COUGAR ENERGY LTD

RESEARCH NOTE

On the verge of ignition.

$2.1m loss for the half 1 March 2010
12mth Rating BUY
 Cougar energy has reported a $2.1m loss for the December half,
Price A$ 0.13
which was 45% higher than last year but inline with our expectations.
Interest revenue was down 28% to $189k while expenses were up by Target Price A$ 0.20
40% as the company gears up for its pre-production burn. 12m Total Return % 53.8

 Cougar has earlier announced that practical completion of its pre- RIC: CXY.AX BBG: CXY AU
production plant at Kingaroy was achieved at the end of January and Shares o/s m 919.1
that commissioning work and training of plant operators would be Free Float % 95.0
completed by the end of February. A$m 119.5
Market Cap.
Net Debt (Cash) A$m -13.0
 Crucially UCG ignition will “follow immediately thereafter” and is now
imminent. Confirmation of a successful ignition, consistency, and gas Net Debt/Equity % na
quality should follow a few weeks thereafter. From our point of view 3m Av. D. T’over A$m 0.27
this is one of those rare occasions when there is a predictable 52wk High/Low A$ 0.13/0.05
calendar event that we expect will provide the catalyst for a 2yr adj. beta 1.58
substantial uplift in investor sentiment.
Valuation:
 The review of the interim report by the Auditor has highlighted that in
order achieve all of its ambitions and remain a going concern Cougar Methodology DCF
will have to raise more capital. We are fully aware of the need for Value per share A$ 0.19
additional project funding and note that on a plain look at the CXY
Balance Sheet, the company has $13m in cash while it has only $1m Andrew Harrington
in total liabilities – so no danger of insolvency or cash crunch. In Analyst:
addition CXY has recently signed an Equity linked Line of Credit with Phone: (+61 2) 8238 6214
YA Global for a total of $10m. The price for the funding will be based Email: aharrington@psl.com.au
on the equivalent number of CXY shares at a VWAP calculation. Over
the next 12 months we expect that CXY will spend about $10m.

 CXY is considering revising its 400MW power station programme. An

initial plant of about 5MW could be installed to generate electricity Patersons Securities Limited acted as
from the pre-production burn, rather than just flaring the gas, which lead manager to the placement that
would substantially offset the cost of the pre-production phase. raised $8.29 million at 8.25 cents per
Secondly, rather than going straight to a 200MW first phase, CXY is share for Cougar Energy Limited in
studying the viability of starting with a smaller unit, of between 30- September 2009. It received a fee for
50MW in size, comparing whether the loss in economies of scale will this service.
be more than made up by profitable production arriving sooner.

 Our NPV on conservative future electricity prices is 19c and we

attribute very little to the large coal resources and additional projects
that CXY has in the pipeline outside of Kingaroy. For example, using
similar assumptions for the Wandoan project as we have used for
Kingaroy would yield a further 15cps depending on the start-up date.
12 Month Share Price Performance
Year End June 30 2009A 2010F 2011F 2012F 2013F
$0.16
180
Reported NPAT ($m) (2.9) (3.7) (4.3) (11.9) 6.4 $0.14
Recurrent NPAT ($m) (2.9) (3.7) (4.3) (11.9) 4.4
$0.12
Recurrent EPS (cents) (0.4) (0.4) (0.4) (1.3) 0.5 140
EPS Growth (%) na na na na na $0.10
PER (x) (32.6) (33.6) (29.2) (10.4) 28.1 $0.08 100

EBITDA ($m) (2.1) (3.0) (2.1) (1.9) 31.4 $0.06

60
EV/EBITDA (x) (42.0) (40.0) (77.2) (178.8) 13.1 $0.04
Capex ($m) 8.1 11.0 50.1 166.2 79.7
Free Cashflow (10.3) (19.6) (55.4) (179.2) (68.4) $0.02 20
CXY (LHS)
FCFPS (cents) (1.4) (2.1) (5.8) (18.8) (7.2)
Rel. S&P/ASX 200 RES
PFCF (x) (9.2) (6.3) (2.2) (0.7) (1.8)

DPS (cents) 0.0 0.0 0.0 0.0 0.0

Performance % 1mth 3mth 12mth
Yield (%) 0.0 0.0 0.0 0.0 0.0
Franking (%) 100.0 100.0 100.0 100.0 100.0 Absolute 18.3 19.6 111.5
Rel. S&P/ASX 300 19.8 21.3 50.6

RESEARCH NOTE – PATERSONS SECURITIES LIMITED 1

All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility
or liability on any account whatsoever on the part of this firm or any member or employee thereof.
1 March 2010 Cougar Energy Ltd

First Half FY10 result and commentary

Spending for the pre-production burn

Cougar energy has reported a $2.1m loss for the December half, which was 45% higher
than last year but inline with our expectations. Interest revenue was down 28% to $189k
while expenses were up by 40% as the company gears up for its pre-production burn at the
Kingaroy site.

Practical Completion Achieved

The key element for CXY is the imminent ignition of its pre-production facility at Kingaroy
following the practical completion of the site development. Cougar had earlier announced
that practical completion of its pre-production plant at Kingaroy was achieved at the end of
January (see photos below) and that commissioning work and training of plant operators
would be completed by the end of February. Crucially UCG ignition will “follow immediately
thereafter”.

Figure 1: Kingaroy Surface Infrastructure complete

Source: CXY

Figure 2: Kingaroy UCG Gas Flares

Source: CXY

Though ignition is now due for March, later than our initial expectations of Jan-Feb 2010, it
is now imminent. Confirmation of a successful ignition, consistency, and gas quality should
follow a few weeks thereafter. From our point of view this is one of those rare occasions
when there is a predictable calendar event that we expect will have a big positive impact on

RESEARCH NOTE – PATERSONS SECURITIES LIMITED 2

All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility
or liability on any account whatsoever on the part of this firm or any member or employee thereof.
1 March 2010 Cougar Energy Ltd

the share price of a company. we believe that ignition will provide the catalyst for a
substantial uplift in investor sentiment.

Qualification from the Auditor

The review of the interim report by the Auditor has highlighted that in order achieve all of
its ambitions and remain a going concern Cougar will have to raise more capital. Though we
are fully aware of the need for additional project funding we were somewhat surprised by
the qualification statement as it would be true of many small companies with big plans. On
a plain look at the CXY Balance sheet the company has $13m in cash and equivalents while
it has only $1m in total liabilities – so no danger of insolvency or cash crunch. Over the
next 12 months we expect that CXY will spend about $10m during this pre-production
phase and will likely need to raise more capital to move to its first phase of commercial
production.

Equity funding arranged

In addition CXY has recently signed an Equity linked Line of Credit with YA Global for a total
of $10m. We view this as a very flexible and cheap source of funding for CXY. The option
and timing to drawdown is completely in the hands of CXY and the price for the funding will
be based on the equivalent number of CXY shares at a VWAP calculation. In this way
dilution is minimized while any working capital shortfalls can be easily met.

Earlier cashflow from smaller plant possible

CXY is considering revising its 400MW power station programme to include more than 2
stages and bring cashflow forward with a smaller initial plant during this pre-production
phase. An initial plant of about 5MW could be installed to generate electricity from the pre-
production burn, rather than just flaring the gas, which would substantially offset the cost
of the pre-production phase.

Secondly, rather than going straight to a 200MW first phase, CXY is studying the viability of
starting with a smaller unit, of between 30-50MW in size, comparing whether the loss in
economies of scale will be more than made up by a smaller capex requirement and
profitable production arriving sooner. We have not yet altered our modelling assumption
based on a 2-phase project to 400MW but we believe that project funding from financial
institutions may well be easier in smaller lumps and will prove continuity of production with
less risk.

Electricity prices still robust

Figure 3: d-cypha SFE Queensland Electricity futures prices (A$/MWh)

Expiry Baseload Peak Load
Mar-10 44.50 72.65
Jun-10 27.50 37.75
Sep-10 27.00 39.75
Dec-10 33.00 49.75
Mar-11 46.60 81.00
Jun-11 27.85 40.50
Sep-11 30.25 46.50
Dec-11 33.60 53.50
Mar-12 54.00 99.00
Jun-12 36.50 55.00
Sep-12 44.00 60.00
Dec-12 51.25 70.00
Mar-13 89.00 142.00
Jun-13 50.00 41.50
Sep-13 43.50 60.00
Dec-13 51.20 70.00

Source: SFE/ASX

RESEARCH NOTE – PATERSONS SECURITIES LIMITED 3

All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility
or liability on any account whatsoever on the part of this firm or any member or employee thereof.
1 March 2010 Cougar Energy Ltd

The electricity futures curve on the SFE has risen slightly since we initiated coverage on
CXY but our starting assumption of $50/MWh and $70/MWh for baseload and peak load
electricity prices respectively from 2013 is intact. At commercial production rates we expect
that Cougar will have power costs of under $30/MWh while selling at prices well over that
level (see above).

The contained energy is undervalued.

As we have highlighted in the past, compared with its peers on a contained energy basis
CXY is very under-valued. CXY trades at a multiple of less that $0.02/GJ. LNC and CNX
trade at about $0.07 and $0.04/GJ respectively, while CSG companies trade at $0.40/GJ.
We recognize that the market has yet to fully accept the UCG industry but we believe that
with CXY trading at an energy multiple of only 5% of the CSG companies there is large
scope for an upward re-rating as the pre-production burn takes place and the BFS is
completed.

Valuation unchanged.

Our NPV on conservative future electricity prices is 19c and we attribute very little to the
large coal resources and additional projects that CXY has in the pipeline outside of
Kingaroy. For example, using similar assumptions for the Wandoan project as we have used
for Kingaroy would yield a further 15cps depending on the start-up date. See diagram
below for the other Australian based UCG projects.

Figure 4: CXY project locations

Source: CXY

RESEARCH NOTE – PATERSONS SECURITIES LIMITED 4

All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility
or liability on any account whatsoever on the part of this firm or any member or employee thereof.
1 March 2010 Cougar Energy Ltd

Cougar Energy 0.130 Year End June 30

Valuation A$m A$/sh Commodity Assumptions 2009A 2010F 2011F 2012F 2013F
US$/A$ 0.7464 0.8879 0.9050 0.8750 0.8350
Kingaroy 164.0 0.17 QLD Baseload Electricity (A$/MWh) 34.70 42.26 41.78 53.48 59.88
Wandoan 17.1 0.02 QLD Peak Electricity (A$/MWh) 47.07 63.56 64.25 82.69 78.38
Latrobe EL4416 0.0 0.00 PCI 206.25 96.25 115.00 112.50 102.50
Thar Coal Pakistan 0.0 0.00 Export Thermal Coal 111.25 73.75 83.25 77.25 73.75
Mine E 0.0 0.00 Domestic Thermal Coal (A$/t) 42.33 43.58 44.65 45.73 46.80
Coal Resources 0.0 0.00
FX Hedging 0.0 0.00
Corporate (15.8) (0.02) Production Summary 2009A 2010F 2011F 2012F 2013F
Unpaid Capital 1.5 0.00 Attributable Power Production
Cash 13.0 0.01
Debt (0.0) (0.00) Kingaroy (GWh) 0 0 0 0 740
NPV 179.7 0.19 Power costs (A$/MWh) 16.12 16.14 16.38 16.69 25.95
Price Target 0.20 Electricity Price (A$/MWh) 35.69 43.97 43.57 55.81 71.28

Valuation Summary of Operating Assets Wandoan (kt) 0 0 0 0 0

Power costs (A$/MWh) 277.05 326.52 333.52 322.48 307.96
Electricity Price (A$/MWh) 103.46 69.54 78.11 72.79 69.62
Kingaroy
Latrobe EL4416 (kt) 0 0 0 0 0
Wandoan FOB costs (US$/t) 7.53 8.04 50.30 72.47 73.85
Price Received (US$/t) 156.82 89.60 123.93 121.23 117.25
Latrobe EL4416
Thar Coal Pakistan (kt) 0 0 0 0 0
Cash costs (US$/t) 3.57 4.25 4.37 4.27 4.07
Coal Production Summary Price Received (US$/t) 31.59 43.95 46.83 45.60 44.29

3,500 80
Mine E (kt) 0 0 0 0 0
3,000 70 Cash costs (US$/t) 3.85 4.57 4.73 4.66 4.48
Price Received (US$/t) 31.59 38.69 40.41 40.02 39.08
60
Coal2,500
Production Summary All Projects (GWh) 0 0 0 0 740
Power costs (A$/MWh) 25.95
50
(A$/MWh)

2,000 Electricity Price (A$/MWh) 42.79 46.64 47.18 57.92 71.28

(GWh)

40
1,500 Profit & Loss (A$m) 2009A 2010F 2011F 2012F 2013F
30 Sales Revenue 0.0 0.0 0.0 0.0 52.8
1,000 Other Income 0.4 0.5 0.5 0.8 0.6
20 Operating Costs 0.0 0.0 0.0 0.0 19.2
Exploration Exp. 0.0 0.0 0.0 0.0 0.0
500 10 Corporate/Admin 2.5 3.4 2.6 2.7 2.8
EBITDA (2.1) (3.0) (2.1) (1.9) 31.4
0 0 Depn & Amort 0.9 0.9 1.0 1.0 6.9
EBIT (3.0) (3.9) (3.1) (2.9) 24.5
2010F

2011F

2012F

2013F

2014F

2015F

2016F

2017F

2018F
2009A

Interest 0.0 0.0 1.3 9.6 17.7

All Projects (GWh) Power costs (A$/MWh) Operating Profit (3.0) (3.9) (4.5) (12.6) 6.8
Electricity Price (A$/MWh) Tax expense 0.0 0.0 0.0 0.0 0.0
Abnormals + Minorities 0.1 0.2 0.2 0.6 (0.3)
Resources 100% Basis (Mt) NPAT (2.9) (3.7) (4.3) (11.9) 6.4
Deposit Meas. & Ind. Inf. Total
Normalised NPAT (2.9) (3.7) (4.3) (11.9) 4.4
Kingaroy
Resources - Meas.& Ind. - Inf. - Tot. 28.0 45.0 73.0 Cash Flow (A$m) 2009A 2010F 2011F 2012F 2013F
Reserves - Prov - Prob - Total 0.0 0.0 0.0 Adjusted Net Profit (2.9) (3.7) (4.3) (11.9) 6.4
+ Interest/Tax/Expl Exp 0.0 0.0 1.3 9.6 17.7
Wandoan - Interest/Tax/Expl Inc 2.0 12.9 3.4 11.7 19.8
Resources - Meas.& Ind. - Inf. - Tot. 34.0 307.0 341.0 + Depn/Amort 0.9 0.9 1.0 1.0 6.9
Reserves - Prov - Prob - Total 0.0 0.0 0.0 +/- Other (Associates) 1.8 7.2 0.0 0.0 0.0
Operating Cashflow (2.3) (8.6) (5.3) (13.0) 11.2
Latrobe - Capex (+asset sales) 8.1 11.0 50.1 166.2 79.7
Resources - Meas.& Ind. - Inf. - Tot. 0.0 0.0 0.0 - Working Capital Increase (0.0) 0.0 0.0 0.0 0.0
Reserves - Prov - Prob - Total 0.0 0.0 0.0 Free Cashflow (10.3) (19.6) (55.4) (179.2) (68.4)
- Dividends (ords & pref) 0.0 0.0 0.0 0.0 0.0
Total Resources 414.0 + Equity raised 7.5 17.9 10.0 0.0 0.0
+ Debt drawdown (repaid) (0.0) (0.2) 58.1 174.2 87.7
Directors Net Change in Cash (3.8) (1.9) 12.7 (5.0) 19.2
Name Position Cash at End Period 5.6 3.7 16.5 11.4 30.7
Malcom McAully Chairman and Non-Exec Director Net Cash/(Debt) 5.4 3.7 (41.7) (220.9) (289.3)
Len Walker Managing Director and CEO
Rodney Watson CFO & Company Secretary Balance Sheet (A$m) 2009A 2010F 2011F 2012F 2013F
Michael Dalling Non-Exec Director Cash 5.6 3.7 16.5 11.4 30.7
Total Assets 21.7 52.2 115.7 277.5 378.7
Total Debt 0.2 0.0 58.2 232.3 320.0
Total Liabilities 1.2 17.9 76.1 251.2 345.2
Significant Shareholders Shares (m) % Shareholders Funds 20.5 34.3 39.6 26.4 33.5
Len walker 108.8 11.8
Acorn Capital 42.7 4.6 Ratios
Michael Dalling 1.1 0.1 Net Debt/Equity (%) na na 105.4% 837.6% 863.7%
Malcolm McAully 0.6 0.1 Interest Cover (x) na na na na 1.4
Andrew Metcalfe 0.3 0.0 Return on Equity (%) na na na na 19.2%

RESEARCH NOTE – PATERSONS SECURITIES LIMITED 5

All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility
or liability on any account whatsoever on the part of this firm or any member or employee thereof.
1 March 2010 Cougar Energy Ltd

RESEARCH NOTE – PATERSONS SECURITIES LIMITED 6

All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility
or liability on any account whatsoever on the part of this firm or any member or employee thereof.