LION ENERGY LIMITED — Proxy Solicitation & Information Statement 2004

May 31, 2004

1 June 2004

The Manager Australian Stock Exchange Limited 10th Floor 20 Bond Street SYDNEY NSW 2000

Reorganisation Proposal - Directors' Recommend Spin Off of Entek Energy

Lion proposes to transfer its interest in its Cooper Basin exploration tenements to its recently established 100% subsidiary Entek Energy Ltd (Entek), and then float Entek as an independent ASX-listed company.

The proposal has these objectives:

• To enable Lion to focus on cash-generating activities in Indonesia and its $(a)$ interest in the exploration tenements in Indonesia.
• $(b)$ To use Entek as the vehicle to unlock the full value and potential of the Cooper Basin exploration tenements.
• To enable Lion shareholders to benefit from both of the above. $(c)$

The proposal is subject to obtaining Lion shareholders approval, and to Entek raising \$3.5 million in cash by a public offer under a prospectus with the new shares being admitted to quotation by ASX. Entek will use the net proceeds raised to fund future exploration of its tenements, and to qualify for admission to ASX's official list.

If the proposal proceeds:

• Lion shareholders (on a nominated record date) will enjoy a priority right to $(i)$ subscribe for Entek ordinary shares under the Entek prospectus subject to Entek being able to meet ASX's shareholder spread requirements.
• $(ii)$ Entek will issue to Lion a total of 22,000,000 ordinary shares fully paid, of which shares Lion will then distribute 17,800,000 to persons who are Lion shareholders on the nominated record date. In legal terms, that distribution will effect an equal reduction of Lion's share capital. Lion will retain for itself 4,200,000 of the Entek shares.
• $(iii)$ Holdings of shares in Lion will not otherwise be affected.
• $(iv)$ The exercise price of existing 20 February 2005 options to subscribe for Lion ordinary shares will reduce from \$0.025 each to \$0.0225.

For full details, please see the Chairman's Letter, Notice of Meeting, Proxy Form and Explanatory Memorandum that accompany this letter and that are soon to be sent to Lion shareholders.

The Entek Prospectus is expected to be lodged before the meeting is held.

Yours faithfully,

G Mercorella Chairman

Enc:

Dear Shareholder/Optionholder

Spin off of Cooper Basin Tenements to Entek Energy Ltd

Lion proposes to transfer its interest in its Cooper Basin exploration tenements to its recently established 100% subsidiary Entek Energy Ltd (Entek), and then float Entek as an independent ASX-listed company.

The proposal has these objectives:

• To enable Lion to focus on cash-generating activities in Indonesia and its $(d)$ interest in the exploration tenements in Indonesia.
• $(e)$ To use Entek as the vehicle to unlock the full value and potential of the Cooper Basin exploration tenements.
• $(f)$ To enable Lion shareholders to benefit from both of the above.

The proposal is subject to obtaining Lion shareholders approval, and to Entek raising \$3.5 million in cash by a public offer under a prospectus with the new shares being admitted to quotation by ASX. Entek will use the net proceeds raised to fund future exploration of its tenements, and to qualify for admission to ASX's official list.

If the proposal proceeds:

• Lion shareholders (on a nominated record date) will enjoy a priority right to $(v)$ subscribe for Entek ordinary shares under the Entek prospectus subject to Entek being able to meet ASX's shareholder spread requirements.
• $(vi)$ Entek will issue to Lion a total of 22,000,000 ordinary shares fully paid, of which shares Lion will then distribute 17,800,000 to persons who are Lion shareholders on the nominated record date. In legal terms, that distribution will effect an equal reduction of Lion's share capital. Lion will retain for itself 4,200,000 of the Entek shares.
• Holdings of shares in Lion will not otherwise be affected. $(vii)$
• The exercise price of existing 20 February 2005 options to subscribe for $(viii)$ Lion ordinary shares will reduce from \$0.025 each to \$0.0225.

For full details, please see the Notice of Meeting and Explanatory Memorandum that accompany this letter. Please note that while these documents are being sent also to optionholders, only shareholders are entitled to vote at the meeting.

Yours faithfully,

G Mercorella

Chairman

LION ENERGY LIMITED A.C.N. 000 753 640 NOTICE OF MEETING

A meeting of members of the company will be held at Suite 33, 168 Melbourne Street, North Adelaide SA 5006 on Tuesday 6 July 2004 at 10.30 am (Central Standard Time) for the purpose of considering the following resolution with or without amendment:

Resolution for reduction of capital & spin off of Entek

That for the purposes of Corporations Act 2001 s. 256B and 256C(1) and all other purposes:

• $\mathbf{1}$ . the paid share capital of Lion Energy Limited (Lion) be reduced by an amount equal to the value of 17,800,000 ordinary shares fully paid held by Lion in Entek Energy Limited A.C.N. 108 403 425 (Entek) on the Record Date (being a date to be determined by the directors of Lion under ASX Listing Rules) as determined by the directors of Lion (estimated to be $$3,560,000$ ); and
• $\overline{2}$ . that such reduction be effected and satisfied by distributing 17,800,000 ordinary shares fully paid in Entek in specie to the holders of ordinary shares in Lion in proportion to the number of ordinary shares in Lion they hold on that Record Date (ignoring fractions and rounding down entitlements) and otherwise on the terms and conditions set out in the explanatory memorandum accompanying the notice of meeting; and
• $3₁$ Lion having promoted Entek to issue a prospectus (on the terms and conditions set out in the explanatory memorandum) for the purpose of Entek becoming a separate listed company, be approved;

subject to:

• the ordinary shares fully paid of Entek being admitted to quotation by ASX within 4 $4₁$ months after the date of this resolution; and
• 1. the directors of Lion having power to cancel the proposed reduction of capital in their discretion.

Notes:

(a) Corporate representatives: A member that is a body corporate may appoint an individual as a representative to exercise all or any of its powers at a meeting of the company, subject to compliance with Corporations Act 2001 s. 250D.

(b) Proxies: A proxy form accompanies this notice of meeting. A member has a right to appoint a proxy; the proxy need not be a member of the company; a member who 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. To be effective, a proxy form (and, if the proxy form is signed by the appointor's attorney - the authority under which the proxy form was signed or a certified copy of the authority) must be received by the company at least 48 hours before the meeting. The company will receive proxy appointments at Suite 33, 168 Melbourne Street, North Adelaide SA 5006 or by facsimile to (08) 8239 1744 or by email to admin@lionenergy.com.au.

By order of the Board of Lion Energy Limited

Signed: Stacey Muggleton (Company Secretary)

LION ENERGY LIMITED A C.N. 000 753 640 FYPI ANATORY MEMORANDIM

Dear Shareholder/Optionholder

This document is given to you for your consideration of an ordinary resolution for an "equal reduction" of Lion's share capital under Corporations Act 2001 s. 256B and 256C, and for you to approve Lion to spin off Entek Energy Limited A.C.N. 108 403 425 (Entek), the terms of which resolution are set out in the Notice of Meeting.

Disclosure Obligations

Section 256C(4) requires Lion to include with the requisite notice of meeting a statement setting out all information known to Lion that is material to the decision on how to vote on the resolution, excepting information it would be unreasonable to require Lion to disclose because Lion had previously disclosed the information to its shareholders.

In addition, ASX Listing Rule 7.20 requires an entity proposing to reorganise its capital to tell equity security holders: (a) the effect of the proposal on the number of securities and the amount (if any) unpaid on the securities; (b) the proposed treatment of any fractional entitlements arising from the reorganisation; and (c) the proposed treatment of any convertible securities on issue.

This document is to satisfy those requirements.

Lion gave copies of this document, the Notice of Meeting and the Proxy Form to ASIC and to ASX before these documents were sent to you. As required by ASX Listing Rule 7.20, copies are also being sent to holders of options to subscribe for unissued shares in Lion, though optionholders have no vote at the general meeting.

The Proposal

The resolution you are asked to consider is part of this proposal:

• $(i)$ Entek is now a wholly owned subsidiary of Lion. It has now only 1 ordinary share (fully paid) on issue and was only recently registered.
• $(ii)$ Lion's principal assets have recently comprised:
• (Indonesian Assets) a 100% interest in the Bula Production Sharing $\circ$ Contract, plus a 2.5% interest in the Seram (Non Bula) Production Sharing Contract- to be retained in Lion and now valued by Lion's directors at \$21,000,000 based on a recent independent valuation commissioned by Lion; and

• (Australian Assets) a 12.5% interest in petroleum exploration $\circ$ licences 86, 87, 89, 104, 111 and 115 (and proportional interest in the joint ventures that under various joint operating agreements operate those licences) in South Australia's Cooper Basin and now valued by Lion's directors at \$4,400,000 based on a recent independent valuation commissioned by Entek (which valuation should appear in Entek's prospectus, see later) – in the process of being assigned by Lion to Entek in exchange for:

• Entek assuming Lion's future obligations under the Australian Assets.

• Entek bearing any stamp duty, GST or registration costs of the $\bullet$ assignment;
• $(iii)$ Entek is in the process of issuing to the public a prospectus for the issue of 17,500,000 ordinary shares fully paid at 20 cents each, which offer is conditional upon:
• $\circ$ (unless obtained beforehand) the assignment of the Australian Assets from Lion to Entek being completed
• Lion shareholders approving the capital reduction as now before you $\circ$
• Entek issuing to Lion 22,000,000 fully paid ordinary shares in return for $\Omega$ Lion having provided to Entek seed capital of \$220,000 (this would occur only if the other conditions are met, or are assured of being met)
• $\circ$ Lion giving effect to its capital reduction by distributing to Lion shareholders (as at a record date to be fixed by Lion's directors under ASX listing rules) 17,800,000 of those Entek shares issued above (Lion retaining 4,200,000 of those Entek shares for some period)
• $\circ$ those Entek shares retained by Lion or distributed in specie by Lion to related parties or promoters of Lion or their associates (directors, their families, entities they control) becoming "restricted securities" under ASX Listing Rules for 24 months after the quotation of Entek shares commences
• $\circ$ those Entek shares distributed in specie by Lion to persons not related parties or promoters of Lion or their associates are not required by ASX to become "restricted securities" in the hands of those Lion shareholders
• a minimum subscription of \$3,500,000 (the net proceeds of which are $\circ$ to be used to exploit the Australian Assets and are now estimated to be no less than \$2,855,000)
• $\circ$ the Entek shares being admitted to quotation by ASX within 3 months after the date of the prospectus (of course necessarily requiring Entek to be admitted to ASX's Official List).
• $(iv)$ Entek's prospectus will, in addition, disclose these matters:
• $\circ$ Lion shareholders (as at the above record date) who may wish to subscribe for new shares in Entek for cash are to be given priority, subject to Entek being able to meet ASX's shareholder spread requirements. Anyone who wishes to subscribe for those new shares will need to complete the application form in or accompanying Entek's prospectus.
• the offer of the new shares will be 100% underwritten by an Australian $\Omega$ financial services licensee (subject to usual rights of early termination by the underwriter)

• an independent geologist's report and valuation on the Australian $\Omega$ Assets

• an investigating accountant's report on Entek Ő

• a solicitor's report on the Australian Assets $\circ$
• Lion has lent Entek seed capital (unsecured, interest-free) to fund its $\circ$ acquisition of the Australian Assets (including stamp duty and registration costs) and to make the offer of new shares, which loan is repavable:
• as to \$220,000, by the issue to Lion of 22,000,000 ordinary shares fully paid (see earlier)
• as to any balance of seed capital, on the date Entek issues shares under its prospectus
• (if Entek lists) Lion permits Entek to have shared access to Lion's ō office facilities, for a 30% contribution to overhead costs (plus GST). terminable on 30 days notice
• (if Entek lists) GA Mercorella (a director of both Lion and Entek) is $\circ$ engaged as managing director for up to 2 years after Entek lists. requiring him to spend not less than 80% of his time and attention on Entek's affairs and entitling him to a gross salary of \$125,000 per annum plus employer superannuation contribution
• $\circ$ (if Entek lists) BCFR Chartered Accountants (of which N Formichella, a director of both Lion and Entek is a principal) is engaged to provide company secretarial and accounting services for up to 1 year after Entek lists, and entitling BCFR Chartered Accountants to a gross fee of \$33,000 per annum (GST inclusive)
• Entek's directors will not claim directors' fees unless and until $\circ$ approved at an annual general meeting after Entek lists.
• $(v)$ Lion calls a general meeting of its shareholders to consider the resolution now before you, and on which resolution all Lion shareholders are entitled to vote
• If the resolution passes and if Entek's prospectus is assured of success (for $(v_i)$ example, the minimum subscription is achieved):
• Entek would issue to Lion the 22,000,000 shares $\circ$
• (if not done beforehand) Lion's directors would fix and publish to the $\mathbf{o}$ market a record date on which Lion shareholders' entitlements to those Entek shares are to be determined
• $\bullet$ Lion would then reduce its share capital and distribute 17,800,000 of those Entek shares (with requisite holding statements) to persons who were Lion shareholders on the record date
• the exercise price of the 20 February 2005 options (not then $\circ$ exercised) to subscribe for shares in Lion would reduce to \$0.0225 cents each and optionholders would be notified accordingly

• $\circ$ Entek would issue to investors the shares subscribed for cash under its prospectus

• Entek would list on the basis that ASX admits to quotation the Entek $\Omega$ shares subscribed under the prospectus, or issued to Lion (excepting those Entek shares issued to Lion and either retained by Lion or distributed in specie by Lion to related parties of Lion, as such Entek shares would "restricted securities" under ASX Listing Rules).

• $(vii)$ Shares in Entek are expected (but not quaranteed) to have an initial open market value of at least 20 cents each. That is not a recommendation or statement of opinion intended to influence a person in making a decision whether to subscribe for shares in Entek. An investment decision should only be based on Entek's prospectus.

ASIC and ASX

Lion consulted ASX about the proposal on these matters:

• Listing Rule $7.22.3$ the appropriate amount (if any) by which the exercise $(a)$ price of Lion's 20 February 2005 options for unissued shares should reduce.
• $(b)$ Listing Rule 7.25 - whether it is required that ASX waive the requirement that the reorganisation not reduce the market price of Lion shares to less than 20 cents, as in fact Lion shares now trade well below that threshold.
• $(c)$ Listing Rule 11.1 - whether ASX would, in effect, require Lion to meet again the conditions for listing, after the reorganisation (albeit that Lion was a listed company before it acquired the Australian Assets).
• $(d)$ Listing Rule 1.1 conditions 7 and 10, Listing Rule 9.1 and Listing Rule 15.12 as concerns the Entek shares not being taken to be restricted securities.

To date, ASX has not objected to the proposal as now set out, but did indicate that the Entek shares retained by Lion or distributed in specie by Lion to its promoters. related parties or their associates should become "restricted securities" under the ASX Listing Rules. ASX also indicated that, within the usual shareholder spread requirements of Listing Rule 1.1 condition 7. Entek would need to have issued shares under its prospectus to at least 200 subscribers for parcels of Entek shares of at least \$2,000 each. ASX did not give a commitment to whether Entek would qualify for admission to its Official List, as that will depend on the content and outcome of Entek's prospectus and whether the other usual rules for admission are met.

ASIC has not been approached about the proposal, but has been given copies of this document and the accompanying documents as stated previously.

Neither ASIC or ASX or their respective officers take any responsibility for the merits of the proposal.

Reasons for the proposal

Your directors believe that:

The securities market under-rates the true value of the Australian Assets. That in turn affects the value at which Lion shares trade, which in turn affects the willingness of holders of the 20 February 2005 options to exercise those options at 2.5 cents each. Those matters impact on Lion's ability to raise more equity working capital to better exploit the Australian Assets.

• If the Australian Assets resided in Entek as a separate listed company, the securities market could more closely focus on the true value of the Australian Assets and may support Entek raising fresh equity capital to be used to exploit the Australian Assets.
• The equal reduction of Lion's share capital is fair and reasonable to Lion's shareholders as a whole and would not prejudice Lion's ability to pay its creditors

State of Affairs

On 29 April 2004, Lion lodged with ASX a Mining Exploration Entity Quarterly Report. for the quarter ended 31 March 2004. As shown there, at 31 March 2004:

• Lion had issued a total 1,540,580,440 ordinary shares fully paid. $\circ$
• ō Lion had outstanding 441.658,000 of 20 February 2005 options to subscribe for ordinary shares fully paid at an exercise price of 2.5 cents per share.
• Cash held or available to Lion was \$899,015. o

Since the date of that quarterly report, there has been no material change in Lion's affairs excepting:

• Lion has issued on a private placement 170,000,000 ordinary shares fully o paid for an issue price of \$0.05 each
• the assignment of the Australian Assets to Entek (as a 100% subsidiary) $\circ$
• Lion extending seed capital to Entek to implement the proposal. o

The capital reduction now proposed would have the effect of reducing Lion's noncurrent assets by an estimated \$3,560,000 (the 17,800,000 Entek shares to be distributed in specie) with a corresponding reduction in Lion's contributed equity. After the assignment of the Australian Assets. Lion would not be liable to make further contributions to the costs of exploiting the Australian Assets, and Entek would become so liable.

If there is any material change to Lion's state of affairs before the meeting. Lion will notify ASX and ASIC under the continuous disclosure regime, and also update shareholders and proxy holders who attend the meeting.

Treatment of Lion shares

If the resolution passes, and if Entek's prospectus is successful. Entek would issue to Lion 22,000,000 Entek shares and Lion will reduce its share capital by an estimated \$3,560,000 to be satisfied by the distribution of 17,800,000 of those Entek shares pro rata to persons who were recorded as Lion shareholders on the record date (ignoring fractions and rounding down entitlements). The capital reduction would not change the number of Lion shares on issue, or the holding of any Lion shares by any person.

It is likely that, after the capital reduction (or perhaps earlier - after the record date for fixing entitlements to the Entek shares), the market price of Lion shares will change by an unknown amount.

Overseas Shareholders

Distribution of the Entek shares to Lion shareholders under the capital reduction would be subject to legal and regulatory requirements in their relevant jurisdictions. If the requirements of any jurisdiction where a shareholder is resident are held to restrict or prohibit the distribution of Entek shares as proposed or would impose on Lion an obligation to prepare a prospectus or similar disclosure document or otherwise impose on Lion an undue burden in the opinion of the directors, the Entek shares to which the relevant shareholder is entitled will be sold by Lion on their behalf as soon as practicable after the Entek shares are to be distributed and Lion will then account to those shareholders for the net proceeds of sale after deducting the costs and expenses of the sale. As the capital reduction is being satisfied by the distribution to Lion shareholders of Entek shares and share prices may vary from time to time (assuming a liquid market is available), the net proceeds of sale to such shareholders may be more or less than the notional Australian dollar value of the capital reduction as set out in this document.

Treatment of Lion options

If and when Lion reduces its capital. Lion will reduce the exercise price of the 20 February 2005 options (not then exercised) to \$0.0225 cents per option. The capital reduction will not change the number of Lion options on issue, or the holding of any Lion options by any person.

Holders of the options would not be entitled to participate in the distribution of Entek shares however, options may be exercised prior to the record date to participate in the distribution.

Tax Treatment

Lion would bear any stamp duty that may be (estimated not to exceed a total \$27,000) payable on the transfer of the Entek shares from Lion to its shareholders.

We anticipate no Australian income and capital gains tax consequences for Lion so far as concerns Entek shares issued to Lion and distributed in specie to Lion's shareholders. As concerns Entek shares retained by Lion, those shares will have a negligible or nil cost base for capital gains tax purposes and, when Lion eventually disposes of those shares, Lion may realise a significant taxable capital gain. The costs and expenses to Lion in promoting the capital reduction will not be deductible from Lion's taxable income. Nor will Lion be allowed an input tax credit for GST borne by Lion in promoting the proposal.

The following is a general guide to the tax position of Lion's shareholders in relation to the capital reduction, based on income tax legislation in force at the date of this document. It is not a complete analysis, does not identify all potential tax consequences nor is intended to replace the need for Lion shareholders to obtain specialist tax advice in respect of their particular circumstances. Neither Lion, its officers nor consultants warrant your taxation outcomes.

The capital reduction is to be made from Lion's share capital account. Accordingly for Lion shareholders who are considered to be residents of Australia for tax purposes, and who hold their Lion shares as capital assets, the return of capital should not be an assessable dividend for the purposes of Income Tax Assessment Act 1936 s. 44.

Lion shareholders who are residents of Australia for tax purposes, and who hold their Lion shares as capital assets, should be eligible for demerger relief under the Income Tax Assessment Act 1997. In broad terms, under this demerger relief, a Lion shareholder may choose to defer the capital gains tax consequences of any capital

gains taxation events that happen to their Lion shares as a result of the demerger:

• $\mathbf{o}$ They do not then realise a capital gain or capital loss on their Lion shares. However, the cost base (and reduced cost base) of each Lion share and Entek share will be determined by each Lion shareholder by reasonably apportioning the cost base (and reduced cost base) of the Lion shares held by that shareholder before the demerger between the Lion shares and the Entek shares held after the demerger. An apportionment must be based on the anticipated or actual market values of Lion shares and Entek shares just after the demerger. When the shareholder later disposes of their Lion shares or Entek shares, any resulting capital gain or loss will be worked out using the cost bases as so apportioned.
• The Entek shares acquired under the demerger are deemed to have been o acquired when that shareholder acquired the Lion shares.

Lion shareholders who are residents of Australia for tax purposes but do not choose demerger relief:

• $\Omega$ Will have the cost base of their Lion shares reduced by the value of the Entek shares they receive - and may realise an immediate capital gain on the demerger if the value of the Entek shares exceeds the cost base of their Lion shares
• May be deemed to have acquired their Entek shares at the date of the $\mathbf{o}$ demerger (rather than when they acquired the Lion shares). That may preclude eligibility for any CPI indexation of the cost base of the Entek shares. It may also preclude eligibility for the 50% capital gains tax concession until the shareholder has held the Entek shares for 12 months.

If you are a non-resident of Australia for taxation purposes, you will not be subject to capital gains tax unless your Lion shareholding has a "necessary connection" with Australia. This will only be the case where you (or you and your associates together) held 10% or more of the value of Lion's issued share capital at any time in the last 5 years. Furthermore, if a tax treaty exists between your country and Australia, the resulting capital gain may be exempt from Australian income tax. Non-resident shareholders are advised to seek their own specific advice in this area.

The taxation consequences to Lion shareholders (resident or non-resident) who hold Lion shares on revenue account, or through a company or superannuation fund, will depend on their specific circumstances and they should seek their own advice.

If the resolution does not pass?

If Lion shareholders do not pass the resolution, your directors may consider other ways to unlock the value of the Australian Assets, or to fully exploit those assets.

Yours faithfully

G. A. Mercorella Chairman

LION ENERGY LIMITED A.C.N. 000 753 640

APPOINTMENT OF PROXY

I/We
01
being a member(s) of the company appoint:
(Name of first proxy)
and
(Name of second proxy, if any)
or in his/their absence the chairman of the meeting, as my/our proxies to vote at the meeting of the members of the company to be held on Tuesday 6 July 2004 at 10.30 am (Central Standard Time) or at any adjournment thereof. [Please indicate your voting preferences. Unless otherwise specified, a proxy may vote as he or she thinks fit.]
RESOLUTION	FIRST PROXY		SECOND PROXY
	For	Against For		Against
To reduce the share capital & spin off Entek
Signed (a body corporate should sign by signatures of 2 officers who must state the office held, or by a sole director and sole secretary who must state that the person is the sole director and sole secretary)

Notes:

(a) This appointment of proxy form need not be dated or witnessed.

(b) A member has a right to appoint a proxy; the proxy need not be a member of the company; a member who 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.

(c) To be effective, a proxy form (and, if the proxy form is signed by the appointor's attorney – the authority under which the proxy form was signed or a certified copy of the authority) must be received by the company at least 48 hours before the meeting. The company will receive proxy appointments at Suite 33, 168 Melbourne Street, North Adelaide SA 5006 or by facsimile to (08) 8239 1744 or by email to admin@lionenergy.com.au.