ICAC investigation Operation Acacia – Pending Government decision on Doyles Creek Mining

TO: The Hon Barry O’Farrell MP
Premier of New South Wales
Minister for Western Sydney
Level 40, Governor Macquarie Tower 1, Farrer Place
SYDNEY NSW 2000, Australia

Dear Premier,

we are writing to you on behalf of the Crocodile Capital Fund, who is a substantial investor in NuCoal Resources Ltd, “NuCoal”, shareholding more than 3% of the company. As you are aware, NuCoal acquired the licence to explore for coal at Jerry s Plains by taking over Doyles Creek Mining in 2010.

We, Crocodile Capital Partners GmbH are the acting and responsible portfolio manager of the Crocodile Capital Fund, an Investment Fund with a global investment approach based in Luxembourg, which is mostly funded by retirement savings of German entrepreneurs. Crocodile Capital has been a substantial investor in Australia. Since 2008, we have made investments in Gloucester Coal, Whitehaven Coal, MacArthur Coal, Centennial Coal, Felix Resources, South Australian Coal, White Energy Co., NuCoal Resources, Malabar Coal, Special Fashion Group, Hillgrove Resources and amaysim Australia totaling over A$ 70 million.

Despite proper due diligence by NuCoal during the acquisition process, we are advised by the Company’s Chairman, Mr. Gait, that there was no hint that there were any questions about EL 7270 that Doyles Creek Mining held over Jerry s Plains. Certainly, when Crocodile Capital purchased its shares, it relied on the records kept by the New South Wales Government in relation to the tenement in question and – as a professional investor – we carried out all proper inquiries that revealed no irregularity. Crocodile Capital also relied on the public disclosure obligations imposed on NuCoal as a public Company and its compliance with the Corporations Law and listing rules, especially in relation to disclosure, when it increased its holding in NuCoal substantially during various capital increases. We also considered New South Wales and Australia as a reliable investment destination with little record of high level corruption.

We share the dismay of residents in NSW at the findings of the ICAC inquiry which has found corruption at work in the New South Wales Government’s granting of an Exploration Licence to Doyles Creek Mining then run by Mr. John Maitland. As shareholders of NuCoal, we had to patiently watch as the value of our investment has been eroded over the recent years because of delays due to the ICAC inquiry, the failure to complete NuCoal’s joint venture with Mitsui Matsushima International Pty Ltd. by the June, 30t h, 2013 deadline and now ICAC’s expression of doubts over the future of EL 7270 and NuCoal’s future rights to explore and mine the tenement.

While we fully support the rights of ICAC it has to conduct the process, and we abhor the conduct of former Government and Union officials that ICAC has unearthed, we find we are innocent and forgotten victims of a failure by the State Government of New South Wales to conduct a corruption free and reliable licensing regime that innocent third parties like Crocodile Capital can rely on when investing.

The purpose of this letter is to seek a legitimate way that Crocodile Capital can join the debate now going on about the future of this licence and NuCoal’s rights to explore and develop the resource. We understand that following ICAC’s next report, it is your State government’s responsibility to decide on the further proceedings regarding NuCoal’s rights under the Exploration Licence.

Crocodile Capital would like to be heard on this issue and it seeks your advice on how we might do this properly. In the meantime Crocodile Capital does not want to interfere in the New South Wales Government’s internal decision-making process, but it wants to make the following submissions:

1. Truly innocent shareholders of a public company like NuCoal need to be protected to the extent possible. They invested in good faith in a great project which will benefit not only investors but unlock real value for residents of NSW through employment, royalties, taxes, training and payments to third party contractors and suppliers. On the Macro level Australia benefits from such investment as well.

2. Crocodile Capital is not only an innocent investor, but when it invested substantial capital, it relied on the transparency of NuCoal’s public disclosure obligations as a public company and relied especially on the NSW Government’s honesty in its dealings with licences and the proper governance the NSW government is expected to apply in issuing licences such as EL 7270.

3. With the Chinese investment boom receding over time, Australia is depending even more on long term foreign investors to continue to finance its current account deficit. Crocodile Capital currently owns further investments in New South Wales – also in other sectors. Crocodile Capital and all other local and foreign investors need to know, that if the proper legal and commercial transparency and governance in NSW or in any Australian State is not adhered to strictly and an investor acting in good faith has to suffer severe losses (in our case exceeding A$ 10 million), that the State Government will work with the innocent victims to agree an appropriate outcome which helps redress damage to the citizens of NSW and the damage to investors. One should not be favored over the other.

4. The future of NSW’s and Australia’s reputation as an investment destination is at stake here.

5. Crocodile Capital has some suggestions for a solution, which meet the need for balance referred to in point three above.

For example, ICAC has already acknowledged, that NuCoal obtained the licence too cheaply and has made the suggestion, then rather than take the licence away (and delay this valuable project subsequently for many years) to apply an additional fee by the NSW government when it issues a mining licence over the EL 7270 tenement As a valuation benchmark, it makes sense to rely on the licencing proceeds received for Malabar Coal’s Spur Hill project, whose EL is covering more or less a project of similar size and coal quality and is located just next door to Doyles Creek. There should also be an adjustment for market valuations; in December 2008, those valuations were extremely low and we think it is inappropriate to benchmark the pricing at levels paid during the boom times before the GFC or after the subsequent recovery.

NuCoal and its owners have already suffered a massive cash outlay to maintain the project’s life support due to the delays which in turn led to the breakdown of the attractive financing arrangements with Mitsui. These arrangements are lost forever. To help compensate for the damage to the project and to its legitimate supporters (caused by the extremely lengthy investigation process) our suggestion would be to allow NuCoal to proceed, but amortize any additional licencing fee charge – including interest – by allowing NuCoal to pay an additional royalty surcharge to the State over the first production years. This will fully compensate NSW for the revenue difference to the initial fee paid when the former government granted the EL in December 2008.

Our proposed solution would be a win for all parties: the project can proceed with the benefits for all stakeholders described above, NuCoal’s innocent shareholders have a chance to recover their investment and maybe get a return, NSW citizens will be retroactively compensated as if there was no corruption in the first place and the State’s reputation for secure investment will be maintained. This does not compromise any of the referrals to the Commonwealth DPP that ICAC has proposed. In our view, this would be a very balanced and responsible mediation result that takes into account all reasonable stakeholder interests.

We at Crocodile Capital would be grateful if you would discuss this letter within your government and then use your discretion to make a responsible compensation and compromise decision in favor of all innocent parties involved, including the citizens of NSW. We think this is not only proper and fair but also important as part of re-building NSW’s reputation as a safe place to invest in public companies that have NSW based projects.

Finally, we would welcome any feedback and are willing to contribute constructively to a fair and responsible solution finding process.

Yours sincerely
Josef Heimann
Managing Director
Crocodile Capital Partners GmbH


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