BRIEFING DOCUMENT TO PORTFOLIO COMMITTEE ON FINANCING OF

BRIEFING DOCUMENT TO PORTFOLIO COMMITTEE ON FINANCING OF BEE IN THE EXPLORATION PETROLEUM, GAS & MINERALS SECTORS in association with & March 2003 SEITLHAMO ENERGY

CONTENTS u u u u u Presentation Purpose and Presentor Introduction - AMEF Current Status of BEE in the SA Exploration Industry - SE Barriers to BEE Entry - SE Key BEE Financing Risk Barriers - BOR Red Herrings of some BEE Financing Structures - BOR Financing & Other Mitigation Strategies - BOR Sample BEE Exploration Financing Structure – BOR Questions & Answers - ALL Presentors Contact Details Annexures 2

THE PURPOSE OF THIS PRESENTATION IS TO… u u Discuss some of the barrier’s to BEE financing in the exploration sectors of the SA Petroleum, Liquid Fuels, Gas and Minerals industries; and Present & discuss possible solutions relating to financing of BEE in these critical and essential SA economy industries; 3

ABOUT AMEF u AMEF was established to assist and promote BEE in the mineral and energy sectors of SA economy to: v v v To promote active participation of Black Business in the Minerals and Energy sector; To rapidly achieve commercially sustainable market share of at least 25% by BEE companies in the relevant sectors; To assist in overcoming barriers to entry and building capacity of AMEF members; To create forums for networking with government, industry and other BEE initiates; To address disparities in the availability of energy services; and To promote training and development programmes 4

ABOUT BORONGWA u u Borongwa is a majority black female owned, operated and managed entity formed to exploit sustainable income and dividend investment opportunities in the ENERGY, RESOURCES, Infrastructure & Logistics and Trading arenas; The entrepreneur founders have acquired vast and valuable experience in business and corporates during their careers and business ventures; As a South African women’s group Borongwa’s focus is to invest and be “meaningfully involved” in profitable long term appreciable investment opportunities; and Borongwa is committed to the sustainable economic growth, transformation and entrepreneurial and SMME development of South Africa through an integrated partnership approach 5

ABOUT SEITLHAMO u u Seitlhamo Energy is wholly black energy company focused on the SA gas market with emphasis on developing the HDE in the Liquefied Petroleum Gas market; Seitlhamo’s primary mission is to positively impact the lives of South Africans through the economic, social and safety of investing in the SA LPG market; Seeks to positioning itself to become the leader in the Liquid Petroleum Gas market in mainstream South Africa; and The company has begun to develop extensive distribution networks. Essential relationships are being established with the people these companies serve. These relationships are expected to hold great potential for ensuring the advancement of HDE’s in the SA Gas Market 6

CURRENT STATUS OF BEE IN OFFSHORE EXPLORATION 1. There are no known established BEE company’s in the SA Offshore Exploration Petroleum or Gas Arenas; 2. Only a few Historically Disadvantaged SA (HDSA) companies have started to penetrated the downstream SA Liquid Gas & Petroleum arenas; 3. To help facilitate BEE in the SA Upstream market, PASA requires that each SA offshore exploration licensee have: 1. 2. At least a 10% BEE partner; and At least a 10% co-nominated free carry by the state 7

BARRIERS TO BEE ENTRY Illustrative example 8

KEY BEE FINANCING BARRIERS Illustrative example 9

RED HERRINGS OF SOME BEE STRUCTURES u u u Deliberate Cash Traps; Dividends Only Structures; Transfer Pricing Schemes; Exorbitant Management Fee Contracts; IRR Returns less than the Cost of Capital (Ke); Exclusion of BEE from High Value / High Margin Operational Activities; High Funding Costs / Exorbitant Financial Institution Rates; Excessive Debt Covenants / Debt Service Provision Restrictions; Inflexible Repayment Terms; Double Dipping (i. e. Inflation Linked Mark-ups); and Inappropriate Balance of Risk Return (i. e. up side carry on concessions) 10

FINANCING MITIGATION STRATEGIES u u u u PPP’s; Assured off-take agreement contracts; Sponsor support agreement; Full Allocation of New Exploration permits and licenses to HDSA companies; Extraordinary BEE Investment Tax Credits; Tax Free Special Project Bonds; Structure debt to enhance shareholder returns (prefs, lower Ke); Fund Equity Stake out of Future Operational Revenues; Higher Energy Prices; Exploration Fund for Jr. BEE Companies; Preference and Cumulative Dividend Distribution Policy; Fixed Rate Debt and/or funding from favorable tax rate payers; Increase GTL Market Incentives / demand 11

OTHER MITIGATION STRATEGIES u u u u Participation by BEE’s in High Value Chain Areas; BEE Regulatory Framework; Create a Petroleum, Gas & Minerals studies curriculum; Formation of accredited SA exploration training programs; Broader participation by industry players in various BEE summits and colloquiums; BEE measuring and monitoring system / Comprehensive industry Scorecards; Encourage and Support early participation by BEE in these industries 12

RISK MITIGATION MATRIX Illustrative example 13

EXPLORATION FINANCING STRUCTURE Other Strategic & Third Party Investors HDSA’s / HDE’s Equity and/or Project Company Cash Infusion Project Co. / JV 4 Acquisition of Project Co. & equity stake Call option 8 2 6 BEENew. Co Put option Allocation of portion excess operational profits & dividends 5 1 Provider of BEECo Debt/Pref. /Equity Funding Funders / Lenders BEE Value Proposition Net Profit Proceeds Reasonable operational costs BEENew. Co Escrow & Sinking Fund Account 7 8 3 Redemption of HDE’s debt & equity Funding Reinvestment of portion excess operational profits & dividends A variety of financing structures need to be thoroughly considered when evaluating exploration opportunities for BEE 14

TRANSACTION & OPERATION STEPS 1. A BEENew. Co to be formed, with ordinary shares & members including empowerment shareholders (say 26%); 2. Members to contribute an agreed cash capital infusion amount to a newly formed Project Co JV; Empowerment partners could raise investment capital in the following ways: 3. A. BEENew. Co to issue BEENew. Co CPI-linked debt, P/N’s or pref shares to the market whereby lenders could look solely to the proceeds of income from the Project. Co JV; or B. In the alternative, a funder could provide a predetermined amount of debt and/or subscribe for cumulative redeemable preference shares in BEENew. Co with attached calls for developed production. Such call Options would grant a sponsor the right to buy a predetermined amount of annual production attributable to the BEENew. Co at a pre-agreed price; or C. Non-HDE sponsor to consider utilizing its own Balance Sheet to fund a significant portion of BEENew. Co funding by issuing different class shares and then on lends to BEENew. Co at par or with a markup; or D. Construct tax efficient annuity insurance policy to procure BEE funding 15

TRANSACTION & OPERATION STEPS 4. BEENew. Co to utilize the funder proceeds to acquire stakes in Project Co JV 5. BEENew. Co consortium members would be operational and create a value proposition in the Project Co JV. Revenue stream from these activities will flow through the various BEENew. Co & Project Co JV’s 6. Agreed Net Profit & Dividend Allocations, Management and Debt Service fees from Project. Co JV to flow directly into BEENew. Co Escrow & Sinking fund. 7. Trustees of BEENew. Co Escrow & sinking fund to use the income to cover reasonable BEENew. Co operational & management agreement costs and also settle in order of priority its debt and preference equity redemption requirements to lender’s 16

KEY FEATURES OF SUCH STRUCTURES Such structures take into account the follow key characteristics and assumptions: u Complies with the legislative requirements of the RSA government for the Petroleum, Gas and Minerals industries; u Offers a more tax efficient and value proposition for shareholder’s; u Allows for funding flexibility as well as broader based empowerment; u Effective value for money proposition for existing shareholders; 17

KEY FEATURES OF SUCH STRUCTURES Such structures takes into account the follow key characteristics and assumptions: u Outside funder ability to underwrite the equity contributions of BEENew. Co consortium members; u Strong demand from the market and pension funds for higher yielding inflation linked debt; u The revenue payable & profits procured by the BEENew. Co should be sufficient to pay principal and interest (or at least interest) on the BEENew. Co funding 18

QUESTIONS AND ANSWERS

PRESENTORS CONTACT DETAILS Siviwe Mafanya - AMEF Telephone: +27 11 783 5583 Mobile: 082 -804 -8544 Fax: +27 11 784 5588 E-mail: siviwe@africoil. co. za Janice Van Wyk – Borongwa Holdings & Investments (Women’s Group) Telephone: +27 11 241 3900/838 0408 Mobile: 082 -821 -3742 Fax: +27 11 838 0407 E-mail: jvwyk@yasny. co. za Borongwaj@yasny. co. za Rudy Roberts – Seitlhamo Energy Group Mobile: 083 -602 -0511 E-mail: rudyr@telkomsa. net

ANNEXURE RELATIONSHIP STRUCTURE BREAKDOWN OF SAMPLE BEE FINANCING STRUCTURE

CONTRACTUAL RELATIONSHIP Other Strategic & Third Party Investors HDSA’s/HDE’s Equity and/or Project Company Cash Infusion Lender’s 3 2 Provider of BEENew. Co Debt/Pref. /Equity Funding BEENew. Co 1 Consortium Operations & Asset Management Agreement Non HDE Sponsor/Partners 2 Production Call option 4 Acquisition of Equity Stake in Project Co. 7 Redemption by BEENew. Co trustees of BEESPV shareholder loans & preference share funding BEE Escrow & Sinking Fund Account Project. Co JV Put option Convertible stock swap into the Non-HDE sponsors stcck in event of default of principal and interest Equity and/or Project Company Cash Infusion 22

OPERATIONS CASHFLOW RELATIONSHIP 7 HDSA’s FUNDER Put / Call Option Redemption of HDE’s debt & equity Funding Put option 6 BEENew. Co 5 Project. CO JV BEE Value Proposition and Operations & Management Agreement 7 8 Allocation of portion excess operational profits & dividends BEENew. Co ESCROW & SINKING FUND ACCOUNT Reinvestment of portion excess operational profits & dividends Reasonable operational costs 23 Net Profit Proceeds 8

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