Interim Financial Report

FINANCIAL REPORT

FOR THE HALF YEAR-ENDED

31 DECEMBER 2013

CORPORATE DIRECTORY

Index

The reports and statements set out below comprise the half-year report presented to shareholders:

The Directors of Coal of Africa Limited ("CoAL" or "the Company") submit herewith the financial report of Coal of Africa Limited and its subsidiaries ("the Group") for the half-year ended 31 December 2013. All amounts expressed in US Dollars unless stated otherwise.

In order to comply with the provision of the Corporations Act 2001, the directors report as follows:

Directors

The Names of the directors of the company during or since the end of the half-year are:

Review of Operations

Principal activity and nature of operations

The principal activity of the Company and its subsidiaries is the acquisition, exploration and development of thermal and metallurgical coal properties in South Africa.

The Company's principal coking and thermal coal assets and projects include:

· The near-term development project, the Vele Colliery;

· The Makhado Project and the Greater Soutpansberg Project ("GSP") comprising three exploration stage coking and thermal coal projects, namely The Chapudi, Mopane and Generaal Projects; and

· Two non-core thermal assets, the Woestalleen and Mooiplaats collieries which are classified as 'Operations held for sale'.

Operations

The Company's focus on safety continued and no lost time incidents ("LTIs") were recorded during the six months (FY2013 H1: 10 LTIs).

The restructuring of CoAL continued during the period and resulted in the disposal of the Woestalleen Complex near Middelburg in Mpumalanga. The Company satisfied suspensive conditions of the transaction and by the end of December 2013, only the conditions requiring regulatory approval were outstanding. This was received at the end of January 2014 with the flow of funds in March 2014. The Opgoedenhoop New Order Mining Right ("NOMR") previously formed part of the Woestalleen Complex and was subject to a separate disposal process. The Company is awaiting regulatory approval for the transaction, expected in Q1 CY2014.

The Mooiplaats Colliery (near Ermelo) in Mpumalanga was placed on care and maintenance in August 2013, at which time it was producing Eskom quality coal only. The colliery is undergoing a formal disposal process which is expected to be completed during CY2014. During December 2013 the Company agreed to sell the Holfontein thermal coal project near Secunda, also in Mpumalanga, and received an option fee of ZAR5 million (US$0.5 million) for a one year option, extendable for further periods on the payment of additional option fees. The Company expects the buyer to exercise its option in CY2014 and once legislative approval for the transaction is granted, the purchase price of ZAR50 million (US$4.8 million) will become payable to CoAL.

During the six months ended December 2013, CoAL converted its interest in ASX listed Lemur Resources Limited into Bushveld Minerals Limited ("Bushveld") shares. Bushveld is listed on AIM (London) and CoAL is in the process of disposing of these shares, expected to be completed in CY2014.

As well as the restructuring of its various non-core assets, CoAL undertook processes to decrease overhead costs which included a reduction in staff numbers at its corporate office as well as its projects. These processes were completed by July 2013 and together with the relocation of the corporate office in Johannesburg, resulted in significant cost savings.

A further step in the turnaround strategy required the confirmation of the Vele Colliery coal quality. During the period the Company supplied samples of semi-soft coking coal to ArcelorMittal South Africa Limited ("AMSA") for tests in their coke batteries. The semi-soft coking coal test results were favourable, (meeting all of AMSA's technical requirements) and in January 2014 the Company received a Letter of Intent ("LoI") for the supply of coal. Both AMSA and CoAL wish to convert the LoI into a formal off-take agreement dependent on agreement on pricing parameters. Furthermore Eskom, the state power utility, successfully undertook combustion tests on Vele thermal coal and the parties are to hold further discussions with regards to a potential off-take agreement.

In terms of South African mining legislation, the Company requires a 26% Black Economic Empowerment ("BEE") shareholding for its mining and exploration projects. The Company is at an advanced stage of finalising agreements to enable a broad based BEE consortium (including communities and future employees) to acquire 26% of the Makhado Project. The Company estimates the Makhado Project Net Present Value to be in excess of ZAR6.9 billion (US$ 656.9 million) and is planned to produce over two million tonnes per annum ("Mtpa") of hard coking coal and over three Mtpa of Eskom quality thermal coal. The construction of the project, including ramp-up, is expected to take 26 months commencing in CY2015 and has an initial life of mine of 16 years. The inclusion of a BEE shareholder ensures that the project has the requisite corporate structure for the granting of the NOMR and in time, the Makhado Project will benefit one of the poorest areas in South Africa. 

Vele Colliery Plant Modification

The confirmation of the Vele coal's semi-soft coking coal characteristics by AMSA during the reporting period resulted in the scaling down of operations in anticipation of the processing plant modifications. The Company approached potential contractors for the detailed design and construction of the modification and in February 2014, appointed Sedgman South Africa ("Sedgman") to complete the three month front-end engineering and design ("FEED"). The FEED will enable CoAL to arrive at a class 1 EPC estimate and once complete, will increase the processing capacity to 2.7 Mtpa of run of mine ("ROM") coal and the simultaneous production of three products, namely:

· Semi-soft coking coal;

· Sized thermal coal for the regional market; and

· Thermal coal for Eskom.

The Vele Colliery has a life of mine in excess of 50 years. The Company estimates that it will cost approximately ZAR450.0 million (US$42.8 million) to complete the plant modification (including mine development and ramp up costs), funded by a combination of debt and equity, and has commenced discussions with South African financing institutions which is expected to be agreed by the end of Q1 CY2014. Plant modifications will be completed in H1 CY2015, followed by a three month ramp-up period.

Current and future funding

During the reporting period the balances outstanding under the Deutsche Bank trade finance facility and the Investec Bank Limited ("Investec") derivative facility were repaid. Furthermore the Company secured a ZAR210.0 million (US$20.0 million) facility from Investec in October 2013 and has drawn ZAR107.0 million (US$10.2 million) of this for general working capital requirements. The Investec facility will be repaid using the proceeds from the disposal of non-core assets.

The Company has a long term project pipeline and the modification of the Vele plant and the development of the Makhado Project will be followed by the development of the GSP project areas. The development of the Company's significant coking and thermal coal resources is expected to be funded by a combination of debt and equity.

Financial review

The loss for the six months under review amounted to US$46.3 million, or 4.42 cents per share compared to a loss of US$111.7 million, or 14.39 cents per share for the prior corresponding period.

The loss for the period under review of US$46.3 million (H12012: US$111.7 million) includes non-cash charges of US$30.3 million (H12012: US$96.1 million) as follows:

· Mooiplaats impairment loss of US$16.5 million (US$50.0 million in the six months ended 31 December 2012);

· net foreign exchange losses of US$12.6 million (2012: US$19.9 million) arising from the translation of inter-group loan balances, borrowings and cash due to changes in the ZAR:AUD exchange rate during the period;

· depreciation of US$0.7 million (2012: US$9.8 million) and amortisation of US$0.5 million (2012: US$9.4 million) contributed further to the non-cash charges;

· loss of nil due to the discount on early settlement of the Grindrod receivable (2012: US$2.7 million); and

· loss of nil (2012: US$4.3 million) on the fair value adjustment of the Investec equity derivative financing package.

As a result of the exclusion of impairment losses from the headline earnings calculations, the headline loss per share (as explained in Note 12 to the financial report) reduced from 7.95 cents in the prior corresponding period, to 2.85 cents per share during the six months under review.

As at 31 December 2013, the Company had cash and cash equivalents of US$4.2 million compared to cash and cash equivalents of US$29.9 million at 30 June 2013.

Authorised and issued share capital

CoAL had 1,048,368,613 fully paid ordinary shares in issue as at 31 December 2013. The holders of ordinary shares are entitled to one vote per share and are entitled to receive dividends when declared.

Dividends

No dividends were declared or paid during the six months.

Highlights and events after the reporting period

· On 31 January 2014, the Department of Mineral Resources ("DMR") granted Section 11 approval in terms of the Mineral and Petroleum Resources Development Act ("MPRDA") for the disposal of the Woestalleen Complex. The sale consideration of ZAR80 million (US$7.6million) was received on 6 March 2014.

· David Brown was appointed as Chief Executive Officer ("CEO") and Executive Director and Bernard Pryor was appointed Chairman, effective 1 February 2014.

· Appointment of Sedgman as the engineer for the FEED of the Vele Colliery plant modification.

Outlook

Good progress has been made on all elements of the turnaround strategy. The placement of the loss making Mooiplaats Colliery on care and maintenance and the commencement of a formal sales process, as well as the disposals of the Woestalleen Complex, Holfontein project and Bushveld investment are at various stages of completion and are all expected to be completed during CY2014. The confirmation of the Vele Colliery semi-soft coking coal qualities by AMSA could, subject to the requisite funds being raised, result in the commencement of the project's processing plant modifications, expected to be completed in H1 CY2015. The granting of the Makhado Project NOMR is expected to occur in CY2014 with the 26 month construction period commencing in CY2015, again subject to the required funding being available.

Rounding off of amounts

The company is a company of the kind referred to in ASIC Class Order 98/100, date 10 July 1998, and in accordance with that Class Order amounts in the directors' report and the half-year financial report are rounded off to the nearest thousand dollars, unless otherwise indicated.

Auditor's Independence Declaration

Acopy of the auditor's independence declaration as required under Section 307C of the Corporations Act 2001 is set out on page 28.

The half-year report set out on pages 8 to 27, which has been approved on the going concern basis, was approved by the board on 9 March 2014 and was signed on its behalf by:

________________________________

David Brown

Director

Dated at Johannesburg, South Africa, this 9th day of March 2014.

The accompanying notes are an integral part of these condensed consolidated financial statements

1. Corporate information

The financial report of Coal of Africa Limited ("CoAL" or the "Company") for the half-year ended 31 December 2013 was authorised for issue in accordance with a resolution of the directors on 9 March 2014. CoAL is a company incorporated in Australia and limited by shares, which are publicly traded on the Australian Securities Exchange ("ASX"), the AIM market of the London Stock Exchange ("AIM") and the Johannesburg Stock Exchange ("JSE").

The nature of the operations and principal activities of the Company and its subsidiaries (the "Group" or the "Consolidated Entity") are described in the Directors' Report.

2. Summary of significant accounting policies

Statement of compliance

The half-year financial report is a general purpose financial report prepared in accordance with the requirements of the Corporations Act 2001 and AASB 134: Interim Financial Reporting. Compliance with AASB 134 ensures compliance with International Financial Reporting Standard IAS 34 'Interim Financial Reporting'. The half-year report does not include notes of the type normally included in an annual financial report and should be read in conjunction with the most recent annual financial report.

Basis of preparation

The half-year condensed consolidated financial statements have been prepared on the basis of historical cost, except for the revaluation of financial instruments. Cost is based on the fair values of the consideration given in exchange for assets.

All amounts are presented in United States dollars, unless otherwise noted.

The accounting policies and methods of computation adopted in the preparation of the half-year financial report are consistent with those adopted and disclosed in the company's 2013 annual financial report for the financial year ended 30 June 2013, except for the impact of the Standard and Interpretations described below. These accounting policies are consistent with the Australian Accounting Standards and with International Financial Reporting Standards ("IFRS"). The Group has revised the presentation of its condensed consolidated financial statements from those reported as at and for the half-year ended 31 December 2012 to take into account the decision to classify its thermal assets as operations held for sale. These revisions had no impact on net loss, total assets or total equity.

The Group has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board ("the AASB") that are relevant to their operations and effective for the current reporting period.

New and revised Standards and amendments thereof and Interpretations effective for the current half-year that are relevant to the Group include:

· AASB 10 'Consolidated Financial Statements'

· AASB 11 'Joint Arrangements'

· AASB 12 'Disclosure of Interests in Other Entities'

· AASB 127 'Separate Financial Statements'

· AASB 13 'Fair value Measurement'

The adoption of all the new and revised Standards and Interpretations has not resulted in any changes to the Group's accounting policies and has no effect on the amounts reported for the current or prior half-years.

2. Summary of significant accounting policies (continued)

AASB 12 requires the extensive disclosure of information that enables users of financial statement to evaluate the nature of, and risks associated with, interest in other entities and the effects of those interests on its financial position, financial performance and cash flows.

AASB 13 Fair value measurement, which has been issued and is effective for accounting periods beginning on or after 1 January 2013, establishes a single source of guidance under accounting standards for all fair value measurements. AASB 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under AASBs when fair value is required or permitted. The application of AASB 13 did not have a material impact on the amounts recognised in the Consolidated Interim Financial Statements.

3. GOING CONCERN

These consolidated financial statements have been prepared on the going concern basis, which contemplates the continuity of normal business activities and the realisation of assets and the settlement of liabilities in the normal course of business.

The Consolidated Entity has incurred a reduced net loss after tax for the period ended 31 December 2013 of US$46.3 million (31 December 2012: loss of US$111.7 million), including a non-cash impairment of US$16.5 million on the Mooiplaats Colliery, realised and unrealised foreign exchange losses of US$12.6 million and depreciation and amortisation charges of US$1.3 million. During the period ended 31 December 2013, net cash outflows from operating activities were US$21.8 million (31 December 2012 net outflow: US$31.9 million) and net cash outflows from investing activities were US$2.2 million (31 December 2012 net outflow: US$44.1 million). As at 31 December 2013 the Consolidated Entity had a net current liability position of US$37.3 million (30 June 2013: net current assets of US$13.8 million), excluding assets and liabilities classified as held for sale.

As part of the process to raise additional funding for the business during the reporting period, the Company has performed the following fundraising activities:

· In October 2013, the Consolidated Entity secured a working capital facility with Investec Bank Limited for ZAR210 million (US$20.0 million) of which ZAR107 million (US$10.2 million) was drawn down on 30 October 2013. Refer to Note 10 for further details of the facility.

During the period ended 31 December 2013 and up to the date of this report the Company also identified certain key deliverables to ensure that the Consolidated Entity continues as a going concern. These include:

· The sale of the Woestalleen Complex was finalised following receipt of Section 11 approval from the Department of Mineral Resources on 31 January 2014. The sale consideration of ZAR80 million (US$7.6 million) was received on 6 March 2014;

· The Company commenced a process for the sale of the Mooiplaats Colliery; and

· The Company commenced negotiations with Rio Tinto with regard to the payment of US$30.0 million (refer Note 9) that will become due within the next 12 months.

Over the next three to twelve months, the Directors have identified certain key deliverables to ensure that the Consolidated Entity continues as a going concern. The ability of the Consolidated Entity to continue as a going concern and to pay its debts as and when they fall due is dependent on: 

· The successful conclusion of additional funding from either financial institutions or the equity markets to meet planned commitments; 

· The successful conclusion of negotiations with Rio Tinto with respect to the timing of the settlement of the US$30.0 million liability in order to match the Company's available cash resources; and

· The sale of other non-core assets during the next twelve months (as contemplated in Note 11) including the release of the associated cash backed rehabilitation guarantees for these assets and the receipt of proceeds from the sale of other financial assets.

3. GOING CONCERN (continued)

At the date of this report and having considered the above factors, the Directors are confident that the Consolidated Entity will achieve the matters set out above and accordingly will be able to continue as a going concern.

In the event that the Consolidated Entity does not achieve successful outcomes in relation to the matters set out above, significant uncertainty would exist as to the ability of the Consolidated Entity to continue as a going concern and, therefore, the Consolidated Entity may be unable to realise its assets and discharge its liabilities in the normal course of business and at the amounts stated in the financial report.

The half-year financial report does not include adjustments relating to the recoverability and classification of recorded asset amounts, nor to the amounts and classification of liabilities that might be necessary should the Consolidated Entity not continue as a going concern.

4. DIVIDENDS

No dividend has been paid or is proposed in respect of the half-year ended 31 December 2013 (2012: None).

5. ISSUED CAPITAL

There were no changes to the issued capital during the half-year.

Fully paid ordinary shares carry one vote per share and carry the right to dividends.

Options

Thefollowing unlisted options to subscribe for ordinary fully paid shares are outstanding at 31 December 2013:

* 1 Option to subscribe for 50 million ordinary shares for 60 pence each between 1 November 2010 and 1 November 2014 as approved by shareholders on 22 April 2010.

** Issued to Investec as part of the short term bridging facility and vest six months after granting.

6. DEVELOPMENT, EXPLORATION AND EVALUATION ASSETS

7. PROPERTY, PLANT AND EQUIPMENT

8. ASSETS HELD FOR SALE

8. ASSETS HELD FOR SALE (continued)

9. DEFERRED CONSIDERATION

Notwithstanding that the Company is currently in negotiations with Rio Tinto to defer the payments with respect to the US$30.0 million that is due in October 2014, the payable has been reflected as current in the balance sheet as at 31 December 2013, as no formal agreement to defer the payment has been reached yet.

The Company is confident that they will be successful in negotiating the deferment of the payment.

10. BORROWINGS

Borrowings are made up as follows:

The Company, through its wholly owned subsidiary GVM Metals Administration (South Africa) (Pty) Ltd has secured an 18-month, ZAR210 million (approximately US$20.0 million) working capital facility from Investec.

The principal terms of the loan include a margin of 500 basis points, pledge and cession of the shares and loan accounts in the major operating subsidiaries of the Group. In addition, CoAL will issue 20 million options to Investec which are exercisable at ZAR1.32 before October 2018.

The effective interest rate is 21.02% based on the expected payments.

The fair value of the option component was determined using the following assumptions:

· a risk-free rate of 6.6%

· a volatility index of 55.0%

· a dividend yield of 0%

· the options vest on 21 April 2014.

The facility is subject to certain covenants associated with a facility of this nature. The covenants include amongst others, maintaining a certain minimum cash level. As at the date of this report, there have been no breaches of covenants applicable to the loan.

11. OPERATIONS HELD FOR SALE

12. LOSS PER SHARE

Headline loss per share (In line with JSE listing requirements)

The calculation of headline loss per share at 31 December 2013 was based on the headline loss attributable to ordinary equity holders of the Company of US$29.8 million (2012: US$61.7 million) and a weighted average number of ordinary shares outstanding during the period ended 31 December 2013 of 1,048,368,613 (2012: 775,886,462).

The adjustments made to arrive at the headline loss are as follows:

13. CASH AND CASH EQUIVALENTS

14. CONTINGENT LIABILITIES

In accordance with normal industry practice, the Company has agreed to provide financial support to its controlled entities.

The Group is currently involved in litigation as outlined below (US$ amounts presented within have been computed using the exchange rate as at 31 December 2013 unless otherwise stated):

Envicoal Proprietary Limited / NuCoal Mining Proprietary Limited

Envicoal launched arbitration proceedings against NuCoal claiming that NuCoal failed to deliver coal as prescribed in terms of the agreement concluded between the parties. As a result, Envicoal has claimed damages to the value of ZAR115.7 million (US$11.0 million), alternatively ZAR50.6 million (US$4.8 million). Both amounts exclude VAT and interest. The arbitration proceedings have commenced but were postponed until April 2014.

The Group has contingent liabilities as listed below:

Ferret Mining Proprietary Limited

During the period, Ferret's 26% shareholding in Mooiplaats Mining Limited was re-instated. Although they are not entitled to any assets or claims in the Mooiplaats group, they are entitled to receive ZAR10.0 million (US$1.0 million) upon the successful disposal of the Mooiplaats Colliery.

There are no other significant contingent liabilities as at 31 December 2013.

15. EVENTS SUBSEQUENT TO REPORTING DATE

· On 31 January 2014, the Department of Mineral Resources ("DMR") granted Section 11 approval in terms of the MPRDA for the disposal of Woestalleen Complex. The sale consideration of ZAR80 million (US$7.6 million) was received on 6 March 2014.

· David Brown was appointed as CEO and Executive Director and Bernard Pryor was appointed Chairman, effective 1 February 2014.

· Appointment of Sedgman as the engineer for the FEED of the Vele Colliery plant modification.

16. SEGMENTAL INFORMATION

The Group has three reportable segments: Exploration, Development and Mining.

The Exploration segment is involved in the search for resources suitable for commercial exploitation, and the determination of the technical feasibility and commercial viability of resources. As at 31 December 2013, projects within this reportable segment include three exploration and development stage coking and thermal coal complexes, namely the Chapudi Complex (which comprises the Chapudi project, the Chapudi West project and the Wildebeesthoek project), the Soutpansberg Complex (which comprises the Voorburg project, the Mt Stuart project and the Jutland project) and the Makhado Complex (comprising the Makhado project, the Makhado Extension project and the Generaal project).

The Development segment is engaged in establishing access to and commissioning facilities to extract, treat and transport production from the mineral reserve, and other preparations for commercial production. As at 31 December 2013 projects included within this reportable segment include one coking coal project, namely the Vele Colliery, in the early operational and development stage.

The Mining segment is involved in day to day activities of obtaining a saleable product from the mineral reserve on a commercial scale and included the Mooiplaats Colliery and the Woestalleen Colliery. As of 30 June 2013 the Mooiplaats Colliery and the Woestalleen Colliery has been classified as operations held for sale after a decision by the Company to dispose of its thermal assets (refer Notes 8 and 11).

The Group evaluates performance on the basis of segment profitability, which represents net operating (loss) / profit earned by each reportable segment.

Each reportable segment is managed separately because, amongst other things, each reportable segment has substantially different risks.  

The Group accounts for intersegment sales and transfers as if the sales or transfers were to third parties, ie at current market prices.

The Group's reportable segments focus on the stage of project development and the product offerings of coal mines in production.

16. SEGMENTAL INFORMATION (continued)

16. SEGMENTAL INFORMATION (continued)

Reconciliations of the total segment amounts to respective items included in the consolidated financial statements are as follows:

17. FINANCIAL INSTRUMENTS

This note provides information about how the Group determines fair values of various financial assets and financial liabilities.

17.1 Fair value of the Group's financial assets and financial liabilities that are measure at fair value on a recurring basis