated Shareholders. The Independent Expert has determined the grant of the Canadian River Option and, subject to satisfaction of conditions set out in the PNE Option Agreement, the transfer of the Canadian River Shares to PNE is fair and reasonable to un-associated Shareholders. Dated: 22 December 2014 By order of the Board J Burness Company Secretary 3 EXPLANATORY STATEMENT For personal use only This Explanatory Statement has been prepared to provide information which the Directors believe to be material to Shareholders in deciding whether or not to pass the Resolution. 1. BACKGROUND 1.1 Acquisition of interest in Canadian River Project On 25 September 2014, the Company announced it had entered into a binding heads of agreement (through its wholly owned subsidiary, Canadian River Inc (Canadian River)) with Inland Oil & Gas LLC (Inland) (Heads of Agreement) to acquire from Inland certain rights and interests in and associated with oil and gas leases, oil and gas wells, equipment and infrastructure forming the Canadian River Field Development Project located in Okfuskee County, Oklahoma, in the United States of America (Canadian River Project) currently owned by Inland (Acquisition). The material terms of the Heads of Agreement are as follows: Stage 1 (a) (Acquisition of interest): Pursuant to the Heads of Agreement, Canadian River will acquire an 80% working interest (a 58% net revenue interest) in the first completed well within the Canadian River Project area, the Wise I-25 Well, together with associated rights and interests including access to the required infrastructure to bring the First Well into production (First Well). (b) (Consideration): In consideration for the acquisition of the First Well, Canadian River has paid the agreed amount of US$3,000,000 to Inland. The consideration paid by Canadian River represents Canadian River’s total costs for the drilling of the First Well to a total depth of 4,500 feet, after which each party will fund their respective working interest proportionate share of all costs and expenses related to the First Well. (c) (Operator): Inland and Canadian River have agreed that the operator of the First Well, currently Inland Operating Company, LLC, an Oklahoma corporation (Operator), will continue to be the Operator of the First Well, which operation shall be governed by the terms of the Heads of Agreement and an operating agreement (Operating Agreement). (d) (Security Deposit): Canadian River is required to provide a security deposit in the amount of US$50,000 to be held in an account by the Operator and used in the event Canadian River fails to pay its proportional share of expenses or costs relating to the First Well under the Operating Agreement. Stage 2 (a) (Conditional option to acquire interest): If the acquisition of the First Well under the Heads of Agreement completes, Inland will grant to Canadian River an option to earn: (i) an 80% working interest (a 54% net revenue interest) in a further four (4) wells, together with other associated rights and interests (Remaining Wells); and 4 (ii) a 4% net revenue interest in all wells drilled on the land containing the Remaining Wells (but not including the Remaining Wells) together with other associated rights and interests, For personal use only (Stage 2 Option). (b) (Conditions precedent): The Stage 2 Option is conditional upon: (i) completion of due diligence by Canadian River on the Remaining Wells and associated rights and interests and completion of due diligence by Inland on Canadian River’s business, assets and operations to the satisfaction of Inland; (ii) the Company seeking and being granted approval for recomplying with Chapters 1 and 2 of the ASX Listing Rules; and (iii) the Company’s shareholders having given the appropriate approval at a general meeting for the re-compliance with Chapters 1 and 2 of the ASX Listing Rules. (c) (Consideration): Pursuant to the Heads of Agreement, Canadian River has until 28 February 2015 (unless extended by Inland) to exercise the Stage 2 Option by providing written notice to Inland, in which case, Canadian River will be required to pay a further US$4,875,000 to Inland. The consideration paid by Canadian River for the exercise of the Stage 2 Option represents Canadian River’s total costs for the drilling of each Remaining Well to a sufficient depth to test each Remaining Well’s formation and (among other things) to fully equip each Remaining Well. Once this has occurred, each party will fund their respective working interest proportionate share of all costs and expenses related to the Remaining Wells. (d) (Termination): If completion of the exercise of the Stage 2 Option by Canadian River has not occurred by 28 February 2015, Inland may terminate the Heads of Agreement. Further details in relation to the Canadian River Project are set out in Section 1.4 below. 1.2 Seismic Option Agreement In addition to the Heads of Agreement, Canadian River has also entered into a Seismic Option Agreement with John Leenerts (the principal owner of Inland and the Operator) and James Holcomb (Seismic Vendors) pursuant to which Canadian River has been granted an option to purchase Seismic Data owned by them covering a total of 64 square miles inclusive of the Canadian River Project area (Seismic Option). The seismic data included within the Seismic Option includes all seismic, geological, or geophysical data owned by the Seismic Vendors over this area, and all interpretations of seismic, geological, or geophysical data owned by them over this area (Seismic Data). Securing exclusive access to this information will provide the Company with additional prospects and drill targets beyond the initial Canadian River Project area. Exercise of the Seismic Option can occur any time on or before the date that is 3 months following the completion of the drilling of the Remaining Well the subject of Stage 2 of the Heads of Agreement. To exercise the Seismic Option, Canadian River will be required to: 5 For personal use only (a) pay an option exercise price of US$250,000 to the Seismic Vendors; (b) grant the Seismic Vendors a 2% overriding royalty interest in any additional well developed (excluding any of the 5 wells drilled and developed under Stage 1 and 2 of the Heads of Agreement); (c) pay the Seismic Vendors US$25,000 for each well drilled for the first five wells drilled using the Seismic Data (excluding the 5 wells to be drilled under Stage 1 and 2 of the Heads of Agreement); (d) issue to the Seismic Vendors 5,000,000 options (post-reconstruction) to acquire fully paid shares in the capital of the ASX listed parent company with an exercise price of $0.25 (post-reconstruction) and expiring 2 years from the date of issue. Completion of the Seismic Option Agreement is conditional upon all board and shareholder resolutions or other required approvals authorising Canadian River’s execution of that agreement and all other documents necessary to complete the transactions contemplated by it. In the event that the Company does not complete 5 additional wells within twelve months of exercising the Seismic Option, the Seismic Vendors will be released to develop wells within the 64 square mile area the subject of the Seismic Option Agreement without obligation to the Company. 1.3 PNE Option Agreement On or around 25 September 2014, the Company entered into an option agreement with Payne Find Gold Limited (PNE), pursuant to which the Company has granted PNE an exclusive option to acquire its rights and interests in all of the shares in the capital of Canadian River (Canadian River Shares) (Canadian River Option). Upon completion of the Heads of Agreement, Canadian River will hold the interests in the Canadian River Project described in Section 1.1, and upon completion of the PNE Option Agreement, PNE will hold all Canadian River Shares. The material terms of the PNE Option Agreement are as follows: (a) (Conditions precedent): Exercise of the Canadian River Option is conditional upon: (i) completion of due diligence by PNE on Canadian River’s business to its absolute satisfaction; (ii) completion of a consolidation of capital by PNE on a ratio to be mutually agreed between PNE and the Company, required for reinstatement to the official list of ASX; (iii) completion of capital raising by PNE of a minimum of AUD$4,000,000 at an issue price of not less than $0.10 per PNE Share, required for reinstatement to the official list of ASX. The Company understands as at the date of this Notice that it is PNE’s intention to raise up to $8,000,000 through its capital raising at $0.10 per PNE Shares so that it can proceed with Stage 2 of the Heads of Agreement; and (iv) both the Company and PNE obtaining the appropriate shareholder and regulatory approvals (including re-compliance with Chapters 1 and 2 of the ASX Listing Rules and approval for PNE’s re-admission to quotation). 6 For personal use only (b) (Consideration): The Canadian River Option may be exercised by PNE at any time on or before 5.00pm, 28 February 2015. If the Canadian River Option is exercised, the following consideration will be payable to the Company by PNE: (i) the issue of 30,000,000 post reconstruction PNE Shares (being AUD$3,000,000 worth at a deemed issue price of $0.002 prereconstruction of PNE’s issued capital as set out in 1.3(a) above); (ii) the issue of 6,000,000 post reconstruction PNE Options to acquire fully paid PNE Shares within 5 years of their issue at an exercise price of $0.125 (post-reconstruction of PNE’s issued capital as set out in 1.3(a) above); and (iii) the payment of AUD$1,000,000 from future oil & gas revenues derived from the project. Interests in PNE and Independent Expert’s Report The Company currently holds 350,000,000 PNE Shares (being a shareholding of approximately 48.9% of the total PNE Shares on issue at the time of entering the PNE Option Agreement and approximately 38.4% as at the date of this Notice). Mr Malcolm Day is also currently a common director of both the Company and PNE (details of the interests of each Director in PNE Securities are set out in Section 1.5). For this reason, and to satisfy ASX Listing Rule requirements, an Independent Expert’s Report accompanies this Notice in Annexure 1. The independent Expert has determined the grant of the Canadian River Option and, subject to satisfaction of conditions set out in the PNE Option Agreement, the transfer of the Canadian River Shares to PNE is fair and reasonable to un-associated Shareholders. 1.4 Details of the Canadian River Project The Canadian River Project is located in the east-central portion of Oklahoma in the southeast portion of Okfuskee County, Oklahoma. Positioned south of the town of Weleetka, the project is easily accessible using the allweather access provided by the state highway system and well-maintained gravel county roads. The local terrain is slightly hilly with ground elevations ranging from 700 to 900 feet above sea level. No known adverse environmental conditions exist on the surface or sub-surface. 7 Okfuskee County, Oklahoma , USA, is a well known and highly prolific oil and gas producing area with multi stacked producing horizons. The first well has been completed for production in the Wilcox sand at a depth of 3,922 feet. For personal use only Stage 1 The First Well within the Canadian River Project area has been completed for production in the Wilcox sandstone horizon at a depth of 3,922 feet. With the completion of the Salt Water Disposal Well (SWDW) to support this well, which is planned for spudding in early October, with completion schedule for the end of that month, the Canadian River Project provides the Company with the opportunity to create immediate cash flow. It is expected that the First Well will produce predominately oil, but also gas. All infrastructure to commence production is included in the acquisition cost, such as gas transmission lines, separation tanks, electricity cables to well head and pumping equipment. Existing cash reserves of the Company have been used to fund the completion of Stage 1. Stage 2 The second stage of the Acquisition relates to an option to drill the four (4) Remaining Wells targeting the same producing horizon. Stage 2 also incorporates the acquisition of all necessary infrastructure, including the SWDW and that accessed under Stage 1, to bring each of the Remaining Wells into production. 1.5 Disclosure of Interests As at the date of this Notice, the directors of the Company each have a relevant interest in PNE Securities as set out in the table below. Director PNE Shares PNE Options Voting Power (%) NIL NIL NIL 3,310,098 1,103,366 0.36% Mr Hans-Rudolf Moser Non Executive Director NIL NIL NIL Mr John Burness Chief Financial Officer and Company Secretary NIL NIL NIL 3,310,098 1,103,366 0.36% Mr Bradley Moore Non Executive Chairman Mr Malcolm Day Managing Director Total 1.6 Advantages of the Canadian River Option The Directors are of the view that the following non-exhaustive list of advantages may be relevant to a Shareholder’s decision on how to vote on the Resolution: (a) In the event Shareholder approval is obtained, the required funds by PNE raised and the re-compliance with Chapters 1 and 2 of the ASX Listing Rules completed by PNE, the Company will have the ability to recoup 8 For personal use only AUD$1,000,000 of its initial US$3,000,000 investment from future revenues generated by the Canadian River Project. 1.7 (b) The Company will continue to hold an interest in the Canadian River Project without the need to recomply with Chapters 1 and 2 of the ASX Listing Rules. (c) PNE will provide the best opportunity for the funds required for exercise of the Stage 2 Option of the Canadian River Project to be raised compared to DLC, and accordingly for the Company to participate in the exploration and development of the additional wells and land covered by the Seismic Data surrounding the Wise #1-25 Well the subject of Stage 1, albeit indirectly through its shareholding in PNE. (d) Shareholders of the Company will not face dilution through the Company having to raise capital itself to fund the exercise of Stage 2 Option of the Canadian River Project, with PNE responsible for raising the required capital. (e) Ongoing risks associated with the operation of the Canadian River Project, including but not limited to financial, environmental, occupational health and safety and regulatory risks pass to PNE in the event the PNE Option Agreement is completed. Disadvantages of the Canadian River Option The Directors are of the view that the following non-exhaustive list of disadvantages may be relevant to a Shareholder’s decision on how to vote on the Resolutions: 1.8 (a) In the event Shareholder approval is obtained, the required funds by PNE raised and the re-compliance with Chapters 1 and 2 of the ASX Listing Rules completed by PNE, the Company will no longer hold a direct interest in the Canadian River Project and will not retain control of the Canadian River Project. Consequently, the Company will not be entitled to a revenue interest from the Canadian River Project, with the exception of the $1 million from initial revenues, but will be reliant on dividend distributions or capital appreciation of its shareholding in PNE or both to register a return on its initial investment. (b) The Company’s interest in the Canadian River Project will be diluted due to the intrinsic value of PNE prior to entering into the PNE Option Agreement and the completion of capital raising by PNE. Based on the Company’s current shareholding in PNE and the consideration to be received under the PNE Option Agreement it is expected that the Company will have a shareholding interest in PNE on completion of the PNE Option Agreement of approximately 41.9% if $4,000,000 is raised by PNE at 10 cents per PNE Share or approximately 28.9% if $8,000,000 is raised by PNE at 10 cents per PNE Share (each excluding any other issues of PNE Shares including by the exercise of PNE Options). Intentions if Acquisition is not approved If the Resolutions are not passed and the Acquisition is not completed, the Company will retain ownership of Canadian River, and therefore the Canadian River Project, inclusive of the Stage 2 Option and the Seismic Option. In these circumstances the Company would seek to negotiate with Inland for the Stage 2 Option period to be extended to allow for re-compliance with Chapters 1 and 2 of the ASX Listing Rules. 9 For personal use only 1.9 Director’s recommendation The Directors (other than Malcolm Day who did not make a determination given his position as a director of both the Company and PNE) unanimously recommend that Shareholders vote in favour of the Resolution as they consider the grant of the Canadian River Option to PNE to be in the best interests of Shareholders for the following reasons: (a) after assessment of the advantages and disadvantages referred to in Sections 1.6 and 1.7 the Directors are of the view that the advantages outweigh the disadvantages; and (b) the Independent Expert has determined the grant of the Canadian River Option to be fair and reasonable to the non-associated Shareholders. 2. RESOLUTION 1 – GRANT OF CANADIAN RIVER OPTION 2.1 General As noted in Section 1.3, the Company has granted PNE an exclusive option to acquire its rights and interests in all of the shares in the capital of Canadian River. Upon completion of the Heads of Agreement, Canadian River will hold the interests in the Canadian River Project described in Section 1.1, and upon completion of the PNE Option Agreement, PNE will own all Canadian River Shares. Resolution 1 seeks Shareholder approval for the grant of the Canadian River Option to and the acquisition of all Canadian River Shares by PNE. 2.2 Chapter 2E of the Corporations Act For a public company, or an entity that the public company controls, to give a financial benefit to a related party of the public company, the public company or entity must: (a) obtain the approval of the public company’s members in the manner set out in sections 217 to 227 of the Corporations Act; and (b) give the benefit within 15 months following such approval, unless the giving of the financial benefit falls within an exception set out in sections 210 to 216 of the Corporations Act. Resolution 1 will result in the grant of an exclusive option to PNE, and, if exercised, the transfer of all Canadian River Shares to PNE, which constitutes the giving of a financial benefit. Further, PNE is a related party of the Company as it is controlled by the Company. The Directors (other than Malcolm Day who did not make a determination given his position as a director of both the Company and PNE) have determined that that Shareholder approval pursuant to Chapter 2E of the Corporations Act is not required in respect of Resolution 1 because the Canadian River Option and associated acquisition of Canadian River Shares were negotiated at arm’s length. 2.3 ASX Listing Rule 10.1 ASX Listing Rule 10.1 provides that an entity must ensure that neither it, nor any of its child entities, acquires a substantial asset from, or disposes of a substantial asset to, 10 amongst other persons, a related party or child entity, without the prior approval of holders of the entity’s ordinary shareholders. For personal use only Disposal by the Company Subject to the successful exercise of the Canadian River Option by PNE, the Company will be making a disposal of the shares it holds in Canadian River. Substantial asset For the purposes of ASX Listing Rule 10.1, an asset is substantial if its value, or the value of the consideration for it is, or in ASX’s opinion is, 5% or more of the equity interests of the entity as set out in the latest accounts given to ASX under the ASX Listing Rules. The Equity Interests of the Company as set out in the latest accounts given to ASX under the ASX Listing Rules (being for the full year statutory accounts for financial year 2014) were $10.914 million. As the value of the consideration pursuant to the PNE Option Agreement is more than 5% of the equity interests of the Company as set out in the latest accounts given to ASX under the ASX Listing Rules, the completion of the Canadian River Option will result in the disposal of a substantial asset. Child entity and related party As stated in Section 1.3, the Company currently holds 350,000,000 PNE Shares (being a shareholding of approximately 48.9% of the total PNE Shares on issue at the time of entering the PNE Option Agreement and approximately 38.4% as at the date of this Notice). On this basis, the Directors (other than Mr Day who did not make a determination given his position as a director of both the Company and PNE) consider that the Company has capacity to determine the outcome of decisions about PNE’s financial and operating policy such that PNE is considered to be a child entity and also a related party of the Company for the purposes of ASX Listing Rule 10.1. Requirement for shareholder approval As a result of the above conclusions, the completion of the Canadian River Option will result in the disposal of a substantial asset to a child entity and related party of the Company and the Company is required to seek Shareholder approval under ASX Listing Rule 10.1. 2.4 Independent Expert’s Report ASX Listing Rule 10.10.2 requires a notice of meeting containing a resolution under ASX Listing Rule 10.1 to include a report on the transaction from an independent expert. The Independent Expert's Report attached sets out a detailed independent examination of the proposed transaction the subject of Resolution 1 to enable nonassociated Shareholders to assess the merits and decide whether to approve Resolution 1. To the extent that it is appropriate, the Independent Expert’s Report sets out further information with respect to the completion of the Canadian River Option and concludes that it is fair and reasonable to the non-associated Shareholders. 11 For personal use only Shareholders are urged to carefully read the Independent Expert’s Report to understand its scope, the methodology of the valuation and the sources of information and assumptions made. The Independent Expert’s Report is also available on the Company’s ASX announcement platform under ASX code ‘DLC’. The Company will provide a hard copy of the Independent Expert’s Report free of charge if requested. 12 GLOSSARY $ means Australian dollars. For personal use only Acquisition means the acquisition by Canadian River of rights and interests in the Canadian River Project pursuant to the Heads of Agreement, as described in Section 1.1. ASIC means the Australian Securities & Investments Commission. ASX means ASX Limited (ACN 008 624 691) or the financial market operated by ASX Limited, as the context requires. ASX Listing Rules means the Listing Rules of ASX. Board means the current board of directors of the Company. Business Day means Monday to Friday inclusive, except New Year’s Day, Good Friday, Easter Monday, Christmas Day, Boxing Day, and any other day that ASX declares is not a business day. Canadian River means Canadian River, Inc., a wholly owned subsidiary of the Company. Canadian River Option means the exclusive option granted to PNE pursuant to the PNE Option Agreement. Canadian River Project means the Canadian River Field Development Project located in Okfuskee County, Oklahoma, in the United States of America, which is the subject of the Heads of Agreements and as described in Sections 1.1 and 1.4. Canadian River Shares means all of the issued share capital in Canadian River. Chair means the chair of the Meeting. Company means Delecta Limited (ACN 009 147 924). Constitution means the Company’s constitution. Corporations Act means the Corporations Act 2001 (Cth). Directors means the current directors of the Company. Equity Interests means the sum of paid up capital, reserves, and accumulated profits or losses, disregarding redeemable preference share capital and outside equity interests, as shown in the consolidated financial accounts. Explanatory Statement means the explanatory statement accompanying the Notice. First Well means the Wise I-25 Well, being the first completed well within the Canadian River Project. General Meeting or Meeting means the meeting convened by the Notice. Heads of Agreement means the Heads of Agreement between Canadian River and Inland in relation to the Acquisition as described in Section 1.1. Independent Expert means RSM Bird Cameron Corporate Pty Ltd. Independent Expert’s Report means the report prepared by the Independent Expert and annexed to this Notice as Annexure 1. Inland means Inland Oil & Gas, LLC (a company incorporated in the United States of America). 13 Notice or Notice of Meeting means this notice of meeting including the Explanatory Statement and the Proxy Form. Operator means Inland Operating Company, LLC, an Oklahoma corporation. For personal use only Operating Agreement means the operating agreement relating to the First Well, referred to in Section 1.1. Option means an option to acquire a Share. Optionholder means a holder of an Option. PNE means Paynes Find Gold Limited ACN 141 450 624 (ASX:PNE). PNE Option means an option to acquire a PNE Share. PNE Option Agreement means the option agreement between the Company and PNE pursuant to which the Company has granted an exclusive option to PNE to acquire its rights and interests in all of the shares in the capital of Canadian River, described in Section 1.3. PNE Security or PNE Securities means a PNE Share or an PNE Option or both as the context requires. PNE Share means a fully paid ordinary share in the capital of PNE. Proxy Form means the proxy form accompanying the Notice. Remaining Wells means the remaining wells referred to in Section 1.1. Resolution means the resolution set out in the Notice. Section means a section of the Explanatory Statement. Security or Securities means a Share or an Option or both as the context requires. Securityholder means a holder of a Security. Seismic Data means the seismic data referred to in Section 1.2. Seismic Option means the option granted to Canadian River pursuant to the Seismic Option Agreement, described in Section 1.2. Seismic Option Agreement means the Seismic Option Agreement described in Section 1.2. Seismic Vendors means Mr John Leenerts and Mr James Holcomb. Share means a fully paid ordinary share in the capital of the Company. Shareholder means a registered holder of a Share. Stage 2 Option means the Canadian River’s option to acquire rights and interests in and associated with the Remaining Wells pursuant to the Heads of Agreement. SWDW means salt water disposal well. WST means Western Standard Time as observed in Perth, Western Australia. 14 For personal use only Delecta Limited Financial Services Guide and Independent Expert’s Report December 2014 We have concluded that the Transaction is Fair and Reasonable to Shareholders of Delecta Limited. For personal use only RSM Bird Cameron Corporate Pty Ltd 8 St Georges Terrace, Perth, WA 6000 GPO Box R1253 Perth WA 6844 T +61 8 9261 9100 F +61 8 9261 9102 www.rsmi.com.au Financial Services Guide RSM Bird Cameron Corporate Pty Ltd ABN 82 050 508 024 (“RSM Bird Cameron Corporate Pty Ltd” or “we” or “us” or “ours” as appropriate) has been engaged to issue general financial product advice in the form of a report to be provided to you. In the above circumstances we are required to issue to you, as a retail client, a Financial Services Guide (“FSG”). This FSG is designed to help retail clients make a decision as to their use of the general financial product advice and to ensure that we comply with our obligations as financial services licensees. This FSG includes information about: who we are and how we can be contacted; the services we are authorised to provide under our Australian Financial Services Licence, Licence No 255847; remuneration that we and/or our staff and any associates receive in connection with the general financial product advice; any relevant associations or relationships we have; and our complaints handling procedures and how you may access them. Financial services we are licensed to provide We hold an Australian Financial Services Licence, which authorises us to provide financial product advice in relation to: deposit and payment products limited to: (a) basic deposit products; (b) deposit products other than basic deposit products. interests in managed investments schemes (excluding investor directed portfolio services); and securities (such as shares and debentures). We provide financial product advice by virtue of an engagement to issue a report in connection with a financial product of another person. Our report will include a description of the circumstances of our engagement and identify the person who has engaged us. You will not have engaged us directly but will be provided with a copy of the report as a retail client because of your connection to the matters in respect of which we have been engaged to report. Any report we provide is provided on our own behalf as a financial services licensee authorised to provide the financial product advice contained in the report. For personal use only General Financial Product Advice In our report we provide general financial product advice, not personal financial product advice, because it has been prepared without taking into account your personal objectives, financial situation or needs. You should consider the appropriateness of this general advice having regard to your own objectives, financial situation and needs before you act on the advice. Where the advice relates to the acquisition or possible acquisition of a financial product, you should also obtain a product disclosure statement relating to the product and consider that statement before making any decision about whether to acquire the product. Benefits that we may receive We charge fees for providing reports. These fees will be agreed with, and paid by, the person who engages us to provide the report. Fees will be agreed on either a fixed fee or time cost basis. Except for the fees referred to above, neither RSM Bird Cameron Corporate Pty Ltd, nor any of its directors, employees or related entities, receive any pecuniary benefit or other benefit, directly or indirectly, for or in connection with the provision of the report. Remuneration or other benefits received by our employees All our employees receive a salary. Referrals We do not pay commissions or provide any other benefits to any person for referring customers to us in connection with the reports that we are licensed to provide. Associations and relationships RSM Bird Cameron Corporate Pty Ltd is beneficially owned by the partners of RSM Bird Cameron, a large national firm of chartered accountants and business advisers. Our directors are partners of RSM Bird Cameron Partners. From time to time, RSM Bird Cameron Corporate Pty Ltd, RSM Bird Cameron Partners, RSM Bird Cameron and / or RSM Bird Cameron related entities may provide professional services, including audit, tax and financial advisory services, to financial product issuers in the ordinary course of its business. Complaints Resolution Internal complaints resolution process As the holder of an Australian Financial Services Licence, we are required to have a system for handling complaints from persons to whom we provide financial product advice. All complaints must be in writing, addressed to The Complaints Officer, RSM Bird Cameron Corporate Pty Ltd, P O Box R1253, Perth, WA, 6844. When we receive a written complaint we will record the complaint, acknowledge receipt of the complaint within 15 days and investigate the issues raised. As soon as practical, and not more than 45 days after receiving the written complaint, we will advise the complainant in writing of our determination. Referral to External Dispute Resolution Scheme A complainant not satisfied with the outcome of the above process, or our determination, has the right to refer the matter to the Financial Ombudsman Service (“FOS”). FOS is an independent company that has been established to provide free advice and assistance to consumers to help in resolving complaints relating to the financial services industry. For personal use only Further details about FOS are available at the FOS website or by contacting them directly via the details set out below. Financial Ombudsman Service GPO Box 3 Melbourne VIC 3001 Toll Free: 1300 78 08 08 Facsimile: (03) 9613 6399 Email: [email protected] Contact Details You may contact us using the details set out at the top of our letterhead on page 1 of the FSG. For personal use only Independent Expert’s Report TABLE OF CONTENTS Page 1. Introduction ..................................................................................................................... 6 2. Summary and Conclusion .............................................................................................. 7 3. Scope of the Report ........................................................................................................ 9 4. Summary of Transaction .............................................................................................. 11 5. Profile of the Project ..................................................................................................... 13 6. Profile of Paynes Find Gold Limited ........................................................................... 14 7. Valuation Approach ...................................................................................................... 21 8. Valuation of the Project ............................................................................................... 25 9. Valuation of Consideration .......................................................................................... 28 10. Valuation of Consideration Options ............................................................................ 33 11. Valuation of the Revenue Payment ............................................................................. 35 12. Is the Proposed Transaction Fair to Shareholders? ................................................. 36 13. Is the Proposed Transaction Reasonable .................................................................. 37 Appendix 1 – Declarations and Disclaimers Appendix 2 – Sources of Information Appendix 3 – Glossary of Terms Appendix 4 – Profile of the International Oil and Gas Industry Appendix 5 – Profile of the Australian Gold Industry Appendix 6 – Fair Market Value Assessment, Canadian Valley Project, Okfuskee County, Oklahoma, USA, Db LLC Petroleum Advisors Appendix 7 – Technical Project Review- Independent Valuation Report Paynes Find Gold Project for RSM Bird Cameron Corporate Pty Limited, Ravensgate Appendix 8 – WACC Assessment - Delecta For personal use only Direct Line: (08) 9261 9447 Email: [email protected] 4 December 2014 The Shareholders Delecta Limited 170-180 Buckhurst Street South Melbourne VIC 3205 Dear Shareholders Independent Expert’s Report (“Report”) 1. Introduction 1.1. This Independent Expert’s Report (the “Report” or “IER”) has been prepared to accompany the Notice of General Meeting and Explanatory Statement (“Notice”) to shareholders for an Extraordinary General Meeting of Delecta Limited (“Delecta” or “the Company”) to be held on or around 31 December 2014, at which, shareholder approval is required with respect to the granting of an option (“Option”) to Paynes Find Gold Limited (“Paynes”) to acquire Delecta’s interest in the Canadian River Field Development Oil and Gas Project (“Project”) (“Proposed Transaction”). 1.2. Under the terms of the Proposed Transaction, Delecta will not receive any consideration for the Option, however, to exercise the Option Paynes must: Issue $3 million in fully paid ordinary shares in Paynes to Delecta (“Share Consideration”); Issue 6 million options to Delecta to acquire fully paid ordinary shares in the capital of Paynes within five years of the options issue at an exercise price of $0.125 (“Option Consideration”); Pay $1 million from future oil and gas revenue from the Project (“Revenue Payment”), (these items together defined as “Consideration”); and All share issues noted above are post a planned consolidation of the share capital of 50:1. 1.3. Delecta currently holds 350,000,000 Paynes Shares (being a shareholding of 38% of the total Paynes shares on issue). For this reason the transaction is considered a related party transaction and to satisfy the ASX Listing requirements, an independent Expert’s Report is required. 1.4. The Independent Directors of Delecta have requested that RSM Bird Cameron Corporate Pty Ltd (“RSMBCC”), being independent and qualified for the purpose, express an opinion as to whether the Proposed Transaction is fair and reasonable to shareholders not associated with the Proposed Transaction (“Shareholders”). 1.5. The ultimate decision whether to approve the Proposed Transaction should be based on each Shareholder’s assessment of their circumstances, including their risk profile, liquidity preference, tax position and expectations as to value and future market conditions. If in doubt as to the action they should take with regard to the Proposed Transaction, or the matters dealt with in this Report, Shareholders should seek independent professional advice. 6 For personal use only 2. Summary and Conclusion Opinion 2.1. In our opinion, and for the reasons set out in Sections 12 and 13 of this Report, the Proposed Transaction is fair and reasonable to the Shareholders of Delecta. Fairness 2.2. 2.3. Our assessed values of the Assets and the Consideration are summarised in the table and figure below. Ref: Assessment of fairness Low Value High Value $m $m Fair Value of the Project 8 3.4 10.2 Fair Value of the Consideration 9 3.9 5.4 Table 1: Assessment of fairness (Source: RSMBCC analysis) Fair Value of the project Fair Value of Consideration 0 2 4 6 8 10 12 $'millions Value Figure 2: Summary of fairness assessment (Source: RSMBCC Analysis) In the absence of any other relevant information, we consider the Proposed Transaction to be fair to the Shareholders of Delecta, as the Fair Value of the Consideration falls within the Fair Value of the Project. Furthermore, Delecta recently acquired the Project on an arm’s length basis for US$3 million ($3.6 million). The Fair Value of the Consideration Delecta will receive is greater than the $3.6 million paid by Delecta. Reasonableness 2.4. 2.5. RG 111 establishes that an offer is reasonable if it is fair. It might also be reasonable if, despite not being fair, there are sufficient reasons for security holders to accept the offer in the absence of any higher bid before the offer closes. As such, we have also considered the following factors in relation to the reasonableness aspects of the Proposed Transaction: The future prospects of the Company if the Proposed Transaction does not proceed; and Any other commercial advantages and disadvantages to the Shareholders as a consequence of the Proposed Transaction proceeding. If the Proposed Transaction does not proceed then Delecta will continue to hold an interest in Paynes and the Project. In these circumstances, Delecta would seek to negotiate with the relevant vendors to extend the period for the completion of Stage 2 of the Project, which is an option to extend its interest to a further 7 For personal use only 4 wells, and the acquisition of additional seismic as Delecta would need the additional time due to the fact it would need to re-comply with the listing rules of the ASX. 2.6. 2.7. The key advantages of the Proposed Transaction are as follows: The Proposed Transaction is fair; Delecta will increase its interest in Paynes; Delecta would continue to hold its interest in the Project without the need to re-comply with the listing rules of the ASX; and Delecta will receive $1 million from future Oil and Gas revenue from the project. The key disadvantages of the Proposed Transaction are as follows: There is a cost to Delecta to exercise the options; There will be a loss of control in the project as Delecta will not have control in Paynes; and There is no guarantee of the value of the Consideration as it is dependent on the future value of Paynes’ shares. 2.8. We are not aware of any alternative proposal at the current time which might offer the Shareholders of Delecta a greater benefit than the Proposed Transaction. 2.9. In our opinion, the position of the Shareholders if the Proposed Transaction is approved is more advantageous than the position if it is not approved. Therefore, in the absence of any other relevant information and/or a superior offer, we consider that the Proposed Transaction is reasonable for the Shareholders of Delecta. 8 For personal use only 3. Scope of the Report ASX Listing Rules 3.1. ASX Listing Rule 10.1 states that “An entity must ensure that neither it, nor any of its child entities, acquires a substantial asset from, or disposes of a financial asset to, a related party or a subsidiary without the approval of holders of the entity’s ordinary securities”. 3.2. Paynes is an associated entity of Delecta as Delecta holds 350,000,000 shares or 38% of the share capital in Paynes as at 12 November 2014. 3.3. An asset is considered substantial “if its value; or the value of the consideration for it is, or in the ASX’s opinion is, 5% or more of the equity interests of the entity as set out in the latest accounts given to the ASX”. 3.4. The equity balance of Delecta as at 30 June 2014 was $10.9 million, and the estimated low value of the Project is estimated at US$2.9 million ($3.4 million), therefore the Proposed Transaction represents more than 5% of the equity interests of the entity. 3.5. Where Shareholder approval is sought, Shareholders must be presented with a report on the proposed transaction from an independent expert. The report must state whether the proposed transaction is “fair and reasonable” to shareholders. 3.6. Delecta is to hold a meeting of its shareholders where it will seek approval for the Proposed Transaction and the Company has engaged RSMBCC, to prepare a report which sets out our opinion as to whether the Proposed Transaction is fair and reasonable to the Shareholders. Basis of Evaluation 3.7. In determining whether the Proposed Transaction is “fair and reasonable” we have given regard to the views expressed by the Australian Securities and Investment Commission (“ASIC”) in Regulatory Guide 111 Contents of Expert’s Reports (“RG 111”). 3.8. RG 111 provides ASIC’s views on how an expert can help security holders make informed decisions about transactions. Specifically it gives guidance to experts on how to evaluate whether or not a proposed transaction is fair and reasonable. 3.9. RG 111 states that the expert’s report should focus on: the issues facing the security holders for whom the report is being prepared; and the substance of the transaction rather than the legal mechanism used to achieve it. 3.10. Furthermore RG 111 states that in relation to related party transactions the expert’s assessment of fair and reasonable should not be applied on a composite test – that is there should be a separate assessment of whether the transaction is “fair and reasonable” as in a control transaction. 3.11. Consistent with the guidelines in RG 111, in assessing whether the Proposed Transaction is fair and reasonable to the Shareholders, the analysis undertaken is as follows: 9 For personal use only 3.12. 3.13. Whether the Consideration is greater than the value of the Project - fairness; RG 111 states that, when considering fairness, an expert should consider all material terms of the transaction; and A review of other significant factors which Shareholders might consider prior to approving the Proposed Transaction - reasonableness. The other significant factors to be considered include: The future prospects of the Company if the Proposed Transaction does not proceed; and Any other commercial advantages and disadvantages to the Shareholders as a consequence of the Proposed Transaction proceeding. Our assessment of the Proposed Transaction is based on economic, market and other conditions prevailing at the date of this report. 10 4. Summary of Transaction For personal use only Overview of Delecta’s purchase of the Project 4.1. Delecta acquired the Project through its wholly owned US incorporated subsidiary - Canadian River, Inc for US$3 million. 4.2. The Project is made up of two key elements: Acquisition of Oil Fields 4.3. 4.4. The acquisition is to be completed in two stages: Stage 1 – Acquisition of an 80% working interest and 58% net revenue interest in a drilled and completed well with access to all required infrastructure such as gas transmission lines, separations tanks, electricity cables and pumping equipment to bring the well into production for a consideration payment of US$3 million; and Stage 2 – An Option to extend its interest to a further four wells and acquire an 80% working interest and 54% net revenue interest in these wells and the required infrastructure accessed through the first well through funding development costs of US$4.9 million (“Project Stage 2 Option”). In order to complete Stage 2, Delecta would need to complete the following: obtain Shareholder approval for the capital raising and re-compliance; undertake a further capital raising under a prospectus; and re-compliance with Chapter 1 and 2 of the ASX Listing Rules. Access to Seismic Data (“Project Seismic Option”) 4.5. Delecta through Canadian River, Inc has been granted an option by John Leenerts and James Holcomb to have exclusive access to seismic data covering a total of 64 square miles inclusive of the Project Area (‘Project Seismic Option’). 4.6. The Project Seismic Option includes all seismic, geological or geophysical data owned by Messers, Leenerts and Holcomb and their interpretations of such data over this area. 4.7. In order to exercise the Project Seismic Option, Delecta would need to complete the following: Pay an option exercise price of US$250,000; Grant John Leenerts and James Holcomb a 2% overriding revenue interest in any well developed (excluding those outlined in 4.3 above); Pay US$25,000 per well drilled for the first 5 wells drilled using the Seismic Data (excluding those outlined in 4.3 above); and 11 For personal use only Issue 5,000,000 options (post reconstruction) to acquire fully paid shares in the capital of the ASX listed parent company with an exercise price of $0.25 (post reconstruction) and expiring 2 years from date of issue. Overview of Transaction 4.8. Delecta has entered into an agreement with Paynes where Delecta will grant the Option to Paynes to acquire Delecta’s interest in the Project (described above). 4.9. The Option may be exercisable by Paynes at any time on or before, 12 January 2015. 4.10. If the Option is exercised, the following Consideration shall be payable: 4.11. Consideration Shares; Consideration Options; and Revenue Payment. Under the terms of the Proposed Transaction, Delecta will have divested its direct interest in the Project, though will have increased the value of its ownership in Paynes, which in turn will hold 100% of the project, and Delecta will also be entitled to the first $1 million from future revenues generated by the Project. Key conditions of the Proposed Transaction 4.12. The completion and exercise of the Option agreement is subject to and conditional upon the following by Paynes: Completion of due diligence; Completion of a consolidation of capital – ratio at 1:50 subject to ASX approving submission to recomply at 10 cents rather than 20 cents; Completion of capital raising of a minimum of $4 million required for reinstatement to the official list of ASX, however it should be noted that Paynes intends to raise a total of $8 million so that it can proceed with Stage 2; and Re-compliance with Chapters 1 and 2 of the ASX Listing Rules and approval for readmission. Rationale for the Proposed Transaction 4.13. The Proposed Transaction will allow Delecta to have an interest in an oil and gas asset without the need for the company changing its business operations and as such re-comply with the ASX listing rules and raise additional capital. 4.14. It also provides Delecta an opportunity to improve potential returns from an existing investment. 12 For personal use only 5. Profile of the Project Overview of the Project 5.1. The project consists of five wells in total. 5.2. Stage 1 involves the first well, which has been drilled and successfully completed and is awaiting the drilling of a salt water disposal well (SWDW) which was expected to be completed by the end of October 2014. The well will produce predominantly oil. 5.3. Stage 2 involves the 4 well drilling program with an agreed turnkey cost of US$4.9 million. Project Location 5.4. The Canadian River Project is located in the east-central portion of Oklahoma in the southeast portion of Okfuskee County, Oklahoma. Positioned south of the town of Weleetka, the project is easily accessible using the allweather access provided by the state highway system and well-maintained gravel county roads. The local terrain is slightly hilly with ground elevations ranging from 700 to 900 feet above sea level. No known adverse environmental conditions existed on the surface or sub‐surface. Okalahoma Energy Profile (from US Energy Information Administration (EIA)) 5.5. Oklahoma is ranked 5th in crude oil production, excluding federal offshore areas in the US in 2013. 5.6. As at 31 January 2013, Oklahoma had five operating petroleum refineries with a combined daily capacity of over 500,000 barrels per day. 5.7. Oklahoma is one of the top natural gas-producing states in the US, accounting for 7.1% of U.S. gross production and 8.4% of marketed production in 2013. 5.8. In 2013, Oklahoma ranked fourth in net electricity generation from wind, which provided almost 15% of the state's net generation. 5.9. Further details of the Project can be found in the dB report in Appendix 6. 13 For personal use only 6. Profile of Paynes Find Gold Limited History 6.1. Paynes was named after Thomas Payne, who was the first prospector to register a lease for gold mining with the Mines Department of Western Australia. 6.2. Gold mining has been confined to underground mining. From 1911-1982, some 69,000t of ore produced 1,784kg (63,000 ounces) of gold at an average grade of 25 g/t Au. 6.3. From 1932 – 2010, the Taylor family owned and mined the majority of the Paynes Find Gold leases. 6.4. In December 2010, Paynes acquired all the Paynes Find tenements held by the Taylor family as well as additional tenements in the Paynes Find area and was listed on the ASX. Location 6.5. Paynes is located approximately 420km Northeast of Perth, Western Australia and serviced by the sealed Great Northern Highway. 6.6. Located in historically significant gold producing region with the following basins: Hill 50 4.85 Moz Au Morning Star 2.0 Moz Au Mt Gibson 1.1 Moz Au Big Bell 3.5 Moz Au Tuckabianna 1.0 Moz Au Reedy 1.8 Moz Au Bluebird 1.2 Moz Au Youanmi 1.0 Moz Au 14 For personal use only Directors A profile of the current board of Paynes is set out in the table below. Name Title Experience Mr Paul Lloyd Chairman, Company Secretary, CFO Mr Lloyd is a Chartered Accountant with over 25 years of commercial experience. He operates his own corporate consulting business, specialising in the area of corporate, financial and management advisory services. After commencing his career with an international accounting firm, he was employed for approximately 10 years as the General Manager of Finance for a Western Australian based international drilling contractor working extensively in Asia and Africa. Mr Lloyd has been responsible for a number of ASX IPO's and is currently Non-executive Director and Company Secretary of ASX listed Firestrike Resources Limited and unlisted Tropicana Gold Limited Mr Malcolm Day Non-Executive Director Mr Day is Managing Director of Delecta Ltd (Paynes largest shareholder). Mr Day was the founder and inaugural Managing Director of Adultshop.com which listed on ASX in June 1999. In October 2010, Adultshop.com was privatised. Prior to founding Adultshop.com in 1996, Mr Day worked in the civil construction industry for ten years, 6 of which were spent in senior management as a Licensed Surveyor and then later as a Civil Engineer. Whilst working as a Surveyor, Mr Day spent 3 years in mining and exploration surveys in Western Australia. Mr Day is a Member of the Australian Institute of Company Directors. Mr David Holden Non-Executive Director Mr David Holden holds a Bachelor of Science degree in geology from Otago University, New Zealand. His career spans over twenty five years in the minerals industry from the coal mines in New Zealand to deep underground gold mines in South Africa. Over his career, David has held a number of senior management roles including Prosperity Resources Limited (ASX listed), Quadrant Australia (ASX listed), Avonlea Minerals Limited (ASX listed) and IGC Resources Inc (TSX listed). Mr Holden was intimately involved in the multimillion ounce discoveries of gold at the Mt Todd in the Northern Territory and the Nimary Mine in Western Australia. In 1997, Mr Holden founded a geological consulting service company, Ravensgate, which specialises in experts’ reports, resource estimations, valuations and exploration management. In 2005 he started Shackleton Capital Pty Ltd, advising listed companies on both corporate and technical matters relating to project acquisition or initial public offering. In 2007 he founded Atomic Resources Limited (ASX listed) a solid energy company that is currently developing major coal assets in Tanzania. Mr Holden also holds a Masters in Business Administration and a Masters in Management. He is a member of the Australian Institute of Mining and Metallurgy and the Canadian Institute of Mining. Figure 4: Profile of Paynes’ Directors (Source: paynesfindgold.com) Project 6.7. Since listing on the ASX the Company has: Completed geological and structural mapping at scales of 1:5000 and 1:2000. This identified 41 gold mineralised quartz reefs over a width of 600m across the main northern section of the Paynes Find Goldfield; 15 For personal use only Identified additional mineralisation over a total distance of at least 3,000m; Conducted a preliminary MMI geochemical survey; and Completed a Stage 1 drilling programme consisting of 3,800 metres within its 100% owned Paynes Find Gold project. Business Activities 6.8. Paynes is engaged in the exploration for gold and investment in minerals exploration and development sector. 6.9. Paynes is currently undertaking an assessment of work completed to date. This is expected to conclude at the end of 2014. It centres on strategy for exploration and environmental rehabilitation and detailed economic modelling being completed before any further drilling costs are incurred. 6.10. Paynes has also been engaged in assessing other project opportunities. Significant Recent Events 6.11. Paynes had the following key events in the last 12 months: Date Key Event 23 April 2014 Agreed to sell 7 Mining Tenements to the West of the main Paynes Find Gold Project for $0.35 million. 15 May 2014 Announced that it expects to receive $0.25 million in funding from Delecta Limited. 30 June 2014 Filed a Follow-on Equity Offering in the amount of $1.01 million. The company intends to use $250,000 of the proceeds raised for the exploration program at the Paynes Find Gold Project, $260,000 for the payment of Delecta loans, $200,000 for the payment of trade and other payables, $276,894 for additional working capital and $20,983 for offer expenses. 04 Aug 2014 0.643, Rights Issue 28 Aug 2014 Completed a Follow-on Equity Offering in the amount of $0.31 million representing a 31% take up. 01 Sept 2014 Completed the sale of 7 Mining Tenements to the West of the main Paynes Find Gold Project for $0.35 million. Paynes received a non-refundable $0.05 million deposit on signing the deed and received the remaining $0.3 million on September 1, 2014. 29 Oct 2014 6.12. Announced that it has received $0.20 million in funding. Paynes intends to use the proceeds for due diligence on the Project, meeting the commitments in respect to its existing exploration project, and working capital requirements. Figure 5: Key Developments (Source: Capital IQ) Following the sale of the 7 Mining Tenements at 23 April 2014 and the current depressed market for gold assets, Paynes is essentially a shell company with immaterial net assets. 16 For personal use only Financial Performance 6.13. The table below sets out a summary of the financial performance of Paynes for the years ended 30 June 2012 (“FY12”), 30 June 2013 (“FY13”) and 30 June 2014 (“FY14”) sourced from the company’s audited financial statements. Paynes Find Gold Limited Year ended Financial Performance Revenue Cost Of Goods Sold Gross Profit 30-Jun-14 AUD '000 5 5 30-Jun-13 AUD '000 53 53 30-Jun-12 AUD '000 5 5 6.15 (610) (170) (13) (1,064) (1,969) (4) (32) (1,419) (529) (726) (253) 6.19 (4,489) - - Total Operating Expenses (5,282) (3,069) (2,927) Operating Income (5,277) (3,016) (2,921) (6) (6) (7) (7) (150) (150) 5 (5,278) (3,023) (3,071) 350 (4,928) (3,023) (604) (3,675) (4,928) (3,023) (3,675) Operating Expenses Selling General & Admin Expenses Exploration/Drilling Costs Stock-Based Compensation Depreciation & Amort. Impair. of Oil, Gas & Mineral Properties REF 6.14 Interest Expense Net Interest Expense Other Non-Operating Income (Expenses) EBT Excl. Unusual Items Gain (Loss) On Sale Of Assets EBT Incl. Unusual Items 6.16 Income Tax Expense Net Income Table 2: Paynes Financial Performance (Source: Paynes Financial Statements) 6.14. The accounts are audited by BDO. While the audit report is not modified, an ‘emphasis of matter’ paragraph has been included with the audit report stating Paynes incurred a net loss of $4.9 million and net operating outflows of $554,000 during the year ended 30 June 2014 which indicate the existence of a material uncertainty which may cast doubt on the company’s ability to continue as a going concern and may be able to realise its assets and discharge its liabilities in the normal course of business. 6.15. Revenue mainly relates to interest revenue. 6.16. Included within selling and administration expenses are employee benefit expenses (mainly directors remuneration and consulting in the region of $196,000 - $250,000), rent and administration expenses. 6.17. The gain on the sale of assets in 2014 relates to the sale of tenements in April 2014 for $350,000. The loss on the sale of assets in 2012 relates to the sale of Plant and Equipment for $73,000 recognising a loss of $604,000. 17 For personal use only Financial Position 6.18. The table below sets out a summary of the financial position of Paynes as at 30 June 2013 (“FY13”) and 30 June 2014 (“FY14”) sourced from the company’s audited financial statements. Paynes Find Gold Limited Year ended Financial Performance ASSETS Current Assets Cash And Equivalents Accounts Receivable Prepaid Expenses Total Current Assets Non Current Assets Property, Plant & Equipment Other Long-Term Assets Total Non Current Assets REF 6.19 Net Assets 30-Jun-13 AUD '000 178 337 5 520 417 61 12 490 - 4,542 229 4,771 520 5,261 121 264 - 65 14 24 24 409 125 228 111 5,034 15,074 (16,992) 2,029 15,074 (12,069) 2,029 111 5,034 6.20 Total Assets LIABILITIES Current Liabilities Accounts Payable Short-term Borrowings Current Portion of Capital Leases Other Current Liabilities Total Current Liabilities 30-Jun-14 AUD '000 6.21 Equity Common Stock Retained Earnings Comprehensive Income and Other Total Equity Table 3: Financial Position of Paynes (Source: Paynes Financial Statements) 6.19. As at 30 June 2014, Paynes disclosed net assets of $111,000. 6.20. Included within Receivables is the amount due of $350,000 with respect to the sale of the tenements on 23 April 2014. This amount was received in cash on 1 September 2014. 6.21. The non-current assets of Paynes is currently $nil. This has resulted from the following: Paynes sold part of the Paynes Project during the year for $350,000 as noted in paragraph 6.19 above. The Directors decided to impair the carried forward exploration expenditure of approximately $4.5 million associated with the Paynes Find gold project in the half yearly report to 31 December 2013. This impairment was made due to the results of the previous exploration program, the failure of the 18 For personal use only trial mining project, the reduction in the gold price, the difficulty raising funds for further exploration due to the state of the capital markets and the inability to joint venture the project. 6.22. Paynes disclosed short term borrowings of $264,000 as at 30 June 2014. This relates mainly to a loan from Delecta of $250,000. The interest rate on the loan is 10% and with an establishment fee of 2%. It was intended that repayment will be on Conversion to equity pursuant to the rights issue announced on 30 July 2014. No security has been provided by the Company. On 28 August $310,000 was raised in the rights issue. The up-take was approximately 31%. Share price and performance 6.24. A summary of Paynes’ share price and volume before the announcement of the Transaction is set out in the figure below: Price Volume Graph with Key Events 0.005 12 4 Oct 2013:Announce Management Changes 25 September 2014: Filed a Follow-on Equity Of f ering in the amount of AUD 8.00 million. 10 0.004 15 May 2014: Announced that it expects to receiv e AUD 0.25 million in f unding f rom Delecta Limited. 0.003 30 July 2014: Filed a Followon Equity Of f ering in the amount of AUD 1.01 million 6 4 Volume (in millions) 8 Price 6.23. 0.002 2 0.001 0 9/13 12/13 3/14 Volume Price 6/14 Key Event Figure 6: Paynes Daily Closing Share Price and Traded Volumes Pre Announcement (Source: Capital IQ) We make the following comments with regard to Paynes’ recent share price performance: In the 12 months prior to the Proposed Transaction, Paynes’ shares have traded between a low of $0.001 on various dates and a high of $0.004; There were two significant trading days over the period of the price chart above. The first was the trading of 9.26 million shares on 26 June 2014 with no explanation. The second was the trading of the 22 September 2014. The announcement of the transaction occurred on the 25 September 2014 and as such the market may have been aware of the transaction before the official announcement; and Further analysis on the recent volume and price at which Paynes’ shares have traded is set out at paragraph 9.7. 19 For personal use only Capital Structure (pre consolidation) 6.25. At 29 October 2014, Paynes had 911,027,100 shares on issue. In addition, the company had 264,448,677 options on issue as summarised in the table below. Date of Expiry Listed/Unlisted Exercise Price unlisted 25 cents 56,000,000 30/06/2015 listed 3 cents 150,808,677 30/06/2015 unlisted 3 cents 33,640,000 01/05/2016 unlisted 01/05/2015 6.26. 35 cents Total Number under Option 24,000,000 264,448,677 Figure 7: Unissued ordinary shares of Paynes (Source: Capital IQ) There are 728 shareholders in total as at 12 November 2014 of which, 96% are Australian and 4% are overseas. Approximately, 58.7% of the company’s ordinary shares are held by the top 10 Shareholders as summarised in the table below. Shareholder Total Units % Issue Capital 350,000,000 38.4% Paranoid Enterprises Pty Ltd 25,000,000 2.7% Mr Michael Charles Mann & Mr Ross Gregory 25,000,000 2.7% Adelco Inc 25,000,000 2.7% Yardie (WA) Pty Limited 20,000,000 2.2% Ms Rebecca Thompson 20,000,000 2.2% Mr Carl Coward 20,000,000 2.2% Mr Andrew William Spencer 20,000,000 2.2% Mr Matthew Blumberg 15,226,220 1.7% Ghan Resources Pty Limited 15,100,618 1.7% Total Top 10 535,326,838 58.7% Other Shareholders 375,700,262 41.3% Total ordinary shares on issue 911,027,100 100.0% Delecta Limited Figure 8: Top 10 Shareholders as at 12 November 2014 (Source: Paynes) 20 For personal use only 7. Valuation Approach Valuation methodologies 7.1. 7.2. In assessing the Fair Value of the Assets, we have considered a range of valuation methodologies. RG 111 proposes that it is generally appropriate for an expert to consider using the following methodologies: the discounted cash flow (“DCF”) method and the estimated realisable value of any surplus assets; the application of earnings multiples to the estimated future maintainable earnings or cash flows added to the estimated realisable value of any surplus assets; the amount which would be available for distribution on an orderly realisation of assets; the quoted price for listed securities; and any recent genuine offers received. We consider that the valuation methodologies proposed by RG 111 can be split into three valuation methodology categories, as follows. Market based methods 7.3. Market based methods estimate the Fair Value by considering the market value of an entity or asset’s securities or the market value of comparable entities or assets. Market based methods include; The quoted price for listed securities; and Industry specific methods. 7.4. The recent quoted price for listed securities method provides evidence of the Fair Value of an entity’s securities where they are publicly traded in an informed and liquid market. 7.5. Industry specific methods usually involve the use of industry rules of thumb to estimate the Fair value of a company and its securities or an asset. Generally rules of thumb provide less persuasive evidence of the Fair Value of a company or asset than other market based valuation methods because they may not account for specific risks and factors. Income based 7.6. 7.7. Income based methods estimate value by calculating the present value of a company or asset’s estimated future stream of earnings or cash flows. Income based methods include: Capitalisation of maintainable earnings; and Discounted cash flow methods. The capitalisation of earnings methodology is generally considered a short form DCF, where an estimation of the Future Maintainable Earnings (“FME”) of the business, rather than a stream of cash flows is capitalised based on an appropriate capitalisation multiple. Multiples are derived from the analysis of transactions involving comparable companies or assets and the trading multiples of comparable companies or assets. 21 For personal use only 7.8. The DCF technique has a strong theoretical basis, valuing a business or asset on the net present value of its future cash flows. It requires an analysis of future cash flows, the capital structure and costs of capital and an assessment of the residual value or the terminal value of the company or asset’s cash flows at the end of the forecast period. This method of valuation is appropriate when valuing companies or assets where future cash flow projections can be made with a reasonable degree of confidence. Asset based methods 7.9. Asset based methodologies estimate the Fair Value of a company’s securities based on the realisable value of its identifiable net assets. Asset based methods include: orderly realisation of assets method; liquidation of assets method; and net assets on a going concern basis. 7.10. The value achievable in an orderly realisation of assets is estimated by determining the net realisable value of the assets of a company which would be distributed to security holders after payment of all liabilities, including realisation costs and taxation charges that arise, assuming the company is wound up in an orderly manner. This technique is particularly appropriate for businesses with relatively high asset values compared to earnings and cash flows. 7.11. The liquidation of assets method is similar to the orderly realisation of assets method except the liquidation method assumes that the assets are sold in a shorter time frame. 7.12. The net assets on a going concern method estimates the market values of the net assets of a company but unlike the orderly realisation of assets method it does not take into account realisation costs. Asset based methods are appropriate when companies are not profitable, a significant proportion of the company’s assets are liquid, or for asset holding companies. Selection of valuation methodologies Valuation of the Project 7.13. In assessing the value of the Project, we have engaged an Independent specialist, dB LLC Petroleum Advisors (“dB”) to undertake a valuation. Use of specialist 7.14. 7.15. dB was instructed by RSMBCC to provide a report (“dB Report”) detailing its independent valuation of the Project to be used in the preparation of this IER. In particular, the Project includes: Stage 1 - 80% working interest (58% net revenue interest) in the initial phase of the project; Stage 2 - An 80% working interest in four additional wells and infrastructure, with a 54% net revenue interest. The four well drilling program has an agreed turnkey cost of US$4.9 million. Option to access 64 square miles of Seismic Data, surrounding the 425 acre Project Area Lease. The dB Report was provided to us on 15 November 2014 and dB has consented to RSMBCC relying on the dB Report for the purposes this IER. The dB Report is included as Appendix 6 of this IER. 22 For personal use only 7.16. 7.17. dB has determined a value for the Canadian Valley Project by using the DCF method. In order to assess the reasonableness of the DCF valuation, dB has compared the result of its DCF to comparable project metrics. We consider the valuation method used by dB to be appropriate. Valuation of Consideration 7.18. 7.19. If the Option is exercised, consideration is payable in the form of: Consideration Shares; Consideration Options; and A Revenue Payment. We have considered the value of each component of the Consideration separately and then combined them to assess the total value of the Consideration. Valuation of the Consideration Shares 7.20. 7.21. In assessing the Fair Value of a Paynes share we have selected the net assets on a going concern methodology for the following reasons: Paynes is effectively a shell company with immaterial assets and net liabilities. In our experience, the most appropriate method for determining the value of companies such as Paynes is on the basis of the Fair Value of their underlying net assets; Paynes does not generate profits and, therefore, there are no historical profits from which future earnings could be inferred. This means that the capitalisation of FME approach is not appropriate; and Paynes has no immediately foreseeable future net cash inflows and is yet to complete a feasibility study and therefore we do not consider the application of the DCF methodology to be appropriate in these circumstances. As a cross-check to our primary valuation methodology, we have also considered the value of a Paynes share based on recent trading prices for portfolio shareholding parcels of Paynes shares on the ASX. Use of Specialist 7.22. Ravensgate was instructed by RSMBCC to provide a report (“Ravensgate Report”) detailing its independent valuation all of the exploration assets held by Paynes to be used in the preparation of this IER. The Ravensgate Report was provided to us on 20 October 2014 and Ravensgate has consented to RSMBCC relying on the Ravensgate Report for the purposes this IER. The Ravensgate Report is included as Appendix 7 of this IER. 7.23. Ravensgate has determined a value for the Paynes Project by reviewing market transactions involving gold projects at the exploration stage in Western Australia. 7.24. We consider the valuation method used by Ravengate to be appropriate. 23 For personal use only Valuation of the Consideration Options 7.25. The basis of the indicative valuation we have undertaken is the binomial option pricing model. 7.26. Binomial option pricing models consist of three components: 7.27. Plots the possible future value of the underlying stock by using a model with many binomial steps. Each step represents a movement upward or downward, the magnitude of which is based on the assessed price volatility of Paynes shares; At each step the underlying stock values are translated to option values; and These future option values are discounted back to determine a single present value of the option as at the grant date. The Options will vest on the grant date therefore we have used a vanilla binomial option pricing model. Valuation of the Revenue Payment 7.28. An amount $1,000,000 is payable to Delecta from revenues generated from the Project. 7.29. We have discounted this amount using what we consider an appropriate discount rate. 7.30. The discount rate we have selected allows for both the time value of money and the risks attached to future cash flows. 7.31. We have utilised the weighted average cost of capital (“WACC”) as our discount rate. We have assessed the pre-tax WACC to be in the range of 11% to 13% with a mid-point of 12%. Details of how we have calculated our preferred range of WACCs is included in Appendix 8. 24 For personal use only 8. Valuation of the Project 8.1. In accordance with RG111, we have relied on the services of a specialist engaged by us to assess the value of the Project. On 15 November 2014, dB prepared a report titled ‘Fair Market Value Assessment, Canadian Valley Project, Okfuskee County, Oklahoma, USA’. The dB report is attached as Appendix 6. 8.2. We note that dB states in its report that the valuation of the Project has been prepared in accordance with the VALMIN Code. We have satisfied ourselves as to dB’s qualifications and independence from Paynes and have placed reliance on their report. 8.3. The report notes that Fair Value of a Petroleum Asset or Security is comprised of two components: technical value of the Mineral or Petroleum Asset or Security and a premium or discount relating to market, strategic or other considerations. 8.4. dB has valued the Project including the Stage 2 Option between US$2.9 million and US$8.8 million with the most likely value to be US$4.8 million (between A$3.4 million and A$10.2 million, with a preferred value of A$5.6 million). Assumptions used by dB 8.5. The technical value of the Project involves the preparation of estimates of net reserves, future annual production and future net income attributable to the anticipated leasehold interest of Delecta Limited. These values are calculated using a 10% discount factor. 8.6. dB modelled Stage 1 and Stage 2 of the Project separately, using the DCF methodology for each stage. The DCF was defined by a decline curve which is presented in the dB report. The decline curve was based on a number of key assumptions and economic parameters, some of which are detailed below: Decline Curve Assumptions: Initial Rate Oil 100 bopd Initial Rate Gas 120 mcfpd Initial GOR Abandonment Oil Rate 1,200 cu. Ft/bbl 10 bopd Recoverable Oil Volume 100,000 bbls Recoverable Gas Volume 165,000 mcf Calculated Result: Exponential decline rate Producing life 27%/year 7 years Figure 9: Decline Curve Assumptions and Calculated Result (source: dB Technical Assessment & Valuation) 25 For personal use only 8.7. The DCF prepared by dB included the following key assumptions: Cash flow Model: Economic Parameters: Delecta Net Revenue Interest 58% (Stage 1) / 54% (Stage 2) Monthly Operating Cost $5,000/well Oklahoma Severance Taxes 7.1% both Oil and Gas US Federal Corporate Tax 30% Discount Factor (real) 10% Figure 10: Cash Flow Model Assumptions (source: dB Technical Assessment & Valuation) Gas and Oil Prices (5 –Year NYMEX Strip pricing) US $ Year Gas Oil 2014 4.06 90.24 2015 3.93 87.55 2016 4.04 85.90 2017 4.18 84.80 2018 4.30 84.53 4.30 84.53 2019 + Figure 11: Gas and Oil Assumptions (source: dB Technical Assessment & Valuation) Technical value range 8.8. dB used three scenarios of estimated ultimate recovery (“EUR”) to assess the sensitivity of the Project. The results are shown in the table below : EUR Case PV10 (bbls) (US $’000) P10 75,000 $1,589 P50 100,000 $2,234 P90 200,000 $3,169 Figure 12: Fair Value of Stage 1 (source: dB Technical Assessment & Valuation) 8.9. The P10 case carries a confidence factor of 90% that the well production will exceed 75,000 barrels of oil. The P50 case indicates a most likely case of 100,000 barrels with a confidence factor of 50%. The P 90 case carries a confidence factor of 10% that the production will exceed 200,000 barrels of oil. 8.10. Furthermore, dB also undertook an economic assessment in the event that Delecta exercises the Stage 2 option to participate in the five well full – field development. The results are shown in the table below : Case EUR PV10 IRR ROI Payout Fair Value (bbls) (US $’000) (%) (%) (yrs) (US $’000) P10 75,000 $3,900 133 2.06 1.27 $2,925 P50 100,000 $6,381 189 2.77 1.15 $4,786 P90 200,000 $11,658 179 5.37 1.15 $8,744 Figure 13: Fair Value of Project including Stage 2 Option (source: dB Technical Assessment & Valuation) 26 For personal use only Premium or discount relating to market, strategic or other considerations 8.11. For the Project, as there is no PDP Production rate currently available to be valued on basis of $/flowing barrel, dB has assessed the Fair Value by taking the P50 project NPV10 and applying a Proved Undeveloped (“PUD’) discount factor of 25%. Value of the Project Seismic Option 8.12. In our opinion, there is not sufficient information to estimate with a reasonable basis the value of the information included in the Project Seismic Option. As such, we consider the value of the opinion to be $nil, due to uncertainties in the potential results from the project. This is supported by Delecta’s acquisition, in which the Project Seismic Option was acquired for $nil consideration. Conclusion 8.13. Paynes intends to raise up to $8 million through its capital raising at $0.20 in order to exercise the Stage 2 Option. As such, we have relied on the Project value including the Stage 2 Option, which is set out in the table above for the basis of our valuation. For comparison purposes, we have converted the US$ into AUD$ using MoneyConverter.com US$1: $1.1644 at 18 November 2014 throughout the report as follows: Case FV FV (US $’000) (AUD $’000) P10 $2,925 $3,406 P50 $4,786 $5,573 P90 $8,744 $10,182 Figure 14: Project Value including Stage 2 Option (source: RSMBCC Analysis) 27 For personal use only 9. Valuation of Consideration 9.1. A summary of the value of consideration is presented in the table below: Low Value High Value Ref $m $m Consideration Shares 9.22 2.5 4.0 Consideration Options Section 10 0.4 0.4 Revenue Payment Section 11 0.9 0.9 3.9 5.4 Summary of Value of Consideration Table 4: Summary of Value of Consideration (Source: RSMBCC Analysis) Valuation of Consideration Shares 9.2. We have performed our analysis of the value of a Paynes share on a pre-consolidation basis. 9.3. We have valued a Paynes share using the net assets on a going concern methodology based on the net book value of the assets and liabilities of Paynes as set out in the statement of financial position of Paynes as at 30 September 2014 as adjusted for items set out in the table below. Proposed Transaction Low Value High Value $m $m 9.4 0.6 0.6 Fair Value of Paynes existing projects 9.5 0.8 1.2 Capital Raise 9.10 8.0 8.0 8 3.4 10.2 11 (0.9) (0.9) 11.9 19.0 Ref: Net assets of Paynes as at 30 September 2014 Plus: Value of Project (including Stage 2) Less: Revenue Payable Value of Paynes Number of Shares (pre- consolidation) Number of shares on issue at 29 October 2014 6.25 911 911 Issued to DLC 9.11 1,500 1,500 Capital Raise 9.10 4,000 4,000 6,411 6,411 0.002 0.003 10% 10% 0.002 0.003 1,500 1,500 2.5 4.0 Value of Shares (Control) Minority Interest Discount 9.13 Value of DLC Shares Shares issued to DLC Value of Consideration 9.11 Table 5: Assessed Value of Paynes on Net Assets Basis (Source: RSMBCC Analysis) 28 For personal use only Net assets as at 30 September 2014 9.4. RSMBC obtained the quarterly results of Paynes as at 30 September 2014 and disclosed net assets of Paynes are $589,000. The movement between 30 June 2014 and 30 September 2014 from $111,000 to $589,000 is mainly due to the equity offering of $310,000 on 28 Aug 2014 and the conversion of the Delecta Loan of $200,000 into equity. We have considered whether any adjustments are required to reflect the true position of the Company and determined no adjustments are necessary. Fair Value of Paynes Projects 9.5. The Fair Value of the various exploration projects of the Company are shown in the table below. Paynes Projects Paynes Find Gold Project The Canadian Valley Project (the Project) Total Ref Low Value $m High Value $m Appendix 7 0.8 1.2 8 3.4 10.2 4.2 11.4 Table 6: Fair Value of Paynes Projects (Source: Ravensgate Report, dB Report and ASX Announcement) 9.6. In accordance with RG111, we have relied on the services of the specialists engaged by us to assess the value of Paynes’ exploration projects. On 20 October 2014, Ravensgate prepared a report titled ‘Independent Technical Assessment and Valuation, Paynes, Valuation of Mineral Assets Western Australia’ for Paynes. Ravensgate calculated a high, low and preferred value for each of Paynes’ exploration interests. The total preferred value for Paynes’ exploration interests was $1.022 million. In selecting its preferred value, Ravensgate has used its professional expertise and, as such, the preferred value may not be the midpoint of its range of values. 9.7. For the Paynes Project, Ravensgate used the comparable transaction method to calculate a value of between of $0.8 million to $1.2 million with a preferred value of $1.0 million. 9.8. We note that Ravensgate states in this report that the valuation of Paynes exploration interests has been prepared in accordance with the VALMIN Code 2005, which is binding upon Members of the Australian Institute of Mining and Metallurgy and the Australian Institute of Geoscientists. We have satisfied ourselves as to Ravensgate’s qualifications and independence from Paynes and have placed reliance on their report. A copy of Ravensgate’s report is attached at Appendix 7. 9.9. We have also included the value of the Project, as following the Proposed Transaction, the Project will be owned by Paynes. Fair Value of Capital Raise 9.10. In order to complete Stage 2, Paynes must complete a capital raise of $8 million at $0.10 equating to 80 million shares post consolidation (the equivalent of 4 billion shares at $0.002 pre consolidation). 29 For personal use only Shares Issued to DLC 9.11. Under the Option, Paynes must issue $3 million in fully paid ordinary shares at a deemed issue price of $0.002, which equates to 1.5 billion shares. Discount to controlling interest 9.12. Based on the minimum capital raising required as part of the Proposed Transaction. Delecta will receive a 44% interest in Paynes. Typically a premium for control would be included when valuing a parcel of shares of this size. However, in our opinion, the market value of a 44% interest in Paynes is likely to include a discount because there is limited liquidity in Paynes and selling a large portion of shares would likely require a discount. As such, we have applied a minority interest discount to our NTA value. 9.13. In selecting a minority interest discount we have given consideration to the RSM Bird Cameron 2013 Control Premium Study. The study performed an analysis of control premiums paid over a 7-year period to 31 December 2012 in 345 successful takeovers and schemes of arrangements of companies listed on the ASX. Our study concluded that, on average, control premiums in takeovers and schemes of arrangements involving Australian companies was in the range of 20% to 35%. In valuing an ordinary Paynes Share we have reflected a minority interest discount of 10% as Delecta holds approximately 44% of the shares. Quoted Price of Listed Securities – Post announcement 9.14. In order to provide a cross-check to the valuation of a Paynes share under the net assets on a going concern basis, we have also assessed the Fair Value based on the quoted market price. 9.15. The assessment reflects trading following the announcement of the Proposed Transaction in order to include the influence of any movement in price that occurred as a result of the announcement (therefore reflecting possible market value). 9.16. The Proposed Transaction was announced to the Australian Securities Exchange on 25 September 2014. Figure 3 shows the daily closing price and traded volumes of Paynes post the announcement. Price Volume Graph with Key Events 0.004 12 25 September 2014: Transaction Announced 10 30 July 2014: Filed a Follow on Equity offering of AUD 1.01 million 8 Price 15 May 2014: Announced it expects to receive AUD 0.25 million in funding from Delecta Limited 6 0.002 4 Volume (in millions) 0.003 2 0.001 11/13 0 2/14 5/14 Volume Price 8/14 Key Event Figure 15: Paynes Daily Closing Share Price and Traded Volumes Post Announcement (Source: Capital IQ) 30 For personal use only 9.17. 9.18. 9.19. We make the following comments with regard to Paynes’ recent share price performance: In the months before the Proposed transaction, Paynes shares have traded between a low of $0.001 to a high of $0.003; We note that before the announcement of the transaction, Paynes shares had traded mostly at $0.002, with occasional trades at $0.001. Trading volumes were also very low; Following the announcement of the Proposed Transaction on 25 September 2014, the Company’s share price has traded between a low of $0.002 to a high of $0.003. However, Paynes shares have not traded since the 03 October 2014 and we note at this date traded at $0.002 and as such the transaction has had very little impact on the share price; and There were two significant trading days over the period of the price chart above. The first was the trading of 9.26 million shares on 26 June 2014 with no explanation. The second was the trading of the 22 September 2014. The announcement of the transaction occurred on the 25 September 2014 and as such the market may have been aware of the transaction before the official announcement. In order to provide further analysis of the market prices for Paynes shares, we have considered the volume weighted average market price (“VWAP”) for 10 day, 30 day, 60 day and 90 trading day periods for the last trading date at 11 November 2014 which was 03 October 2014 : $ 10 Days 30 Days 60 Days 90 Days 0.003 0.002 0.002 0.002 VWAP Table 7: Volume Weighted Average Price of Paynes (Source: Capital IQ) An analysis of the volume in trading in Paynes shares for the past 90 days from 03 October 2014 is set out in the table below: Low High $ $ Cumulative Volume (‘000) % of Total 1 trading day 0.002 10 trading days 0.002 0.002 650 0.1% 0.003 22,740.16 3.2% 30 trading days 0.001 0.003 25,905.19 3.6% 60 trading days 0.001 0.003 28,655.19 4.0% 90 trading days 0.001 0.003 29,582.25 4.1% Capital Table 8: Traded Volumes of Paynes to 03 October 2014 (Source: Capital IQ) 9.20. The table shows that only 4.1% of Paynes’ shares have been traded in the 90 trading days from 03 October 2014. 9.21. The table indicates very limited volume and liquidity in Paynes shares. 9.22. Our assessment of the Fair Value of a Paynes share is based on the quoted market price, and is $0.002 based on the volume weighted average prices for 10 days, 30 days, 60 days and 90 days respectively. 31 For personal use only Valuation Summary 9.23. 9.24. A summary of our assessed values of a Paynes share is shown below. Low $ High $ Net assets on a going concern basis 0.002 0.003 Quoted market price value 0.002 0.002 Preferred valuation 0.002 0.003 Valuation Methodology Table 9: Paynes Valuation Summary (Source: RSMBCC Analysis) In our opinion we consider that the net asset valuation methodology provides a better indicator of the Fair Value of a Paynes Share as we consider our analysis of the trading of Paynes’ shares post the announcement of the Proposed Transaction indicates that the market for Paynes’ shares is not deep enough to provide an assessment of their Fair Value. 32 For personal use only 10. Valuation of Consideration Options 10.1. We have used a vanilla binomial option pricing model, to value the Options. 10.2. In order to ensure our assumptions are reflective of those included in the Notice of Meeting, we have performed our valuation of the Consideration Options on a post-consolidation basis. 10.3. We have calculated a value of $0.4 million for the Consideration Options, based on a value of $0.067 per option, as set out in the table below. Valuation Summary $0.067 Value per option Number of options to be issued Delecta 6,000,000 Total value of Consideration Options $402,000 Option Valuation Model Assumptions 10.4. We set out the assumptions we have used in the binomial model below, in assessing the indicative Fair Value of the Options. Assumption Ref Options Grant date 10.5 27 November 2014 Spot price 10.6 $0.10 Exercise price 10.7 $0.125 Expiry period 10.8 5 years Expected future volatility 10.9 90% Risk free rate 10.10 2.82% Dividend yield 10.11 0% Table 10: Assumptions (Source: RSMBCC Analysis) 10.5. Grant date – For the purposes of this indicative valuation, we have assumed that the grant date is the date of this Report. 10.6. Spot price – Based on our assessment of Paynes shares in Section 9.22 we consider the underlying value of a Paynes’ share to be $0.002. A consolidation of capital ratio of 1:50 is assumed, which results in a price of $0.10. However, this is subject to ASX approving submission to recomply at 10 cents. 10.7. Exercise price – The exercise price will be $0.125. 10.8. Expiry date – We understand that the expiry date of the Options is to be 5 years after the date of issue. 33 For personal use only 10.9. Expected future volatility – Due to a low level of trading activity in Paynes’ shares and a lack of historical price data related to its future operations as an oil and gas producer, we have assessed the expected future volatility on the historical volatility of comparable oil and gas producers over 5 years. Our results are set out in the table below: Company Company Description Volatility AusTex Oil Limited (ASX:AOK) AusTex Oil Limited, a junior oil and gas company, is engaged in the exploration, development, and production of hydrocarbons in Oklahoma and Kansas, the United States. 71.63% Target Energy Limited (ASX:TEX) Target Energy Limited explores, develops, and produces oil and gas in the United States. 109.84% Sun Resources NL (ASX:SUR) Sun Resources NL engages in the exploration, development, and production of oil and gas projects in Australasia and the United States. 91.64% Empire Energy Group Limited (ASX:EEG) Empire Energy Group Limited, through its subsidiaries, is engaged in the acquisition, exploration, development, and production of oil and natural gas primarily in Appalachia and the Central Kansas Uplift, the United States. 92.01% Lonestar Resources Limited (ASX:LNR) Lonestar Resources Limited, an independent oil and gas company, acquires, explores for, develops, and produces oil and gas properties in the United States. 63.67% Median 92% Average 86% Figure 16: Comparable Companies (Source: Capital IQ) 10.9.1. We have selected an expected volatility factor which we believe to be representative of the future volatility of the company. 10.9.2. Based on our analysis we have concluded that a volatility figure of 90% is reflective of the future volatility of Paynes shares over the life of the options. 10.10. Risk free rate - We have determined this based on the yield of a Commonwealth Government 5 year bond, being the period which most closely corresponds to the estimated option life, which at 11 November 2014 yielded 2.82%. 10.11. Dividend yield – Dividend yield of 0% has been assumed as we cannot predict with certainty if or when Paynes may pay a dividend. 34 For personal use only 11. Valuation of the Revenue Payment 11.1. A consideration amount of $1 million is payable from the future oil & gas revenues derived from the project. We have calculated the net present value of the deferred consideration using a discount rate of 12% and have assumed that the cash will be received within approximately six months based on the cash flow profile prepared by dB. 11.2. We have utilised the weighted average cost of capital (“WACC”) of Delecta as our discount rate. We have assessed the pre-tax WACC to be in the range of 11% to 13%. Accordingly, given that we have assumed that the revenue payment will be made six months after the Proposed Transaction has completed we have applied a discount rate of between 5.4% and 6.3% to the $1 million payment representing six months discounting. Details of how we have calculated our preferred range of WACCs is included in Appendix 8. 11.3. Deferred Consideration amount Discount rate Present value of Deferred Consideration Low Value $m High Value $m 1.0 1.0 6.3% 5.4% 0.9 0.9 Table 12: Value of Consideration (Source: RSMBCC analysis) We consider the value of the Consideration to be approximately $0.9 million. 35 For personal use only 12. Is the Proposed Transaction Fair to Shareholders? 12.1. 12.2. Our assessed values of the Project and Consideration are summarised in the table and figure below. Ref: Assessment of fairness Low Value High Value $m $m Fair Value of the Project 8 3.4 10.2 Fair Value of the Consideration 9 3.9 5.4 Table 13: Assessment of fairness (Source: RSMBCC analysis) Fair Value of the project Fair Value of Consideration 0 2 4 6 8 10 12 $'millions Value Figure 17: Summary of fairness assessment (Source: RSMBCC Analysis) In the absence of any other relevant information, we consider the Proposed Transaction to be fair to the Shareholders of Delecta, as the Fair Value of the Consideration falls within the Fair Value of the Project. Furthermore, Delecta recently acquired the Project on an arm’s length basis for US$3 million ($3.6 million). The Fair Value of the Consideration Delecta will receive is greater than $3.6 million. 36 For personal use only 13. Is the Proposed Transaction Reasonable 13.1. RG111 establishes that an offer is reasonable if it is fair. If an offer is not fair it may still be reasonable after considering the specific circumstances applicable to the offer. In our assessment of the reasonableness of the Proposed Transaction, we have given consideration to: The future prospects of Delecta if the Proposed Transaction does not proceed; and Other commercial advantages and disadvantages to the Shareholders as a consequence of the Proposed Transaction proceeding. What happens if the Proposed Transaction does not proceed? 13.2. If the Proposed Transaction does not proceed then Delecta will continue to hold an interest in the Project. However, Delecta will need to raise capital to exercise the Stage 2 Option and will need to recomply with the ASX Listing Rules as Delecta’s business operations will have moved into oil and gas production. Advantages and disadvantages 13.3. In assessing whether the Shareholders are likely to be better off if the Proposed Transaction proceed than if it does not, we have also considered various advantages and disadvantages that are likely to accrue to the Shareholders. Advantages of approving the Proposed Transaction Advantage 1 – The Proposed Transaction is fair 13.4. RG 111 states that a transaction is reasonable if it is fair. Advantage 2 – Influence over Paynes 13.5. While Delecta will have divested its direct interest in the Project, it will have increased the value of its ownership in Paynes through the establishment of an indirect interest in the Project and will have the ability to recoup $1 million of its initial investment from future revenues generated by the Project. Advantage 3 – No requirement to re-comply 13.6. Delecta will have an interest in oil and gas without the need to recomply with Chapters 1 and 2 of the ASX Listing Rules, including consolidation of capital as a result of a shift in business operations. Advantage 4 – No dilution in shareholders 13.7. The Proposed Transaction will not result in a dilution in Shareholders interest even though the Project needs to be funded. Delecta understands that it is Paynes intention to raise $8 million which will enable it to proceed with the Stage 2 Option. Advantage 5 – Corporate Structure 13.8. Delecta’s corporate structure can remain unchanged through changing its direct interest in the Project to an indirect interest while ensuring significant influence over the asset through increased its control over Paynes. 37 For personal use only Advantage 6 – Transfer of Risk 13.9. Ongoing risk associated with the Project including financial, environmental, safety and regulatory pass to Paynes. Disadvantages of approving the Proposed Transaction Disadvantage 1 – Cost to exercise options 13.10. Delecta will have to pay to exercise their options in Paynes. However, it is unlikely Delecta would exercise its Paynes Options unless it was financially beneficial to do so. Disadvantage 2 – Loss of Interest in the Project 13.11. Delecta currently owns 100% of the Project (including options to purchase each stage). Delecta will only hold an indirect interest in the project following the proposed transaction and as such there will be a loss of some control. However, we note that Delecta will hold 44% of Paynes and will be able to exercise control over Paynes via its shareholding. Delecta will also be required to share the returns from the Project with other Paynes shareholders. Disadvantage 3 – No guarantee of the Value of Consideration 13.12. There is no guarantee in the value of Consideration, with the exception of the $1 million from initial revenues, Delecta will be dependent on the future share price of Paynes or on dividend distributions for a return on its initial investment. Alternative Proposal 13.13. We are not aware of any alternative proposal at the current time which might offer the Shareholders of Delecta a greater benefit than the Proposed Transaction. Conclusion on Reasonableness 13.14. In our opinion, the position of the Shareholders if the Proposed Transaction is approved is more advantageous than the position if it is not approved. Therefore, in the absence of any other relevant information and/or a superior offer, we consider that the Proposed Transaction is reasonable for the Shareholders of Delecta. 13.15. An individual shareholder’s decision in relation to the Proposed Transaction may be influenced by his or her individual circumstances. If in doubt, shareholders should consult an independent advisor. Yours faithfully RSM BIRD CAMERON CORPORATE PTY LTD A GILMOUR G YATES Director Director 38 For personal use only APPENDIX 1 Declarations and Disclosures RSM Bird Cameron Corporate Pty Ltd holds Australian Financial Services Licence 255847 issued by ASIC pursuant to which they are licensed to prepare reports for the purpose of advising clients in relation to proposed or actual mergers, acquisitions, takeovers, corporate reconstructions or share issues. Qualifications Our report has been prepared in accordance with professional standard APES 225 “Valuation Services” issued by the Accounting Professional & Ethical Standards Board. RSM Bird Cameron Corporate Pty Ltd is beneficially owned by the partners of RSM Bird Cameron (RSMBC) a large national firm of chartered accountants and business advisors. Mr. Andrew Gilmour and Mr Glyn Yates are directors of RSM Bird Cameron Corporate Pty Ltd. Both Mr Gilmour and Mr Yates are Chartered Accountants with extensive experience in the field of corporate valuations and the provision of independent expert’s reports for transactions involving publicly listed and unlisted companies in Australia. Reliance on this Report This report has been prepared solely for the purpose of assisting Delecta Shareholders in considering the Proposed Transaction. We do not assume any responsibility or liability to any party as a result of reliance on this report for any other purpose. Reliance on Information Statements and opinions contained in this report are given in good faith. In the preparation of this report, we have relied upon information provided by the Directors and management of Delecta and we have no reason to believe that this information was inaccurate, misleading or incomplete. However, we have not endeavoured to seek any independent confirmation in relation to its accuracy, reliability or completeness. RSM Bird Cameron Corporate Pty Ltd 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. The opinion of RSM Bird Cameron Corporate Pty Ltd 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. In addition, we have considered publicly available information which we believe to be reliable. We have not, however, sought to independently verify any of the publicly available information which we have utilised for the purposes of this report. We assume no responsibility or liability for any loss suffered by any party as a result of our reliance on information supplied to us. 39 For personal use only Disclosure of Interest At the date of this report, none of RSM Bird Cameron Corporate Pty Ltd, RSMBC, Andrew Gilmour, Glyn Yates, nor any other member, director, partner or employee of RSM Bird Cameron Corporate Pty Ltd and RSMBC has any interest in the outcome of the Proposed Transaction, except that RSM Bird Cameron Corporate Pty Ltd are expected to receive a fee in the region of $17,500 based on time occupied at normal professional rates for the preparation of this report. The fees are payable regardless of whether Delecta receives Shareholder approval for the Proposed Transaction, or otherwise. Consents RSM Bird Cameron Corporate Pty Ltd consents to the inclusion of this report in the form and context in which it is included with the Notice of General Meeting and Explanatory Memorandum to be issued to Shareholders. Other than this report, none of RSM Bird Cameron Corporate Pty Ltd or RSM Bird Cameron Partners or has been involved in the preparation of the Notice of General Meeting and Explanatory Memorandum. Accordingly, we take no responsibility for the content of the Notice of General Meeting and Explanatory Statement. 40 For personal use only APPENDIX 2 Sources of Information In preparing this Report we have relied upon the following principal sources of information: Financial statements for three years ended 30 June 2014 for Paynes and Delecta; Profit and Loss Statement for period ended 30 September 2014 and Balance Sheet as at 30 September 2014 for Paynes; Independent specialist report on the value of the Project Fair Market Value Assessment, Canadian Valley Project, Okfuskee County, Oklahoma, USA, dB LLC Petroleum Advisors Independent specialist report on the value of exploration assets held by Paynes – Technical Project Review- Draft and Independent Valuation Report Paynes Find Gold Project for RSM Bird Cameron Corporate Pty Limited, Ravensgate Directors rationale for the Proposed Transaction and details of other alternative transactions considered by the Board; Copies of any recent offers received for the Project or for the exploration assets held by Paynes; Details of the directors plans if the Proposed Transaction is not successful; ASX announcements of Transaction; Website: http://www.goldpriceoz.com; Website: www.paynesfindgold.com; Website: www.eia.gov/state; Website: www.rba.gov.au; BP Statistical Review of World Energy 2014; OPEX World Energy Review 2013; IBISWorld; S&P Capital IQ database; and Discussions with Directors, Management and staff of Delecta. 41 For personal use only APPENDIX 3 Glossary of Terms and Abbreviations Term or Abbreviation Definition $ Australian Dollar Act Corporations Act 2001 (Cth) APES Accounting Professional & Ethical Standards Board ASIC Australian Securities & Investments Commission ASX Australian Securities Exchange Consideration Includes the Consideration Shares, Consideration Options, and Revenue Payment. Consideration Options Issue of 3,000,000 post reconstruction options to acquire a fully paid ordinary share in the capital of Paynes within 5 years of their issue at an exercise price of $0.125 (post reconstruction) Consideration Shares Issue of $3,000,000 in fully paid ordinary shares in the capital of PNE at a deemed issue price of $0.002 (pre - reconstruction of Payne’s issued capital) Control basis As assessment of the Fair Value on an equity interest, which assumes the holder or holders have control of entity in which the equity is held Delecta Delecta Limited Directors Directors of Delecta Discounted Cash Flow Method (DCF) A method within the income approach whereby the present value of future expected net cash flows is calculated using a discount rate EBIT Earnings, Before, Interest and Tax EBITDA Earnings, Before, Interest, Tax, Depreciation and Amortisation Equity The owner's interest in property after deduction of all liabilities EV Enterprise Value, meaning, the total value of the equity in a business plus the value of its debt or debt-related liabilities, minus any cash or cash equivalents available to meet those liabilities Fair Value the amount at which an asset could be exchanged between a knowledgeable and willing but not anxious seller and a knowledgeable and willing but not anxious buyer, both acting at arm’s length FME Future Maintainable Earnings FOS Financial Ombudsman Service 42 Definition FSG Financial Services Guide FY## Financial year ended 30 June GFC Global financial crisis IBIS IBIS World, producer of industry reports IER This Independent Expert Report Non control basis As assessment of the Fair Value on an equity interest, which assumes the holder or holders do not have control of entity in which the equity is held Notice The notice of meeting to vote on the Proposed Transaction NPBT Net Profit Before Tax NPAT Net Profit After Tax Paynes Paynes Find Gold Limited Paynes Option Agreement between Delecta and Paynes where Delecta will grant Paynes an Option to acquire its( Delecta’s) interest in the Project inclusive of the Project Stage 2 Option to complete Stage 2 of the Project and the Project Seismic Option over the additional 64 square miles of Seismic Data, subject to certain conditions being satisfied. Project Acquisition of the Canadian River Field Development oil and gas project in Oklahoma For personal use only Term or Abbreviation Project Seismic Option Delecta’s option to have exclusive access to Seismic Data covering a total of 64 square miles inclusive of the Project Area Proposed Transaction Sale of interest in Canadian River Field Development Oil and Gas Project to Paynes Find Gold Project Regulations Corporations Act Regulations 2001 (Cth) Report This Independent Experts Report prepared by RSMBCC dated 4 December 2014 Revenue Payment The payment of $1,000,000 from future oil & gas revenues derived from the project RG 111 ASIC Regulatory Guide 111 Contents of Expert's Reports RSMBCC RSM Bird Cameron Corporate Pty Ltd S&P Capital IQ An entity of Standard and Poors which is a third party provider of company and other financial information VWAP Volume weighted average share price 43 For personal use only APPENDIX 4 Profile of the International Oil and Gas Industry The International Oil and Gas industry consist of two segments, being the upstream and downstream segments. The upstream segment explores, produces and processes crude oil and natural gas. The downstream segment refines these outputs into fuels, lubricants and petroleum products and then markets them for sale. The Canadian River Field Development Oil and Gas Project’s operations are focused on the exploration for and production of oil and gas in Oklahoma, therefore in this section of the Report we set out an overview of the following; The international oil exploration and production industry; and The international natural gas exploration and production industry. International oil exploration and production industry The oil industry supplies product to a number of downstream markets, but the biggest is petroleum refining, which according to producer of industry reports IBIS World Inc (“IBIS”) accounted for 68% of the industry’s output. Crude oil is used to manufacture petroleum products, primarily gasoline and automotive distillate (“diesel”). There are many grades of crude oil produced worldwide, ranging from the highest quality light sweet crude oil to poor quality heavy, sour crude oil. In 2013 the world consumed approximately 91.3 million barrels of oil per day (“MMBLS/day”). The biggest consumers of oil in the world based on 2013 consumption are the USA (18.9 MMBLS/day), China (10.6 MMBLS/day), Japan (4.5 MMBLS/day) and India (3.7 MMBLS/day)1. Combined, the global oil and gas exploration and production industries generate total revenues of approximately $4.6 trillion in 2014, up from $2.6 trillion in 2009. Crude Oil Demand The level of demand for petroleum products and as such crude oil is heavily influenced by global economic growth, and underlying levels of economic activity. Global primary energy consumption accelerated in 2013 despite stagnant global economic growth. Global oil consumption grew by 1.4 million barrels per day (b/d), or 1.4% – this is just above the historical average. Countries outside the OECD now account for the majority (51%) of global oil consumption and they once again accounted for all of the net growth in global consumption. OECD consumption declined by 0.4%, the seventh decrease in the past eight years. Oil Supply The world’s crude oil is effectively supplied by two suppliers as follows: 1 State owned producers located in countries which are members of the Organisation of Petroleum Exporting Countries (“OPEC”); and Privately owned producers located in non OPEC countries. BP Statistical Review of World Energy 2014 44 For personal use only In 2013 the world had proven oil reserves of 1,687.9 billion of which OPEC accounted for 42.1%. Global oil production did not keep pace with the growth in global consumption, rising by just 550,000 b/d or 0.6%. The US (1.1 million b/d) recorded the largest growth in the world and the largest annual increment in the country’s history for a second consecutive year. The US accounted for nearly all (97%) of the non-OPEC output increase of 1.1 million b/d (the strongest since 2002) to reach a record 49.9 million b/d. The table below sets out a breakdown of the world’s proven oil reserves by region as at 31 December 2013. Region Proven Reserve (Billion Barrels) % share 808.5 329.1 229.5 148.5 130.0 42.20 1,687.9 47.9% 19.5% 13.6% 8.8% 7.7% 2.5% 100.0% Middle East South & Central America North America Europe & Eurasia Africa Asia Pacific Total Table 14: Worlds’ Proven Oil reserves (Source: BP Statistical Review of World Energy 2014) Global oil production in 2013 was the highest of the last 24 years with a production of 86.7 million barrels per day. Oil Price Crude oil is one of the most actively traded commodities in the world, and over 50% of annual world production is traded internationally. There are a number of different types of traded crude oil products and today there are over 150 different types of crude oil (known as markers), traded internationally. As the project is located in the US we have set out the historical daily closing price for WTI over the period 2000 to 2013. Crude Oil Prices (2000-2013) 100.06 66.02 95.04 94.13 97.99 2011 2012 2013 79.45 72.20 61.92 56.59 41.49 30.37 25.93 26.16 2000 2001 2002 31.07 2003 2004 2005 2006 2007 2008 2009 2010 $/bbl ‡ Figure 18: Historical WTI crude oil price 2000 – 2013 (Source: BP Statistical Review of World Energy 2014) Short-term spikes in the price of oil and gas have largely driven the industry's expansion over the period. However, the industry experienced significant pitfalls during the global recession, when revenue dropped 39.5% in 2009. 45 For personal use only Outlook Oil is expected to be the slowest growing of the major fuels to 2035, with demand growing at an average of just 0.8% a year. Nonetheless, this will still result in demand for oil and other liquid fuels being nearly 19 million barrels a day higher in 2035 than 2012. All the net demand growth is expected to come from outside the OECD – demand growth from China, India and the Middle East will together account for almost all of net demand growth. Global oil consumption is expected to grow from around 88.9 MMBLS/day in 2012 to 108.5 MMBLS/day by 2035.2 100% of this growth is expected to come from non OECD Asian countries primarily China and India. Most of the growth in demand is expected to come from the transportation industries. China is the key component behind long term oil consumption growth. Their consumption is forecast to increase by 45% over the next 20 years from 9.7 MMBLS/day to 17.5 MMBLS/day by 2035 at which point they will have overtaken the USA as the world’s largest oil consumer. With regard to future oil prices we note that the Energy Information Administration expects the price of crude oil to rise in the period from 2012 to 2035. OPEC in their World Energy Model have assumed in their Reference Case a nominal price that remains at an average of $110 per barrel over the period to 2020, and rises thereafter to US$160 by 20352. International gas industry Natural gas is gas formed primarily of methane and is an important source of fuel and as feedstock for fertilisers. There are two main sources of natural gas, conventional natural gas is found in underground reservoirs often associated with oil reserves, and coal seam gas located within coal deposits and is formed as a by-product during the natural process of coalification where organic matter turns into coal. Natural gas share of overall energy consumption has grown significantly over the last twenty years. The shift towards gas reflects; the greater availability of gas compared to oil (gas reserves are more dispersed than those of oil), increased use of gas in stationery applications such as power generation, greater investment in gas infrastructure such as pipelines and LNG facilities, and the use of gas as an energy source is more environmentally friendly than other fossil fuels. Natural Gas Demand Long term demand for natural gas is driven by the following: 2 New technologies and users – New technologies are expected to allow natural gas-fired stations to generate electricity from natural gas as cheap as, if not cheaper than coal fired generation. Demand for gas is also expected to be boosted through increasing industrial use, particularly in chemical and mineral processing, petrochemical operations and mining. Environmental issues – Natural gas is a more environmentally friendly source of energy than oil and coal. Governments around the world continue to implement policies that aim to produce energy from more environmentally friendly sources, which is expected to increase the demand for natural gas. Relative price of substitutes – The demand for gas is heavily reliant on the price of its major substitutes which in terms of being a source of fuel is oil and coal. OPEC World Energy Review 2013 46 For personal use only Availability of gas supply infrastructure – Gas usage tends to rise rapidly when supply infrastructure become available, before settling down to a more sustainable rate of expansion. World natural gas consumption grew by 1.4% in 2013, below the historical average of 2.6%. Natural Gas Supply In 2013, the world had total proven natural gas reserves of approximately 6,558 trillion cubic feet. The table below sets out the location of the worlds proven gas reserves. Region Proven Reserve (Trillion cubic feet) % share 2,833 2,000 538 498 413 269 6,558 43.2% 30.5% 8.2% 7.6% 6.3% 4.1% 100.0% Middle East Europe & Eurasia Asia Pacific Africa North America South & Central America Total Table 15: Worlds Proven natural gas reserves (Source: BP Statistical Review of World Energy 2014) The largest producers of natural gas in 2013 were the USA and Russia with average production of 66.5 and 58.5 BCF/day respectively. Natural Gas Price The price of natural gas is affected by a number of factors including, overall economic conditions, and the weather, prices of alternative fuels such as oil and coal and storage capacity. The pricing point for natural gas is Henry Hub, natural gas is traded on a spot and futures basis on the NYMEX. The figure below sets out the historical Henry Hub natural gas price in millions of British thermal units (“MMBtu”) for the period 2000 to 2013. HENRY HUB GAS PRICES (2000-2013) US$/MM Btu 8.85 8.79 6.76 5.63 4.23 2000 4.07 2001 6.95 5.85 3.89 3.33 2002 4.39 4.01 3.71 2.76 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Figure 19: Historical Henry Hub natural gas price (Source: BP Statistical Review of World Energy 2014) 47 For personal use only Natural Gas Outlook Global demand for natural gas will grow by 1.9% p.a. over the outlook period, reaching 497 Bcf/d by 2035, with nonOECD growth (2.7% p.a.) outpacing the OECD (1% p.a.). In the OECD, gas will overtake oil as the dominant fuel by 2031, reaching a share of 31% in primary energy by 2035. But in the non-OECD, gas remains in third place, behind coal and oil, with a 24% share of primary energy by 2035. The fastest growing sector is transport (7.3% p.a.), but this is from a small base. In volume terms the largest growth comes from industry (71 Bcf/d, 1.9% p.a.) and power (63 Bcf/d, 1.9% p.a.). The pattern of growth by sector differs between the OECD and non OECD. OECD volume growth comes primarily from the power sector (17 Bcf/d, 1.2% p.a.) followed by industry (10 Bcf/d, 0.8% p.a.), while industry remains the largest source of non-OECD growth (61 Bcf/d, 2.6% p.a). 48 For personal use only APPENDIX 5 Profile of the Australian Gold Industry Gold ore mining is a well-established industry in Australia, dating back the mid- to late 1800s. The industry experienced a strong period of growth over the past decade. This growth stems from gold's status as a countercyclical commodity. As such, the global financial crisis and the recessionary environment provided a massive boost for the industry. As a result, in the five years through to 2014-15, industry revenue increased at an annualised 3.2%. The sudden increase in demand during the recession caused global gold prices to increase which resulted in increases in industry revenue and profit. These conditions prompted gold producers to expand production, as higher prices more than offset the higher cost of developing lower grade ores. However, the gold price declined in 2012-13 and 2013-14 as the global economy strengthened and inflationary fears eased. Despite gold prices expected to rise in 2014-15, industry revenue is expected to decline by 2.4% to $12.2 billion in 2014-15 on lower volumes. Over the five years through 2019-20, the industry's fortunes will be largely tied to the rise and fall of world gold prices. Gold prices are expected to vary annually at a moderate rate, which will expose the industry to some revenue volatility. However, prices are expected to remain largely stagnant compared with 2014-15. As a result, the expected slight increase in gold production will largely drive industry performance. Overall, industry revenue is forecast to increase at an annualised 0.9% over the five years through 2019-20, to $12.7 billion. The small overall changes in gold prices and rising production and transportation costs are expected to limit profit growth in the next five years. Price Gold Price per Ounce 1999-2014 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1800 1600 1400 1200 1000 800 600 400 200 0 1999 Gold Price Gold prices are denominated in US dollars, as such, fluctuations in the value of the Australian dollar against the US dollar add to revenue volatility. Volatility has been at a medium level in the past five years due to strong gold pricing growth in the years through late 2012, followed by a large decline in 2012-13 and further falls in subsequent years. The recent gold price declines have coincided with a weaker Australian dollar, which has helped to limit industry declines. Years Gold Price Annual End of Period Figure 20: Gold Price per Ounce 1999-2014 (Source: Goldprice OZ) 49 For personal use only World gold prices have a direct effect on revenue generated by Australian gold mining operations. When the value of gold is high, industry products generate positive returns. In addition, firms are likely to commit to projects with lower gold grades and higher costs. The rapid increase in gold prices over the four years through 2011-12 provided the industry with an opportunity to expand, before declining in the following two years. IBISWorld expects the world gold price to again increase in 2014-15. 50 For personal use only APPENDIX 6 Fair Market Value Assessment, Canadian Valley Project, Okfuskee County, Oklahoma, USA, Db LLC Petroleum Advisors 51 dB, LLC Petroleum Advisory Services www.dbgeo.com For personal use only Richard G. Boyce Partner Mr. Peter Gray RSM Bird Cameron 8 St. Georges Terrace Perth 6000 Western Australia November 15, 2014 Subject: Fair Market Value Assessment Canadian Valley Project Okfuskee County, Oklahoma, USA Dear Mr. Gray: FAIR MARKET VALUE ASSESSMENT This opinion has been prepared following the guidance provided by the Australian Institute of Mining and Metallurgy’s Code and Guidelines for Technical Assessment and/or Valuation of Mineral and Petroleum Assets and Mineral and Petroleum Securities for Independent Expert Reports (the VALMIN Code). The definition of Value or Fair Market Value of a Petroleum Asset or Security is the amount of money (or the cash equivalent of some other consideration) determined by the Expert in accordance with the provisions of the VALMIN Code for which the Petroleum Asset or Security should change hands on the Valuation Date in an open and unrestricted market between a willing buyer and a willing seller in an “arms-length” transaction, with each party acting knowledgeably, prudently and without compulsion. Value is usually comprised of two components, the underlying or “Technical Value” of the Mineral or Petroleum Asset or Security and a premium or discount relating to market, strategic or other considerations. Value should be selected as the most likely figure from within a range after taking account of risk and the possible variation in recovery, capital and operating costs, commodity prices, exchange rates and the like. We have prepared estimates of the net reserves, future annual production and future net income attributable to the anticipated leasehold interest of DELECTA LIMITED (“DELECTA”) in the Canadian Valley Project as of October 31, 2014. The properties evaluated in this review are located in Okfuskee County, Oklahoma. The discounted net present values (NPV10) presented in the table below should be considered as the “Technical Value” of the petroleum asset with respect to the VALMIN standard quoted above. These proved reserve classifications were assigned following the Society of Petroleum Engineers (SPE) guidelines. Economics were run utilizing future oil and gas prices from the 5-Year NYMEX Strip pricing as of October 1, 2014 held flat (no additional escalation or de-escalation) and operating cost parameters held constant for the life of the production. 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 1 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com For personal use only Richard G. Boyce Partner The summary of Net Future Estimated Reserves and Discounted Net Present Value are presented in the Reserve Table shown below. These values are calculated using a 10% discount factor, calculated at the middle of each year and an “AS OF” Date on October 31, 2014. All values summarized in the table below are net to the interest of DELECTA and include Oklahoma State Severance Tax (7.1%) and estimated US Federal Corporate Taxes (30%). PROVED RESERVES SUMMARY (ALL VALUES ARE NET TO DELECTA INTERESTS) (values are in US Dollars) PROVED PRODUCING BEHIND PIPE UNDEVELOPED TOTAL 0 0 5 267,430 436,400 5 267,430 436,400 $22,998,460 $1,804,990 $24,803,450 $22,998,460 $1,804,990 $24,803,450 Expenses Taxes (State and Federal) $2,110,030 $9,200,840 $2,110,030 $9,200,840 Investments $4,875,000 $4,875,000 Future Net Income – zero discount $8,617,580 $8,617,580 Future Net Inc-10% discount Fair Market Value – 25% discount $6,381,500 $4,786,125 $6,381,500 $4,786,125 Gross Wells Net Oil, STB Net Gas, MCF Net Revenue Oil – USD ($) Gas – USD ($) Total DISCUSSION OF PREMIUM OR DISCOUNT RELATED TO MARKET OR STRATEGIC CONSIDERATIONS The second component of Fair Market Value is much more subjective as a result of the wide variety of oil and gas properties currently available in the USA markets. In recent years, billions of dollars have changed hands over very large transactions in the USA that have occurred in pursuit of the highly successful and popular horizontal shale plays. In this arena, transactions occur with the sale of large undeveloped acreage positions (10,000 to 100,000 acres) that have been de-risked through the drilling of numerous horizontal wells that have established a large component of Proved Developed Production (PDP) that also provides a large number of Proved Un-Developed (PUD) drilling locations. In this case, a useful metric for transaction value ranges between $60,000 to $100,000 USD per flowing PDP barrel of oil. This metric can be used to establish fair market value estimates for large horizontal shale play projects. Low rate vertical production similar to the Canadian Valley Project carries a similar but much reduced metric for fair market value which ranges between $20,000 and $35,000 per flowing barrel. These metrics are typically derived by a potential buyer by paying 100% of the PDP value discounted at 10% 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 2 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com For personal use only Richard G. Boyce Partner (NPV10). In the event that PUD locations are included in the transactions, those values are typically discounted by paying 75% of the indicated PUD values. These reduced rates reflect the reality of the limited upside represented in developing a smaller conventional project area and the current market preference to invest in the much larger upside represented by the horizontal shale projects now popular in the USA. In the case of the Canadian Valley Project, the Operator has drilled an initial well which has been tested successfully in the Wilcox, but operations are still ongoing as of the date of this report to build the infrastructure necessary to establish stabilized production for this well. As such, no specific production history exists for the well on this lease. However, using analogous production from other recently completed wells in the region, we have based our technical evaluation on the production rates shown to be reasonable as compared to these analogous wells. We have also presented a range of possible economic outcomes which we have represented in the report as P10 (90% confidence in outcome), P50 (50% confidence in outcome) and P90 (10% confidence in outcome) for the project ultimate recoveries and discounted present values. For the Canadian Valley Project, as no PDP production rate is currently available to be valued on the basis of $/flowing barrel as discussed above, we have chosen to set the Fair Market Value (“FMV”) by taking the P50 project NPV10 of $8,617,580 USD and applying the standard PUD discount factor of .75 which results in the FMV of $6,463,185 USD. It is the opinion of this evaluator that this value of $6,463,185 USD represents a fair price should the property change hands on the Valuation Date in an open an unrestricted market between a willing buyer and a willing seller in an “arms-length” transaction, with each party acting knowledgeably, prudently and without compulsion. Three classes of Proved Reserves have been considered in this report, Proved Developed Producing (PDP), Proved Behind Pipe (PBP) and Proved Undeveloped (PUD). The estimated Proved Developed Producing Reserve (PDP) is typically calculated by decline curve forecasting of historical production data using historical production data from the daily pumper reports supplied by the operator Inland Oil & Gas, LLC. The estimated reserve values for Proved Behind Pipe (PBP) and Proved Undeveloped (PUD) classifications were calculated using decline curve forecasting through extrapolation of historical production observed in analogous producing fields that exhibit geological and reservoir conditions similar to those in the Canadian Valley Project for the various reservoirs evaluated. The estimated future reserves should not be considered exact quantities because these values are projected based on an estimated decline curve derived from actual production history. The actual recovered reserves may vary from the projections in this report due to a wide range of circumstances. Future prices for hydrocarbons and operating costs are two major factors that will determine if future reserves can be economically produced. Oil and Condensate volumes have been expressed in the standard 42 gallons per barrel. The gas volumes are expressed in thousands of cubic feet (MCF), at the official pressure and temperature base for the State of Oklahoma, USA. 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 3 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com Richard G. Boyce Partner For personal use only EVALUATION PRICE/COST ASSUMPTIONS Forecast of Prices and Costs The oil and gas prices used in the economic forecast are derived from publically available sources as published by the New York Mercantile Exchange (NYMEX) using the 5-Year NYMEX Strip pricing as of October 1, 2014. The prices were then held flat for the duration of each year as shown in the table below with no additional escalation or de-escalation applied. Year 2014 2015 2016 2017 2018 2019+ Gas $4.06 $3.93 $4.04 $4.18 $4.30 $4.30 Oil $90.24 $87.55 $85.90 $84.80 $84.53 $84.53 During the most recent 30 days preceding this report, world oil markets have experienced extraordinary volatility with prices dropping nearly 20% almost overnight, and markets testing new lows below $75/bbl. At this time, it is unknown if these lower prices will stabilize at these levels or if this should be considered as a short term condition in the market place. As such we have relied on what is generally accepted as a credible source for the price decks used in this evaluation. Cost Parameters The Operating Costs for the vertical Wilcox wells operating with Electrical Submersible Pumps (ESP) of $5,000/well/month was supplied by Inland Oil & Gas, LLC which we reviewed and considered as normal for the area of operations. The operating costs used in the economic calculations include the direct operating charges applicable to each well and allocated general and administrative overhead charges from the Operator. The economics also include Oklahoma oil and gas production taxes and ad valorem taxes (7.1% for both oil and gas) as well as US Federal Corporate Tax which was estimated to be 30%. The future Operating Costs were held constant for the economic life of each property. Well cost estimates based on actual vertical drilling experiences on the project area have been reviewed and accepted as normal for the area and depth of drilling. Well cost estimates used in the economic model are $1,218,750 per completed vertical well. This turnkey fixed cost includes the completion and equipment cost (electric submersible pump) necessary to produce the well. Estimated Future Remaining Reserves contained in this report are based upon our extensive subsurface review of well logs, core information, pressure test information, 3D seismic data, historical oil and gas production. No on site field examination of the subject properties has been undertaken. No existing environmental liabilities are currently identified with regard to the daily operations of Inland Oil & Gas, LLC. No environmental impact report has been provided for this property by the Operator. 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 4 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com For personal use only Richard G. Boyce Partner The values for working interest and net revenue interest, furnished in connection with this report were accepted as given and without further verification by dB, LLC. Future estimates in this report are based on available data through October 2014. Tax Considerations The Proforma economics and Net Present Values shown are net of Oklahoma Oil and Gas severance taxes. Currently these tax rates are 7.10% for both Oil and Gas Production. In Oklahoma, these taxes are paid upon sale of the various hydrocarbons at the well head and are deducted from the Net Present Value calculations. The economics also include U.S. Federal Income Tax which was estimated to be 30%. DISCLOSURE STATEMENT Independence and Conflict of Interest - This report has been prepared by dB, LLC based on a brief directed by RSM Bird Cameron (“RSM”) dB, LLC (“dB”) is an independent oil and gas advisory firm headquartered in Dallas, Texas. Mr. Richard G. Boyce, the primary evaluator, holds no economic interest in the Canadian Valley Project, Inland Oil & Gas, LLC or in PAYNES FIND GOLD LIMITED (“PNE) or in DELECTA LIMITED (“SELLER”). This report is produced under a “fee for services rendered” engagement for the amount of $5,000 USD and in compliance with the ASIC Regulatory Guide 112 in relation to Independence of Experts. Purpose, Scope and Use of this Report - This report was commissioned by RSM Bird Cameron for inclusion in a Notice for General Meeting in relation to Australian Securities Exchange Listing Rule 10.1 relating to the disposal of a substantial asset to a related party. The scope of this report includes economic evaluation and an assessment of future present worth based on stated economic considerations. Recommendations for future development plans are outlined in the report and have been included in the economic forecasts. This report was prepared exclusively for RSM and should not be duplicated or distributed to any third parties without the express written consent of RSM and dB LLC, except as required by law. Available Data - This study was based on data supplied by the project Operator- Inland Oil & Gas, LLC and on public domain information acquired from the Oklahoma Corporation Commission, IHS Energy, Inc. and DrillingInfo.com. The supplied data was reviewed for reasonableness from a technical perspective. As is common in oil field situations, basic physical measurements taken over time cannot be verified independently in retrospect. As such, beyond the application of normal professional judgment, such data must be accepted as representative. While we are not aware of any falsification of records or data pertinent to the result of this study, dB does not warrant the accuracy of the data and accepts no liability for any losses from actions based upon reliance on data which is subsequently shown to be falsified or erroneous. Professional Qualifications - dB personnel who prepared this report are degreed professionals with the appropriate qualifications and experience to complete the project brief. dB and its staff do not claim expertise in accounting, legal and environmental matters, and do not offer legally binding opinions and such matters do not form part of this report. Mr. Richard G. Boyce is not a registered petroleum engineer. 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 5 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com For personal use only Richard G. Boyce Partner Reserves Estimates - Reserves estimates were made using industry-accepted methodology including extrapolation of performance trends, volumetric calculations, material balance and statistical analysis of analogs. The evaluators’ professional judgment and experience was used to select the most appropriate method and to determine the reasonableness of the results. The estimates were made in accordance with the rules established by the Society of Petroleum Engineers (SPE). The reserves definitions allow for changes in category as information is gathered and as producing history is accumulated. As such, the volume and class of reserves is expected to change and be revised over time. Net oil and gas reserves are those estimated quantities of crude oil, natural gas and natural gas liquids attributed to the evaluated interests (after deduction of applicable royalties and overriding royalties) that are considered to be economically recoverable under the economic conditions modeled. It is implicit that good oil field practices are maintained in order to cause recovery of the estimated reserves. Future Cash Flow Estimates - Future cash flow estimates to the evaluated interests are based upon the estimated future production profile and future prices for oil and gas adjusted for capital expenditure, operating costs, interest reversions and severance and ad valorem taxes, but without consideration of any federal income tax liability or any other types of encumbrance that might exist against the evaluated interests. The estimates do not include the salvage value for the leases or the cost of abandonment and site restoration. The present worth of future cash flow reflects the application of certain discount factors and does not represent an estimate of fair market value for the properties on a standalone basis. Please refer to the section entitled DISCUSSION OF PREMIUM OR DISCOUNT RELATED TO MARKET OR STRATEGIC CONSIDERATIONS for additional discussion relating to this subject. The future cash flow and present worth of future cash flow estimates presented herein, are representative of the pricing and development/recompletion scenarios that have been modeled. Such estimates should not be construed as exact quantities. Future production rates, product prices, development costs and revenues from the sale of petroleum products could differ from the estimates presented. Modification of drilling schedules, availability of capital, and many other factors outside the realm of an engineering estimate could result in significant variances from the estimates present herein. Exclusions - dB cannot attest to the validity or correctness of the ownership information provided by Inland Oil & Gas, LLC and such an opinion does not form part of this report. Operating cost data was provided by Inland Oil & Gas, LLC who is currently operating the properties evaluated. This report is restricted to our independent estimate of reserves. It is not the intention or purpose of this report to comment on title, ownership or legal encumbrances, any commercial or business relationships or sunk costs involved in acquiring the properties. Field Visit and Inspection – No field visit was undertaken in support of this report. Liability Waiver - This report has been prepared on a best efforts basis to address the requirement of the brief specified by RSM Bird Cameron. The results and conclusions represent informed professional judgments based on the data available. No warranty is implied or expressed that actual results will conform to these estimates. dB, LLC accepts no liability for actions or losses derived from reliance on this report or the data on which it was based. 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 6 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com Richard G. Boyce Partner For personal use only EVALUATOR This evaluation was conducted by Mr. Richard G. Boyce. He has practiced professional geological, geophysical and reserve evaluations for 35 years. He began oil and gas consulting in 1996 and founded dB, LLC in 2002. Mr. Boyce began his career as a geophysicist for The Superior Oil Company with early training at their Geoscience Laboratory in Houston, Texas. In 1980, Mr. Boyce transferred to Midland, Texas to continue working for Superior Oil Company until 1983. During his ten year career in the Permian Basin, Mr. Boyce also worked for both Conquest Exploration Inc. and Hunt Oil Company. In 1991, Mr. Boyce transferred to Dallas, Texas where he served as the Chief Geophysicist for Hunt Oil Company and in 1992 was appointed the Exploration Manager for the Yemen Hunt Oil Company and the Exploration Vice President of the Hunt Oil subsidiaries, Ethiopia Hunt Oil and Jannah Hunt Oil. Boyce’s education was at Colorado School of Mines where he received a Bachelor of Science Degree in Geophysical Engineering, graduating in 1978. He is a registered Professional Geoscientist in Texas, license number 2179. Memberships in professional associations at the local, state and national levels are the Society of Exploration Geophysicists, American Association of Petroleum Geologists, Society of Professional Earth Scientists (SIPES # 3245) and Association of International Petroleum Negotiators. EVALUATOR QUALIFICATIONS I, Richard G. Boyce, a consulting geoscientist, maintaining offices at 4849 Greenville Avenue, Suite 1360, Dallas, Texas 75206, hereby certify: 1. That I am a founding member of dB, LLC and I did prepare this internal evaluation and development plan with corresponding economic values net to the interests of DELECTA LIMITED for properties located at in Okfuskee County, Oklahoma. 2. That I graduated in Geophysical Engineering in 1978 with a Bachelor of Science degree from Colorado School of Mines, Golden, Colorado. 3. That I am a registered Professional Geoscientist in Texas #2179. That I have thirty-five years experience in exploration and production, reservoir studies and evaluations of Canadian, Middle Eastern, African, Australian, Central Asian, Russian, South American, and United States oil and gas fields, both onshore and offshore. 4. That I maintain memberships in the following professional associations: the American Association of Petroleum Geologists; the Society of Exploration Geophysicists; the Society of Professional Earth Scientists (SIPES #3245); and the Association of International Petroleum Negotiators. 5. That I have no financial interests (past, present or future) in any of the parties involved in this business transaction. 6. That I have read the ASIC Regulatory Guide 112 in relation to Independence of Experts and consider myself qualified as an independent third party evaluator under those guidelines. 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 7 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com For personal use only Richard G. Boyce Partner Sincerely, Richard G. Boyce Texas Board of Professional Geoscientists, License No. 2179 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 8 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com For personal use only Richard G. Boyce Partner EXECUTIVE SUMMARY The Canadian Valley Prospect is a field development project located in Okfuskee County, Oklahoma. The project Operator will be Inland Oil & Gas, LLC (“Inland”) headed by Mr. Jeffrey Leenerts. Inland has recently drilled the Wise #1-25 well in section 25 of T10N R11E and is currently completing the well in the Wilcox sand at a depth of 3,922 feet. Initial test results indicate production from the Wilcox at rates of 100-150 barrels of oil per day (bopd). In order to produce the well, Inland is in the final stages of building necessary production infrastructure including installation of an electric submersible pump (“ESP”) salt water disposal facilities (“SWDS”), tank batteries, gas sales line, meter run and three phase electrical lines. Partners in the project will be Inland Oil & Gas, LLC (Operator), and DELECTA LIMITED (“DELECTA”) The base lease royalty is 20% to the mineral owners while ESA and Focus are both reserving a 5% overriding royalty (ORRI) each on the property. These various Working Interests and Net Revenue Interests are detailed in the table below. Participant Mineral Owners Inland O&G, LLC DELECTA, LTD ESA (ORRI) Focus (ORRI) Totals Revenue Distribution Royalty Working Interest % 20.0% 0.00% 0.0% 20.00% 0.0% 80.00% 5.0% 0.00% 5.0% 0.00% 30.0% 100.00% Net Revenue Interest % 0.0% 16.0% 58.0% / 54.0% 0.0% 0.0% 70.0% DELECTA has agreed to acquire an 80% working interest (58% net revenue interest) in the initial phase of the project. Additionally DELECTA has the option to earn an interest in the drilling of an additional three (3) new wells to fully develop the Wilcox pay sands and one (1) new well to test the potential of the Woodford Shale formation. Should this option be exercised, DELECTA would have an 80% working interest in each of the four wells and infrastructure, with a 54% net revenue interest. The four well drilling program has an agreed turnkey cost of $4,875,000 USD. The economics of the initial project have been modeled using three scenarios of estimated ultimate recovery (EUR) to assess the sensitivity of the project to this variable. In the opinion of the evaluator, the P10 case carries a confidence factor of 90% that the well production will exceed 75,000 barrels of oil, while the P90 case carries a confidence factor of 10% that the well production will exceed 200,000 barrels of oil. The P50 case indicates a most likely case of 100,000 barrels with a confidence factor of 50%. Geological and Engineering review of the initial one (1) well investment indicates the following economic summary using NYMEX Five Year Strip Price as of 10/01/2014 held flat for the life of the production. All present values shown are net to DELECTA’s 80% working interest and 58% net revenue interest in this initial well. 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 9 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com For personal use only Case P10 P50 P90 EUR (bbls) 75,000 100,000 200,000 Richard G. Boyce Partner PV10 (USD 000) $1,589 $2,234 $3,169 IRR (%) ROI (%) Payout (yrs) In the event that DELECTA exercises the option to participate in the optional four additional well fullfield development, preliminary economic evaluation indicates the project upside could approach: Case P10 P50 P90 EUR/well (bbls) 75,000 100,000 200,000 PV10 (USD 000) $3,900 $6,381 $11,658 IRR (%) 133 189 179 ROI (%) 2.06 2.77 5.37 Payout (yrs) 1.27 1.15 1.15 As above all discounted present values and economic indicators shown are net to DELECTA’s 80% working interest and 58% net revenue interest in the initial well and 54% net revenue interest in all subsequent wells. 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 10 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com For personal use only Richard G. Boyce Partner PROJECT ASSESSMENT OVERVIEW dB, LLC Petroleum Advisors have been engaged to conduct independent geological and geophysical technical due diligence on the Canadian Valley Project. Additionally dB has been asked to provide an independent engineering opinion regarding the economic viability of the project as well as to outline and discuss the various risk elements regarding drilling and completion along with a preliminary view of the overall potential of the project. The project Operator, Inland Oil & Gas, LLC have already drilled and are in the final stages of completing the #1-25 Wise well to establish oil and gas production from the Wilcox sands at a depth of 3,922 feet. Inland has provided an extensive database of information regarding their pre-drill interpretation of both 3D seismic data and subsurface well control. Additionally, the results of well testing completed on the #1-25 well have been made available to dB for evaluation. Independently, dB has compiled a digital geological database including well logs, well completion histories, monthly production data, scout cards and various well test results which has been placed into the Petra mapping system to conduct independent confirmation of the geological picks, completion intervals and structural mapping presented by Inland. Additionally, the large 3D seismic data volume utilized by Inland to position the first well has been loaded on the seismic workstation and reviewed by dB geophysical staff. PROJECT LOCATION The Canadian Valley Project is located in the east-central portion of Oklahoma in the southeast portion of Okfuskee County, Oklahoma. Positioned south of the town of Weleetka, the project is easily accessible using the all-weather access provided by the state highway system and well-maintained gravel county roads. The local terrain is slightly hilly with ground elevations ranging from 700 to 900 feet above sea level. No known adverse environmental conditions exist on the surface or sub-surface. 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 11 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com For personal use only Richard G. Boyce Partner OKLAHOMA ENERGY PROFILE – from U.S. Energy Information Administration Excluding federal offshore areas, Oklahoma ranked fifth in crude oil production in the nation in 2013. Oklahoma is an “oil industry friendly” state. Private mineral ownership is wide spread in the state and individuals reap the benefits of an active development of oil and gas resources directly. Oil and Gas activity is regulated by the State of Oklahoma Corporation Commission which is well organized, efficient and reasonable in protecting the environment while encouraging the development of oil and gas resources to the benefits of the tax base enjoyed by the citizens of Oklahoma. Severance taxes for both oil and gas are 7.1%. As of January 2013, Oklahoma had five operating petroleum refineries with a combined daily capacity of over 500,000 barrels per day (3% of the total U.S. operating distillation capacity). Oklahoma is one of the top natural gas-producing states in the nation, accounting for 7.1% of U.S. gross production and 8.4% of marketed production in 2013. Cushing, Oklahoma is where West Texas Intermediate crude oil futures prices are settled for the New York Mercantile Exchange (NYMEX). In 2013, Oklahoma ranked fourth in net electricity generation from wind, which provided almost 15% of the state's net generation. GEOLOGY The project is located within the very prolific oil and gas producing region of east-central Oklahoma at the convergence of the Arkoma Basin, the Cherokee Platform and the Arbuckle Uplift tectonic provinces of Oklahoma. There is a general north-northwest regional strike and an average west-southwesterly dip of approximately 80 to 100 feet per mile across the project area. The normal inclination of strata is interrupted in places by basement involved faulting that subsequently forms doubling plunging anticlines and numerous closed structural features. Many times these parallel, en-echelon fault systems create highly prospective horst blocks upon which major oil and gas production occurs. 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 12 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com Richard G. Boyce Partner For personal use only Stratigraphy The stratigraphy of the Cherokee Platform contains at least 15 stacked pay horizons beginning in the Pennsylvanian at depths of 1,200 feet that persist throughout the Paleozoic at maximum depths of 5,000 feet. The stratigraphic column at right illustrates these pay zones which are comprised of both sandstone reservoirs and limestone sequences. The main pay sands already proven productive in the Canadian Valley Project are the First and Second Wilcox sands found within the Simpson Group at a depth of 3,920 feet and 3,960 feet respectively. Typically Wilcox sands in this area range in thickness from 3’ to 10’ with porosity ranging from 12% to 18% which exhibit typical ultimate recovery in the range of 50,000 barrels of oil per zone. In addition to the Wilcox sands other pay zones recognized in the Simpson Group include the Viola Limestone, the Tulip Creek Sand and the Oil Creek Sand. In addition to the already perforated and producing Wilcox Sands, petrophysical analysis of the #1-25 Wise well logs indicates potential pay zones are present in the Viola limestone at a depth of 3,880’ and in the shallower Cromwell Sandstone at a depth of 3,200’ as well as in the Union Valley Limestone at a depth between 3,030-3,122’. Within a three mile radius of the Canadian Valley Project most of the 15 pay zones shown on the stratigraphic column above have been produced in the numerous wells surrounding the area since the first wells were drilled in the 1930’s. Structural Setting The Canadian Valley Project is positioned on an up-thrown horst feature which is bounded by faults to the west and to the east. The positions of these faults have been mapped using a large 50 square mile 3D seismic survey that clearly demonstrates a regional up-thrown basement block trending NE – SW upon 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 13 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com For personal use only Richard G. Boyce Partner which a four way anticlinal closure at the Wilcox Sand level is mapped covering sections 25 and 36 of T10N R11E. The #1-25 Wise well is optimally positioned on the crest of this structure. The map below is a seismic time structure map on the Viola horizon which is an excellent seismic reflector. The Wilcox sands are located immediately below this level and as such, this map provides excellent control on the overall hydrocarbon trap size. Please note that only wells that penetrate the Simpson interval are shown on the map. For purposes of clarity, shallower well penetrations have been removed. Our technical review of all deep wells on this feature reveals that within the indicated structural closure, all wells that penetrated the Wilcox sands had indications of oil while none have yet been produced. Several of the wells were drilled in the 1930’s so wireline well logs and test information on these vintage wells is sparse, but Inland has recovered scout ticket information that supports the oil shows indicated on the map. Having reviewed all available information we believe that the hydrocarbon saturation on this feature is now fully documented and any pre-drill risk of hydrocarbons trapped on this structure have now been virtually eliminated. RESERVOIR ENGINEERING Original Oil In Place (OOIP) - #1-25 Wise Oil wells drilled in Oklahoma have been determined by the state oil conservation commission to drain a maximum of 40 acres. This drainage area is known as a proration unit. Full field development of the Canadian Valley Project will occur on 40 acre spacing at the Wilcox sand level. Review of the well logs from the #1-25 Wise well reveals specific intervals that indicate potential oil and gas production. Based on the rock properties of each pay zone, reservoir engineering can determine the Original Oil in Place (OOIP) across each 40 acre unit using a standardized volumetric equation. Once OOIP is known, a recovery factor appropriate to the rock properties is applied to determine the estimated recoverable barrels of oil from each zone. 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 14 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com Richard G. Boyce Partner For personal use only The table below outlines each of these potential pay zones within the #1-25 Wise well. Formation 1st Wilcox Sd 2nd Wilcox Sd Viola Limestone Cromwell Sd Union Valley Lm Pay Interval 3921 3925 3930 3957 3960 3964 3867 3878 3888 3200 3205 3030 3034 3042 3045 3067 3070 3072 3076 3102 3112 3925 3930 3933 3960 3964 3968 3875 3886 3892 3205 3212 3034 3037 3045 3049 3070 3072 3074 3080 3112 3122 Totals/Avg. Where: Sw is water saturation So is oil saturation H Feet Ф % Sw % So % 4 4 3 3 4 4 8 8 4 5 7 4 3 3 4 3 2 2 4 9 10 Net Acre s 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 13 12 12 12 14 16 4 3 3 14 12 4 3 3 3 3 3 3 3 3 3 33 30 27 40 33 35 50 60 58 21 23 50 60 58 58 58 58 58 58 58 58 67 70 73 60 67 65 50 40 42 79 77 50 40 42 42 42 42 42 42 42 42 99 40 7% 47% 53% Ф is porosity in percent H is net pay in feet OOIP Bbls Recovery Factor % Estimated Recoverable Oil 65,392 84,087 87,630 72,074 117,371 78,081 40,041 24,025 12,613 138,393 161,867 20,021 9,009 9,460 12,613 9,460 6,307 6,307 12,613 28,379 31,533 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 13,078 16,817 17,538 14,415 23,474 15,616 8,008 4,805 2,523 27,679 32,373 4,004 1,802 1,892 2,523 1,892 1,261 1,261 2,523 5,676 6,307 1,027,336 20 205,467 Formation Total BO 47,433 53,505 15,336 60,052 29,141 7758 bbls per acre-foot 1.24 = oil formation volume factor (Bo) It is anticipated that the 1st and 2nd Wilcox sands will be produced together during the initial production phase in this well. The estimated recoverable reserve for these two sands totals 100,938 barrels of oil. Additional revenue will be derived from the associated high BTU gas that will be produced and sold along with the oil. Inland has provided a gas assay from the produced gas that indicates 1,500 BTU natural gas will be produced from the Wilcox interval. This high BTU content will bring a premium price from the gas gatherer. Based on analogy to other recently competed Wilcox wells that have been completed and produced in a fashion similar to the #1-25 well, it is anticipated that an initial stabilized gas/oil ratio (GOR) will be 1,200 cu. ft/bbl of oil produced. Utilizing this GOR the pro-forma decline curve predicts that approximately 165 million cubic feet of gas (mmcf) will be produced from the Wilcox interval. Producing Wilcox wells provide engineering analogy Since the Wise #1-25 well is still being completed and the necessary production facilities and salt water disposal capacity is still under construction, there is no long term production history from this well to provide the basis for an actual production forecast in support of a cash flow model. As such we have identified two new Wilcox wells that have been recently drilled and completed with Electrical Submersible Pumps (ESP) and that represent geologically similar conditions to the Wise #1-25 well. In 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 15 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com For personal use only Richard G. Boyce Partner support to the project, Inland has provided production data and well logs from the Wildhorse #2-31 well located in section 31-T17N-R5E, Lincoln County, Oklahoma. The figure shown below illustrates the producing Wilcox Sand interval and is included with permission from the Operator’s well file. For comparison, the #1-25 Wise well is shown below. 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 16 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com For personal use only Richard G. Boyce Partner Review of the Operator’s daily completion notes indicates that a total of two Wildhorse wells have been completed in the Wilcox sands beginning in February 2014. The Wildhorse #2-31 well was perforated, acidized and swab tested the lower section of the Wilcox Sandstone. The result was a very strong oil and natural gas show with formation water. A bridge plug (RBP) was set to isolate the lower Wilcox and the upper section of the Wilcox was also perforated, acidized and swab tested again yielding very strong oil and natural gas shows with formation water. Subsequently the RBP was pulled and the two Wilcox zones were commingled for production. The well was equipped with an electrical submersible pump (ESP). Essentially the same operations have occurred on the Wildhorse #1-31. Review of Inland’s daily completion notes indicates very similar swab and test results from the #1-25 Wise well. Given the geological similarities, the same depth and completion techniques, the production results from the Wildhorse project have been deemed as useful analogs for setting up the production proforma decline curve. 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 17 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com For personal use only Richard G. Boyce Partner The Operator of the Wildhorse project has provided some detailed daily production records that are included herein with their permission. It is important to note that this level of data not available without access to the Operator’s internal well records. The initial daily production from the Wildhorse #1-31 well stabilized at 90-95 bopd and 100 mcfgpd within 1 week of completion. The initial daily production from the Wildhorse #2-31 well stabilized at 150-155 bopd and 300 mcfgpd in approximately the same time period. The daily production graph included below illustrates the combined well performance over time. Decline Curve Analysis provides basis for economic model A proforma decline curve was constructed using the following assumptions: Assumptions: Initial Rate Oil Initial Rate Gas Initial GOR Abandonment Oil Rate Recoverable Oil Volume 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 100 bopd 120 mcfpd 1,200 cu. ft/bbl 10 bopd 100,000 bbls 18 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com For personal use only Richard G. Boyce Partner 165,000 mcf Recoverable Gas Volume Calculated Result: Exponential decline rate Producing Life 27%/year 7 years These assumptions were inserted into the PHDWin production decline modeling software which produced the pro-forma decline curves for oil and natural gas production (shown below). Based on the production forecasts, a fully discounted cash flow model was constructed to determine net present value, discounted cash flow, return on investment and other economic parameters reported. Economic Assumptions and Pro forma Model Forecast of Prices and Costs The oil and gas prices used in the economic forecast are derived from publically available sources as published by the New York Mercantile Exchange (NYMEX) using the 5-Year NYMEX Strip pricing as 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 19 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com For personal use only Richard G. Boyce Partner of October 1, 2014. The prices were then held flat for the duration of each year as shown in the table below with no additional escalation or de-escalation applied. Year 2014 2015 2016 2017 2018 2019+ Gas $4.06 $3.93 $4.04 $4.18 $4.30 $4.30 Oil $90.24 $87.55 $85.90 $84.80 $84.53 $84.53 During the most recent 30 days preceding this report, world oil markets have experienced extraordinary volatility with prices dropping nearly 20% almost overnight, and markets testing new lows below $75/bbl. At this time, it is unknown if these lower prices will stabilize at these levels or if this should be considered as a short term condition in the market place. As such we have relied on what is generally accepted as a credible source for the price decks used in this evaluation. Cost Parameters The Operating Costs for the vertical Wilcox wells operating with Electrical Submersible Pumps (ESP) of $5,000/well/month was supplied by Inland Oil & Gas, LLC which we reviewed and considered as normal for the area of operations. The operating costs used in the economic calculations include the direct operating charges applicable to each well and allocated general and administrative overhead charges from the Operator. The economics also include Oklahoma oil and gas production taxes and ad valorem taxes (7.1% for both oil and gas) as well as US Federal Corporate Tax which was estimated to be 30%. The future Operating Costs were held constant for the economic life of each property. Well cost estimates based on actual vertical drilling experiences on the project area have been reviewed and accepted as normal for the area and depth of drilling. Well cost estimates used in the economic model are $1,218,750 per completed vertical well. This turnkey fixed cost includes the completion and equipment cost (electric submersible pump) necessary to produce the well. Estimated Future Remaining Reserves contained in this report are based upon our extensive subsurface review of well logs, core information, pressure test information, 3D seismic data, historical oil and gas production. No on site field examination of the subject properties has been undertaken. No existing environmental liabilities are currently identified with regard to the daily operations of Inland Oil & Gas, LLC. No environmental impact report has been provided for this property by the Operator. The values for working interest and net revenue interest, furnished in connection with this report were accepted as given and without further verification by dB, LLC. Future estimates in this report are based on available data through October 2014. 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 20 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com Richard G. Boyce Partner For personal use only Tax Considerations The Proforma economics and Net Present Values shown are net of Oklahoma Oil and Gas severance taxes. Currently these tax rates are 7.10% for both Oil and Gas Production. In Oklahoma, these taxes are paid upon sale of the various hydrocarbons at the well head and are deducted from the Net Present Value calculations. The economics also include U.S. Federal Income Tax which was estimated to be 30%. Using these assumptions the single well economics model for the P50 assumption of producing 100,000 barrels of oil and 165 mmcf of natural gas during a seven year production life is presented below. This economics run includes a drilling cost investment of $1,218,750 yields a PV10 value of $990,570 after the project has paid out in 1.49 years. This represents a 81% internal rate of return (IRR) and an undiscounted return on investment (ROI) of 2.17. The Present Worth (PW) Profile shown in the bottom right hand corner computes PW at various other discount rates. 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 21 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com For personal use only Richard G. Boyce Partner All numbers shown are quoted in USD and include both State and Federal Taxes and are computed net to the DELECTA 54% net revenue interest. Economic Sensitivity Modeling As in any risked investment in the oil business, uncertainties in the actual volumes of oil and gas to be produced in the future determines in large part project economics. While no one can accurately predict the exact future performance of a given well, informed geologic and engineering estimates can place reasonable boundary conditions with regard to future expectations. Based on this approach we have modeled a series of potential economic outcomes by varying the total volume of oil produced while applying the same investment and pricing scenarios. Based on the volumetric calculations performed on the #1-25 well and the overall results of numerous wells drilled in this area historically along with comparison to the recent production results of the Wildhorse project we have chosen three scenarios of estimated ultimate recovery (EUR) which are summarized in the table below. In the opinion of the evaluator, the P10 case carries a confidence factor of 90% that the well production will exceed 75,000 barrels of oil, while the P90 case carries a confidence factor of 10% that the well production will exceed 200,000 barrels of oil. The P50 case indicates a most likely case of 100,000 barrels with a confidence factor of 50%. Geological and Engineering review of the initial one (1) well investment indicates the following economic summary using NYMEX Five Year Strip Price as of 10/01/2014 held flat for the life of the production. All present values shown are net to DELECTA’s 80% working interest and 58% net revenue interest in this initial well. Case P10 P50 P90 EUR (bbls) 75,000 100,000 200,000 PV10 (USD 000) $1,589 $2,234 $3,169 IRR (%) ROI (%) Payout (yrs) In the event that DELECTA exercises the option to participate in the optional four additional well fullfield development, preliminary economic evaluation indicates the project upside could approach: Case P10 P50 P90 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA EUR/well (bbls) 75,000 100,000 200,000 PV10 (USD 000) $3,900 $6,381 $11,658 22 IRR (%) 133 189 179 ROI (%) 2.06 2.77 5.37 Payout (yrs) 1.27 1.15 1.15 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 dB, LLC Petroleum Advisory Services www.dbgeo.com For personal use only Richard G. Boyce Partner As above all discounted present values and economic indicators shown are net to DELECTA’s 80% working interest and 58% net revenue interest in the initial well and 54% net revenue interest in all subsequent wells. 4849 Greenville Ave. Suite 1360 Dallas, Texas 75206 USA 23 [email protected] Tel: 214-987-1779 Fax: 214-447-9523 For personal use only APPENDIX 7 Technical Project Review- Independent Valuation Report Paynes Find Gold Project for RSM Bird Cameron Corporate Pty Limited, Ravensgate 52 For personal use only TECHNICAL PROJECT REVIEW and INDEPENDENT VALUATION REPORT PAYNES FIND GOLD PROJECT for RSM BIRD CAMERON CORPORATE PTY LTD For personal use only TECHNICAL PROJECT REVIEW and INDEPENDENT VALUATION REPORT PAYNES FIND GOLD PROJECT for RSM BIRD CAMERON CORPORATE PTY LTD 20 October 2014 For personal use only TECHNICAL PROJECT REVIEW and INDEPENDENT TECHNICAL VALUATION Prepared by RAVENSGATE on behalf of: RSM Bird Cameron Corporate Pty Ltd Author(s): Sam Ulrich Principal Consultant BSc (Hons) Geology, MAusIMM, MAIG, GDipAppFin, FFin Alan Hawkins Principal Consultant BSc (Hons) Geology, MSc Ore Deposit Geology, MAIG, FSEG H. Kate Holdsworth Senior GIS Geologist BSc (Hons) Geology, MAusIMM Reviewer: Neal Leggo Principal Consultant BSc (Hons) Geology, MAIG, MSEG Date: 20 October 2014 Copies: Delecta Limited (2) Ravensgate (1) Project No: PAY002 Document Ref: PAY002_VAL_03_NOV_2014_FINAL_DELECTA_RSM _______________________ Sam Ulrich For and on behalf of: _______________________ Alan Hawkins For and on behalf of: RAVENSGATE RAVENSGATE This report has been commissioned from and prepared by Ravensgate for the exclusive use of RSM Bird Cameron Corporate Pty. Each statement or opinion in this report is provided in response to a specific request from RSM Bird Cameron Corporate Pty to provide that statement or opinion. Each such statement or opinion is made by Ravensgate in good faith and in the belief that it is not false or misleading. Each statement or opinion contained within this report is based on information and data supplied by Paynes Find Gold Limited to Ravensgate, or otherwise obtained from public searches conducted by Ravensgate for the purposes of this report. Page 3 of 62 For personal use only TABLE OF CONTENTS 1. EXECUTIVE SUMMARY ............................................................................................8 1.1 1.2 1.3 2. INTRODUCTION .................................................................................................. 10 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3. Terms of Reference .................................................................................. 10 Tenement Status Verification ...................................................................... 10 Site Investigation ..................................................................................... 10 Qualifications, Experience and Independence .................................................. 11 Disclaimer ............................................................................................. 12 Consent ................................................................................................ 13 Principal Sources of Information .................................................................. 13 Competent Persons Statement .................................................................... 13 Background Information ............................................................................ 13 PAYNES FIND GOLD PROJECT ................................................................................. 15 3.1 3.2 3.3 3.4 3.5 4. Background .............................................................................................. 8 Project Review ......................................................................................... 8 Technical Valuation.................................................................................... 8 Introduction ........................................................................................... 15 3.1.1 Project Location ............................................................................ 15 3.1.2 Access ........................................................................................ 16 3.1.3 Supporting Infrastructure ................................................................ 17 3.1.4 Geopolitical Environment ................................................................ 17 Ownership and Tenure .............................................................................. 17 3.2.1 Project Ownership and Relevant Interests ............................................ 19 3.2.2 Agreements ................................................................................. 19 3.2.3 Royalties and Taxes........................................................................ 20 History ................................................................................................. 21 3.3.1 Ownership History ......................................................................... 21 3.3.2 Exploration History ........................................................................ 21 3.3.3 Previous Mineral Resource Estimates .................................................. 24 3.3.4 Previous Production ....................................................................... 24 Geological Setting ................................................................................... 26 3.4.1 Regional Geology and Mineralisation ................................................... 26 3.4.2 Project Geology ............................................................................ 26 3.4.3 Controls on Mineralisation ............................................................... 28 Exploration Results and Potential ................................................................. 31 3.5.1 Recent Exploration Activities ............................................................ 31 3.5.2 Exploration Potential ..................................................................... 43 3.5.3 Constraints to Further Exploration Success ........................................... 46 VALUATION ....................................................................................................... 47 4.1 4.2 4.3 4.4 Introduction ........................................................................................... 47 Previous Mineral Asset Valuations ................................................................. 49 Material Agreements ................................................................................ 49 Comparable Transactions ........................................................................... 50 Page 4 of 62 For personal use only 4.5 4.6 4.4.1 Reported Market Transactions ........................................................... 50 4.4.2 Commodity Prices .......................................................................... 53 Mineral Asset Valuations ............................................................................ 54 4.5.1 Paynes Find Gold Project, Western Australia ......................................... 54 Valuation Summary .................................................................................. 58 5. REFERENCES ...................................................................................................... 59 6. LIST OF ABBREVIATIONS ....................................................................................... 60 7. GLOSSARY ......................................................................................................... 61 Page 5 of 62 For personal use only LIST OF TABLES Table Table Table Table Table Table Table Table Table 1 2 3 4 5 6 7 8 9 Table Table Table Table 10 11 12 13 Summary Project Technical Valuation in 100% Equity Terms ...................................... 9 Paynes Find Gold Project Tenement Details ........................................................ 17 Paynes Find Gold Project: Exploration History ..................................................... 21 Significant Results from historical drilling ......................................................... 22 Production Records from Historical Gold Mines (after, Paynes Find Gold Limited, 2011) . 25 Paynes Find Gold Limited Stage 1 drilling Program Significant results >1g/t Au ............ 34 Assay Results – 2012 Stage 2 Drilling Program ...................................................... 38 Stage 2 drill holes with no significant result ....................................................... 40 Market Transactions Involving Gold Projects at the Exploration Stage in Western Australia ................................................................................................... 51 Summary Statistics of Comparative Transactions by Tenement Type ......................... 54 Tenement Type Value Ranges Breakdown ........................................................... 55 Comparable Transaction Valuation of PFGL’s Exploration Tenure ............................. 57 Summary Project Technical Valuation in Ownership Equity Percentage Terms ............. 58 Page 6 of 62 For personal use only LIST OF FIGURES Figure Figure Figure Figure 1 2 3 4 Figure Figure Figure Figure Figure 5 6 7 8 9 Figure 10 Figure 11 Figure 12 Figure 13 Figure 14 Figure 15 Figure Figure Figure Figure 16 17 18 19 Location of the Paynes Find Gold Project ........................................................... 14 Location of the Paynes Find Gold Project (after Paynes Find Gold Ltd, 2014) ............... 15 Great Northern Highway Route from Perth to Paynes Find ...................................... 16 Paynes Find Granted Tenements (after Paynes Find Gold Limited, 2014 edited by Ravensgate) ............................................................................................... 18 Tenements Divested as of 1 September 2014 ....................................................... 20 Significant Historic Drilling Results (after Paynes Find Gold Limited, 2011) ................. 24 Yilgarn Craton and Murchison Province .............................................................. 26 Paynes Find Gold Project Simplified Geology ...................................................... 27 Fine, Visible Gold in Laminated, Sheared (S2) Vein (PFGDD003, 1m @ 26.79g/t Au, from 210-211m) ................................................................................................. 29 Schematic Representation of Conceptual Gold Target ........................................... 30 Paynes Find Tenement Holding (2013) Overlain on Magnetics and Soil Geochemistry; Interpreted Shears and Drilling Areas, with New Zones of Interest in Yellow ............... 31 MMI Results and Historical RC Drilling Within the Planned Stage 2 Area Prior to Drilling . 32 Significant Results from the Stage 1 Drilling Programme (after Paynes Find Gold Limited, 2011) ............................................................................................ 33 Composite Cross-Section 6763915N, as Shown on Figure 12 and Figure 13 ................... 33 Historical and Stage 1 Drill Holes (A) and Planned (2012) Stage 2 RC and Diamond Drill Holes (B) ................................................................................................... 37 Stage 2 Drill Hole Locations and Significant Intersections ....................................... 42 Cross-Section Through Stage 2 Drilling .............................................................. 43 CSA Priority Targets ..................................................................................... 44 Gold Five Year Monthly Average Price Chart to September 2014 .............................. 53 Page 7 of 62 For personal use only 1. EXECUTIVE SUMMARY 1.1 Background Corvidae Pty Ltd ATF Ravensgate Unit Trust T/As Ravensgate (Ravensgate) was commissioned by RSM Bird Cameron Corporate Pty Ltd (RSM) and Delecta Limited (Delecta) to provide a Technical Project Review on the Paynes Find Gold Project and an Independent Technical Valuation over this project. This Technical Project Review and Independent Valuation Report were prepared by Ravensgate for inclusion in the Independent Expert’s Report (IER) prepared by RSM. The effective date of this Technical Project Review and Independent Valuation Report prepared by Ravensgate is the 20 October 2014. The project included in this report and its ownership is listed below. Mineral Asset Paynes Find Gold Project, Western Australia 1.2 PFGL Ownership % 100% Project Review The Paynes Find Gold Project area is located approximately 420km northeast of Perth in the Murchison Province of the Mid-West region of Western Australia. The Paynes Find area has undergone historic mining since the early 1900s. Gold was first discovered in the area in 1911 with an estimated 36 historic gold mines reporting production grades that ranged from 15g/t Au to 150g/t Au. Paynes Find Gold Limited (PFGL) acquired the Paynes Find Gold Project in June 2010 and carried out geological mapping and geochemical surveys, before commencing two drilling campaigns in 2011 and 2013, centred around the main area of previous historic workings. The drill programs returned encouraging results, both confirming historic areas of high grade mineralisation and identifying new areas of mineralisation, which led to a structural study being carried out identifying four phases of deformation throughout the area and three styles of mineralisation. This study was refined to identify 11 targets for (Stage 3) follow-up drilling over the tenement package, however due to the decline in the gold price over the last two years this program was not carried out. PFGL has also trialed alluvial mining through a small, on site, gravity processing plant, signing various agreements with local contractors; however these activities ceased in late 2013. The depressed gold price led PFGL to review all aspects the Paynes Find Gold Project which led to a Deed of Sale for seven tenements in the northwest of the project in April 2014, with the divestment being finalised in September 2014. 1.3 Technical Valuation The valuation presented in this report was completed on behalf of PFGL. The valuation has been completed with information provided by and with the full support of PFGL. The applicable valuation date is 20 October 2014. The project can be classified as an Advanced Exploration Area Mineral Asset. No Mineral Resources as defined by the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves – 2012 Edition (JORC Code 2012) have been reported for the project. Ravensgate did not carry out a site visit to the Paynes Find Gold Project. Ravensgate is satisfied that there is sufficient current information available to allow an informed appraisal to be made. Both Mr Alan Hawkins and Mr Sam Ulrich of Ravensgate have had extensive Western Australian gold experience and have visited the Paynes Find area in the past. Ravensgate is of the opinion that no significant additional benefit would have been gained through a site visit to the project area at this stage. To derive appropriate values for the various exploration tenements Ravensgate reviewed the exploration data and prospectivity for the various licences. The preferred value for each Page 8 of 62 For personal use only range was based upon a review of the prospectivity of each licence and the number and quality of exploration targets on each licence as described in Section 3.5. To derive the values for the mineral resources, Ravensgate reviewed the resources and the values assigned reflected the confidence and grade of the mineral resources. Ravensgate has concluded that the Paynes Find Gold Project is of merit (although at varying stages of exploration and subsequent Mineral Asset classification), and worthy of further exploration. A summary of the Paynes Find Gold Project valuation in 100% equity terms is provided in Table 1. The applicable valuation date is 20 October 2014 and is derived from using the Comparable Transactions valuation method. The value of the Paynes Find Gold Project is considered to lie in a range from $0.835M to $1.208M; within this range Ravensgate has selected a preferred value of $1.022M. As the technical valuation is based on comparable market transactions it can be considered to also be the market value. The definition of market value that Ravensgate adopts is that used in the VALMIN code, which is the market value definition as defined by the International Valuation Standards Committee (IVSC). Table 1 Summary Project Technical Valuation in 100% Equity Terms Valuation Project Mineral Asset Paynes Find Gold Project Advanced Exploration Area Equity % Area km2 Low $M Preferred $M High $M 100 7.007 0.835 1.022 1.208 Note: The valuation has been compiled to an appropriate level of precision and minor rounding errors may occur. Page 9 of 62 For personal use only 2. INTRODUCTION The objective of this report is to firstly provide a Technical Project Review of Paynes Find Gold Limited’s (PFGL) Paynes Find Gold Project in Western Australia. The second objective of this report is to provide a market valuation and technical assessment of this project prepared in accordance with the guidelines of the VALMIN Code. The work has been commissioned by RSM Bird Cameron Corporate Pty Ltd (RSM) and Delecta Limited (Delecta). RSM has been engaged by the Directors of Delecta to prepare an Independent Expert’s Report (IER) in relation to the issue of an option to PFGL to acquire assets held by Delecta. Part of the consideration payable by PFGL to exercise the option is the issue of ordinary shares and options in PFGL to Delecta. This report does not provide a valuation of PFGL as a whole, but only of the Paynes Find Gold Project mineral assets. This report does not make any comment on the fairness and reasonableness of any transaction between any two companies. The conclusions expressed in this Independent Technical Project Review and Independent Technical Valuation are valid as at the valuation date (20 October 2014). The review and valuation is therefore only valid for this date and may change with time in response to changes in economic, market, legal or political factors, in addition to ongoing exploration results. All monetary values included in this report are expressed in Australian dollars (A$) unless otherwise stated. This report has been prepared in accordance with the Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports (The VALMIN Code) as adopted by the Australasian Institute of Mining and Metallurgy (AusIMM) in April 2005. The report has also been prepared in accordance with ASIC Regulatory Guides 111 (Contents of Expert Reports) and 112 (Independence of Experts). The Technical Project Review and Independent Technical Valuation report has been compiled based on information available up to and including the valuation date of this report for the valuation of exploration tenure and two years of data post the transaction date has been used for the valuation of mineral resources to provide a larger dataset for comparison. 2.1 Terms of Reference Corvidae Pty Ltd as trustee for the Ravensgate Unit Trust trading as Ravensgate (Ravensgate) has been commissioned by RSM and Delecta to provide an Independent Technical Project Review and Independent Technical Valuation on the Paynes Find Gold Project in Western Australia. This report has been prepared in accordance with the Code and Guidelines for Assessment and Valuation of Mineral Assets and Mineral Securities for Independent Expert Reports (The VALMIN Code) and the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves - 2012 Edition (JORC Code 2012). 2.2 Tenement Status Verification Ravensgate has not independently verified the status of all the tenements that are referred to in this report as set out in Section 3.2 of this report. This is a matter for independent legal or tenement experts. PFGL commissioned an independent review of PFGL’s tenement status. Tenement specialist McMahon Mining Title Services Pty Ltd (McMahon), of Perth, Australia completed this review and did not identify any material issues that would impact on Ravensgate’s valuation. Ravensgate is satisfied, based on McMahon’s review, that the tenements are in good standing and the values assigned to the tenements correctly reflect PFGL’s ownership. 2.3 Site Investigation Ravensgate did not carry out a site visit to the Paynes Find Gold Project. Ravensgate is satisfied that there is sufficient current information available to allow an informed appraisal to be made. Both Mr Alan Hawkins and Mr Sam Ulrich of Ravensgate have had extensive Western Australian gold experience and have visited the Paynes Find area in the past. Page 10 of 62 For personal use only Ravensgate is of the opinion that no significant additional benefit would have been gained through a site visit to the project area at this stage. Ravensgate has concluded that the project is of technical merit and is worthy of conducting further review and exploration. 2.4 Qualifications, Experience and Independence Ravensgate is an internationally recognised and respected minerals industry consultancy that has been serving the industry with excellence since 1997. Ravensgate provides world class technical expertise to the mining and resource sector globally. The company has worked for major clients globally, such as Freeport at Grasberg Mine, Ok Tedi Gold Mine in Papua New Guinea, Goldfields and Newmont in Ghana and many junior resource companies which are ASX (Australian Stock Exchange), TSX (Toronto Stock Exchange) or AIM (London Stock Exchange) listed. Ravensgate has focused upon providing resource estimations, valuations, independent technical documentation and has been involved in the preparation of Independent Reports for Canadian, Australian and United Kingdom companies. Author: Sam Ulrich, Principal Consultant, BSc (Hons) Geology, GDipAppFin, MAusIMM, MAIG, FFin. Sam Ulrich is a geologist with over 19 years’ experience in near mine and regional mineral exploration, resource development and the management of exploration programs. He has worked in a variety of geological environments in Australia, Indonesia, Laos and China primarily in gold, base metals and uranium. Prior to joining Ravensgate Sam worked for Manhattan Corporation Ltd a uranium exploration and resource development company in a senior management position. Mr Ulrich holds the relevant qualifications and experience as well as professional associations required by the ASX, JORC and VALMIN Codes in Australia to qualify as a Competent Person as defined in the JORC Code. He is a Qualified Person under the rules and requirements of the Canadian Reporting Instrument NI43-101. Co-Author: Alan Hawkins, Principal Consultant, BSc (Hons) Geology, MSc Ore Deposit Geology, MAIG, FSEG. Alan Hawkins is a geologist with over 18 years’ experience in near mine and regional mineral exploration, resource development and the management of exploration programs. He has worked in a variety of geological environments in Australia and Indonesia, primarily in gold and copper. Prior to joining Ravensgate, Alan worked for Newmont Mining Corporation as a Principal Geologist in their exploration, corporate and business development divisions, providing technical support, due diligence and rapid first-filter geological and economic analysis to M&A teams in the Asia Pacific region as well as US and African EBD teams. This role also included project and non-core asset divestments including commercial negotiations with junior exploration companies, stakeholders and land & legal teams. Previous to this, Alan held various principal and senior regional exploration management roles in WA and NT. In the 1990’s Alan worked as a near mine exploration geologist for Eagle Mining Corporation NL, Great Central Mines Ltd and Normandy Mining Ltd at the Jundee-Nimary Gold Mine and was part of the team that discovered the +2Moz Au Westside deposit, where he also worked as a resource modelling geologist before joining Newmont’s regional exploration team. Alan holds the relevant qualifications and professional associations required by the ASX, JORC and VALMIN Codes in Australia to qualify as a Competent Person as defined in the JORC Code. He is a Qualified Person under the rules and requirements of the Canadian Reporting Instrument NI43-101. Co-Author: H. Kate Holdsworth, BSc (Hons) Geology, MAusIMM. Kate Holdsworth is a senior GIS geologist with over 17 years GIS experience who joined the Ravensgate team in September 2006. During her tenure at Ravensgate, she has contributed to the compilation of numerous Independent Geologists Reports, Valuation Reports, GIS projects Page 11 of 62 For personal use only as well as having assisted clients with their exploration reporting requirements and QA/QC investigations into client’s data quality. Prior to joining Ravensgate, she worked for Giscoe Pty Ltd, a GIS company in Johannesburg, for ten years, where she was involved in diverse GIS projects, including database creation, database population and data validation. Kate has four years’ experience in GIS with the Geological Survey of South Africa, where she was a member of their GIS database design team. Peer Reviewer: Neal Leggo, Principal Consultant, BSc (Hons) Geology, MAIG, MSEG Neal Leggo has over 28 years’ experience in minerals geology including senior management, consulting, exploration, development, underground mining and open pit mining. He has extensive experience with a wide variety of commodities including gold, copper, iron ore, silver, lead and zinc, uranium and manganese across numerous geological terrains within the Asia-Pacific region. Prior to joining Ravensgate, Neal worked for FMG leading a large field team undertaking fasttrack exploration, delineation and feasibility study of a major new iron ore discovery in the Pilbara of WA. Previous to this Neal was Exploration Manager at Crescent Gold were he led a successful exploration team and also managed feasibility study and development work on seven gold deposits in preparation for mining. At Hatch he undertook numerous geological consulting assignments included scoping, prefeasibility and review studies, geological audit and due diligence. At BHP he modelled mineral resources including the Cannington, Mt Whaleback and Yandi world-class deposits. Previous to this Neal worked 8 years in Mt Isa for MIM where roles included chief geologist for the Hilton underground lead zinc mine and exploration manager for Isa District. During the 1980s he worked as a field geologist across northern Australia on a wide variety of exploration projects and mines. Neal offers extensive knowledge of available geological, geophysical, geochemical and exploration techniques and methodologies, combined with strong experience in feasibility study, development and mining of mineral deposits. Neal completed an Honours degree in Geology at the University of Queensland in 1980 and holds the relevant qualifications, experience and professional associations required by the ASX, JORC and VALMIN Codes in Australia. He is a Qualified Person under the rules and requirements of the Canadian Reporting Instrument NI43-101. 2.5 Disclaimer The authors of this report, and Ravensgate, have had a prior association with PFGL in regard to the mineral assets, but have no interest in the outcome of this technical assessment. Ravensgate completed an independent review of the project in 2011. Ravensgate is independent of PFGL, its directors, senior management and advisors and has no economic or beneficial interest (present or contingent) in any of the mineral assets being reported on. Ravensgate is remunerated for this report by way of a professional fee determined in accordance with a standard schedule of commercial rates, which is calculated based on time charges for review work carried out, and is not contingent on the outcome of this report. Fees arising from the preparation of this report are in the order of $18,000 to $20,000. The relationship with PFGL is solely one of professional association between client and independent consultant. None of the individuals employed or contracted by Ravensgate are officers, employees or proposed officers of PFGL or any group, holding or associated companies of PFGL. The report has been prepared in compliance with the Corporations Act and ASIC Regulatory Guides 111 and 112 with respect to Ravensgate’s independence as experts. Ravensgate regards RG112.31 to be in compliance whereby there are no business or professional relationships or interests which would affect the expert’s ability to present an unbiased opinion within this report. Page 12 of 62 For personal use only This report has been compiled based on information available up to and including the valuation date. The statements and opinions are based on the reference date of 20 October 2014 and could alter over time depending on exploration results, mineral prices and other relevant market factors. 2.6 Consent Ravensgate consents to this report being distributed, in full, in the form and context in which the technical assessment in provided, for the purpose for which this report was commissioned. Ravensgate provides its consent on the understanding that the assessment expressed in the individual sections of this report will be considered with, and not independently of, the information set out in full in this report. 2.7 Principal Sources of Information The principal sources of information used to compile this report comprise technical reports and data variously compiled by PFGL and their partners or consultants, publically available information such as ASX releases, government reports and discussions with PFGL’s technical and corporate management personnel. With the consent of PFGL, the report sections describing the geology, historical exploration and current exploration have been reproduced from their reports. A listing of the principal sources of information is included in the references attached to this report. Ravensgate has endeavoured, by making all reasonable enquiries, to confirm the authenticity, accuracy and completeness of the technical data upon which this report is based. A final draft of this report was also provided to PFGL prior to finalisation by Ravensgate, requesting that PFGL identify any material errors or omissions prior to its final submission. Ravensgate does not accept responsibility for any errors or omissions in the data and information upon which the opinions and conclusions in this report are based, and does not accept any consequential liability arising from commercial decisions or actions resulting from errors or omissions in that data or information. 2.8 Competent Persons Statement The information in this report to which this statement is attached that relates to Exploration Results (Section 3.5) is based on information compiled by Mr David Holden, a Competent Person who is a Member of The Australasian Institute of Mining and Metallurgy. Mr Holden is a full-time employee of Paynes Find Gold Limited. Mr Holden has sufficient experience that is relevant to the style of mineralisation and type of deposit under consideration and to the activity being undertaken to qualify as a Competent Person as defined in the 2012 Edition of the ‘Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves’. Mr Holden consents to the inclusion in the report of the matters based on his information in the form and context in which it appears. 2.9 Background Information The project discussed in this report is located in Western Australia. A locality map of the projects is presented in Figure 1 below. A summary of the Paynes Find tenement details are listed in Section 3.2. Report file references and a glossary of terms are also included at the end of this report. Ravensgate understands that the tenements held by PFGL are held in good standing. A brief overview of the project is outlined in Section 3. The Independent Valuation of the projects is outlined in Section 4. Section 3.2.2 refers to a recent Deed of Sale for seven tenements which was finalised on 1 September 2014. Various figures in this report will show tenement outlines which include these divested tenements, as they were current at the time of the work that is being reported on at the time. Figure 4 shows the current tenement package controlled by PFGL, with Figure 5 showing the tenements that were divested. Page 13 of 62 Location of the Paynes Find Gold Project For personal use only Figure 1 Page 14 of 62 For personal use only 3. PAYNES FIND GOLD PROJECT 3.1 Introduction The Paynes Find area has undergone historic mining since the early 1900s (refer to Section 3.3.4 and Table 5). Gold was first discovered in the area in 1911. An estimated 36 historic gold mines within the Paynes Find Goldfield have reported production grades that ranged from 15g/t Au to 150g/t Au. From 1911-1982, approximately 69,000t of ore produced 1,784kg (63,000 ounces) of gold at an average grade of 25g/t Au, (Paynes Find Gold Limited, 2011). 3.1.1 Project Location The project area is located approximately 420km northeast of Perth in the Mid-West region of Western Australia (Figure 2). Figure 2 Page 15 of 62 Location of the Paynes Find Gold Project (after Paynes Find Gold Ltd, 2014) For personal use only The area experiences a semi-desert Mediterranean climate, which is defined as nine to eleven months of dry weather, mild wet winters and hot dry summers. The mean maximum temperature is 27.7oC whilst the mean minimum temperature is 12.8oC, with an annual rainfall of 281.9mm. 3.1.2 Access The area can be accessed via the Great Northern Highway, a sealed highway originating in Perth which passes through the project area (Figure 3) and then continues north to Mt Magnet, Cue and Meekatharra (Figure 1). The area is also serviced by an airstrip located at Paynes Find (refer Figure 4). Figure 3 Great Northern Highway Route from Perth to Paynes Find Page 16 of 62 For personal use only 3.1.3 Supporting Infrastructure There is a roadhouse and tavern at Paynes Find Town, which also serves as a fuel stop, has a dining room and offers accommodation (refer Figure 3 and Figure 4). The airstrip is located ~1km to the west of the Paynes Find Tavern and Roadhouse (refer Figure 4). 3.1.4 Geopolitical Environment Australia is a politically stable, liberal democracy. According to Control Risks Group Limited on the Intierra / SNL Metals and Mining website, Political risk, Security risk and Terrorism risk ratings are all categorised as low risk, with Operational risk rating categorised as insignificant risk. 3.2 Ownership and Tenure The tenements are all held by PFGL, the details of which are listed in Table 2 and a map of the tenements are shown in Figure 4. Table 2 Exploration Licence Area (km2) Paynes Find Gold Project Tenement Details Grant Date Expiry Date Owner and Equity M59/0002* 0.05 31-Aug-83 30-Aug-25 100% PFGL M59/0010* 0.25 23-Oct-84 22-Oct-26 100% PFGL, First Tech Energy Caveat M59/0235* 0.07 04-Nov-91 03-Nov-33 100% PFGL, First Tech Energy Caveat M59/0244* 0.92 24-Jan-92 23-Jan-34 100% PFGL, First Tech Energy Caveat M59/0396# 0.05 23-Jul-96 22-Jul-17 100% PFGL M59/0662# 0.39 27-Oct-09 26-Oct-30 100% PFGL, First Tech Energy Caveat M59/0663# 0.14 27-Oct-09 26-Oct-30 100% PFGL, First Tech Energy Caveat P59/1907# 0.08 18-Nov-09 17-Nov-17 100% PFGL P59/1908# 0.01 18-Nov-09 17-Nov-17 100% PFGL P59/1909# 0.01 18-Nov-09 17-Nov-17 100% PFGL P59/1924# ^ 0.44 30-Sep-10 29-Sep-14 100% PFGL P59/1941** 1.75 02-May-12 01-May-16 100% PFGL P59/1942# 0.85 22-Feb-12 21-Feb-16 100% PFGL P59/1956# 0.05 16-Dec-11 15-Dec-15 100% PFGL P59/1957# 0.05 16-Dec-11 15-Dec-15 100% PFGL P59/1958# 0.52 16-Dec-11 15-Dec-15 100% PFGL P59/1959# 1.48 16-Dec-11 15-Dec-15 100% PFGL *Condition of tenement, compliance with the provisions of the Aboriginal Heritage Act, 1972 to ensure that no action is taken which is likely to interfere with or damage any Aboriginal Site (eMiTs, 2014). ** Expedited Procedure: Native Title Cleared - Expedited Applies (eMiTs, 2014). # Native Title cleared (eMiTs, 2014). ^ Four year extension of term applied for on 25 September 2014. Page 17 of 62 For personal use only Figure 4 Paynes Find Granted Tenements (after Paynes Find Gold Limited, 2014 edited by Ravensgate) Page 18 of 62 3.2.1 Project Ownership and Relevant Interests For personal use only The tenements are all held 100% by PFGL, as listed in Table 2. 3.2.2 Agreements The Taylor Agreement and the Cable Agreement are agreements entered into by First Tech Energy to acquire the tenements from D. and E. Taylor and from D. Cable. By a Deed of Assignment made 15 July 2010, First Tech Energy Limited assigned its rights and obligations under the Taylor Agreement to Paynes Find Gold Limited. By a Deed of Assignment made 15 July 2010, First Tech Energy Limited assigned its rights and obligations under the Cable Agreement to Paynes Find Gold Limited. First Tech Energy Limited has thus reserved the right to enter the tenements and explore for and extract the minerals of nickel, cobalt and other base metals (Paynes Find Gold Limited, 2010). In 2013, PFGL entered into a toll processing agreement with a local contractor, which allowed mining and processing of eluvial and alluvial gold utilising PFGL’s existing alluvial gravity circuit plant with mill and knudsen concentrator which is capable of processing at a rate of 50 tonnes/hour. All expenditure was borne by the contractor on a return for the Company totalling 25% of off the top revenue. On 4 June 2013, PFGL announced that it had entered into an agreement with MJF Mining Contractors (MJF) to upgrade mining and processing operations at Paynes Find. The contractor was to install a three stage track-mounted crushing and screening circuit to exploit a selective open pit development plan previously designed by PFGL. Under the agreement PFGL was entitled to 50% of the recovered gold after taking into account refining costs. PFGL advised the ASX on 1 October 2013, that it had not been able to conclude a revised Mining Services Agreement with MJF and had formally terminated the agreement. Further trial mining would not be considered until results of a re-evaluation of the Paynes Find Project was determined and communicated to shareholders. PFGL announced to the ASX on 23 April 2014, that a conditional Deed of Sale for seven mining tenements to the west of the main Paynes Find Gold Project had been signed. PFGL received a non-refundable $50,000 deposit on signing the deed. The sale of the tenements for a total consideration of $350,000 was conditional upon the purchaser raising funds to pay the balance of the consideration within 90 days from signing of the deed. The tenements subject to the conditional Deed of Sale made up an area of 247 hectares which was approximately 25% of PFGL’s total land holding at the Paynes Find Gold Project and are considered grass roots exploration ground which had not been the subject of the PFGL’s previous exploration efforts and drilling programs. Settlement of the tenement sale was announced to the ASX on 1 September 2014. The seven divested tenements that were part of this Deed of Sale can be seen in Figure 5. The operations and proposed activities on the tenements of the Paynes Find Gold Project are subject to State and Federal laws and regulations concerning the environment. As with most exploration projects and mining operations, PFGLs activities have had an impact on the environment, particularly with regard to M59/0010, M59/0224 and M59/0662 where the Stage 1 and 2 drilling campaigns have been carried out. A recent Department of Mines and Petroleum (DMP) inspection identified that PFGL had not met its environmental obligations with respect to the Stage 1 and 2 drill programs and identified additional environmental and occupational health and safety (OHS) concerns. Although it is the intention of PFGL to conduct its activities to the highest standard of environmental obligation, including compliance with all environmental laws, at the time of this report no rehabilitation has been conducted. Tracks need to be vegetated, drill collars are to be removed and plugged and sumps need to be filled in. In addition, the alluvial plant would need to be removed (or scrapped) and the tails storage facility rehabilitated to meet environmental and OHS requirements, should a decision be made to cease further work at the project. Page 19 of 62 For personal use only Figure 5 Tenements Divested as of 1 September 2014 (Modified from PFGL, Q3 Report, 2014) 3.2.3 Royalties and Taxes First Tech Energy Limited is to receive a royalty equal to 2% of the gross revenue derived from the tenements which are the subject of the Taylor Agreement and the Cable Agreement where gross revenue is described as the amount received from the sale of gold derived from the tenements (Paynes Find Gold Limited, 2010). Page 20 of 62 For personal use only 3.3 History 3.3.1 Ownership History Refer to Table 3 for ownership history. 3.3.2 Exploration History The project has been explored by a number of explorers in the past, their programs are summarised in Table 3, with significant results in Figure 6 and Table 4. Drill hole locations are displayed in Figure 15 (A), in Section 3.5.1.2. Table 3 Date Paynes Find Gold Project: Exploration History Company Findings 1983 West Australian Geological Survey Geological mapping. 1985 G R Dale and Associates Undertook both surface and underground exploration. 1987 Falcon Australia Limited Carried out exploration of the Carnation Gold Mine as well as sampling other old mine workings including Blue Heaven, Leschenaultia, Romes, Carnation, Daphne, Scadden (extensions), Daisy, Primrose, Sweet William, Kowhai, Horseshoe, Wattle, Marigold, Orchid. It was determined that gold mineralisation at the Carnation Mine is structurally controlled, high grade mineralisation shoots within narrow, tight shear zones having variable, generally limited, wall rock alteration. They also undertook a drilling program (refer Figure 6). 1986-1987 Forsayth NL Carried out a field inspection, photograph interpretation and a drilling programme (refer Figure 6). 1996-1998 Kirkwood Gold NL Two holes were drilled on M59/10, one diamond with an RC collar (57.6m RC and 125.6m diamond, total depth 183.20m) and one RC for 46m (PFRCDD1, PFRC5). For PFRCDD1 seven samples were analysed from the diamond core, two returning results less than 0.01g/t Au, the rest of the results are listed in Table 4. For PFRC5 from the 18 samples analysed the results greater than 0.5g/t Au are listed in Table 4. Three RC drill holes (PFRC2-4) were drilled on M59/244 for a total of 85m. A hundred samples were assayed with the results ranging from below the detection limit to 23.9g/t, the median result was 0.03g/t Au. The most significant result being one metre at 23.9g/t Au from 55m in PFRC4 (refer Figure 6). 2002-2003 Page 21 of 62 Hallmark Mining Limited Undertook drilling with the aim of testing high-grade gold shoots below old workings for depth extensions. During 2002 11 RC holes were drilled for 1,272m. Results >0.50g/t Au are listed in Table 4. Hallmark drilled two RC holes in 2003 for 164m. Results >0.50g/t Au are listed in Table 4 (refer Figure 6). For personal use only Table 4 Drill hole Significant Results from historical drilling From (m) To (m) Length (m) Grade Au (g/t) Kirkwood 1996 – 1998 Drilling Intersections PFRCDD1 74.18 74.42 0.24 0.16 PFRCDD1 74.54 74.82 0.28 PFRCDD1 91.73 92.27 0.54 0.12 PFRCDD1 94.02 94.42 0.40 2.8 PFRCDD1 134.61 135.05 0.44 83.7 13.7 PFRC5 12 16 4 4.6 PFRC5 32 34 2 3.7 PFRC5 34 38 4 0.6 PFRC5 32 33 1 0.83 PFRC5 34 35 1 0.9 PFRC5 30 31 1 0.12 Hallmark Mining Limited 2002 and 2003 Drilling Results HPFRC18 63 64 1 4.16 HPFRC18 64 65 1 3.9 HPFRC18 112 113 1 0.62 HPFRC20 20 21 1 0.51 HPFRC20 23 24 1 0.72 HPFRC20 27 28 1 1.53 HPFRC20 29 30 1 4.32 HPFRC20 30 31 1 0.69 HPFRC20 33 34 1 1.19 HPFRC20 34 35 1 0.75 HPFRC19 20 21 1 0.93 HPFRC19 21 22 1 12.2 HPFRC19 22 23 1 17.2 HPFRC19 23 24 1 3.52 HPFRC19 30 31 1 0.93 HPFRC19 34 35 1 1.07 HPFRC19 39 40 1 0.87 HPFRC19 55 56 1 0.73 HPFRC19 106 107 1 0.71 Page 22 of 62 For personal use only Table 4 Drill hole Significant Results from historical drilling From (m) To (m) Length (m) Grade Au (g/t) HPFRC21 33 34 1 5.23 HPFRC21 34 35 1 0.84 HPFRC21 38 39 1 0.96 HPFRC21 60 61 1 1.09 HPFRC21 63 64 1 0.53 HPFRC21 64 65 1 0.73 HPFRC21 66 67 1 2.9 HPFRC21 67 68 1 2.5 HPFRC21 69 70 1 0.8 HPFRC21 70 71 1 4.66 HPFRC21 71 72 1 1.77 HPFRC21 72 73 1 1.52 HPFRC21 110 111 1 1.07 HPFRC21 111 112 1 0.96 HPFRC21 131 132 1 1.02 HPFRC22 88 89 1 2.37 HPFRC22 91 92 1 0.54 HPFRC22 103 104 1 2.86 HPFRC22 112 113 1 8.86 HPFRC22 140 141 1 4.82 HPFRC30 41 42 1 0.67 HPFRC30 42 43 1 0.94 HPFRC30 44 45 1 0.78 HPFRC33 35 36 1 5.47 HPFRC33 77 78 1 2.35 Page 23 of 62 For personal use only Figure 6 Significant Historic Drilling Results (after Paynes Find Gold Limited, 2011) (Refer to Figure 14 for cross-section 6763915N) 3.3.3 Previous Mineral Resource Estimates There have been no previous mineral resource estimates in accordance with the JORC Code (2004 or 2012) at the project. 3.3.4 Previous Production The Paynes Find area has undergone historic mining since the early 1900s. Gold was first discovered in the area in 1911 when prospector Thomas Payne, registered a lease for gold mining with the Mines Department of Western Australia. An estimated 36 historic gold mines within the Paynes Find Goldfield have reported production grades that ranged from 15g/t Au to 150g/t Au. From 1911-1982, approximately 69,000t of ore produced 1,784kg (63,000 ounces) of gold at an average grade of 25g/t Au, (Paynes Find Gold Limited, 2011). Table 5 below shows the production records from historical gold mines (after, Paynes Find Gold Limited, 2011). Page 24 of 62 For personal use only Table 5 Mine Name Production Records from Historical Gold Mines (after, Paynes Find Gold Limited, 2011) Production Period Max. Inclined depth (m) Ounces Produced Grams/Tonne Gold Current Lease Ark 1933-1982 240 5,258 23 M59/244 Aster 1935-1951 180 3,281 18 M51/244 Aster Cons 1913-1919 180 1,092 23 M59/244 Big 5 1940-1954 190 N/A 45 M59/10 Blue Heaven 1939-1945 105 * 93 M59/10 Bob's 1943-1945 108 * 150 M59/10 Carnation 1912-1951 280 * 31 M59/10 Centre 1980-1985 69 300+ 31 M59/10 Cracker 194-N/A 105 * 62 M59/10 Daphne 1915-1917 90 376 33 M59/10 Goat 1943-N/A 45 80 31 M59/10 Green Heaven 1940-1949 36 200 31 M59/10 Horseshoe 1943-1956 270 * 32 M59/10 Lake View 1912-1925 210 10,559 31 M59/244 Lake View 1926-1937 210 5,222 28 M59/244 League 1930-N/A 108 * 50 M59/10 Marigold 1940-N/A 150 1,780 15 M59/10 Mariposa 1912-1940 140 968 26 M59/244 Orchid 1911-1942 210 13,839 31 M59/244 Oversight I912-N/A 120 2,700 15 M59/244 Princess Mary 1916-1931 118 528 28 M59/244 Rolands 11964-N/A 50 300 23.00 M59/10 Scadden 1951-N/A 51 * 18 M59/10 Sweet William 1911-1981 210 4,600 35 M59/235 Blue Bell 1912-1981 75 392 34 M57/663 * Shafts grouped under Carnation 21,450ozs Production details source from Paynes Find Gold Battery records Page 25 of 62 For personal use only 3.4 Geological Setting The project is located in the Yilgarn Craton (Block) of Western Australia (Figure 7). The craton is primarily composed of approximately 2.8 billion year old (~2.8 Ga) granite-gneiss metamorphic terrains (the Southwest Gneiss Terrane and Northwest Gneiss Terrane), and three granite-greenstone terrains - the Eastern Goldfields Province (which contains the Norseman-Wiluna Belt), the Southern Cross Province and Murchison Province (Figure 7 and Figure 2). Figure 7 Yilgarn Craton and Murchison Province The Murchison Province is exposed in the western and northern third of the Yilgarn Craton. The Province is bounded by major transcrustal structures which separate it from the surrounding tectonic provinces of the craton and the Northwest Gneiss Terrane. The structural framework in the northeastern Yilgarn craton was largely shaped by transpression that led to the development of folds, reverse faults, sinistral strike-slip movement on northnorthwest trending regional shears, followed by regional folding and shortening. The latter occurred in overlapping tectonic processes. The first deformation event is poorly understood but appears to have involved north-south thrusting. 3.4.1 Regional Geology and Mineralisation The regional area is comprised of Archaean folded mafic volcanics which have been intruded by granitoids and covered by alluvium and laterite. Rock types within the region consist of interlayered basaltic and dacitic, meta-volcanics, subordinate banded iron formations and ultramafic schists. Within the project area, rock types include granite, gneiss, ultramafic and mafic schist and felsic porphyries. The Paynes Find Gneiss hosts most of the quartz vein mineralisation, The Paynes Find Gneiss is strongly deformed and metamorphosed to amphibolites grade. Gold mineralisation has also been noted in places within the felsic intrusive rocks (Maynard, 2010 and Fitton, 2011). 3.4.2 Project Geology Most of the gold mineralisation at Paynes Find is hosted by a rock type that has been informally named the Paynes Find Gneiss. This is a 3,000m long by up to 800m wide lozenge shaped unit striking northwesterly from P59/1942 in the north, to the Pansy deposit in the south and is bounded by the Daffodil and Primrose Faults (Figure 8). The gneiss is a variably deformed and metamorphosed quartz diorite / tonalite / gabbro intrusive, varying in colour from blue-grey to black and is commonly porphyritic. The foliation is very regular and has a strike direction of 330º to 360º (along the principal axis of the unit) and a dip of 60ºW to the vertical. It contains numerous (sometimes very large) xenoliths of black amphibolite and hosts Page 26 of 62 For personal use only numerous gold-bearing quartz veins and stringers. This unit is in fault contact to the east with large younger batholitic granite (the Eastern Granite). Figure 8 Paynes Find Gold Project Simplified Geology (NB: Tenement package outline shown as at 2011) To the west of the Paynes Find Gneiss and in fault contact with it is a sequence of mafic and ultramafic rocks striking north-south to north-northwest. The ultramafic rocks form what has been termed the Paynes Find Intrusion which aeromagnetic data shows to be a 10km long by up to 2.5km wide body of strongly magnetic rock. Where this rock type outcrops it varies from a strongly magnetic massive grey/blue - green serpentinite to a less magnetic talc-tremolitechlorite (carbonate) schist. The age relationship between these ultramafic rocks and the Paynes Find Gneiss is as yet unclear. Several small bodies of younger felsic porphyry intrude both the ultramafic rocks and the Paynes Find Gneiss. A larger, poorly exposed granitoid body (the Western Granite) occurs to the west of the Paynes Find Intrusion but again its age relationship with the ultramafic rocks is unclear. Evidence for the ultramafic rocks being intrusive is as follows: The aeromagnetic signature which suggests a discrete deformed lopolith. The presence of a titaniferous magnetite unit. These rocks are only found in differentiated intrusive igneous complexes which are usually layered. The predominance of serpentinite after original dunitic or magnesium-rich, peridotitic cumulate rocks. Gold mineralisation within the Paynes Find Gneiss exhibits weak to strong foliation striking 300-340° and dipping steeply westwards at 60-80°. The auriferous quartz veins strike approximately north-south, have a consistent plunge direction at 206°- 249° and dip at 55°77°W. The plunge of the lodes is the dominant structural control which helps to predict the location of down-dip mineralisation. The mineralised shears are tight, measuring up to two metres wide with minor wallrock alteration. The auriferous quartz veins occasionally split and tend to be boudinaged with high grade shoots having a strike length of up to 10m. Late-stage Page 27 of 62 For personal use only pegmatites, known locally as bars, intrude the shear zones and have displaced some of the quartz lodes. 3.4.3 Controls on Mineralisation A structural review was carried out by CSA Global (CSA) in late 2012 / early 2013 following the completion of the Stage 2 drilling program. Four major structural episodes can be recognised over the Paynes Find Gold Project area, which originally comprised an Archaean sequence of mafic and ultramafic volcanics interlayered with sedimentary units. D1 deformation is characterised by a regional metamorphic event, leading to regional amphibolite-facies metamorphism and development of compositional layering within gneissic units (shearing S1). During early D2, a pervasive ductile northwest-southeast foliation (S2) developed, partly exploiting the existing S1 fabric. Shearing was accompanied by fluid-flow along the shears, accompanied by quartz veining during late D2. High grade gold occurs within these quartz veins and is mostly restricted to them. D2 veins are intensely boudinaged, pinching and swelling significantly along the strike of the veins, which usually dip at 45⁰ in the eastern parts to very steeply west, towards the western contact. D3 is characterised by intense pegmatitic dyke/sill and stock intrusion. Pegmatites occur throughout the gneissic parts of the study area, are shallow-dipping (usually <50⁰) and display a northwest trending domal structure. D3 is accompanied by a non-pervasive S3 fabric, overprinting all earlier foliations. Anecdotal association of the pegmatite with gold requires further investigation. A late-stage brittle overprint (D 4) is evident in the form of brittle fractures and faults accompanied by strong epidote alteration. Two separate mineralising events were initially identified by CSA over the exploration area, with further study identifying a third: 1. Shear-related quartz veining indicated by high-grade gold within segmented and boudinaged quartz veins within the gneissic units, associated with a late D 2 fabric (Type 1). 2. Consistent gold mineralisation along the sheared contact between mafic amphibolite and gneiss (Type 2). 3. Quartz veining containing gold mineralisation in the western mafic / ultramafic sequence (Type 3). Type 1 mineralisation is generally of a very high-grade gold tenor. Where these veins were successfully intersected in PFGL’s drilling campaigns, this was reflected in drill sample assays (Figure 9). The gold-bearing veins pinch and swell due to their boudinaged shape, generally extending from 5-20m in length, 1-5m in width and pinching to sub-metre widths away from the boudin development. These veins were the target of historical mining activities within the gneiss and the focus for most of PFGL’s Stage 1 and Stage 2 drilling programs. Most historic workings follow individual lenses along a prominent steep south-westerly plunge (~75°), often to 100’s of metres depth. This shoot geometry shows good continuity and a large lateral extent for the gold mineralising system. Page 28 of 62 For personal use only Figure 9 Fine, Visible Gold in Laminated, Sheared (S2) Vein (PFGDD003, 1m @ 26.79g/t Au, from 210-211m) (Source: PFGL, 2013) Compared with the somewhat discontinuous surface expression of gold veins within the gneiss, the contact area between the mafic amphibolite and gneiss is strongly sheared along its length (and mappable in excess of 6km strike in the project area, refer Figure 11, Zone 1) with significant gold values over good thicknesses apparent within the sheared contact, accompanied by chlorite-epidote-carbonate alteration. This contact is considered to be poorly explored and warrants further targeting, particularly in light of the results from the Stage 2 drilling program and especially at depth where veins and contact-shears potentially coalesce, as seen conceptually in Figure 10. Page 29 of 62 For personal use only Figure 10 Schematic Representation of Conceptual Gold Target High grade veins, distal to the mafic amphibolite/gneiss contact, tend to dip at a flatter angle, while veins more proximal to the sheared contact dip more steeply. The intersection of converging, boudinaged quartz veins with the main shear at depth could present a further valuable target within Zone 1 (Figure 11) that remains largely untested to date. Page 30 of 62 For personal use only Figure 11 Paynes Find Tenement Holding (2013) Overlain on Magnetics and Soil Geochemistry; Interpreted Shears and Drilling Areas, with New Zones of Interest in Yellow (Source: PFGL, 2013) Additional review of the larger area highlighted that a gold geochemical anomaly on very wide-spaced reconnaissance sampling is coincident with an interpreted parallel contact zone on the western side of the mafic amphibolite, which may possibly be sheared (refer Figure 11, Zone 2). A third area (Zone 3) was also interpreted along a possibly sheared felsic schist contact, which converges with Zone 2 (refer Figure 11). 3.5 Exploration Results and Potential PFGL is the first company to bring all the tenements of the Paynes Find area under the one company control, providing security in tenure and access to the project area. Historically many of the tenements have been owned by private companies or individuals, who have not explored them to the extent an exploration company normally would. 3.5.1 Recent Exploration Activities During the period 2010-2011 PFGL undertook geological mapping at scales of 1:5000 and 1:2000. As a result of the mapping, 41 gold mineralised quartz reefs were identified over an extent of 600m. The mapping program outlined the following: Quartz lode separation was on average 15m. Lower grade link structures were identified between the main high-grade gold lodes. The quartz vein mineralisation within the strongly deformed quartz diorite outcrops over a strike length of approximately 2,000m before dipping beneath laterite cover. Further mineralisation was observed over approximately 3,000m within varying rock types adjoining the main goldfield. PFGL also completed a Mobile Metal Ion (MMI) geochemical survey (Figure 12) and concluded that the results from the survey indicated that gold mineralisation was more widespread than initially thought, especially in areas of shallow soil and laterite cover. Ravensgate advises that caution should be exercised when reviewing this data however, since the Paynes Find Page 31 of 62 For personal use only area has been extensively worked historically and the potential for gold mineralisation ‘contamination’ from many sources is significant. Figure 12 MMI Results and Historical RC Drilling Within the Planned Stage 2 Area Prior to Drilling 3.5.1.1 Stage 1 Drilling -2011 On 4 April 2011, PFGL announced that the company had commenced its Stage 1 drilling program centred on the Carnation/Blue Heaven line of old workings. The drilling targeted an area 500m long north-south and 400m wide east - west to a depth of 50 to 80m. A program comprising 69 RC drill holes for 3,800m were completed in the area shown on Figure 8. Significant results from the Stage 1 drilling program are indicated on Figure 13 and listed in Table 6. Page 32 of 62 For personal use only Figure 13 Significant Results from the Stage 1 Drilling Programme (after Paynes Find Gold Limited, 2011) Figure 14 Page 33 of 62 Composite Cross-Section 6763915N, as Shown on Figure 12 and Figure 13 For personal use only Table 6 Hole ID Paynes Find Gold Limited Stage 1 drilling Program Significant results >1g/t Au From (m) To (m) Width (m) Grade Au (g/t) Comments PFRC003 29 30 1 2.38 PFRC004 42 43 1 2.36 72 73 1 1.54 28 34 6 1.5 55 57 2 2.9 85 92 7 1.1 16 18 2 3.4 24 29 5 1.0 35 36 1 1.00 62 63 1 1.92 23 28 5 1.5 56 57 1 6.2 68 70 2 1.7 25 27 2 1.1 31 32 1 15.20 19 22 3 1.8 incl. 1m at 4.57 g/t from 21m 25 34 9 1.1 incl. 1m at 2.20 g/t from 26m 18 28 10 1.8 incl. 2m at 4.16 g/t from 18m 45 46 1 3.93 34 35 1 1.01 39 41 2 19.0 50 51 1 1.10 44 46 2 2.4 51 52 1 1.19 PFRC015 51 52 1 5.2 PFRC017 35 36 1 1.68 PFRC018 20 26 6 1.9 30 33 3 1.9 PFRC019 42 45 3 1.0 PFRC021 31 32 1 1.14 PFRC024 17 18 1 1.53 PFRC005 PFRC006 PFRC007 PFRC008 PFRC009 PFRC010 PFRC012 PFRC013 incl. 1m at 4.81 g/t from 29m incl. 1m at 5.26 g/t from 27m incl. 1m at 36.0 g/t from 39m incl. 2m at 2.78 g/t from 22m Page 34 of 62 For personal use only Table 6 Hole ID Paynes Find Gold Limited Stage 1 drilling Program Significant results >1g/t Au From (m) To (m) Width (m) Grade Au (g/t) PFRC026 41 42 1 1.06 PFRC034 17 20 3 1.3 29 30 1 1.03 25 27 2 1.3 32 33 1 3.41 37 38 1 2.14 PFRC039 50 53 3 8.6 PFRC043 46 49 3 1.1 PFRC046 22 24 2 2.4 PFRC047 40 41 1 6.99 50 51 1 1.52 PFRC048 37 38 1 0.66 PFRC049 22 24 2 50.5 PFRC051 52 53 1 1.11 39 40 1 1.70 PFRC053 55 56 1 4.41 PFRC056 13 16 3 2.6 PFRC058 58 61 3 4.2 PFRC059 9 12 3 1.0 39 45 6 2.4 PFRC061 2 3 1 7.52 PFRC062 2 3 1 1.22 15 16 1 2.05 25 26 1 3.12 PFRC063 18 20 2 2.0 PFRC065 32 35 3 16.0 PFRC066 25 27 2 1.6 34 36 2 2.6 PFRC068 31 32 1 2.67 PFRC069 26 31 5 1.6 PFRC070 5 8 3 1.6 PFRC037 Page 35 of 62 Comments incl. 1m at 2.73 g/t from 19m incl. 1m at 1.80 g/t from 25m incl. 2m at 12.56 g/t from 50m incl. 1m at >100 g/t from 22m incl. 2m at 5.84 g/t from 39m incl. 1m at 46.4 g/t from 32m incl. 1m at 4.9 g/t from 26m For personal use only 3.5.1.2 Stage 2 Drilling - 2012 The Stage 2 drilling program was designed as a northwestern extension to the Stage 1 drill program (Figure 15) consisting of six diamond drill holes and approximately 64 RC drill holes, for 2,000 and 5,000m respectively, to test open ended known extensions of gold mineralisation. The Stage 2 program was commenced in July 2012 with drilling of the initial area of interest completed by early September, with 54 RC holes totaling 5,326m (to a maximum depth of 250m) and six diamond drill holes totaling 1,540m (to a maximum depth of 480m). A total of 7,145 samples (including duplicates) were assayed for gold, silver and copper, significant results are presented below in Table 7 and Figure 16. Drill holes that returned no significant results are shown in Table 8. A geological cross-section of the deposit is shown in Figure 17, with the location of this cross-section depicted in the accompanying map Figure 16. Page 36 of 62 For personal use only Figure 15 Historical and Stage 1 Drill Holes (A) and Planned (2012) Stage 2 RC and Diamond Drill Holes (B) Page 37 of 62 For personal use only Table 7 Assay Results – 2012 Stage 2 Drilling Program Hole ID Easting (m) Northing (m) PFRC102 566800 6764080 80 -60 90 16 19 3 0.84 PFRC110 566760 6764160 108 -60 90 96 98 2 3.82 PFRC112 566672 6764148 192 -60 90 13 15 2 0.63 57 59 2 0.71 114 117 3 4.94 170 172 2 1.11 16 20 4 1.91 26 33 7 2.43 44 47 3 0.6 71 73 2 1.85 PFRC115 566608 6764206 Max Depth (m) 102 Dip (°) -60 Azi (°) 90 From (m) To (m) Int. (m) Au (g/t) PFRC116 566643 6764196 80 -60 90 10 22 12 6.61 PFRC117 566596 6764181 144 -60 90 49 51 2 0.6 92 95 3 2.07 40 45 5 1.24 49 51 2 1.45 41 44 3 92.0 8 58 61 3 0.8 69 71 2 2.56 82 85 3 1.45 9 12 3 0.63 40 43 3 1.2 53 56 3 1.82 91 96 5 1.24 PFRC118 PFRC120 PFRC121 566640 566587 566565 6764133 6764185 6764205 120 186 144 -60 -60 -60 90 90 90 PFRC123-1 566686 6764231 18 -60 90 8 10 2 2.56 PFRC124 566651 6764233 120 -60 90 7 9 2 1.11 PFRC127 566745 6764265 120 -60 90 6 8 2 0.88 59 61 2 2.45 67 69 2 1.85 90 93 3 1.27 69 71 2 1.45 122 124 2 1.02 PFRC128 PFRC131 566788 566830 6764194 6764126 100 131 -60 -60 90 90 Page 38 of 62 For personal use only Table 7 Assay Results – 2012 Stage 2 Drilling Program Hole ID Easting (m) Northing (m) PFRC133 566764 6764123 PFRC134 PFRC135 PFRC136 566733 566740 566787 6764121 6764002 6764103 Max Depth (m) 108 198 102 90 Dip (°) -60 -60 -60 -60 Azi (°) 90 90 90 90 From (m) To (m) Int. (m) Au (g/t) 50 52 2 1.61 99 103 4 2.64 45 48 3 8.04 140 143 3 5.21 25 28 3 0.69 48 50 2 3.59 77 84 7 4.83 93 97 4 0.89 23 27 4 1.13 42 47 5 1.66 PFRC137 566759 6764080 84 -60 90 60 62 2 1.43 PFRC140 566827 6764050 90 -60 90 15 18 3 0.87 22 24 2 1.15 PFRC142 566763 6764047 120 -60 90 30 33 3 3.21 PFRC143 566730 6764045 198 -60 90 91 93 2 0.94 155 157 2 2.29 44 46 2 3.33 50 56 6 1.37 60 62 2 0.6 82 85 3 0.67 PFRC145 566797 6763983 96 -60 90 PFRC146 566820 6763984 115 -60 90 29 34 5 0.99 PFRC147 566772 6763982 80 -60 90 22 24 2 0.95 27 31 4 1.16 76 79 3 3.15 PFRC148 566978 6763742 234 -60 90 128 130 2 3.94 PFRC149 566832 6764025 84 -60 90 41 44 3 4.64 46 50 4 1.21 51 56 5 0.99 79 83 4 6.28 109 111 2 0.81 120 126 6 3.56 PFRC150 Page 39 of 62 566768 6764015 155 -60 90 For personal use only Table 7 Assay Results – 2012 Stage 2 Drilling Program Hole ID Easting (m) Northing (m) PFGDD01 566640 6764024 483 -60 60 294 297 3 0.5 PFGDD02 566777 6764100 327.2 -62 58.7 36 37 1 3.95 PFGDD03 566784 6763974 402 80 70 74 4 0.73 80 92 12 1.33 219 221 2 0.88 214 216 2 2.07 222 225 3 1.28 PFGDD06 566625 Table 8 Max Depth (m) 6763993 385 Azi (°) Dip (°) 62.3 -70 70 From (m) To (m) Int. (m) Au (g/t) Stage 2 drill holes with no significant result Hole ID Easting (m) Northing (m) Max Depth (m) Dip (°) Azi (°) From (m) To (m) Int. (m) PFRC100 566880 6764080 80 -60 90 NRI PFRC101 566840 6764080 80 -60 90 NRI PFRC103 566880 6764200 80 -60 90 NRI PFRC104 566840 6764200 80 -60 90 NRI PFRC105 566760 6764200 78 -60 90 NRI PFRC106 566720 6764200 80 -60 90 NRI PFRC107 566680 6764200 80 -60 90 NRI PFRC108 566880 6764160 80 -60 90 NRI PFRC109 566800 6764160 79 -60 90 NRI PFRC111 566720 6764148 120 -60 90 NRI PFRC113 566639 6764164 120 -60 90 NRI PFRC114 566643 6764189 54 -60 90 NRI PFRC119 566608 6764131 138 -60 90 NRI PFRC122 566722 6764232 174 -60 90 NRI PFRC125 566624 6764235 90 -60 90 NRI PFRC126 566588 6764238 90 -60 90 NRI PFRC129 566840 6764169 108 -60 90 NRI PFRC130 566871 6764127 100 -60 90 NRI PFRC132 566796 6764124 92 -60 90 NRI Au (g/t) Page 40 of 62 For personal use only Table 8 Stage 2 drill holes with no significant result Hole ID Easting (m) Northing (m) Max Depth (m) Dip (°) Azi (°) From (m) To (m) Int. (m) PFRC138 566721 6764079 90 -60 90 NRI PFRC139 566876 6764057 60 -60 90 NRI PFRC141 566794 6764052 80 -60 90 NRI PFRC144 566625 6763993 150 -60 90 NRI PFGDD04 566598 6764162 378 -60 80 NRI PFGDD05 566740 6764002 142.4 -60 80 NRI Au (g/t) Notes: • All coordinates are Zone 50, MGA94 based on single GPS averages. • PFGDD prefixes are for holes drilled with NQ diamond core. • PFRC prefixes are for holes drilled by 51/2” RC percussion. • Half NQ core was sampled in 1m intervals following geological logging. • RC percussion samples were split on site using a riffle splitter. • All holes were geologically logged by industry standard approaches. • Sample recoveries from both drilling techniques were good. • Sample analysis was by Nagrom laboratory in Perth, WA. • 40g of sample is digested in aqua regia (HCL and HNO3) and the solution analysed by ICP. Ag and Au are analysed by ICP-MS and Cu by ICP-OES. • Intersections were calculated using minimum criteria of 2m at 0.5 g/t Au and with a maximum internal waste interval of 1m. • Field standards and duplicates together with laboratory QC replicates and standards were used to monitor the reliability of the analysis. Inspection of QA reports showed no issues with the analysis. • The extreme high grade samples were verified by repeat sampling of the original bulk reject RC percussion chips from the drill hole, together with laboratory repeats, by the Company’s personnel. • All intersections are downhole lengths and it is not known whether these are true widths. • NRI - No reportable intersection - note that the holes are potentially part of further planned drilling at different azimuths and angles taking into account the 'snaking' mineralised nature of the reefs encountered. Page 41 of 62 Stage 2 Drill Hole Locations and Significant Intersections For personal use only Figure 16 The results of the Stage 2 drill program led to the structural study carried out by CSA and ioGlobal, as described in Section 3.4.3. PFGL were confident that the key point to derive from the Stage 2 results was that it now provided the economic and geological rationale to continue further drilling to assess the real potential of the tenements at large. Page 42 of 62 For personal use only Figure 17 3.5.1.3 Cross-Section Through Stage 2 Drilling Stage 3 Program PFGL began planning a short interim program of shallow RC holes (15 holes for ~500m) into regional targets, and reviewed requirements for a third phase of drilling based on outcomes from Stage 2 and the associated structural studies. The third round of drilling was planned for Q1 2013, however due to the declining gold price (refer to Figure 19) that was experienced during this time (which has continued to the present) the Stage 3 program has been postponed. 3.5.2 Exploration Potential Potential remains at the Paynes Find Project due to the following reasons: Multiple high-grade intersections have been returned from PFGL’s Stage 1 and 2 drilling programs, confirming multiple lodes and target geometries. Shallow high-grade gold results have enhanced the open pit potential of the area. Stage 1 and 2 assay results confirm that gold mineralisation is not limited to the predominantly explored gneiss (as previously thought), with significant intersections occurring in the adjacent greenstone schist. Page 43 of 62 For personal use only Considerable potential remains for small to medium scale development of the higher grade shoots and to potentially link high grade zones along strike; and for the discovery of additional blind high grade zones along strike during future exploration or mining activity. In addition, CSA reviewed and re-ranked targets outlined by ioGlobal (in mid-2013) in the context of resource potential (refer Figure 18). Several targets (A, B, F, H) represent high grade gold targets, and are identified for RC drill testing. Targets C, D, E, G, I, J and K are targets for RAB or possibly aircore testing on 100m line spacing with 50m drill centres and nominal 60m drill depth, though this may not be achievable in some areas with limited weathering. Figure 18 CSA Priority Targets NB: PFGL tenure* (red), CSA ranked targets (pink), and selected drill intersection highlights underlain by combined Au geochemistry, structural control, and other prioritised anomalies (yellow, mostly obscured). *Note that the tenement package shown includes the recently divested tenements that contain targets G, H, I, and J. Page 44 of 62 For personal use only On an individual basis, Ravensgate provides the following comments on the tenements of the Paynes Find Gold Project: M59/0002: The licence is located immediately to the south from M59/396 and is largely underlain by the Paynes Find Gneiss, containing historic workings in its northern area. Minor granite occurs in the south. The prospectivity of the licence is rated as medium to high. M59/0010: The licence mostly contains the Paynes Find Gneiss and contains a line of historic workings on the northwest – southeast trending Primrose Fault and sheared contact with the mafic schist, which was the focus of PFGL’s Stage 2 drilling program. The licence contains CSA’s target ‘A’ which is proximal to the high grade result from PFRC120 which returned 3m at approximately three ounces of gold (Figure 17 and Figure 18). Therefore, the prospectivity of the licence is rated as high. M59/0235: The licence is on the Paynes Find Gneiss with historic workings, immediately to the northeast of the Stage 2 drill program. The southern area was previously drilled by Forsayth in 1987 (Figure 15). The prospectivity of the licence is rated as medium to high. M59/0244: The licence mostly contains the Paynes Find Gneiss and contains a line of historic workings on the northwest – southeast trending Primrose Fault and sheared contact with the mafic schist, which was the focus of PFGL’s Stage 1 drilling program. The areas potential has been highlighted by CSA, which also contains target ‘F’ (Figure 18). Therefore, the prospectivity of the licence is viewed as high. M59/0396: The licence is located immediately to the east of CSA target ‘F’ on the Paynes Find Gneiss, containing historic workings. The prospectivity of the licence is rated as medium to high. M59/0662: South of the historic Daffodil open pit and containing the historic workings of Pansy (south) and Shamrock, the area has been identified by CSA with the western area of the licence viewed as prospective, containing target ‘B’ (Figure 18). As it is not on the main Paynes Find Gneiss package, the licence is viewed as medium to high prospectivity. M59/0663: The licence contains the historic Bluebell workings on the Paynes Find Gneiss which is at the northern end of the main strike of historic workings (Figure 8) and favourable structural trend, containing CSA target ‘E’ (Figure 18). The licence is viewed as having medium to high prospectivty, with also alluvial potential on the licence. P59/1907: On the Eastern side of the Daffodil Fault, on the Eastern Granite, the area has not been covered by geochemical surveys. The area is underlain by the Eastern Ultramafic and therefore maybe more prospective for nickel. The area is proximal to the Daffodil tailings – refer to comments for P59/1956. The prospectivity of the licence is rated as low. P59/1908: A small, strategic, gap-fill prospecting licence in proximity to CSA’s target ‘A’. The licence is on the mafic schist and Paynes Find Gneiss contact at the Primrose Fault, within close proximity to historic workings. Therefore, although a small area, the prospectivity of the licence is viewed as high. P59/1909: A small, strategic, gap-fill prospecting licence on Paynes Find Gneiss, immediately to the northwest of the historic Adeline workings. Therefore, although a small area, the prospectivity of the licence is viewed as high. P59/1924: The licence is split approximately north to south by the Daffodil Fault with the eastern half of the licence on the Eastern Granite and the western half on the Paynes Find Gneiss, which contains historic workings. The licence does not contain any targets identified by CSA, and is viewed as having medium prospectivity. P59/1941: CSA has defined a structural corridor at the north-south border between this licence and P59/1959 to the west, containing target ‘C’ on P59/1941 and target ‘D’ on P59/1959 (Figure 18). The licences are viewed as having medium prospectivity. They are traversed by the Great Northern Highway in their northern area, with P59/1941 also containing the Paynes Find Tavern and Roadhouse. Page 45 of 62 For personal use only P59/1942: The tenement is mostly underlain by the Eastern Granite, with a sheared area of the Paynes Find Gneiss in the southwest corner, which is the only area of the tenement that was covered by geochemical soil sampling. The tenement does not contain any historic workings or drill holes, is not proximal to any of the CSA targets and is therefore viewed as having low prospectivity. P59/1956: A small licence on the eastern side of the Daffodil Fault on the Eastern Granite, at the southern pinch-out of the Paynes Find Gneiss. The southern area of the licence has been used as a tailings dump from the historic Daffodil open pit which is ~400m to the southwest (refer to Figure 4). In Ravensgate’s opinion, an area that has been used as a waste / tailings site is viewed as having low prospectivity. P59/1957: A strategically placed tenement at the southern pinch out of the Paynes Find Gneiss, the licence covers the southern strike extent of a line of historic workings (Figure 4), which is viewed as having medium prospectivity. P59/1958: The licence covers the east-west extension of licences P59/1941 and P59/1959, which includes the southern extension of CSA identified north – south structural corridor, however the licence does not contain a target and is viewed as having medium prospectivity. P59/1959: Refer to P59/1941. In addition to the gold potential at the project, according to Fitton (n.d.), detailed geological mapping has shown the rocks of the Paynes Find intrusion are believed to form a discrete intrusive lopolithic complex. By analogy with other such bodies around the world, these types of rocks are known to host significant economic deposits of nickel sulphides, often accompanied by copper, cobalt and PGEs. The size of the Paynes Find intrusion (10km x 3km) is fairly typical of other world examples that host very large nickel sulphide deposits e.g. Voisey’s Bay in Labrador, Canada (141Mt @1.6% Ni) and Jinchuan in China (this deposit is 10km long up to 500m wide and extends to at least 1.5km vertical depth). Athena Resources are currently exploring similar ultramafic intrusions in the Byro district (Milly Milly) ~200km north-northwest of Paynes Find. 3.5.3 Constraints to Further Exploration Success Geologically, intersecting the boudinaged high-grade zones (Type 1 veins) effectively with conventionally orientated drilling is considered difficult unless vein density is demonstrably high, however as described above, the prospectivity and potential of the project remains high. Ravensgate views the current depressed gold price and market sentiment towards exploration projects, as the most problem constraint to further exploration success at the Paynes Find Project, as highlighted in PFGL’s 2013 December quarterly report, announced to the ASX on 29 January 2014, stating that the project would be subject to re-evaluation, in relation to administrative holding costs, which ultimately led to the conditional Deed of Sale announced to the ASX on 23 April 2014 and finalised on 1 September 2014. Page 46 of 62 For personal use only 4. VALUATION 4.1 Introduction There are a number of recognised methods used in valuing mineral assets. The most appropriate application of these various methods depends on several factors, including the level of maturity of the mineral asset, and the quantity and type of information available in relation to the asset. All monetary values included in this report are expressed in Australian dollars (A$) unless otherwise stated. The VALMIN Code, which is binding upon Experts and Specialists involved in the valuation of mineral assets and mineral securities, classifies mineral assets in the following categories: Exploration Areas refer to properties where mineralisation may or may not have been identified, but where specifically a Mineral Resource has not been identified. Advanced Exploration Areas refer to properties where considerable exploration has been undertaken and specific targets have been identified that warrant further detailed evaluation, usually by some form of detailed geological sampling. A Mineral Resource may or may not have been estimated but sufficient work will have been undertaken that provides a good understanding of mineralisation and that further work will elevate a prospect to the resource category. Ravensgate considers any identified Mineral Resources in this category would tend to be of relatively lower geological confidence. Pre-Development Projects are those where Mineral Resources have been identified and their extent estimated, but where a positive development decision has not been made. This includes projects at an early assessment stage, on care and maintenance or where a decision has been made not to proceed with immediate development. Development Projects refers to properties which have been committed to production, but which have not been commissioned or are not operating at design levels. Operating Mines are those mineral properties, which have been fully commissioned and are in production. Various recognised valuation methods are designed to provide the most accurate estimate of the asset value in each of these categories of project maturity. In some instances, a particular mineral property or project may include assets that comprise one or more of these categories. When valuing Exploration Areas and therefore by default where the potential is inherently more speculative than more advanced projects, the valuation is largely dependent on the informed, professional opinion of the valuer. There are a number of methods available to the valuer when appraising Exploration Areas. The Multiple of Exploration Expenditure (MEE) method can be used to derive project value, when recent exploration expenditure is known or can be reasonably estimated. This method involves applying a premium or discount to the exploration expenditure or Expenditure Base (EB) through application of a Prospectivity Enhancement Multiplier (PEM). This factor directly relates to the success or failure of exploration completed to date, and to an assessment of the future potential of the asset. The method is based on the premise that a grass roots project commences with a nominal value that increases with positive exploration results from increasing exploration expenditure. Conversely, where exploration results are consistently negative, exploration expenditure will decrease along with the value. The following guidelines are presented on selection of the PEM: PEM = 1. Exploration activities and evaluation of mineralisation potential justifies continuing exploration. PEM = 2. Exploration activities and evaluation of mineralisation potential has identified encouraging drill intersections or anomalies, with targets of noteworthy interest generated. PEM = 3. Exploration activities and evaluation of mineralisation potential has identified significant grade intersections and mineralisation continuity. Page 47 of 62 For personal use only Where transactions including sales and joint ventures relating to mineral assets that are comparable in terms of location, timing, mineralisation style and commodity, and where the terms of the sale are suitably “arm’s length” in accordance with the VALMIN Code, such transactions may be used as a guide to, or a means of, valuation. This method (termed Comparable Transactions) is considered highly appropriate in a volatile financial environment where other cost based methods may tend to overstate value. The Joint Venture Terms valuation method may be used to determine value where a Joint Venture Agreement has been negotiated at “arm’s length” between two parties. When calculating the value of an agreement that includes future expenditure, cash and/or shares payments, it is considered appropriate to discount expenditure or future payments by applying a discount rate to the mid-point of the term of the earn-in phase. Discount factors are also applied to each earn-in stage to reflect the degree of confidence that the full expenditure specified to completion of any stage will occur. The value assigned to the second and any subsequent earn-in stages always involves increased risk that each subsequent stage of the agreement will not be completed, from technical, economic and market factors. Therefore, when deriving a technical value using the Joint Venture Terms method, Ravensgate considers it appropriate to only value the first stage of an earn-in Joint Venture Agreement. Ravensgate have applied a discount rate of 10.0% per annum to reflect an average company’s cost of capital and the effect of inflation on required exploration spends over the timeframe required. The total project value of the initial earn-in period can be estimated by assigning a 100% value, based on the deemed equity of the farminor, as follows: V1 0 0 100 1 CP CE * t D (1 I ) 2 1 * P EE * t 2 1 I where: V100 = Value of 100% equity in the project ($) D = Deemed equity of the farminor (%) CP = Cash equivalent of initial payments of cash and/or stock ($) CE = Cash equivalent of committed, but future, exploration expenditure and payments of cash and/or stock ($) EE = Uncommitted, notional exploration expenditure proposed in the agreement and/or uncommitted future cash payments ($) I = Discount rate (% per annum) t = Term of the Stage (years) P = Probability factor between 0 and 1, assigned by the valuer, and reflecting the likelihood that the Stage will proceed to completion. Where Mineral Resources remain in the Inferred category, reflecting a lower level of technical confidence, the application of mining parameters using the more conventional DCF/NPV approach may be problematic or inappropriate and technical development studies may be at scoping study level. In these instances it is considered appropriate to use the ‘in-situ’ Resource method of valuation for these assets. This technique involves application of a heavily discounted valuation of the total in-situ metal or commodity contained within the resource. The level of discount applied will vary based on a range of factors including physiography and proximity to infrastructure or processing facilities. Typically and as a guideline, the discounted value is between 1% and 5% of the in-ground value of the metal in the Mineral Resource. Page 48 of 62 For personal use only In the case of Pre-development, Development and Mining Projects, where Measured and Indicated Mineral Resources have been estimated and mining and processing considerations are known or can be reasonably determined, valuations can be derived with a reasonable degree of confidence by compiling a discounted cash flow (DCF) and determining the net present value (NPV). The Australasian Code of Reporting of Exploration Results, Mineral Resources and Ore Reserves (JORC Code 2012) sets out minimum standards, recommendations and guidelines. A Mineral Resource defines a mineral deposit with reasonable prospects of economic extraction. Mineral Resources are sub-divided into Inferred, Indicated and Measured to represent increasing geological confidence from known, estimated or interpreted specific geological evidence and knowledge. An Ore Reserve is the economically minable part of a Measured or Indicated Resource after appropriate studies. An Inferred Resource reflecting insufficient geological knowledge, cannot translate into an Ore Reserve. Measured Resources may become Proved (highest confidence) or Probable Reserves. Indicated Resources may only become Probable Reserves. 4.2 Previous Mineral Asset Valuations Ravensgate is not aware, nor have we been made aware, of any valuations over the Paynes Find Gold Project. Exploration tenements have not been included in the valuation where tenure or permits have not been granted to the relevant company and the company does not therefore have any ownership over tenement mineral assets or any exploration value within the tenements. Whilst ground is under application, there are uncertainties as to whether the tenement will be granted in its entirety or only part due to specific exclusions or if at all, due to environmental or Native Title considerations. There could be competing applications for the same ground with no guarantee that PFGL would be successful in its application. 4.3 Material Agreements Ravensgate has been commissioned by RSM to provide an Independent Technical Project Review and Valuation Report. The Technical Project Review and Valuation report encompasses the Paynes Find Gold Project. The Technical Valuation report provides an assessment of the Australian “Advanced Exploration Area” mineral assets listed below in which the tenements are owned 100% by PFGL. Mineral Asset Paynes Find Gold Project, Western Australia PFGL Ownership % 100% Ravensgate understands all active mining and exploration tenements are granted at this point in time and are in good standing. Refer to Section 3.2.3 for information relating to royalties and taxes. Ravensgate is not aware, nor have been made aware, of any other agreements that have a material effect on the provisional valuations of the mineral assets, and on this basis have made no adjustments on this account. Page 49 of 62 For personal use only 4.4 Comparable Transactions Ravensgate has completed a search for publicly available market transactions involving gold projects, without resources within Western Australia primarily on Prospecting and Mining Licences. Transactions reflect comparable tenement holdings in geological provinces that are considered prospective for similar commodities, and that are of similar prospectivity to the mineral assets being valued. In Ravensgate’s opinion and experience, it is understood that individual market transactions are rarely completely identical to the relevant project area or may not necessarily contain all the required information for compilation. In practice, a range of implied values on a dollar per metal unit or dollar per square kilometre of tenement holding will be defined as suitable for use. The transactions identified along with the implied cash-equivalent values are summarised in Section 4 by commodity and region. Based on the limited information available Ravensgate have done their best to only use transactions between willing buyers and sellers in arms length transactions. Publically available market transactions have been separated to reflect transactions on a dollar per square kilometre of tenement holding or on a dollar per metal unit for a more advanced Exploration Target or Mineral Resource. This was undertaken to reflect the varying levels of geological exploration carried out within the various project tenements. In general terms, exploration projects may start with a relatively large tenement holding where a lack of detailed geological sampling and knowledge renders the use of the “in-situ” yardstick valuation method inappropriate (i.e. an Exploration Area Mineral Asset). For these particularly early-stage exploration areas comparable transactions on a dollar per square kilometre basis are more relevant. As the project advances and as geological sampling and knowledge increase, tenement areas tend to decrease to match a narrowing focus on more prospective areas. For these areas where specific, drill sample supported Exploration Targets have been identified that warrant further detailed evaluation or Mineral Resources require estimation, comparable transactions on a dollar per metal unit basis may be more appropriate (i.e. an “Advanced Exploration Area Mineral Asset or Pre-Development Project at early assessment”). 4.4.1 Reported Market Transactions 4.4.1.1 Reported Market Transactions for Exploration Area Gold Projects in Western Australia Ravensgate’s analysis of Western Australian market transactions for exploration gold projects (Table 9) on Prospecting and Mining Licences indicates an implied value between $3,497 and $1,586,207 per km2 for Exploration and Advanced Exploration Area Mineral Assets, with no estimated Mineral Resources in accordance with the JORC Code 2012. The implied value per km2 is dependent on the type of licence, whether it is an Exploration Licence, Prospecting Licence or Mining Licence. With lower implied values per km 2 for Exploration Licences compared to Prospecting Licences and lower implied values per km 2 for Prospecting Licences compared to Mining Licences. The implied value was also affected by the strategic importance of the licences and the presence of known gold mineralisation upon them and the grade of the gold mineralisation. Page 50 of 62 For personal use only Table 9 Date Market Transactions Involving Gold Projects at the Exploration Stage in Western Australia Vendor Value2 $M Purchaser/Farminee Transaction Type Prospective Commodities1 Area km2 Cost per km2 A$ Acquisition Au 0.450 9.30 48,387 15-Sep-14 Meteoric Resources NL Resourceful Mining Group Pty Ltd 7-Mar-14 Mount Magnet South NL Australian Mines Limited Joint Venture Au-Cu 1.515 129.00 11,745 20-Dec-13 Doray Minerals Limited Mithril Resources Limited Joint Venture Au-BM 1.033 160.00 6,457 17-Oct-13 Cazaly Resources Limited Excelsior Gold Limited Acquisition Au 0.230 18.00 12,778 12-Aug-13 Panoramic Resources Limited Gateway Mining Limited Joint Venture Au 1.522 6.51 233,755 9-Aug-13 Private Vendors Stratum Metals Limited Acquisition Au 0.110 3.77 29,201 1-Jul-13 Ramelius Resources Limited Eros Mining Limited Acquisition Au-Ni 0.400 114.40 3,497 19-Jun-13 Private Vendor Phoenix Gold Limited Acquisition Au 0.030 1.70 17,647 27-May-13 Private Vendors Bligh Resources Ltd Acquisition Au 0.080 0.37 216,216 7-May-13 Trafford Resources Limited Alloy Resources Limited Joint Venture Au 1.131 27.64 40,913 3-Apr-13 Resources and Investment NL Naracoota Resources Limited Acquisition Au 0.300 45.50 6,593 7-Sep-12 Breakaway Resources Limited Mithril Resources Limited Acquisition Au 0.200 10.45 19,139 20-Aug-12 Private Vendors Resource & Investment NL Joint Venture Au-Cu 1.518 5.93 255,984 13-Jun-12 Clive Humberston General Mining Corporation Ltd Acquisition Au 0.920 0.58 1,586,207 29-May-12 Wakeford Holdings Pty Ltd Millennium Minerals Limited Acquisition Au 0.350 1.20 291,181 14-May-12 Birimian Gold Limited Peel Mining Limited Acquisition Au 0.060 0.24 247,219 28-Mar-12 Carrick Gold Limited Phoenix Gold Limited Acquisition Au 0.706 85.00 8,311 08-Feb-12 Breakaway Resources Limited Ramelius Resources Limited Acquisition Au 0.300 20.81 14,419 27-Jan-12 Galaxy Resources Limited Phillips River Mining Limited Acquisition Au 0.250 3.10 80,645 Page 51 of 62 For personal use only Table 9 Date Market Transactions Involving Gold Projects at the Exploration Stage in Western Australia Vendor Purchaser/Farminee Transaction Type Prospective Commodities1 Value2 $M Area km2 Cost per km2 A$ 25-Jan-12 Private Vendor GGG Resources Plc Acquisition Au 3.129 10.00 312,936 12-Dec-11 Northern Mining Limited Macphersons Reward Gold Limited Acquisition Au-Zn-Ag 0.500 1.08 465,116 12-Dec-11 Cazaly Resources Limited Macphersons Reward Gold Limited Acquisition Au-Zn-Ag 0.826 30.10 27,439 12-Dec-11 Private Vendor Macphersons Reward Gold Limited Acquisition Au-Zn-Ag 0.100 8.06 12,405 12-Dec-11 Private person Macphersons Reward Gold Limited Acquisition Au-Zn-Ag 0.005 0.76 6,595 22-Sep-11 Private Vendor Exterra Resources Limited Acquisition Au 0.050 1.75 28,571 13-Sep-11 Private Vendor Power Resources Limited Acquisition Au 0.022 3.42 6,498 18-Aug-11 Millennium Minerals Limited Novo Resources Corp Joint Venture Au 2.013 8.36 240,730 05-Apr-11 Millennium Minerals Limited Galliard Resources Corp Joint Venture Au 1.299 8.36 155,310 24-Feb-11 Private Vendor Vector Resources Limited Acquisition Au 0.250 17.72 14,108 31-Jan-11 Australian Gold Investments Limited Phoenix Gold Limited Acquisition Au 2.500 24.28 102,965 19-Jan-11 Provider Express Pty Ltd Paynes Find Gold Limited Acquisition Au 0.060 0.43 139,535 30-Dec-10 Private Vendor Saracen Mineral Holdings Limited Acquisition Au 0.538 1.53 351,307 1 Commodities: Au = Gold, Ni = Nickel, BM = Base Metals, Cu = Copper, Zn = Zn, Ag = Silver. 2 Value is on a 100% equity basis. Page 52 of 62 Commodity Prices Ravensgate has examined the historical commodity chart for gold Figure 19 for general trends over time. A general analysis of the five year price chart for gold in Figure 19 shows a continuous steady rise culminating in a significant rise in late 2011 interpreted to be partly a response to the European Debt Crisis. The gold price remained relatively steady until October 2012, from where it was in decline until July 2013, from where it has traded in a range from US$1,200 to US$1,350. In the last few months the gold price has been declining. Ravensgate has taken into consideration the general commodity trend as an influence on deriving a final project valuation. Figure 19 Gold Five Year Monthly Average Price Chart to September 2014 $2,000 US$ Per Troy Ounce $1,500 $1,000 $500 Source: Perth Mint Commodity Prices (Monthly Average London PM Fix Gold Price in US$) Page 53 of 62 Sep-14 Jun-14 Mar-14 Dec-13 Sep-13 Jun-13 Mar-13 Dec-12 Sep-12 Jun-12 Mar-12 Dec-11 Sep-11 Jun-11 Mar-11 Dec-10 Sep-10 Jun-10 Mar-10 Dec-09 $0 Sep-09 For personal use only 4.4.2 For personal use only 4.5 Mineral Asset Valuations 4.5.1 Paynes Find Gold Project, Western Australia To value the Paynes Find Gold Project Ravensgate has broken it up into its individual tenements and valued it based on the results and prospectivity of each tenement. 4.5.1.1 Selection of Valuation Method The Paynes Find Gold Project, in which PFGL has a 100% interest in can be classified as a “Advanced Exploration Area” mineral asset as defined in Section 4.1 and the surrounding exploration tenure purchase can be classified as an Exploration Area mineral asset as defined in Section 4.1. A mineral resource as defined in the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves - 2012 Edition (JORC Code 2012) has not been reported for the Paynes Find project. In valuing the mineral asset of the Paynes Find project, Ravensgate considers the DCF/NPV method inappropriate, due to the early stage of the project. Ravensgate has elected to apply the Comparable Transaction method to value the project after consideration of the various valuation methods outlined in Section 4.1 and the geological / exploration information outlined in Section 3.5. Multiples of Exploration (MEE) and other cost based methods were not thought to be appropriate to apply in this case due to the very mature stage of exploration at the project and the substantial historic expenditures. 4.5.1.2 Project Analysis – Comparable Transactions Method Ravensgate’s analysis of Western Australian market transactions for exploration mineral assets (Table 9) suggests an implied value between $3,497 and $1,586,207 per km2 for exploration mineral assets, with no estimated mineral resources in accordance of the JORC Code 2012. Analysing the transactions in Table 9 in more detail and sub-setting transactions into just prospecting licences, mining licences, a mixture of prospecting and mining licences and a mixture of exploration with either prospecting and/or mining licences, the following statistics were determined (Table 10). It can be seen that the average values are all skewed upwards due to a few highly valued strategic transactions, with the median values being more representative of a normal price for a type of tenement. Table 10 Summary Statistics of Comparative Transactions by Tenement Type Tenure Combinations Low $ High $ Mean $ Median $ Exploration + Prospecting and/or Mining 3,497 48,387 16,313 8,311 Prospecting 6,595 465,116 96,803 28,571 Prospecting + Mining 12,778 351,307 114,710 47,377 Mining 155,310 1,586,207 415,415 251,602 The value ranges differ between the different licence types, where generally mining tenements are worth more than prospecting, which are worth more than exploration tenements on a cost per km2 basis. A breakdown of ranges for Prospecting and Mining Licences based on their prospectivity and strategic value are shown in Table 11 below. Page 54 of 62 For personal use only Table 11 Cost per km2 Range Tenement Type Value Ranges Breakdown Comments Prospecting Licences $6,000 - $15,000 Grass roots early stage exploration, with limited work or limited exploration potential. $15,000 - $30,000 Average exploration stage, some defined gold targets for follow up. Mature exploration ground that has been well explored $30,000 - $150,000 Advanced stage exploration with good potential, defined gold targets ready for resource drilling $150,000+ Advanced stage exploration with good potential and/or strategic to the purchaser. Mining Licences $150,000 - $500,000 Value varies due to quality of gold mineralisation and how strategic it is to the purchaser. $500,000+ Good quality gold targets with good potential to be converted to a mineral resource and/or highly strategic to the purchaser. Ravensgate has derived implied ranges and preferred values varying on the tenements prospectivity per km2 to apply to the area of the granted Prospecting and Mining licences (Table 12), which have a total combined area of 7.007km2. These values relate to approximately $0.835M to $1.208M. From this range a preferred value of $1.022M has been selected, which reflects the outcome of successful exploration to date and the quality of the exploration ground. To derive appropriate values for the various tenements Ravensgate reviewed the exploration data and prospectivity for the various licences and selected an appropriate range based on Table 11. The values attributed to each tenement were based upon a review of the prospectivity and quality of exploration targets on each tenement as described in Section 3.5. A brief description of the factors that have been taken into account in determining the value range and preferred value for the tenements are as follows: M59/0002: The licence is located immediately to the south from M59/396 and is largely underlain by the Paynes Find Gneiss, containing historic workings in its northern area. Minor granite occurs in the south. The prospectivity of the licence is rated as medium to high. M59/0010: The licence mostly contains the Paynes Find Gneiss and contains a line of historic workings on the northwest – southeast trending Primrose Fault and sheared contact with the mafic schist, which was the focus of PFGL’s Stage 2 drilling program. The licence contains CSA’s target ‘A’ which is proximal to the high grade result from PFRC120 which returned 3m at approximately three ounces of gold (Figure 17 and Figure 18). Therefore, the prospectivity of the licence is rated as high. The value of this licence was discounted by 25% due to ongoing environmental and OHS concerns as detailed in Section 3.2.2. M59/0235: The licence is on the Paynes Find Gneiss with historic workings, immediately to the northeast of the Stage 2 drill program. The southern area was previously drilled by Forsayth in 1987 (Figure 15). The prospectivity of the licence is rated as medium to high. M59/0244: The licence mostly contains the Paynes Find Gneiss and contains a line of historic workings on the northwest – southeast trending Primrose Fault and sheared contact with the mafic schist, which was the focus of PFGL’s Stage 1 drilling program. Page 55 of 62 For personal use only The areas potential has been highlighted by CSA, which also contains target ‘F’ (Figure 18). Therefore, the prospectivity of the licence is viewed as high. The value of this licence was discounted by 25% due to ongoing environmental and OHS concerns as detailed in Section 3.2.2. M59/0396: The licence is located immediately to the east of CSA target ‘F’ on the Paynes Find Gneiss, containing historic workings. The prospectivity of the licence is rated as medium to high. M59/0662: South of the historic Daffodil open pit and containing the historic workings of Pansy (south) and Shamrock, the area has been identified by CSA with the western area of the licence viewed as prospective, containing target ‘B’ (Figure 18). As it is not on the main Paynes Find Gneiss package, the licence is viewed as medium to high prospectivity. The value of this licence was discounted by 25% due to ongoing environmental and OHS concerns as detailed in Section 3.2.2. M59/0663: The licence contains the historic Bluebell workings on the Paynes Find Gneiss which is at the northern end of the main strike of historic workings (Figure 8) and favourable structural trend, containing CSA target ‘E’ (Figure 18). The licence is viewed as having medium to high prospectivty, with also alluvial potential on the licence. P59/1907: On the Eastern side of the Daffodil Fault, on the Eastern Granite, the area has not been covered by geochemical surveys. The area is underlain by the Eastern Ultramafic and therefore maybe more prospective for nickel. The area is proximal to the Daffodil tailings – refer to comments for P59/1956. The prospectivity of the licence is rated as low. P59/1908: A small, strategic, gap-fill prospecting licence in proximity to CSA’s target ‘A’. The licence is on the mafic schist and Paynes Find Gneiss contact at the Primrose Fault, within close proximity to historic workings. Therefore, although a small area, the prospectivity of the licence is viewed as high. P59/1909: A small, strategic, gap-fill prospecting licence on Paynes Find Gneiss, immediately to the northwest of the historic Adeline workings. Therefore, although a small area, the prospectivity of the licence is viewed as high. P59/1924: The licence is split approximately north to south by the Daffodil Fault with the eastern half of the licence on the Eastern Granite and the western half on the Paynes Find Gneiss, which contains historic workings. The licence does not contain ant targets identified by CSA, and is viewed as having medium prospectivity. P59/1941: CSA has defined a structural corridor at the north-south border between this licence and P59/1959 to the west, containing target ‘C’ on P59/1941 and target ‘D’ on P59/1959 (Figure 18). The licences are viewed as having medium prospectivity. They are traversed by the Great Northern Highway in their northern area, with P59/1941 also containing the Paynes Find Tavern and Roadhouse. P59/1942: The tenement is mostly underlain by the Eastern Granite, with a sheared area of the Paynes Find Gneiss in the southwest corner, which is the only area of the tenement that was covered by geochemical soil sampling. The tenement does not contain any historic workings or drill holes, is not proximal to any of the CSA targets and is therefore viewed as having low prospectivity. P59/1956: A small licence on the eastern side of the Daffodil Fault on the Eastern Granite, at the southern pinch-out of the Paynes Find Gneiss. The southern area of the licence has been used as a tailings dump from the historic Daffodil open pit which is ~400m to the southwest (refer to Figure 4). In Ravensgate’s opinion, an area that has been used as a waste / tailings site is viewed as having low prospectivity. P59/1957: A strategically placed tenement at the southern pinch out of the Paynes Find Gneiss, the licence covers the southern strike extent of a line of historic workings (Figure 4), which is viewed as having medium prospectivity. Page 56 of 62 For personal use only P59/1958: The licence covers the east-west extension of licences P59/1941 and P59/1959, which includes the southern extension of CSA identified north – south structural corridor, however the licence does not contain a target and is viewed as having medium prospectivity. P59/1959: Refer to P59/1941. Table 12 Tenement Comparable Transaction Valuation of PFGL’s Exploration Tenure Area km2 Equity % Values Per km2 Low $ Preferred $ Valuation High $ Low $K Preferred $K High $K M59/0002 0.050 100 300,000 400,000 500,000 14.9 19.8 24.8 M59/0010* 0.243 100 700,000 800,000 900,000 127.4 145.7 163.9 M59/0235 0.060 100 300,000 400,000 500,000 18.0 24.0 30.0 M59/0244* 0.911 100 700,000 800,000 900,000 478.3 546.7 615.1 M59/0396 0.040 100 400,000 500,000 600,000 16.2 20.2 24.3 M59/0662* 0.390 100 300,000 400,000 500,000 87.6 116.9 146.1 M59/0663 0.136 100 150,000 250,000 350,000 20.5 34.1 47.7 P59/1907 0.080 100 6,000 10,500 15,000 0.5 0.8 1.2 P59/1908 0.006 100 150,000 175,000 200,000 0.9 1.1 1.2 P59/1909 0.002 100 110,000 130,000 150,000 0.2 0.2 0.2 P59/1924 0.431 100 20,000 40,000 60,000 8.6 17.2 25.8 P59/1941 1.741 100 15,000 22,500 30,000 26.1 39.2 52.2 P59/1942 0.841 100 6,000 10,500 15,000 5.0 8.8 12.6 P59/1956 0.047 100 6,000 10,500 15,000 0.3 0.5 0.7 P59/1957 0.047 100 20,000 40,000 60,000 0.9 1.9 2.8 P59/1958 0.511 100 15,000 22,500 30,000 7.7 11.5 15.3 P59/1959 1.472 100 15,000 22,500 30,000 22.1 33.1 44.2 TOTAL 7.007 100 NA NA NA 835.2 1,021.7 1,208.1 The valuation has been compiled to an appropriate level of precision and minor rounding errors may occur. *Licences M59/0010, M59/0244 and M59/0662 were discounted by a further 25% due to environmental and OHS concerns. Page 57 of 62 For personal use only 4.6 Valuation Summary Ravensgate has concluded that the Paynes Find Gold Project is of merit and worthy of further exploration. A summary of the Paynes Find Gold Project valuation in ownership equity percentage terms is provided in Table 13. The applicable valuation date is 20 October 2014 and is derived from using the Comparable Transactions valuation method. The value of the Paynes Find Gold Project is considered to lie in a range from $0.835M to $1.208M; within this range Ravensgate has selected a preferred value of $1.022M. As the technical valuation is based on comparable transactions it can be considered to also be the market value. The definition of market value that Ravensgate adopts is that used in the VALMIN code, which is the market value definition as defined by the International Valuation Standards Committee (IVSC). Table 13 Summary Project Technical Valuation in Ownership Equity Percentage Terms Valuation Project Mineral Asset Paynes Find Advanced Exploration Area Equity % Area km2 Low $M Preferred $M High $M 100 7.007 0.835 1.022 1.208 The valuation has been compiled to an appropriate level of precision and minor rounding errors may occur. Page 58 of 62 For personal use only 5. REFERENCES Downie, A., 2002. Hallmark Mining Limited, Annual Technical Report, Paynes Find Project, M59/10, for reporting period 23/10/2001 to 22/10/2002, Wamex a65721. Fitton, F., 2011. Comparison of the Paynes Find Goldfield with the Boddington Gold Deposit, West Australia. JORC, 2004. Australasian Code for Reporting of Mineral Resources and Ore Reserves (The JORC Code) prepared and jointly published by: The Joint Ore Reserve Committee of the Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and the Minerals Council of Australia (JORC) Published December 2004. JORC, 2012. Australasian Code for Reporting of Mineral Resources and Ore Reserves (The JORC Code) prepared and jointly published by: The Joint Ore Reserve Committee of the Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and the Minerals Council of Australia (JORC) The JORC Code 2012 Edition - Effective 20 December 2012 and mandatory from 1 December 2013 (Published December 2012). Libby, J., 2003. Batavia Mining Limited Annual Technical Report, Paynes Find Project, M59/10, October 2003, Wamex a67824. Maynard, A., 2010. Independent Geologist’s Report on Mineral Exploration Projects in Western Australia for Paynes Find Gold Limited. Paynes Find Gold Limited, 2010. Prospectus, Section 9.4 pp78. Paynes Find Gold Limited, 2011. Exploration update, ASX Release, 21st February 2011. Paynes Find Gold Limited, 2013. Structural Review of Paynes Find Gold Field. ASX Announcement 24 January 2013. Paynes Find Gold Limited, 2013. Positive Results from Structural Survey Confirms Greater Gold Potential. ASX Announcement 7 March 2013. Paynes Find Gold Limited, 2013. Gold Production Commences. ASX Announcement 7 March 2013. Paynes Find Gold Limited, 2013. Milestone Mining Agreement. ASX Announcement 4 June 2013. Paynes Find Gold Limited, 2013. Geochem Results Confirm New Gold Targets at Paynes Find. ASX Announcement 12 June 2013. Paynes Find Gold Limited, 2013. Quarterly Activities Report and Appendix 5B. For the Quarter ending 30 September 2013. Paynes Find Gold Limited, 2013. Operations Update. ASX Announcement 1 October 2013. Paynes Find Gold Limited, 2014. http://www.paynesfindgold.com Paynes Find Gold Limited, 2014. Quarterly Activities Report and Appendix 5B. For the Quarter ending 31 March 2014. Paynes Find Gold Limited, 2014. Quarterly Activities Report and Appendix 5B. For the Quarter ending 30 June 2014. VALMIN, 2005. Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports – The VALMIN Code, 2005 Edition. Wolstencroft, A., 1997. Annual Report for Mining Lease M59/10, Paynes Find for the period 23 October 1996 to 22 October 1997. Kirkwood Gold NL, Wamex a52954. Wolstencroft, A., 1998. Annual Report for Mining Lease M59/10, Paynes Find for the period 24 January 1997 to 23 October 1998. Kirkwood Gold NL, Wamex a52955. www.intierra.com Page 59 of 62 For personal use only 6. LIST OF ABBREVIATIONS A$ AC Ag ASX Au Azi Cu DCF FAusIMM g/t JORC Code K km km2 m M MAIG MAusIMM mm MMI Mt NPV oz Pb PGE ppb ppm QA/QC RAB RC t US$ Zn Australian dollar(s) Aircore (drill hole) Silver Australian Securities Exchange Gold Azimuth Copper Discounted cash flow Fellow of the Australasian Institute of Mining and Metallurgy Grams per tonne 2012 Edition of the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves Thousand(s) kilometre(s) Square kilometre(s) Metre(s) Million(s) Member of the Australian Institute of Geoscientists Member of the Australasian Institute of Mining and Metallurgy Millimetre(s) Mobile Metal Ion Million Tonnes. Net present value Ounce (Troy ounce measure of weight) Lead Platinum Group Element Parts per billion; a measure of concentration Parts per million; a measure of concentration Quality Assurance / Quality Control Rotary Air Blast (drill hole) Reverse circulation (drill hole) Tonne(s) United States Dollar(s) Zinc Page 60 of 62 7. GLOSSARY For personal use only aircore drilling aeromagnetic anomalies amphibolite Archaean assayed bedrock boudin / boudinage craton diamond drilling dolerite domain dykes fault geochemical geophysical geosyncline gneiss graben granite greenschist greenstone belt magnetite mesothermal metamorphic mobile metal ion Page 61 of 62 Air Core Drilling. A relatively inexpensive drilling technique similar to RC drilling, in that the drill cuttings are returned to surface inside the rods. A survey undertaken by helicopter or fixed-wing aircraft for the purpose of recording magnetic characteristics of rocks by measuring deviations of the Earth’s magnetic field. An area where exploration has revealed results higher than the local background level. A metamorphic rock consisting mainly of amphibole, especially the species hornblende and actinolite The oldest rocks of the Precambrian era, older than about 2,500 million years. The testing and quantification metals of interest within a sample. Any solid rock underlying unconsolidated material. Structures formed by extension, where a rigid tabular body such as Hornfels, is stretched and deformed amidst less competent surroundings. The competent bed begins to break up, forming sausage-shaped boudins. An old and stable part of the continental lithosphere Drilling method employing a (industrial) diamond encrusted drill bit for retrieving a cylindrical core of rock. A medium grained mafic intrusive rock composed mostly of pyroxenes and sodium-calcium feldspar. Geological zone of rock with similar geostatistical properties; typically a zone of mineralisation A tabular body of intrusive igneous rock, crosscutting the host strata at a high angle. A wide zone of structural dislocation and faulting. Pertains to the concentration of an element. Pertains to the physical properties of a rock mass. A subsiding linear trough that was caused by the accumulation of sedimentary rock strata deposited in a basin and subsequently compressed. A common and widely distributed type of rock formed by high-grade regional metamorphic processes from pre-existing formations that were originally either igneous or sedimentary rocks. A depressed block of land bordered by parallel faults. A coarse-grained igneous rock containing mainly quartz and feldspar minerals and subordinate micas. A metamorphosed basic igneous rock which owes its colour and schistosity to abundant chlorite. A broad term used to describe an elongate belt of rocks that have undergone regional metamorphism to greenschist facies. A mineral comprising iron and oxygen which commonly exhibits magnetic properties. A hydrothermal ore deposit formed at intermediate temperatures (200-300°C) and depths. A rock that has been altered by physical and chemical processes involving heat, pressure and derived fluids MMI is a highly sensitive proven geochemical exploration method For personal use only NQ orogeny outcrop Precambrian Proterozoic RAB drilling RC drilling regolith resource rock chip sampling sedimentary soil sampling strata stratigraphic strike unconformity volcanics whereby Mobile Metal Ions, adsorbed onto the surface of screened soil particles, are dissolved using patented chemical extractants and analysed at ppb levels. This method is more sensitive than conventional geochemical methods. Diamond Drilling. A core diameter of 47.6mm. The process of mountain formation, especially by a folding and faulting of the earth's crust. Surface expression of underlying rocks. A period of geological time older than 570 million years before present. An eon of geological time spanning the period from 2,500 million years to 570 million years before present Rotary Air Blast. A relatively inexpensive and less accurate drilling technique involving the collection of sample returned by compressed air from outside the drill rods. Reverse Circulation. A drilling method in which the fragmented sample is brought to the surface inside the drill rods, thereby reducing contamination. The layer of unconsolidated material which overlies or covers in situ basement rock In situ mineral occurrence from which valuable or useful minerals may be recovered. The collection of rock specimens for mineral analysis. A term describing a rock formed from sediment. The collection of soil specimens for mineral analysis. Sedimentary rock layers. Composition, sequence and correlation of stratified rocks. Horizontal direction or trend of a geological structure. An erosional or non-depositional surface separating two rock masses or strata of different ages, indicating that sediment deposition was not continuous. Rocks formed or derived from volcanic activity. Page 62 of 62 For personal use only APPENDIX 8 WACC Assessment – Delecta When assessing an appropriate discount rate to use in a discounted cash flow valuation, due regard must be given to the rates of return available in the marketplace, the degree of risk attached to the business, shares or project and the required rate of return. Businesses are normally funded by a mix of debt and equity. The Weighted Average Cost of Capital (“WACC”) is a widely used and accepted basis to calculate the “representative” rate of returns required by debt and equity investors. We have applied the WACC methodology to determine an appropriate discount rate to be used in assessing the Fair Value of the Consideration. The Capital Asset Pricing Model (“CAPM”) is the most frequently used model in determining the cost of equity of an investment or project and the required rate of return for debt funding is determined having regard to current borrowing costs and prevailing credit ratings. The cost of equity and cost of debt are weighted by the respective proportions of equity and debt funding to arrive at the WACC. WACC The generally accepted WACC formula is the post-tax WACC as shown below: WACC = [Re * E/V] + [Rd (1 - t) * D/V] Re = Expected equity investment return or cost of equity Rd = Interest rate on debt (pre-tax) t = Corporate tax rate E = Market value of equity D = Market value of debt V = Market value of debt plus equity Where: CAPM The CAPM is based on the theory that the prudent investor will price investments so that the expected return is equal to the risk free rate of return plus a premium for risk. CAPM assumes that there is a positive relationship between risk and return; that is, investors are risk averse and therefore demand higher returns for accepting higher levels of risk. The CAPM calculates the cost of equity through the following formula: Re = Rf + β[E(Rm) – Rf] Re = Cost of equity capital or expected return on the investment. Rf = Risk free rate of return. E(Rm) = Expected return on the market. E(Rm) - Rf = Market risk premium β = Beta Where: 53 We have considered each component of the CAPM below. For personal use only Risk free rate - Rf We have assumed a risk free rate of 2.53% being the average yield on the 2-year Australian Government Bond for the last 2 years, as published by the RBA. We have used the 2-year bond rate as the revenue payment is due from the first revenue earned from the project. Market Risk Premium – E(Rm) - Rf Market risk premium represents the level of return investors require over and above the risk free rate in order to compensate them for the non-diversifiable risks associated with an investment in a market portfolio. Strictly speaking, the market risk premium is equal to the expected return from holding shares over and above the return from holding risk-free government securities. Various empirical studies undertaken in Australia and overseas show that historical market risk premiums vary across markets; the Australian market is generally in line with the overall range of other developed countries but is slightly higher than the world average. A paper published in the Journal of Law and Financial Management in 2003 estimated that the long-term market risk premium in Australia was 6.7%. This is in line with an earlier study carried out by the Australian Graduate School of Management (“AGSM”) using data from 1974 to 1995. The 10 year average return of the ASX300 index is 10.4% (excluding 2008 and 2009 where there was a significant amount of volatility). Having regard to this information, we have assumed a market risk premium to be 7% in our determination of the discount rate. Beta - β The beta coefficient measures the systematic risk of the company compared to the market as a whole. A beta of 1 indicates that the company’s risk is comparable to that of the market. The choice of a beta requires judgement and necessarily involves subjective assessment as observations of beta in comparable companies may be subject measurement issues and other variations. Accordingly, depending upon circumstance, a sector average, or a basket of comparable companies may present a more reliable beta, rather than relying on a single comparable company. Beta can be expressed as an equity beta (which includes the effect of gearing on equity returns) or as an asset beta (where the impact of gearing is removed). The asset beta will be lower than the equity beta for any given investments, with the difference dependent upon the level of gearing in the capital structure. The selection of an appropriate beta involves a degree of professional judgement, particularly where the performance drivers of the company being valued are not directly aligned with the most comparable listed companies. Delecta is listed on the Australian Stock Exchange and as such we have used Delecta’s ungeared beta, as presented in the table below: Company Delecta Limited Levered beta 1.330 Total debt/ equity 0.0% Unlevered beta 1.330 Table 16: Beta of Delecta (Source: Capital IQ) 54 Calculation of WACC For personal use only We set out the detailed calculation of the WACC in the table below. WACC Market Risk Premium (Rm - Rf) Multiplied by: Levered Beta Adjusted Market Risk Premium Add: Risk-Free Rate of Return (Rf)(1) Add: Size Premium Cost of Equity Multiplied by: E/(D+P+E) Cost of Equity Portion 7% 1.330 9.3% 2.5% 0% 11.8% 100.0% 11.8% ASX:VIE Cost of Debt (Rd) ASX:VIE Tax Rate After-Tax Cost of Debt 0.0% 30.0% 0.0% Multiplied by: D/(D+P+E) 0.0% Cost of Debt Portion 0.0% WACC 11.8% Table 17: WACC Calculation (Source: Capital IQ) Based on the assumptions set out above, we have assessed the post-tax WACC to be 12%. 55 PROXY FORM For personal use only DELECTA LIMITED ACN 009 147 924 GENERAL MEETING I/We of: being a Shareholder entitled to attend and vote at the Meeting, hereby appoint: Name: OR: the Chair of the Meeting as my/our proxy. or failing the person so named or, if no person is named, the Chair, or the Chair’s nominee, to vote in accordance with the following directions, or, if no directions have been given, and subject to the relevant laws as the proxy sees fit, at the Meeting to be held at 9 Foundry Street, Maylands, Perth, Western Australia, on 28 January 2015 at 10 am, and at any adjournment thereof. The Chair intends to vote undirected proxies in favour of all Resolutions in which the Chair is entitled to vote. In exceptional circumstances the Chair may change his/her voting intention on any Resolution. In the event this occurs an ASX announcement will be made immediately disclosing the reasons for the change. FOR Voting on business of the Meeting Resolution 1 AGAINST ABSTAIN Approval of grant of Canadian River Option Please note: If you mark the abstain box for a particular Resolution, you are directing your proxy not to vote on that Resolution on a show of hands or on a poll and your votes will not be counted in computing the required majority on a poll. % If two proxies are being appointed, the proportion of voting rights this proxy represents is: Signature of Shareholder(s): Individual or Shareholder 1 Shareholder 2 Shareholder 3 Sole Director/Company Secretary Director Director/Company Secretary Date: Contact name: Contact ph (daytime): E-mail address: Consent for contact by e-mail in relation to this form: YES NO For personal use only Instructions for completing Proxy Form 1. (Appointing a proxy): A Shareholder entitled to attend and cast a vote at the Meeting is entitled to appoint a proxy to attend and vote on their behalf at the Meeting. If a Shareholder is entitled to cast 2 or more votes at the Meeting, the Shareholder may appoint a second proxy to attend and vote on their behalf at the Meeting. However, where both proxies attend the Meeting, voting may only be exercised on a poll. The appointment of a second proxy must be done on a separate copy of the Proxy Form. A Shareholder who appoints 2 proxies may specify the proportion or number of votes each proxy is appointed to exercise. If a Shareholder appoints 2 proxies and the appointments do not specify the proportion or number of the Shareholder’s votes each proxy is appointed to exercise, each proxy may exercise one-half of the votes. Any fractions of votes resulting from the application of these principles will be disregarded. A duly appointed proxy need not be a Shareholder. 2. (Direction to vote): A Shareholder may direct a proxy how to vote by marking one of the boxes opposite each item of business. The direction may specify the proportion or number of votes that the proxy may exercise by writing the percentage or number of Shares next to the box marked for the relevant item of business. Where a box is not marked the proxy may vote as they choose subject to the relevant laws. Where more than one box is marked on an item the vote will be invalid on that item. 3. (Signing instructions): • (Individual): Where the holding is in one name, the Shareholder must sign. • (Joint holding): Where the holding is in more than one name, all of the Shareholders should sign. • (Power of attorney): If you have not already provided the power of attorney with the registry, please attach a certified photocopy of the power of attorney to this Proxy Form when you return it. • (Companies): Where the company has a sole director who is also the sole company secretary, that person must sign. Where the company (pursuant to Section 204A of the Corporations Act) does not have a company secretary, a sole director can also sign alone. Otherwise, a director jointly with either another director or a company secretary must sign. Please sign in the appropriate place to indicate the office held. In addition, if a representative of a company is appointed pursuant to Section 250D of the Corporations Act to attend the Meeting, the documentation evidencing such appointment should be produced prior to admission to the Meeting. A form of a certificate evidencing the appointment may be obtained from the Company. 4. (Attending the Meeting): Completion of a Proxy Form will not prevent individual Shareholders from attending the Meeting in person if they wish. Where a Shareholder completes and lodges a valid Proxy Form and attends the Meeting in person, then the proxy’s authority to speak and vote for that Shareholder is suspended while the Shareholder is present at the Meeting. 5. (Return of Proxy Form): To vote by proxy, please complete and sign the enclosed Proxy Form and return by: (a) post to Delecta Limited, Level 1, 170-180 Buckhurst Street, SOUTH MELBOURNE, VIC, AUSTRALIA, 3205; or (b) facsimile to the Company on facsimile number +61 3 9686 0644, so that it is received not less than 48 hours prior to commencement of the Meeting. Proxy Forms received later than this time will be invalid.
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