Company announcements

Quarterly Activities Report for the period to 30 September 2011

31 October 2011

The Board of Firestone Energy Limited (ASX/JSE: FSE) (“Firestone” or the “Company”) is pleased to provide shareholders with its Quarterly Activities Report for the 3 month period ended 30 September 2011.

Highlights

  • Appointment of the Chief Executive Officer (CEO) to be dedicated to the project in South Africa
  • Mining Right approval and execution by DMR giving the project 30 year licence to mine four properties, being Smitspan, Minnasvlakte, Hooikraal and Massenberg
  • Firestone agrees to re-negotiate the MOU with Eskom in order to secure increased tonnages and an extended supply period
  • Exclusivity agreement signed with major, multinational listed mining and power company to carry out due diligence on the project
  • Linc Energy acquires a strategic equity stake in Firestone

Overview

This quarter has been significant primarily because of the occurrence of four major events:

  • appointment of David Knox as CEO of Firestone;
  • approval of the mining rights and execution of the mining right licence by DMR in respect of four (of the seven) project properties, being Smitspan, Minnasvlakte, Hooikraal and Massenberg;
  • agreement to renegotiate the Eskom MOU; and,
  • awarding of an exclusive due diligence period to a major, multinational listed mining and power company with a view to such company providing Firestone with a development proposal.

The appointment of the CEO has been a primary focus for the directors for most of the year.  Given the early stage of development of our Smitspan project, and the particular requirements of our joint venture, the Company has not found it easy to attract the right resources.  The Board considers that David Knox has the right mixture of talents required at this time and is pleased to report that he has settled into South Africa and has assumed day-to-day responsibility for the Company. 

The approval of the mining right application and the execution of the mining right licence in August 2011 were significant steps for the project, despite being later than anticipated.

While each of the renegotiation of the Eskom MOU and the awarding of the due diligence period to a major, multinational listed mining and power company have been previously announced, neither matter has progressed to a level which has allowed the Company to provide further information.

Your directors consider the renegotiation of the Eskom offtake MOU to be attractive and potentially beneficial to Firestone because it may lead to increased tonnages and an extended supply period – two factors which heavily impact upon the economics of the project.  In addition, directors consider that the parameters now being discussed with Eskom will provide a much stronger and more rewarding long-term relationship with Eskom. 

Similarly,  the awarding of a due diligence period to a major, multinational listed mining and power company with the intention that at the end of that period that company will present a firm development proposal to Firestone, provides an exciting prospect.  However, the quality of any such proposal will not be known until sometime following the end of the due diligence period which is towards the middle of November.

The combined effect of these two significant events has meant that development work which might otherwise have been pursued following the approval of the mining right application and the execution of the mining right licence in August, has not taken place.  Each of the negotiations includes the possibility of producing an operating environment significantly different to that incorporated in the assumptions underpinning the current mine plan.  Progressing development on the basis of the current mine plan could have resulted in wasted effort and expense in the event that the Board is able to achieve a desired outcome in relation to one or both of the negotiations.  As a consequence, the Company is no longer intending to produce coal in the first quarter of 2012. Further market updates will be announced in due course.

Regulatory Approvals

The mining right approved on the 3rd of August 2011 was signed by the Minister and registered at the end of August 2011.   However, the Minister signed the mining right licence with respect to four (of the seven) properties only, being Smitspan, Hooikraal, Massenberg and Minnasvlakte.  This is a correction to the announcements made by the Company in relation to this matter.  At that time it was thought that the mining right licence applied to all properties which had been included in the mining right application.  In its final analysis, the DMR decided to award and execute the mining right with respect to only those (four) properties which house the current project.  These mining rights will be transferred to the designated joint venture company by way of a new section 11 application which is expected to be submitted during the December 2011 quarter.

The other properties, being Duikerfontein, Olieboomfontein and Swanepoelpan,continue to be subject to prospecting rights.  An application can be made for conversion of those prospecting rights to a mining right at a time when a specific project is identified for those properties and the relevant environmental impact and other assessments are undertaken.  The prospecting rights which relate to these properties will also be transferred to the relevant joint venture company by way of a new section 11 application which is expected to be submitted during the December 2011 quarter.

The prospecting right of Vetleegte, the property containing shallow resources of metallurgical coal, is a separate prospecting right relating only to that property.  It is intended that this prospecting right be transferred to the relevant joint venture company by way of a new Section 11 application which is expected to be submitted during the December 2011 quarter.

Logistics

The Company has continued its discussions with Transnet Freight Rail on tonnages, tariff structure including take or pay fees, the requirement for Public Private Participation (PPP) and implementation dates.  These discussions are being conducted on a cooperative basis.  As yet no agreements have been entered into.

Cornerstone Investor

A number of potential cornerstone investors accessed the Company’s data room and the process of identifying long term investors for the project is ongoing. The Company will update investors at the end of the third quarter 2010.

Funding

During the quarter the Company completed the Share Purchase Plan commenced in the previous quarter in relation to its South African shareholders, raising approximately $240,000 before costs.  In addition, the Company raised A$1.8m by way of a placement of approximately 150 million shares at A$0.012 per share, under the Company’s 15% issue capacity, to ASX listed global energy company Linc Energy Limited (ASX:LNC).  Following the placement, Linc Energy holds approximately 9.6% of Firestone’s issued capital.

The funds have been allocated towards Firestone’s general working capital requirements for the development of the Smitspan project. 

Public Investment Corporation (PIC)

During the quarter PIC issued a draft non-binding project finance terms sheet and commenced due diligence on the project to develop a mine on the Smitspan farm.  In view of the material changes which may arise from the current negotiations referred to above, this project finance facility will not be advanced until the outcome of those negotiations is known.

Project Funding

As at 30 September 2011 the A$25m convertible note facility was almost completely drawn down, with only A$300k of the facility remaining. 

Marketing

Eskom MOU

As noted above the Company agreed with Eskom this quarter to renegotiate its MOU in order to seek improved tonnages and to extend the supply period. The Board and Eskom’s designated project team are working to finalise a revised MOU, during Q4, 2011.

In addition it is anticipated that successful negotiation of the arrangements referred to above with a major, multinational listed mining and power company will incorporate an offtake agreement.

Cornerstone Investor

The joint venture with Sekoko Resources (Pty) Ltd has granted an exclusive period with a major, multinational listed mining and power company to conduct due diligence on the project. As stated above, it is intended the company will present a firm development proposal to Firestone at the end of its due diligence process and further announcements will be made in due course.

Corporate

The Board appointed Mr David Knox as its Chief Executive Officer effective 20 September 2011. Mr Knox will be located in Johannesburg working alongside the joint venture partner, Sekoko Resources, and will be responsible for Firestone's overall operations. Mr Knox has extensive experience in project development, financing and banking and has had particular high-level experience in Africa in the energy and resources sectors. The appointment considerably strengthens the Board’s knowledge in the areas of public administration and the development of its coal resources in South Africa.

Changes in the Board include the appointment of Morore Benjamin (Ben) Mphahlele as non-executive director to replace Mr Peter Tshisevhe who resigned in June 2011. Mr Kobus Terblanche has also been appointed as non- executive director to the Board as a nominee of Linc Energy. Mr Sizwe Nkosi has terminated his executive role with the joint venture and Firestone to take up another senior executive role. Mr Nkosi has agreed to continue as a non-executive director for the immediate future.

Outlook

The immediate outlook for the Company is to focus upon successfully concluding the renegotiation of its Eskom MOU and the achievement of a satisfactory outcome with the proposed cornerstone investor. In advance of those decisions, the Company is focusing on keeping costs to a minimum while at the same time advancing the regulatory and structural issues which are referred to above and which remain outstanding.

For further information see Appendix 5B – Mining exploration entity quarterly report (PDF - 125KB)

Firestone Energy Limited

David Perkins
Chairman
www.firestoneenergy.com.au

About Sekoko Resources

Sekoko Resources (Pty) Ltd is a South African-based black-owned energy and minerals company developing the coal, magnetite iron ore and PGMs Projects in the Limpopo Province of South Africa. This includes a significant exploration program and development of the Waterberg Coal Joint Venture Project based on significant Coal Zone Resources. Sekoko is targeting to commence operations in 2012, thus forming the basis for developing a global coal business.

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