How Are Coal Industry Suppliers Adapting To Change? SubZero Group Case Study

Australian Coal Conference 2015 1 st May 2015

Joe Clayton CEO and Executive Director SubZero Group

Disclaimer

This document has been prepared by SubZero Group Ltd and/or its affiliates (together, "SubZero") for the exclusive use of the party to whom SubZero delivers this document (the "Recipient"). This document should not be regarded by the Recipient as a substitute for the exercise of its own judgment and the Recipient is expected to rely on its own due diligence if it wishes to proceed further.

The valuations, forecasts, estimates, opinions and projections contained herein involve elements of subjective judgment and analysis. Any estimates or projections as to events that may occur in the future (including projections of financial performance) are based upon the best judgment of SubZero as of the date of this document.

Any statements, estimates or projections are accurate only as at the date of this document. There is no guarantee that any of these estimates or projections will be achieved. Actual results will vary from the projections and such variations may be material. Nothing contained herein is, or shall be relied upon as, a promise or representation as to the past or future. SubZero, its affiliates, directors, employees and/or agents expressly disclaim any and all liability relating or resulting from the use of all or any part of this document or any of the information contained therein.

This document has been prepared solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The Recipient should not construe the contents of this document as legal, tax, accounting or investment advice or a recommendation. The Recipient should consult its own counsel, tax and financial advisors as to legal and related matters concerning any transaction described herein. This document does not purport to be all-inclusive or to contain all of the information that the Recipient may require. No investment, divestment or other financial decisions or actions should be based solely on the information in this document.

This document has been prepared on a confidential basis solely for the use and benefit of the Recipient. Distribution of this document to any person other than the Recipient and those persons retained to advise the Recipient, who agree to maintain the confidentiality of this material is unauthorized. This material must not be copied, reproduced, distributed or passed to others at any time, in whole or in part, without the prior written consent of SubZero.

SubZero Group

ASX listed Hunter Valley based mining services company.

Commenced operations in 1999. Listed in April 2013.

SubZero provides a comprehensive portfolio of specialised support services to Tier 1 mining companies operating in Australia. We take pride in creating long-term relationships by being responsive, proactive and consistently delivering fit for purpose value.

How did SubZero get here?

•SubZero Services founded

1999 •SubZero Services continually grows into Hunter Basin

•SubZero Group acquires Nash Engineering and establishes SubZero Line Boring, by 2004 becomes largest line boring company in Australia

2003 •SubZero Field Service founded •SubZero Automotive founded

•SubZero Group acquires Bro-Built Engineering

• Diesel & Plant Services founded

2008 •SubZero Mining Services founded

2011 •SubZero Supplementary Labor Hire commences

2002

2005

2012

•SubZero Group acquires DMST and Harness Master franchise

•Integration of Harness Master and Hydraulic Isolator products

•ASX Listing – SubZero Group (ASX code: SZG)

•Purpose built new 9,500 sqm mining equipment and machinery repair & refurbishment facility, Muswellbrook

2013 • HMWS JV – under renegotiation
- •SubZero Mechanical Support, Moranbah JV

SubZero Structural Services

Provides a range of structural repair and fabrication services for mining equipment under multiple brands.

Bro-Built Engineering:

Offsite specialist heavy engineering services
Repair and refurbishment of dragline, excavator & shovel buckets, truck bodies, dozer blades and other machinery parts

Field Service:

Onsite mining asset support services
Onsite welding services specialist boom welding
Site shut downs and CHP maintenance

Industrial Services:

Mobile industrial cleaning
Mobile abrasive blasting and painting

Line Boring:

Unique milling capabilities, Linear or Gantry Mill

Liquid Nitrogen:

Only supplier of liquid nitrogen based in Hunter Valley

SubZero Mechanical Services

Provides a range of solutions under multiple brands that support specialised facets of mechanical support.

SubZero Mechanical Support:

Onsite mechanical support with fully trained technicians in configured vehicles

Offsite mechanical support with the Hunter Valley's largest mechanical workshop

SubZero Automotive:

Light vehicle fleet specialists
Automotive and fleet vehicle glazing and glass supply

BHP Billiton and Roads & Traffic Authority (RTA) authorised inspection station

DMST (Diagnostic Monitoring and Safety Technology):

Technical support through electronic and mechanical design solutions
Diagnostic monitoring services
Safety technology products supply and support Hydraulic Isolator
Electrical wiring design and remanufacture solutions
Mine site audit compliance
Specialised component rebuild facilities

SubZero Mining Support

Provides ancillary mining activities supporting the efficiency & production capacity of core mining activities.

SubZero Mining Services:

Rehabilitation project team
Conveyor and material handling cleanup support
Minesite civil projects
Poly pipe supply and installation services
Infrastructure general maintenance
Landscaping services

SubZero Personnel:

Mine site operating and professional labour hire

Customer Overview – Strong Client base

Revenue Dec 14 YTD

Mine Upgrades = Incremental Business

Hunter Valley coal production is still growing to achieve economies of scale. 4 major mines have received approval to expand. 1 mine is still seeking approval to expand.

Mangoola	Mt Arthur Coal	Bulga	Bengalla	Mt ThorleyWarkworth
•Increase from10.5Mtpa to13.5Mtpa	•Extension of lifeof mine to 2026	•BulgaOptimisationProject	•Increase from9.7Mtpa to15Mtpa	•PACrecommendedexpansion for
•PAC approvedApril 14	•Additional 128mtonnes of coal tobe extracted	•$1.5B Capex toextendproduction	•PAC approvedFeb 15	approval Mar 15
	•Equipment fleetincreased from193 to 291vehicles	•PAC approvedNov 14
	•PAC approvedSep 14

Hunter Valley Thermal Coal Exports

Source: Port of Newcastle

Coal exports through Newcastle coal terminals have continued to grow significantly despite the declining thermal coal price

"Downturn"

The coal price came off 48% from December 2010 to January 2015

Source: Index Mundi April 2015

Reaction to Coal Prices

Change from revenue maximisation to cost reduction:

Chase the low strip ratio coal "High Grade".
Park up mining equipment.
Extend equipment rebuild timeframes.
Extend timeframes between maintenance shutdown.
Restructure workforce.
Restructure contractors.

Maintenance & Rebuild Upswing – Parker Bay

Parker Bay is a third party, independent database that identifies the location of more than 67,000 large pieces of surface mining equipment and scheduled rebuilds.

Source: Parker Bay Company

Notes: Bulk of truck acquisitions made by Rio Tinto in 2010 & 2011, purchases made by BHP in 2010, 2011 and 2012. Analysis assumes 6,300 hours of use per annum for machinery. Recommended rebuild intervals assumes a maintenance frequency of 18,000 hours which is based on Caterpillar (OEM) maintenance guides. Extending recommended rebuild intervals by 20% - 40% implies a maintenance frequency range of 21,600 – 25,200 hours.

Our Problem

Floated the business on cusp of industry downturn.

Total Losses $4.4M EBITDA (Underlying) Loss

How Did We Adapt?

Hired Vantage Performance to complete an independent review.
Review confirmed a viable operational turnaround of SubZero was achievable subject to recapitalisation.
Corporate and operational initiatives were identified to enhance profitability of business.
A comprehensive 100 day project plan implemented.

The Implementation

Installed a new management team with turnaround experience.
Restructured business operations and "casualised" workforce.
Major Lender agreed to debt restructure for an orderly recapitalization process.
Cost out program implemented.
3 equipment auctions completed.
Cut premises from 11 to 5.
Comprehensive Communication Strategy implemented for:
- Clients
- Suppliers
- Employees

NEW Management Team

New CEO New CFO New GM Mining New Safety Manager New Financial Controller New Commercial Manager New Human Resources Manager

Board and Senior Management have a significant vested interest in making a success of the turnaround.

People – Workforce Platform Leverage

Significant Restructure of Employee Base well underway – opportunity to optimise further

Division	Total
	Pre	Post
Permanent	311	197
Casual	213	193
Total	524	390
Casual %	41%	49%

Improved EBITDA profile January 2015.

Break even EBITDA in February 2015.

Positive EBITDA in March 2015.

Installed New Management Team with Turnaround Experience

Conducted Positive Negotiations with Lender Regarding Debt Restructure

Vantage Performance Independent Review Completed

Cost out Program on Track

Recapitalise Company with Equity

Complete implementation of operational and corporate initiatives

Further Reduce Costs and target break even EBITDA at $3.2m Rev per month

To be

Client Insights – Hunter valley coal still competitive

Hunter Valley / Newcastle thermal coal is a premium product:
- High energy content
- Low ash & sulfur content causes less air pollution effects
- Very competitive cost
Customer profitability increased with the falling $A: spot Newcastle thermal coal price A$72/tonne
Lower oil price and labour costs have improved the cost structures
Cash costs below current A$ coal price
BHP in November cut costs to less than US$45 / tonne for thermal coal
Rio Tinto stripped ~ US$30/tonne from thermal coal businesses

Implies the mines which SubZero service are now even more profitable

What our customers are telling us?

Rio Tinto - Contract for offsite repairs for dippers/blades/buckets significantly increased.

Working through new opportunities for component and engine rebuilds.
Bengalla labour contract until end 2018 increased to138 operators.

"...We continue to support our local economies with over 75 per cent of our goods and services purchased in Queensland and New South Wales."

Rio Tinto Coal Australia Sustainability Report 2014

Glencore – Bulga optimisation approved with significant contracts to be awarded.

BHP Billiton - cut 150 maintenance personnel resulting in increased offsite equipment rebuilds. - 2015 to date SubZero has completed 7 x CAT 793D truck engine changes.

Hunter Valley Coal Outlook

Hunter Valley Thermal coal exports to grow over next 5 years.
5 Hunter mines & Whitehaven announce production increases.
Motivating factors to increase production levels :
- Increasing production to reduce unit costs.
- Long term Take or Pay obligations with infrastructure providers
- Mine Closure costs are prohibitive & politically damaging (redundancies, environmental rehabilitation, bank guarantees for defaulting on Take or Pay obligations, sunk capital costs).

SubZero Outlook

Only provider of all "must have" ancillary services for all aspects of coal operations.
Exposed to production cycle customer spend not discretionary.
Not exposed to mine construction or exploration markets.
Market share has improved with exited competitors from Muswellbrook e.g. Resco, G&S, Bradken.
Delayed major rebuild backlog now coming on stream.
Solid month on month growth.

SubZero Group Strategic Plan

Take Home Message It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.