Lodestone Exploration Limited

www.lodestonex.com

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ABN 20 075 877 075

Lodestone Exploration Limited

ABN 20 075 877 075

NOTICE OF EXTRAORDINARY GENERAL MEETING

Notice is given that an extraordinary general meeting of Lodestone Exploration Limited ABN 20 075 877 075 ( Company ) will be held at the offices of Stanley Yeates & Associates, Level 1, 101 Edward Street, Brisbane on Tuesday, 9 September 2008 and will commence at 10.00 am Brisbane time ( Meeting ).

The Explanatory Memorandum accompanying this Notice provides additional information on the matters to be considered at the Meeting to enable the shareholders to make an informed decision regarding the Resolutions. The Explanatory Memorandum is intended to be read in conjunction with, and forms part of, this Notice.

Words that are defined in the Explanatory Memorandum have the same meaning when used in this Notice, unless the context requires otherwise.

Items of business

1. Approval of Farmin Deed

To consider and, if thought fit, pass the following resolution as an ordinary resolution:

For the purposes of Chapter 2E of the Corporations Act, Listing Rules 10.1 and 10.11, and for all other purposes, the performance by the Company of its obligations under the Farmin Deed, the terms and conditions of which are summarised in the Explanatory Memorandum, be approved.

Voting exclusion statement

The Company will disregard any votes cast on Resolution 1 by:

Moreton Energy Pty Ltd and Orbit Capital Pty Ltd; and
any of their associates.

However, the Company need not disregard a vote if:

it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form; or
it is cast 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 their proxy decides.

2. Approval of Employee Share Option Plan

To consider and, if thought fit, pass the following resolution as an ordinary resolution:

For the purposes of Exception 9(b) of Listing Rule 7.2, the Employee Share Option Plan ( ESOP ), the terms and conditions of which are summarised in the Explanatory Memorandum, and the issue of securities under the ESOP, be approved.

Voting exclusion statement

The Company will disregard any votes cast on Resolution 2 by:

Mr John McCawley; and
any of his associates.

However, the Company need not disregard a vote if:

it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form; or
it is cast 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 their proxy decides.

3. Issue of options to Mr John McCawley pursuant to the ESOP

To consider and, if thought fit, pass the following resolution as an ordinary resolution:

For the purposes of Chapter 2E of the Corporations Act, Listing Rules 10.11 and 10.14, and for all other purposes, the grant of 2,000,000 options to Mr John McCawley, a Director, for no consideration and otherwise on the terms and conditions described in the Explanatory Memorandum, be approved.

Voting exclusion statement

The Company will disregard any votes cast on Resolution 3 by:

Mr McCawley; and
any of his associates.

However, the Company need not disregard a vote if:

it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form; or
it is cast 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 their proxy decides.

4. Issue of options to Mr Martin Ackland

To consider and, if thought fit, pass the following resolution as an ordinary resolution:

For the purposes of Chapter 2E of the Corporations Act, Listing Rule 10.11 and for all other purposes, the grant of 2,000,000 options to Mr Martin Ackland, a Director, or his nominee for no consideration and otherwise on the terms and conditions described in the Explanatory Memorandum, be approved.

Voting exclusion statement

The Company will disregard any votes cast on Resolution 4 by:

Mr Ackland; and
any of his associates.

However, the Company need not disregard a vote if:

it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form; or
it is cast 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 their proxy decides.

5. Issue of options to Mr Greg Baynton

To consider and, if thought fit, pass the following resolution as an ordinary resolution:

For the purposes of Chapter 2E of the Corporations Act, Listing Rule 10.11 and for all other purposes, the grant of 2,000,000 options to Mr Greg Baynton, a Director, or his nominee on the terms described in the Explanatory Memorandum, be approved.

Voting exclusion statement

The Company will disregard any votes cast on Resolution 5 by:

Mr Baynton; and
any of his associates.

However, the Company need not disregard a vote if:

it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form; or
it is cast 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 their proxy decides.

6. Issue of options to Mr Bill Stubbs

To consider and, if thought fit, pass the following resolution as an ordinary resolution:

For the purposes of Chapter 2E of the Corporations Act, Listing Rule 10.11 and for all other purposes, the grant of 2,000,000 options to Mr Bill Stubbs, a Director, or his nominee for no consideration and otherwise on the terms and conditions described in the Explanatory Memorandum, be approved.

Voting exclusion statement

The Company will disregard any votes cast on Resolution 6 by:

Mr Stubbs; and
any of his associates.

However, the Company need not disregard a vote if:

it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form; or
it is cast 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 their proxy decides.

7. Issue of options to Mr Lance Grimstone

To consider and, if thought fit, pass the following resolution as an ordinary resolution:

For the purposes of Chapter 2E of the Corporations Act, Listing Rule 10.11 and for all other purposes, the grant of 2,000,000 options to Mr Lance Grimstone, a Director, or his nominee for no consideration and otherwise on the terms and conditions described in the Explanatory Memorandum, be approved.

Voting exclusion statement

The Company will disregard any votes cast on Resolution 7 by:

Mr Grimstone; and
any of his associates.

However, the Company need not disregard a vote if:

it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form; or
it is cast 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 their proxy decides.

8. Ratification of previous share issues

To consider and, if thought fit, pass the following resolution as an ordinary resolution:

For the purposes of Listing Rule 7.4, the issue of 16,998,680 Shares to the investors, for the purposes and on the terms set out in the Explanatory Memorandum, be ratified.

Voting exclusion statement

The Company will disregard any votes cast on Resolution 8 by:

Any person who participated in the issue; and
any of their associates.

However, the Company need not disregard a vote if:

it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form; or
it is cast 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 their proxy decides.

9. Placement to Mr Martin Ackland

To consider and, if thought fit, pass the following resolution as an ordinary resolution:

For the purposes of Chapter 2E of the Corporations Act, Listing Rule 10.11 and for all other purposes, the issue of 1,000,000 Shares to Mr Martin Ackland, a Director, or his nominee, at an issue price of $0.03 per Share and otherwise on the terms and conditions described in the Explanatory Memorandum, be approved.

Voting exclusion statement

The Company will disregard any votes cast on Resolution 9 by:

Mr Ackland; and
any of his associates.

However, the Company need not disregard a vote if:

it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form; or
it is cast 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 their proxy decides.

10. Placement to Mr Greg Baynton

To consider and, if thought fit, pass the following resolution as an ordinary resolution:

For the purposes of Chapter 2E of the Corporations Act, Listing Rule 10.11 and for all other purposes, the issue of 1,666,666 Shares to Mr Greg Baynton, a Director, or his nominee, at an issue price of $0.03 per Share and otherwise on the terms and conditions described in the Explanatory Memorandum, be approved.

Voting exclusion statement

The Company will disregard any votes cast on Resolution 10 by:

Mr Baynton; and
any of his associates.

However, the Company need not disregard a vote if:

it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form; or
it is cast 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 their proxy decides.

11. Placement to Mr John McCawley

To consider and, if thought fit, pass the following resolution as an ordinary resolution:

For the purposes of Chapter 2E of the Corporations Act, Listing Rule 10.11 and for all other purposes, the issue of 1,666,666 Shares to Mr John McCawley, a Director, at an issue price of $0.03 per Share and otherwise on the terms and conditions described in the Explanatory Memorandum, be approved.

Voting exclusion statement

The Company will disregard any votes cast on Resolution 11 by:

Mr McCawley; and
any of his associates.

However, the Company need not disregard a vote if:

it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form; or
it is cast 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 their proxy decides.

12. Placement to Mr Bill Stubbs

To consider and, if thought fit, pass the following resolution as an ordinary resolution:

For the purposes of Chapter 2E of the Corporations Act, Listing Rule 10.11 and for all other purposes, the issue of 3,000,000 Shares to Mr Bill Stubbs, a Director, or his nominee, at an issue price of $0.03 per Share and otherwise on the terms and conditions described in the Explanatory Memorandum, be approved.

Voting exclusion statement

The Company will disregard any votes cast on Resolution 12 by:

Mr Stubbs; and
any of his associates.

However, the Company need not disregard a vote if:

it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form; or
it is cast 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 their proxy decides.

13. Placement to Mr Lance Grimstone

To consider and, if thought fit, pass the following resolution as an ordinary resolution:

For the purposes of Chapter 2E of the Corporations Act, Listing Rule 10.11 and for all other purposes, the issue of 1,000,000 Shares to Mr Lance Grimstone, a Director, or his nominee, at an issue price of $0.03 per Share and otherwise on the terms and conditions described in the Explanatory Memorandum, be approved.

Voting exclusion statement

The Company will disregard any votes cast on Resolution 13 by:

Mr Grimstone; and
any of his associates.

However, the Company need not disregard a vote if:

it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form; or
it is cast 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 their proxy decides.

14. Directors’ remuneration

To consider and, if thought fit, pass the following resolution as an ordinary resolution:

For the purposes of clause 13.3 of the Company’s constitution and Listing Rule 10.17 and for all other purposes, that the maximum aggregate amount of remuneration that may be paid out of the funds of the Company to the Directors (excluding executive Directors) for their services be increased by $140,000 to a maximum of $300,000, to be divided among those Directors in such manner as they may determine.

Voting exclusion statement

The Company will disregard any votes cast on Resolution 14 by:

Mr Martin Ackland, Mr Greg Baynton, Mr Bill Stubbs and Mr Lance Grimstone; and
any of their associates.

However, the Company need not disregard a vote if:

it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the Proxy Form; or
it is cast 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 their proxy decides.

BY ORDER OF THE BOARD

Leni Stanley Company Secretary 4 August 2008

NOTES TO THE NOTICE OF EXTRAORDINARY GENERAL MEETING

Eligibility to vote

A person’s entitlement to vote at the Meeting will be determined by reference to the number of fully paid ordinary shares registered in the name of that person (reflected in the register of members) as at 7pm (Sydney time) on Sunday, 7 September 2008.

Proxy votes and corporate representatives

A member who is entitled to attend and cast a vote at the meeting is entitled to appoint a proxy. A form of appointment of proxy is enclosed with this Notice.

The proxy need not be a member of the Company. A member who is entitled to cast two or more votes may appoint two proxies and may specify the proportion or number of votes each proxy is appointed to exercise. If no such specification is given and two proxies are appointed, each may exercise half of the votes to which that member is entitled.

All proxy forms will need to be lodged with the Company no later than 48 hours before commencement of the Meeting being, 10.00 am Sunday, 7 September 2008. Any Proxy Form received after that time will not be valid for the Meeting.

If you wish to appoint a proxy and are entitled to do so, then complete the enclosed proxy form in accordance with the instructions on it and return it to the Company’s share registry by the deadline for lodgement as follows:

by using the reply paid envelope
by posting or faxing the proxy form to Lodestone Exploration Limited’s share registry as follows:

Lodestone Exploration Limited C/- Link Market Services Limited Locked Bag A14 Sydney South NSW 1235 Facsimile: (02) 9287 0309

by delivering the proxy form to Lodestone Exploration Limited’s share registry at Level 12, 680 George Street, Sydney NSW 2000.

A corporation may elect to appoint a representative in accordance with the Corporations Act 2001 in which case the Company will require written proof of the representative’s appointment, which must be lodged with or presented to the Company no later than 48 hours before commencement of the meeting.

If you have any queries on how to cast your votes then please call the Company Secretary, Leni Stanley, on (07) 3221 6022 during business hours.

Lodestone Exporation Limited

ABN 20 075 877 075

EXPLANATORY MEMORANDUM

This Explanatory Memorandum has been prepared for the information of shareholders in relation to the business to be conducted at the extraordinary general meeting of the Company to be held at the offices of Stanley Yeates & Associates, Level 1, 101 Edward Street, Brisbane on Tuesday, 9 September 2008 at 10.00 am Brisbane time. This Explanatory Memorandum should be read in conjunction with the Notice.

A number of words and terms used in this Explanatory Memorandum have defined meanings, which are set out in the Definitions section at the end of this document.

Resolution 1 – Approval of Farmin Deed

Introduction

Pursuant to Resolution 1 shareholder approval is sought for the purposes of Chapter 2E of the Corporations Act, Listing Rules 10.1 and 10.11, and for all other purposes, for the performance by the Company of its obligations under the Farmin Deed.

Summary of Farmin Deed

Overview

On 18 June 2008 the Company entered into the Farmin Deed. The parties to the Farmin Deed are the Company, Moreton and Orbit. Both Moreton and Orbit are entities controlled by Mr Greg Baynton, a Director.

Under the Farmin Deed, the Company has a right to earn a 50% interest in three tenements that are prospective for coal by undertaking exploration activities, and incurring exploration expenditure, to the value of $2 million over a period of three years ( Earning Period ). The tenements, EPC1302, EPC1313 and EPC1299, are currently under application and cover four known coal-bearing areas in the Moreton Basin near Beaudesert, in south east Queensland. Further details of the tenements are set out in the Independent Expert’s Report.

Conditions precedent and obligation to issue securities

The Farmin Deed is, and the Company’s obligations under it are, conditional upon the Company’s eligible ordinary shareholders approving the performance by the Company of its obligations under the Farmin Deed for the purposes of Chapter 2E of the Corporations Act, Listing Rules 10.1 and 10.11 and for all other purposes. The reason why this approval is required is described below. If this condition precedent is satisfied the Company must issue an initial tranche of three million Shares to Orbit (or a related body corporate).

Except for the Company’s obligation to issue the initial tranche of three million Shares, the parties’ obligations under the Farmin Deed are also conditional upon each tenement being granted by the Queensland Department of Minerals and Energy, and in the case of EPC1299, Orbit transferring its beneficial interest in that tenement to Moreton. If both of these conditions are satisfied the Company must issue a second tranche of three million Shares to Orbit (or a related body corporate). If either condition is not satisfied (or waived by the Company) by 18 March 2009, then the Farmin Deed will automatically terminate and each party will have no further obligations under it. ASX has granted the Company a waiver from Listing Rule 10.13.3 to permit the second tranche of shares to be issued more than one month after the date of the meeting. This waiver has been granted on conditions, including

that the date by which the Company may issue the second tranche of shares may not be later than the date that is nine months after the date of the Meeting.

The Company must issue Orbit (or a related body corporate) a third tranche of up to three million Shares once it has carried out exploration work and incurred exploration expenditure to the value of $1 million with 1,000,000 Shares to be issued for each tenement the Company elects to retain an interest in (see below for an outline of the Company’s rights to exclude tenements from the Farmin Deed). The waiver of Listing Rule 10.13.3 granted by ASX permits the Company to issue the third tranche of shares more than one month after the date of the meeting on conditions including that the date by which the Company may issue the third tranche of shares may not be later than the date that is three years after the date of the Meeting.

Parties’ obligations during Earning Period

Pending grant of the tenements, both Moreton and Orbit must do everything reasonably possible to preserve the value of the tenements and must not, without the prior written consent of the Company, withdraw their applications for any of the tenements or take any action to prejudice any of those applications. The Company must use its reasonable endeavours to assist Moreton and Orbit to secure the grant of the tenements.

During the Earning Period, the Company has the exclusive right to access and explore the tenements, including the right to determine the nature and content of exploration programmes and budgets. In carrying out such exploration activities, the Company must abide by the terms of the tenements and not do anything to breach, or cause any other party to breach, the terms and conditions of those tenements.

Provided the Company has satisfied all obligations in respect of the tenements imposed by applicable mining legislation (including expenditure conditions), the Company may withdraw from the Farmin Deed at any time by notice to Moreton. Following its withdrawal, the Company is not obliged to undertake any work or incur any further liability in respect of the tenements, to fund any further exploration in or about the tenements or to rehabilitate land within the tenements.

Until the Company withdraws from the Farmin Deed, the Earning Period expires, or the Company satisfies its expenditure obligations (whichever occurs first), the Company must satisfy the minimum expenditure obligations for each tenement required under applicable mining legislation (or for a part of the year, the pro rata proportion of that amount). The Company is not under any other obligation to undertake exploration or incur exploration expenditure.

If at any stage during the Earning Period the Company considers that one or more of the tenement areas is no longer prospective for commercial exploration or production of coal, it may exclude the tenement area from the Farmin Deed, although this does not reduce the Company’s expenditure obligations.

If the Company fails to satisfy wholly its exploration and expenditure obligations within the Earning Period, it will not acquire any interest in the tenements and is deemed to have withdrawn from the Farmin Deed.

At any time during the first 12 months of the Farmin Deed, Moreton may by notice indicate its intention to carry out exploration activities in a specified part of the tenement areas within which the Company is not currently, and has no immediate plans, to undertake its own exploration activities (a Sole Risk Proposal ). Within 30 days of receiving a Sole Risk Proposal, the Company may elect to undertake the proposed exploration activities within six months. If the Company does not elect to undertake the activities proposed in a Sole Risk Proposal, Moreton may undertake them at its own cost. If it does so, it must, upon the completion of those activities, report on their outcome to the Company. The Company then has six months in which to elect whether to participate in the sole risk area by making a payment to Moreton of an amount equivalent to four times the expenditure made by Moreton

in completing the sole risk activities. If the Company chooses not to make such a payment, then the relevant sole risk area is excluded from the operation of the Farmin Deed and Moreton will retain a 100% beneficial interest in that area.

The parties have agreed that if any of them proposes to take up or acquire, or is offered an interest in, any mining tenement in an area that is within a 75 kilometres of the Boonah post office, that party must offer the other a right to participate in a joint venture in respect of the relevant tenement interest, that joint venture to be on the same terms as the Farmin Deed.

Transfer and termination rights

The Company is prohibited from transferring the whole or any part of its interest in the Farmin Deed except with the prior written consent of Moreton (which must not be unreasonably withheld), or unless the transfer is to a related body corporate of the Company, or is otherwise permitted or contemplated by the Farmin Deed.

Moreton is prohibited from transferring any interest in a tenement except as expressly permitted by the Farmin Deed. If Moreton wishes to transfer a tenement to a third party, the Company has a first right of refusal to acquire that tenement on the same terms and conditions. If the Company does not acquire the tenement, the transferee must agree to perform the obligations of Moreton under the Farmin Deed. Moreton may assign a tenement area to a related body corporate without the consent of the Company subject to certain conditions.

If there is a change in control of Moreton (as defined in the Farmin Deed), or Moreton becomes insolvent, then the Company has a right to acquire the whole of Moreton’s interest in the tenements at a price agreed between the Company and Moreton, or failing agreement, at a price determined by an independent valuer appointed in accordance with the Farmin Deed.

If either Moreton or Orbit commits a material breach of their respective obligations under the Farmin Deed, then the Company has a right to acquire all of Moreton’s interest in the tenements at a price equal to the fair market value of those tenements (either as agreed between the parties or failing agreement, as determined by an independent valuer appointed in accordance with the Farmin Deed). If the Company elects not to acquire the relevant tenements, it may terminate the Farmin Deed.

Moreton may terminate the Farmin Deed if an insolvency event occurs in relation to the Company, or the Company commits a breach of a material obligation under the Farmin Deed, that is not remedied within 30 business days of Moreton giving notice.

Entry into joint venture

If the Company satisfies its exploration and expenditure obligations within the Earning Period, the Company and Moreton will enter into an unincorporated joint venture to explore for, produce, process and transport coal from the tenement areas. The Company and Moreton will each have a 50% interest in the joint venture and the Company will be the initial operator. The joint venture will be governed by a joint venture operating agreement, which the parties must negotiate and execute as soon as practicable after the joint venture commences. Until the operating agreement is executed, the joint venture will be governed by operating principles set out in the Farmin Deed.

Why is shareholder approval required?

Listing Rule 10.1

Listing Rule 10.1 provides that an entity must ensure that neither it, nor any of its child entities, acquires a substantial asset from a related party of the entity. A substantial asset is

defined in Listing Rule 10.2 as an asset whose value, or the value of the consideration for it is, 5% or more of the equity interests of the entity.

Both Moreton and Orbit are entities controlled by Greg Baynton, a Director, and are related parties of the Company for the purposes of Listing Rule 10.1. The consideration payable by the Company under the Farmin Deed to acquire a 50% interest in the tenements exceeds 5% of the equity interests of the Company.

Shareholder approval is therefore required under Listing Rule 10.1 because if the Farmin Deed is approved and becomes binding on the Company, the Company will acquire a ‘substantial asset’, being a right to earn a 50% interest in the tenements from Moreton and Orbit.

Listing Rule 10.11

Listing Rule 10.11 provides that an entity must not issue, or agree to issue, securities to a related party of the entity without first obtaining shareholder approval.

As the Farmin Deed requires the Company to issue Shares to Orbit (a related party), shareholder approval is therefore required under Listing Rule 10.11 before those Shares can be issued. Orbit is a related party of the Company because it is controlled by Greg Baynton, a Director.

Chapter 2E of the Corporations Act

Chapter 2E of the Corporations Act prohibits a company (subject to certain exceptions) from giving a financial benefit to a related party of the Company, except with the approval of the Company’s members. Buying an asset from, or issuing securities to, a related party are examples of giving a financial benefit that require shareholder approval under Chapter 2E.

An approval under Chapter 2E is required in the circumstances because, pursuant to the Farmin Deed, the Company will be acquiring an asset – namely an interest in the tenements currently under application by Moreton and Orbit – from a related party and the Company will be issuing securities to a related party (Orbit).

Advantages and disadvantages of approval of the Farmin Deed

The Board considers that approval of the Farmin Deed will provide the Company with an exciting opportunity to expand its activities into the coal and energy sector while at the same time continuing to advance its Mount Morgan and Limestone Creek base and precious metals projects. The Board considers that advantages of the proposal include:

It provides the Company with an opportunity to earn an interest in tenements that cover four known coal-bearing project areas in the Moreton Basin near Beaudesert, which offer good road access and are located close to the railway to Brisbane and the Port of Brisbane.
The tenements include a thermal coal deposit at Veresdale Scrub, which previous exploration indicates may be capable of being extended through further exploration work. Further work is however required to determine whether this deposit can be profitably exploited.
Under the Farmin Deed, the Company has the exclusive right to determine the nature and content of exploration programs and budgets and is not under any obligation to undertake exploration or incur exploration expenditure whilst it is a party to the Farmin Deed, except for expenditure necessary to satisfy minimum expenditure obligations for each tenement required under applicable mining legislation (as described in more detail above).

The Company has a right to exclude one or more tenement areas from the Farmin Deed if it considers the area is no longer prospective for commercial exploration or production of coal and the Company may withdraw from the Farmin Deed at any time.

A potential disadvantage of the Farmin Deed is that, as described above, the Company is obliged to issue up to nine million shares to Orbit (or a related body corporate). The issue of these shares, together with the satisfaction of the Company’s $2 million expenditure commitment, represents the consideration payable by the Company to earn a 50% interest in the tenements the subject of the Farmin Deed. There can be no guarantee however that the known coal deposits in the tenement areas will be able to be commercially exploited or that additional coal resources capable of commercial exploitation will be discovered. It is therefore, possible that the Company will be required to issue up to nine million shares without obtaining a benefit. The Board will, however, actively seek to manage and mitigate this risk.

Independent expert’s report

Listing Rule 10.10 provides that a notice of meeting prepared for the purposes of obtaining an approval under Listing Rule 10.1 must include a report from an independent expert as to whether the relevant transaction in respect of which shareholder approval is being sought is fair and reasonable to the Company’s eligible ordinary shareholders.

For the purposes of Listing Rule 10.10 the Company engaged Jeff Jamieson & Associates to prepare an Independent Expert’s Report.

The Independent Expert’s Report accompanies this Explanatory Memorandum in schedule 2. It provides members with a detailed description of the tenements the subject of the Farmin Deed and outlines the valuation methodology used by the Independent Expert in assessing the fairness and reasonableness of the Farmin Deed.

The Independent Expert has concluded that the Farmin Deed is fair and reasonable to the shareholders of Lodestone who are not associates with Moreton or Orbit.

Shareholders are encouraged to read the Independent Expert’s Report carefully.

Other information

For the purposes of Listing Rule 10.13 and satisfying the conditions of the waiver of that Listing Rule granted by ASX, the following additional information is provided to shareholders for the purposes of Resolution 1:

The maximum number of Shares that the Company may be required to issue under the Farmin Deed is 9,000,000.
The first tranche of 3,000,000 Shares will be issued to Orbit or a related body corporate of Orbit no later than one month after the date of the Meeting. Up to 6,000,000 of these Shares may be issued later than one month after the date of the meeting as outlined below.
In accordance with the terms of a waiver granted by ASX from Listing Rule 10.3.3, the date by which the second tranche of up to 3,000,000 Shares may be issued to Orbit or a related body corporate may be no more than nine months after the date of the Meeting and the date by which the third tranche of up to 3,000,000 Shares may be issued may be no later than three years after the date of the Meeting.
In accordance with the accounting standards, the value of the Shares in Company to be issued to Orbit will be the market price of the relevant Shares on the date they are issued.

The Company will not raise any funds from the issue of Shares under the Farmin Deed.
The Shares issued to Orbit will rank equally with the Shares then on issue.

Pursuant to Listing Rule 7.2 Exception 14, where an issue of Shares is made with the approval of the shareholders under Listing Rule 10.11, approval is not required under Listing Rule 7.1. The requirements of Listing Rule 7.1 are summarised in connection with Resolution 2 below.

In accordance with the requirements of Chapter 2E of the Corporations Act, the following information is provided to shareholders for the purposes of Resolution 1:

The related parties to whom a financial benefit will be given if Resolution 1 is approved are Moreton and Orbit.
Under the Farmin Deed the financial benefits that the Company will provide to Moreton and Orbit are as follows:
The Company is to issue up to 9,000,000 Shares to Orbit, as summarised above; and
In the case of Moreton, the Company has agreed to acquire a 50% interest in the tenements the subject of the Farmin Deed, on the terms summarised above.

Directors’ interests and recommendations

None of the Directors, other than Mr Greg Baynton, have an interest in the Farmin Deed, except in their capacity as shareholders of the Company.

As noted above, Mr Baynton, a Director, controls both Moreton and Orbit, who are both parties to the Farmin Deed.

The Directors, other than Mr Baynton, have considered all the relevant information relating to Resolution 1, including the accompanying Independent Expert’s Report, which states that, in the opinion of the Independent Expert the Farmin Deed is fair and reasonable to the shareholders of Lodestone who are not associated with Moreton or Orbit. These Directors unanimously recommend that you vote in favour of Resolution 1.

As Mr Baynton has, by virtue of his interests in Moreton and Orbit, an interest in Resolution 1, he makes no recommendation in relation to it.

Resolution 2 - Approval of Employee Share Option Plan

Introduction

Pursuant to Resolution 2 shareholder approval is sought for the purposes of Exception 9(b) of Listing Rule 7.2 for the introduction of the Employee Share Option Plan ( ESOP ) and the issue of securities under the ESOP.

Summary of ESOP

The purpose of the ESOP is to better align the interests of employees with those of the Company by providing an appropriate level of incentive to employees, including executive Directors, to add value to the Company.

A summary of the terms of the ESOP is set out in schedule 1 to this Explanatory Memorandum. The full terms of the ESOP are available on request from the Company.

Why is shareholder approval required?

Listing Rule 7.1 imposes a limit on the number of equity securities (e.g. shares or options to subscribe for shares) that the Company can issue without shareholder approval. In general terms, the Company may not, without shareholder approval, issue equity securities representing more than 15% of its share capital in a 12 month period. Unless an exemption applies, an issue of shares or options by the Company to participants under the ESOP will reduce the Company’s capacity to issue further securities without requiring shareholder approval under Listing Rule 7.1.

Pursuant to exception 9(b) of Listing Rule 7.2, an issue of securities under an ESOP approved by shareholders as an exemption to Listing Rule 7.1 will not be taken into account when calculating the maximum number of securities that the Company is permitted to issue within its 15% limit, provided that the securities are issued within three years of the ESOP being approved. Resolution 2 is being put to shareholders to take advantage of this exception.

Other information

Shareholder approval will be required before any securities can be issued to any Director or related party of the Company under the ESOP.

There have been no previous issues of securities under the ESOP.

None of the Directors, other than Mr John McCawley, have an interest in the Company issuing securities pursuant to the ESOP. The Directors, other than Mr McCawley, have considered all the relevant information relating to Resolution 2 and unanimously recommended that you vote in favour of it.

Resolution 3 – Approval of issue of options to Mr John McCawley under the ESOP

Introduction

Pursuant to Resolution 3 shareholder approval is sought for the purposes of Chapter 2E of the Corporations Act, Listing Rules 10.11 and 10.14 and for all other purposes, for the grant of 2,000,000 options, for no consideration, to Mr John McCawley, a Director, on the terms set out below.

Why is shareholder approval required?

Listing Rules 10.11 and 10.14

As noted above, Listing Rule 10.11 provides that an entity must not issue, or agree to issue, securities to a related party of the entity without first obtaining shareholder approval. As the Company proposes to issue options to Mr McCawley (a related party) under the ESOP, shareholder approval is therefore required under Listing Rule 10.11 before the options can be issued.

In addition, Listing Rule 10.14 provides that an entity must not permit any director, or any associate of a director, to acquire securities under an employee incentive scheme, without the prior approval of its ordinary shareholders. As Mr McCawley is a Director, the proposed issue of options to him under the ESOP therefore also requires the prior approval of the Company’s shareholders under Listing Rule 10.14.

Chapter 2E of the Corporations Act

As noted above, Chapter 2E of the Corporations Act prohibits a company (subject to certain exceptions) from giving a financial benefit to a related party of the Company, except with the

approval of the Company’s members. Issuing securities (including options) to a related party is an example of giving a financial benefit that requires shareholder approval under Chapter 2E.

An approval under Chapter 2E is required in the circumstances because, if Resolution 3 is approved, the Company will issue options to a related party, being Mr John McCawley, a Director.

Details of options

If Resolution 3 is approved the Company will issue to Mr McCawley 2,000,000 options which, if exercised, will entitle him to acquire one Share per option. The options are to be issued under the rules of the ESOP, a summary of which is set out in the schedule and otherwise on the following terms:

the options will be issued for no consideration;
the exercise price is $0.07 per option; and
each option will have an expiry date of two years from the date of issue.

Why are the options being issued?

The primary purpose of the grant of the options to Mr McCawley under Resolution 3 is not to raise capital but, consistent with the objectives of the ESOP, to better align the interests of the Company and Mr McCawley by providing an incentive to him to remain with the Company and increase shareholder value.

Value of options

The Board has engaged an independent adviser to prepare a valuation of the options to be granted under Resolutions 3, 4, 5, 6 and 7. The independent advisor has determined the value of the options to be issued pursuant to Resolutions 3, 4, 5, 6 and 7 to be $0.047 per option.

This value has been derived using both a Black Scholes Option Pricing Model and a Binomial Model Option Pricing Model, assuming the following:

Share price of $0.075 (being the closing price of Shares on the ASX on 30 June 2008);
An option exercise price of $0.07;
A risk free rate of 6.83% per annum;
A volatility factor of 116.376%, which has been determined having regard to the historical trading of the Company’s shares on ASX;
An expiry date of two years from the date of issue; and
All other terms and conditions as outlined in this Explanatory Memorandum.

Other information

For the purposes of Listing Rules 10.13 and 10.15, and for all other purposes, the following information is provided to shareholders for the purposes of Resolution 3:

Non-executive Directors are not eligible to participate in the ESOP. Mr McCawley is the only executive Director and is therefore currently the only person of the kind referred to in Listing Rule 10.14 who is eligible to participate in the ESOP.
Under Resolution 3, approval is being sought to issue a maximum of 2,000,000 options to Mr McCawley. An issue of additional options to Mr McCawley under the ESOP will require further prior shareholder approval.
The options will be granted to Mr McCawley as soon as practicable after the Meeting, but in any event, no later than one month after the date of the Meeting.
Because the options are to be issued for no consideration, the Company will not raise any funds from the issue. If any or all of the options are exercised, the funds raised from the issue of Shares to Mr McCawley will contribute to the Company’s working capital.
There have been no previous issues of securities under the ESOP.
The Company will not provide a loan in connection with the exercise of any options issued pursuant to Resolution 3.

Pursuant to Listing Rule 7.2 Exception 14, where an issue is made with the approval of the shareholders under Listing Rule 10.11, approval is not required under Listing Rule 7.1.

In accordance with the requirements of Chapter 2E of the Corporations Act, the following additional information is provided to shareholders for the purposes of Resolution 3:

If Resolution 3 is approved, the Company will be permitted to give Mr McCawley, a related party, a financial benefit. The financial benefit to be given to Mr McCawley is the grant of 2,000,000 options to subscribe for shares on the terms summarised above.
The current annual compensation of Mr McCawley is as follows:

Salary & fees	Non monetary benefits	Post employment benefits and superannuation	Total
$150,000	nil	$13,500	$163,500

■ The 2,000,000 options that are proposed to be granted to Mr McCawley pursuant to Resolution 3 will, if exercised, result in the issue of 2,000,000 Shares in the capital of the Company. If all of the options the subject of Resolution 3 and Resolutions 4, 5, 6 and 7 ( Options Resolutions ) - a total of 10,000,000 options - were to be exercised, shareholders interests in the Company would be diluted by approximately 5.6% (based on the Company’s issued share capital on 1 August 2008 of 167,076,197 Shares and assuming no other options then on issue are exercised). Although all other shareholders’ holdings in the Company will be diluted, the Company will benefit from an expanded capital base by reason of the money, being the exercise price, payable by the option holder to the Company.

■ To the extent that the exercise price of the options may be below the market price of the Company’s shares at the time the options are exercised, the Company will potentially have foregone the opportunity of issuing the relevant Shares at a price that is higher than the exercise price and that is closer to the relevant market price.

The last price that shares traded on ASX prior to the finalisation of this Notice was $0.035 on 1 August 2008. As at this date the lowest and highest price that shares traded on ASX in the past 12 months was $0.021 (on 23 January 2008) and $0.080 (on 30 June 2008 and 1 July 2008) respectively.

Other than the information specified above, the Company believes there is no other information that would be reasonably required by shareholders in order to decide whether to pass Resolution 3.

Directors’ interests and recommendations

None of the Directors, other than Mr McCawley, has an interest in Resolution 3. As the proposed recipient of options under Resolution 3, Mr McCawley has an interest in Resolution 3, and therefore makes no recommendation in relation to it.

The Directors, other than Mr McCawley, have considered all the relevant information relating to Resolution 3 and unanimously recommend that you vote in favour of it.

Resolutions 4, 5, 6 and 7– Approval of issue of options to Mr Martin Ackland, Mr Greg Baynton, Mr Bill Stubbs and Mr Lance Grimstone

Introduction

Pursuant to Resolutions 4, 5, 6 and 7 shareholder approval is sought for the purposes of Chapter 2E of the Corporations Act, Listing Rule 10.11 and for all other purposes for the grant by the Company, for no consideration, of:

2,000,000 options to Mr Martin Ackland or his nominee (Resolution 4);
2,000,000 options to Mr Greg Baynton or his nominee (Resolution 5);
2,000,000 options to Mr Bill Stubbs or his nominee (Resolution 6); and
2,000,000 options to Mr Lance Grimstone or his nominee (Resolution 7).

The options are to be issued on the terms summarised below. Mr Ackland, Mr Baynton, Mr Stubbs and Mr Grimstone are each Directors.

Why is shareholder approval required?

Listing Rule 10.11

Listing Rule 10.11 provides that an entity must not issue or agree to issue securities to a related party of the Company without first obtaining shareholder approval. Under each of Resolutions 4, 5, 6 and 7 the Company will, if the relevant Resolution is passed, issue options to a Director (i.e. to a related party). Accordingly, the Company must obtain shareholder approval under Listing Rule 10.11 before those options are issued.

Chapter 2E of the Corporations Act

Chapter 2E of the Corporations Act prohibits a company (subject to certain exceptions) from giving a financial benefit to a related party of the Company, except with the approval of the Company’s members. Issuing securities (including an option) to a related party is an example of giving a financial benefit that requires shareholder approval under Chapter 2E.

An approval under Chapter 2E is required in the circumstances because, if Resolutions 4, 5, 6 and 7 are approved, the Company will issue options to a related party pursuant to the relevant Resolution.

Details of options

The options to be issued under each of Resolutions 4, 5, 6 and 7 will, if the relevant Resolution is approved, be issued on the following terms:

the options will be issued for no consideration;
each option will, on exercise, entitle the holder to acquire one Share;
the exercise price is $0.07 per option;
each option will have an expiry date of two years from the date of issue; and
although the options under not being issued under the ESOP, the rules of the ESOP will otherwise apply to the options.

These are materially the same terms as the options to be issued to Mr McCawley if Resolution 3 is approved.

Details of the value of the options to be issued under Resolutions 4, 5, 6 and 7 are set out in the discussion of Resolution 3 above.

Why are the options being issued?

The primary purpose of the grant of the options under Resolutions 4, 5, 6 and 7.is to better align the interests of the Company and each relevant Director by providing an incentive to him to remain with the Company and increase shareholder value.

Other information

For the purposes of Listing Rule 10.13, and for all other purposes, the following information is provided to shareholders for the purposes of Resolutions 4, 5, 6 and 7.

Under Resolutions 4, 5, 6 and 7, approval is being sought to issue to each of Mr Ackland (Resolution 4), Mr Baynton (Resolution 5), Mr Stubbs (Resolution 6) and Mr Grimstone (Resolution 7), or their respective nominees, a maximum of 2,000,000 options each. An issue of additional options to any of them will require further prior shareholder approval.
The options will be granted to each recipient as soon as practicable after the Meeting, but in any event, no later than one month after the date of the Meeting.
Because the options are to be issued for no consideration, the Company will not raise any funds from the issue. If any or all of the options are exercised, the funds raised from the issue of Shares pursuant to that exercise will contribute to the Company’s working capital.
The Company will not provide a loan in connection with the exercise of any options issued pursuant to Resolutions 4, 5, 6 and 7.

Pursuant to Listing Rule 7.2 Exception 14, where an issue is made with the approval of the shareholders under Listing Rule 10.11, approval is not required under Listing Rule 7.1.

In accordance with the requirements of Chapter 2E of the Corporations Act, in addition to the information set out in relation to Resolution 3 above, the following additional information is provided to shareholders for the purposes of Resolutions 4, 5, 6 and 7.

Under each of Resolutions 4, 5, 6 and 7 the Company will, if the relevant Resolution is approved, be permitted to give the recipient, a related party, a financial benefit.

The financial benefit to be given is the grant of 2,000,000 options to subscribe for Shares on the terms summarised above.

■ The annual compensation of each Recipient Director for the year ended 30 June 2008 is as follows:

Name	Salary & fees	Non monetary benefits	Post employment benefits and superannuation	Total
Martin Ackland1	$35,833	Nil	$3,225	$39,058
Greg Baynton	$30,000	Nil	$2,700	$32,700
Bill Stubbs2	$7,500	Nil	$675	$8,175
Lance Grimstone3	Nil	Nil	Nil	Nil

■ If all four resolutions are passed, the 8,000,000 options issued by the Company, would, if exercised, result in the issue of 8,000,000 Shares. As noted in relation to Resolution 3, if each of the 10,000,000 options the subject of the Options Resolutions were to be exercised, shareholders’ interests in the Company would be diluted by approximately 5.6% (based on the Company’s issued share capital on 1 August 2008 of 167,076,197 Shares and assuming no other options then on issue are exercised).

Other than the information specified above, the Company believes there is no other information that would be reasonably required by shareholders in order to decide whether to pass Resolution 4, 5, 6 and 7.

Director’s interests and recommendations

Resolution 4

None of the Directors, other than Mr Ackland, has an interest in Resolution 4. As the proposed recipient of options under Resolution 4, Mr Ackland has an interest in Resolution 4, and therefore makes no recommendation in relation to it.

The Directors, other than Mr Ackland, have considered all the relevant information relating to Resolution 4 and unanimously recommend that you vote in favour of it .

1 Mr Ackland was appointed chairman of the Board on 30 November 2008 and, in this capacity, is entitled to an annual fee of $40,000 plus superannuation of $3,600.

2 Mr Stubbs was appointed a director on 31 March 2008. Mr Lance Grimstone was appointed a director on 30 June 2008. Their annual fee entitlement is $30,000 plus superannuation of $2,700.

3 Mr Stubbs was appointed a director on 31 March 2008. Mr Lance Grimstone was appointed a director on 30 June 2008. Their annual fee entitlement is $30,000 plus superannuation of $2,700.

Resolution 5

None of the Directors, other than Mr Baynton, has an interest in Resolution 5. As the proposed recipient of options under Resolution 5, Mr Baynton has an interest in Resolution 5, and therefore makes no recommendation in relation to it.

The Directors, other than Mr Baynton, have considered all the relevant information relating to Resolution 5 and unanimously recommend that you vote in favour of it .

Resolution 6

None of the Directors, other than Mr Stubbs, has an interest in Resolution 6. As the proposed recipient of options under Resolution 6, Mr Stubbs has an interest in Resolution 6, and therefore makes no recommendation in relation to it.

The Directors, other than Mr Stubbs, have considered all the relevant information relating to Resolution 6 and unanimously recommend that you vote in favour of it.

Resolution 7

None of the Directors, other than Mr Grimstone, has an interest in Resolution 7. As the proposed recipient of options under Resolution 7, Mr Grimstone has an interest in Resolution 7, and therefore makes no recommendation in relation to it.

The Directors, other than Mr Grimstone, have considered all the relevant information relating to Resolution 7 and unanimously recommend that you vote in favour of it.

Resolution 8 – Ratification of previous Share issues

The Company has issued Shares in the capital of the Company to each of the persons listed in the table below.

Listing Rule 7.1 imposes a limit on the number of equity securities (e.g. Shares or options to subscribe for Shares) that the Company can issue without shareholder approval. In general terms, the Company may not, without shareholder approval, issue equity securities representing more than 15% of its share capital in a 12 month period.

Shares that are issued with shareholder approval do not reduce the number of equity securities that may be issued by the Company under Listing Rule 7.1.

Under Listing Rule 7.4, shareholder approval can be obtained after the Shares are issued if the issue did not breach the 15% limit in Listing Rule 7.1 when made and the Company’s members subsequently approve it. The issues set out in the table below did not breach the 15% limit.

Under Resolution 8, the Company seeks approval from shareholders for, and ratification of, the issue of Shares set out in the table below.

Listing Rule 7.5 requires the following information to be given to shareholders:

Date of issue	Investor	Issue price per Share	Number of Shares issued	Total capital subscribed
18 June 2008	Wealford Investments Limited	$0.03	10,000,000	$300,000.00
18 June 2008	Slipline Pty Ltd	$0.03	1,000,000	$30,000.00

Date of issue	Investor	Issue price per Share	Number of Shares issued	Total capital subscribed
18 June 2008	TBIC Pty Ltd	$0.03	1,000,000	$30,000.00
18 June 2008	Mr David Oakley	$0.03	1,000,000	$30,000.00
18 June 2008	Profin Investments Pty Ltd	$0.03	1,000,000	$30,000.00
18 June 2008	Mirrup Pty Ltd	$0.03	1,000,000	$30,000.00
18 June 2008	BCP Alpha Investments Pty Ltd	$0.03	1,000,000	$30,000.00
18 June 2008	Mr Roger Clarke & Mrs Barbara Clarke	$0.03	998,680	$29,960.40
Total			16,998,680	$509,960.40

All shares were issued on the same terms and conditions as other Shares in the capital of the Company.

The Company has used the funds raised from issues listed above for the purposes of working capital.

The Directors recommend that shareholders vote in favour of Resolution 8 as it will allow the Company to retain the flexibility to issue the maximum number of equity securities permitted under Listing Rule 7.1 without shareholder approval.

Resolutions 9, 10, 11, 12 and 13 – Placements of Shares to Mr Martin Ackland, Mr Greg Baynton, Mr John McCawley, Mr Bill Stubbs and Mr Lance Grimstone

Introduction

Pursuant to Resolutions 9, 10, 11, 12 and 13, shareholder approval is sought for the purposes of Chapter 2E of the Corporations Act, Listing Rule 10.11 and for all other purposes, to issue Shares, at an issue price of $0.03 per Share, as follows:

1,000,000 Shares to Mr Martin Ackland or a nominee (Resolution 9);
1,666,666 Shares to Mr Greg Baynton or a nominee (Resolution 10);
1,666,666 Shares to Mr John McCawley (Resolution 11);
3,000,000 Shares to Mr Bill Stubbs or a nominee (Resolution 12) and
1,000,000 Shares to Mr Lance Grimstone or a nominee (Resolution 13).

Mr Ackland, Mr Baynton, Mr McCawley, Mr Stubbs and Mr Grimstone (each a Recipient Director ) are all Directors.

Placement agreement

Each Recipient Director has entered into a conditional placement agreement with the Company to subscribe for the number of Shares set out beside their name above. Each placement agreement (other than that entered into by Mr Grimstone):

■ Was entered into prior to 18 June 2008, being the date that the Company announced:

its intention to enter into the Farmin Deed (as summarised in connection with Resolution 1);
the ESOP (as described in relation to Resolution 2);
a share purchase plan; and
its capital raising and forward program. Copies of these announcements are available on the Company’s website (www.lodestonex.com) or the website of ASX (www.asx.com.au).

Mr Grimstone entered into a placement agreement with the Company on 7 July 2008.

■ Is subject to and conditional upon the Company obtaining all necessary shareholder approvals required under the Corporations Act and the Listing Rules.

Provides that the Company will not be obliged to issue the placement Shares to the Recipient Director if, in the opinion of the Company, to do so would result in a breach of the Corporations Act or the Listing Rules.
Provides that the Shares issued to the Recipient Director will rank equally in all respects with other Shares on the date of issue. The Company is required to seek quotation of the placement Shares on ASX.

The issue price under each placement agreement is $0.03 per Share. This is the same price at which the Company placed Shares to investors as described in Resolution 8 above and the same price at which the Company has offered Shares to existing shareholders under the share purchase plan announced on 18 June 2008.

If the placements to each Recipient Director are all approved, the Company will issue a total of 8,333,332 shares to raise a total of $250,000.

Why shareholder approval is required?

Listing Rule 10.11

Listing Rule 10.11 provides that an entity must not issue or agree to issue securities to a related party of the Company without first obtaining shareholder approval. Each of Resolutions 9, 10, 11, 12 and 13 will, if approved, require the Company to issue shares to a Director (or their nominee), who is a related party of the Company for the purposes of the Listing Rules. Shareholder approval is therefore required under Listing Rule 10.11 before those securities are issued.

Chapter 2E of the Corporations Act

Chapter 2E of the Corporations Act prohibits a company (subject to certain exceptions) from giving a financial benefit to a related party of the Company, except with the approval of the Company’s members. Issuing securities to a related party is an example of giving a financial benefit that requires shareholder approval under Chapter 2E.

Each of Mr Ackland, Mr Baynton, Mr McCawley, Mr Stubbs and Mr Grimstone is a related party for the purposes of Chapter 2E.

Shareholder approval under Chapter 2E is not required if the financial benefit is provided to the related party on terms that would be reasonable in the circumstances if the Company and the related party were dealing at arm’s length.

The Board has reasonably formed the view that the issue of shares as contemplated by Resolutions 9, 10, 11 and 12 respectively represents, in each case, a transaction that would be reasonable in the circumstances if the Company and the relevant Recipient Director were dealing at arm’s length. For the reasons outlined below, the Board does not however consider that the proposed placement to Mr Grimstone is an arm’s length transaction. Accordingly, the Board does not believe that shareholder approval of the placements of Shares to each Recipient Director (other than Mr Grimstone) is required for the purposes of Chapter 2E. The Board has, nevertheless, elected to obtain shareholder approval under Chapter 2E in order to give shareholders an opportunity to vote on the issue of the Shares.

The Board considers that the proposed placements to each Recipient Director pursuant to Resolutions 9, 10, 11 and 12 are transactions on arm’s length terms on the basis that the issue price of the Shares under each placement agreement of $0.03 is the same price as that at which:

Shares were placed with private investors as outlined in Resolution 8 above; and
Shares have been offered to the Company’s existing shareholders (as at 21 June 2008) under the share purchase plan announced by the Company on 18 June.

As noted above, each Recipient Director (other than Mr Grimstone) entered into a placement agreement with the Company prior to 18 June 2008. The closing price of the Company’s ordinary shares on ASX on 17 June 2008, being the last trading day prior to the announcements made by the Company on 18 June 2008, was $0.031. The issue price of the placement Shares of $0.03 represents a discount of 3% to this price.

The Board considers that the proposed placement of shares to Mr Grimstone pursuant to Resolution 13 is a related party transaction that requires shareholder approval under Chapter 2E of the Corporations Act. This is because Mr Grimstone only entered into a placement agreement on 7 July 2008. The closing price of the Company’s shares on 4 July 2008, being the last trading day prior to Mr Grimstone entering into the placement agreement was $0.058. The issue price of the placement shares of $0.03 represents a discount of approximately 48% to this price.

The closing price of the Company’s ordinary shares on ASX on 1 August 2008, being the last trading day prior to the date the Notice was finalised, was $0.035. The issue price of the placement Shares of $0.03 represents a discount of 14% to this price.

Other relevant information

For the purposes of Listing Rule 10.11, and for all other purposes, the following information is provided to shareholders for the purposes of Resolutions 9, 10, 11, 12 and 13:

Under Resolutions 9, 10, 11, 12 and 13 approval is being sought to issue a maximum of 1,000,000 Shares to Mr Ackland (Resolution 9), 1,666,666 Shares to Mr Baynton (Resolution 10), 1,666,666 Shares to Mr McCawley (Resolution 11), 3,000,000 shares to Mr Stubbs (Resolution 12) and 1,000,000 shares to Mr Grimstone (Resolution 13). An issue of additional shares to any of them will require further prior shareholder approval.
The Shares will be issued to each Recipient Director as soon as practicable after the Meeting, but in any event, no later than one month after the date of the Meeting.
The funds raised from the issue of shares to each Recipient Director will contribute to the Company’s working capital.

The Company will not provide a loan in connection with the subscription by any Recipient Director of any Shares pursuant to Resolutions 9, 10, 11, 12 and 13 respectively.

Pursuant to Listing Rule 7.2 Exception 14, where an issue is made with the approval of the shareholders under Listing Rule 10.11, approval is not required under Listing Rule 7.1.

In accordance with the requirements of Chapter 2E of the Corporations Act, in addition to the information set out elsewhere in this Explanatory Memorandum, the following additional information is provided to shareholders for the purposes of Resolutions 9, 10, 11, 12 and 13.

Under each of Resolutions 9, 10, 11, 12 and 13 the Company will, if the relevant resolution is approved, be permitted to give the relevant Recipient Director, a related party, a financial benefit. The financial benefit to be given is the issue of Shares to the Recipient Director on the terms summarised above.
If all five Resolutions are passed, the Company will issue a total of 8,333,332 shares to raise a total of $250,000, representing represent 4.7% of the diluted capital of the Company as at 1 August 2008 of 167,076,197 Shares (assuming no other options then on issue are exercised).
Although all other shareholders’ holdings in the Company will be diluted by the proposed placements to each Recipient Director, the Company will benefit from an expanded capital base by reason of the subscription money received from the Recipient Directors.
To the extent that the issue price of the Shares ($0.03) may be below the market price of the Company’s Shares at the time of issue, the Company will potentially have foregone the opportunity of issuing the relevant Shares at a price that is higher than the issue price and that is closer to the relevant market price.
The last price that Shares traded on ASX prior to the finalisation of this Notice was $0.035 (on 1 August 2008). As at 1 August, the lowest and highest price that Shares traded on ASX, in the past 12 months was $0.021 (on 23 January 2008) and $0.080 (on 30 June 2008 and 1 July 2008) respectively.

Director’s interests and recommendations

Resolution 9

None of the Directors, other than Mr Ackland, has an interest in Resolution 9. As Mr Ackland will be entitled to subscribe for Shares in the Company on the terms described above if Resolution 9 is approved, Mr Ackland has an interest in the Resolution, and therefore makes no recommendation in relation to it.

The Directors, other than Mr Ackland, have considered all the relevant information relating to Resolution 9 and unanimously recommend that you vote in favour of it.

Resolution 10

None of the Directors, other than Mr Baynton, has an interest in Resolution 10. As Mr Baynton will be entitled to subscribe for shares in the Company on the terms described above if Resolution 10 is approved, Mr Baynton has an interest in the Resolution, and therefore makes no recommendation in relation to it.

The Directors, other than Mr Baynton, have considered all the relevant information relating to Resolution 10 and unanimously recommend that you vote in favour of it.

Resolution 11

None of the Directors, other than Mr McCawley, has an interest in Resolution 11. As Mr McCawley will be entitled to subscribe for Shares in the Company on the terms described above if Resolution 11 is approved, Mr McCawley has an interest in the Resolution, and therefore makes no recommendation in relation to it.

The Directors, other than Mr McCawley, have considered all the relevant information relating to Resolution 11 and unanimously recommend that you vote in favour of it.

Resolution 12

None of the Directors, other than Mr Stubbs, has an interest in Resolution 12. As Mr Stubbs will be entitled to subscribe for Shares in the Company on the terms described above if Resolution 12 is approved, Mr Stubbs has an interest in the Resolution, and therefore makes no recommendation in relation to it.

The Directors, other than Mr Stubbs, have considered all the relevant information relating to Resolution 12 and unanimously recommend that you vote in favour of it.

Resolution 13

None of the Directors, other than Mr Grimstone, has an interest in Resolution 13. As Mr Grimstone will be entitled to subscribe for Shares in the Company on the terms described above if Resolution 13 is approved, Mr Grimstone has an interest in the Resolution, and therefore makes no recommendation in relation to it.

The Directors, other than Mr Grimstone, have considered all the relevant information relating to Resolution 13 and unanimously recommend that you vote in favour of it.

Resolution 14 – Directors’ remuneration

Why is Shareholder Approval required?

Under the Company’s constitution, the fees payable to non-executive directors for their services are determined by the Board within a maximum aggregate amount approved by the shareholders for that purpose. The present maximum of $160,000 per annum was approved by the shareholders on 2 October 2002, prior to the Company’s listing on the ASX on 13 March 2003.

Shareholder approval is sought for the purposes of clause 13.3 of the Company’s constitution, Listing Rule 10.17 and for all other purposes, to increase the maximum aggregate amount of remuneration that may be paid out of the funds of the Company to the Directors (other than executive Directors) for their services to $300,000, an increase of $140,000.

Increasing the maximum amount of non-executive remuneration payable does not mean that the whole of the new maximum aggregate will be used immediately. There are currently no plans to increase the remuneration of specific Directors. The Company undertakes periodic reviews of the fees paid to non-executive Directors to ensure that the fees paid by the Company are competitive, and to enable the Company to attract and retain high calibre Directors. Increasing the fee pool will provide the Board with the flexibility to increase the non-executive Director’s fees over time, in order for the Company to ensure that the fees paid remain competitive and if appropriate, to appoint additional Directors without needing to seek further shareholder approval to increase the fee pool.

Shareholders should note that the proposed increase in the Directors’ remuneration does not relate to the salaries paid to executive Directors. The Company’s sole executive director, Mr John McCawley, does not receive Directors’ fees in addition to his salary.

Director’s interests and recommendations

Each of the Company’s Directors, other than Mr John McCawley, has an interest in Resolution 14 and makes no recommendation in relation to it.

Mr McCawley has considered information relevant to Resolution 14 and recommends that shareholders vote in favour of it.

Definitions

ASX means ASX Limited, or the stock market operated by it, as the context requires.

Board means the board of Directors.

Company means Lodestone Exploration Limited ACN 075 877 075.

Corporations Act means the Corporations Act 2001 (Cth).

Director means a director of the Company.

Explanatory Memorandum means this memorandum, which forms part of and accompanies the Notice.

Farmin Deed means the Farmin Deed dated 18 June 2008 between the Company, Moreton and Orbit.

Independent Expert means the Jeff Jamieson & Associates.

Independent Expert’s Report means the report of the Independent Expert prepared for the purposes of Listing Rule 10.10 as to whether the transaction pursuant to the Farmin Deed is fair and reasonable to the Company’s eligible ordinary shareholders, as attached at schedule 2.

Listing Rules means the official listing rules of ASX.

Meeting means the extraordinary general meeting of the Company to be held for the purpose of considering the Resolutions.

Moreton means Moreton Energy Pty Limited ACN 131 181 434.

Notice means the notice of meeting convening the Meeting.

Options Resolutions means Resolutions 3, 4, 5, 6, and 7.

Orbit means Orbit Capital Pty Ltd ACN 092 586 831.

Proxy Form means a proxy form accompanying the Notice.

Resolution means a resolution set out in the Notice.

Share means a fully paid ordinary share in the capital of the Company.

Schedule 1

Summary of terms of Employee Share Option Plan (ESOP)

Eligibility	The Board may issue options to full and part-time employees, including executive Directors, of the Company or an associated body corporate, or a person engaged by the Company as a contractor.
Grant of options	The Board may issue options to an eligible participant having regard to various criteria including the participant’s position, contribution to the Company, length of service, remuneration and other matters the Board considers relevant.
Nature of option	Each option entitles the holder to subscribe for one Share on exercise of the option.
Participation	An offer of options to a participant must be contained in a letter of offer, which may be subject to conditions. Acceptance of an offer must be in writing.
Issue price	Options are to be issued for no or nominal consideration.
Expiry date	The expiry date of an option is five years after the date the option vests in the participant, or such other date as the Board determines.
Exercise price	The exercise price of a Share to be issued on exercise of an option is the price determined by the Board, in its discretion, on or before the relevant option is issued.
Performance and other conditions	The Board has a broad discretion regarding the terms on which options are issued, including any performance hurdles or conditions that must be satisfied in order for options to vest and be capable of exercise. These conditions may vary between grants.
Transfer	An option is personal to the participant and cannot be transferred or otherwise disposed of except as determined by the Board.
Ranking	Shares issued on the exercise of options will rank equally with all existing Shares then on issue.
Delivery	Upon the exercise of an option, the Shares in respect of that option may, at the discretion of the Board, be delivered to the participant by being either issued to the participant or purchased by the Company and transferred to the participant.
Conditions on exercise	An option may only be exercised after it has vested, and must be exercised before its expiry date. The Board may determine minimum parcels in which options may be exercised, and any further conditions of exercise that are otherwise consistent with the rules of the ESOP. The exercise by a participant of some options does not affect their right to exercise other options at a later time.
Lapse	A participant’s options lapse on their expiry date, or if the Board determines that the participant has acted fraudulently, dishonestly or in breach of the participant’s obligations to the Company or an associated body corporate and that theiroptions should therefore

	be forfeited. Unless exercised in accordance with the rules of the ESOP, a participant’s options will also lapse upon: • the participant ceasing to be employed or engaged by the Company (except as a consequence of a disposal or sale of the Company’s undertaking); • 30 days after the date the participant dies, is retrenched or made redundant, retires or is permanently, physically or mentally incapacitated; or • 30 days following a person acquiring a relevant interest in not less than 90% of the Company’s Shares or, at the discretion of the Board, ten days following the Company issuing a notice of meeting in connection with a scheme of arrangement, which, if implemented, will give a person a relevant interest in not less than 90% of the Company’s Shares.
Change in control	If, in the opinion of the Board, a change of control event as defined in the ESOP rules occurs, or is likely to occur, the Board may declare options to be free on any conditions of exercise, in which case the relevant options may be exercised at any time on or before their expiry date.
New issues	Options to not confer on participants any rights or entitlements to participate in new issues of capital.
Reorganisations of capital	In the event of a reorganisation of the issued capital of the Company the rights of option holders will be changed to the extent necessary to comply with the Listing Rules.
Quotation	Options issued under the ESOP will not be listed for quotation on ASX.
Bonus Issue	If the Company makes a bonus issue, participants whose options have not expired will not be entitled to any adjustment to the number of Shares that will be issued to them upon exercise of any of those options.
Administration	The ESOP will be administered by the Board, or if the Board so determines, by a committee of the Board.
Amendment of rules	The Board may from time to time amend any or all of the rules of the ESOP. An amendment with retrospective affect may only be made provided the Board obtains the prior approval of at least 50% of participants who may be adversely affected by the amendment.
Suspension or termination	The Board may suspend or terminate the ESOP at any time, in which case further grants of options cannot be made at all or, if the ESOP is suspended, during the suspension period.
Maximum number of options to be issued	The number of options granted under the ESOP during any financial year, when aggregated with the number of securities issued during the previous five years under all employee share plans established by the Company, will not exceed 5% of the Company’s issued capital (subject to certain exemptions).

Schedule 2

Independent Expert’s Report

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A REPORT TO THE DIRECTORS OF LODESTONE EXPLORATION LIMITED

PROVIDING AN OPINION AS TO WHETHER A

TRANSACTION CONTEMPLATED BY THE DIRECTORS

IS BOTH FAIR AND REASONABLE FOR THE NON-ASSOCIATED SHAREHOLDERS

18 July 2008

A Report to the Directors of Lodestone Providing an Opinion as to whether a Transaction Contemplated by the Directors is both Fair and Reasonable for the Non-Associated Shareholders

1. OPINION

1.1 INTRODUCTION

Lodestone Exploration Limited has entered into a conditional Farmin Deed with Moreton Energy Pty Ltd and Orbit Capital Pty Ltd pursuant to which Lodestone proposes to acquire a 50% interest in three Exploration Permits for Coal (EPC) applications, the exploration focus of which is in coal bearing prospects around Beaudesert to the south of Brisbane in southern Queensland. The locations of the EPCs at the centre of the proposed transaction are shown in Figure 1.1 and Figure 1.2. Both Moreton Energy Pty Ltd and Orbit Capital Pty Ltd are controlled by Mr Greg Baynton, a director of Lodestone.

As the transaction is proposed to take place between Lodestone and entities controlled by one of its directors, an opinion is required from an independent expert that the transaction contemplated is fair and reasonable from the perspective of Lodestone’s other shareholders. Jeff Jamieson & Associates (JJA) provides that opinion in this report.

The Beaudesert area has a history of limited underground mining for coal and previous exploration has shown the presence of coal and coal resources. If coal of sufficient quality and quantity can be proved up by further exploration then the areas are well placed to supply the thermal coal export market from the Port of Brisbane, which is in easy rail access from Beaudesert.

1.2 THE TRANSACTION CONTEMPLATED BY LODESTONE

Under the Farmin Deed, Lodestone has the right to earn a 50% interest in the three EPCs and undertakes to issue up to 9 million shares to Orbit Capital or a related corporate entity in 3 tranches and to spend up to $2 million on exploration on the permits over a period of 3 years. The issue of shares will be subject to three conditions precedent. The initial 3 million shares will be issued immediately upon shareholders approving the Farmin Deed and issue of shares pursuant to it. The second tranche of up to 3 million shares will be issued on granting of the permits (1 million shares per permit) and the final tranche of up to 3 million shares will be issued after Lodestone has spent an initial $1 million on exploration of the permits.

1.3 TRANSACTION OPINION

After considering current coal prices and contemporaneous sales of coal mines and coal tenements, JJA considers the transaction contemplated by the directors of Lodestone to be fair and reasonable to non-associated shareholders of Lodestone Exploration Limited.

A detailed discussion of the methodology used to arrive at the opinion is set out in Section 8. JJA has come to its opinion by valuing Lodestone’s interest in the EPCs based on the Veresdale Scrub resource in EPC 1302 and the likelihood of it being mined. The value ascribed to the part of the resource inside EPC 1302 that could be mined and which is attributable to Lodestone is conservatively valued at $3M, being more than the assessed value of the consideration payable by Lodestone under the terms of the Farmin Agreement of $2.3M as at 17 June 2008, the day prior to the announcement to the ASX of the proposal to enter into the Farmin.

Based on its valuation of EPC 1302 alone, the transaction is seen by JJA as being reasonable and fair to other non-associated Lodestone shareholders.

This obviates the need to assign individual valuations to EPC 1299 that has a coal mining history or to EPC 1313 where coal exposures have been located but where no resources have yet been delineated.

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1.4 NATIVE TITLE CONSIDERATIONS

If Native Title has not been extinguished over the area of the EPC applications and the applicants have to enter into negotiations with the Native Title claimants, it can take from 18 months to more than five years for the EPC to be granted.

There are unlikely to be any Native Title issues for EPC 1299 and EPC 1302. However, it is highly likely that Native Title has not been extinguished over significant areas of EPC 1313.

1.5 VARIATIONS OR RESTRICTIONS TO EPCS

There is a possibility that the Queensland Department of Mines and Energy (DME) on the advice of the Environmental Protection Agency (EPA) may reject, or place restrictions on, parts of the applications; especially those parts of EPC 1302 located in built up areas and those parts of EPC 1313 located adjacent to environmentally sensitive areas, especially in the foothills of the Border Ranges and the headwaters of the Albert River.

1.6 VERESDALE SCRUB AND SOUTH PROJECT (EPC 1302)

The Veresdale Scrub area itself is now an area of relatively high population density, and hosts a large number of small acreage blocks adjacent to Beaudesert. In recent years, Beaudesert and surrounds has become a dormitory satellite of Brisbane and home to commuters who work in Brisbane but want to live on acreage in a semi-rural environment. Exploration in the Veresdale Scrub area may be difficult due to the presence of local homes. Following exploration and a decision to develop a small mine, some opposition to any mining taking place can be expected. Impediments to the exploitation of the Veresdale Scrub resource include:

Steep dips and high stripping ratios (>10:1); and
High population density and the probable resultant coal mining compensation payments.

1.7 STRATHNAVER COLLIERY/BROMELTON PROJECT (EPC 1299)

Bromelton is located on the western flank of the South Moreton Anticline. Sediments of the Walloon Coal Measures strike north-south through the EPC, dip to the east, and crop out, possibly at shallow depths.

New Hope Coal Australia (NHCA) drilled a few holes in the area and intersected a 3.5m thick, banded seam that was thought to dip gently to the east. Pacific Coal drilled one hole along the southern boundary of the EPC to a depth of 166m and intersected 2.2m of coal and mudstone (estimate 65% coal) at 12m and 8.8m of coal and mudstone (estimate 40% coal) at 52m.

Although EPC1299 is largely unexplored, the EPC does have potential to host coal resources at shallow depth in an area that has been set aside as an industrial area and on which some industrial development has taken place.

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1.8 ALBERT RIVER COAL PROJECT (EPC 1313)

The Walloon Coal Measures within EPC 1313 are generally overlain by Tertiary basalts, and only crop out on the valley floors of several north flowing rivers that have cut through the basalts. Due to the presence of the basalts, which thicken from north to south, there is little potential for shallow coal resources in the area; and in any case, the evidence from exploration holes drilled to the north of the area indicates that any coal seams present in the Walloon Coal Measures are likely to be of poor quality and/or coked.

The Walloon Coal Measures do crop out in a small oval shaped area in the headwaters of the Albert River in the SE corner of EPC 1313 (the Albert River inferred coal resource area), where they occupy an erosional window in the volcanic cover, in a mountainous area at the foot of the Lamington Ranges.

1.9 QUALIFICATIONS AND INDEPENDENCE OF JJA

Jeff Jamieson is both a Fellow of the Australian Institute of Mining and Metallurgy and a Chartered Professional (Mining) and has been working in the coal mining industry for 28 years inclusive of 22 years as a consultant.

JJA has no involvement or obtains non-benefit from the transaction apart from a fee for undertaking this report ($17,827 plus GST).

JJA worked with the Chairman of Lodestone (Martin Ackland) in Broken Hill in the period 1974-1976. JJA has only met Mr Greg Baynton on one occasion and although JJA has worked extensively on Surat Basin coal projects, Jeff Jamieson has not worked on or had any previous or ongoing interest in the EPCs in question.

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Figure 1.1 Location Map

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__________________
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Figure 1.2 EPCs Topo 100k Plan

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		Page No.
1.	OPINION ................................................................................................................... 1
	1.1	INTRODUCTION ................................................................................................................... 1
	1.2	THETRANSACTIONCONTEMPLATED BYLODESTONE ........................................................... 1
	1.3	TRANSACTIONOPINION ...................................................................................................... 1
	1.4	NATIVETITLECONSIDERATIONS ......................................................................................... 2
	1.5	VARIATIONS ORRESTRICTIONS TOEPCS ............................................................................ 2
	1.6	VERESDALESCRUB ANDSOUTHPROJECT(EPC 1302) ....................................................... 2
	1.7	STRATHNAVERCOLLIERY/BROMELTONPROJECT(EPC 1299) ............................................. 2
	1.8	ALBERTRIVERCOALPROJECT(EPC 1313) ....................................................................... 3
	1.9	QUALIFICATIONS ANDINDEPENDENCE OFJJA ..................................................................... 3
2.	INTRODUCTION AND PURPOSE OF THIS REPORT ............................................. 6
3.	THE TRANSACTION PROPOSED BY LODESTONE .............................................. 7
4.	THE MORETON BASIN ............................................................................................ 8
	4.1	INTRODUCTION ................................................................................................................... 8
	4.2	BEAUDESERTDISTRICT ...................................................................................................... 8
		4.2.1 Introduction .......................................................................................................... 8
		4.2.2 Previous Mining Activities ..................................................................................... 9
5.	THE CURRENT COAL MINING ENVIRONMENT .................................................... 9
	5.1	INTRODUCTION ................................................................................................................... 9
	5.2	VALUATIONS WILLFOLLOWTHERMALCOALPRICING ........................................................ 10
	5.3	TYPICALIMPEDIMENTS TOCOALMINEDEVELOPMENT ....................................................... 10
	5.4	MININGINFRASTRUCTURE ................................................................................................ 10
6.	THE EPCS .............................................................................................................. 11
	6.1	GENERALINTRODUCTION ................................................................................................. 11
	6.2	VERESDALESCRUB ANDSOUTHPROJECT(EPC 1302) ..................................................... 11
		6.2.1 Coal Quality ........................................................................................................ 15
		6.2.2 Stansfield’s Colliery Area ................................................................................... 15
	6.3	STRATHNAVERCOLLIERY/BROMELTONPROJECT(EPC 1299) ........................................... 16
		6.3.1 Bromelton Industrial Area ................................................................................... 16
	6.4	ALBERTRIVERCOALPROJECT(EPC 1313) ..................................................................... 17
7.	CURRENT POSITION IN REGARD TO EPC ISSUANCE IN QLD ......................... 19
	7.1	INTRODUCTION ................................................................................................................. 19
	7.2	NATIVETITLECONSIDERATIONS ....................................................................................... 19
	7.3	VARIATIONS ORRESTRICTIONS TOEPCS .......................................................................... 19
8.	EPCS VALUATION, METHODOLOGY AND OUTCOME ...................................... 20
	8.1	COAL PRICE MOVEMENTS ......................................................................................... 20
	8.2	TYPICALVALUATIONMETHODOLOGY ................................................................................ 21
		8.2.1 Similar Sale Transactions ................................................................................... 21
		8.2.2 Alternate Valuation Approaches ......................................................................... 22
		8.2.3 Putting a Value on the Coal Insitu ...................................................................... 22
		8.2.4 Transaction – A Package ................................................................................... 22
9.	TRANSACTION OPINION ...................................................................................... 23
10.	JJA INDEPENDENCE ............................................................................................ 23
11.	REFERENCES AND ACKNOWLEDGEMENTS ..................................................... 23
	11.1	REFERENCES ................................................................................................................... 23

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11.2 ACKNOWLEDGEMENTS ..................................................................................................... 23

FIGURES

Page No. Figure 1.1 Location Map ........................................................................................................................... 4 Figure 1.2 EPCs Topo 100k Plan ............................................................................................................. 5 Figure 6.1 Tenure Map ........................................................................................................................... 13 Figure 6.2 Veresdale Scrub and South Exploration Project Regional Aerial Photograph ......................... 14 Figure 6.3 Albert River Coal Exploration Project .................................................................................... 18 Figure 8.1 Australia Thermal and Coking Coal Prices ............................................................................ 20

APPENDICES

Appendix 1 Proposed Exploration – Moreton Energy Tenements

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2. INTRODUCTION AND PURPOSE OF THIS REPORT

Lodestone Exploration Limited (Lodestone) floated on the Australian Stock Exchange (ASX) in 2003 and has primarily been involved in exploring for copper mineralisation around Mt Morgan. Lodestone is now entering into arrangements to purchase and fund a 50% equity interest in three Exploration Permits for Coal (EPCs) in the Beaudesert region of southern Queensland.

The EPCs in question are under application by Moreton Energy Pty Limited (Moreton) and Orbit Capital Pty Ltd (Orbit) which are controlled by one of the Lodestone Directors, Mr Greg Baynton. Under Australian Stock Exchange (ASX) Listing Rule 10.1, a listed entity must obtain shareholder approval before acquiring a substantial asset from either a related party or a substantial shareholder. Under the Listing Rules, a “substantial asset” is an asset worth more than 5% of the entity’s shareholder’s equity at the date of the entity’s last lodged accounts. A “related party” includes a director of the company or an entity controlled by a director. The value of EPCs to be acquired by Lodestone pursuant to the Farmin Deed, constitute a substantial asset for the purposes of the Listing Rules.

ASX Listing Rule 10.10 requires that a notice of meeting containing a resolution prepared for ASX Listing Rule 10.1 purposes must be accompanied by a report from an independent expert stating whether or not, in that person’s opinion, the proposed transaction is fair and reasonable to shareholders not associated with the related party.

Consequently the other Lodestone Directors have asked Jeff Jamieson & Associates (JJA) to provide an opinion as to whether the proposed transaction is fair and reasonable to the shareholders of Lodestone not associated with Moreton Energy Pty Ltd or Obit Capital Pty Ltd.

The Moreton Energy coal projects are located in the Moreton basin in southeast Queensland in an area well serviced by infrastructure and where there has been some small scale historical coal production. The tenements include two former small-scale producing collieries that operated briefly during the early part of the 20[th] Century (Strathnaver Colliery and former Stansfield’s Colliery), along with most of a known coal deposit called the Veresdale Scrub deposit. The Veresdale Scrub deposit has eight partlycored drill holes. Information obtained by New Hope Collieries (1992) during its exploration program identified the deposit as a typical Walloon Coal, having a high volatile content, high raw ash and low total sulphur.

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3. THE TRANSACTION PROPOSED BY LODESTONE

Lodestone is planning to take a 50% equity in three EPCs applied for by Moreton in consideration for nine million Lodestone shares and the expenditure of $2 million on exploration. In the six months prior to the announcement to the ASX of the proposed transaction on 18 June 2008, Lodestone shares traded on the ASX in a range from 2.1c to 3.6c, and based on the last sale price of Lodestone shares on 17 June 2008 of 3.1c, being the day prior to the announcement of the proposed transaction, the market value of the equity component of the consideration payable by Lodestone is around $280,000. This amount plus up to $2 million for funding exploration means the total consideration payable by Lodestone for its 50% interest in the EPCs will be approximately $2.3M.

The areas subject to the farmin agreement are EPC 1302 (Veresdale Scrub and South Project), EPC 1299 (Strathnaver Colliery/Bromelton Project) and EPC 1313 (Albert River Coal Project). These areas are under applications held by Orbit Capital Pty Ltd and Moreton Energy Pty Limited: both are parties to the Farmin Deed and both are controlled by Mr Greg Baynton, a Director of Lodestone Exploration.

Under the Farmin Deed, Lodestone has the right to earn a 50% interest in the three permits and undertakes to issue up to 9 million shares to Orbit Capital or a related corporate entity in 3 tranches and to spend up to $2 million on exploration on the permits over a period of 3 years.

The issue of shares will be subject to individual conditions precedent to the issue of each tranche:

The initial 3 million shares will be issued immediately upon shareholders approving the Farmin Deed and issue of shares pursuant to it;
The second tranche of up to 3 million shares will be issued on granting of the permits (1 million shares per permit); and
The final tranche of up to 3 million shares will be issued after Lodestone has spent an initial $1 million on exploration of the permits.

The joint venture relationship between Lodestone and Moreton Energy includes other potential coal projects the parties may identify within a 75km radius of the township of Boonah in South East Queensland.

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4. THE MORETON BASIN

4.1 INTRODUCTION

The Moreton Basin is a late Triassic to Cretaceous intracratonic basin, situated in southeast Queensland covering the area between Brisbane and Dalby and south to the Queensland/New South Wales border. The Moreton Basin is partly continuous with the Surat Basin to the west and is part of the Clarence-Moreton Basin which extends southwards into New South Wales.

The Jurassic Walloon Coal Measures contain lower and upper coal zones which consist of abundant thin banded coal seams. These measures have been mined at various locations since the 1870s. Historically most mining has been undertaken by underground methods. Increased exploration during the 1970s and 1980s has led to the delineation of very large resources and reserves of opencut thermal coal in the Surat and Clarence-Moreton Basins on Queensland’s Darling Downs.

Large scale development of these resources for export has been hindered by the lack of rail and port infrastructure; the only export mines currently active on the Darling Downs are Wilkie Creek and New Acland, which utilise limited rail and port infrastructure to export coal through the Port of Brisbane. The Kogan Creek and Millmerran Mines, which are also on the Darling Downs, provide coal to adjacent mine mouth power stations. Small quantities of coal are also mined from the Walloons at Oakleigh Mine near Rosewood, to the west of Ipswich; and coal has previously been mined by opencut methods from Jeebropilly and Ebenezer Mines south of Ipswich.

Coal deposits in the Walloon Coal Measures are characterised by lenticular coal “seams”, which are locally thick but tend to thin out laterally between the main commercial deposits. The “seams” are more correctly described as coal horizons, which contain numerous thin coal plies separated by beds of carbonaceous shale and montmorillonite claystones. The claystones are unstable and break down rapidly in water; and can cause serious problems in the washplant if they comprise a significant proportion of the plant feed. As a result, claystones are selectively mined down to 0.1m thickness to exclude them from the plant feed wherever possible.

Commercial deposits in the Walloon Coal Measures are typically flat lying, with average insitu strip ratios (m[3] /t) in the order of 3:1 to 4:1. The plant feed, with claystone bands greater than 0.1m excluded, typically gives yields of 60% to 70% at 12% to 15% ash, 38% to 43% volatile matter, 0.4% to 0.6% sulphur, and specific energy of 6,300 to 6,700kcal/kg. The coals have a very low Hardgrove grindability index (HGI) of 30 to 40, which means more energy is required to grind the coal to power station feed sizing than for coals of equivalent energy value from the Bowen and Sydney Basins. The HGI has been one of the main impediments to selling Walloon coals in the past; but research has shown that Walloon coals have such excellent burnout characteristics that they don’t need to be ground as fine as other coals, and much of the buyer resistance has evaporated over the past five years.

4.2 BEAUDESERT DISTRICT

4.2.1 Introduction

Coal was first recognised in the Beaudesert district during the mid 1880s. Although numerous coal occurrences have since been identified in the district, most are of no economic interest being either of inferior quality or in steeply dipping seams. Moreover, the deposits are typically small, isolated and located in areas of rough and steep topography, making exploration difficult.

Despite these difficulties, a few attempts at mining have been made, notably at Stansfield’s Colliery on the eastern outskirts of Beaudesert and at the Strathnaver Colliery 9km west of Beaudesert, just above

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Sandy Creek. The Strathnaver Colliery located near the interstate railway on Portion 87 operated from two tunnels, where a single 1.4m thick seam was worked. The mine commenced operations in 1932 and continued to be worked until the outbreak of World War Two.

In more recent times continued housing development in the area will make access for exploration and mining more difficult.

4.2.2 Previous Mining Activities

There have been numerous coal occurrences identified, but most have been not economically significant at the time or have had access constraints. Only two notable mines have operated in the Beaudesert district, both of which operated in the first half of last century:

Stansfield’s Colliery on the eastern outskirts of Beaudesert near the cemetery which operated between about 1900 to about 1910. A 1.2m thick seam was worked from a 10m long tunnel set into the side of a hill on Portion 98. Operations ceased due to the collapse of the mine tunnel - Marks (1910) reported the tunnel to have collapsed by the time he investigated the area in 1910; and
Strathnaver Colliery located near the interstate railway (9km west of Beaudesert) on Portion 87 which operated from 1932 to 1939 from two tunnels, where a single 1.4m thick seam was worked. Operations ceased with the outbreak of World War Two.

The Powell Duffryn Report (Reference1) identified the areas of the Strathnaver Colliery area, Stansfield’s Colliery and the Veresdale Scrub as the three best prospects for coal deposits in the Beaudesert area. Subsequently, New Hope Collieries held exploration permits that included each of these areas. New Hope Collieries, now New Hope Coal Australia (NHCA), identified a coal resource at Veresdale Scrub in 1992 and drilled boreholes near the former Strathnaver Colliery, while the area immediately to the north and around Bromelton on the interstate railway line appears to remain underexplored. At the Stansfield’s Colliery area, it appears that no boreholes have been drilled and the area still remains very under explored.

The Powell Duffryn Report also identified the Albert River coal outcrop and adjacent areas near the New South Wales border in the area of the headwaters of the Albert River. The report notes, inter alia , that in one of the branches of the Albert River, there is a big cliff exposure of coal measures about 80 feet high containing a typical Walloon coal seam. This area was held by NHCA and relinquished in 1979 with no drilling conducted during that time or since.

5. THE CURRENT COAL MINING ENVIRONMENT

5.1 INTRODUCTION

Primarily due to rapidly rising prices for both coking and thermal coal, the Australian coal mining industry is growing rapidly with all the industry inputs in very short supply including skilled labor, diesel fuel, tyres and all other consumables. In both Queensland and New South Wales, the growth of the export industry has been constrained due to rail and port infrastructure growth not keeping up with industry capacity, although in the short term this position has temporarily reversed due to the impact of the recent Queensland floods, which caused many companies to call force majeure on their contracts.

The most rapid growth in the industry has been in the coking coal sector. This sector of the Australian coal industry has the biggest tonnage in the seaborne coal trade. Growth in this sector has been driven by the need for coking coal to make coke for steel making in both India and China.

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The thermal coal market has also had rising prices due at least in part to the to the rapidly rising oil price.

The EPCs in question, which form the central part of the transaction now being discussed, are likely to include only thermal coal given their location and the types of coal known to be present in the Moreton Basin.

5.2 VALUATIONS WILL FOLLOW THERMAL COAL PRICING

Valuations for coal mines and tenements closely follow spot coal prices, contract sale prices and the market’s view on future prices. Future coal prices are an important determinant in a coal property valuation because they will mainly determine both future cash flow and the profitability of any mine development. Thermal coal pries generally show a close relationship to oil prices as oil and coal are both forms of energy and both are burnt in power stations. Due to its lower heat content and slightly higher ash content, as well as its hardness, Walloon coal commands slightly lower than the average coal price. For the purposes of this report and for the purpose of making a valuation and stating an opinion US$80 per tonne of product coal FOB Port of Brisbane has been used in relation to the proposed transaction. This price sits between historical prices for thermal coal of around US$45 and current thermal coal contract prices of US$125 and is therefore considered a conservative guide to forward coal sales in future years. As coal prices have rapidly increased since 2004 so have coal property valuations with most at least doubling in price as shown by recent transactions for coal shares.

5.3 TYPICAL IMPEDIMENTS TO COAL MINE DEVELOPMENT

The main impediments to coal mining in Queensland and New South Wales are:

Access to land for mining at a reasonable price and having resolved or negotiated any Native Title issues
Any insurmountable environmental issues involving endangered flora ,fauna or eco-systems
Water supply; and
Access to both rail and port capacity.

There is also a growing threat from environmental groups in respect of “greenhouse gas issues” and each new project has to calculate its carbon footprint and ideally adopt carbon minimisation strategies, prior to receiving development approval.

5.4 MINING INFRASTRUCTURE

Coal projects in North Queensland suffer currently from the lack of suitable rail and port infrastructure. It is not expected that this situation will change materially until 2011-2012 when Wiggins Island is developed in the Port of Gladstone and access from the Goonyella rail line is made to Abbot Point. Whilst the Port of Brisbane has its limitations, any coal from the Beaudesert area would have good access to both rail and the Port of Brisbane. This comment applies if economic coal can be found and mined in EPC1299, which has a railway line running through it bisecting the EPC along a Central North South line.

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A Report to the Directors of Lodestone Providing an Opinion as to whether a Transaction Contemplated by the Directors is both Fair and Reasonable for the Non-Associated Shareholders

6. THE EPCS

6.1 GENERAL INTRODUCTION

Moreton has provided documentation to JJA outlining what it considers to be the key highlights to the EPCs:

EPC tenements including four main projects generally in the Beaudesert area of the Moreton Basin identified as coal-bearing or inferred resource (Strathnaver Colliery, Veresdale Scrub Deposit, Stansfield’s Colliery and Albert River)
All four project areas located strategically on railway infrastructure connected with Brisbane and good road access, good proximity to Brisbane and Gold Coast population centres, and close to the Port of Brisbane
Project areas are prospective for coal, contain the Walloon Coal Measures, and remain relatively under-explored
28.8Mt thermal coal resource identified at Veresdale Scrub (approximately 60% within Moreton Energy tenements) with potential for resource to be upgraded with further exploration
Strathnaver project located strategically near the Bromelton area in southeast Queensland proposed as a future State Development Area for heavy and noxious industries
Albert River coal resource area includes a 2m Walloon coal seam outcropping with no prior drilling.

In preparing this report JJA has visited the three EPCs and concurs with the above information provided by Moreton.

6.2 VERESDALE SCRUB AND SOUTH PROJECT (EPC 1302)

(100% Moreton Energy)

Key Highlights:

28.8Mt insitu resource identified (approx. 60% of which is within Moreton Energy tenements) commencing at 12m depth to at least 100m
Mining of some of this resource may be impeded by the presence of local housing
Previous explorer reported that there was also potential for the location of further resources down-dip (untested)
Resource located next to Beaudesert to Brisbane rail line
Tenement area includes the abandoned Stansfield’s Colliery area.

The Veresdale Scrub Deposit and EPC are shown in Figure 6.1 and Figure 6.2 which include cadastral information as well as the exact location of the Veresdale Scrub Deposit and its relationship to the EPC boundary.

NHCA reported that the Veresdale Scrub Deposit is located 8km northeast of the Beaudesert Township. Approximately 60% of this deposit is contained within the Moreton Energy tenements. The deposit is understood to dip to the south-south-west within the Moreton Energy tenements.

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Sealed and unsealed roads provide access to most of the area with the closest major road being the Beaudesert-Beenleigh Road. Veresdale Scrub Road provides immediate access to the majority of the New Hope borehole locations.

Tributaries of Collins Creek traverse the area, flowing eastwards to the Albert River. The majority of the area is cleared for grazing and dairy farming, with alternation in topography ranging from low lying plains to elevated basalt hills.

The Veresdale Scrub inferred coal resource deposit lies within the Jurassic Moreton Basin sediments and is geologically consistent with other Walloon Coal Measure sequences.

NHCA explored the area between 1978 and 1992. Eighty six drill holes were completed, some of which were geophysically logged. Eight holes were partially cored. NHCA estimated that resources of 28.2 million insitu tonnes occur from 12m to a depth of 100m, commencing at 12m. To a depth of 40m, there is an estimated 12.4Mt. In its report, New Hope anticipated that these resources could be upgraded with further exploration, particularly the resource between 40m and 100m. NHCA also reported that there was potential for the location of further resources down-dip.

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A Report to the Directors of Lodestone Exploration Limited in reference to An Opinion On the Fairness of Coal EPC Equity Participation by Share Grant and Exploration Funding

Figure 6.1 Tenure Map

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Figure 6.2
Veresdale Scrub and South Exploration Project Regional Aerial Photograph
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A Report to the Directors of Lodestone Providing an Opinion as to whether a Transaction Contemplated by the Directors is both Fair and Reasonable for the Non-Associated Shareholders

NHCA recommended that future exploration should concentrate on the area downdip of the existing resource, despite the fact that the Walloons appear to continue to the south of the Veresdale Scrub resource area. No reason was given in the report (New Hope Collieries, 1992) for not investigating potential shallow resources to the south of Veresdale Scrub, but this area had been part of EPC 221 until it was relinquished in 1987, and it is possible the seams may, as is normal with the Walloons, thin and/or lens out to the south.

Pacific Coal drilled two holes (BD07R and BD08R) at the southern end of EPC 1302. BD07R intersected a 1m thick coaly horizon (estimate 67% coal) at 98m; and BD08R intersected 3.4m of coal and mudstone (estimate 47% coal) at 151m, and 3.5m of coal and mudstone (estimate 37% coal) at 161m. These results appear to confirm that the Walloon seams thin and deteriorate south of Veresdale Scrub.

Impediments to potential exploitation of the Veresdale Scrub resource include:

Steep dips and high strip ratios (>10:1); and
The high population density and the resultant compensation payments.

6.2.1 Coal Quality

The Veresdale Scrub Deposit contains eight partially cored drill holes. The quality information provided by the Veresdale Scrub area identifies the deposit as a typical Walloon Coal. It has high volatile content, high raw ash and low total sulphur.

The southern part of the Veresdale Scrub deposit in EPC 1302 is closely settled to the south but more sparsely settled up to the EPC boundary and mining of this area to the South and North of Veresdale School Road is a possible option for the future. Figure 6.2 shows that the remainder of the area hosts a large number of small acreage blocks adjacent to Beaudesert. In recent years, Beaudesert and surrounds has become a dormitory satellite of Brisbane, and home to commuters who work in Brisbane but want to live on acreage in a semi-rural environment. Exploration in the area would be difficult; and any proposed coal mine development would probably meet with vocal opposition.

The average quality results (probably based on laboratory analysis rather than process simulation) is provided by NHCA based on a 15% ash product, are as follows:

Total Sulphur 0.6% Yield 65.4% Inherent Moisture 5.2% Specific Energy 6,540 Kilocalories/Kilogram

6.2.2 Stansfield’s Colliery Area

Stansfield’s Colliery, on the eastern outskirts of Beaudesert within EPC 1302, operated around the turn of the century and a 1.2m thick seam was worked from a 10m long tunnel set into the side of a hill on Portion 98 near the cemetery. Marks (1910) reported the tunnel to have collapsed by the time he investigated the area in 1910. There appears to have been no drilling conducted in the Stansfield's Colliery area by previous explorers.

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A Report to the Directors of Lodestone Providing an Opinion as to whether a Transaction Contemplated by the Directors is both Fair and Reasonable for the Non-Associated Shareholders

6.3 STRATHNAVER COLLIERY/BROMELTON PROJECT (EPC 1299)

(100% Orbit Capital - parent company of Moreton Energy, to be assigned to Moreton Energy)

Key Highlights:

Inferred coal resource/coal occurrence (according to Queensland DME)
Original colliery located next to interstate railway approximately 9km west of Beaudesert
Only a single 1.4m thick seam was worked from 1932 until the outbreak of World War Two
The coal was mined from two tunnels in an underground operation
Tenement located near to the proposed Bromelton industrial area, a proposed State Development Area
Tenement area covers an area of 9 sq km from the former colliery north, along the interstate railway line.

The Strathnaver Colliery was one of the two notable coal mining operations in the Beaudesert area. The Strathnaver Colliery, located near the interstate railway on Portion 87 operated from two tunnels, where a single 1.4m thick seam was worked. The mine commenced operations in 1932 and continued to be worked until the outbreak of World War Two.

Moreton Energy's tenements commence in the vicinity of the former colliery and extend north for approximately 5.6km to Allan Creek. Boonah-Beaudesert Road (east-west) and the interstate railway (north-south) intersect in the central area of the tenements.

Bromelton is located on the western flank of the South Moreton Anticline. Sediments of the Walloon Coal Measures strike northsouth through the EPC, dip to the east, and crop out, possibly at shallow depths. NHCA drilled a few holes in the area and intersected a 3.5m thick, banded seam that was thought to dip gently to the east. Pacific Coal drilled one hole along the southern boundary of the EPC to a depth of 166m and intersected 2.2m of coal and mudstone (estimate 65% coal) at 12m and 8.8m of coal and mudstone (estimate 40% coal) at 52m.

Although EPC1299 is largely unexplored, the EPC does have potential to host coal resources at shallow depth in an area that has been set aside as an industrial area.

6.3.1 Bromelton Industrial Area

In recognition of Bromelton's advantages as a strategic location for industrial development, the Queensland Government has proposed that it be declared a State Development Area under Section 77 of the State Development and Public Works Organisation Act 1971.

Lying outside of the Brisbane and Gold Coast population centres, Bromelton has been identified as a site for large industrial uses and high impact industrial uses (noxious, offensive and hazardous) that can be separated from residential and incompatible land uses with a large permanent buffer.

According to the Queensland Department of Infrastructure and Planning, Bromelton is strategically located for industrial uses and logistics operations and is the only area available for future industrial development in SEQ currently with access to the National standard gauge rail network.

The Queensland Government plan for the Bromelton State Development Area identifies a dedicated Materials Transportation and Services Corridor and buffer area separating the Corridor from land use outside the Bromelton State Development Area.

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6.4 ALBERT RIVER COAL PROJECT (EPC 1313)

(100% Moreton Energy)

EPC 131 is located approximately 30km south of the township of Beaudesert comprising 66 sub-blocks near the New South Wales border and is shown in Figure 6.3. The western perimeter of the EPC includes the interstate railway line (the same line that runs through Strathnaver/Bromelton to the north).

Among other coal occurrences, the area is known to host a 2m thick outcrop of coal at the headwaters of the Albert River. DME records describe this deposit as Albert River inferred coal resource area, 7.7km SE of Millview, Jinbroken Range.

The area is sparsely-populated open farmland and some undulating country that is accessible via a number of minor roads.

EPC 1313 is located immediately south of EPC 1109 held by Carbon Energy and wraps around the eastern and southern sides of EPC 1123 (Moreton), which is under application by Ansett Resources.

The Walloon Coal Measures do crop out in a small oval shaped area in the headwaters of the Albert River in the SE corner of EPC 1313 (the Albert River inferred coal resource area – see above), where they occupy an erosional window in the volcanic cover, in a mountainous area at the foot of the Lamington Ranges.

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A Report to the Directors of Lodestone Providing an Opinion as to whether a Transaction Contemplated by the Directors is both Fair and Reasonable for the Non-Associated Shareholders

Figure 6.3 Albert River Coal Exploration Project

(30Km South of Beaudesert)

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A Report to the Directors of Lodestone Providing an Opinion as to whether a Transaction Contemplated by the Directors is both Fair and Reasonable for the Non-Associated Shareholders

7. CURRENT POSITION IN REGARD TO EPC ISSUANCE IN QLD

7.1 INTRODUCTION

EPC applications have two components: the application for the exploration permit itself, and an application for an Environmental Authority (EA) from the EPA. The EPC application is processed by the DME and the EA application is passed on to the EPA for assessment. EPC applications take three to four months from initial application to grant, providing there are no environmental or Native Title issues. If the EPA decides to apply more stringent environmental conditions to the EA, the time period between the initial application and grant can be up to 12 months.

7.2 NATIVE TITLE CONSIDERATIONS

There are unlikely to be any Native Title issues for EPC 1299 and EPC 1302. However, it is highly likely that Native Title has not been extinguished over significant areas of EPC 1313.

7.3 VARIATIONS OR RESTRICTIONS TO EPCS

There is a possibility that the Queensland Department of Mines and Energy (DME) on the advice of the Environmental Protection Agency (EPA) may reject, or place restrictions on, parts of the applications; especially those parts of EPC 1302 located in built up areas, and those parts of EPC 1313 located adjacent to environmentally sensitive areas, especially in the foothills of the Border Ranges and the headwaters of the Albert River.

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A Report to the Directors of Lodestone Providing an Opinion as to whether a Transaction Contemplated by the Directors is both Fair and Reasonable for the Non-Associated Shareholders

8. EPCS VALUATION, METHODOLOGY AND OUTCOME

8.1 COAL PRICE MOVEMENTS

Figure 8.1 shows how thermal and coking coal prices in US dollars have changed from 2002 to 2008, for thermal coal, and from 2005 to 2008 for coking coal. Prices have increased particularly in 2007 and 2008.

Figure 8.1 Australia Thermal and Coking Coal Prices

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A Report to the Directors of Lodestone Providing an Opinion as to whether a Transaction Contemplated by the Directors is both Fair and Reasonable for the Non-Associated Shareholders

8.2 TYPICAL VALUATION METHODOLOGY

8.2.1 Similar Sale Transactions

JJA believes that coal property valuations closely follow coal prices; this belief is supported by recent transactions in respect of coal sales generally for operating coal mines.

Currently, most of the coal mine sale activity is taking place on the ASX with listed coal companies that own operating mines and the transactions are therefore not directly pertinent to this Farmin transaction. However, the transactions both on and off the ASX for coal company purchases show that historical values have at least doubled based on the higher prices now being obtained for coal shown in Figure 8.1.

Recent coal property sale transactions that have confirmed how coal mine sales prices have followed coal sales spot and contract prices; include the following recently completed transactions:

Xstrata’s takeover of Resource Pacific which resulted in Xstrata paying a final price of $3.20 per share or a total of AU$1078M for an underground mine in New South Wales producing both thermal and semi-soft coking coal. Current production capacity is at least 4.0 million tonnes per annum (Mtpa). The operating mine contains around 250 million tonnes of coal resources;
Anglo’s takeover of 70% of Foxleigh Anglo acquired 70% of the Foxleigh coal mine joint Venture in late 2007 for $US620 million, extending its coal holdings in Queensland's Bowen Basin. Foxleigh's joint venture partners, Korean steel company POSCO and Japanese trading and mining investment company Itochu, still hold 20% and 10% interests respectively. The Foxleigh opencut mine, located near Middlemount, currently produces 2.5 million tonnes per annum of PCI coal (pulverised coal injection). The operation has a production capacity of 3.3Mtpa, which it is expected to reach following completion of rail and port expansion projects. The mine adjoins Anglo Coal's Capcoal (German Creek) operations and its Lake Lindsay mine development, offering potential synergies, according to Anglo. The company intends that the mine and surrounding tenements will be the subject of ongoing exploration and feasibility studies;
Macarthur Coal in recent times Macarthur shares have been trading on the ASX for over $20 per share valuing this PCI and thermal coal mining company at over $4.2 billion dollars. The capacity of the Macarthur’s Coppabella and Moorvale mines is 8 Mtpa, of which almost 6Mtpa is attributable to Macarthur.

These three transactions confirm how recent coal mine valuations have closely followed coal prices, but these valuations apply to operating mines and therefore are not entirely appropriate to use as an evaluation of a Farmin agreement, in regard to prospective EPCs.

The valuation of EPCs is generally undertaken by reference to other similar concurrent, concluded transactions that are taking place in the market place at the same time. The prospectivity of the EPCs is a key factor and any resources which have been previously identified allow for a value per insitu tonne to be assigned as the basis of the valuation.

A similar order of magnitude transaction to the one contemplated by the Lodestone directors was the purchase by Intercoal of the Kingaroy Project from Metallica Minerals for $6M worth of stock and options in Intercoal and a retained royalty of 40 cents per tonne sold. This transaction did not proceed as the Intercoal Prospectus was withdrawn.

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A Report to the Directors of Lodestone Providing an Opinion as to whether a Transaction Contemplated by the Directors is both Fair and Reasonable for the Non-Associated Shareholders

8.2.2 Alternate Valuation Approaches

Apart from comparing similar sales, other methods for valuation purposes include Net Present Value analysis and valuing coal insitu. Because of the nature of the transaction in question being a Farmin agreement, the method adopted by JJA has been to value the coal insitu.

An alternative valuation approach is Net Present Value analysis, where an estimated future cash flow is discounted back to a present lump sum. This methodology is not appropriate here because of the numerous and uncertain assumptions that have to made to assemble the cash flow estimate.

8.2.3 Putting a Value on the Coal Insitu

As discussed in 8.2.2, with EPCs that contain previously drilled out resources, a value can be assigned to coal in the ground. An industry norm for thermal coal insitu, before the recent price rises was to assign a value based on using 50 cents (AUD) for each insitu tonne. Using this historical value would now be too conservative as thermal coal prices have recently risen strongly and consequently JJA has used a valuation range of AU$0.5 to AU$1 per insitu tonne, with a midpoint value of AU$0.75 per insitu tonne.

This insitu valuation is supported by higher prices for thermal coal. JJA believes a price for commonly traded thermal coal of US$80 per tonne FOB Port of Brisbane will be achievable or approximately double the average long term price pertaining prior to 2002 so the insitu value range of AU$0.50 to AU$1 per tonne can therefore be assigned to insitu tonnes at Veresdale.

Due to the uncertainties of establishing a small mine in a rural setting pertaining at Veresdale JJA has determined to use a midpoint value of AU$0.75 per insitu tonne.

After taking into account the surface constraints over the Veresdale Scrub deposit JJA considers that up to 8 million insitu tonnes of the Veresdale Scrub deposit may be mined at some point in the future from within the area covered by EPC 1302. This approach puts a conservative valuation of AU$6 million dollars on the insitu coal, assuming 75 cents per tonne insitu.

Half the value of this coal would accrue to Lodestone under the terms of the proposed transaction. Consequently a value of approximately AU$3M can be assigned to Lodestone shareholders, which is more than the assessed value of the consideration payable by Lodestone for the EPCs of approximately AU$2.3M.

8.2.4 Transaction – A Package

Whilst JJA has assigned a valuation to the transaction based on the Veresdale Scrub resource in EPC1302, the transaction is seen as one package – thereby obviating the need to assign individual valuations to the other EPC with a coal mining history (EP 1299), or to the EPC that contains coal exposures but where no resources have yet been identified (EPC 1302). The EPC areas, however, are clearly prospective for coal but a commercial value has not been determined in this report.

The approach of aggregating the EPCs does not necessitate assigning current values to EPC 1313 or EPC 1299, which provide an upside exploration possibility to Lodestone’s non-associated shareholders.

Assigning the valuation to the resources in EPC 1302 and taking into account their quality and likelihood of mining, it is JJA’s opinion that the transaction contemplated by the Lodestone directors is consistent with both contemporaneous mine and tenement sale transactions and current coal pricing.

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A Report to the Directors of Lodestone Providing an Opinion as to whether a Transaction Contemplated by the Directors is both Fair and Reasonable for the Non-Associated Shareholders

9. TRANSACTION OPINION

In the opinion of Jeff Jamieson, the principal of Jeff Jamieson and Associates, the transaction contemplated by between the Directors of Lodestone and Moreton Energy Pty Ltd/Other is fair and reasonable to non-associated shareholders of Lodestone.

10. JJA INDEPENDENCE

JJA (Jeff Jamieson) is known to the Chairman of Lodestone but has no association with Mr Greg Baynton, the owner of Moreton Energy Pty Limited and/or the other Directors of Lodestone. JJA has no interest in the transaction in question and had not worked previously on the EPCs at the centre of the transaction for any other company.

11. REFERENCES AND ACKNOWLEDGEMENTS

11.1 REFERENCES

The following references were used to formulate the opinions in this report to the directors of Lodestone:

Powell Duffryn Technical Services Ltd, 1949: First Report on the Coal Industry of Queensland.
Department of Minerals & Energy (QLD), Coal Geology and Resources of the Moreton Basin, Queensland, 1993, Queensland Minerals & Energy Review Series.
New Hope Collieries Pty Ltd, September 1992, Exploration Permit for Coal 221, Veresdale Scrub Area - Preliminary Evaluation.
University of Queensland, Department of Mechanical Engineering, UCG Research Project, 2008, http://www.mech.uq.edu.au/ucq/
Miller, K. R. and Hewitt, G. R., 1983: Authority to Prospect 405C Beaudesert – Statutory Report for the Six Monthly Period 25th November 1982 to 24th May 1983 and Final Report. Open File report held by the Department of Mines and Energy as CR12221.

11.2 ACKNOWLEDGEMENTS

This report has been undertaken by:

Jeff Jamieson ARMIt (Mining Eng), FAIMM, CP(Mining)

and

Ken O’Reilly BSc (Hons), MAIMM, CP(Geol).

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A Report to the Directors of Lodestone Providing an Opinion as to whether a Transaction Contemplated by the Directors is both Fair and Reasonable for the Non-Associated Shareholders

APPENDIX 1 Proposed Exploration – Moreton Energy Tenements

Bromelton

Year 1

Five holes at 400m spacing and six holes at 1km spacing along strike in the railway corridor (if accessible). Holes should be drilled to depths of 225m and geophysically logged.

The aim of drilling across strike is to intersect the complete Walloon sequence, based on the assumption that the dip is less than 25 degrees. At these dips the holes should intersect correlative seams in successive holes, which would confirm local dips and seam continuity. The drilling should also provide targets for coal quality holes in subsequent programs.

Year 2

Cores to obtain samples for coal quality testing of all prospective seams identified in Year 1 (assume three cores); plus two more lines of open holes across the strike on roads located more than 1km to the north and south of the Boonah-Beaudesert Road.

Veresdale Scrub and South

Year 1

Review cadastral maps and ground truth the outcrop zone of the Walloons to find areas which are not built up.

Record two lines of Mini-SOSIE seismic (approximately 9km): one from the eastern outskirts of Beaudesert to the eastern boundary of the EPC along the Beaudesert-Beenleigh Road (4km); and the other along the minor road sub-parallel to, and approximately 5km north of the Beaudesert-Beenleigh Road (5km). Both lines cross the strike of most of the Walloons; and the processed data should give indicative dips and show targets for follow up drilling.

Year 2

Test any reflectors identified from the seismic by initially drilling geophysically logged open holes followed by coal quality cores of any prospective seams identified in the open holes. Assume 10 open holes and four cores.

Albert River

Year 1

Comprehensive field mapping in the Albert River inferred coal resource area.

Year 2

Drill six geophysically logged open holes to 225m depth, at 400m to 500m spacing (depending on the dips identified from the field mapping) across the strike of the Walloons, to test for coal seams of commercial thickness. Drill additional holes adjacent to the open holes to obtain samples from seams of commercial thickness and potentially commercial quality (assume three holes).

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Please return your Proxy forms to: Link Market Services Limited Level 12, 680 George Street, Sydney NSW 2000 Locked Bag A14, Sydney South NSW 1235 Australia Telephone: (02) 8280 7454 Facsimile: (02) 9287 0309 ASX Code: LOD Website: www.linkmarketservices.com.au

Lodestone Exploration Limited ABN 20 075 877 075

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APPOINTMENT OF PROXY

If you would like to attend and vote at the Extraordinary General Meeting, please bring this form with you. This will assist in registering your attendance.

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X99999999999
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X99999999999

I/We being a member(s) of Lodestone Exploration Limited and entitled to attend and vote hereby appoint

A

the Chairman OR if you are NOT appointing the Chairman of the of the Meeting Meeting as your proxy, please write the name of the (mark box) person or body corporate (excluding the registered securityholder) you are appointing as your proxy

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or failing the person/body corporate named, or if no person/body corporate is named, the Chairman of the Meeting, as my/our proxy to act generally at the meeting on my/our behalf and to vote in accordance with the following instructions (or if no directions have been given, as the proxy sees fit) at the Extraordinary General Meeting of the Company to be held at 10:00am (Brisbane time) on Tuesday, 9 September 2008 at the Offices of Stantley Yeates & Associates, Level 1, 101 Edward Street, Brisbane and at any adjournment of that meeting.

Where more than one proxy is to be appointed or where voting intentions cannot be adequately expressed using this form an additional form of proxy is available on request from the share registry. Proxies will only be valid and accepted by the Company if they are signed and received no later than 48 hours before the meeting. The Chairman of the Meeting intends to vote undirected proxies in favour of all items of business.

B To direct your proxy how to vote on any resolution please insert in the appropriate box below.X

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Resolutions For Against Abstain Resolutions For Against Abstain
1 Approval of Farmin Deed 8 Ratification of previous share issues
2 Approval of Employee Share Option Plan 9 Placement to Mr Martin Ackland
3 Issue of options to Mr John McCawley 10 Placement to Mr Greg Baynton
pursuant to the ESOP
4 Issue of options to Mr Martin Ackland 11 Placement to Mr John McCawley
5 Issue of options to Mr Greg Baynton 12 Placement to Mr Bill Stubbs
6 Issue of options to Mr Bill Stubbs 13 Placement to Mr Lance Grimstone
7 Issue of options to Mr Lance Grimstone 14 Directors’ remuneration
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IMPORTANT: FOR ITEMS 4, 9 AND 14 ABOVE

If the Chairman of the Meeting is appointed as your proxy, or may be appointed by default and you do not wish to direct your proxy how to vote as your proxy in respect of Items 4, 9 and 14 above, please place a mark in this box. By marking this box, you C acknowledge that the Chairman of the Meeting may exercise your proxy even though he has an interest in the outcome of these Items and that votes cast by him for these Items, other than as proxyholder, would be disregarded because of that interest. If you do not mark this box, and you have not directed your proxy how to vote, the Chairman of the Meeting will not cast your votes on Items 4, 9 and 14 and your votes will not be counted in calculating the required majority if a poll is called on these Items. The Chairman of the Meeting intends to vote undirected proxies in favour of Items 4, 9 and 14.

If you mark the Abstain box for a particular Item, you are directing your proxy not to vote on your behalf on a show of hands or on a poll and your votes will not be counted in computing the required majority on a poll.

D SIGNATURE OF SECURITYHOLDERS – THIS MUST BE COMPLETED

Securityholder 1 (Individual) Joint Securityholder 2 (Individual) Joint Securityholder 3 (Individual) Sole Director and Sole Company Secretary Director/Company Secretary (Delete one) Director

This form should be signed by the securityholder. If a joint holding, either securityholder may sign. If signed by the securityholder’s attorney, the power of attorney must have been previously noted by the registry or a certified copy attached to this form. If executed by a company, the form must be executed in accordance with the securityholder’s constitution and the Corporations Act 2001 (Cwlth).

LOD PRX842

How to complete this Proxy Form

1 Your Name and Address

This is your name and address as it appears on the company’s share register. If this information is incorrect, please make the correction on the form. Shareholders sponsored by a broker should advise their broker of any changes. Please note: you cannot change ownership of your shares using this form.

2 Appointment of a Proxy

If you wish to appoint the Chairman of the Meeting as your proxy, mark the box in section A. If the person you wish to appoint as your proxy is someone other than the Chairman of the Meeting please write the name of that person in section A. If you leave this section blank, or your named proxy does not attend the meeting, the Chairman of the Meeting will be your proxy. A proxy need not be a shareholder of the company. A proxy may be an individual or a body corporate.

3 Votes on Items of Business

You should direct your proxy how to vote by placing a mark in one of the boxes opposite each item of business. All your shares will be voted in accordance with such a direction unless you indicate only a portion of voting rights are to be voted on any item by inserting the percentage or number of shares you wish to vote in the appropriate box or boxes. If you do not mark any of the boxes on the items of business, your proxy may vote as he or she chooses. If you mark more than one box on an item your vote on that item will be invalid.

4 Appointment of a Second Proxy

You are entitled to appoint up to two persons as proxies to attend the meeting and vote on a poll. If you wish to appoint a second proxy, an additional Proxy Form may be obtained by telephoning the company’s share registry or you may copy this form.

To appoint a second proxy you must:

(a) on each of the first Proxy Form and the second Proxy Form state the percentage of your voting rights or number of shares applicable to that form. If the appointments do not specify the percentage or number of votes that each proxy may exercise, each proxy may exercise half your votes. Fractions of votes will be disregarded.

(b) return both forms together.

5 Signing Instructions

You must sign this form as follows in the spaces provided:

Individual: where the holding is in one name, the holder must sign.

Joint Holding: where the holding is in more than one name, either securityholder may sign.

Power of Attorney: to sign under Power of Attorney, you must have already lodged the Power of Attorney with the registry. If you have not previously lodged this document for notation, please attach a certified photocopy of the Power of Attorney to this form when you return it.

Companies: where the company has a Sole Director who is also the Sole Company Secretary, this form must be signed by that person. If the company (pursuant to section 204A of the Corporations Act 2001 ) does not have a Company Secretary, a Sole Director can also sign alone. Otherwise this form must be signed by a Director jointly with either another Director or a Company Secretary. Please indicate the office held by signing in the appropriate place.

If a representative of the corporation is to attend the meeting the appropriate “Certificate of Appointment of Corporate Representative” should be produced prior to admission. A form of the certificate may be obtained from the company’s share registry.

Lodgement of a Proxy

This Proxy Form (and any Power of Attorney under which it is signed) must be received at an address given below by 10:00am (Brisbane time) on Sunday, 7 September 2008, being not later than 48 hours before the commencement of the meeting. Any Proxy Form received after that time will not be valid for the scheduled meeting.

Proxy forms may be lodged using the reply paid envelope or:

by post, deliver or facsimile to Lodestone Exploration Limited’s share registry as follows:

Lodestone Exploration Limited

C/- Link Market Services Limited

Locked Bag A14 Sydney South NSW 1235 Facsimile: (02) 9287 0309

delivering it to Level 12, 680 George Street, Sydney NSW 2000.

Link Market Services Limited advises that Chapter 2C of the Corporations Act 2001 requires information about you as a securityholder (including your name, address and details of the securities you hold) to be included in the public register of the entity in which you hold securities. Information is collected to administer your securityholding and if some or all of the information is not collected then it might not be possible to administer your securityholding. Your personal information may be disclosed to the entity in which you hold securities. You can obtain access to your personal information by contacting us at the address or telephone number shown on this form. Our privacy policy is available on our website (www.linkmarketservices.com.au).

AI assistant

PACIFIC RESOURCES LIMITED — Proxy Solicitation & Information Statement 2008

65638_rns_2008-08-04_9a80ea8a-9799-4915-b0e9-ee0cdd552c01.pdf

Lodestone Exploration Limited

ABN 20 075 877 075

NOTICE OF EXTRAORDINARY GENERAL MEETING

Items of business

1. Approval of Farmin Deed

Voting exclusion statement

2. Approval of Employee Share Option Plan

Voting exclusion statement

3. Issue of options to Mr John McCawley pursuant to the ESOP

Voting exclusion statement

4. Issue of options to Mr Martin Ackland

Voting exclusion statement

5. Issue of options to Mr Greg Baynton

Voting exclusion statement

6.

Issue of options to Mr Bill Stubbs

Voting exclusion statement

7. Issue of options to Mr Lance Grimstone

Voting exclusion statement

8. Ratification of previous share issues

Voting exclusion statement

9. Placement to Mr Martin Ackland

Voting exclusion statement

10. Placement to Mr Greg Baynton

Voting exclusion statement

11. Placement to Mr John McCawley

Voting exclusion statement

12. Placement to Mr Bill Stubbs

Voting exclusion statement

13. Placement to Mr Lance Grimstone

Voting exclusion statement

14. Directors’ remuneration

Voting exclusion statement

BY ORDER OF THE BOARD

NOTES TO THE NOTICE OF EXTRAORDINARY GENERAL MEETING

Eligibility to vote

Proxy votes and corporate representatives

Lodestone Exporation Limited

ABN 20 075 877 075

EXPLANATORY MEMORANDUM

Resolution 1 – Approval of Farmin Deed

Introduction

Summary of Farmin Deed

Overview

Conditions precedent and obligation to issue securities

Parties’ obligations during Earning Period

Transfer and termination rights

Entry into joint venture

Why is shareholder approval required?

Listing Rule 10.1

Listing Rule 10.11

Chapter 2E of the Corporations Act

Advantages and disadvantages of approval of the Farmin Deed

Independent expert’s report

Other information

Directors’ interests and recommendations

Resolution 2 - Approval of Employee Share Option Plan

Introduction

Summary of ESOP

Why is shareholder approval required?

Other information

Resolution 3 – Approval of issue of options to Mr John McCawley under the ESOP

Introduction

Why is shareholder approval required?

Details of options

Value of options

Other information

Directors’ interests and recommendations

Resolutions 4, 5, 6 and 7– Approval of issue of options to Mr Martin Ackland, Mr Greg Baynton, Mr Bill Stubbs and Mr Lance Grimstone

Introduction

Why is shareholder approval required?

Listing Rule 10.11

Chapter 2E of the Corporations Act

Details of options

Why are the options being issued?

Other information

Director’s interests and recommendations

PACIFIC RESOURCES LIMITED Proxy Solicitation & Information Statement 2008