FINEXIA FINANCIAL GROUP LIMITED - Proxy Solicitation & Information Statement 2008

Natural Fuel Limited ABN 52 106 760 418

Notice of Meeting

and

Explanatory Memorandum to Shareholders

2008 Power Knight Proposal

Please read the Notice and Explanatory Memorandum carefully.

If you are unable to attend the meeting please complete and return the enclosed proxy form in accordance with the specified instructions.

Important Notices

Entire Information Memorandum

Shareholders are encouraged to read this Explanatory Memorandum in its entirety before making a decision on how to vote on the resolutions to be considered at the Meeting.

Purpose of Explanatory Memorandum

The Explanatory Memorandum seeks to provide information material to an assessment of the Power Knight Proposal and the Additional Matters. Shareholders may also obtain information on the Power Knight Proposal and the Additional Matters by calling + 61 (8) 9286 6788 and can access information regarding the Company from the ASX or the Company’s website at www.naturalfuel.com.au.

ASX Limited

A copy of the Explanatory Memorandum has been lodged with the ASX. Neither the ASX nor any of its officers take any responsibility.

Investment Decisions

The Explanatory Memorandum does not take into account the investment objectives, financial situation and particular needs of each individual Shareholder or any other particular person. The Explanatory Memorandum should not be relied upon as the sole basis for any investment decision in relation to any of the Company’s securities. Before making any investment decision in relation to your securities in the Company, you should consider, with or without the assistance of a securities adviser, whether that decision is appropriate in light of your particular investment needs, objectives and financial circumstances.

Date of Explanatory Memorandum

The Explanatory Memorandum is dated 7 May 2008.

Shareholder Notice of Meeting and Explanatory Memorandum

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Important Notices 1
Table of Contents 2
Letter from the Chairman 3
The Proposals at a glance 5
Actions required by Shareholders 9
Notice of general meeting 10
Explanatory memorandum to Shareholders 13
1 Introduction......................................................................................................... 13
2 Executive summary............................................................................................. 14
3 Impact of the Power Knight Proposal and Additional Matters on the Company..... 17
4 Power Knight acquisition of Shares in the Company............................................ 23
5 Natural Fuel Company Update ............................................................................ 24
6 The resolutions in detail....................................................................................... 26
7 Glossary.............................................................................................................. 33
Tropical Oils Options terms and conditions.................................................................... 35
Independent Expert’s Report......................................................................................... 42

Shareholder Notice of Meeting and Explanatory Memorandum

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Letter from the Chairman

Dear Shareholder,

We present to you a proposal to inject capital into Natural Fuel Limited ( Natural Fuel or the Company ) which, if approved, will provide vital funding. Under the proposal, Power Knight Pte Ltd ( Power Knight ), a company associated with the Jakarta based PT Risjadson Holding & Investment Co, will inject US$40 million of funding ( Power Knight Proposal ).

The Power Knight Proposal involves a US$20 million share placement and a US$20 million secured convertible project finance loan, of which US$6 million has already been advanced to the Company. If approved, the Power Knight Proposal will result in Power Knight holding 33.31% of the issued shares of the Company following the Placement and up to 49.98% if the Project Finance Loan is fully converted by Power Knight exercising the Conversion Rights (assuming in both cases that no further shares are issued). The Company has also agreed that if the Power Knight Proposal is approved, Power Knight will be entitled to appoint three directors to the Board, which will have seven directors.

The Power Knight Proposal has both financial and non financial benefits for Natural Fuel.

The funds to be injected are critical to addressing the Company’s difficult financial position. Natural Fuel will also gain a strategic investor which has substantial and diversified business interests in Indonesia and a strong interest in the development of Jatropha as a fuel crop.

The Directors consider that the Power Knight Proposal provides the best alternative available to Natural Fuel at this testing time. The Company has been actively pursing financing alternatives for several months, however these alternatives involved either terms or timing which were unacceptable.

Shareholders should be aware that failure to approve the Power Knight Proposal is likely to have serious financial consequences for the Company and the Directors would need to carefully consider the financial position of the Company and assess all available alternatives to protect the interests of shareholders and other stakeholders. The Directors consider that if they are able to secure an alternative equity raising it may need to be priced at a discount to the market price. In contrast the effective share issue price under the Power Knight Proposal is at a premium to the recent market.

The Directors have engaged Lonergan Edwards & Associates Ltd to prepare a report for shareholders on the proposal. Lonergan Edwards & Associates has concluded that the issue of securities to Power Knight under the Power Knight Proposal is fair and reasonable. The Directors recommend that you vote in favour of the Power Knight Proposal.

Shareholders are also being asked to approve the grant of options to Tropical Oils for their part in facilitating the Power Knight Proposal and the conversion of the Working Capital Loan from an entity controlled by Mike Coote, a director of the Company, into shares in the Company.

The shareholder meeting will be conducted on June 5[th] at 9am at the Parmelia Hilton Hotel, Perth, Western Australia. We urge you to vote in person or by proxy at this meeting. This is the only immediate action you must take as a result of this document.

Please carefully read the attached explanatory materials and if you have any questions, seek advice from your financial adviser. I also suggest that you read the opinion of Lonergan Edwards & Associates in the attached Independent Expert’s Report.

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We look forward to your support for the proposals, and once again strongly encourage you to have your say by voting at the Shareholders meeting on June 5[th] .

Richard Selwood Chairman Natural Fuel Limited

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The Proposals at a glance

Proposals Overview

What are the The Proposals are: Proposals? • the Power Knight Proposal; and

the Additional Matters.

The Power Knight Proposal

What is the Power Knight Proposal?

The Power Knight Proposal comprises:

the issue of Shares to Power Knight to raise US$20 million;
a Project Finance Loan of US$20 million to be advanced to the Company in two portions of US$6 million on 24 April 2008 and US$14 million in mid May 2008; and
a right for Power Knight to convert the outstanding principal amount of the Project Finance Loan into Shares.

Power Knight’s right to convert the Project Finance Loan is split into the First Tranche Conversion Right, which Power Knight may exercise at any time and the Second Tranche Conversion Right, which may only be exercised by Power Knight if Shareholders approve the Power Knight Proposal.

What is the benefit to If, implemented in full, the Power Knight Proposal has the Shareholders? following benefits for Shareholders:

an increase in Natural Fuel’s available cash resources which will facilitate the continuing execution of the Company’s ‘Asset Utilisation Strategy’;
the Company will be assisted in continuing as a going concern; and
the Company will have a new strategic partner in Power Knight.

What happens if the The Placement and Power Knight’s ability to exercise the Power Knight Second Tranche Conversion Right are conditional on Proposal is not Shareholder approval. Accordingly, the Power Knight approved? Proposal will not proceed as contemplated if Shareholders do not approve Resolution 1.

If Shareholders do not approve Resolution 1, Power Knight may still exercise the First Tranche Conversion Right and the

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Company will be unable to issue any further Shares for 12 months without Shareholder approval.

The Company intends to drawdown the second portion of the Project Finance Loan (US$14 million) in mid-May 2008. Shareholders should be aware that the full amount of the Project Finance Loan (US$20 million) is repayable within 12 months if Resolution 1 is not approved by Shareholders. Please refer to section 2.5 for further details.

The Company requires the funds which will be made available under the Power Knight Proposal by June 2008. If the Power Knight Proposal does not proceed as intended, the Directors would need to assess all available alternatives to protect the interests of Shareholders and other stakeholders. The Directors consider that if they are able to secure an alternative equity raising it may need to be priced at a discount to the market price. In contrast the effective Share issue price under the Power Knight Proposal is at a premium to the recent market.

Key effects of approving Resolution 1 for Shareholders

Power Knight will become a major Shareholder of the Company

If Shareholders approve Resolution 1, Power Knight will become the largest Shareholder in the Company. Upon the issue of the Placement Shares to Power Knight, Power Knight will hold 33.31% of Shares on issue in the Company. If Power Knight exercises the Conversion Rights and converts the Project Finance Loan into Shares, it will hold up to 49.98% of the Shares on issue in the Company (assuming in both cases that no further Shares are issued).

The shareholdings of existing Shareholders will therefore be significantly diluted.

Power Knight will have a strong Board presence

If Resolution 1 is approved and the Power Knight Proposal is implemented, Power Knight will be entitled to nominate 3 directors to be appointed to the Board. The Company has agreed that the total number of Directors will not be greater than 7. Therefore, Power Knight will have a significant presence on the Board.

Additional matters

What are the additional matters being proposed?

Two additional matters are being put to Shareholders for approval at the Meeting:

the issue of the Tropical Oils Options to Tropical Oils; and
the conversion of the outstanding balance of the Working Capital Loan into Shares.

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Implications

The issue of the Tropical Oils Options is conditional on Resolution 1 being approved. The terms of the Tropical Oils Options are set out in Annexure 1.

If, following approval of Resolution 1, the issue of the Tropical Oils Options is not approved, the Tropical Oils Options will not be issued but the Company will be required to provide alternative compensation to Tropical Oils.

The exercise of the Company’s right to convert the Working Capital Loan into Shares is conditional on Shareholders approval of the issue of Shares to Ganesha Nominees. Shareholders are being asked to approve conversion of the full principal amount of the Working Capital Loan, although the Company’s current intention is to convert only 60% of the Working Capital Loan following approval.

If the issue of Shares to Ganesha Nominees is not approved the Company will not be able to convert the loan into equity and will be forced to repay the principal amount of the loan by 31 December 2008.

Key implication for Shareholders

The structure of the There are currently 337,812,127 issued Shares in the Company’s Company. ownership will Up to approximately 384,145,341 further Shares may be change significantly issued if:

all resolutions put to Shareholders are approved;
Power Knight exercises the Conversion Rights;
the Working Capital Loan is converted in full; and
the Tropical Oils Options are exercised in full.

The Shareholdings of existing Shareholders will therefore be significantly diluted.

Recommendations, support and Independent Expert Report conclusions

Board The Power Knight Proposal and the Additional Matters are Recommendations unanimously supported by the Board. Each director recommends you vote in favour of ALL resolutions.

Independent Expert The terms and circumstances of the acquisition by Power Knight of Shares in the Company have been reviewed by Lonergan Edwards & Associates Limited whose report is set out in Annexure 2.

This report concludes that the issue of Shares to Power Knight under the Power Knight Proposal is fair and

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reasonable to Shareholders not associated with Power Knight.

Questions

If you have any questions regarding the Power Knight Proposal or the Additional Matters after having read the Explanatory Memorandum and the Independent Expert’s Report, please contact the Company Secretary on +61 8 9286 6788 or contact your financial or other profession adviser.

Information regarding Natural Fuel is available by contacting the ASX or on the Company’s website at www.naturalfuel.com.au.

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Actions required by Shareholders

Review this document in detail and seek professional advice

This document contains important information about your investment in Shares and should be read in its entirety. We encourage you to seek advice from your financial advisers before making any decisions.

Vote on the resolutions

We strongly urge you to vote in person or by proxy at the meeting of Shareholders to be conducted at 9am on 5 June 2008 at the Parmelia Hilton Hotel, 14 Mill Street, Perth, Western Australia.

Voting by proxy

A proxy form is enclosed with this document.

The instructions for completion of the proxy form are on the reverse side of the proxy form. The proxy form should be completed and returned to Security Transfers Registrars Pty Ltd:

In person: Security Transfers Registrars Pty Ltd, 770 Canning Highway, Applecross, Western Australian 6153
Or by post to: PO Box 535, Applecross, Western Australia 6953
Or by fax: +61 8 9315 2233

A reply paid envelope is enclosed for proxy forms posted from within Australia.

To be valid your proxy form must be received at the above address on or before 9am on 3 June 2008 (being 48 hours before the time of the meeting).

Voting in person at the Shareholder Meeting

Your may vote by attending the Shareholder Meeting to be held at 9am on 5 June 2008 at the Parmelia Hilton Hotel, 14 Mill Street, Perth, Western Australia.

If you are a corporate Shareholder and wish to appoint a representative to attend the Shareholder Meeting, you should ensure that your representative can provide appropriate evidence of his or her appointment.

Your may appoint another person by power of attorney to attend the Shareholder Meeting and vote on your behalf. Appropriate evidence of the grant of the power of attorney must be received at the above address on or before 9am on 3 June 2008 (being 48 hours before the time of the meeting).

Voting restrictions

There are voting restrictions which apply to certain resolutions. These are explained in the Notice of Meeting. If you are in any doubt as to your entitlement to vote, please contact your financial or other professional adviser.

Questions

If you have any enquiries concerning your Shareholding please contact the Company’s share registry, Security Transfers Registrars Pty Ltd on +61 8 9315 2333 or contact your stockbroker or professional adviser.

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Natural Fuel Limited ABN 52 106 760 418

Notice of general meeting

Notice is given that an extraordinary general meeting of the Company will be held at the Parmelia Hilton Hotel, 14 Mill Street, Perth, Western Australia, on 5 June 2008 at 9am.

Agenda items

The following resolutions to be considered at the meeting are explained in the attached Explanatory Memorandum. Words used in this notice have the meanings given to them in the Explanatory Memorandum.

To consider, and if thought fit, to pass the following resolutions as ordinary resolutions:

1 Resolution 1: Issue of shares to Power Knight

That for the purposes of item 7 of section 611 of the Corporations Act and for all other purposes, the Company approves the issue to Power Knight of up to 337,529,956 Shares, pursuant to any combination of:

(a) the issue of up to 168,764,978 Shares to Power Knight at an issue price of A$0.13 per Share; and

(b) the issue of up to 50,629,493 Shares to Power Knight on the exercise of the First Tranche Conversion Right at a conversion price A$0.13 per Share and on the terms and conditions of the Convertible Loan Deed to convert US$6 million of the outstanding balance of the Project Finance Loan into Shares; and

(c) the issue of up to 118,135,485 Shares to Power Knight on the exercise of the Second Tranche Conversion Right at a conversion price A$0.13 per Share and on the terms and conditions of the Convertible Loan Deed to convert US$14 million of the outstanding balance of the Project Finance Loan into Shares.

2 Resolution 2: Issue of options to Tropical Oils

That, subject to and conditional on Resolution 1 being passed, for the purposes of Listing Rule 7.1 and for all other purposes, the Company approves the issue to Tropical Oils by the Company of the Tropical Oils Options which may be converted into a maximum of 12 million Shares.

3 Resolution 3: Issue of shares to Ganesha Nominees

That for the purposes of Listing Rule 10.11 and for all other purposes, the Company approves the issue by the Company of up to 34,615,385 Shares to Ganesha Nominees Pty Ltd upon the exercise by the Company of its option to convert the outstanding principal of the Working Capital Loan.

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Explanatory Memorandum

Shareholders are referred to the Explanatory Memorandum accompanying and forming part of this notice of meeting.

Entitlement to vote

Snapshot date

It has been determined that under the Corporations Regulations 2001 (Cth) regulation 7.11.37, for the purposes of the general meeting, shares will be taken to be held by the persons who are the registered holders at 9am on 3 June 2008. Accordingly, share transfers registered after that time will be disregarded in determining entitlements to attend and vote at the meeting.

Voting exclusion statement

Resolutions 1

The Company will disregard any votes cast on resolution 1 by Power Knight and any of its associates.

Resolution 2

The Company will disregard any votes cast on resolution 2 by Tropical Oils and any of its associates, a person who may participate in the proposed issue and a person who might obtain a benefit except a benefit solely in the capacity of a holder of ordinary securities if the resolution is passed.

Resolution 3

The Company will disregard any votes cast on resolution 3 by Ganesha Nominees and any of its associates.

Unless, in relation to each resolution, the vote is cast in the following circumstances:

by a person as proxy for a person who is entitled to vote in accordance with the directions on the proxy form;
by the person chairing the meeting as a proxy for a person who is entitled to vote, in accordance with a direction on the proxy form to vote as the proxy decides; or
by the nominee of a beneficial owner who has directed the nominee to vote for or against the resolution and the beneficial owner has confirmed to the nominee in writing that the beneficial owner is neither the (named) person (or a member of the class of persons) excluded from voting or an associate of the (named) person (or a member of the class of persons) excluded from voting.

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Proxies

A shareholder entitled to attend and vote has a right to appoint a proxy to attend and vote instead of the shareholder. A proxy need not be a shareholder and can be either an individual or a body corporate. If a shareholder appoints a body corporate as a proxy, that body corporate will need to ensure that it:

appoints an individual as its corporate representative to exercise its powers at the meeting, in accordance with section 250D of the Corporations Act; and
provides satisfactory evidence of the appointment of its corporate representative prior to commencement of the meeting.

If such evidence is not received before the meeting, then the body corporate (through its representative) will not be permitted to act as a proxy.

A shareholder that is entitled to cast 2 or more votes may appoint 2 proxies and may specify the proportion or number of votes each proxy is appointed to exercise. If no proportion or number is specified, each proxy may exercise half of the shareholder’s votes.

A proxy form accompanies this notice and to be effective must be received at the company’s corporate registry:

In person: Security Transfers Registrars Pty Ltd, 770 Canning Highway, Applecross, Western Australian 6153
Or by post to: PO Box 535, Applecross, Western Australia 6953
Or by fax: +61 8 9315 2233

by 9am on 3 June 2008 (being 48 hours before the time of the meeting).

By Order of the Board

Mathew Whyte Company Secretary

7 May 2008

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Explanatory memorandum

Natural Fuel Limited ABN 52 106 760 418

Explanatory memorandum to Shareholders

This Explanatory Memorandum has been prepared to assist Shareholders to understand the proposed resolutions to be put to Shareholders at the forthcoming extraordinary general meeting.

Words used in the Explanatory Memorandum have the meanings given to them in the Glossary in section 7 of this Explanatory Memorandum.

1 Introduction

An extraordinary general meeting of the Company has been convened for 5 June 2008 at 9am ( Meeting ).

The purpose of the meeting is to consider resolutions that will enable the Company to implement the Power Knight Proposal and the Additional Matters.

Under the Power Knight Proposal the Company intends, subject to Shareholder approval:

(1) to issue 168,764,978 Shares to Power Knight within a week of the Meeting pursuant to the Placement; and
(2) that Power Knight will have a right to convert US$14 million of the Project Finance Loan into a further 118,135,485 Shares.

Shareholders are also being asked to:

(3) ratify the existing right of Power Knight to convert US$6 million of the Project Finance Loan into 50,629,493 Shares;
(4) approve the issue of 12 million options to Tropical Oils for facilitating the Power Knight Proposal; and
(5) approve the exercise of the Company’s option to convert the outstanding balance of the Working Capital Loan and to issue up to 34,615,385 Shares to Ganesha Nominees if the Company chooses to exercise that option.

Further information on each of the resolutions is set out below.

The Corporations Act and the Listing Rules require certain information to be provided to Shareholders when seeking the necessary approvals for each of the resolutions. This is set out in this Explanatory Memorandum.

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2 Executive summary

2.1 Outline of Power Knight Proposal for completion of Singapore Plant

The Company has executed a binding term sheet for a US$40 million funding arrangement with Power Knight Pte Ltd ( Power Knight ), a company associated with the Jakarta-based Risjadson Group. There are two parts to the Power Knight Proposal:

(a) Part 1: US$20 million subscription

Pursuant to the term sheet, Power Knight has agreed, subject to the execution of the formal Subscription Agreement, to subscribe for a placement of 168,764,978 Shares for a total issue price of US$20 million (equivalent to A$0.13 per Share at the exchange rate on 25 March 2008). It is the Company's intention that, prior to the date of the Meeting, the Company and Power Knight will have entered into the formal Subscription Agreement.

(b) Part 2: US$20 million Project Finance Loan

Power Knight has lent US$6 million and is committed to lend a further US$14 million to the Company, subject to satisfaction of certain conditions (which include granting the security referred to below). The Company expects to drawdown the second portion of the Project Finance Loan in mid-May 2008.

The Project Finance Loan, which has a term of 2 years from 24 April 2008, will be secured by a first ranking charge over the assets of the Company’s Singapore subsidiary, Natural Fuel Pte Ltd, excluding its inventory financing assets, and has an interest rate of 10% per annum payable half-yearly. The Company expects that this security will be in place by mid-May.

Under the terms of the Project Finance Loan, the Company has agreed:

(1) that Power Knight has the right to convert US$6 million of the outstanding balance of the loan into 50,629,493 Shares; and
(2) that, subject to Shareholder approval, Power Knight has the right to convert US$14 million of the outstanding balance of the loan into 118,135,485 Shares,

at a US dollar denominated conversion price equal to A$0.13 per Share.

2.2 Drawdown of the Project Finance Loan and First Tranche Conversion Right

The first drawdown of US$6 million under the Project Finance Loan was lent by Power Knight to the Company on 28 April 2008 to enable the Company to continue its operations at the Singapore Plant and for general corporate purposes.

The First Tranche Conversion Right relates to the first drawdown of US$6 million under the Project Finance Loan and allows Power Knight to convert that part of the loan into 50,629,493 Shares at a US dollar denominated conversion price equal to A$0.13 per Share.

The Company anticipates that the second drawdown of US$14 million under the Project Finance Loan will be lent by Power Knight to the Company in mid-May 2008.

The Second Tranche Conversion Right relates to the second drawdown of US$14 million under the Project Finance Loan and, if Resolution 1 is approved, will allow Power Knight to convert that part of the loan into 118,135,485 Shares at a US dollar denominated conversion price equal to A$0.13 per Share.

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2.3 Threshold conditions

The Convertible Loan Deed in respect of the Project Finance Loan contains the following threshold conditions:

(a) Shareholders approval of Resolution 1;
(b) Power Knight’s proposed investment in the Company being approved by the Foreign Investment Review Board; and

(c) Power Knight being provided with an engineer’s report on the viability of the Singapore Plant for accepting refined Jatropha as feed stock for the production of biodiesel.

If Shareholders approve Resolution 1 but the threshold conditions in (b) and (c) have not been satisfied then the Power Knight Proposal will not be fully implemented until those conditions have been satisfied.

If any of the threshold conditions has not been satisfied by 30 June 2008 then the Power Knight Proposal will not be implemented as intended and the outstanding balance of the Project Finance Loan will be repayable within 12 months.

2.4 Rationale for the Power Knight Proposal

In its half year report to 31 December 2007, which was released to the market on 29 February 2008, the Company disclosed that it requires additional funding in the first half of 2008 in order to continue its current operating plans under the ‘Asset Utilisation Strategy’ at the Singapore Plant, which was announced in 2007. The Power Knight Proposal will provide the Company with US$40 million of vital funding. The Company intends to use the funds which will be made available from the Power Knight Proposal to complete the capital construction of Singapore, for testing and commissioning of Train 2 and Train 3, to support the Singapore operations and for general corporate purposes.

Shareholders will appreciate that the Company has encountered a difficult trading environment. Adverse market conditions for biodiesel production are continuing with palm oil feedstock prices increasing at a higher rate than biodiesel prices, making it uneconomic to produce biodiesel. There is ongoing uncertainty about the timing for a recovery in the biodiesel market, with increasing emphasis on the development of second generation, non-food feedstock sources (such as jatropha) to provide sustainability to the industry.

The Singapore Plant has the capability to refine high-grade glycerine, a significant advantage compared to most biodiesel operations. The Company has made good progress towards executing the ‘Asset Utilisation Strategy’ with production and sale of refined glycerine from the Singapore Plant having commenced in March 2008 and reductions made in fixed operating and corporate costs. Glycerine refining is expected to make a substantial contribution to fixed costs.

The Power Knight Proposal provides the Company with the funding necessary to reach completion of the construction phase of Singapore and to implement an operating model which the directors anticipate will help to stabilise the Company’s ongoing cash needs.

2.5 Key implications of the Power Knight Proposal for Shareholders

The Company currently has 337,812,127 Shares on issue. If Resolution 1 is approved and Power Knight exercises its right to convert the full outstanding balance of the Project Finance Loan into Shares, the Company will have 675,342,083 Shares on issue (assuming no other Shares are issued).

The Power Knight Proposal will therefore significantly dilute Shareholders’ holdings in the Company. However, the Directors believe that the Power Knight Proposal is the best available proposal to meet the Company’s requirement for immediate financing.

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If the Power Knight Proposal is implemented in full by Shareholders approving Resolution 1, and Power Knight exercises the Conversion Rights, Power Knight will become the largest Shareholder of the Company. The Company will not only benefit from the capital injection but also by having a new strategic partner in Power Knight.

The existence of a major shareholder may mean that the Company is a less attractive takeover target for a potential bidder.

2.6 Implications for the Company if the Power Knight Proposal is not approved

The Company has been discussing financing arrangements with a number of interested parties. Other than the Power Knight Proposal, the alternatives were either on unacceptable terms or did not meet the Company’s timing requirements for funds to be available by mid-2008.

If Resolution 1 is not approved, the Project Finance Loan will be repayable within 12 months. It is expected this period would be sufficient for the Company to pursue alternative sources of funding. However, there can be no certainty as to the availability or terms of such funding.

Shareholders should be aware that failure to approve Resolution 1 is likely to have serious financial consequences for the Company and the Directors would need to carefully consider the Company’s financial position and assess all available alternatives to protect the interests of Shareholders and other stakeholders. The Directors consider that if they are able to secure an alternative equity raising it may need to be priced at a discount to the market price. In contrast the effective Share issue price under the Power Knight Proposal is at a premium to the recent market.

If the Company is unable to repay the Project Finance Loan after 12 months, the Company will be in default under the Convertible Loan Deed and Power Knight will be able to enforce the security over the assets of Natural Fuel Pte Ltd referred to in section 2.1(b) above.

2.7 Facilitation by Tropical Oils

The Power Knight Proposal was facilitated by Tropical Oils. In recognition of Tropical Oil Group’s role in the transaction, the Company has agreed, subject to Shareholder approval, to issue to Tropical Oils, 12 million options exercisable at a price of A$0.13 per Share within 3 years from the date of this meeting. The Tropical Oils Options will not be issued if Resolution 1 is not passed.

2.8 Background to the Working Capital Loan

Natural Fuel, in conjunction with its advisers, has been actively pursuing several financing alternatives since the first quarter of the 2008 financial year. When it became apparent that none of the alternatives could be implemented within the timeframe needed to meet the Company’s working capital requirements, Mr Michael Coote, a director of the Company, agreed that Ganesha Nominees would lend the Company A$4.5 million, to be used by Natural Fuel for working capital purposes, including to meet the cash flow requirements of the Singapore plant.

Subject to shareholder approval, the Company may exercise an option to convert all or part of the principal of the loan into Shares at an issue price of A$0.13. The Company’s current intention is to convert 60% of the principal of the loan into 20,769,231 Shares. However, the Company may choose to convert a different amount or amounts over the terms of the loan.

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2.9 What are Shareholders being asked to approve?

(a) Power Knight has agreed to subscribe, subject to Shareholder approval and FIRB approval, for 168,764,978 Shares for a total issue price of US$20 million (equivalent to A$0.13 per Share at the exchange rate on 25 March 2008).

The Company has agreed that Power Knight has the right to convert US$6 million of the outstanding balance of the Project Finance Loan into Shares. The maximum number of Shares which could be issued to Power Knight on exercise of this conversion right is 50,629,493.

The Company has also agreed that, subject to Shareholder approval and FIRB approval, Power Knight will have the right to convert US$14 million of the outstanding balance of the Project Finance Loan into Shares. The maximum number of Shares which could be issued to Power Knight on exercise of this conversion right is 118,135,485.

If Power Knight completes its subscription for Shares pursuant to the Placement and subsequently exercises the Conversion Rights in respect of the full amount of the Project Finance Loan, the maximum number of Shares which could be issued by the Company to Power Knight is 337,529,956 Shares, representing 49.98% of the Shares on issue in the Company based on the current number of issued Shares and assuming that no other Shares are issued in the meantime.

Shareholder approval for the issue of Shares pursuant to the Power Knight Proposal is sought under Resolution 1.

(b) The Company has agreed to grant Tropical Oils options to acquire 12 million Shares, if Shareholders approve Resolution 1.

Subject and conditional on Resolution 1 having been passed, Shareholder approval of the grant of the Tropical Oils Options to Tropical Oils is sought under Resolution 2.

Shareholder approval for the issue of Shares to Ganesha Nominees is sought under Resolution 3.

3 Impact of the Power Knight Proposal and Additional Matters on the Company

3.1 Basis for information in this section

To assist Shareholders to assess the effect of the Power Knight Proposal and the Additional Matters on the Company, information on the effect of the proposal is included in this section.

3.2 The financial position of the Company will be strengthened

The Power Knight Proposal, if implemented in full, will provide the Company with important funding, which will strengthen its near term financial position.

The Directors are actively implementing a revised operating model for the business which responds to difficult market conditions. The Company expects that glycerine refining will make a substantial contribution to fixed costs and will assist in stabilising the Company’s cash needs. However Shareholders should be aware that market conditions are volatile and, therefore, the Company could require further working capital support.

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3.3 Financial Information

Pro forma balance sheets as at 31 December 2007 for the Company on the basis that the Power Knight Proposal is implemented in full are shown below:

Balance Sheet of Natural Fuels Limited

		Historical	Effect of	Effect of this	Pro Forma 31
		Reviewed 31	transactions to	offer (See note	December
		December 2007	31 March 2008	2)	2007
	Notes		(See note 1)
		A$ million	A$ million	A$ million	A$ million
Current Assets
Cash Assets	1	36.00	(24.40)		11.60
- Risjadson proposal	2			42.74	42.74
- Working capital loan	2			4.42	4.42
Total cash assets	5	36.00	(24.40)	47.16	58.76
Other Assets		18.00			18.00
Total Current Assets		54.00	(24.40)	47.16	76.76
Non - Current Assets
Development Costs		107.50	17.22		124.72
Other		5.79		0.49	6.28
Total Non-Current Assets		113.29	17.22	0.49	131.00
TOTAL ASSETS		167.29	(7.18)	47.65	207.76
Liabilities	3	102.42		24.66	127.08
NET ASSETS		64.87	(7.18)	22.99	80.68
Shareholders' Equity	4
Share Capital		174.86		22.50	197.36
Reserves		(5.00)		0.49	(4.51)
Accumulated Losses		(104.99)	(7.18)		(112.17)
TOTAL SHAREHOLDER'S	EQUITY	64.87	(7.18)	22.99	80.68

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Note 1

Subsequent to 31 December 2007 but before the date of this Explanatory	Memorandum NFL has incurred approximately the following expenses
	A$m
Capital expenditure (development costs primarily in Singapore)	17.22
Working capital and general expenses	7.18
Approximate costs incurred to 31 March 2008	24.40
	A$m
Opening cash per 31 December 2007	36.00
Approximated costs incurred to 31 March	(24.40)
Opening cash per proforma 31 December 2007	11.60

Note 2

The effect of all the proposals put forward in this notice of meeting will be to increase the cash reserves by up to A$47.2m after transaction costs.

Risjadson proposal - Amount raised - Less issuance costs Net cash raised Working capital loan - Amount raised - Less issuance costs Net cash raised Total net funds raised	A$m 43.01 (.27)
	42.74 4.50 (.08)
	4.42
	47.16

Note 3

The effect of all the proposals put forward will increase net liabilities by borrowing the Project Finance Loan

Liabilities

Trade and other payables Other current liabilities Convertible bonds (net of issuance costs) Project Finance Loan - Risjadson (net of costs) Working capital loan (net of issuance costs) Deferred tax liability Total Liabilities Note 4 Share capital Issued Capital - Share placement (net of issuance costs) - Conversion Right equity component - Working capital equity component Reserves & Surplus Accumulated losses Total Shareholders Funds	Historical Reviewed 31 December 2007 Pro Forma 31 December 2007 A$m A$m 17.92 17.92 0.31 0.31 81.67 81.67 20.33 4.33 2.52 2.52
	102.42 127.08
	Historical Reviewed 31 December 2007 Pro Forma 31 December 2007 A$m A$m 174.86 174.86 21.37 1.04 0.10 (5.00) (4.50) (104.99) (112.17)
	64.87 80.68

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Note 5

The approximate use of proposed net funds raised are as follows:

Total cash assets as per Pro Forma 31 Dec 07 Use of funds Capital expenditure at Singapore Working capital and general expenses for Singapore Interest Corporate and Other Source Receipt from sale of inventory and GST refund Cash Balance (Approximate) ****	A$m 58.76 (31.00) (12.33) (2.90) (2.03) 6.31
	16.81

Figure includes interest and other direct project related costs. *Figure is to June 2008.

*** Of this balance A$8.7m is reserved as security for letters of credit and bank guarantees

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3.4 Impact on capital structure

The effect of the Power Knight Proposal and the Additional Matters will be that the total contributed equity will increase as shown below. Earnings per share will be calculated on the expanded capital base.

The following capital structure shows the ordinary share, convertible instruments and fully diluted position of the Company at the following points:

(a) pre-26 March : the date on which the binding term sheet with Power Knight was signed;
(b) Current Position : on 26 March 2008 the Company granted the Tropical Oils Option, entered into the Working Capital Loan and on 24 April 2008 it entered into the Project Finance Loan under which the Company agreed to the First Tranche Conversion Right;
(c) following the Placement; and
(d) following approval of the Second Tranche Conversion Right.

	Ordinary Shares	Convertible	Fully Diluted Capital
		securities/agreements
		to issue
Pre-26 March 2008 position
Listed Shares	337,812,127	0	337,812,127
2008 Natural Fuel employee options(1)	0	5,947,143	5,947,143
Convertible Bonds(2)	0	187,986,391	187,986,391
Total capital pre-26 March(3)	337,812,127	193,933,534	531,745,661
Current Position
Tropical Oils Options	0	12,000,000	12,000,000
Working Capital Loan(4)	0	34,615,385	34,615,385
First TrancheConversion Right	0	50,629,493	50,629,493
Current total capital	337,812,127	291,178,412	641,977,512
Risjadson Placement	168,764,978	0	168,764,978
Total capital following Placement	506,577,105	291,178,412	810,742,490
Second Tranche Conversion Right	0	118,135,485	118,135,485
Total capital following approval of	506,577,105	409,313,897	928,877,975
Second Tranche Conversion Right

(1) Options issued to employees under January 2008 employee incentive scheme. Does not include non-vested options as those will not vest until 24 January 2009 (5,947,143 Tranche 1 options) and 24 January 2011 (9,394,286 Tranche 2 options) with the Tranche 2 options only becoming vested if certain performance criteria measured against total shareholder returns are met.

(2) US$80 million convertible bonds issued in April 2007. This figure assumes that the bond conversion price is reset to lowest reset price being US$0.528. The bonds have a fixed exchange rate of A$1.2407 = US$1.

(3) 51,900,000 options issued to pre-IPO vendors and promoters (some of whom were directors and employees) for providing services to the Company have not been included. The options are all vested but expire on 30 June 2008. 1,500,000 of the options are exercisable at an exercise price of $0.50 and 50,400,000 are exercisable at an exercise price of $0.33. The Company does not expect any of these options to be exercised given that they are “out of the money” and expire at the end of June 2008.

(4) The Company’s current intention is to convert 60% of the Working Capital Loan into Shares.

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3.5 Substantial Shareholders

As at the 4 May 2008, the Company had the following substantial shareholders, whose shareholdings will be diluted as set out in the following table:

	No. of	% of current	% of share	% of fully
	shares	issued share	capital	diluted share
		capital	following	capital
			placement
Holder
Distinctive Nominees Pty Ltd	54,823,800	16.23%	10.82%	5.90%
Stephanie Linda Stroud	37,467,000	11.09%	7.40%	4.03%
Meerview Investments Pty Ltd	31,269,300	9.26%	6.17%	3.37%

3.6 Maximum Power Knight shareholding

If Resolution 1 is approved and Power Knight exercises the Conversion Rights, Power Knight will become a substantial shareholder holding up to 337,529,956 Shares:

Risjadson Holding

Placement First Tranche Conversion Right Second Tranche Conversion Right Maximum holding	168,764,978 50,629,493 118,135,485
	337,529,956

Following the Placement, Power Knight will hold 168,764,978 Shares, which will represent 33.31% of the Shares on issue in the Company.

If, following the Placement, Power Knight exercises the First Tranche Conversion Right, it will be issued with a further 50,629,493 Shares, which will represent 9.09% of the Shares on issue in the Company.

If, following the Placement, Power Knight exercises the Second Tranche Conversion Right, but not the First Tranche Conversion Right, it will be issued with a further 118,135,485 Shares, which will represent 18.91% of the Shares on issue in the Company.

If both of the Conversion Rights are exercised, then together with the Placement Shares, the maximum number of Shares which could be issued to Power Knight is 337,529,956 Shares, which will represent 49.98% of the Shares on issue in the Company.

These percentages do not take into account the convertible securities which are currently on issue. If any of those convertible securities are converted into Shares, or other Shares are issued (including those which may be issued on conversion of the Working Capital Loan or the Tropical Oils Options) then the resulting percentage shareholding figures for Power Knight will be lower than shown above.

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4 Power Knight acquisition of Shares in the Company

4.1 Details of Power Knight and its Associates

Power Knight is an associated company of PT Risjadson Holding & Investment Co ( Risjadson ). Risjadson is a privately owned investment and holding company based in Jakarta, Indonesia that was established by Ibrahim Risjad and sons and which is controlled by the Risjad family.

Risjadson is an investment group focusing on core businesses leveraging on Indonesia's vast primary energy and natural resources. Its main investments are in the energy and mining resources, services and agro-industries, and plantation resources sectors in Indonesia. Having demonstrated the viability of jatropha as a fuel crop by a well advanced pilot programme, the Risjad family is firmly committed to the development of green energy through renewable fuel crop production. Jatropha is an inedible vegetable oil that is compatible with Natural Fuel’s biodiesel and glycerine plants. The Risjad family’s pilot program includes an established jatropha plantation of more than 200 hectares, which is currently generating jatropha-based fuel mix for equipment and haulage trucks for the Risjad family’s coal mining operations in Indonesia. The Risjad family anticipates that the alliance with Natural Fuel will offer it the opportunity for significant expansion of its jatropha production and refining capacity.

4.2 Maximum shareholding of Power Knight

At the date of the Explanatory Memorandum, Power Knight did not hold any Shares in the Company. If Resolution 1 is approved, Power Knight may receive Shares and a right to receive Shares through:

(a) the Conversion Rights; and
(b) the Placement.

Following the Placement, Power Knight will hold approximately 33.31% of the Company. If both the Conversion Rights are subsequently fully converted, Power Knight will hold 49.98% of the Company (assuming in both cases that no further Shares are issued).

4.3 Effect of approving the acquisition of Shares by Power Knight

The effect of Shareholders approving Resolution 1 is to permit Power Knight to receive up to 337,529,956 Shares representing up to 49.98% of the issued Shares in the Company.

4.4 Intentions of Power Knight

(a) Directors

On implementation of the Power Knight Proposal, Power Knight will be entitled to appoint 3 nominee directors to the Board of the Company. No decision has been made as to the identity of those nominee directors or when they will be appointed. This will depend upon the relevant circumstances at the time.

(b) Intentions for the future of the Company

Other than as disclosed elsewhere in this Explanatory Memorandum, Power Knight has advised that, upon increasing its interest in the Company upon being issued with Shares pursuant to the Placement or on conversion of the Project Finance Loan:

(1) it has no current intention to change the business of the Company, such that it will continue materially in the same manner as at the date of this Explanatory

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Memorandum. In particular Power Knight is supportive of the Company's current strategy as described in section 5;

(2) it has no current intention to inject further capital into the Company;
(3) it has no current intention regarding the future employment of the present employees of the Company;
(4) without limiting its rights under agreements relating to the Project Finance Loan and any associated security documentation, it has no current intention in relation to any proposal whereby property will be transferred between itself or its associates and the Company; and
(5) it has no current intention to otherwise redistribute the fixed assets of the Company.

(c) Intentions regarding the right of conversion under the Project Finance Loan

In the event that Resolution 1 is approved, Power Knight will assess from time to time whether to convert the amounts drawn under the Project Finance Loan into Shares in the Company.

(d)

Financial and dividend policies of the Company

Without limiting its rights under agreements relating to the Project Finance Loan and any associated security documentation, Power Knight has no current intention to significantly change the financial or dividend policies of the Company (to the extent that there are any specific policies in place).

(e)

General

The intentions and statements of future conduct set out above are of current intention only which may change as new information becomes available or circumstances change. The statements should be read in this context and also as being subject to the legal obligation of the Directors of the Company at the time, including any nominees of Power Knight, to act in good faith in the best interest of the Company and for the proper purposes, and to have regard to the interests of the Shareholders.

The implementation of Power Knight's current intentions of its ownership of Shares in the Company will be subject to the law (including the Corporations Act), the Listing Rules and the Company's constitution.

In particular, the requirements of the Corporations Act and the Listing Rules in relation to conflicts of interest and "related party" transactions will apply in the event that Power Knight is treated as a related party of the Company.

Power Knight would only make a decision on its courses of action in light of material facts and circumstances at the relevant time and after it receives appropriate legal and financial advice on such matters, where required, including in relation to any requirements for Shareholder approval

5 Natural Fuel Company Update

The Company announced a net loss after tax for the six months to 31 December 2007 of $39.9 million. The result was impacted by a significant non cash write down in relation to the Company’s loan to its equity accounted associate Natural Fuels Australia Limited ( NFAL ).

The Company had a working capital surplus at 31 December 2007 of $35,776,000. However, the cash requirements for the completion and commissioning of the Singapore plant, support of NFAL’s Darwin facility, and working capital for ongoing operations have necessitated additional external funding (refer to section 3.3).

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5.1 Operations Update

(a) Jurong Island Biodiesel Facility, Singapore

During the period, the Company has made good progress on the implementation of its Asset Utilisation Strategy at the Singapore Plant. For more detail on the progress of the strategy please refer to section 2.4.

(b) Sourcing Alternate Feedstock

The Company has now finalised the long-term Off-take Agreement with GEM BioFuels Plc (GEM) for the supply of crude jatropha oil as a feedstock for the Singapore Plant.

The supply of the crude jatropha oil will commence in early 2009 at a free on board delivery price of US$500 per tonne, adjusted for inflation, for the first five years of the 10 year agreement. Freight costs to Singapore and the cost of refining the crude jatropha oil prior to use in the Singapore Plant will be approximately US$190 per tonne.

GEM will initially supply Natural Fuel with 2.5% of the Singapore Plant production requirements, with supply increasing year on year as its jatropha plantation program in Madagascar develops. By 2013, 55% of GEM’s jatropha production will be provided to the Company, equivalent to 25% of the Singapore Plant’s overall feedstock requirements. The Company holds a 3.9% interest in the AIM-listed company.

The Company’s biodiesel plants are designed to use a broad variety of virgin vegetable oils as feedstock, providing significant flexibility in feedstock sourcing and blending. Jatropha oil produces high quality biodiesel with superior cold flow properties, allowing the Company to blend it with palm oil and achieve cool weather biodiesel.

Darwin Biodiesel Facility, Australia

The Darwin Biodiesel Facility is owned and operated by Natural Fuels Australia Ltd ( NFAL ), a 50/50 joint venture between Natural Fuel Ltd and Babcock & Brown Environmental Investments ( BEI ).

In December 2007, the directors carried out an assessment of the recoverability of the loan to NFAL. Due to continued high feedstock prices negatively impacting the economics of biodiesel production and ongoing problems with the commissioning of NFAL’s Darwin plant, a provision for impairment of $30.3 million has been made in the half year accounts to 31 December 2007.

Ongoing work is being carried out by Lurgi (NFAL’s technology provider) to address the deficiency in the biodiesel plant design. Lurgi have indicated that they are confident that these issues can be resolved.

While this rectification work continues and until feedstock prices return to levels that will enable economic production of biodiesel NFAL management will pursue a strategy of refining crude glycerine to generate revenue along with cost reductions to contribute to fixed cost recovery. To date, production of refined glycerine at Darwin has occurred using externally sourced crude glycerine, achieving better than target specifications (99.5%) and better than nameplate daily capacity rates.

NFAL is currently dependent on the ongoing support of its shareholders and will require additional funding in order to finalise commissioning and continue as a going concern until biodiesel economics improve.

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6 The resolutions in detail

6.1 Resolution 1: Power Knight Proposal

Under the takeovers provisions of the Corporations Act, a person is prohibited from acquiring a relevant interest in shares in the Company if:

(1) the acquisition would result in the person having voting power in the Company of more than 20%; or

(2) the person already has voting power in the Company of between 20% and 90% and, after the acquisition, would have a greater percentage of voting power in the Company,

unless the acquisition falls under one of the exceptions set out in section 611 of the Corporations Act. One such exception is an acquisition which has been approved by Shareholders who do not have an interest in the acquisition.

Approval is sought under s.611 of the Corporations Act

Under the Power Knight Proposal, Power Knight could potentially be issued a maximum of 337,529,956 Shares which would represent a maximum of 49.98% of the Shares on issue (assuming that no further Shares are issued - see section 3.6 for more details).

Accordingly, the Company seeks approval for the purposes of item 7 of section 611 of the Corporations Act, and for all other purposes, of the following issues of Shares to Power Knight:

(1) 168,764,978 Shares pursuant to the Placement;
(2) 50,629,493 Shares if Power Knight exercises the First Tranche Conversion Right; and
(3) 118,135,485 Shares if Power Knight exercises the Second Tranche Conversion Right.

The following paragraphs set out information required to be provided to Shareholders under item 7 of section 611 and ASIC Regulatory Guide 74. Shareholders are also referred to the attached Independent Expert’s Report.

(b) Information about Power Knight and its associates

For more information about Power Knight, please refer to section 4.1.

Power Knight has the following associates:

First Pacific Company Ltd, Hong PT. Coastal Pasific Resources PT. Ribis Perdana International Kong Oricom Trading Pty, Singapore PT. Delima Makmur PT. Risjadson Sejahtera Agrobusiness PT. ABS Industry Indonesia PT. Delma Mining PT. Sanmaru Foods Manufacturer PT. Aceh Nusa Indrapuri PT. Derco Pasific Nikel PT. Sarilembah Tirta Hijau PT. ARBE Chemindo PT. Derco Pasific Resources PT. Seaborne Celebes Minerals PT. ARBE Styrindo PT. Erbanusa Arta Nusantara PT. Selatan Selabara PT. Argha Karya Prima Industry PT. Indopoly Swakarsa Industri PT. Sisirau Tbk

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PT. Armadian Tritunggal PT. Kay Pi Transmalindo PT. Stargate Pasific Resources PT. Batavia City Realty PT. Kingdom Pasific Chromes PT. Suluh Dwi Pantara PT. Berau Coal PT. Mandarin Oriental Hotel PT. Tenaga Listrik Amurang PT. Besitang Bio Energi PT. Multi Harapan Utama PT. Tenaga Listrik Sibolga PT. Bina Murindo PT. NV Gambar PT. Teumaron PT. Bintang Cement Mandiri PT. Perkasa Primarindo PT. Tiga Mitra Perdana PT. Bogasari Flour Mill PT. Polypet Karya Persada PT. Transmega Engineering & Construction PT. Branta Mulia Tbk PT. Polyprima Reksa Karya PT. Tri Polyta Indonesia PT. Bumi Shangrila Jaya PT. Pondok Indah Hospital PT. Wiraswasta Gemilang Indonesia PT. Celebes Pacific Minerals PT. Pondok Indah Housing Estate PT. Centranusa Persada PT. Primarindo Arga Tile

(c)

Proposed Directors

If Shareholders approve Resolution 1, the Board has undertaken to appoint 3 directors nominated by Power Knight as Directors of the Company, one of whom will be appointed as chairman of the Company’s audit committee. At this stage, Power Knight has not finalised its proposed nominees.

The Company has agreed that the total number of Directors will not be greater than 7.

(d)

Shareholder approval not obtained

If Shareholder approval is not obtained by 30 June 2008, Power Knight may terminate the Power Knight Proposal and the Project Finance Loan will be repayable within 12 months.

(e)

Effect of approval with respect to Listing Rule 7.1

Listing Rule 7.1 prevents a company from issuing shares which represent more than 15% of a company’s equity securities, unless approved by Shareholders. However there is an exception to Listing Rule 7.1 for issues approved for the purposes of item 7 of section 611 of the Corporations Act. Accordingly, approval of Resolution 1 will refresh the 15% limit under Listing Rule 7.1, meaning that the Company will be able to issue up to 15% of its share capital without shareholder approval during the period of 12 months from the date of approval.

Shareholders should note that if Resolution 1 is not approved, Power Knight may still exercise the First Tranche Conversion Right. The issue of shares under the First Tranche Conversion Right is within the 15% limit set by Listing Rule 7.1, however the Company will be prevented from issuing any further securities without Shareholder approval for 12 months.

(f)

Issue price of the Shares

The issue price for the Placement Shares is A$0.13 per Share.

Under the Project Finance Loan, the conversion price for Power Knight to convert the outstanding balance of the Project Finance Loan is the US dollar equivalent of A$0.13 per Share. A fixed exchange rate of A$1 = US$0.9116 applies.

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(g) Identity of allottee and any person who will have a relevant interest in the Shares to be allotted

The Shares will be issued to Power Knight or a wholly owned subsidiary of Power Knight.

The following persons will have a relevant interest in the Shares to be allotted to be confirmed:

(1) Power Knight or a wholly owned subsidiary of Power Knight (which will be the registered holder of the Shares);
(2) Mr Amirsyah Risjad and Mr Rizal Risjad (who are deemed to have a relevant interest in the Shares held by Power Knight (or its wholly owned subsidiary) by virtue of section 608(3)(a) of the Corporations Act); and
(3) the associates of Power Knight set out in section 6.1(b) above.
(h) Terms of Shares to be issued

The Shares to be issued to Power Knight will rank pari passu in all respects with all other Shares. The Company will apply to ASX for quotation of the Shares. The Company expects that the Shares will be quoted on ASX shortly after being issued.

(i) Allotment of Shares

The allotment of Shares to be issued to Power Knight will occur progressively in accordance with the timing set out in the following paragraph.

(j) Timing

If Shareholders approve Resolution 1, the issue of the 168,764,978 Shares under the Placement will take place within a week after the Meeting and the Company expects that the Shares will be quoted on ASX shortly after being issued.

Under the terms of the Placement, Power Knight will pay A$21,957,000 million (equivalent to US$20 million at A$0.13 per Share at the exchange rate on 25 March 2008), being the subscription monies for the Placement, to the Company’s solicitors, Freehills, to hold in escrow pending Shareholder approval and satisfaction or waiver of the other threshold conditions referred to in paragraph 2.3. If Shareholders approve Resolution 1 and the remaining threshold conditions are satisfied by no later than 30 June 2008, the subscription monies will be released from escrow and Freehills will transfer the funds to the Company.

The Company will be required to issue Shares to Power Knight upon exercise of either of the Conversion Rights. Power Knight may exercise its right of conversion at any time during the term of the Project Finance Loan, which runs until 31 June 2010. The Company expects that the Shares will be quoted on ASX shortly after being issued.

(k) Fair and reasonable

The Directors commissioned Lonergan Edwards & Associates Limited to prepare a report on whether the issue of Shares to Power Knight under the Power Knight Proposal is fair and reasonable. This report is attached to this Explanatory Memorandum. Shareholders are urged to read the report.

Lonergan Edwards & Associates Limited concludes that the issue of Shares pursuant to the Placement and the Conversion Rights are fair and reasonable to the Shareholders of the Company.

(l) Directors’ recommendation

All Directors are of the opinion that the proposed issue of Shares to Power Knight is in the best interest of the Company and its Shareholders and accordingly recommend that Shareholders vote in favour of Resolution 1.

None of the Directors has any personal interest in Resolution 1 being passed.

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The Directors recommendation that Shareholders vote in favour of Resolution 1 is based on the benefits of the Power Knight Proposal which have been explained in section 2 of the Explanatory Memorandum and the conclusions in the Independent Expert’s Report.

6.2 Resolution 2: Approval of Tropical Oils Option

Listing Rule 7.1 prevents a company, subject to certain exceptions, from issuing during any 12 month period any equity securities if the number of such securities exceeds 15% of the number of ordinary shares on issue at the commencement of that 12 month period.

(a)

Approval is sought under Listing Rule 7.1

The Company has agreed, subject to Shareholder approval, to issue the Tropical Oils Options to Tropical Oils. If Shareholders approve Resolution 1, the Company will issue the Tropical Oils Options which may be exercised at an exercise price of A$0.13 per Share and the Company will be required to issue 12 million Shares.

The options are exercisable at any time during the three years following approval of Resolutions 1. If Shareholders do not approve Resolution 2, the Company will be unable to issue the Tropical Oils Options and will be required to provide Tropical Oils with alternative compensation.

Accordingly, the Company seeks approval for the issue of the Tropical Oils Options. The following paragraphs set out information required to be provided to Shareholders under Listing Rule 7.3.

(b)

Maximum number of options to be issued

The maximum number of options the Company agrees to issue, subject to Shareholder approval of Resolution 1, is 12 million.

Timing

If the Shareholders approve Resolution 2, the Company will issue the Tropical Oils Options within a few days of the Meeting. The Tropical Oils Options may be exercised, subject to Resolution 1 being passed, during the three year period following their issue. The Company expects that the Shares will be quoted on ASX shortly after being issued.

Issue price of the Shares

The issue price for the Shares on exercise of the Tropical Oils Options will be A$0.13.

Identity of allottees

The Shares will be issued to Tropical Oils.

Terms of the Shares to be issued

Each of the Tropical Oils Options is convertible into one Shares which will rank pari passu with all other Shares.

The Tropical Oils Options will have an exercise period of 3 years from the date of approval and an exercise price of A$0.13.

The full terms of the Tropical Oils Options are set out in Annexure 1.

Intended use of the funds

The Tropical Oils Options will be issued as consideration for services therefore no funds will be raised by the issue.

Directors Recommendation

All Directors are of the opinion that the proposed issue of the Tropical Oils Options to Tropical Oils is in the best interest of the Company and its Shareholders and accordingly recommend that Shareholders vote in favour of Resolution 2.

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The Directors recommendation that Shareholders vote in favour of Resolution 2 is based on the benefit to the Company of ensuring that directors are able to raise capital by issuing Shares up to the equivalent of 15% in any one year without having to incur the considerable expense of obtaining Shareholder approval.

6.3 Resolution 3: Issue of Shares to Ganesha Nominees

Listing Rule 10.11 provides that a company may not issue shares or agree to issue shares to a related party, unless the agreement is conditional upon the company obtaining the approval of its shareholders before the issue is made.

The definition of a related party in the Listing Rules is taken from section 228 of the Corporations Act and includes directors and entities controlled by directors. Ganesha Nominees is controlled by Mr Michael Coote, a director of the Company, and is therefore a related party of the Company.

The Company has executed an agreement with Ganesha Nominees under which Ganesha Nominees will lend the Company A$4.5 million at an interest rate of BBRW plus 3.3%. The Company will grant Ganesha Nominees security over the Company’s interest in its secured loan to its 50% owned company, Natural Fuels Australia Limited. The amount recoverable under the security will be limited to A$3.2 million.

The agreement for the Working Capital Loan provides that, subject to approval of the Shareholders, the Company may elect to convert the Working Capital Loan into Shares, at a conversion price of A$0.13, which represents the volume weighted average price of the Shares for the 5 trading days ending on the day prior to the date of the agreement, 26 March 2008.

Any amounts outstanding under the Working Capital Loan which have not been converted into Shares must be repaid by the Company on 31 December 2008.

(a)

Approval is sought under Listing Rule 10.11

If the Shareholders approve the issue of Shares to Ganesha Nominees, the Company intends to exercise part of its option. The current intention of the Company is to convert 60% of the outstanding balance and interest of the Working Capital Loan into Shares immediately.

Accordingly, the Company seeks approval for the issue of up to 34,615,385 Shares to Ganesha Nominees, when it exercises its option to convert the Working Capital Loan. The following paragraphs set out information required to be provided to Shareholders under Listing Rule 10.13.

If Shareholders approve the issue of Shares to Ganesha Nominees, for the purposes of Listing Rule 10.11, then, as per Exception 14 of Listing Rule 7.2, approval is not required under Listing Rule 7.1.

(b)

Summary of terms of the Working Capital Loan

Under the loan agreement, which was entered into on 26 March 2008 ( Working Capital Loan Agreement) , Ganesha lent the Company $4.5 million for working capital purposes. The Working Capital Loan Agreement gives the Company (but not Ganesha) the right to convert the outstanding principal amount of the Working Capital Loan into Shares, subject to approval by Shareholders.

The conversion price in the Working Capital Loan Agreement is A$0.13 per share, therefore the maximum number of Shares which could be issued to Ganesha is 34,615,385.

The Company currently intends to convert 60% of the principal amount of the loan into ordinary shares within a few days of obtaining shareholder approval under Listing Rule 10.11. At the conversion price of A$0.13 per share this equates to 20,769,231 ordinary shares being issued to Ganesha.

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Under the terms of the Working Capital Loan Agreement, if the Company has not elected to covert it into Shares, the remaining 40% of the principal amount of the Working Capital Loan must be repaid by the Company to Ganesha on 31 December 2008. At the conversion price of A$0.13 per share, the maximum number of shares which could be issued following a conversion of the remaining 40% of the principal amount of the loan is 13,846,154.

(c)

Identity of related parties

Ganesha Nominees is a related party of the Company by virtue of being controlled by Mr Coote, a director of the Company.

(d)

Information about Mr Coote

Mr Coote joined the Natural Fuel board in October 2007, bringing his extensive experience in the energy and resources industry, including as the founder of the ASX listed engineering company, Coote Industrial Limited.

Maximum number of Shares to be issued

The maximum number of Shares which the Company may issue to Ganesha Nominees can be calculated by applying the conversion price of A$0.13 to the outstanding principal amount of A$4.5 million under the Working Capital Loan calculated as BBSW plus 8% per annum.

(f)

Timing

The Company intends to exercise part of its option immediately. If Shareholders approve Resolution 3 the Company currently intends to elect to convert 60% of the principal amount of the Working Capital Loan. However, the Company may choose to convert a different amount or amounts over the terms of the loan.

Listing Rule 10.13 provides that a notice of meeting to approve an issue of securities to a related party must include a deadline within which the entity proposes to issue the securities, which must not be more than one month after the meeting. The Company has applied for a waiver of Listing Rule 10.13 from ASX for conversion of the remaining 40% of the principal amount of the Working Capital Loan plus interests so that the conversion may occur at any time before 31 December 2008 and is waiting for final determination of that waiver by ASX. The Company will announce the terms of the final determination of the waiver to the market.

(g)

Ownership of Ganesha Nominees

Mr Coote is one of the shareholders of Ganesha Nominees. The company is acting as trustee for the Ganesha Family Trust, of which Mr Coote is one of the beneficiaries.

(h)

Issue price and terms of Shares to be issued

The Shares to be issued to Ganesha Nominees will be issued at a price of A$0.13 per Share and the Shares will rank pari passu in all respects with all other Shares in the Company. The Company expects that the Shares will be quoted on ASX shortly after being issued.

(i)

Intended use of the funds

The Company intends to use the funds under the Working Capital Loan for working capital purposes.

(j)

Directors Recommendation

Mike Coote has abstained from recommending Resolution 3 to Shareholders. The following recommendation is made by all Directors except Mike Coote.

The Directors are of the opinion that the proposed issue of Shares to Ganesha Nominees upon exercise of the Company’s option to convert the Working Capital Loan is in the best interest of the Company and its Shareholders and accordingly recommend that Shareholders vote in favour of Resolution 3.

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The Directors recommendation that Shareholders vote in favour of Resolution 3 is based benefit to the Company of converting the Working Capital Loan into Shares at the current market price, saving interest which would have been payable on the outstanding balance of the Working Capital Loan for the remainder of the term.

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7 Glossary

Term	Meaning
Additional Matters	1 the issue of the Tropical Oils Options to Tropical Oils; and
	2 the conversion of the outstanding balance of the Working Capital
	Loan into Shares.
ASX	the Australian Securities Exchange operated by ASX Limited (ABN 98
	008 624 691).
BBSW	the Australian Financial Markets Association's bank-bill reference rate,
	published daily on AAP Reuters page BBSW.
Board	the board of directors of the Company.
Company	Natural Fuel Limited (ABN 52 106 760 418).
Conversion Rights	the First Tranche Conversion Right and the Second Tranche Conversion
	Right.
Convertible Loan	the Convertible Loan Deed dated 24 April 2008 entered into between
Deed	the Company and Power Knight relating to the Project Finance Loan.
Corporations Act	Corporations Act 2001 (Cth).
Directors	the directors of the Company.
First Tranche	the right of Power Knight to convert US$6 million of the outstanding
Conversion Right	balance of the Project Finance Loan into Shares as set out in section
	2.2 of the Explanatory Memorandum.
Ganesha Nominees	Ganesha Nominees Pty Ltd ACN 092 111 192 as trustee for the
	Ganesha Family Trust.
Independent Expert’s	the report of Lonergan Edwards & Associates Limited attached to this
Report	Explanatory Memorandum as Annexure 2.
Listing Rules	the Listing Rules of published by ASX.
Placement	the issue of up to 168,764,978 Shares to Power Knight, being Part 2 of
	the Power Knight Proposal set out in section 2.1 of the Explanatory
	Memorandum.
Project Finance Loan	the loan of US$20 million from Power Knight to the Company, being Part
	1 of the Power Knight Proposal set out in section 2.1 of the Explanatory
	Memorandum.
Power Knight	Power Knight Pte Ltd.
Power Knight	the proposal by Power Knight to finance the completion of the Singapore
Proposal	Plant by the Company set out in section 2.1 of the Explanatory
	Memorandum.

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Term	Meaning
Second Tranche	the right of Power Knight to convert US$14 million of the outstanding
Conversion Right	balance of the Project Finance Loan into Shares as set out in section
	2.1(b)(1) of the Explanatory Memorandum.
Share	an ordinary share in the capital of the Company.
Shareholder	a holder of a Share.
Singapore Plant	the biodiesel and glycerine plant operated by the Company’s Singapore
	subsidiary, Natural Fuel Pte Ltd located in Jurong, Singapore.
Subscription	the subscription agreement to be entered into between the Company
Agreement	and Power Knight pursuant to which Power Knight will subscribe for
	168,764,978 Shares for a total subscription price of US$20 million.
Tropical Oils	Tropical Oils Products Pte Ltd.
Tropical Oils Options	the 12 million options exercisable at A$0.13 per Share described in
	section 6.2 of the Explanatory Memorandum.
Working Capital Loan	the loan of A$4.5 million from Ganesha Nominees to the Company.

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Annexure 1

Tropical Oils Options terms and conditions

1 Glossary

Expressions used in these terms are defined in the glossary in clause 7.

2 Rights and liabilities of Options

2.1 Exercise Price and Share entitlement

Subject to these terms:

(a) the exercise price for each Option is A$0.13; and
(b) on exercise, each Option entitles the Optionholder to the issue of one Share.

2.2 Transfer

(a) An Optionholder may transfer the Optionholder’s Options, but any such transfer must be for all the Options held by that Optionholder.
(b) If an Optionholder purports to transfer an Option other than in accordance with this clause 2.2, the Option immediately lapses.
(c) Transfer of an Option takes effect on registration in the Issuer’s register of optionholders.

2.3 Distributions

Options do not confer any right to distributions.

2.4 Rights in relation to reports and meetings

(a) Optionholders will be sent reports, accounts and other information required to be sent to Shareholders, including notices of meeting.
(b) Optionholders will have the right to attend, but (subject to the Corporations Act) not to vote at, general meetings of Shareholders.

2.5 Expiry of Options

All unexercised Options expire at 5.00pm on the date that is 3 years after their issue date.

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3 Exercise

3.1 Optionholder may exercise

An Optionholder may exercise the Options of which the Optionholder is the registered holder in accordance with this clause 3.

3.2 Exercise conditional

(a) The Options may only be exercised after the following conditions are satisfied:
(1) formal agreements for the proposed US$20 million equity private placement ( Placement ) and the US$20 million convertible loan ( Convertible Loan ) have been signed by the Issuer and Ibrahim Risjad or by entities controlled / owned by Ibrahim Risjad; and
(2) NFL shareholders have approved the Placement and the option for conversion of the Convertible Loan in accordance with applicable legal requirements.
(b) If these conditions are not satisfied by 30 June 2008, the Options will immediately lapse.

3.3 How the Optionholder may exercise

(a) The Options may only be exercised on one occasion. If some but not all Options are exercised, the Options that are not exercise will immediately lapse.
(b) The Optionholder may only exercise Options by giving the Issuer, before the Options expire:
(1) a completed Exercise Notice signed by the Optionholder or a director or secretary of the Optionholder;
(2) a cheque in Australian dollars in favour of the Issuer for the amount payable by the Optionholder on exercise of the Options (being the number of Options specified in the Exercise Notice multiplied by the Exercise Price); and
(3) if the Issuer has issued a certificate for the Options — the certificate,

and any purported exercise which does not comply with this clause 3.3(b) will be invalid. An Exercise Notice is irrevocable.

(c) If any cheque given to the Issuer in purported satisfaction of the requirements of clause 3.3(a) is dishonoured, the relevant Options will be deemed not to have been exercised.

3.4 Issue of Shares on exercise

The Issuer must issue the Optionholder the Shares to which the Optionholder is entitled on exercise within 5 Business Days after the Exercise Date.

4 Rights of Options

4.1 No rights to participate

An Option confers no right to vote, attend meetings, participate in a Pro Rata Issue, Bonus Issue, distribution of profit, return of capital or any other participating rights or entitlements of Shareholders unless and until the Option is exercised and a Share is issued pursuant to the exercise of the Option.

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4.2 Quotation

The Issuer will not apply for official quotation of the Options on the Australian Securities Exchange of ASX.

4.3 Reorganisation

If, before exercise or expiry of the Options, the Issuer implements a reorganisation of its capital, the Options must be treated as follows:

(a) in a consolidation of capital — the number of Options is consolidated in the same ratio as the ordinary capital and the Exercise Price must be amended in inverse proportion to that ratio;
(b) in a subdivision of capital — the number of Options is sub-divided in the same ratio as the ordinary capital and the Exercise Price must be amended in inverse proportion to that ratio;
(c) in a return of capital — the number of Options remains the same and the Exercise Price of each Option must be reduced by the same amount as the amount returned in relation to each Ordinary Security;
(d) in a reduction of capital by a cancellation of paid up capital that is lost or not represented by available assets where no Securities are cancelled — the number of Options remains the same and the Exercise Price of each Option must remain unaltered;
(e) in a pro rata cancellation of capital — the number of Options is reduced in the same ratio as the ordinary capital and the Exercise Price must be amended in inverse proportion to the ratio; and
(f) in any other case — the number of Options are reorganised so that the Optionholder does not receive a benefit that holders of Ordinary Securities do not receive. This does not prevent a rounding up of the number of Securities to be received on exercise if the rounding up is approved at the Security holders’ meeting which approves the reorganisation,

provided that if the Listing Rules require the Options to be treated differently to that set out above, the Options must be treated as the Listing Rules require.

5 Undertakings of the Issuer

The Issuer agrees:

(a) to use its best endeavours to procure that official quotation is granted for the Shares on ASX as soon as possible after the issue date;
(b) to offer and issue the Shares in accordance with its constitution, clause 3.4 the Corporations Act, the Listing Rules, any other applicable law or regulation of any jurisdiction in which the offer is made and any other legally binding requirement of ASIC or ASX; and
(c) if the requirements of section 708A(5)(a) to (d) of the Corporations Act are satisfied in respect of the Shares, on the Quotation Date (after issue of the Shares and before the Shares commence trading on ASX) to lodge a notice with ASX in relation to the issue of the Shares in accordance with sections 708A(6) of the Corporations Act.

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6 Rights of Shares issued on exercise of Options

Shares issued on exercise of Options:

(a) are of the same class, and rank equally with, other Shares on issue as at that date; and
(b) only carry an entitlement to receive distributions that have a Record Date after the date the Shares were issued.

7 General

7.1 Notices

(a) All notices, requests and statements given or made under these terms must be in writing.
(b) The Issuer must send any notice, request or other document relating to the Options to be sent to an Optionholder under these terms to the Optionholder’s registered address as recorded in the Issuer’s register of option holders.
(c) An Optionholder must send any notice, request or other document relating to the Options to be sent to the Issuer under these terms to:
(d) Security Transfer Registrars Pty Ltd Suite 1, 770 Canning Highway Applecross WA 6153

or as otherwise specified by the Issuer by announcement to ASX or notice to the Optionholder.

7.2 Exercise Notices

At any time, an Optionholder may request the Issuer to give the Optionholder a blank Exercise Notice. The Issuer must give the Optionholder a blank Exercise Notice promptly on receiving the request.

7.3 Certificates

(a) The Issuer may issue certificates for the Options if, and only if:
(1) the Options are not, or cease to be, quoted by the ASX; or
(2) the law or ASX Operating Rules require the Issuer to issue certificates for the Options.
(b) If any certificate for an Option is lost, stolen, mutilated, defaced or destroyed, the Optionholder may request a replacement certificate. The request must:
(1) state that the certificate has been lost, stolen, mutilated, defaced or destroyed and not been pledged, sold or otherwise disposed of;
(2) if the certificate has been lost — state that proper searches have been made; and
(3) include an undertaking that, if the certificate is found or received by the Optionholder, it will be returned to the Issuer.
(c) Before accepting an application, the Issuer may require the Optionholder to:
(1) pay the Issuer’s expenses in connection with the issue of the replacement certificate; and

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(2) give a bond or indemnity for an amount equal to at least the current market value of the Options indemnifying the Issuer against loss following the production of the original certificate.
(d) The Issuer must issue the replacement certificate within 15 Business Days of accepting the request, unless when it accepts the request, the Issuer has ceased to issue certificates for Options.

7.4 Calculations

(a) The board of the Issuer may make any calculations or adjustments that are required in relation to the Options. In the absence of manifest error such calculations or adjustments are conclusive and binding on the Optionholders.
(b) The Issuer must notify each Optionholder of any adjustments made to the Exercise Price, the number of Shares over which an Option may be exercised and the number of outstanding Options within 5 Business Days after the date of the adjustment.

7.5 Governing law

(a) These terms and the Options are governed by the laws of Western Australia.
(b) The Issuer and the Optionholders irrevocably submit to the non-exclusive jurisdiction of the courts of Western Australia and irrevocably waive any objection to the venue of any legal process on the basis that the process has been brought in an inconvenient forum.

7.6 Variation

(a) The Issuer may vary these terms and change the Optionholder’s rights and liabilities, to the extent necessary to comply with the Listing Rules applying to reorganisations of capital at the time of the reorganisation. The Issuer must notify each Optionholder of any such variation within 10 Business Days of the date of the variation.
(b) Otherwise, subject to the Listing Rules, the Issuer and an Optionholder may vary the terms applicable to any Options of which the Optionholder is registered holder by agreement.

7.7 Duties and taxes

The Issuer is not responsible for any duties or taxes that may become payable in connection with the issue of Securities following exercise of, or in connection with any other dealing with, the Options.

7.8 Interpretation

In these terms, headings and boldings are for convenience only and do not affect the interpretation of these terms and, unless the context requires otherwise:

(a) words importing the singular include the plural and vice versa;
(b) other parts of speech and grammatical forms of a word or phrase defined in these terms have a corresponding meaning;
(c) an expression importing a natural person includes any company, partnership, joint venture, association, corporation or other body corporate and any government agency;
(d) a reference to any thing (including any right) includes a part of that thing, but nothing in this paragraph implies that performance of part of an obligation constitutes performance of the obligation;

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(e) a reference to a clause or glossary is a reference to a clause of, and a glossary to, these terms and a reference to these terms includes any glossary;
(f) a reference to a document includes all amendments or supplements to, or replacements or novations of, that document;
(g) a reference to a document includes any agreement in writing, or any certificate, notice, instrument or other document of any kind;
(h) a reference to a party to a document includes that party’s successors and permitted assigns;
(i) a reference to a body (including an institute, association or authority), other than a party, whether statutory or not:
(1) that ceases to exist; or
(2) whose powers or functions are transferred to another body,
(3) is a reference to the body that replaces it or substantially succeeds to its powers or functions; and
(j) none of these terms will be construed adversely to the Issuer solely on the ground that the Issuer was responsible for preparing these terms.

7.9 Use of ‘include’ and ‘in particular’

Use of the expressions ‘include’ and ‘in particular’ does not limit the generality of the preceding words, or exclude anything not expressly included or particularised, unless these terms expressly provide otherwise.

8 Glossary

8.1 Defined terms

The meanings of the terms used in these terms are set out below.

Term	Meaning
ASIC	the Australian Securities and Investments Commission.
ASX	the Australian Securities Exchange operated by ASX Limited ABN 98 008 624
	691.
ASX Operating Rules	the Listing Rules, the ASX Market Rules published by ASX and the ASTC
	Settlement Rules published by ASX Settlement and Transfer Corporation Pty
	Limited ABN 49 008 504 532.
Cleansing Statement	a notice to ASX under section 708A(5) of the Corporations Act 2001 (Cth).

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Term	Meaning
Corporations Act	Corporations Act 2001 (Cth)
Exercise Date	the date when an Optionholder properly exercises that Option in accordance
	with clause 3.3(a).
Exercise Notice	a notice in such form as the Issuer approves from time to time.
Exercise Price	the exercise price specified in clause 2.1(a).
Issuer	Natural Fuel Limited ABN 52 106 760 418.
Listing Rules	the ASX Listing Rules published by ASX.
Option	a right to subscribe for one Share on these terms, subject to adjustment in
	accordance with clause 4.3.
Optionholder	a person registered from time-to-time on the Issuer’s register of option holders
	as a holder of Options.
Quotation Date	the date on which the Issuer is required to give notice to ASX under clause
	5(c), which shall be no later than 5 Business Days following the issue of
	Shares.
Share	an ordinary Share in the Issuer.

8.2 Definitions in Listing Rules

In these terms, unless the context requires otherwise, the following expressions have the same meaning as in the Listing Rules: Bonus Issue , Business Day , Ordinary Securities, Pro Rata Issue , Record Date and Security .

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Annexure 2

Independent Expert’s Report

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The Directors Natural Fuel Limited Level 11 Outridge Crescent Subiaco WA 6008

ABN 53 095 445 560 AFS Licence No 246532 Level 27, 363 George Street Sydney NSW 2000 Australia GPO Box 1640, Sydney NSW 2001

Telephone: [61 2] 8235 7500 Facsimile: [61 2] 8235 7550 www.lonerganedwards.com.au

2 May 2008

Subject: Issue of shares and grant of conversion right

Dear Sirs

Introduction

1 On 26 March 2008 Natural Fuel Limited (NFL) announced that it had executed a US$40 million funding agreement (the Agreement) with Power Knight Pte Ltd (Power Knight), an associated company of Jakarta based PT Risjadson Holding and Investment Co. Limited (Risjadson).
2 Under the Agreement:
(a) Power Knight will subscribe for a placement of approximately 168.8 million NFL shares for a total issue price of US$20 million (approximately A$0.13 per share[1] ) (the Share Issue)
(b) Power Knight will lend a US$20 million project finance loan (the Loan) to NFL. The Loan will have a term of two years, be secured by a first ranking charge over the assets of NFL’s Singapore subsidiary, Natural Fuel Pte Ltd (NFPL), excluding its working capital assets, and have an interest rate of 10% per annum (payable half-yearly)
(c) Power Knight will, subject to shareholder approval, have an conversion right (the Conversion Right) to convert the outstanding balance of the Loan (up to US$20 million) into approximately 168.8 million NFL shares at a US dollar denominated conversion price equivalent to approximately A$0.13 per share[1] .

1 Based on an exchange rate of A$1.00 = US$0.911.

Liability limited by a scheme approved under Professional Standards Legislation

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3 Subsequently NFL executed a convertible facility deed with Power Knight on 24 April 2008 (Facility Deed). Under the Facility Deed, NFL will borrow US$20 million which may be drawn down in two tranches of US$6 million one day after execution and US$14 million on satisfaction of certain conditions precedent, including the execution of security documents and a subscription agreement.
4 If Power Knight exercises its Conversion Right in full, it will own approximately 49% of NFL’s issued share capital[2] .
5 In addition, on 26 March 2008 NFL also announced that:
(a) 12 million three year options exercisable at A$0.13 will be issued to an entity in the Tropical Oils Group, which facilitated the transaction
(b) NFL also executed an agreement to borrow A$4.5 million from Ganesha Nominees Pty Ltd, a company controlled by NFL director Mr Michael Coote. NFL may convert outstanding amounts under the loan (including interest) to NFL shares at A$0.13 per share.
6 The funds raised will be used to fund the completion of NFPL’s biodiesel facility in Singapore, working capital for commissioning and glycerine refining and general corporate purposes.

Natural Fuel limited

7 NFL is an Australian ASX listed company which owns a biodiesel plant and glycerine refinery on Singapore’s Jurong Island. The facility has the capacity to produce up to 600,000 tonnes of biodiesel and 60,000 tonnes of refined glycerine per annum. NFL also owns a 50% joint venture interest in Australia’s largest biodiesel facility in Darwin.

PT Risjadson Holding and Investment Co. Limited

8 As stated above, Power Knight is an associated company of PT Risjadson Holding & Investment Co Limited (Risjadson). Risjadson is a privately owned investment and holding company based in Jakarta, Indonesia that was established by Ibrahim Risjad and sons and is controlled by the Risjad family.
9 Risjadson is an investment group focusing on core businesses leveraging on Indonesia's vast primary energy and natural resources. Its main investments are in the Energy & Mining Resources, Services and Agro-Industries & Plantation Resources sectors in Indonesia. Having demonstrated the viability of jatropha as a fuel crop by a well advanced pilot programme, the Risjad family is firmly committed to the development of green energy through renewable fuel crop production. Jatropha is an inedible vegetable oil that is

2 This also takes into account the proposed Share Issue to Power Knight referred to in paragraph 1(a).

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compatible with NFL’s biodiesel and glycerine plants. The Risjad family’s businesses includes a pilot programme of a jatropha plantation of more than 200 hectares, which is currently generating jatropha-based fuel mix for equipment and haulage trucks for the Risjad family’s coal mining operations in Indonesia. . The Risjad family anticipates that the alliance with NFL will offer it the opportunity for significant expansion of its jatropha production and refining capacity.

Purpose of report

10 As the Share Issue and Conversion Right (if exercised) will result in Power Knight holding up to approximately 49% of NFL’s issued share capital, the Share Issue and Conversion Right require approval by NFL shareholders.
11 Consequently, the directors of NFL have requested that Lonergan Edwards & Associates Limited (LEA) prepare an Independent Expert’s Report (IER) to assist existing NFL shareholders in making a decision whether or not to approve the Share Issue and Conversion Right. Our report has been prepared for the purpose of meeting the requirements of section 611 of the Corporations Act in relation to the Share Issue and Conversion Right to be allotted pursuant to the proposal.
12 Our report will accompany a notice of general meeting and explanatory statement to be sent by NFL to its shareholders in connection with the Share Issue and Conversion Right. LEA is independent of NFL, Power Knight and the Risjadson Group and has no other involvement or interest in the proposal.

Summary of opinion

13 In our opinion the Share Issue and Conversion Right is fair and reasonable to the shareholders of NFL. The main reasons for this opinion are summarised below.

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Valuation of NFL shares

14 In our opinion the market value of the shares in NFL (on a 100% controlling interest basis) ranges between 11.5 cents and 14.5 cents per share, as summarised below:

	Low A$m High A$m
Value of Singapore Project Value of 50% interest in NFAL Value of NFE Value of shares in GEM Enterprise value Cash Convertible bonds Option exercise money Value of shares in NFL Fully diluted shares on issue(1) Value per NFL share (cents)	97.3 109.0 5.5 9.0 - - 0.8 0.8
	103.6 118.8 7.0 7.0 (71.6) (76.1) 2.3 2.3
	41.3 52.0 359.1 359.1
	11.5 14.5

Note:

1 Fully diluted shares on issue assumes 21.3 million options are exercised (at $0.11 per share)

Effective issue price

15 The issue price of the shares and the conversion price of the Conversion Right (being 13 cents per NFL share) lies within our assessed valuation range. However, it should be noted that the Conversion Right does not expire for two years from the date of issue, and accordingly the present value of the conversion price is less than 13 cents per share.
16 As Power Knight is to be issued both shares and granted a conversion right under the proposal, in our opinion, the fairness of the Share Issue and Conversion Right should be assessed based on the effective issue price of the shares taking into account the value of the Conversion Right.

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17 The effective price of the shares issued under the Share Issue is therefore as follows:

	Cents per share
Price of shares issued under Share Issue Less value of Conversion Right granted to Power Knight (per NFL share) Effective issue price of shares (taking into account benefit of Conversion Right)	13.0 (1.4)
	11.6

Fairness and reasonableness

18 A comparison of the effective issue price and the market value of NFL shares on a 100% controlling interest value is shown below:

	Low cents High cents Mid-point cents
Effective Share Issue price per share Value of 100% of NFL per share Extent to which effective Share Issue price exceeds (or is less than) the value per NFL share	11.6 11.6 11.6 11.5 14.5 13.0
	0.1 (2.9) (1.4)

19 As the effective Share Issue price is consistent with our value of NFL shares on a 100% controlling interest basis (albeit at the low end) we have concluded that the Share Issue and Conversion Right is fair to NFL shareholders.
20 Under ASIC Regulatory Guide 111 the issue price is also reasonable if it is fair. Consequently, in our opinion, the Share Issue and Conversion Right is fair and reasonable to NFL shareholders.

Other advantages

21 NFL shareholders should also note that:
(a) if the Share Issue and Conversion Right does not proceed NFL will need to raise additional equity capital[3] in order to complete the construction and commissioning of its Singapore plant. Such an equity issue would normally be priced at a significant discount to the listed market price. In contrast the effective Share Issue price represents a

3 While the convertible bonds are outstanding the level of secured debt is limited to no more than US$20 million.

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premium to the recent market prices of NFL shares

(b) failure to approve the proposal is likely to have serious financial consequences for NFL.

Disadvantages

22 NFL shareholders should note that Power Knight will own approximately 49% of NFL shares on issue if the Share Issue and Conversion Right proceeds (and the Conversion Right is exercised in full), and will therefore obtain effective control over NFL. This is likely to reduce the possibility of a takeover offer being made for NFL in the future, as other bidders may be deterred from making an approach for NFL without the support of Power Knight.
23 However given NFL’s urgent need for additional funding, in our opinion, the advantages of the Share Issue and Conversion Right outweigh the disadvantages.

Impact of conditions

24 Shareholders in NFL should note that the Share Issue and Conversion Right is conditional upon a number of conditions being fulfilled. Should these conditions not be met the Share Issue and Conversion Right will not proceed and NFL will need to seek alternative sources of funding.

Other matters

25 The ultimate decision whether to approve the Share Issue and Conversion Right should be based on each NFL shareholder’s assessment of their own circumstances. If shareholders are in doubt about the action they should take in relation to the Share Issue and Conversion Right or matters dealt with in this report, shareholders should seek independent professional advice. For our full opinion on the Share Issue and Conversion Right, NFL shareholders should read the remainder of our report.

Yours faithfully

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Craig Edwards Authorised Representative

Martin Holt Authorised Representative

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Section		Paragraph
I	The Share Issue and Conversion Right	26 – 34
II	Scope of our report	35 – 54
III	Profile of NFL	55 – 92
IV	Industry overview	93 – 109
V	Valuation approach	110 – 118
VI	Valuation of NFL	119 – 153
VII	Opinion on the Share Issue and Conversion Right	154 – 177
Appendices
A	Financial services guide
B	Qualifications, declarations and consents
C	Glossary

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I The Share Issue and Conversion Right

26 On 26 March 2008 Natural Fuel Limited (NFL) announced that it had executed a US$40 million funding agreement (the Agreement) with Power Knight Pte Ltd (Power Knight), an associated company of Jakarta based Risjadson Group.
27 Under the Agreement:
(a) Power Knight will subscribe for a placement of approximately 168.8 million NFL shares for a total issue price of US$20 million (approximately A$0.13 per share[4] ) (the Share Issue)
(b) Power Knight will lend a US$20 million project finance loan (the Loan) to NFL. The Loan will have a term of two years, be secured by a first ranking charge over the assets of NFL’s Singapore subsidiary, Natural Fuel Pte Ltd (NFPL), excluding its working capital assets, and have an interest rate of 10% per annum (payable half-yearly)
(c) Power Knight will, subject to shareholder approval, have a conversion right (the Conversion Right) to convert the outstanding balance of the Loan (up to US$20 million) into approximately 168.8 million NFL shares at a US dollar denominated conversion price equivalent to approximately A$0.13 per share[1] .
28 Subsequently NFL executed a convertible facility deed with Power Knight on 24 April 2008 (Facility Deed). Under the Facility Deed, NFL will borrow US$20m which may be drawn down in two tranches of US$6m one day after execution and US$14m on satisfaction of certain conditions precedent, including the execution of security documents and a subscription agreement.
29 If Power Knight exercises its Conversion Right in full, it will own approximately 49% of NFL’s issued share capital[5] .
30 If the Share Issue and Conversion Right is approved by shareholders, Power Knight will be entitled to nominate 3 new members to NFL’s board, which is expected to consist of 7 board members.
31 Shareholders should also note that 12 million three year options exercisable at A$0.13 will be issued to an entity in the Tropical Oils Group, which facilitated the transaction.
32 The funds raised will be used to fund the completion of NFPL’s biodiesel facility in Singapore, working capital for commissioning and glycerine refining and general corporate purposes.
4 Based on an exchange rate of A$1.00 = US$0.911.

5 This also takes into account the proposed Share Issue to Power Knight referred to in paragraph 27(a).

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Conditions

33 In addition to the standard lending conditions applicable to the Loan, the Share Issue and Conversion Right is subject to the approval of NFL shareholders and the Foreign Investment Review Board (FIRB), and the submission of an Independent Engineering Report on NFL’s Singapore facility.
34 If the shareholder and FIRB approval conditions to the Share Issue and Conversion Right are not satisfied by 30 June 2008, Power Knight may terminate the Agreement, in which case NFL will be required to repay the Loan within 12 months from termination.

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II Scope of our report

Purpose

35 If the Share Issue and Conversion Right is approved and the Conversion Right is exercised in full, Power Knight will hold approximately 49% of the share capital in NFL.
36 Section 606 of the Corporations Act 2001 (Corporations Act) generally prohibits the acquisition of a relevant interest in issued voting securities of an entity if the acquisition results in a person’s voting power in a company increasing from below 20% to more than 20%, or from a starting point between 20% and 90%, without making an offer to all securityholders of the entity[6] . An exception to this general prohibition is set out in Section 611(7), whereby such an acquisition is allowed where the acquisition is approved by a majority of securityholders of the entity at a general meeting and no votes are cast in respect of securities held by the acquirer or any of its associates.
37 Regulatory Guide 111 sets out the view of ASIC on the operation of Section 611(7) of the Corporations Act. Section 611(7) of the Corporations Act allows shareholders to waive the prohibition in Section 606. ASIC Regulatory Guide 111 requires that shareholders approving a resolution pursuant to this section be provided with all material information in relation to the proposed transaction including an IER.
38 As Power Knight will acquire more than 20% of NFL shares there is a regulatory requirement for NFL to commission an IER. Consequently, the Directors of NFL have requested that LEA prepare an IER stating whether, in LEA’s opinion, the Share Issue and Conversion Right is fair and reasonable to the shareholders of NFL.
39 This report has been prepared to assist the Directors of NFL in making their recommendation to the shareholders of NFL not associated with Power Knight, and to assist these shareholders assess the merits of the Share Issue and Conversion Right.
40 This report should not be used for any other purpose or by any other party. The ultimate decision whether to approve the Share Issue and Conversion Right should be based on each shareholders’ assessment of their own circumstances, including their risk profile, liquidity preference, tax position and expectations as to value and future market conditions. If in doubt about the Share Issue and Conversion Right or matters dealt with in this report, NFL shareholders should seek independent professional advice.

6 Subject to the 3% every six months “creep provisions”.

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Basis of assessment

41 In preparing our report we have given due consideration to the Policy Statements and Practice Notes issued by ASIC, particularly Regulatory Guide 74 “Acquisitions Agreed to by Shareholders”, and Regulatory Guide 111 “Content of Expert Reports”.
42 ASIC Regulatory Guide 111 – Content of Expert Reports states that an issue of shares requiring approval under item 7 of section 611 of the Corporations Act should be analysed as if it were a takeover bid under Chapter 6[7] . Accordingly, the expert is required to assess the transaction in terms of the convention established for takeovers pursuant to section 640 of the Corporations Act), being:
(a) is the offer “fair”; and (b) is it “reasonable”[8] .
(b)
43 When assessing takeovers, an offer is “fair” if the value of the offer price or consideration is equal to or greater than the value of the securities the subject of the offer. Further, this comparison should be made assuming 100% ownership of the company and is irrespective of whether the offer is cash or scrip.
44 An offer is “reasonable” if it is fair. An offer may also be reasonable if, despite being “not fair”, there are sufficient reasons for security holders to accept the offer in the absence of any higher bid before the close of the offer.
45 Specifically, for the purpose of assessing an issue of shares where the allottee acquires greater than 20% but less than 50% of the company (and thus, conventionally, does not provide the vendor / allottee with 100% control of the company incorporating the merged business), Regulatory Guide 111 requires that the value of the consideration offered be assessed against the value of the shares issued to the allottee on a 100% controlling interest basis (ie including a control premium), even though 100% control will not pass.
46 Regulatory Guide 111 also states that the expert should identify the advantages and disadvantages of the proposal to the shareholders not associated with the transaction, and should provide an opinion on whether the advantages of the proposal outweigh the disadvantages[9] .
47 In LEA’s opinion, assessing the “fairness” of the Share Issue and Conversion Right by comparing the effective issue price with the value of 100% of NFL (including a full control premium), does not necessarily assist NFL shareholders in making an informed choice as to whether to accept or reject the proposal. Simply put, this is because 100% ownership is not being

7 RG111.21 provides an example of such an issue of shares that is comparable to a takeover bid, being where a company issues shares to a vendor of another entity or the vendor of a business and as a consequence, the vendor acquires over 20% of the company incorporating the merged business. 8 RG111.23 and RG111.9. 9 RG 111.39.

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transferred. Accordingly, for the purpose of this analysis, we have placed greater emphasis on whether the advantages of the Share Issue and Conversion Right outweigh the disadvantages to NFL’s existing shareholders.

48 The following facts, inter alia, have been considered when determining whether the Share Issue and Conversion Right is fair and reasonable to NFL shareholders:
(a) the issue price of shares under the Share Issue and the exercise (or conversion) price under the Conversion Right
(b) the value of 100% of the equity of NFL
(c) whether the Share Issue price and exercise price under the Conversion Right represents a premium (or discount) to the current market price of NFL shares
(d) the current funding requirements of NFL and related level of debt and available financing facilities
(e) the impact of the Share Issue and Conversion Right on the financial performance and net tangible asset backing per NFL share
(f) the impact of the Share Issue and Conversion Right on the ownership and control of NFL
(g) the impact of the Share Issue and Conversion Right on the availability of NFL’s tax losses
(h) the relevant position of NFL shareholders before and after the proposed Share Issue and Conversion Right
(i) other qualitative and strategic issues associated with the Share Issue and Conversion Right and the extent to which, on balance, they may advantage or disadvantage existing NFL shareholders.

Limitations and reliance on information

49 Our opinions are based on economic, market and other conditions prevailing at the date of this report. Such conditions can change significantly over relatively short periods of time.
50 Our report is also based upon financial and other information provided by NFL. We have considered and relied upon this information and believe that the information provided is reliable, complete and not misleading and we have no reason to believe that material facts have been withheld. The information provided was evaluated through analysis, enquiry and review for the purpose of forming an opinion on the proposed transaction from the perspective of

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NFL shareholders. However, in assignments such as this, time is limited and we do not warrant that our enquiries have identified or verified all of the matters which an audit, extensive examination or “due diligence” investigation might disclose. None of these additional tasks have been undertaken.

51 We understand the accounting and other financial information that was provided to us has been prepared in accordance with the Australian equivalent to International Financial Reporting Standards (AIFRS) and on a consistent basis with the method of accounting in previous years.
52 An important part of the information base used in forming an opinion of the kind expressed in this report is the opinions and judgement of management of the relevant companies. This type of information has also been evaluated through analysis, enquiry and review to the extent practical. However, it must be recognised that such information is not always capable of external verification or validation.
53 We in no way guarantee the achievability of budgets or forecasts of future profits. Budgets and forecasts are inherently uncertain. They are predictions by management of future events which cannot be assured and are necessarily based on assumptions of future events, many of which are beyond the control of management. Actual results may vary significantly from forecasts and budgets.
54 We have assumed that the budgets and forecasts have been prepared fairly and honestly based on the information available to management at the time and within the practical constraints and limitations of such budgets and forecasts. We have assumed that the budgets and forecasts do not reflect any material bias, either positive or negative. Based on our discussions with NFL management we have no reason to believe that these assumptions are inappropriate.

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III Profile of NFL

Overview

55 NFL is an Australian ASX listed company which owns a biodiesel plant and glycerine refinery on Singapore’s Jurong Island. The facility has name-plate capacity to produce up to 600,000 tonnes of biodiesel and 60,000 tonnes of refined glycerine per annum. NFL also owns a 50% joint venture interest in Australia’s largest biodiesel facility in Darwin.
56 The structure of the NFL Group is shown below:

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----- Start of picture text -----

Natural Fuel
Limited
(NFL)
50% 100% 100%
Natural Fuel Natural Fuel Natural Fuel &
Australia Ltd Pte Ltd Energy Inc
(NFAL) (NFPL) (NFE)
100% 100% 100%
Natural Fuel Biofuels Pte Natural Fuel &
Darwin Ltd Ltd Energy
(NFD) (BPL) Biofuels Inc
(NFEB)
----- End of picture text -----

57 NFL was incorporated in October 2003 and listed on the ASX in December 2006. The Company raised pre-IPO debt funding of A$30 million (which converted to equity on listing) and a further A$83 million in equity (before issue costs) in the IPO. In April 2007 NFL raised US$80 million through a convertible bond issue. The funds raised were principally used to fund the construction of the biodiesel plants in Singapore and Darwin.

Natural Fuel Pte Ltd

58 NFL’s wholly owned subsidiary, Natural Fuel Pte Ltd (NFPL) is in the final stages of constructing one of the world’s largest biodiesel plants on Jurong Island in Singapore.

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59 The 600,000 tonnes per annum (mta) facility comprises three biodiesel trains of 200,000 mta. Each train is able to produce biodiesel and glycerine simultaneously from a vegetable oil feedstock, with crude glycerine a byproduct of the biodiesel production process. Alternatively, the trains, via their independent glycerine refining circuits, can simply refine crude glycerine to pharmaceutical grade glycerine, which is currently in high demand for use in food, cosmetics and pharmaceuticals. This is a significant competitive advantage as the majority of the world’s biodiesel plants do not have the capacity to refine crude glycerine independently of the biodiesel production process.
60 Due to significant increases in the price of vegetable oil feedstock the production of biodiesel at the Singapore plant is currently uneconomic. As a result the facility is currently refining crude glycerine only, but intends to produce biodiesel once industry conditions improve.
61 Train 1 (BD1 and GLY1) was completed in December 2007 and the first throughput of external sourced crude glycerine from GLY1 occurred in March 2008, with the production of refined glycerine being achieved. Train 2’s glycerine refining circuits (GLY2) are mechanically complete and are currently undergoing commissioning tests. Train 3 (GLY3) is expected to be complete by early May 2008.
62 All three independent glycerine refining circuits will be ramped up to full capacity over the coming months and are capable of producing a total of 60,000 tonnes of refined glycerine per annum. NFL has identified approximately 80,000 tonnes of crude glycerine which, if required, is enough to run the glycerine circuits at full capacity for 2008.
63 NFL has also received an audit report on its glycerine refining facilities which has certified the plant to a kosher-grade glycerine refining standard. Koshergrade glycerine is regarded as a premium product and will further allow NFL to capitalise on the product’s limited availability.
64 In June 2007 NFPL signed a 12-year Agreement with Singapore-based energy company Banyan Utilities Pte Ltd to build, operate and transfer a Cogeneration Facility at Jurong Island. The Agreement will supply power and steam and is expected to deliver a substantial reduction in operating costs[10] when full production of biodiesel is achieved.
65 NFPL also recently finalised a long term Off-take Agreement with GEM Biofuels Plc (GEM) for the supply of crude jatropha oil as a feedstock for the Singapore facility. Under this agreement, the supply of the crude jatropha oil will commence in early 2009 at a free on board delivery price of US$500 per tonne[11] , adjusted for inflation, for the first five years of the 10 year agreement. GEM will initially supply NFL with 2.5% of its Singapore facility production requirements, with supply increasing year on year as its jatropha plantation

10 Being a saving in operating costs of more than 5%

11 Management have estimated additional jatropha oil refining costs and freight costs to Singapore of approximately US$190 per tonne.

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program in Madagascar develops. By 2013, 55% of GEM’s jatropha production will be provided to NFL, equivalent to 25% of the Singapore plant’s overall feedstock requirements. NFL holds approximately 3.9% of the shares in GEM (which is listed on the Alternative Investment Market (AIM) in the UK).

66 It should also be noted that NFPL has been awarded “Pioneer Status” by the Economic Development Board of Singapore, resulting in a tax incentive where zero tax will be payable for 10 years from 1 January 2008.

Natural Fuels Australia Limited

67 NFL owns 50% of Natural Fuels Australia Limited (NFAL) through a joint venture with Babcock & Brown Environmental Investments Limited (BEI).
68 The joint venture owns and operates Australia’s largest biodiesel plant located in Darwin. The plant has a nameplate capacity of 138 million litres of biodiesel and as a by-product, 12,250 tonnes of pharmaceutical grade glycerine per annum.
69 The joint venture was entered into in July 2005, with plant construction completed in November 2006. The commissioning and ramp up of production was hampered by filtration issues requiring plant modifications resulting in cost overruns. The technology provider has indicated that they are confident that these issues can be resolved.
70 However, the cost of the plant feedstock, vegetable oil (primarily in the form of palm olein), has soared making production uneconomic. As a result biodiesel production quantities to date have been minimal.
71 Until feedstock prices return to levels that will enable economic production of biodiesel NFAL management intend to pursue a strategy of refining crude glycerine to generate revenue, along with cost reductions to contribute to fixed cost recovery. To date, small quantities of refined glycerine at Darwin have occurred using externally sourced crude glycerine, achieving better than target specifications (99.5%) and better than nameplate daily capacity rates.
72 NFAL is currently dependent on the ongoing support of its shareholders and will require additional funding in order to finalise commissioning and continue as a going concern until biodiesel economics improve.
73 As a result, NFL wrote down the value of its investment[12] in NFAL by $30.3 million to $10.9 million as at 31 December 2007.

12 Comprising both debt and equity.

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Natural Fuel & Energy Inc

74 Natural Fuel & Energy Inc (a wholly owned subsidiary of NFL) was established for the purpose of developing a new biodiesel plant in Houston in the United States of America.
75 However, due to the rising cost of soy feedstock, rising capital construction costs and the withdrawal of the Texas State Government’s Biofuels Incentive Program (which would have contributed US20 cents per gallon for up to 18 million gallons per year) the proposed Houston project was no longer considered viable.
76 As a result, a non-cash impairment charge of A$21.1 million was recognised in the year ended 30 June 2007, which wrote the carrying value of this project down to nil.
77 NFL has now terminated the services of its US based employees and is currently winding up all operations in the USA. NFL management do not expect to recover any material value from its US operations.

Summary of financial performance

78 A summary of NFL’s operating performance for the two years ended 30 June 2007 and the half year ended 31 December 2007, is summarised below:

Financial performance for NFL
	Year to 30/6/06 Actual $000 Year to 30/6/07 Actual $000 6 mths to 31/12/07 Actual $000
Revenue(1) EBITDA Depreciation and amortisation EBIT Net interest income/(expense) Significant items Loss before income tax Income tax benefit/(expense) Loss attributable to minority interests Loss after tax attributable to NFL shareholders	140 1,004 71 (3,073) (7,322) (13,859) (37) (60) (56)
	(3,110) (7,382) (13,915) 132 (19,271) 4,205 (9,947) (21,125) (30,289)
	(12,925) (47,778) (39,999) (2,522) - - 40 - -
	(15,407) (47,778) (39,999)

Note:

1 Excludes interest income.

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79 Key factors impacting on the performance of NFL during the above periods is outlined below:

Year ended 30 June 2006

(a) NFL was mainly engaged in construction of a biodiesel plant in Darwin (50% joint venture) and progressed its development plans to commence construction of other biodiesel plants in Singapore and Houston, USA
(b) NFL had no sales from trading during the financial year
(c) NFL sold a 50% interest in NFAL to BEI for $18 million and recognised a net gain of $9.3 million on the sale[13]
(d) an impairment charge against goodwill of $19.2 million was recognised due to changes in the project economics for the Houston project[14]
(e) income tax expense of approximately $2.5 million represents deferred tax.

Year ended 30 June 2007

(a) a guarantee fee of $891,965 was received from NFAL
(b) due to the rising cost of soy feedstock, rising capital construction costs and the withdrawal of the Texas State Government’s Biofuels Incentive Program the proposed Houston project was considered no longer viable. As a result an impairment charge of A$21.1 million was recognised (which reduced the carrying value of the project to nil)
(c) net interest includes a non-cash finance charge of $20 million incurred on the conversion of $30 million pre-IPO convertible notes to equity
(d) NFL’s 50% share of NFAL’s loss after tax was $1.66 million
(e) employee benefits expenses increased by $1.6 million reflecting an increase in staff in Singapore and the USA
(f) an unrealised foreign exchange loss of approximately $1.0 million was recognised on the conversion of US dollar and Singapore dollar cash balances and US dollar convertible bonds to the spot rate at year end
(g) construction of the Jurong Island, Singapore plant started in November 2006

13 This net gain is shown in the table above as a significant item.

14 This impairment charge is treated in the table above as a significant item.

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Half-year ended 31 December 2007

(a) NFL’s 50% share of the net loss incurred by NFAL was $6.5 million
(b) employee costs increased by $1.9 million to $2.9 million which was largely attributable to the Singapore subsidiary employing more staff
(c) NFL’s loan to NFAL was written down by $30.3 million. This impairment occurred due to ongoing high feedstock prices and ongoing problems bringing the plant to nameplate capacity
(d) NFL acquired 3.9% of the shares in GEM Biofuels Plc (GEM) for A$1.5 million.

Cash flow

80 NFL’s cash flow statement for the two years ended 30 June 2007 and the half year ended 31 December 2007 is summarised below:

Cash flow statement
	Year to 30/6/06 $000 Year to 30/6/07 $000 6 mths to 31/12/07 $000
Cash flow from operating activities: Receipts from services provided Payments to suppliers and employees Net interest received (paid) Net cash used in operating activities Cash flow from investing activities: Development costs Loans to NFAL Purchase of investments Other (net) investing cash flows Net cash used in investing activities Cash flow from financing activities: Proceeds from share issues Proceeds from convertible notes Proceeds from convertible bonds Costs associated with capital raisings Other (net) financing cash flows Net cash provided by financing activities Net increase (decrease) in cash held Cash at beginning of period Effect of exchange rate fluctuations Cash at end of period	130 113 98 (1,025) (14,296) (7,338) 132 321 1,722
	(763) (13,862) (5,518)
	(821) (32,878) (59,607) - (32,436) (5,073) (3,765) (4,916) (1,513) 50 (754) (447)
	(4,536) (70,984) (66,640) 5,433 83,771 - - 30,000 - - 93,963 - - (10,456) (8) 205 594 (3,458)
	5,638 197,872 (3,466)
	339 113,026 (75,624) 1,069 1,408 114,434 - - (2,811)
	1,408 114,434 35,999

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81 As indicated above, NFL has incurred operating cash flow deficits in recent periods with the cost of the Darwin and Singapore plants being funded by debt and equity capital raisings.

Financial position

82 The consolidated financial position of NFL as at 31 December 2007 is set out below:

Statement of financial position
	Actual(1) $000
Current assets Cash and cash equivalents Trade and other receivables Inventories Total current assets Non-current assets Other financial assets Development costs Goodwill Property, plant and equipment Total non-current assets Total assets Current liabilities Trade and other payables Borrowings Total current liabilities Non-current liabilities Borrowings Deferred tax liability Total non-current liabilities Total liabilities Net assets	35,999 11,553 6,451
	54,003
	1,472 107,496 3,083 1,234
	113,285
	167,288
	17,914 313
	18,227
	81,674 2,522
	84,196
	102,423
	64,865

Note:

1 The consolidated financial position of NFL as at 31 December 2007 was reviewed by its auditors (but is not audited).

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83 With respect to the above it should be noted that:
(a) while NFL held A$36.0 million in cash and cash equivalents as at 31 December 2007 the company stated in note 5 of its accounts for the six months ended 31 December 2007 that “the cash requirements for the completion and commissioning of the Singapore plant, support for NFAL’s Darwin facility, and working capital for ongoing operations, will necessitate additional external funding during the first half of calendar 2008”
(b) NFL’s loan to NFAL was written down to $10.9 million as at 31 December 2007 (and is included in trade and other receivables)
(c) other financial assets represent the cost of NFL’s investment in GEM
(d) development costs relate to capital costs incurred on construction of the Singapore plant
(e) goodwill relates to the group’s operations in Singapore
(f) non-current borrowings principally reflect US dollar denominated convertible bonds (less issuance costs)[15] . The amount outstanding on the convertible bonds is US$80 million. Their key terms are as set out below:
- (i) the interest rate is 6.75% per annum (payable semi-annually in arrears)
- (ii) the bonds were originally convertible by the holder into NFL shares at A$1.32 per NFL share (the Conversion Price). However, the Conversion Price reduces on various reset dates and events, and is currently A$1.06 per NFL share
- (iii) NFL has the right to redeem all outstanding bonds at their par value (plus accrued and any unpaid interest) on or after 11 April 2011 if the NFL share price exceeds 50% of the prevailing Conversion Price for a specified period of time
- (iv) unless previously redeemed, converted or cancelled the bonds are required to be redeemed on 10 April 2012

15 It should be noted that a portion of the face value of the convertible bonds (US$7.2 million as at 31 December 2007) is included in NFL’s accounts as equity.

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(v) while the convertible bonds are unsecured, the level of debt which can be secured against the Singapore plant while the bonds are outstanding is limited to a principal amount of US$20 million
(g) for accounting purposes a portion of the face value of the convertible bonds (US$7.2 million as at 31 December 2007) is treated as equity.

Operating lease commitments

84 As at 31 December 2007 NFL had operating lease commitments of approximately A$179.0 million. These commitments principally relate to the 20 year storage and handling lease entered into by NFPL with Vopak Terminals Singapore (VTS).
85 In accordance with the terms of the lease NFL has issued an unconditional and irrevocable bank guarantee in favour of VTS in the amount of SG$9 million. The bank guarantee has an expiry date of 24 February 2012 and the cash security required to support the bank guarantee of SG$9 million is included in “Cash and cash equivalents” in the above balance sheet.

Share capital

86 NFL currently has 337,812,127 ordinary shares on issue.
87 There are also 51,900,000 options on issue held by pre IPO vendors, promoters and employees. These expire on 30 June 2008 and have exercise prices of $0.33 (for 50,400,000 options) and $0.50 (for 1,500,000 options).
88 In addition there are a further 21,288,572 options on issue pursuant to an employee share option plan approved by shareholders at the November 2007 AGM. These options have an exercise price of $0.11 and expire on 24 January 2013.

Shareholders

89 As at 8 April 2008 the top 10 shareholders in NFL held 51.54% of the issued capital. The substantial shareholders[16] in the company are as follows:

	Number of shares	%
Shareholder	held	interest
Distinctive Nominees Pty Limited	54,823,800	16.23
Stephanie Linda Strand (RSS Family A/C)	37,467,000	11.09
Mere View Investments Pty Limited	26,716,800	7.91

16 Being those holding 5% or more of NFL’s shares.

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Share price performance

90 The price of NFL shares from 21 December 2006 to 31 March 2008 is summarised in the table below:

	High	Low	Close	Volume
c	ents	cents	cents	000
Quarter ended
Mar-07(1) 1 Jun-07 1 Sep-07 Dec-07 Mar-08	48.0	83.0	100.0	35,102
	00.0	53.0	57.5	36,503
	58.0	25.0	27.0	24,532
	28.5	12.0	15.0	50,540
	26.0	9.7	15.5	33,267

Note:

1 The quarter ended 31 March 2007 includes trading from the date of listing on 21 December 2006.
91 The following graph illustrates the movement in NFL’s share price:

Natural Fuel Limited

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----- Start of picture text -----

Share Price History: Daily from 21 December 2006 to 31 March 2008
($)
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08
----- End of picture text -----

92 As indicated above, the NFL share price has fallen significantly since listing. Significant matters which have contributed to this decline include:
(a) significant increases in the price of vegetable oil feedstock which has made the production of biodiesel at the Singapore and Darwin plants uneconomic

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(b) negative market and investor sentiment towards the Australian and international biodiesel sector
(c) technical difficulties at the Darwin plant which meant that the plant was not able to operate efficiently or at planned capacity, resulting in significant additional capital costs being incurred and commissioning delays
(d) the fact that NFAL is currently dependent on the ongoing support of its shareholders and will require additional funding in order to finalise commissioning and continue as a going concern until biodiesel economics improve.

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IV Industry overview

Biodiesel

93 Biodiesel is a fuel derived from vegetable oils or animal fats through the process of transesterification (reaction of a triglyceride with an alcohol to form esters and glycerol). The chemistry involves conversion of a vegetable oil or animal fat into fatty acid methyl ester (biodiesel) by a reaction using methanol and a basic catalyst such as sodium or potassium hydroxide. A by-product of the production process is crude glycerine.
94 Biodiesel can be mixed with petroleum diesel to create a biodiesel blend to be used in most compression-ignition (diesel) engines with no major modifications.
95 Biodiesel can be made from many oilseed crops, including soybeans, corn, cottonseed, sunflower seed, peanut oil, canola, palm oil and coconut oil, animal fats (tallow), used cooking oil or non-edible oils. Several of these oil crops have relatively high oil content and are therefore ideal for biodiesel production.
96 Biodiesel has been in commercial production in Europe and the USA since 1991 and 1998 respectively. In recent times record crude oil prices and environmental concerns have increased the use of biodiesel around the world.
97 The European Union (EU) is leading the international movement towards biodiesel, currently accounting for half the world’s biodiesel consumption, or four million tonnes per year. The EU has set a target for biodiesel to represent 5.75% of total diesel sales in the EU by 2010. The US, in comparison, consumes about one tenth of that of Europe, due to less government friendly policies towards biodiesel in favour of its large ethanol industry.
98 The promotion of biodiesel in the EU has certainly created demand for biodiesel. Looking forward such policies are likely to become more prevalent as more countries adopt environmentally friendly energy policies. However, neither Singapore or Australia have introduced mandates requiring minimum levels of biodiesel use.

Feedstock

99 A large proportion of feedstock for biodiesel production also has many other uses, such as food. On the back of rising global biodiesel production and strong global demand for food the cost of feedstock has soared. As biodiesel prices have not increased by the same extent, in many cases this has resulted in biodiesel production becoming uneconomic. This has resulted in some companies (including NFL) considering other biodiesel feedstocks such as Jatropha, a non-edible seed oil crop generally produced on arable, dry land with poor soil quality. Given these qualities Jatropha is becoming a

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potentially promising feedstock of choice for the biodiesel industry in the future. However, current volumes of Jatropha are relatively limited.

100 In terms of global production, volumes and traded volumes, palm oil ranks first amongst the vegetable oils (with 30% of 2005-06 global oil production) with soybean oil second (with 29% of 2005-06 global oil production).
101 NFL uses refined bleached deodorised palm olein as the primary feedstock for the production of biodiesel. Palm olein is derived from palm oil. World palm oil production in 2006 was approximately 37 million tonnes, of which Malaysia and Indonesia accounted for some 90%. The price of palm olein has more than doubled since early November 2006, rising from $US450 per tonne to approximately US$1,200 per tonne at the time of writing.

Environmental benefits

102 Biodiesel is a clean burning and environmentally friendly alternative diesel fuel. It has numerous environmental advantages when compared to petroleum diesel and other energy sources, some of which are outlined below:
(a) the crops used for biodiesel feedstock are renewable resources
(b) biodiesel is biodegradable and biodiesel blends accelerate the biodegradability of petroleum diesel. For example, petroleum diesel, when blended with 20% biodiesel, degrades twice as fast
(c) there is a substantial reduction of carbon dioxide in the production of biodiesel as the crops that provide the feedstock, consume carbon dioxide through the process of photosynthesis
(d) independent studies, including those conducted by the US Departments of Energy and Agriculture, have demonstrated that biodiesel performs similarly to petroleum diesel in terms of fuel economy, horsepower and torque due to its lower viscosity, while providing superior lubricity
(e) when biodiesel replaces the lubricating qualities lost in low sulphur petroleum it can significantly reduce engine wear without the introduction of a chemical additive.

The Australian biodiesel industry

103 The Australian biodiesel industry is small on an international scale with only a handful of producers. As is the case globally, soaring feedstock prices have impacted local production. Under current market conditions and government policy settings the cost of producing biodiesel in Australia exceeds current selling prices. Unlike the EU, where government mandated minimum standards exist for biodiesel additives, there are no such requirements in

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Australia. The Australian Government has however set a target of 350 million litres of renewable fuel use within the Australian market annually by 2010.

104 While there are no mandated minimum standards, the biodiesel industry receives support from The Clean Fuels Act 2004, whereby the Australian Government provides a grant of A$0.38 per litre of biodiesel used in Australia that meets the biodiesel fuel standard. This grant effectively offsets the excise duty of $0.38 per litre that is payable on biodiesel. From 1 July 2011, the grant decreases annually to A$0.191 per litre in 2015.
105 In a bid to resurrect the sector various industry players have been calling on a government mandate to include 2% biodiesel in the production of Australian diesel.
106 In response to the challenging market conditions Australian producers have sold non core assets, placed their production facilities on care and maintenance, while new entrants are deferring any new investments in the industry. A summary of the status of the listed Australian biodiesel producers at present is set out as follows:

		Litres
Listed companies	Location	000	Status
Agri Energy	USA (Beatrice, Nebraska)	227,125	In construction, sold in January 2008
Australian	Australia (Narangba, Qld.)	160,000	Care and maintenance
Biodiesel Group
	Australia (Berkeley Vale, NSW)	40,000	Mothballed, recently sold for $2.64
			million
Australian	Australia (Largs Bay, SA)	44,500	Care and maintenance
Renewable Fuels
	Australia (Picton, WA)	44,500	Care and maintenance
Mission Biofuels	Malaysia (Kuantan Port)	113,636	Care and maintenance
	Malaysia (Kuantan Port Plant	284,091	To be completed and commissioned in
	No. 2)		Aug 2008
Natural Fuels	Singapore (Jurong Island)	681,818	Under construction, completion Q2 2008
	Australia (Darwin, NT, 50%	69,602	Construction finished. Plant not yet
	share)		commissioned. Producing intermittently
			at reduced capacity
Sterling Biofuels	Malaysia (Lahad Datu, Sabah)	113,636	Care and maintenance
International

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107 Biodiesel plant operators in Australia have indicated that they expect the current difficult market conditions to remain for some time, resulting in their decision to place their plants on “care and maintenance”. In this regard we note that:
(a) at NFL’s 2007 AGM on 28 November 2007 the chairman stated that “the Board (of NFL) expects the tough market conditions to continue in the medium term”
(b) on 2 November 2007 Australian Renewable Fuels Limited stated that “production of biodiesel from ARF’s two processing plants has become uneconomic with no indication of material improvement in feedstock prices in the immediate future”
(c) at Agri Energy Limited’s 2007 AGM on 28 November 2007 the chairman stated that “local biodiesel developments will continue to struggle due to an inadequate feedstock base and unfavourable government legislation surrounding consumption”
(d) on 23 November 2007 the Chairman of Sterling Biofuels stated at its 2007 AGM that they are managing their cash flows and containing costs so that they are able to see through the next 2 to 2.5 years until their plantation development and other upstream activities reduces the cost of feedstock.

Glycerine

108 As stated above, crude glycerine is a by-product of the biodiesel production process. However, when biodiesel production is low, glycerine becomes relatively rare and expensive. In these situations, the price of refined glycerine (which is used in food products, soaps, personal care skin products and toothpastes) tends to rise more than crude glycerine, making refining of crude glycerine attractive. As shown below the spot price differential between crude and refined glycerine has increased significantly in recent times:

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----- Start of picture text -----

Refined Glycerine v Crude Glycerine
USD PMT Historical Prices: 1996-2007
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Refined Glycerine FOB South East Asia (source ICIS) Crude Glycerine CFR Rotterdam (source: HBI) Spot Price Differential (Dry Weight)
Mar-96Sep-96Mar-97Sep-97Mar-98Sep-98Mar-99Sep-99Mar-00Sep-00Mar-01Sep-01Mar-02Sep-02Mar-03Sep-03Mar-04Sep-04Mar-05Sep-05Mar-06Sep-06Mar-07Sep-07
----- End of picture text -----

109 However, NFL management believe that this price differential will return to historical levels in the medium term.

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V Valuation approach

110 Australian Securities and Investments Commission (ASIC) Regulatory Guide 111 “Content of Expert Reports” outlines the appropriate methodologies that a valuer should consider when valuing assets or securities for the purposes of, amongst other things, share buy-backs, selective capital reductions, schemes of arrangement, takeovers and prospectuses. These include:
(a) the discounted cash flow (DCF) methodology
(b) the application of earnings multiples appropriate to the businesses or industries in which the company or its profit centres are engaged, to the estimated future maintainable earnings or cash flows of the company, added to the estimated realisable value of any surplus assets
(c) the amount that would be available for distribution to shareholders in an orderly realisation of assets
(d) the quoted price of listed securities, when there is a liquid and active market and allowing for the fact that the quoted market price may not reflect their value on a 100% controlling interest basis
(e) any recent genuine offers received by the target for any business units or assets as a basis for valuation of those business units or assets.
111 The DCF method is the superior valuation methodology because:
(a) value is the net present value (NPV) of future cash flows (ie future year’s cash flows, net of outgoings, expressed in terms of today’s dollars)
(b) the DCF methodology is technically superior as it separately assesses key factors such as growth and risk rather than trying to capture them in a single factor (ie the capitalisation multiple).
112 Under the DCF methodology the value of the business is equal to the NPV of the estimated future cash flows including a terminal value. In order to arrive at the NPV the future cash flows are discounted using a discount rate which reflects the risks associated with the cash flow stream.
113 Methodologies using capitalisation multiples of earnings or cash flows are commonly applied when valuing businesses where a future “maintainable” earnings stream can be established with a degree of confidence. Generally, this applies in circumstances where the business is relatively mature, has a proven track record and expectations of future profitability and has relatively steady growth prospects. This methodology is generally not applicable where

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a business is in start-up phase, has a finite life, or is likely to experience a significant change in growth prospects and risks in the future.

114 Capitalisation multiples can be applied to either estimates of future maintainable operating cash flow, earnings before interest, tax depreciation and amortisation (EBITDA), earnings before interest, tax and amortisation (EBITA), earnings before interest and tax (EBIT) or net profit after tax. The appropriate multiple to be applied to such earnings is usually derived from stock market trading in shares in comparable companies which provide some guidance as to value and from precedent transactions within the industry. The multiples derived from these sources need to be reviewed in the context of the differing profiles and growth prospects between the company being valued and those considered comparable. When valuing controlling interests in a business an adjustment is also required to incorporate a premium for control. The earnings from any non-trading or surplus assets are excluded from the estimate of the maintainable earnings and the value of such assets is separately added to the value of the business in order to derive the total value of the company.
115 An asset based methodology is applicable in circumstances where neither a capitalisation of earnings nor a DCF methodology is appropriate. It can also be applied where a business is no longer a going concern or where an orderly realisation of assets and distribution of the proceeds is proposed. Using this methodology, the value of the net assets of the company would be adjusted for the time, cost and taxation consequences of realising the company’s assets.

Methodology adopted

116 Given the current industry conditions and outlook it is difficult to reliably predict when NFL’s Singapore and Darwin biodiesel plants will achieve profitability and the quantum thereof. Consequently, in our opinion, the DCF and capitalisation of earnings methods cannot be reliably applied.
117 In order to value NFL’s Singapore project and NFAL we have therefore considered:
(a) a discounted replacement cost approach, which assumes that NFL will be able to generate an economic return on the plant’s replacement cost (and associated working capital) once industry conditions improve in the future
(b) the estimated realisable value of the plant (having regard to recent transaction evidence and the amounts being spent on new plants currently in construction)
(c) the current replacement cost of the plant, which we would expect to exceed the market value of the plant given current industry conditions.

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118 NFL’s shares in GEM have been valued at their listed market value, reflecting the portfolio nature of the shareholding.

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VI Valuation of NFL

Methodology

119 As set out in Section V it is difficult to reliably predict NFL’s future earnings and cash flows due to the current industry conditions and outlook. Consequently, in our opinion, the DCF and capitalisation of earnings methods cannot be reliably applied.
120 We have therefore assessed the value of NFL’s Singapore and Darwin projects by reference to:
(a) a discounted replacement cost approach, whereby we have assumed that an economic return on the plant’s replacement cost (and associated working capital) will be able to be generated once industry conditions improve in the future
(b) the estimated realisable value of the plant (having regard to recent transaction evidence and the amounts being spent on new plants currently in construction)
(c) the actual and replacement cost of the plant.

Value of Singapore project

Discount replacement cost approach

121 Our discounted replacement cost approach assumes that current industry conditions will improve and enable NFL’s Singapore project to generate an appropriate rate of return on the replacement cost of the plant (and associated working capital) within 2 to 2.5 years. On this basis it is appropriate to assume that the plant would be worth its estimated replacement cost at that date.
122 While it is difficult to estimate when industry conditions will improve to allow an economic rate of return to be generated, in our opinion, it is likely that the current unsustainable situation will be rectified in time, although this may require government mandates for minimum biodiesel use[17] .
123 Until it becomes economic to produce biodiesel NFL’s Singapore plant will refine crude glycerine only. Due to the current demand for refined glycerine this is expected to generate a significant contribution to fixed costs once full production is achieved, significantly reducing the fixed operating costs which would otherwise be incurred if the plant was on “care and maintenance”.

17 Neither Singapore or Australia have mandates requiring a minimum level of biodiesel use.

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124 For valuation purposes we have therefore determined the net present value of the estimated future replacement cost in 2 to 2.5 years and the cash flows likely to be generated over this period from glycerine refining. For the purposes of our assessment we have assumed that:
(a) the current replacement cost of the plant (on a completed basis) is approximately US$153 million (based on independent advice)
(b) the replacement cost of the plant will increase by 5% to 10% per annum over the 2 to 2.5 year period, reflecting the impact of higher commodity prices which is pushing up the cost of capital projects above the level of underlying inflation
(c) the profit contribution from glycerine refining (once full production is achieved), together with initiatives to reduce fixed costs (such as subleasing tank capacity not required for the glycerine refining process), will result in the Singapore project largely covering its fixed (and corporate) costs until biodiesel production is economic.
125 Differential discount rates of 15% per annum[18] and 8% per annum respectively have been used to discount the estimated future replacement cost and the cash flows likely to be generated over the 2 to 2.5 year period while the plant is refining crude glycerine only. This reflects:
(a) the high level of uncertainty associated with when industry conditions will improve
(b) the high operating leverage of the plant (due to the high level of fixed costs)
(c) the greater certainty associated with the fixed costs likely to be incurred while the plant is refining crude glycerine only[19] .

18 Determined using the capital asset pricing model (CAPM) and 25% debt funding at 10% per annum (consistent with the interest rate under the proposed loan). No interest tax shield has been assumed given the tax incentives received.

19 While the margin from glycerine will fluctuate depending on the price differential between refined and crude glycerine a separate risk allowance has been made in the cash flows to reflect this uncertainty.

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126 On this basis we have adopted the following value for the Singapore project:

	Low US$m High US$m
Value of plant once complete Less expected costs to complete(1) Less net working capital deficiency(2) Value of Singapore project (before debt)	120.6 131.4 (28.8) (28.8)
	91.8 102.6 (2.0) (2.0)
	89.8 100.6

Note:

1 Excluding interest costs associated with funding.

2 Includes restricted cash (at valuation, having regard to the fact that it cannot be withdrawn), inventory and trade and other payables.

127 For valuation purposes we have adopted the average AUD:USD exchange rate over the 1 month period to 11 April 2008 of A$1.00 = US$0.9229. On this basis the value of the Singapore project before debt is A$97.3 million to A$109.0 million.

Market evidence

128 Given the commodity nature of the biodiesel production industry and the difficulty associated with reliably forecasting future biodiesel and feedstock prices, we have reviewed recent transaction evidence and the amounts being spent on new plants currently in construction in terms of their value as a multiple of annual production capacity.
129 The value attributed to listed biodiesel companies as a multiple of annual production capacity has also been reviewed and is shown below:

	EV/Capacity(1)
	US$/gy
Australian Biodiesel Group	0.12
Australian Renewable Fuels	0.34
Mission Biofuels	0.72
China Biodiesel International Holdings	0.32
D1 Oils Plc	0.50
Petrotec AG	0.55
Note:
1 EV refers to Enterprise value.
2 Based on share prices as at 8 April 2008.

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130 The above multiples reflect the fact that most biodiesel companies have their plants on “care and maintenance” and are incurring significant losses. In contrast, glycerine refining at NFL’s Singapore plant is expected to make a significant contribution to fixed costs (once full glycerine refining is achieved) prior to biodiesel production being economic.
131 Recent transaction evidence is summarised below:

					Value /
Announcement			Value(1)	Capacity	Capacity
date	Target	Acquirer	US$m	Mgy	US$/gy
May 2007	44% interest in Houston	US Renewables Group	27.9	35	0.80
	Biodiesel LLC
January 2008	US Canadian Biofuels	Beatrice Biodiesel	38.1 – 44.0(3)	60.0	0.64 – 0.73
	Inc(2)	Acquisition Company
		LLC

Note:

1 Enterprise value on a 100% acquisition basis taking into account expected costs to complete facility (but ignoring working capital required for commissioning).
2 The main asset of US Canadian Biofuels Inc was 100% of the Beatrice Biodiesel Project, a 60 million gallon biodiesel project in Beatrice, Nebraska in the USA. US Canadian Biofuels Inc. was owned by Agri Energy Limited.
3 As the purchase price includes an earn out payable over the next five years (subject to a minimum payment of US$15 million by the end of the fifth year) the consideration is shown within a range. The quoted sale price in Agri Energy’s ASX announcement dated 7 January 2008 was US$42.5 million. The price paid excludes start-up and initial working capital requirements.
132 Based on discussions with management we believe the sale in January 2008 of the Beatrice Biodiesel Project by ASX listed Agri Energy Limited is the most relevant transaction. This is principally because the project was nearing completion and is capable of producing 95% technical grade glycerine. However, we note that the Beatrice Biodiesel Project is significantly smaller than NFL’s Singapore plant (which is likely to benefit from greater economies of scale).

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Replacement cost considerations

133 As stated above the replacement cost of the Singapore plant has been estimated at around US$153 million, representing US$0.85 per gallon of annual biodiesel production capacity. In comparison the cost of recently completed (and proposed) facilities is as follows:

			Direct capital		Cost /
		Start-up	cost	Capacity	capacity
Plant	Location	year	US$m	Mgy	US$/gy
Biopetrol	Rotterdam	3Q-07	92	120	0.77
Binge	Mannheim	2007	38	30	1.27
Cargill	Frankfurt	2007	59	60	0.98
Diester Indusrie	Grand Couronne	2007	100	150	0.67
Ag Processing	St. Joseph, USA	2Q-07	29	30	0.97
Imperium Renewables	Seattle, USA	2Q-07	73	100	0.73
Queensland Biodiesel	Queensland,	2008(1)	42.5	47.5	0.89
	Australia
Renewable Energy	St. Rose, Louisiana	2Q-08(1)	60(2)	60	1.00

Note:

1 Proposed start-up date.

2 Excludes cost of storage and rail / dock logistics infrastructure.

134 As indicated above the direct capital cost of plants vary widely. In part, this is due to differences in plant size as larger plants are generally cheaper to construct than smaller ones on a cost / capacity basis.

Reasonableness of assessed value

135 Our assessed value of NFL’s Singapore plant represents the following multiple of its biodiesel production capacity (measured in gallons per year):

	Low US$m High US$m
Assessed value of plant on completion Production capacity (Mgy) Value / capacity (US$/gy)(1)	120.6 131.4 180.0 180.0
	0.67 0.73

Note:

1 This ratio has been calculated based on the value of the plant only (ie it excludes working capital items). This is consistent with the basis upon which the transaction multiples for the Beatrice Biodiesel Project and Houston Biodiesel LLC and the above capital cost / capacity multiples for recently constructed and proposed plants were calculated.

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136 In our opinion the value / capacity multiple implied by our valuation is reasonable. In particular, we note that our implied value / capacity multiple:
(a) is consistent with that derived from the price paid for the Beatrice Biodiesel project; and
(b) represents a 14% to 21% discount to the estimated replacement cost of NPL’s Singapore plant, which we consider appropriate given current industry conditions.

Value of NFAL

137 As stated above we have adopted similar valuation approaches when valuing NFL’s 50% interest in NFAL.

Discounted replacement cost approach

138 For the purposes of our discounted replacement cost approach we have adopted the following key assumptions:
(a) industry conditions will improve within 2 to 2.5 years such that the NFAL plant will be able to generate an economic return on its estimated replacement cost (and associated working capital) at that date
(b) the estimated replacement cost of the NFAL plant is around A$40 million (and will increase at 5% to 10% per annum for the reasons discussed above)
(c) while NFAL expects to be able to sub-lease excess storage tank capacity to reduce costs prior to biodiesel production commencing, and full scale glycerine refining is scheduled to take place shortly, NFAL is still expected to generate significant losses until biodiesel production becomes economic.
139 Discount rates of 18% and 8% per annum have been used respectively to discount the estimated future replacement cost and the losses incurred over the 2 to 2.5 year period. The higher discount rate used to discount the estimated future replacement cost compared to that applied when valuing the Singapore Project (ie 18% versus 15%) principally reflects:
(a) NFAL’s inability to secure external debt funding
(b) NFAL’s higher operating leverage due to its high level of fixed costs relative to the size of the plant.

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140 We have also taken into account the proposed settlement terms between the contractor and NFAL regarding:
(a) capital cost overruns associated with the plant (claimed by the contractor)
(b) claims for consequential losses incurred by NFAL as a result of the technical problems identified during commissioning (claimed by NFAL).
141 However, we have been asked to keep the terms of the proposed settlement confidential.
142 Based on our analysis we have assessed the value of NFL’s 50% interest in NFAL at between A$5.5 million and A$9.0 million[20] .

Value of plant per gallon of biodiesel production capacity

143 Our value of NFAL’s plant (before taking into account working capital items and other adjustments) implies a value per gallon of annual biodiesel production capacity[21] of A$0.19 to A$0.37. While significantly lower than that implied by our value of the Singapore plant, in our opinion, this is appropriate because:
(a) prior to biodiesel production becoming economic NFAL’s plant will incur significant losses even after full scale glycerine refining takes place and excess storage tanks are sub-leased. In contrast the Singapore plant is expected to be able to largely breakeven after all operating (and corporate) costs prior to biodiesel production being economic
(b) the Singapore plant is significantly larger and more efficient due to economy of scale benefits
(c) NFAL is dependent on the continued support of its shareholders in order to remain a going concern.

Value of Natural Fuel & Energy Inc

144 As stated in Section III NFL management does not expect to recover any value from the winding up of Natural Fuel & Energy Inc (NFE). The value of NFE has therefore been assessed at nil, consistent with its carrying value.

20 This reflects a small increase compared to the value set out in our report dated 20 December 2007 on the takeover offer for Babcock and Brown Environmental Infrastructure Limited, and largely reflects the terms of the proposed settlement with the contractor.

21 Assuming technical problems identified during commissioning are resolved.

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Value of shares in GEM Biofuels Plc

145 NFL owns approximately 3.9% of the shares in GEM Biofuels Plc (GEM), an AIM listed company. Due to recent global stockmarket volatility and the illiquid nature of the shares, we have valued the shares based on their 30 day volume weighted average price. On this basis the value of NFL’s shareholding in GEM is approximately A$0.8 million.

Cash

146 As at 29 February 2008 NFL held cash balances (excluding restricted cash related to the operations of the Singapore and Darwin plants which is reflected in their project values) of A$7.0 million.

Convertible bonds

147 NFL’s convertible bonds have a face value of US$80 million (in total) and have a coupon interest rate of 6.75% per annum (payable semi-annually). While these bonds are not listed, trades have occurred at very large discounts to their face value.
148 For valuation purposes we believe it is appropriate to recognise that the market value of the convertible notes is less than their face value. This arises because the interest rate on the bonds is significantly less than the interest rate that would be demanded by an investor in the bonds having regard to current interest rates and required credit margins, the default risk associated with NFL and the unsecured nature of the bonds[22] . The lower value of the bonds (compared to face value) also reflects the present value benefit to NFL of the low interest rate on the bonds over their term relative to what would be payable if the debt was refinanced.
149 For the purposes of our valuation we have discounted the cash flows attributable to the bonds at 12% to 14% per annum (pre-tax). This reflects a premium to the 10% interest rate on the secured loan to be provided under the proposal and reflects the unsecured nature of the bonds. In assessing the appropriate interest rate we also had regard to the other funding proposals provided to NFL.
150 On this basis the value of the convertible bonds ranges from US$66.1 million to US$70.2 million. This represents a discount to the face value of the bonds (plus accrued interest as at 31 March 2008) of approximately 15% and 20% respectively.
151 Based on the 1 month average AUD:USD exchange rate to 11 April 2008 of A$1.00 = US$0.9229 the value of the convertible bonds is A$71.6 million to A$76.1 million.

22 As stated in paragraph 83 it should be noted that, while the convertible bonds are outstanding, the level of secured borrowings is restricted to no more than a principal amount of US$20 million (which provides some level of protection to bondholders).

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152 While our valuation exceeds that implied by recent trades in the convertible bonds, in our opinion, our valuation range is appropriate as it reflects the estimated market value of all the bonds rather than the price received for small holdings in an illiquid market.

Valuation of NFL

153 Based on the above we have assessed the value of the shares in NFL (on a 100% controlling interest basis) at 11.5 cents to 14.5 cents per share:

	Low A$m High A$m
Value of Singapore Project Value of 50% interest in NFAL Value of NFE Value of shares in GEM Enterprise value Cash Convertible bonds Option exercise money Value of shares in NFL Fully diluted shares on issue(1) Value per NFL share (cents)	97.3 109.0 5.5 9.0 - - 0.8 0.8
	103.6 118.8 7.0 7.0 (71.6) (76.1) 2.3 2.3
	41.3 52.0 359.1 359.1
	11.5 14.5

Note:

1 Fully diluted shares on issue assumes 21.3 million options are exercised (at $0.11 per share)

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VII Opinion on the Share Issue and Conversion Right

154 In our opinion the Share Issue and Conversion Right is fair and reasonable to the shareholders of NFL. This is principally because:
(a) the effective Share Issue price lies within our assessed value of 100% of the shares in NFL
(b) if the Share Issue and Conversion Right does not proceed NFL will need to raise additional equity capital[23] in order to complete the construction and commissioning of its Singapore plant. Such an equity issue would normally be priced at a significant discount to the listed market price. In contrast, the effective Share Issue price represents a premium to the recent market prices of NFL shares
(c) no superior funding proposal has been received by NFL.
155 These matters are discussed in more detail below.

Fairness and reasonableness

156 Under ASIC Regulatory Guide 111 an issue of shares is “fair” if the issue price of the shares is equal to or greater than the market value of the shares in the company on a 100% controlling interest basis.
157 As set out in Section VI, in our opinion, the market value of NFL shares on a 100% controlling interest basis ranges from 11.5 cents to 14.5 cents per share.
158 The issue price of the shares and the conversion price of the Conversion Right (being 13 cents per share) therefore lies within our assessed valuation range. However, it should be noted that the Conversion Right does not expire for two years from the date of issue, and accordingly the present value of the conversion price is less than 13 cents per share.
159 Nonetheless, as Power Knight is to be issued both shares and granted a conversion right in respect of the Loan under the proposal, in our opinion, the fairness of the Share Issue and Conversion Right should be assessed based on the effective issue price of the shares taking into account the value of the Conversion Right.

23 While the convertible bonds are outstanding the level of secured debt is limited to no more than US$20 million.

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The value of the Conversion Right

160 In order to value the Conversion Right we have applied the Black & Scholes and Bionomial Option Pricing models. The following assumptions have been adopted for the purposes of the option value calculations:

Risk free rate	=	6.2% per annum (consistent with the 2 year
		Commonwealth Government Bond yield on 16
		April 2008)
Volatility rate	=	40% to 45% per annum (reflecting the high level
		of uncertainty associated with when biodiesel
		production might be economic)
Exercise price	=	13 cents per NFL share
Market price of NFL shares	=	10 to 10.5 cents per share (consistent with the
		VWAP of NFL shares as traded on the ASX over
		the last five and 10 trading days up to 16 April
		2008)
Term	=	2 years
Dividends over Conversion	=	Nil
Right term
Discount for lack of	=	30% (This is appropriate as the Conversion Right
marketability		lacks marketability as it cannot be traded
		separatelyfromtheloanand will not belisted).

161 On this basis the value of the Conversion Right ranges from 1.2 to 1.6 cents per NFL Share[24] . For valuation purposes we have adopted the mid-point of this range of 1.4 cents per share.

24 These values are after applying the 30% discount for lack of marketability.

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The effective issue price per share

162 The effective price of the shares to be issued under the Share Issue is therefore as follows:

	Cents per share
Price of shares issued under Share Issue Less value of Conversion Right granted to Power Knight (per NFL share) Effective issue price of shares (taking into account benefit of Conversion Right)	13.0 (1.4)
	11.6

Fairness and reasonableness

163 A comparison of the effective issue price and the market value of NFL shares on a 100% controlling interest value is shown below:

	Low Cents High cents Mid-point cents
Effective Share Issue price per share Value of 100% of NFL per share Extent to which effective Share Issue price exceeds (or is less than) the value per NFL share	11.6 11.6 11.6 11.5 14.5 13.0
	0.1 (2.9) (1.4)

164 As the effective Share Issue price is consistent with our value of NFL shares on a 100% controlling interest basis (albeit at the low end) we have concluded that the Share Issue and Conversion Right is fair to NFL shareholders.
165 Under ASIC Regulatory Guide 111 the issue price is also reasonable if it is fair. Consequently, in our opinion, the Share Issue and Conversion Right is fair and reasonable to NFL shareholders.
166 Further, we note that:
(a) the other funding proposals received also involved the issue of options over NFL shares to the debt providers
(b) the number of shares in NFL received upon exercise of the Conversion Right depends on the amount of the loan outstanding at the date of exercise (but cannot exceed 168.8 million shares). The number of shares received upon conversion will therefore be reduced if NFL

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reduces the amount owing under the loan prior to exercise of the Conversion Right.

Requirement for additional equity capital

167 NFL requires US$40 million in additional funding in order to complete construction and commissioning of the Singapore plant and for general working capital purposes. However:
(a) while the Convertible Bonds are outstanding NFL’s secured borrowings cannot exceed a principal amount of US$20 million
(b) as NFL’s debt to equity ratio is already high and NFL is not currently profitable it is unlikely that it could raise an additional A$40 million in debt funding.
168 Consequently, if the Share Issue and Conversion Right does not proceed NFL will need to raise additional equity capital. Based on our experience such equity issues are normally priced at a significant discount to the listed market price of the company’s shares.
169 Further, the size of the discount is often greater the larger the capital raising as a percentage of the market capitalisation of the company. As NFL’s market capitalisation was only A$33.4 million as at 16 April 2008[25] NFL would need to undertake a large equity capital raising if the Share Issue and Conversion Right does not proceed. Given the above such an equity issue would normally take place at a significant discount to NFL’s recent listed market prices.
170 However, we note that the effective issue price of the shares to be issued under the Share Issue (net of the Conversion Right value) exceeds recent market prices.

Implications if the Share Issue and Conversion Right does not proceed

171 As announced on 28 February 2008 NFL’s cash requirements for completion and commissioning of the Singapore plant, support for NFL’s Darwin facility and working capital necessitate additional funding by mid-2008. Should the Share Issue and Conversion Right not proceed there is a high probability that NFL will not be able to raise the funds required by this time. Failure to approve the proposal is therefore likely to have serious financial consequences for NFL.

25 Based on the closing price on 16 April 2008 of 9.9 cents per share.

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Alterative funding proposals

172 NFL, in conjunction with its advisers, has been actively pursuing several alternative funding alternatives since the first quarter of the 2008 financial year. These alternative proposals have been reviewed by LEA. However, in our opinion, no superior funding proposal was received which met NFL’s requirements for funds to be available by mid-2008.

Ownership interest of Power Knight

173 If the Share Issue and Conversion Right is approved (and the Conversion Right is exercised in full) Power Knight will own approximately 49% of the shares in NFL. Upon exercising the Conversion Right Power Knight will therefore obtain effective voting control of NFL and is likely to be able to control NFL’s day to day operations, strategic direction and dividend policy.
174 If the Share Issue and Conversion Right is approved by shareholders, Power Knight will also be entitled to nominate 3 new members to NFL’s board, which is expected to consist of 7 board members.

Dilution of existing shareholder interests

175 If the Share Issue and Conversion Right proceeds (and the Conversion Right is exercised in full) the interests of existing NFL shareholders will be diluted to approximately 51% of the shares on issue. However, it should be noted that:
(a) NFL’s existing shareholders may have been diluted anyway as NFL will require additional equity capital if the Share Issue and Conversion Right does not proceed
(b) under the proposal NFL’s existing shareholders are not required to provide the additional funding required by the company
(c) in our opinion, those NFL shareholders that wish to increase their investment in NFL are likely to be able to do so at prices equal to or less than the effective price at which shares are to be issued under the Share Issue.

Likelihood of takeover offer

176 As stated above, if the Share Issue and Conversion Right proceeds (and the Conversion Right is exercised in full) Power Knight will own approximately 49% of the NFL shares on issue. This is likely to reduce the possibility that a takeover for NFL might arise in future as any potential bidder would need to persuade Power Knight to accept its offer in order to obtain control.

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Conclusion

177 On balance we have concluded that:
(a) the Share Issue and Conversion Right is fair and reasonable to NFL shareholders; and
(b) the advantages of the Share Issue and Conversion Right outweigh the disadvantages.

Appendix A

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Financial Services Guide

Lonergan Edwards & Associates Limited

1 Lonergan Edwards & Associates Limited (ABN53 095 445 560) (LEA) is a specialist valuation firm which provides valuation advice, valuation reports and Independent Expert’s Reports in relation to takeovers and mergers, commercial litigation, tax and stamp duty matters, assessments of economic loss, commercial and regulatory disputes.
2 LEA holds Australian Financial Services Licence No 246532.

Financial Services Guide

3 The Corporations Act 2001 authorises LEA to provide this Financial Services Guide (FSG) in connection with its provision of an Independent Expert’s Report (the Report) to accompany a notice of general meeting and explanatory statement to be sent to NFL shareholders in connection with the Share Issue and Conversion Right.
4 This FSG is designed to assist retail clients in their use of any general financial product advice contained in the Report. This FSG contains information about LEA generally, the financial services we are licensed to provide, the remuneration we may receive in connection with the preparation of the Report, and if complaints against us ever arise how they will be dealt with.

Financial services we are licensed to provide

5 Our Australian financial services licence allows us to provide a broad range of services to retail and wholesale clients, including providing financial product advice in relation to various financial products such as securities, derivatives, interests in managed investment schemes, superannuation products, debentures, stocks and bonds.

General financial product advice

6 The Report contains only general financial product advice. It was prepared without taking into account your personal objectives, financial situation or needs.
7 You should consider your own objectives, financial situation and needs where assessing the suitability of the Report to your situation. You may wish to obtain personal financial product advice from the holder of an Australian Financial Services Licence to assist you in this assessment.

Appendix A

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Fees, commissions and other benefits we may receive

8 LEA charges fees to produce reports, including this Report. These fees are negotiated and agreed with the entity who engages LEA to provide a report. Fees are charged on an hourly basis or as a fixed amount depending on the terms of the agreement with the person who engages us. In the preparation of this Report our fees are based on a time cost basis using agreed hourly rates.
9 Neither LEA nor its directors and officers receives any commissions or other benefits, except for the fees for services referred to above.
10 All of our employees receive a salary. Our employees are eligible for bonuses based on overall performance and the firms profitability and do not receive any commissions or other benefits arising directly from services provided to you. The remuneration paid to our directors reflects their individual contribution to the company and covers all aspects of performance. Our directors do not receive any commissions or other benefits arising directly from services provided to you.
11 We do not pay commissions or provide other benefits to other parties for referring prospective clients to us.

Complaints

12 If you have a complaint, please raise it with us first, using the contact details listed below. We will endeavour to satisfactorily resolve your complaint in a timely manner.
13 If we are not able to resolve your complaint to your satisfaction within 45 days of your written notification, you are entitled to have your matter referred to the Financial Industry Complaints Services (FICS), an external complaints resolution service. You will not be charged for using the FICS service.

Contact details

14 LEA can be contacted by sending a letter to the following address:

Level 27 363 George Street Sydney NSW 2000 (or GPO Box 1640, Sydney NSW 2001)

Appendix B

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Qualifications, declarations and consents

Qualifications

1 LEA is a licenced investment adviser under the Corporations Act. LEA’s authorised representatives have extensive experience in the field of corporate finance, particularly in relation to the valuation of shares and businesses.
2 This report was prepared by Craig Edwards, Director and Martin Holt, Director who are both authorised representatives of LEA. Mr Edwards and Mr Holt have over 15 years and 20 years experience in the provision of valuation advice respectively.

Declarations

3 This report has been prepared at the request of the directors of NFL to accompany a notice of general meeting of shareholders and an explanatory statement. It is not intended that this report should serve any purpose other than as an expression of our opinion as to whether or not the Share Issue and Conversion Right is fair and reasonable to NFL shareholders not associated with Power Knight and the Risjadson Group.

Interests

4 At the date of this report, neither LEA, Mr Edwards or Mr Holt have any interest in the outcome of the proposed transaction. LEA is entitled to receive a fee of $70,000 (plus GST) based on time expended at our standard hourly professional rates plus out of pocket expenses for the preparation of this report. With the exception of this fee, LEA will not receive any other benefits, either directly or indirectly, for or in connection with the preparation of this report.

Indemnification

5 As a condition of LEA’s agreement to prepare this report, NFL agrees to indemnify LEA in relation to any claim arising from or in connection with its reliance on information or documentation provided by or on behalf of NFL or Power Knight which is false or misleading or omits material particulars or arising from any failure to supply relevant documents or information.

Consents

6 LEA consents to the inclusion of this report in the form and context of which it is included in the explanatory statement to shareholders.

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Appendix C

Glossary

Agreement The US$40 million funding agreement between NFL and Power Knight ASIC Australian Securities and Investments Commission ASX Australian Securities Exchange Conversion Right The right to convert the outstanding balance of the Loan (up to US$20 million) into approximately 168.8 million NFL shares EBIT Earnings before interest and tax EBITA Earnings before interest, tax and amortisation of goodwill EBITDA Earnings before interest, tax, depreciation and amortisation of goodwill FSG Financial Services Guide FY Financial year IER Independent Expert’s Report LEA Lonergan Edwards & Associates Limited Loan The US$20 million loan to be advanced to NFPL NFL Natural Fuel Limited NFPL Natural Fuel Pte Ltd Power Knight Power Knight Pte Ltd Share Issue The placement of approximately 168.8 million NFL shares for US$20 million to Power Knight Share Issue and The proposed share issue to Power Knight and the Conversion Right conversion right in respect of the Loan.

AI assistant

FINEXIA FINANCIAL GROUP LIMITED — Proxy Solicitation & Information Statement 2008

64936_rns_2008-05-06_26ce6517-229b-400b-8b5b-f0366a68fbb0.pdf

Notice of Meeting

and

Entire Information Memorandum

Purpose of Explanatory Memorandum

ASX Limited

Investment Decisions

Date of Explanatory Memorandum

Table of Contents

Letter from the Chairman

Dear Shareholder,

Proposals Overview

The Power Knight Proposal

Key effects of approving Resolution 1 for Shareholders

Additional matters

Implications

Key implication for Shareholders

Recommendations, support and Independent Expert Report conclusions

Questions

Review this document in detail and seek professional advice

Vote on the resolutions

Voting by proxy

Voting in person at the Shareholder Meeting

Voting restrictions

Questions

Notice of general meeting

Agenda items

2 Resolution 2: Issue of options to Tropical Oils

3 Resolution 3: Issue of shares to Ganesha Nominees

Explanatory Memorandum

Entitlement to vote

Snapshot date

Voting exclusion statement

Resolutions 1

Resolution 2

Resolution 3

Proxies

By Order of the Board

Explanatory memorandum

Natural Fuel Limited ABN 52 106 760 418

Explanatory memorandum to Shareholders

1 Introduction

2.1 Outline of Power Knight Proposal for completion of Singapore Plant

2.2 Drawdown of the Project Finance Loan and First Tranche Conversion Right

2.3 Threshold conditions

2.4 Rationale for the Power Knight Proposal

2.5 Key implications of the Power Knight Proposal for Shareholders

2.6 Implications for the Company if the Power Knight Proposal is not approved

2.7

Facilitation by Tropical Oils

2.8

Background to the Working Capital Loan

2.9 What are Shareholders being asked to approve?

3 Impact of the Power Knight Proposal and Additional Matters on the Company

3.1 Basis for information in this section

3.2

The financial position of the Company will be strengthened

3.3 Financial Information

Balance Sheet of Natural Fuels Limited

Note 1

Note 2

Note 3

Liabilities

Note 5

3.4 Impact on capital structure

3.5 Substantial Shareholders

3.6 Maximum Power Knight shareholding

Risjadson Holding

4.1 Details of Power Knight and its Associates

4.2 Maximum shareholding of Power Knight

4.3 Effect of approving the acquisition of Shares by Power Knight

4.4 Intentions of Power Knight

(b) Intentions for the future of the Company

(c) Intentions regarding the right of conversion under the Project Finance Loan

(d)

Financial and dividend policies of the Company

(e)

General

FINEXIA FINANCIAL GROUP LIMITED Proxy Solicitation & Information Statement 2008