TerraCom Limited

ACN 143 533 537

Notice of Extraordinary General Meeting to be held on 12 January 2016 Explanatory Memorandum for the Notice of Extraordinary General Meeting

and

Prox Form y

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

TO BE HELD AT

Bertram Room, Quality Suites Pioneer Sands 19 Carters Lane, Towradgi, Wollongong NSW 2518 Australia

AT

9:00 A.M. (AEDT) on 12 January 2016

THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. IF YOU ARE IN ANY DOUBT ABOUT THE ACTION YOU SHOULD TAKE PLEASE CONSULT YOUR STOCKBROKER, SOLICITOR, ACCOUNTANT OR OTHER PROFESSIONAL ADVISER.

TO BE VALID, FORMS OF PROXY FOR USE AT THE EXTRAORDINARY GENERAL MEETING MUST BE COMPLETED AND RETURNED TO THE COMPANY NO LATER THAN 9.00am (AEDT) ON 10 January, 2016

Section A – Chairman's Letter	2
Section B – Glossary	3
Section C – Notice of Extraordinary General Meeting	5
Section D – Explanatory Memorandum	9

Section A – Chairman’s Letter

10 December 2015

Dear Shareholder,

On behalf of the Directors of TerraCom Limited, I would like to invite you to an Extraordinary General Meeting ( EGM ) of the shareholders of TerraCom Limited (ACN 143 533 537) ( Company ) which will be held at the Bertram Room, Quality Suites Pioneer Sands, 19 Carters Lane, Towradgi, Wollongong NSW 2518 Australia at 9:00 A.M. (AEDT) on 12 January 2016.

In the face of ongoing challenging global conditions for the resource sector, the Company remains focused and on track to deliver all aspects of the 2015 strategic review, both on a corporate and an operational level.

In particular, we continue to pursue and explore alternative options to restructure our finances and reduce our debt burden. This process has required more frequent meetings of our shareholders than would normally be the case, and we are grateful for your participation and support. As you will know, at our recent EGM on 30 October 2015 ( October EGM ) Shareholders supported the efforts of management to amend arrangements with our financiers to provide time for the Company to implement this financial restructuring. At that meeting, we explained more about the financial restructuring options the Company is considering and evaluating. During this period, the Company has had, and it continues to have, a strong and supportive working relationship with our financial backers in connection with our existing obligations and debt restructuring plan.

This meeting of Shareholders is essentially focused on two further key steps in the Company’s financial restructuring plan – the conversion of the Company’s existing convertible notes into fully paid ordinary shares (Shares) in the Company, and the placement of additional Shares to SPG Investment Holdings Ltd ( SPG ) which we recently announced to the market, to raise AUD$7 million in funding for the Company for additional working and development capital ( Placement ).

Resolution 1: Approval of the issue of Shares to Morning Crest Capital pursuant to the conversion of Convertible Notes

The first resolution for consideration at this EGM is approval of the issue of Shares to Morning Crest Capital Management Limited ( Morning Crest Capital ) pursuant to the conversion of Convertible Notes first issued by the Company on 30 December 2013.

The Company has been informed that Morning Crest Capital has entered into an agreement to acquire 50% of the Convertible Notes, and intends to convert those Convertible Notes into equity in the Company. The Company is not a party to that agreement and therefore not privy to its details other than what we have been informed.

The Company has also been informed that Morning Crest Capital and SPG are associates. Further information about Morning Crest Capital is contained in the Explanatory Memorandum.

Shareholders will be aware that the conversion pricing applicable to the Convertible Notes is a formula calculated on the basis of the Company’s share price at the time a conversion notice is given. No conversion notice has been received by the Company at the date of this notice, and therefore we are not able to provide Shareholders with the exact number of Shares that will be issued to Morning Crest Capital if this resolution is passed. However, to ensure that Shareholders are as well informed as possible:

we have included both upside and downside cases (together with their relevant assumptions) in the Explanatory Memorandum, indicating to shareholders the percentage of Shares which in each case would be issued to Morning Crest Capital; and
we are asking Shareholders to vote on the downside case – meaning that Shareholders would have the opportunity to consider the scenario where the largest number of Shares would be issued to Morning Crest Capital.

The scenarios in the Explanatory Memorandum indicate that Morning Crest Capital together with its associated entities (which for this purpose includes SPG) would through the conversion of the Convertible Notes acquire a voting power in the Company of between 16.64% (upside case) and 31.83% (downside case). This range is also considered in Table 21 of the Independent Expert’s Report. We seek Shareholders’ approval for the downside case.

Section 606(1) of the Corporations Act prohibits the acquisition of voting shares in a listed company if that acquisition results in a person's voting power increasing above 20%, however section 611 (Item 7) of the Corporations Act provides an exception to this prohibition where shareholders approve the acquisition. Shareholder approval to the issue of Shares pursuant to the conversion of the Convertible Notes is therefore being sought by the Company pursuant to this exception.

Shareholders should appreciate that this resolution represents your approval to issue these Shares to Morning Crest Capital in the event it acquires and then converts the Convertible Notes as explained above. It does not mean that either of those steps will occur.

The first resolution has been unanimously supported by the directors of the Company. The conversion of the Convertible Notes will have a positive effect on the Company’s balance sheet and is a condition precedent to the Placement. Further details are included in the Explanatory Memorandum.

Resolution 2: Placement

The second resolution for consideration at this EGM is the proposed Placement to SPG, which will raise AUD$7 million in funding for the Company. We announced this to the market on 19 October 2015. This is a key step for the Company in its debt restructuring plans.

The Company has been informed that SPG and Morning Crest Capital are associates. Further information about SPG is contained in the Explanatory Memorandum.

Again, the Company is not able to determine the exact number of Shares that would be issued to SPG in respect of the Placement if Shareholders vote to approve the placement. This is because the Placement is for a fixed monetary amount rather than a fixed percentage of the Shares and therefore movements in the Share price up to the time the Placement is made will affect the number of Shares that would be on issue after the conversion of the Convertible Notes. However, to ensure that Shareholders are as well informed as possible:

we have again included both upside and downside cases (together with their relevant assumptions) in the Explanatory Memorandum, indicating to Shareholders the percentage of the Company’s Shares which in each case would be issued to SPG; and
we are again asking Shareholders to vote on the downside case – meaning that Shareholders would have the opportunity to consider the scenario where the largest number of Shares would be issued to SPG.

The scenarios in the Explanatory Memorandum show that SPG together with its associated entities (which for this purpose includes Morning Crest Capital) would through the Placement acquire a voting power in the Company of between 12.63% (upside case) and 23.18% (downside case).

This range is also considered in Table 21 of the Independent Expert’s Report, and Shareholders will observe that these scenarios are the inverse of those applicable to the conversion of the Convertible Notes. We seek Shareholders’ approval for the downside case.

Shareholders are reminded that the Placement is conditional upon the satisfaction of a number of conditions. In broad terms the key conditions are:

completion of the current debt restructuring process on terms which are within certain specified parameters; and
conversion of all of the existing Convertible Notes issued by the Company into Shares.

There is further explanation of all of the conditions and their implications in the Explanatory Memorandum and we urge you to consider all of them carefully. As always with conditional agreements, there is a risk that notwithstanding the approval of Shareholders at the EGM, the Placement will not proceed. That is not the Company’s expectation, but Shareholders should be aware of that possibility.

The second resolution has been unanimously supported by the directors of the Company. Whilst acknowledging the Placement price of $0.012 was, at that time, at a discount to the Company's prevailing share price on 19 October 2015 when the Placement terms were agreed, the directors consider that considerable advantages will accrue from it. These considerations are set out in further detail in the Explanatory Memorandum.

Interconditionality

The resolutions being put to Shareholders at this EGM are interconditional. Therefore, the transactions contemplated by Resolution 1 and Resolution 2 will only occur if Shareholders approve both Resolutions. Shareholders should carefully consider this when deciding how to vote in respect of the two Resolutions.

Independent Expert’s Report

An independent expert’s report has been prepared by DMR Corporate Pty Ltd ( DMR ) in connection with the proposed issue of Shares to Morning Crest Capital pursuant to the conversion of Convertible Notes and the issue of Shares to SPG though the Placement. The report accompanies the Notice of Meeting and Explanatory Memorandum. DMR has concluded that the Convertible Note conversion to Morning Crest Capital and the SPG Placement are both fair and reasonable. As set out in the Independent Expert’s Report, DMR’s principal reasons for reaching this opinion are:

The basis for the fair conclusion is as follows:

DMR has valued the TerraCom Shares before the Convertible Note conversion and the SPG Placement at $0.0004 per share on a control basis;
DMR has valued the TerraCom Shares after the Convertible Note conversion and the SPG Placement on a minority basis at $0.006 per share;
as the value of the non-associated Shareholders’ interests in TerraCom on a post transaction minority basis ($0.006) is greater than the value of TerraCom pre-transaction on a control basis ($0.0004), DMR considers that the Convertible Note conversion and the SPG Placement are fair.

The key reasons for DMR’s reasonable assessment are:

TerraCom needs to increase its equity base to strengthen its balance sheet and borrowing capacity;

the SPG Placement represents the best and most appropriate funding package that management has been able to negotiate;
TerraCom expects to have a new US$115 million bond facility and no capital repayments will be required over the next 5 years; and
SPG’s major shareholder has a strong network in the coal and steel sectors (both private and state owned entities) in China and this should assist TerraCom in their South Gobi coking coal basin expansion and increased exports into China.

Business of the EGM

The business to be considered at the EGM is the approvals for the purposes of section 611 (item 7) of the Corporations Act, and for all other purposes, of the issue of Shares to Morning Crest Capital pursuant to the conversion of Convertible Notes and the issue of Placement Shares to SPG.

The Company’s clear strategic direction is to transition over the next 12 months to a dynamic midtier globally diverse resource and energy mining company generating strong positive cash flows.

During this past year and despite significantly adverse market conditions, a key achievement has been the commissioning of the Mongolian Baruun Noyon Uul ( BNU ) coking coal mine which has enabled the Company to transition from explorer to miner status. We intend to use this as a foundation for growth not only organically in Mongolia, but also through the potential acquisition of cash flow positive operating projects.

Shareholders are encouraged to read the enclosed Notice of Meeting and Explanatory Memorandum carefully, in their entirety and to attend the EGM and vote on the Resolutions. A proxy form is enclosed to enable any Shareholder who is unable to attend the EGM to vote at the meeting.

Should you wish to discuss the Notice of Meeting you can contact the Company Secretary, Mr Anthony Mooney AM, on email [email protected] or +61 423 841 259.

Yours faithfully,

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The Hon Craig Wallace Chairman

Section B – Glossary

1. Definitions

The following definitions are used in the Notice of Meeting and the Explanatory Memorandum:

2013 EGM means the extraordinary general meeting held by the Company on 30 December 2013.

AEDT means Australian Eastern Daylight Time.

ASIC means the Australian Securities and Investments Commission.

Associate has the meaning given to that term in the Corporations Act.

ASX means ASX Limited ACN 008 624 691.

ASX Listing Rules means the Listing Rules of the ASX as amended from time to time.

Board means the board of Directors of the Company.

Company means TerraCom Limited ACN 143 533 537.

Convertible Notes means the convertible notes issued by the Company with a face value of USD 10,000,000 on the Issue Date pursuant to a Subscription and Implementation Deed dated on or around 20 December 2013.

Convertible Note Redemption Amount means the ‘Convertible Note Redemption Amount’ described in Section D – Explanatory Memorandum of the 2013 EGM materials.

Corporations Act or Act means the Corporations Act 2001 (Cth).

Director means a director of the Company.

Explanatory Memorandum means the explanatory memorandum set out in Section D of this document.

Extraordinary General Meeting means the extraordinary general meeting of the Company to be held on 12 January 2016 pursuant to the Notice of Meeting.

Issue Date means 8 January 2014.

Morning Crest Capital means Morning Crest Capital Management Limited.

Notice of Meeting or Notice means the notice of extraordinary general meeting set out in Section C of this document.

Placement means the issue of Placement Shares to SPG.

Placement Shares means the number of Shares equivalent to A$7 million divided by A$0.012, rounded down to the nearest whole number.

Resolution means a resolution referred to in the Notice of Meeting.

Security has the meaning given in Section D – Explanatory Memorandum of the 2013 EGM materials.

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

Shareholder means a holder of a Share.

Shareholder Approval means the approval by the requisite number of Shareholders of the relevant Resolution.

SPG means SPG Investment Holdings Limited.

USD means the lawful currency of the United States of America.

2. Interpretation

For the purposes of interpreting the Explanatory Memorandum and the Notice of Meeting:

(a) the singular includes the plural and vice versa;
(b) words importing any gender include the other genders;
(c) reference to any statute, ordinance, regulation, rule or other law includes all regulations and other instruments and all considerations, amendments, reenactments or replacements for the time being in force;
(d) all headings, bold typing and italics (if any) have been inserted for convenience of reference only and do not define, limit or affect the meaning or interpretation of the Explanatory Memorandum and the Notice of Meeting;
(e) reference to persons includes bodies corporate and government authorities and in each and every case, includes a reference to the person’s executors, administrators, successors and substitutes (including without limitation persons taking by novation and assignment); and
(f) reference to $, A$, Australian Dollars or dollars is a reference to the lawful tender for the time being and from time to time of the Commonwealth of Australia.

Section C – Notice of Extraordinary General Meeting

NOTICE IS HEREBY GIVEN that an Extraordinary General Meeting of Shareholders of TerraCom Limited ACN 143 533 537 will be held at Bertram Room, Quality Suites Pioneer Sands, 19 Carters Lane, Towradgi, Wollongong NSW 2518 Australia at 9:00 A.M. (AEDT) on 12 January 2016.

BUSINESS

1. Resolution 1: Approval of the issue of Shares to Morning Crest Capital pursuant to the conversion of Convertible Notes

Shareholders are asked to consider, and if thought fit, to pass the following ordinary resolution:

“That for the purposes of section 611 (item 7) of the Corporations Act and for all other purposes, and conditional on Shareholders passing Resolution 2, Shareholders approve the issue of Shares to Morning Crest Capital pursuant to the proposed conversion of the Convertible Notes, on the terms and conditions set out in the Explanatory Memorandum accompanying this Notice of Meeting.”

2. Resolution 2: Approval of Placement

Shareholders are asked to consider, and if thought fit, to pass the following ordinary resolution:

“That for the purposes of section 611 (item 7) of the Corporations Act and for all other purposes, and conditional on Shareholders passing Resolution 1, Shareholders approve the Placement, on the terms and conditions set out in the Explanatory Memorandum accompanying this Notice of Meeting.”

By order of the Board

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Anthony Mooney AM Company Secretary

10 December 2015

NOTES

1. Determination of membership and voting entitlement

For the purpose of determining a person’s entitlement to vote at the Extraordinary General Meeting, a person will be recognised as a member of the Company and the holder of Shares if that person is registered as a holder of those Shares at 7pm (Sydney time) on Friday 8 January 2016.

2. Votes of members

On a show of hands, each member present in person or by proxy or, in the case of a body corporate, by a corporate representative at the meeting shall have one vote.

On a poll, every member present in person or by attorney or by proxy or, in the case of a body corporate, by a representative shall have one vote for each Share held by him, her or it provided that all Shares are fully paid.

3. Proxies

Please note that:

(a) a member entitled to attend and vote at the meeting is entitled to appoint no more than two proxies;
(b) an instrument appointing a proxy must be in the form of the proxy form attached to this Notice of Meeting;
(c) where more than one proxy is appointed, each proxy must be appointed to represent a specified proportion of the member’s voting rights. If a member appoints two proxies, and the appointment does not specify the proportion of the member’s voting rights, each proxy may exercise one-half of the voting rights;
(d) a proxy need not be a member of the Company;
(e) a proxy form may specify the manner in which the proxy is to vote in respect of a particular Resolution and, where the proxy form so provides, the proxy is not entitled to vote on the Resolution except as specified in the proxy form;
(f) a proxy has the authority to vote on the member’s behalf as he or she thinks fit, on any motion to adjourn the meeting, or any other procedural motion, unless the member gives a direction to the contrary;
(g) a valid proxy form will be deemed to confer authority to demand or join in demanding a poll;
(h) to be valid, a proxy form must be signed by the member or the member’s attorney or, if the member is a corporation, executed in accordance with the corporation’s constitution and the Corporations Act (and may be signed on behalf of the corporation by its attorney); and
(i) to be valid, a proxy form and the power of attorney or other authority (if any) under which it is signed (or an attested copy of it) must be received by no later than 9.00am (AEDT) on 10 January 2016:

by the Company:

in person: TerraCom Limited C/- Link Market Services Limited 1A Homebush Bay Drive RHODES NSW 2000 Australia
by mail: TerraCom Limited C/- Link Market Services Limited Locked Bag A14 Sydney South NSW 1235 Australia
by facsimile: + 61 2 9287 0309
online: www.linkmarketservices.com.au

A form of proxy accompanies this Notice of Meeting.

Section D - Explanatory Memorandum

1. Introduction

This Explanatory Memorandum has been prepared to assist Shareholders in understanding the Resolutions to be voted on at the Extraordinary General Meeting on 12 January 2016.

Shareholders should carefully read the whole of this Explanatory Memorandum.

2. Resolution 1

2.1 Background to Resolution 1

Shareholders approved the issue of the Convertible Notes to OCP Asia at an extraordinary general meeting held on 30 December 2013 ( 2013 EGM ). The Convertible Notes were issued on 8 January 2014 and pursuant to the terms of the original CN Conditions would have matured on 8 July 2015. The CN Conditions were subsequently amended to 8 December 2015 and then to 31 January 2015 (the Adjusted Maturity Date ).

The Company has been informed that Morning Crest Capital intends to acquire 50% of the Convertible Notes and to convert those Convertible Notes. The Company is not party to any agreement under which the Convertible Notes will be acquired and is not privy to the terms of any such agreement.

The Company notes that there can be no certainty that Morning Crest Capital will acquire or convert the Convertible Notes. If the Convertible Notes are converted by Morning Crest Capital there is a risk that the Placement may not occur. Shareholder approval is being sought in connection with the potential issue of Shares pursuant to the conversion of the Convertible Notes because any such issue may otherwise contravene s 606 of the Corporations Act. The Company is seeking Shareholder approval at this time because it is a condition to the Placement that all Convertible Notes are converted and the resulting issue of Shares has occurred.

Morning Crest Capital, incorporated and based in Hong Kong, is a fund focussed on investment in frontier technology and natural resources in Australia and China. Morning Crest Capital was established by Mr. David Wang, Mr. William Huang and Mr. Fred Bai in 2013 who are the shareholders in the Company.

The Company has been informed that Morning Crest Capital is an associate of SPG. Shareholders should carefully note this and the implications it will have on control of the Company.

Further information about Mr David Wang is set out below in section 3.1. Mr. William Huang is a director of the board of Peninsula Shanghai Limited. He graduated from the University of Chicago with honors degree in Economics and Mathematics. After that, he worked in JPMorgan and Morgan Stanley, with experience in corporate finance, M&A, equity and fixed income transactions across China. Mr Huang was also the General Manager of Business Development at Greenland Hong Kong, responsible for capital market transactions and corporate strategies.

Mr. Fred Bai graduated from The University of Sydney with major in Accounting and Finance. After that, he worked in Macquarie Bank (Sydney), Shenyin & Wanguo Securities Co. Ltd (Shanghai) and China Pacific Insurance Group (Shanghai). He has been participated in several international M&A deals and has wide knowledge of both Australian and Chinese Capital markets.

The Company has been advised that Morning Crest Capital’s investment in TerraCom Ltd. is the start of Mr Wang and Morning Crest Capital’s investment into natural resources development. The Company has been informed that Mr Wang fully supports the development of the company. As already noted, Morning Crest Capital also has interests in frontier technology. This includes investments in ChinaTank Stream Ventures, Building IQ and Airtasker.

2.2 Regulatory background to Resolution 1

The Corporations Act sets out a number of regulatory requirements that must be satisfied in relation to the issue of Shares under Resolution 1. These are summarised below.

(a) Section 606(1) of the Corporations Act

Section 606(1) of the Corporations Act prohibits the acquisition of voting Shares in a listed company if that acquisition results in a person's voting power increasing:

from 20% or below to more than 20%; or
from a starting point above 20% and below 90%,

collectively the ( Takeover Prohibition ).

The voting power of a person in a body corporate is determined in accordance with section 610 of the Corporations Act. The calculation of a person's voting power in a company involves determining the voting Shares in the company in which the person and the person's Associates have a Relevant Interest.

If Resolution 1 is approved the Company anticipates that following any conversion of the Convertible Notes into Shares the aggregate voting power ( Relevant Interest ) of SPG may exceed 20%.

(b) Item 7 section 611 of the Corporations Act

Section 611 (Item 7) of the Corporations Act provides an exception to the Takeover Prohibition described in (a) above. Specifically, section 611 (Item 7) of the Corporations Act allows a person and their Associates to acquire a relevant interest in a company's voting Shares with prior shareholder approval as an exception to the Takeover Prohibition.

On this basis and in accordance with section 611 (Item 7) of the Corporations Act, the Company seeks Shareholder approval for the proposed issue of the Shares to SPG.

In order to rely on section 611 (Item 7) of the Corporations Act, certain information is required to be provided to Shareholders. This information is set out below.

Approval pursuant to Listing Rule 7.1 for the issue of the Shares is not required as an issue of securities with approval pursuant to section 611 (Item 7) is exempt from the requirements of Listing Rule 7.1 (the exception being Listing Rule 7.2 exception 16).

2.3 Relevant information

For the purposes of section 611 (Item 7) of the Corporations Act, the following information is disclosed:

(a) The identity of the person to whom Shares will be issued and their associates

Morning Crest Capital. SPG is an associate of Morning Crest Capital.

(b) The voting power that Morning Crest Capital would have as a result of the issue of Shares

In the most dilutive scenario in respect of the Convertible Note conversion only (using the scenario of an issue price of A$0.005 per share at an USD:AUD exchange rate of 0.6800 and assuming all Convertible Notes are converted) the issue of Shares under this resolution would result in a 31.83% voting power for Morning Crest Capital.

(c) The maximum extent of the increase in Morning Crest Capital’s voting power in the Company that would result from the issue of Shares

(d) The maximum extent of the increase in the voting power of each of Morning Crest Capital’s associates that would result from the issue of Shares

None, as there are currently no known TerraCom shareholders who are associates of Morning Crest Capital. SPG is an associate of Morning Crest Capital, but at the time of the conversion of the Convertible Notes by Morning Crest Capital, SPG is not expected to hold any Shares.

(e) The voting power of each of Morning Crest Capital’s associates would have as a result of the issue of Shares

2.4 Independent Expert’s Report

As Resolution 1 and 2 are interdependent, DMR have assessed these 2 transactions as part of the one transaction and its opinion both the Convertible Note conversion and the SPG Placement are fair and reasonable.

3. Resolution 2

3.1 Background to Resolution 2

As the Company announced to the ASX on 19 October 2015, the Company has reached agreement with SPG to, subject to the satisfaction of certain conditions set out below, issue the Placement Shares to SPG at an issue price of $0.012. There are approximately 583.3 million Placement Shares.

The Placement is conditional on:

Shareholders approving the Placement for all purposes, including (without limitation) for the purposes of Item 7 of section 611 of the Corporations Act;
the issue of Shares by the Company to the holders of Convertible Notes following the conversion of all of the Convertible Notes having occurred;

the Company completing the proposed public bond issuance being conducted as at the date of this Agreement (as contemplated in the Company’s announcement released to the market on 30 October 2015);
the Company successfully completing the refinancing of its current debt on terms which are within specified parameters agreed between the Company and SPG; and
certain other customary conditions, including Board and regulatory approvals.

Under the terms of the agreement reached with SPG, if the conditions are not satisfied by 21 January 2015 SPG or the Company may terminate the agreement in respect of the Placement.

In addition, the agreement in respect of the Placement entered into with SPG currently contain a further condition additional to those outlined, which has become obsolete and will now technically not be met. As this does remain a condition to the Placement, the Company is seeking SPG’s waiver of this condition. The Company expects that agreement will quickly be reached in this regard.

The Company reminds shareholders that there is no certainty the conditions to the Placement will be satisfied and that the Placement will occur. The Company does not control who holds the Convertible Notes, nor can it compel their conversion. Therefore there is no guarantee that the conversion of all of the Convertible Notes will occur. In particular:

if Morning Crest Capital does not acquire the Convertible Notes as outlined above, or it acquires them but cannot or does not convert all of them. One such scenario would be where Morning Crest Capital acquires the Convertible Notes but cannot convert them because shareholders have not approved Resolution 1 or Resolution 2; or
regardless of the position of Morning Crest Capital, if all of the remaining 50% of the Convertible Notes are not converted;

then the conditions to the Placement will not be met and SPG will have no obligation to make the Placement. On the basis of the information it currently has, the Company does not anticipate that any other regulatory approvals will be required in connection with the issue of Shares further to the conversion of the remaining Convertible Notes.

Further, while the Company is confident about the progress of its refinancing process, there can be no guarantee that a successful outcome will be achieved and in such circumstances, regardless of the position of the Convertible Notes, the conditions to the Placement will not be met and SPG will have no obligation to make the Placement.

The Company welcomes this strategic investment by SPG. SPG has undertaken extensive due diligence, culminating in a physical inspection of the Company's BNU coking coal mine in Mongolia, which showcased the Company's ability to develop and operate a world-class mine in the South Gobi desert and to produce a high quality hard coking coal product in close proximity to a large number of Chinese steel makers operating in northern China.

Whilst the Placement price of $0.012 was at a discount to the Company's share price on 19 October 2015 (being the date on which the Placement was announced to the market), it is the Board's view that this should be seen as a significant and strategic opportunity for the Company to secure a very large and well connected Chinese group on the share register to support the expansion of coking coal operations in Mongolia and in particular through the expansion of the market for the BNU hard coking coal in China and through removing costs out of the supply chain to Chinese end users.

SPG was incorporated in March 2004 and is an investment holding company of Mr David Wang, who is the key company officer. SPG is owned by the family trust of Mr. David Wang.

SPG is incorporated in the British Virgin Islands and its main business offices are in Hong Kong and Shanghai.

Mr Wang is the Honourable Chairman and board member of Greenland Hong Kong Holdings Limited ( Greenland HK ) which was formerly known as SPG Land (Holdings) Limited. This entity was listed on the Hong Kong Stock Exchange in October 2006 and was involved in real estate projects over ten cities in China. Mr Wang is the founder of SPG Land and was the chairman of this group, engaging in real estate development, property and hotel investment, and related business in China. SPG Land changed its name to Greenland HK in August 2013. Mr Wang is also the Chairman of the Peninsula Shanghai Hotel, one of the top luxury hotels in Asia. Mr. Wang has over 20 years of experience in finance, construction, property development and investment. He graduated from South China University of Technology with a Bachelor degree in Building Materials and University of Technology, Sydney (Australia) with a Bachelor degree in Commerce and now holds an Australian Passport. Mr. Wang enjoys a strong reputation and has considerable influence in the commercial, banking and real estate sectors in China and Australia, as well as academic circles. In recent years, he has devoted his efforts to promote the friendly cooperation between China and Australia in economic, banking and academic areas. Mr. Wang has a deep understanding of real estate investment. Through Mr Wang's extensive business success he has created a strong network in China in the coal and steel sectors with both private and state owned entities.

The Company has been advised that SPG’s investment in TerraCom is the start of Mr Wang and SPG’s investment into natural resources development. The Company has been informed that Mr Wang fully supports the development of the company.

3.2 Regulatory background to Resolution 2

The regulatory background to Resolution 2 is the same as for Resolution 1.

3.3 Resolution 2: Approval of the issue of Shares to SPG

For the purposes of section 611 (Item 7) of the Corporations Act, the following information is disclosed:

(a) The identity of the person to whom Shares will be issued and their associates SPG. Morning Crest Capital is an associate of SPG.
(b) The voting power that SPG would have as a result of the issue of Shares
In the most dilutive overall scenario in respect of the Placement (using the scenario of an issue price of A$0.005 per share at an USD:AUD exchange rate of 0.6800 and assuming all Convertible Notes are converted) the issue of Shares under this resolution would result in a 12.63% voting power for SPG without taking into account its associates. However, the maximum voting power of SPG when aggregated with its associate Morning Crest Capital would be 44.46% after this issue of Shares (made up of 31.83% held by Morning Crest Capital and 12.63% held by SPG).
(c) The maximum extent of the increase in SPG’s voting power in the Company that would result from the issue of Shares

The maximum increase in the voting power of SPG (taking into account the Shares held by its associate Morning Crest Capital) after this issue of Shares would be 44.46%.

(d) The maximum extent of the increase in the voting power of each of SPG’s associates that would result from the issue of Shares

If conversion of all of the Convertible Notes into Shares in the Company has occurred prior to this issue of Shares, the maximum voting power of SPG’s associate Morning Crest Capital would increase by 12.63%. to make an aggregate of

44.46% after this issue of Shares (made up of 31.83% held by Morning Crest Capital and 12.63% held by SPG).

(e) The voting power of each of SPG’s associates would have as a result of the issue of Shares

Other scenarios are possible which would result in different voting power for each of SPG and Morning Crest Capital but in each other case their aggregate voting power would be less than 44.46%. These scenarios are set out in Table 21 of the Independent Expert’s Report.

3.4 Independent Expert’s Report

An independent expert’s report has been prepared by DMR Corporate Pty Ltd ( DMR ) in connection with the Approval of the issue of Shares to Morning Crest Capital pursuant to the conversion of Convertible Notes and the Placement resolutions. The report accompanies the Notice of Meeting and Explanatory Memorandum. DMR has concluded that the Convertible Note conversion to Morning Crest Capital and the Placement are fair and reasonable. As set out in the Independent Expert’s Report, DMR principal reasons for reaching this opinion are:

The basis for the fair conclusion is as follows:

DMR valued the TerraCom Shares before the Convertible Note conversion and the SPG Placement at $0.0004 per share on a control basis;
DMR valued the TerraCom Shares after the Convertible Note conversion and the SPG Placement on a minority basis at $0.006 per share;
as the value of the non-associated Shareholders’ interests in TerraCom on a post transaction minority basis ($0.006) is greater than the value of TerraCom pretransaction on a control basis ($0.0004), DMR considers that the Placement is fair.

The key reasons for DMR’s reasonable assessment are:

TerraCom needs to increase its equity base to strengthen its balance sheet and borrowing capacity;
the SPG Placement represents the best and most appropriate funding package that management has been able to negotiate;
TerraCom expects to have a new US$115 million bond facility and no capital repayments will be required over the next 5 years;
SPG’s major shareholder has a strong network in the coal and steel sectors (both private and state owned entities) in China and this should assist TerraCom in their South Gobi coking coal basin expansion and increased exports into China.

4. Recommendation of the Board

The Board recommends that Shareholders vote in favour of Resolutions 1 and 2.

Given the Resolutions are interconditional, if Resolution 1 is not passed, the Placement will not occur. In addition, the passage of Resolution 1 will facilitate the satisfaction of a

condition precedent to the Placement under the agreement with SPG in respect of the Placement. In addition, if Resolution 1 is not passed, the holders of the Convertible Notes may elect to redeem them for the Convertible Note Redemption Amount. Given the Company cannot compel the conversion of the Convertible Notes this risk arises even if Resolution 1 is passed. However, given the Company has been informed that Morning Crest Capital intends to convert the Convertible Notes, in the circumstances the Company considers the risk of this occurring is higher if Resolution 1 is not passed. At present the Company does not have funding arrangements in place to meet the Convertible Note Redemption Amount. Failure to make payment of the Convertible Note Redemption Amount would place the Company in default to its financiers. If such a default occurs and is subsisting the Security may be enforced immediately. In addition, if an event of default occurs it may trigger cross defaults under the Company’s other financing arrangements.

If Resolution 2 is not passed, the Company will not be able to issue the Placement Shares to SPG and will need to source alternative funding. Further, the Company will not be able to obtain the benefits set out in section 3.2 of this Explanatory Memorandum.

5. Voting Exclusion

The Company will disregard any votes cast on Resolutions 1 and 2 by:

(a) SPG;
(b) Morning Crest Capital;
(c) any person who might obtain a benefit, except a benefit solely in the capacity of a holder of ordinary securities, if the resolution is passed; and
(d) an Associate of any person described in (a) to (c) above.

However, the Company need not disregard a vote if:

(a) 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
(b) it is cast by the person chairing the meeting as proxy for a person who is entitled to vote, in accordance with a direction on the proxy form to vote as the proxy decides.

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TerraCom Limited ABN 35 143 533 537

LODGE YOUR VOTE

ONLINE  www.linkmarketservices.com.au

BY MAIL  TerraCom Limited C/- Link Market Services Limited Locked Bag A14 Sydney South NSW 1235 Australia

 BY FAX

+61 2 9287 0309

 BY HAND Link Market Services Limited 1A Homebush Bay Drive, Rhodes NSW 2138

ALL ENQUIRIES TO Telephone: +61 1300 554 474

PROXY FORM I/We being a member(s) of TerraCom Limited and entitled to attend and vote hereby appoint: APPOINT A PROXY the Chairman of the OR if you are NOT appointing the Chairman of the Meeting as your proxy, please write the name of the person or Meeting (mark box) body corporate you are appointing as your proxy or failing the person or body corporate named, or if no person or body corporate is named, the Chairman of the Meeting, as my/our proxy to act on my/our behalf (including to vote in accordance with the following directions or, if no directions have been given and to the extent permitted by the law, as the proxy sees fit) at the Extraordinary General Meeting of the Company to be held at 9:00am on Tuesday, 12 January 2016 at Bertram Room, Quality Suites Pioneer Sands, 19 Carters Lane, Towradgi, Wollongong NSW 2518 Australia (the Meeting ) and at any postponement or adjournment of the Meeting. The Chairman of the Meeting intends to vote undirected proxies in favour of each item of business. VOTING DIRECTIONS Proxies will only be valid and accepted by the Company if they are signed and received no later than 48 hours before the Meeting. Please read the voting instructions overleaf before marking any boxes with an T Resolutions For Against Abstain *

1 Approval of the issue of Shares to Morning Crest Capital pursuant to the conversion of Convertible Notes

2 Approval of Placement

 * 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.

SIGNATURE OF SHAREHOLDERS – THIS MUST BE COMPLETED

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

This form should be signed by the shareholder. If a joint holding, either shareholder may sign. If signed by the shareholder’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 company’s constitution and the Corporations Act 2001 (Cth).

For

TER PRX601A

HOW TO COMPLETE THIS SHAREHOLDER PROXY FORM

YOUR NAME AND ADDRESS

LODGEMENT OF A PROXY FORM

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.

This Proxy Form (and any Power of Attorney under which it is signed) must be received at an address given below by 9:00am on Sunday, 10 January 2016, 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.

APPOINTMENT OF PROXY

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

If you wish to appoint the Chairman of the Meeting as your proxy, mark the box in Step 1. If you wish to appoint someone other than the Chairman of the Meeting as your proxy, please write the name of that individual or body corporate in Step 1. A proxy need not be a shareholder of the Company.

ONLINE

www.linkmarketservices.com.au

Login to the Link website using the holding details as shown on the Proxy Form. Select ‘Voting’ and follow the prompts to lodge your vote. To use the online lodgement facility, shareholders will need their “Holder Identifier” (Securityholder Reference Number (SRN) or Holder Identification Number (HIN) as shown on the front of the Proxy Form).

DEFAULT TO CHAIRMAN OF THE MEETING

Any directed proxies that are not voted on a poll at the Meeting will default to the Chairman of the Meeting, who is required to vote those proxies as directed. Any undirected proxies that default to the Chairman of the Meeting will be voted according to the instructions set out in this Proxy Form.

BY MAIL  Form. TerraCom Limited VOTES ON ITEMS OF BUSINESS – PROXY APPOINTMENT C/- Link Market Services Limited You may direct your proxy how to vote by placing a mark in one of the Locked Bag A14 boxes opposite each item of business. All your shares will be voted in Sydney South NSW 1235 accordance with such a direction unless you indicate only a portion of Australia 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  BY FAX do not mark any of the boxes on the items of business, your proxy may +61 2 9287 0309 vote as he or she chooses. If you mark more than one box on an item your BY HAND vote on that item will be invalid.  delivering it to Link Market Services Limited APPOINTMENT OF A SECOND PROXY 1A Homebush Bay Drive You are entitled to appoint up to two persons as proxies to attend the Rhodes NSW 2138 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 and return them both together. * During business hours (Monday to Friday, 9:00am–5:00pm) 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; and (b) return both forms together. 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 shareholder may sign. Power of Attorney:* to sign under Power of Attorney, you must lodge 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.

During business hours (Monday to Friday, 9:00am–5:00pm)

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.

CORPORATE REPRESENTATIVES

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 in accordance with the Notice of Meeting. A form of the certificate may be obtained from the Company’s share registry or online at www.linkmarketservices.com.au.

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.

DMR CORPORATE

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______

9 December 2015

Mr C Wallace Chairman TerraCom Limited Level 7, 370 Flinders Street Townsville, QLD 4810

Dear Sir,

Independent Expert’s Report

1. Introduction

The directors of TerraCom Limited (“TerraCom” or “the Company”) have requested DMR Corporate Pty Ltd (“DMR Corporate”) to prepare an independent expert's report in respect of the following 2 proposals that form part of the funding restructuring that is currently being undertaken.

TerraCom shareholders are now being requested to approve both of the following proposed restructuring steps:

(1) Approval of the issue of shares to Morning Crest Capital Venture Capital I Holding Limited (“Morning Crest Capital”) (a company associated with SPG Investment Holdings Ltd –“SPG”) pursuant to the conversion of convertible notes

At the November 2013 Extraordinary General Meeting TerraCom s hareholders approved the issue of the Convertible Notes to OCP Asia (Hong Kong) Limited together with any associated body corporate or any fund managed by any of them – “OCP Asia”). The TerraCom shareholders subsequently approved an adjustment to the terms of the Convertible Notes on 30 October 2015.

OCP Asia holds 50% of the convertible notes on behalf of Orchard Makira Ltd and Makira SP7 Ltd and the other 50% on behalf of JP Morgan Plc (“JP Morgan”).

Morning Crest Capital has subsequently entered into an agreement to acquire the 50% interest in the Convertible Notes currently held by JP Morgan and if Morning Crest Capital convert these convertible notes to shares prior to the Proposed SPG Placement they may hold a 21.66% interest in TerraComs’ voting power.

(2) Proposed SPG Placement

A proposed placement of 583,333,333 TerraCom shares at $0.012 per share to SPG for $7,000,000.

The Proposed SPG Placement is conditional on:

(a) a circa US$115 million five year interest-only listed bond facility being established with the following terms:
semi-annual interest payments paid in arrears;;
a bullet repayment at the end of the term;;

DMR Corporate Pty Ltd Melbourne ACN 063 564 045 Level 12, 440 Collins Street AFSL No. 222050 Melbourne VIC 3000 Australia

In association with PKF

p (03) 9679 2350 (03) 96792351

PKF International Limited administers a network of legally independent firms which carry on separate businesses under the PKF Name. PKF International Limited is not responsible for the acts or omissions of individual member firms of the network.

For office locations visit www.pkf.com.au

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an option to capitalize 50% of the interest payments;; and
a variable component of the interest payments linked to actual coal sales;;

and

(b) the conversion of all Convertible Notes and the issue of shares by the Company to the holders of the Convertible Notes in respect of the conversion of the Convertible Notes having occurred.

The above conditions precedent must be completed prior to the Proposed SPG Placement. For condition (b) above to be met, the TerraCom shareholders must approve the issue of shares in Resolution 1 below, as following conversion of the Convertible Notes Morning Crest Capital may hold in excess of 20% of TerraCom’s voting power.

Following the Convertible Note conversion and the Proposed SPG Placement, TerraCom’s issued share capital may be increased from 1,095,928,523 as at 30 September 2015 to 2,516,639,724 shares as determined in Table 1 below.

If the TerraCom shareholders approve both Resolutions 1 and 2 in Section 2 below, then SPG and its associates may increase their interests in TerraCom from nil to 39.82%.

Table 1 Shareholders Shares Held Non-Associated Shareholders 1,095,928,523 Conversion of Convertible Notes - 1 US$5,000,000 418,688,934 1,514,617,457 Conversion of Convertible Notes - 1 US$5,000,000 - Morning Crest Capital 418,688,934 1,933,306,391 Placement to SPG A$7,000,000 583,333,333 SPG and Associated entities 2,516,639,724	Conversion Placement 56.69% 43.55% 21.66% 16.64% 60.18% 21.66% 16.64% 100.00% 23.18% 39.82% 100.00% Diluted Percentage Interests	Conversion Placement 56.69% 43.55% 21.66% 16.64% 60.18% 21.66% 16.64% 100.00% 23.18% 39.82% 100.00% Diluted Percentage Interests



1,514,617,457		60.18%
		16.64% 23.18%
418,688,934	21.66%

1,933,306,391	100.00%



		39.82%

2,516,639,724		100.00%

Source: DMR Corporate

Note 1 The maximum number of shares that will be issued by the Company to holders of the convertible notes will vary depending on the applicable amended conversion price on the date of conversion. At the date of this report using an estimated conversion price of USD 0.012 (A$0.0166), being the estimated Volume Weighted Average Price of an ordinary share for the thirty (30) consecutive dealing days ending 20/11/2015 converted at the estimated Reserve Bank of Australia closing USD:AUD exchange rate of 0.7194 as at 20/11/2015, the maximum number of shares that would be issued by the Company to holders of the convertible notes would be 837,377,868.

The approval of both of the Resolutions in Section 2 below will increase SPG’s voting power from nil to 39.82% after the restructure or if the conversion variables of share price and exchange rates vary from the above calculations as at the conversion date the maximum voting power may increase to 44.46%) refer to Table 21 below), which is more than the 20% limit imposed by Section 606 of the Corporations Act 2001 (“the Act”). The transactions are however permitted by Section 611 of the Act provided they are agreed to by shareholders, other than those involved in the proposed transactions or persons associated with such persons (i.e. the Non-Associated Shareholders).

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2. The Proposed Transaction

At the forthcoming Extraordinary General Meeting TerraCom shareholders are being asked to approve the following two resolutions.

1. Approval of the issue of Shares to Morning Crest Capital pursuant to the conversion of Convertible Notes

That for the purposes of section 611 (item 7) of the Corporations Act and for all other purposes, and conditional on Shareholders passing Resolution 2, Shareholders approve the issue of shares to Morning Crest Capital which may increase its voting power up to approximately 31.83% (Table 21 below) pursuant to the proposed conversion of the convertible notes, on the terms and conditions set out in the Explanatory Memorandum accompanying this Notice of Meeting.

TerraCom has been informed that Morning Crest Capital is an associate of SPG and therefore if the shareholders approve both this resolution and resolution 2 below then Morning Crest Capital together with its associated entities (i.e. SPG) will through this process acquire a voting power in the Company of between 39.82% and approximately 44.46% as shown in Table 21 of this report.

2. Approval of the Placement of Shares to SPG

That, for the purposes of item 7 of section 611 of the Corporations Act and for all other purposes, and conditional on Shareholders passing Resolution 1, the Shareholders hereby approve the acquisition by SPG (or its permitted nominee(s)) of a relevant interest in 583,333,333 fully paid ordinary shares in the Company at an issue price of $0.012 per share. The SPG Placement may increase the maximum voting power of Morning Crest Capital and its associate SPG to a range of 39.82% to 44.46%.

As the Proposed SPG Placement agreement includes a condition precedent that the Convertible Notes must be converted prior to the Proposed SPG Placement proceeding and as the agreement between JP Morgan and Morning Crest Capital includes a clause that the transfer of the convertible notes is subject to TerraCom shareholder approval, we consider that the two approvals are interdependent as neither may take place without the shareholder approvals. For this reason, we have assessed these 2 transactions as part of the one transaction and our opinion is based on this premise. These two interdependent transactions may be referred to as the Proposed Restructure Transaction throughout the remainder of this report.

The directors have requested DMR Corporate to prepare an independent expert’s report in accordance with ASIC Regulatory Guide 111 – Content of expert reports. ASIC Regulatory Guide 111 requires the Independent Expert to advise shareholders whether the Proposed Restructure Transaction (comprising both the Convertible Note conversion and the SPG Placement) is fair and reasonable, when considered in the context of the interests of the Non- Associated Shareholders.

3. Summary Opinions

In our opinion the Convertible Note conversion by Morning Crest Capital and the Proposed SPG Placement are fair and reasonable . Our principal reasons for reaching this opinion are:

Fairness

a) in Section 7.10 we valued the TerraCom shares before the Convertible Note conversion and the SPG Placement at $0.0004 per share on a control basis;;
b) in Section 9.2 we valued the TerraCom shares after the Convertible Note conversion and the SPG Placement on a minority basis at $0.006 per share.
c) as the value the Non-Associated Shareholders’ interests in TerraCom on a post transaction minority basis ($0.006) is greater than the value of TerraCom pre- transaction on a control basis ($0.0004), we consider that the Convertible Note conversion and the SPG Placement are fair.

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Reasonableness

The key reasons for assessing the Proposed Restructure Transaction as reasonable are:

TerraCom needs to increase its equity base to strengthen its balance sheet and borrowing capacity;;
The SPG Placement represents the best and most appropriate funding package that management has been able to negotiate;;
TerraCom will have a new US$115 million bond facility and no capital repayments will be required over the next 5 years;; and
SPG’s major shareholder a strong network in the coal and steel sectors (both private and state owned entities) in China and this should assist TerraCom in their South Gobi coking coal basin expansion and increased exports into China.

4. Structure of this Report

The remainder of this report is divided into the following Sections:

Section

5
Purpose of the Report
6
TerraCom - Key Information
7
Valuation of TerraCom before the SPG Placement
8
Value of SPG Consideration
9
Valuation of TerraCom after the SPG Placement
10
Assessment as to Fairness
11
Assessment as to Reasonableness
12
Assessment as to Fairness and Reasonableness
13
Financial Services Guide
Appendix

A
Discount Rate
B
Sources of Information
C
Declarations, Qualifications and Consents

Attachment

Executive Summary of the Xenith Valuation Report

Page
4
6
15
26
27
28
28
31
31

33
37
38

39

5. Purpose of the Report

This report has been prepared to meet the following regulatory requirements:

• Corporations Act 2001

Section 606 of the Act contains a general prohibition on the acquisition of shares in a company if, as a result of the acquisition, any person increases his or her voting power in the company:

(a) from 20% or below to more than 20%;; or
(b) from a starting point that is above 20% and below 90%.

Section 611 of the Act contains an exception to the Section 606 prohibition. For an acquisition of shares to fall within the exception, the acquisition must be approved in advance by a resolution passed at a general meeting of the company in which shares will be acquired.

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As the Convertible Note conversion and the Proposed SPG Placement will result in Morning Crest capital and its associate SPG holding in excess of a 20% interest in TerraCom’s voting power, the Company is seeking shareholder approval for Resolution 1 under Section 611 of the Act. In preparing an IER for the purposes of a Section 611 approval, we are required to comply with ASIC Regulatory Guides and in particular with Regulatory Guide RG 111 (“RG 111”), and the relevant paragraphs are set out below.

• ASIC Regulatory Guides

RG 111.24 An issue of shares by a company otherwise prohibited under s606 may be approved under item 7 of s611 and the effect on the company’s shareholding is comparable to a takeover bid. Examples of such issues approved under item 7 of s611 that are comparable to takeover bids under Ch 6 include:
(b) a company issues securities in exchange for cash and, as a consequence, the allottee acquires over 20% of the company. The allottee could have achieved the same or a similar outcome by using a cash-rich entity to make a scrip takeover bid for the company.
RG111.27 There may be circumstances in which the allottee will acquire 20% or more of the voting power of the securities in the company following the allotment or increase an existing holding of 20% or more, but does not obtain a practical measure of control or increase its practical control over that company. If the expert believes that the allottee has not obtained or increased its control over the company as a practical matter, then the expert could take this outcome into account in assessing whether the issue price is ‘reasonable’ if it has assessed the issue price as being ‘not fair’ applying the test in RG111.11.
RG111.10 It has long been accepted in Australian mergers and acquisitions practice that the words ‘fair and reasonable’ in s640 established two distinct criteria for an expert analysing a control transaction:
(a) is the offer ‘fair’;; and
(b) is it ‘reasonable’?

That is, ‘fair and reasonable’ is not regarded as a compound phrase.

RG111.11 Under this convention, an offer is ‘fair’ if the value of the offer price or consideration is equal to or greater than the value of the securities the subject of the offer[1] . This comparison should be made:
(a) assuming a knowledgeable and willing, but not anxious, buyer and a knowledgeable and willing, but not anxious, seller acting at arm’s length;; and
(b) assuming 100% ownership of the ‘target’ and irrespective of whether the consideration is scrip or cash. The expert should not consider the percentage holding of the ‘bidder’ or its associates in the target when making this comparison. For example, in valuing securities in the target entity, it is inappropriate to apply a discount on the basis that the shares being acquired represent a minority or ‘portfolio’ parcel of shares.
RG111.12 An offer is ‘reasonable’ if it is fair. It might also be ‘reasonable’ if, despite being ‘not fair’, the expert believes that there are sufficient reasons for security holders to accept the offer in the absence of any higher bid before the close of the offer.

ASIC Regulatory Guide 111 requires that the Proposed SPG Placement be assessed as if it was a takeover of TerraCom. In assessing a takeover bid, Regulatory Guide 111 states that the expert should consider whether the Proposed SPG Placement is both “fair” and “reasonable”.

1 In an ASIC Corporate Finance Liaison presentation in May 2013, ASIC has expressed the view that transactions pursuant to item 7 of Section 611 should be assessed by “comparing the fair market value of the company’s shares pre-transaction on a control basis, with the fair market value of the company’s shares post-transaction on a minority basis.”

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• General

The terms fair and reasonable are not defined in the Act so we have defined them as follows:

Proposed SPG Placement

Fairness - the Convertible Note conversion and the Proposed SPG Placement are fair if the minority value of a TerraCom share after the Convertible Note conversion and the SPG Placement is equal to or greater than the control value of a TerraCom share before the Convertible Note conversion and the Proposed SPG Placement.
Reasonableness - the Convertible Note conversion and the Proposed SPG Placement may be reasonable whether or not they are fair as this assessment involves consideration of other significant factors that shareholders might consider prior to voting on the resolutions.

What is fair and reasonable for the Non-Associated Shareholders should be judged in all the circumstances of the proposal.

The methodology that we have used to form an opinion as to whether the Proposed Restructure Transaction is fair and reasonable, is summarised as:

(i) In determining whether the Proposed Restructure Transaction is fair, we have:
assessed the value of the TerraCom shares on a control basis before the Convertible Note conversion and the Proposed SPG Placement;;
assessed the value of a TerraCom share on a minority basis after the Convertible Note conversion and the Proposed SPG Placement;; and
compared the above two values.
(ii) In determining whether the Convertible Note conversion and the Proposed SPG Placement are reasonable, we have considered other significant factors shareholders should review before deciding whether to approve or reject the Convertible Note conversion and the Proposed SPG Placement.
(iii) In determining whether the Convertible Note conversion and the Proposed SPG Placement are fair and reasonable to the TerraCom Non-Associated Shareholders, we have considered and concluded upon the results of (i) and (ii) above.

6. TerraCom - Key Information

6.1 Background

TerraCom was incorporated on 7 May 2010 and it was listed on the ASX on 21 July 2010. On 30 October 2015 the Company changed its name from Guildford Coal Limited to TerraCom.

The Company has been primarily engaged in the exploration of coal tenements in Queensland, Australia and in Mongolia, Central Asia. TerraCom’s international effort is currently focused on Mongolia with all interests held through a Mongolian subsidiary, Terra Energy.

Terra Energy controls both thermal and coking coal tenements located in the coal bearing basins of the South, Middle Gobi and Uvs Province.

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Mongolian Operations

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In late 2014 the Company had its first coal shipment from the Barrun Noyon Uul (BNU) mine in the South Gobi. Mining ramp-up is progressing, however commercial mining operating levels were not yet achieved during the 2014/2015 financial year so the revenue from these shipments in the 2014/2015 financial year ($9.1 million) was credited to Mine Development rather than the Income Statement. Commercial levels of production are expected to be achieved in the first half of the 2015/2016 financial year.

TerraCom has recently secured offtake agreements with two end-users in China, Juiquan Iron & Steel (Group) Co Ltd (“JISCO”) and Juiquan Haohai Coal Chemical Co Ltd (“Haohai”), to sell coking coal produced at the BNU mine. Based on the successful trial-use of the BNU coal in the first quarter of 2015, the customers have stated that TerraCom’s coal performs consistently with low sulphur, low ash and a high coking index. Since 30 June 2015 the Company has continued to increase the monthly shipped volumes to key customers through expanded capacity in the subcontractor operated trucking and washing system. The ramp up in production for the 3 months to 30 September 2015 has been:

Table 2	Actual Forecast	Actual Forecast	Actual Forecast	Actual Forecast	Actual Forecast	Actual Forecast	Actual Forecast
	July 2015	August 2015	September 2015		October 2015	November 2015	December 2015
Coal Mined (Tonnes)	28,716	53,663	72,138		91,109	122,776	125,589

Source: ASX announcement

TerraCom increased its stake in its subsidiary, TerraCom (Mongolia) Pty Ltd from 70% to 83.87% during the 2015 financial year. This occurred through the conversion of an inter-company loan facility into shares. The subsidiary holds the Hovguun Project, which has a 41Mt Inferred Resource and has a Mining Licence covering it.

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Source: TerraCom - 2015 Annual Report

Queensland, Australia

TerraCom’s Queensland tenements cover approximately 11,500 km[2 ] and are defined within project areas as follows:

Hughenden Project (Galilee/Eromanga Basins) (Northern Galilee Consolidation);;
Clyde Park Project (Galilee Basin) (Northern Galilee Consolidation);;
Pentland Project (Galilee/ Eromanga Basins) (Northern Galilee Consolidation);;
Springsure Project (Bowen Basin);;
Kolan Project (Maryborough Basin);; and
Sierra Project (Bowen Basin).

The priority projects in the above list are:

Northern Galilee Projects consolidated with over 1.9 Bt JORC 2004 resource of thermal coal on less than 5% of tenement area;;
Springsure Project with over 190 Mt JORC 2004 resource of high energy prime thermal/PCI coal.

The projects are strategically positioned close to existing rail and port infrastructure. Over the last three years, TerraCom has successfully delineated JORC 2004 compliant resources in excess of two billion tonnes with significant future exploration potential for its Queensland tenements.

Additionally, in 2015 a Mineral Development Licence was successfully granted for the Springsure Project.

All of TerraCom’s projects have excellent access to established rail and port infrastructure that is currently under utilised or scalable to greater capacity, making them highly attractive projects with lower logistics costs compared to local competitors.

The Queensland Resources are summarized as:

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Source: TerraCom - 2015 Annual Report

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Northern Galilee Projects

The Northern Galilee Projects consolidated comprise three existing projects:

Hughenden Project (100% GUF)
Clyde Park Project (64.4% – Mineral Development Application in progress)
Pentland Project (100% GUF)

Key Highlights:

JORC 2004 to date:
- Hughenden – 133 Mt indicated & 1,076 Mt inferred
- Clyde Park – 51 Mt indicated & 677 Mt inferred
Significant exploration potential
- Pentland exploration target 295 Mt – 2,890 Mt
Coal Quality:
- 5000 – 5600 raw calorific value
Multiple mining options in mega project area:
- Mostly underground with potential annual production of 4-6 Mtpa per mine
- Smaller scale open cut options
- Numerous incremental mine development options
Significant opportunities for regional mine infrastructure optimisation and synergies within the region:
- Mine, haul (road), coal washing, product stockpile and rail load out

Springsure Project - 35.78%

Key highlights:

Potential underground project in Southern Bowen Basin, targeting coal seams in the Reids Dome Beds.
2013 drilling program has led to a revised total JORC 2004 resource in October 2013 of 191.5 Mt, with 148 Mt in the inferred resource category and 43 Mt in the indicated resource category.
Product coal is likely to be high calorific value export prime thermal coal. The coal quality analysis results suggest that the coal is of a similar quality to the neighbouring Minerva Mine.

6.2 Directors

TerraCom Board of Directors at the date of this report comprises:

The Hon Craig Wallace Non-Executive Chairman Michael Avery Managing Director Tsogt Togoo Non-Executive Director David Stone Executive Director Philip Forrest Independent Director Loo Hwee Fang Independent Director

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6.3 Summary of outstanding Debt and Borrowings as at 30 June 2015

As at 30 June 2015 the Company’s borrowings were:

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Table 3 Summary of TerraCom Borrowings:
Repayment Comments from Annual Report
Lender Facility Amount Date
Amount A$
Current Liabilities
Working capital facility Noble [(a)] US$10,000,000 15/08/15 Revised to 30/9/15 after balance date
Additional working capital facility Noble US$7,000,000 22,135,418 15/08/15 Revised to 30/9/15 after balance date
Interest bearing loans Noble US$10,000,000 Revised to 30/9/2015 after balance date
Fuel exclusivity agreement Noble US$8,000,000 Revised to 30/9/2015 after balance date
Additional debt facility Noble US$14,000,000 31,249,999 Revised to 30/9/2015 after balance date
Convertible Notes OCP Asia [(b)] US$10,000,000 13,020,787 8/07/15 Revised to 8/12/15 after balance date
Amortising Notes OCP Asia US$55,000,000 27,113,145 8/07/15 Revised to 31/10/15 after balance date
& 66,762,962 Warrants OCP Asia 8/07/19
93,519,349
Non-Current Liabilities
Amortising Notes OCP Asia 44,340,796
Total Borrowings 137,860,145
(a) Noble International Pte Ltd (b) OCP Asia Limited
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Source: 2015 Annual Report and DMR Corporate

As can be seen from the above Table, the 2015 Annual Report and ASX announcements the Company has had to renew many of the above interest repayment dates, partial repayment dates and the entire facility repayment dates on many occasions. Some of these renewed dates have again been renegotiated and extended on more than one occasion.

This situation has been totally unacceptable and the strategic plan and Board initiatives have determined that the entire debt needs to be properly restructured and the preferred debt structure proposal is with a new US$115 million five-year interest-only listed bond facility being entered into.

On 30 October 2015 the shareholders approved the following amendments to the issued Convertible Notes and Amortising Notes, the approval of New Warrants and the cancellation of the existing Detachable Warrants:

(i) Convertible Notes– US$10,000,000
amend the maturity date to 8 December 2015
change the coupon rate:
- - up to the effective date to 12% per annum payable on each interest payment date - on and from the effective date 6% per annum on each interest repayment date in cash and 6% per annum, which will be capitalized on each interest repayment date by increasing the outstanding principal amount on each Convertible Note.
adjust the Convertible Note Redemption Amount to an amount equal to a 15% internal rate of return on the outstanding principal up to the date on which the Convertible Notes are redeemed.
conversion – convertible into shares at the holder’s option for the amended conversion price.
the number of shares on conversion of each Convertible Note will be calculated at the lower of A$0.037 (based on the Bloomberg USD/AUD spot rate) and the volume weighted average price (“VWAP”) for the 30 consecutive days prior to the conversion date.

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(ii) Amortising Notes – US$55,000,000 • change the coupon rate:
- up to the effective date to 12% per annum payable on each interest payment date in cash
- on and from the effective date 6% per annum on each interest repayment date in cash and 6% per annum, which will be capitalized on each interest repayment date by increasing the outstanding principal amount on each Amortising Note.
- amortising schedule:
- - 20% of the face value to be repaid on the earlier of 31 October 2015, cross listing date or the completion of any other capital raising by the Company;;
- - 40% of the face value to be repaid on the date falling 30 months after the issue date;; and
- - 40% of the face value to be repaid on the maturity date of the Amortising Notes together with the redemption amount in relation to all Amortising Notes.
- Adjusted Amortising Note Redemption amount is to be an amount equal to a 15% internal rate of return on the outstanding principal up to the date on which the Amortising Notes are redeemed.

(iii) New Warrants

- Unlisted and convertible into shares
- The Company will issue 126,308,306 detachable and freely traded warrants with each Warrant holder entitled to 1 new share at the warrant exercise price.
- Warrants are fully transferable.
- Warrants will have a 5 year maturity date from the earlier of 31 October 2015, the cross listing date and the date of completion of any other capital raising.
- The New Warrant exercise price will be the lower of:
if the cross listing process has completed, the average VWAP of the shares for each dealing day commencing on the date falling 30 dealing days prior to the deferred payment date and ending on the deferred payment date;; or
• the price based on the average ASX VWAP for the 30 trading days prior to 31 October 2015.

Whilst shareholders approved the issue of the New Warrants on 30 October 2015, the Warrants have not as yet been issued. We have however used the following parameters to estimate the dilutive effect of the warrants based on the holders exercising their warrants at the date of this report:

the 30 trading days VWAP of A$0.023 per share
a US$:A$ exchange rate as at 16 November 2015 of 0.7115

to determine that approximately 611 million new shares would be issued.

6.4 Share Capital and Capital Raisings

6.4.1 Share Capital

As at 30 September 2015 TerraCom had on issue 1,095,928,523 fully paid ordinary shares. The major shareholders of TerraCom on 30 September 2015 are presented in the following table. As at that date, the top 15 shareholders as recorded on the share register held 75.83% of the issued ordinary capital of TerraCom.

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Table 4 Shareholder Name - Per Share Register HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED EQUITAS NOMINEES PTY LIMITED <3083923 A/C> THE SUMMIT HOTEL BONDI BEACH PTY LTD MAIORA SPECIAL SITUATIONS FUND CODAN TRUST COMPANY (CAYMAN) LIMITED NATIONAL NOMINEES LIMITED HAYMAKER INVESTMENT PTY LTD CITICORP NOMINEES PTY LIMITED CAPRI TRADING PTY LTD GLENEAGLE SECURITIES (AUST) (AUSTRALIA) LIMITED - A/C 3 MRS CONNIE LO LIN SYE HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 3 MR KEVIN TAY HAK-LEONG HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED MRS SARAH HATHWAY	Number of Percentage Shares Held Interest 186,235,402 16.99% 166,674,040 15.21% 100,000,000 9.12% 94,806,864 8.65% 54,054,054 4.93% 47,923,564 4.37% 30,021,250 2.74% 29,162,379 2.66% 29,000,000 2.65% 27,463,684 2.51% 24,819,508 2.26% 12,419,626 1.13% 10,419,095 0.95% 9,437,541 0.86% 8,605,000 0.79%
	831,042,007 75.83%

Table 4
Shareholder Name - Per Share Register
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
J P MORGAN NOMINEES AUSTRALIA LIMITED
EQUITAS NOMINEES PTY LIMITED <3083923 A/C>
THE SUMMIT HOTEL BONDI BEACH PTY LTD
MAIORA SPECIAL SITUATIONS FUND CODAN TRUST
COMPANY (CAYMAN) LIMITED
NATIONAL NOMINEES LIMITED
HAYMAKER INVESTMENT PTY LTD
CITICORP NOMINEES PTY LIMITED
CAPRI TRADING PTY LTD
GLENEAGLE SECURITIES (AUST) (AUSTRALIA) LIMITED - A/C 3
MRS CONNIE LO LIN SYE
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 3
MR KEVIN TAY HAK-LEONG
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
MRS SARAH HATHWAY

Number of
Percentage
Shares Held
Interest
186,235,402
16.99%
166,674,040
15.21%
100,000,000
9.12%
94,806,864
8.65%
54,054,054
4.93%
47,923,564
4.37%
30,021,250
2.74%
29,162,379
2.66%
29,000,000
2.65%
27,463,684
2.51%
24,819,508
2.26%
12,419,626
1.13%
10,419,095
0.95%
9,437,541
0.86%
8,605,000
0.79%

831,042,007
75.83%

Source: TerraCom share register

TerraCom also maintains an active review of its beneficial shareholders and the following table summarises the top 15 beneficial shareholders and their interests:

Table 5

Beneficial Owners - Analysis of Shareholders Maiora Asset Mgt C1 Commodities Harkham Family The Chairmen 1 Och Ziff Capital Mgt Gleneagle Securities (Aust) Mr Bradley Gerdis & Ms Ruth Odes Mr Geoffrey Kinghorn Mrs Connie LL Sye RNB Resources HSBC Private Bank Terra Holdings Limited Thorney Investments Mr Michael Avery Mr & Mrs Richard A Pegum	Number of Percentage Shares Held Interest 216,710,948 19.77% 100,000,000 9.12% 91,120,074 8.31% 60,593,156 5.53% 47,767,058 4.36% 30,177,119 2.75% 30,021,250 2.74% 29,000,000 2.65% 25,758,329 2.35% 24,748,789 2.26% 22,998,901 2.10% 20,000,000 1.82% 15,000,000 1.37% 14,869,517 1.36% 12,715,309 1.16%
	741,480,450 67.66%

Source: TerraCom Board Report - 30 September 2015

Options

Other than the Convertible Notes and Warrants referred to in Section 6.3 above, there are no other options outstanding in respect of the Company.

Capital Raisings

On 26 February 2015 TerraCom announced a partially underwritten Pro Rata Renounceable Rights Issue on the basis of 1 new share for every 4.85 shares held at a price of $0.037 per share. As a result of the rights issue 178,315,842 new shares were issued and approximately $6.6 million of capital was raised.

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6.5 Statements of Financial Position

TerraCom’s audited consolidated statements of financial position as at 30 June 2014 and 2015 are as follows:

Table 6 Statement of Financial Position TerraCom Assets Current assets Cash and cash equivalents Trade and other receivables Other assets Total current assets Non-current assets Trade and other receivables Property, plant and equipment Intangible assets Exploration and evaluation assets Investment in an associate Total non-current assets Total Assets Liabilities Current liabilities Trade and other payables Short term provisions Borrowings Total current liabilities Non-current liabilities Borrowings Provisions Other liabilities Total non-current liabilities Total liabilities Net Assets Equity Ordinary shares Reserves Retained earnings Total equity attributable to equity holders of the Company Non-controlling interests Total equity	30/06/14 30/06/15 Audited Audited $ $ 9,140,971 686,987 750,969 21,671 2,004,359 2,226,820
	11,896,299 2,935,478
	2,289,436 5,887,350 70,770,041 129,140,549 330,810 417,256 79,392,258 58,573,488 - 1,390,404
	152,782,545 195,409,047

	164,678,844 198,344,525
	12,329,974 32,919,590 130,151 53,695 38,216,560 93,519,349
	50,676,685 126,492,634
	65,978,178 44,340,796 660,152 1,015,548 28,300 -
	66,666,630 45,356,344

	117,343,315 171,848,978

	47,335,529 26,495,547
	170,466,514 186,354,850 (32,612,791) (31,590,252) (89,843,600) (132,933,210)
	48,010,123 21,831,388
	(674,594) 4,664,159
	47,335,529 26,495,547

Source: TerraCom - 2015 Annual Report

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6.6 Operating Performance

TerraCom’s audited consolidated statements of comprehensive income for the financial years ended 30 June 2014 and 2015 are as follows:

Table 7	2014	2015
Consolidated Statement of Profit of Comprehensive Income	Audited	Audited
TerraCom	$	$
Other income	5,654,617	21,652
Employee benefits expense	(2,838,790)	(2,914,910)
Depreciation and amortisation	(346,696)	(104,921)
Legal and professional fees	(2,545,875)	(1,389,458)
Management fees	(2,500,000)	(413,074)
Rent expense	(1,009,097)	(923,853)
Consulting fees	(789,229)	(873,159)
Travel expense	(371,133)	(326,823)
Withholding tax expense	(3,034,251)	-
Impairment losses	(44,220,177)	(284,448)
Exploration deposit write-off	(2,066,867)	-
Other operating expenses	(5,009,660)	(26,967,040)
Finance costs	(6,493,737)	(8,246,912)
Loss on disposal of subsidiary	-	(1,000,313)
Share of profit of an associate	-	98,350
Loss before tax	(65,570,895)	(43,324,909)
Income tax (expense)/benefit	(22,538)	(950)
Loss for year from continuing operations	(65,593,433)	(43,325,859)

Loss for the year	(65,593,433)	(43,325,859)
Other comprehensive income
Other comprehensive income to be reclassified to profit and loss
in subsequent periods (net of tax):
Exchange differences on translating foreign subsidiaries	(10,719,635)	8,014,137
Other comprehensive income for the year, net of tax	(10,719,635)	8,014,137

Total comprehensive income for the year, net of tax	(76,313,068)	(35,311,722)
Lossattributableto:
EquityholdersoftheCompany	(62,819,804)	(43,089,610)
Non6controllinginterests	(2,773,629)	(236,249)
Totalloss	(65,593,433)	(43,325,859)
Totalcomprehensiveincomeattributableto:
EquityholdersoftheCompany	(72,907,049)	(35,015,699)
Non6controllinginterests	(3,406,019)	(296,023)
Totalcomprehensiveincome	(76,313,068)	(35,311,722)

Source: TerraCom - 2015 Annual Report

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6.7 Cash Flow Statements

TerraCom’s audited consolidated cash flow statements for the financial years ended 30 June 2014 and 2015 are as follows:

Table 8 Statement of Cash Flows TerraCom Cash flows from operating activities Receipts from customers Payment to suppliers and employees Interest received Net cash (used in) operating activities Cash flows from investing activities Payments for property, plant and equipment Payments for exploration and evaluation expenditure Payments for acquisition of intangible assets Net cash flow from disposal of a subsidiary Net cash (used in) investing activities Cash flows from financing activities Proceeds from non-controlling interest share contribution Proceeds from issue of shares Repayment of borrowings Proceeds from borrowings Finance costs Net cash from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents, beginning of year Net foreign exchange difference Cash and cash equivalents, end of year	30/06/14 30/06/15 Audited Audited $ $ - 9,068,458 (17,696,471) (11,908,116) 112,068 20,464
	(17,584,403) (2,819,194)
	(37,001,690) (18,653,518) (4,084,274) (731,210) (296,110) (93,564) - (101)
	(41,382,074) (19,478,393)
	486,386 - - 15,888,336 (44,246,086) (4,825,236) 92,799,755 8,747,245 (6,296,364) (7,448,617)
	42,743,691 12,361,728

	(16,222,786) (9,935,859)
	25,681,908 9,140,971 (318,151) 1,481,875
	9,140,971 686,987

Source: TerraCom - 2015 Annual Report

7. Valuation of TerraCom before the Proposed SPG Placement

7.1 Value Definition

DMR Corporate’s valuation of TerraCom has been made on the basis of fair market value, defined as the price that could be realized in an open market over a reasonable period of time given the current market conditions and currently available information, assuming that potential buyers have full information, in a transaction between a willing but not anxious seller and a willing but not anxious buyer acting at arm’s length.

7.2 Valuation Methodologies

In selecting appropriate valuation methodologies, we considered the applicability of a range of generally accepted valuation methodologies. These included:

share price history;;
capitalisation of future maintainable earnings;;
• net present value of future cash flows;;
asset based methods;;
comparable market transactions;; and
• alternate acquirer.

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7.3 Share Price History

7.3.1 The share price history valuation methodology values a company based on the past trading in its shares. We normally analyse the share prices up to a date immediately prior to the date when a takeover, merger or other significant transaction is announced to remove any price speculation or price escalations that may have occurred subsequent to the announcement of the proposed transaction.
7.3.2 A table of the share price history of TerraCom from 1 October 2014 to 18 October 2015 (the day immediately prior to the $7 million SPG share placement was announced) is as follows:

Month 2014 October November December 2015 January February March April May June July August September Table 9	High Low Average $ $ $ 0.050 0.036 0.043 0.050 0.035 0.040 0.045 0.031 0.039 0.040 0.033 0.036 0.039 0.033 0.035 0.037 0.029 0.031 0.038 0.030 0.034 0.042 0.030 0.038 0.040 0.031 0.037 0.042 0.031 0.038 0.040 0.026 0.032 0.030 0.024 0.027 8 0.026 0.024 0.026 TerraCom Share Prices	Volume Value $ 7,110,955 302,339 15,634,898 622,284 14,268,103 550,702 7,720,130 274,806 7,575,438 265,705 27,677,472 852,308 28,841,422 988,068 120,074,606 4,548,577 45,248,735 1,657,618 71,763,333 2,702,135 4,042,784 129,740 15,674,946 425,598 667,535 17,356 366,300,357 13,337,234
October 1 - 1

Source: ASX and DMR Corporate

and graphically as:

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

$ No
70,000,000
0.050
60,000,000
0.040 50,000,000
40,000,000
0.030
30,000,000
0.020
20,000,000
0.010
10,000,000
0.000 -
Close
1-Oct-14 22-Oct-14 12-Nov-14 3-Dec-14 24-Dec-14 14-Jan-15 4-Feb-15 25-Feb-15 18-Mar-15 8-Apr-15 29-Apr-15 20-May-15 10-Jun-15 1-Jul-15 22-Jul-15 12-Aug-15 2-Sep-15 23-Sep-15 14-Oct-15 Volume
----- End of picture text -----

Source: ASX and DMR Corporate

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7.3.3 We comment on the above table and graph below:

Share Volumes

The shares held by the strategic shareholders, directors and employees total 505.2 million shares or 46% of the issued capital. The balance of the issued capital is 590.7 million and this represents the ‘free float’ that is readily tradeable on market.

The turnover in the last 12 months to 18 October 2015 was 360,952,029 shares or 61.1% of the free float. We consider that there is sufficient liquidity in the market for TerraCom shares for us to apply the share price valuation methodology as at 18 October 2015.

Share Prices

The share price during the period depicted has ranged from a high of $0.05 on 3 October 2014 to a low of $0.024 on 15 October 2015.

7.3.4 ASX announcements in 2015 that may have had an impact on the daily share prices were:

Table 10	TerraCom
Date	Headline Announcement
19/10/15	Finance Update - Equity placement for $7 million to strategic Chinese investor
12/10/15	BUN Mine Mongolia Production Update showing 154,517 tonnes produced in the September 2015
	quarter and forecast production of 339,474 tonnes for December quarter
30/09/15	Full Year Statutory Accounts
28/09/15	Notice of meeting - adjustments to Convertible Notes and Amortising Notes and Warrants
	Mining Licence (MV-019149) granted in Mongolia. Includes the 12600X exploration area which has
15/09/15	JORC 2012 inferred resources of 15MT and additional Exploration Targets of 26Mt to 45MT. Licence
	is valid for 30 years with 2 options of 20 years each.
21/08/15	Company decides not to proceed with Tsaidam Coal Project in Mongolia after due diligence process.
3/08/15	Quarterly Activities Report and Appendix 5B
31/07/15	Ramp up of Coal Volumes Forecast for BNU Mine to 125,000 Mt per month
30/07/15	Grant of MDL 3002 and positive coal quality results for Springsure Project (EPC 1674)
27/07/15	C Wallace disposes of 30 million Guildford shares @ $0.0275 per share
21/07/15	Guildford Coal Updated Announcement Shallow Coking Coal Micro basin at BNU mine
15/07/15	Guildford Coal advises H2 2015 Production Forecast and granting of Baruun Termes exploration licences NE-025961 and NE-025966 - both are prospective for potash.
23/06/15	JORC Resource Upgrade for 12600X in Mongolia
22/06/15	Completion of Acquisition of Enkhtunkh Orchlon LLC ('EO') from Noble Resources International - EO controls prospective 12600 exploration licence and associated mining licence
15/06/15	Guildford Executive buys 2 million shares on market
1/06/15	Guildford announces a MOU to acquire an 80% stake in a large thermal coal project and associated power station project in Mongolia
29/05/15	Guildford Coal's subsidiary Terra Energy granted new exploration licence XV-018111 in South Gobi 60 km east of BNU mine
15/05/15	Executive Director David Stone appointed
14/05/15	Terra Energy has secured 2 offtake agreement with 2 end users in China - Haohai and JISCO
4/05/15	New License - Baruun Termes exploration licence ID NE-025374
30/04/15	Quarterly Activities Report and Appendix 5B
28/04/15	Strategic Review Update
17/04/15	Guildford Increases stake in Guildford Coal Mongolia from 70% to 83.87%. The remaining 16.13% interest is held by Terra Holdings Ltd
7/04/15	March coal shipments totalling 38,000 tonnes of coal shipped to 2 Chinese iron and steel companies
13/03/15	December 2014 Half Year Financial Report

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7.3.5 The volume weighted average price (“VWAP”)(based on closing prices) for the periods referred to below are:

Table 11 Period VWAP Number Value $ $ 20 October 2014 to 18 October 2015 360,952,029 13,111,357 0.036 120 Days to 18/10/15 102,626,039 3,622,652 0.035 90 Days to 18/10/15 58,118,879 2,084,302 0.036 60 Days to 18/10/15 18,020,518 493,206 0.027 30 Days to 18/10/15 8,254,472 222,449 0.027 Shares Traded	Share Price
	Low High $ $ 0.024 0.050 0.024 0.042 0.024 0.042 0.024 0.033 0.024 0.030

Source: DMR Corporate

7.3.6 Summary – Share Price History

Based on the above information we have formed the opinion that the TerraCom shares have a market value in a range of $0.024 to $0.030 per share as at 18 October 2015.

Control Premium

The ASX share prices upon which the above values are based represent the prices at which minority parcels of shares are traded on a daily basis, so when we use ASX share prices as a valuation methodology we normally consider adjusting the valuation to include a control premium.

A control premium represents the difference between the price that would have to be paid for a share to which a controlling interest attaches and the price at which a share which does not carry with it control of the company could be acquired. Control premiums are normally in a range of 30% to 35%[2 ] above the value of a minority share.

The RSM Bird Cameron Control Premium Study is summarised below:

Table 12		Control Premium	Control Premium
		20 days Pre Announcement
Analysis by:	Criteria	Average	Median
All transactions		35.30%	29.00%
Metal & Mining		35.47%	31.70%
Consideration type	Cash	37.10%	30.00%
Size	<$25M	49.00%	42.90%

The actual control premium paid is transaction specific and depends on a range of factors, such as the level of synergies available to the purchaser, the level of competition for the assets and strategic importance of the assets.

We consider that the Mongolian operations are trending in the right direction with increased production month on month and if this continues for the remainder of the 2015/2016 financial year then the BNU mine should become cash flow positive.

2 RSM Bird Cameron Control Premium Study –2013.

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We consider that the large debt issues that TerraCom is facing are now being appropriately dealt with and that the current low market prices reflect the negative investor sentiment toward the Company whilst these issues still remain unresolved. In our opinion a medium to large mining company would have to pay a substantial premium above the current share price to acquire control of TerraCom and its substantial base of projects and tenements.

For these reasons we consider that a control premium in a range of 30% to 35% should be applied to a valuation of TerraCom on a share price history basis.

Table 13	Low	High
Control Premium	$	$
Value per share price history - minority values	0.024	0.030
Control Premium	30.00%	35.00%
TerraCom's share value on a control basis	0.031	0.041

Source: DMR Corporate

Based on the above, we consider that the control value of a TerraCom share is in a range of $0.031 to $0.041 per share, based on the share price valuation methodology as at 18 October 2015.

7.4 Earnings Based Valuation

Capitalisation of earnings is a method commonly used for valuing manufacturing and service companies and, in our experience, is the method most widely used by purchasers of such businesses. This method involves capitalising the earnings of a business at a multiple which reflects the risks of the business and its ability to earn future profits. There are different definitions of earnings to which a multiple can be applied. The traditional method is to use net profit after tax. Another common method is to use Earnings Before Interest and Tax, or EBIT. One advantage of using EBIT is that it enables a valuation to be determined which is independent of the financing and tax structure of the business. Different owners of the same business may have different funding strategies and these strategies should not alter the fundamental value of the business.

As TerraCom does not have a history of profitable trading, we consider that the capitalisation of maintainable earnings is not an appropriate methodology to use to value TerraCom shares.

7.5 Net Present Value of Future Cash Flows

An analysis of the net present value of the projected cash flows of a business (or discounted cash flow technique) is based on the premise that the value of the business is the net present value of its future cash flows. This methodology requires an analysis of future cash flows, the capital structure and costs of capital and an assessment of the residual value of the business remaining at the end of the forecast period.

TerraCom has not been generating positive cash flows and its Queensland Projects are at the exploration stage only and cannot be valued using the net present value of the future cash flows methodology.

Nevertheless TerraCom’s BNU mine is generating cash inflows and can be valued using the net present value of the future cash flows methodology, with the value of BNU determined using this methodology incorporated into an overall valuation of TerraCom.

We engaged Xenith Consulting Pty Ltd (“Xenith”)(an independent technical consultancy providing resource evaluation, mining engineering and mine valuation services to the resources industry), to prepare an Independent Technical Review (“ITR”) of TerraCom’s Mongolian and Queensland coal assets.

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The Xenith report provides a description of the BNU mine and sets out the expected cash flows and the key underlying assumptions. The executive summary of this report is included as Attachment I to this report. We reviewed the Xenith report and discussed its contents in detail with the author. Our review included an assessment of the methodologies and assumptions adopted by Xenith.

7.5.1 BNU mine Projected Cash Flows

The BNU mine projected cash flows only include the coal stated in the JORC compliant Resource Statement (summarised in Section 6.1 above) and accompanying mine plan. The potential upside for additional resources to be identified outside the mine plan was valued separately by Xenith using the comparative transaction methodology and this value is accounted for separately in Section 7.8 of this report.

The key discounted cash flow assumptions used in the Xenith analysis include:

Standalone operation using owner-operated mining;;
Cash Flow allocated to the Life of Mine (“LOM”) JORC Code compliant Measured, Indicated and Inferred Resource of 9.9 Mt of which 8.4 Mt is considered saleable with a 85% overall recovery (includes bypass coal and middlings);;
1.5 Mtpa run-of-mine (“ROM”);;
A mine life of 7 years
It is assumed all coal is mined and sold in the same year;;
Cash flow is discounted to 1 September 2015 on a 100% ungeared basis;;
Rehabilitation has been allowed for in the mine operating costs;;
Any residual value of plant and equipment is not considered to be material;; and
Costs and Value are in USD.

The cash flows reviewed by Xenith include the following key operating cost assumptions:

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

Table 14 Cost
US$/t
Onsite
Waste &&&&&&&&&&&30.54&
Coal&Mining &&&&&&&&&&&&&2.00&
Opencut&support& &&&&&&&&&&&&&1.77&
Rehabilitation &&&&&&&&&&&&&0.35&
Water&Management &&&&&&&&&&&&&0.24&
Crushing&&&Loadout &&&&&&&&&&&&&1.41&
Provision&for&road&construction& &&&&&&&&&&&&&0.59&
Other&Site&Costs& &&&&&&&&&&&&&1.60&
Off Site
Contract&Trucking &&&&&&&&&&&16.07&
Noble&Royalty &&&&&&&&&&&&&3.54&
CHPP &&&&&&&&&&&&&5.30&
Import&agency&fee&+&Tax&+&Other &&&&&&&&&&&&&7.49&
Head&Office/Marketing& &&&&&&&&&&&&&0.50&
Royalty&(@7%)& &&&&&&&&&&&&&5.01&
Total 76.41&
----- End of picture text -----

Source: Xenith report Table 3.5

The cash flows also include an allowance of US$5.5 million for minor development and US$12.4 million for additional capital costs through the life of the mine.

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The key revenue assumptions were provided to Xenith by Guildford. Xenith checked these assumptions and they were found to be aligned with long term coking coal forecasts. Xenith has not seen a marketing study of BNU coal. The key revenue assumptions are summarised below:

• 100% of coal washed at 80% yield to produce coking product;; and • 50% of wash plant rejects is sold as middlings @ US$22.4/t.

The table below shows the key revenue assumptions for the BNU mine used in the cash flow model:

Table 15	2016	2017	2018	2019	2020	2021	2022
	US$/T	US$/T	US$/T	US$/T	US$/T	US$/T	US$/T
BenchmarkHardCokingPrice	116	123	134	138	143	143	143
CFRChina	107	110	122	126	131	131	131
CekeDiscount	(14)	(14)	(14)	(14)	(14)	(14)	(14)
ImpliedCekeFOTPrice	94	96	108	112	117	117	117
AssumedCokingSalePrice	94	96	108	112	117	117	117
AssumedMiddlingSalePrice	22	22	22	22	22	22	22
AverageRealisedPrice@Ceke	89	92	103	107	111	111	111

Source: TerraCom Cash Flow Model reviewed by Xenith

We have carried out our own review of the benchmark Hard Coking Coal price used in the model. Our review utilised the current forecasts as per the Capital IQ database. This review revealed that the prices used in the cash flow model are within the forecast range for each year, however for some years the prices are above the median forecast prices. For this reason we increased the discount rate, which we applied to the cash flows.

7.5.2 Discount Rate

Set out in Appendix A is an assessment of discount rates appropriate to the BNU mine. As can be seen from Appendix A, we have assessed the discount rate to be in a range of 15.0% to 18.0%. This discount rate includes an allowance for project specific risk, particularly in relation to the future coal prices.

7.5.3 Valuation

Using the projected cash flows determined by Xenith and a discount rate range of 15.0% to 18.0%, we have assessed the net present value of the BNU mine to be in a range of US$76.2 million to US$84.2 million or A$107.3 million to $118.6 million.

7.6 Asset Based Methods

This methodology is based on the realisable value of a company’s identifiable net assets. Asset based valuation methodologies include:

(a) Net Assets

The net asset valuation methodology involves deriving the value of a company or business by reference to the value of its assets. This methodology is likely to be appropriate for a business whose value derives mainly from the underlying value of its assets rather than its earnings, such as property holding companies and investment businesses that periodically revalue their assets to market. The net assets on a going concern basis method estimates the market values of the net assets of a company but does not take account of realization costs.

This valuation methodology is based on the book value of a company’s assets. TerraCom’s 2 major assets are capitalised Exploration and Evaluation Assets ($58.6 million) and Mine Development ($113 million - classified as part of Property, Plant and

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Equipment). The recoverability of these costs is dependant on the successful development and commercial exploitation or sale of the areas of interest to which these costs relate. As such the book value of the company’s net assets may not reflect the market value of these assets.

The net assets of TerraCom as at 30 June 2015 as per the reviewed financial statements were $26,495,547 – Section 6.4 above.

We have concluded that the net asset backing of TerraCom was $26,495,547 as at 30 June 2015, however this is not considered to be a valid valuation of the TerraCom shares.

(b) Orderly Realisation of Assets

The orderly realisation of assets method estimates the fair market value by determining the amount that would be distributed to shareholders, after payment of all liabilities including realisation costs and taxation charges that arise, assuming the company is wound up in an orderly manner.

The existing providers of the Company’s debt and its major shareholders appear to be working with TerraCom towards the restructuring of TerraCom’s capital and a new 5- year bond facility. The Proposed SPG Placement is an integral part of the debt restructuring process that will result in additional capital of approximately $21,000,000 being raised from the placement or from the capitalisation of existing loans.

Given the fact that the debt providers and major shareholders are supporting TerraCom, we do not consider that an orderly realisation of its assets is an appropriate valuation methodology to use in assessing the value of TerraCom at this point in time.

The liquidation method is similar to the orderly realisation of assets method except the liquidation method assumes that the assets are sold in a short time frame.

We consider that this methodology is an inappropriate valuation methodology to use as TerraCom has existing cash resources and support from its major shareholders and lenders.

7.7 Comparable Market Transactions

Industry specific methods estimate market values using rules of thumb for a particular industry. Generally, rules of thumb provide less persuasive evidence of the market value of a company than other valuation methods because they may not account for company specific factors.

We do not consider that this methodology is applicable due to the broad range of assets held in different geographic regions, the different stages of prospectivity, the commencement of production at the BNU mine and the ramp up of its production in the last 3 months and the projected production in the next 3 months.

For these reasons we do not consider that it is appropriate to apply this valuation methodology to a valuation of TerraCom however this methodology was used by Xenith to value some of the coal tenements.

7.8 Sum of the Parts Valuation

In Section 7.6(a) we assessed the value of the TerraCom based on the book values of the net assets at $26,495,547

Due to the range of the Company’s projects, leases and tenements, we considered that this methodology was not an appropriate methodology to use to value TerraCom so in the Table 16 below we have specifically eliminated the book values of ‘Mine Development’ and ‘Exploration

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and evaluation assets’ and inserted our assessment of the values of these assets based on the assumptions stated in the notes below.

Our sum of the parts aggregation based on the 30 June 2015 financial statements is as follows:

Table 16 Sum of the Parts Aggregation	Table 16 Sum of the Parts Aggregation
TerraCom	Notes	2015	Valuation	Sum of the
		Audited	Xenith		Parts
				Valuation
		$	$		$
Assets
Current assets
Cash and cash equivalents		686,987			686,987
Trade and other receivables		21,671			21,671
Other assets		2,226,820			2,226,820
Total current assets		2,935,478			2,935,478
Non-current assets
Trade and other receivables		5,887,350			5,887,350
Property, plant and equipment
Land and buildings		62,159			62,159
Capital Works	2	12,328,921			-
Plant & equipment		3,730,916			3,730,916
Mine Development	2	113,018,553	114,000,000	114,000,000
Intangible assets	3	417,256			-
Exploration and evaluation assets	4	58,573,488	52,700,000		52,700,000
Less: liability for purchase of EL 12600	4		(8,450,000)	(8,450,000)
Investment in an associate		1,390,404			1,390,404
Total non-current assets		195,409,047		169,320,829

Total Assets		198,344,525		172,256,307
Liabilities
Current liabilities
Trade and other payables		32,919,590			32,919,590
Short term provisions		53,695			53,695
Borrowings		93,519,349			93,519,349
Total current liabilities		126,492,634		126,492,634
Non-current liabilities
Borrowings		44,340,796			44,340,796
Provisions		1,015,548			1,015,548
Total non-current liabilities		45,356,344			45,356,344

Total liabilities		171,848,978		171,848,978

Net assets		26,495,547			407,329
			Say:	$	400,000
Based on 1,095,928,523	shares on issue the value		per share is:	$	0.00036

Source: DMR Corporate

We appointed Xenith to assist us in the valuation of the BNU mine and the valuation of the other mining leases and/or tenements in both Mongolia and Queensland, Australia.

The above adjustments to book values have been made based on the following assumptions:

Note 1 All tangible assets and liabilities have been included in the ‘Sum of the Parts’ valuation above except for the book values of ‘Mine Development’ and ‘Capital

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Works’ that are classified as part of Property, Plant & Equipment and the ‘Exploration and Evaluation’ assets. We have used the Xenith specialist report to assist us in the valuation of these assets and further explanations are included in the notes below.

Note 2

The capitalised values in these classifications relate to the BNU mine together with the tenements that relate to the mine. We appointed Xenith to review the BNU mine cash flows and to value the related tenements. They have performed their work and they have satisfied themselves that the inputs to the cash flow model are reasonable. We have then taken these net cash flows and converted the US$ to Australian dollars using an exchange rate of USD$1.00:A$0.71. This rate was based on the approximate Reserve Bank rates for the first week of November 2015.

We reviewed the Xenith report together with the key inputs to the model and we determined that there is currently significant uncertainty as to the future direction of coal prices. In our opinion these uncertainties are not reflected in the assessment of Beta in Section 1.3 of Appendix A. For this reason we have increased the cost of equity in a range of 2.0% to 4.0% to allow for these risks.

The Xenith report had a valuation range of US$40.1 million to US$129.4 million with a preferred value of US$84.2 million whereas our range (determined with our discount rates) was US$76.2 million to US$84.2 million with a mid point value of US$80.2 million.

The reasons for the variances in the Xenith BNU mine valuations and the DMR Corporate valuations are as follows:

Xenith have a ‘preferred’ valuation of US$84.2 million determined using a discount rate of 15%.

For the high case Xenith assumed a discount rate of 12.5%, a 5% increase in the revenue assumptions and a 5% decrease in operating costs.

For the low case Xenith has assumed a discount rate of 17.0%, a 5% decrease in the revenue assumptions, a 5% increase in operating costs and a 5% decrease in yield assumptions.

Xenith has not provided any background research to support the above discount rates of 12.5%, 15% and 17% and their range is excessively broad from a low of US$40.1 million to a high of US$129.4 million.

DMR Corporate on the other hand used the traditional basis of estimating the weighted average cost of capital, as detailed in Appendix A.
Based on our calculations we determined a range of 15% to 18% for the discount rates to be applied to the cash flows determined by Xenith. On this basis we arrived at a value range of US$76.2 million to US$84.2 million with a mid point value of US$80.2 million.
As the Xenith preferred valuation of US$84.2 million was only US$4 million higher than our valuation, we used our mid point valuation in our assessments as the discounts rates can be properly substantiated with research material.

We have used our mid point valuation for the BNU mine valuation plus the sum of US$1.0 million for the tenements outside of the mine plan and then converted these values to Australian dollars to give us a range of $108.5 million to $119.7 million with a mid point value of $114.0 million.

Note 3 The intangibles represent capitalised computer software ($391,128) and other intangible assets ($26,128). We have attributed no value to these assets.

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Note 4 The remaining tenements in both Mongolia and Australia were valued by Xenith based on ‘Past exploration expenditure’ or ‘Comparative transaction’ data and the Xenith report valued these tenements in a range of $47.2 million to $58.2 million with a preferred value of $52.7million. We have used the preferred valuation of $52.7 million.

The acquisition of the EL 12600X, the Kar Servegen (KS) coking coal resource, located adjacent to the South Gobi project was completed subsequent to 30 June 2015 for a cost price of US$6 million (A$8,450,000 based on current exchange rates). The settlement of this sum has been deferred with the consent of the vendor until the US$115 million bond facility is completed.

Based on the Sum of the Parts valuation methodology in Table 16 above, TerraCom is valued at $400,000 or approximately $0.0004 per share on a control basis.

7.9 Alternate Acquirer

The value that an alternative offeror may be prepared to pay to acquire TerraCom is a relevant valuation methodology to be considered.

We are not aware of any offers for the TerraCom shares and we can see no reason as to why an offer would be initiated at this time without the consent and support of the major shareholders.

7.10 Conclusion

The applicable valuation methodologies that we have considered are summarised as:

Table 17
		Low	Preferred	High
Valuation Methodology	Section	$	$	$
Share price history control values	7.3.6	0.031		0.041
Sum of the parts	7.8	-	0.0004	-

Source: DMR Corporate

As can be seen from Table 17, there is a significant disconnect between the valuation of TerraCom shares derived from the share price history methodology and the sum of the parts methodology. Whilst the share price methodology is based on actual trades in TerraCom shares through to 18 October 2015, these trades only reflect the publicly available information in the market up to that date.

As at 18 October 2015, the Company had on issue 1,095,928,523 shares and in the Notice of Meeting dated 28 September 2015 shareholders were asked to approve changes to the terms of the Convertible Notes, including a change in the conversion factor. This change was approved on 30 October 2015 and, based on the 30-day VWAP of the TerraCom shares as at 20 November 2015 this would result in the issue of approximately 850 million additional shares.

The Sum of the parts methodology reflects the events that have occurred between 30 June 2015 and the date of this report.

Since 30 October 2015 (the date of the Extraordinary Shareholders’ Meeting at which the shareholders voted on the conversion of the convertible notes) the share price has fallen from a high of $0.016 to a low of $0.010 with a very limited turnover (5,379,482 shares with a value of approximately $73,000).

The share price valuations above also do not take into account the November 2015 Xenith report which reduces their valuation of the coal assets and the BNU mine from $184.43 million (valuation dated December 2014 included in TerraCom’s Target’s Statement) to $172.3 million

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as this latest valuation is not as yet in the market place. The latest Xenith valuation of $172.3 million also incorporates approximately $57 million of new capital expenditure incurred in FY 2014/15 and it excludes a liability of $8.45 million, which is still to be paid for one of the exploration tenements acquired subsequent to 30 June 2015.

The latest Xenith valuation reflects the downward movement in the coal prices over the last 12 months (from US$/t of $151 in 2015 to $116 in 2016), current production yields and detailed cost estimates, which have not been released to the market.

The Sum of the Parts valuation is based on a detailed analysis of all the coal assets owned by TerraCom and in particular on detailed cash flow projections for the BNU mine, including current forecasts of future coal prices.

For these reasons we have elected to use the Sum of the Parts valuation methodology on this occasion and we have adopted the control value of $400,000 for TerraCom, which equates to $0.0004 per share before the Proposed SPG Placement.

8. Value of SPG Consideration

8.1 General

TerraCom’s recent activities have included the evaluation and active pursuit of several funding alternatives to enable a restructuring of its existing debt facilities, which in some cases are past their expiry dates and have had to be renegotiated with extensions being granted by the various lenders pending an equity injection of capital and a total debt restructure package being implemented.

The Proposed SPG Placement is, among other things, a cornerstone component of the major debt restructuring proposal and will result in the issue of 583,333,333 TerraCom shares at $0.012 per share.

8.1.1 The background to SPG is as follows:

SPG is part of a group of companies controlled by Mr. David Wang, who is the Chairman and Board member of Greenland Hong Kong Holdings Limited (“Greenland HK”), which was formerly known as SPG Land Holdings Limited (“SPG Land”). This entity was listed on the Hong Kong Stock Exchange in October 2006 and was involved in real estate projects in over ten cities in China. Mr Wang is the founder of SPG Land and was Chairman of this group, engaging in real estate development, property investment, hotel investment and related businesses in China. SPG Land changed its name to Greenland HK in August 2013. Mr Wang is also Chairman of Peninsula Shanghai Hotel, one of the top luxury hotels in China and Asia.

Mr Wang has a strong reputation and has considerable influence in the commercial, banking and real estate sectors in China and Australia, as well as academic circles. In recent years he has devoted his efforts to promote the friendly cooperation between China and Australia in economic, banking and academic areas.

8.1.2 Based on the above we have assessed the consideration offered for the shares at $7 million or $0.012 per share.

9. Valuation of TerraCom after the Proposed Convertible Note conversion and the SPG Placement

9.1 To assess the value of TerraCom after the Convertible Note capitalisation, the debt restructure and the Proposed SPG Placement we prepared the following update of the Sum of the Parts valuation methodology used in Table 16:

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Table 18 Statement of Financial Position TerraCom Assets Current assets Cash and cash equivalents Trade and other receivables Other assets Total current assets Non-current assets Trade and other receivables Property, plant and equipment Land and buildings Capital Works Plant & equipment Mine Development Intangible assets Exploration and evaluation assets Less: liability for purchase of EL 12600 Investment in an associate Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Short term provisions Borrowings Total current liabilities Non-current liabilities Borrowings Provisions Total non-current liabilities Total liabilities Net assets Shares on issue Value per share	Sum of the Conversion SPG Parts of Debt Placement Valuation Convertible Restructuring Before Notes Restructuring Note 1 Note2 Note 3 $ $ $ $ 686,987 7,000,000 21,671 2,226,820 2,935,478 5,887,350 62,159 - 3,730,916 114,000,000 - 52,700,000 (8,450,000) 1,390,404 169,320,829 172,256,307 32,919,590 (12,113,173) 53,695 93,519,349 (13,020,787) (80,498,562) 126,492,634 44,340,796 92,611,735 1,015,548 45,356,344 171,848,978 407,329 1,095,928,523 837,377,868 583,333,333 0.0004 $ 0.016 $ 0.012 $	Sum of the Parts Valuation After SPG Placement $ 7,686,987 21,671 2,226,820
		9,935,478
		5,887,350 62,159 - 3,730,916 114,000,000 - 52,700,000 (8,450,000) 1,390,404
		169,320,829

		179,256,307
		20,806,417 53,695 -
		20,860,112
		136,952,531 1,015,548
		137,968,079

		158,828,191

		20,428,116
		2,516,639,724 0.008 $

Source: DMR Corporate

Note 1 The Convertible Notes are recorded in the accounting records at $13,020,787 as at 30 June 2015 and as the shareholders have approved the capitalisation of these notes we have assumed that all of the Convertible Notes will be capitalised and this liability will be extinguished and 837,377,868 TerraCom fully paid ordinary shares will be issued. A loss on foreign currency exchange will be incurred as part of this transaction.

Note 2 The establishment of a circa US$115 million five year interest only listed bond facility will result in borrowings ($80,498,562) and accrued interest ($12,113,173) presently classified as current liabilities being transferred to non-current liabilities. The new facility equates to approximately A$162 million using a US$1:A$0.71 exchange rate.

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Note 3 The Proposed SPG Placement of $7 million capital referred to in Section 1 for the issue of 583,333,333 TerraCom ordinary shares.
9.2 Based on the Sum of the Parts valuation methodology in Table 18 above, TerraCom’s net assets after completion of the Convertible Note conversion and the Proposed SPG Placement increase to $20,428,116 or $0.008 per share.

This value represents the control value of a TerraCom share and pursuant to RG 111 we are required to convert this value to a minority value after the Convertible Note conversion and the Proposed SPG Placement.

Table 19 TerraCom share value on a control basis - Table 18 Control premium elimination to obtain minority values TerraCom share values on a minority basis	Low High 0.008 $ 0.008 $ 25.9% 23.1%
	0.006 $ 0.006 $

Source: DMR Corporate

10. Assessment as to Fairness

10.1 As Morning Crest Capital and its associate SPG may hold up to an approximate 44.46% interest in TerraCom’s voting power, RG 111 directs us to evaluate this transaction as a ‘control transaction’.
10.2 In Section 7.10 we concluded that the value of the TerraCom shares on a control basis before the Convertible Note conversion and the Proposed SPG Placement is $0.0004 per share and in Section 9.2 we assessed the minority value of a TerraCom share after the Convertible Note conversion and the Proposed SPG Placement at $0.006 per share.
10.3 As the minority value of a TerraCom share after the Convertible Note conversion, the debt restructure and the Proposed SPG Placement ($0.006) is greater than the control value of a TerraCom share before the Convertible Note conversion and the Proposed SPG Placement ($0.0004), we have concluded that the Convertible Note conversion and the Proposed SPG Placement are fair.

11. Assessment as to Reasonableness

Prior to deciding whether to approve or reject the interdependent Proposed Restructure Transactions, the TerraCom shareholders should also consider the following significant factors:

In Section 11 above we assessed the Convertible Note conversion and the Proposed SPG Placement as being fair and therefore they are reasonable.
TerraCom needs to increase its equity to strengthen the Company’s balance sheet and borrowing capacity.
TerraCom’s management team and advisers contacted a number of potential financiers and investors as part of the strategic process to seek new financing arrangements and/or investors either at the company or project level. The proposed funding package as detailed in Section 1 above has been selected by the Board of directors as the best and most appropriate funding package to place before shareholders for approval.
The placement price of $0.012 is the highest placement price that TerraCom ’s advisors and the directors have been able to negotiate following presentations to and discussions with many potential investors and financiers.

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Placement are generally made at a discount to the current market prices of shares as a strategy to get the investors to accept the placement shares being offered and to limit the dilution impact that placements or rights issues may have on their investments.

There is evidence in the market that large rights issues or private placements have been offered at a discount to the prevailing trading prices of the shares at the time of issue. The magnitude of the discount depends on several things, including, but not limited to the following:

The size of the raisings compared with the market capitalisation of the company;;
The purpose of the capital raising (i.e. the funding of future developments or the recapitalisation of the company to reduce the level of outstanding borrowings);;
The industry in which the company operates;; and
The specific circumstances of the company.

For the purposes of establishing an appropriate level of placement discount the following table analyses private placements over the last 3 years in the Australian mining industry. The placement price is compared with the closing share price of the issuing company on the day prior to the announcement.

	For the purposes of establishing an appropriate level of placement discount the follo table analyses private placements over the last 3 years in the Australian mining indu The placement price is compared with the closing share price of the issuing compan the day prior to the announcement.
	Offer Share Date ASX Price Price Percentage Share Price Percentage Transactions Target/Issuer Ticker of 1 Day Prior Discount 5 Days Prior Discount Table 20
	Announced Securities

	03/13/2014 ABM Resources NL ASX:ABU 0.024 0.030 20.00% 0.420 94.29%
	05/19/2015 Blackham Resources Limited ASX:BLK 0.130 0.160 18.75% 0.145 10.34%
	08/21/2015 Imdex Limited ASX:IMD 0.200 0.240 16.67% 0.225 11.11%
	10/28/2014 Atrum Coal NL ASX:ATU 1.200 1.430 16.08% 1.430 16.08% 04/17/2015 Kibaran Resources Limited ASX:KNL 0.170 0.200 15.00% 0.240 29.17% 02/18/2015 Northern Minerals Limited ASX:NTU 0.200 0.230 13.04% 0.200 0.00% 03/05/2014 Rex Minerals Limited ASX:RXM 0.400 0.460 13.04% 0.460 13.04% 02/13/2014 Doray Minerals Limited ASX:DRM 0.800 0.910 12.09% 0.870 8.05% 05/11/2015 Triton Minerals Limited ASX:TON 0.350 0.395 11.39% 0.390 10.26% 07/28/2014 MacPhersons Resources Limited ASX:MRP 0.160 0.180 11.11% 0.170 5.88% 06/13/2014 Tiger Resources Ltd ASX:TGS 0.340 0.370 8.11% 0.380 10.53% 11/14/2013 Orocobre Limited ASX:ORE 2.100 2.260 7.08% 2.400 12.50% 05/09/2014 Sheffield Resources Limited ASX:SFX 0.810 0.870 6.90% 0.880 7.95% 01/28/2014 Jameson Resources Limited ASX:JAL 0.200 0.210 4.76% 0.220 9.09% 05/28/2015 Atherton Resources Ltd ASX:ATE 0.140 0.140 0.00% 0.150 6.67% 02/10/2015 RTG Mining Inc ASX:RTG 0.680 0.670 -1.49% 0.740 8.11% 10/06/2014 Xanadu Mines Ltd ASX:XAM 0.123 0.120 -2.17% 0.130 5.69% Average 10.02% Average 15.22% Mean 11.39% Mean 10.26%

Source: Capital IQ and DMR Corporate

The SPG placement price of $0.012 represents a discount of 50% on our low share price valuation of $0.024 per share. This discount is considerably higher than the above average placement discount of 15% (Table 20), however TerraCom has been facing severe funding pressures and in our opinion a discount substantially greater than 15% would be needed to obtain a placement of new capital in the current circumstances.

• The Proposed SPG Placement and the conversion of the Convertible Notes by OCP Asia (Hong Kong) Limited (“OCP Asia”)(a condition precedent to the Proposed SPG Placement) will see the emergence of several significant investors on the Company’s share register that are able to support the future development of the Company’s projects in Mongolia both politically and financially. The Company still requires mining licenses together with certain other licenses, permits and approvals to develop the Mongolian projects and for coal shipments from Mongolia to China.

• Another condition precedent to the Proposed SPG Placement is the establishment of a circa US$115 million five-year interest-only listed bond facility. This facility, if consummated, will provide a level of market confidence for investors and enable the Board to implement its strategic plans over the next 4 to 5 years.

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As stated in Section 8.1.1 above, SPG is controlled by Mr. Wang and we have been advised by TerraCom management that through his extensive business successes he has created a strong network in the coal and steel sectors (both private and state owned entities) in China. It is for this reason that the board of directors and the executive management of the Company regard the placement of the 583,333,333 shares to SPG as important as SPG will become a strategic investor. This should assist TerraCom in their South Gobi coking coal basin expansion and increased exports into China.
There have already been 2 rights issues during the 2014/2015 financial year and the TerraCom shareholders are unlikely to support another rights issue that would solve the Company’s share capital and debt issues.
Morning Crest Capital (an associate of SPG) recently acquired a 50% interest in the Convertible Notes and 100% of the Convertible Notes must be converted if the Proposed SPG Placement of 583,333,333 shares is to proceed. If both resolutions in Section 2 above are approved by shareholders then Morning Crest Capital and its associate SPG may hold a 39.82% to 44.46% interest in TerraCom’s voting power based on the variable Convertible Note inputs. As the conversion of the Convertible Notes is based upon a formula of VWAP and the US$ to A$ exchange rates, we have provided the following table to advise the shareholders of the sensitivity of these 2 elements of the conversion formula and the resulting voting power that SPG and its associates may finally end up holding:

Table 21
US$1.00:A$
VWAP
Non-Associated shareholders:
Present TerraCom shareholders
Convertible note holders
Other shareholders
Morning Crest Capital
SPG Placement
Total issued capital

20/11/15
Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5
0.7194
Interests
0.73
0.069
0.73
0.069
0.68
A$0.0166
A$0.015
A$0.015
A$0.010
A$0.010
A$0.005
Shares
%
%
%
%
%
%
1,095,928,523
43.54%
42.28%
41.43%
35.95%
35.03%
23.71%
418,688,934
16.64%
17.61%
18.26%
22.46%
23.16%
31.83%
1,514,617,457
60.18%
59.89%
59.69%
58.41%
58.19%
55.54%
418,688,934
16.64%
17.61%
18.26%
22.46%
23.16%
31.83%
583,333,333
23.18%
22.50%
22.05%
19.13%
18.65%
12.63%
1,002,022,267
39.82%
40.11%
40.31%
41.59%
41.81%
44.46%
2,516,639,724
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%

The variables in the above scenarios are the US$:A$ exchange rate and the VWAP for the 30 dealing days immediately preceding the conversion date. As the Convertible Notes will be converted at a future time we are unable to predict these variables, so we have included several scenarios that may be applicable at the date of conversion to advise shareholders of the impact that the conversion price will have on the equity interests in TerraCom.

• If the shareholders do not approve the capital restructuring proposals in Resolutions 1 and 2 or if the if the Convertible Note holders elect to redeem their notes rather than convert them, then:

another source of funding will be required in the immediate short term to repay the Convertible Notes and this may be on less favorable terms that the current proposals;;
failure pay any Convertible Note redemption amounts would constitute a default event and the underlying security mat be enforced immediately;; and
if any default event were to occur it may trigger cross defaults under the Company’s other financing arrangements.

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Since the announcement of the Proposed SPG Placement the share price has fallen and it is currently trading on a VWAP of $0.011 per share on low volumes. If the Proposed SPG Placement is not approved we do not believe that the share price will recover.

Based on the above we consider that the advantages of the Convertible Note conversion and the SPG Placement out weigh the disadvantages of the Convertible Note conversion and the SPG Placement, and for this reason we consider that the Proposed Restructuring Transaction is reasonable.

12. Assessment as to Fairness and Reasonableness

After considering the above matters we have concluded that the Convertible Note conversion and the Proposed SPG Placement are both fair and reasonable.

13. Financial Services Guide

13.1 Financial Services Guide

This Financial Services Guide provides information to assist retail and wholesale investors in making a decision as to their use of the general financial product advice included in the above report.

13.2 DMR Corporate

DMR Corporate holds Australian Financial Services Licence No. 222050, authorizing it to provide general financial product advice in respect of securities to retail and wholesale investors.

13.3 Financial Services Offered by DMR Corporate

DMR Corporate prepares reports commissioned by a company or other entity (“Entity”). The reports prepared by DMR Corporate are provided by the Entity to its members.

All reports prepared by DMR Corporate include a description of the circumstances of the engagement and of DMR Corporate’s independence of the Entity commissioning the report and other parties to the transactions.

DMR Corporate does not accept instructions from retail investors. DMR Corporate provides no financial services directly to retail investors and receives no remuneration from retail investors for financial services. DMR Corporate does not provide any personal retail financial product advice directly to retail investors nor does it provide market-related advice to retail investors.

13.4 General Financial Product Advice

In the reports, DMR Corporate provides general financial product advice. This advice does not take into account the personal objectives, financial situation or needs of individual retail investors.

Investors should consider the appropriateness of a report having regard to their own objectives, financial situation and needs before acting on the advice in a report. Where the advice relates to the acquisition or possible acquisition of a financial product, an investor should also obtain a product disclosure statement relating to the financial product and consider that statement before making any decision about whether to acquire the financial product.

13.5 Independence

At the date of this report, none of DMR Corporate, Derek M Ryan nor Mr Paul Lom has any interest in the outcome of the Proposed SPG Placement, nor any relationship with TerraCom, SPG, Greenland HK or any of their directors.

Drafts of this report were provided to and discussed with the Directors of TerraCom and its advisers. Certain changes were made to factual statements in this report as a result of the

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reviews of the draft reports. There were no alterations to the methodology, valuations or conclusions that have been formed by DMR Corporate.

DMR Corporate and its related entities do not have any shareholding in or other relationship with TerraCom that could reasonably be regarded as capable of affecting its ability to provide an unbiased opinion in relation to the Convertible Note conversion and the Proposed SPG Placement.

DMR Corporate had no part in the formulation of the Proposed Restructuring Transactions. Its only role has been the preparation of this report.

DMR Corporate considers itself to be independent in terms of Regulatory Guide 112 issued by ASIC on 30 March 2011.

13.6 Remuneration

DMR Corporate is entitled to receive a fee of approximately $70,000 for the preparation of this report. With the exception of the above, DMR Corporate will not receive any other benefits, whether directly or indirectly, for or in connection with the making of this report.

13.7 Complaints Process

As the holder of an Australian Financial Services Licence, DMR Corporate is required to have suitable compensation arrangements in place. In order to satisfy this requirement DMR Corporate holds a professional indemnity insurance policy that is compliant with the requirements of Section 912B of the Act.

DMR Corporate is also required to have a system for handling complaints from persons to whom DMR Corporate provides financial services. All complaints must be in writing and sent to DMR Corporate at the above address.

DMR Corporate will make every effort to resolve a complaint within 30 days of receiving the complaint. If the complaint has not been satisfactorily dealt with, the complaint can be referred to the Financial Ombudsman Service Limited – GPO Box 3, Melbourne Vic 3000.

Yours faithfully

DMR Corporate Pty Ltd

Paul Lom Director

Derek Ryan Director

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Appendix A-1

TerraCom Limited

Discount Rate

In order to derive the net present value (“NPV”) of the projected future cash flows to equity holders of the BNU project, the cash flows need to be discounted by an appropriate discount rate. The generally acceptable methodology for assessing the appropriate discount rate is the capital asset pricing model (“CAPM”).

The CAPM makes separate calculations of the cost of equity and the cost of debt. The cost of capital and the cost of debt are then combined to calculate the weighted average cost of capital (“WACC”).

The CAPM expresses the cost of equity by the following formula:

Ke = Rf + (ß x Rp)

Where:

Ke = cost of equity Rf = risk free rate of interest Rp = market risk premium ß = beta of the investment being valued

The CAPM expresses the cost of debt by the following formula:

Kd = i x (1 – t)

Where: i = interest cost t = corporate tax rate

Set out below are our comments in respect of each of the inputs into the calculations of cost of equity and cost of debt.

1. Cost of Equity

1.1 Risk free rate of return

The risk free rate of return should be for a period that corresponds to the cash flows being valued.

The risk free rate should also be in the same currency in which the cash flows are estimated.

The BNU project is located in Mongolia and the coal produced is sold into the Chinese market. However the international coal market is generally conducted in US$ and we have therefore considered US risk free rates in determining an appropriate discount rate.

The current US Treasury 10-year bond yields are 2.17%.

1.2 Market risk premium

This is the difference between the return that investors require from an investment in equity and the return investors accept from a risk free investment. The market risk premium needs to be observed over an extended period of time.

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Appendix A-2

A significant amount of research data is available that analyses the observed market risk premium. In Australia authorities that set regulated prices regularly review the available research. One such document is the discussion paper published by the Queensland Competition Authority in November 2012. The paper reviewed recent research and Australian Regulatory practice and concluded that the majority of regulators continue to use a market risk premium of 6%. This research is consistent with the results published by KPMG in Australian Valuation Practices Survey 2015, which found that in excess of 75% of survey participants in Australia use a market risk premium of 6%. This contrasts with the US where the rate is generally between 5% and 6% and the UK where a rate of 5% is most commonly used.

After reviewing the recent research, we have concluded that a market risk premium of 6.0% should be adopted in calculating the cost of equity.

1.3 Beta

Beta measures the sensitivity of the share price to fluctuations of the market as a whole. A beta greater than one indicates greater volatility, and a beta of less than one indicates lower volatility, than the market. The volatility of the overall market is 1.0.

Set out below are the unlevered betas (excluding the impact of gearing) of a range of ASX listed companies that hold coal assets:

		Market	Unlevered
ASX Code	Company Name	Capital A$mil	Beta
ASX:ACB	A-Cap Resources Limited	11.9	2.26
ASX:AFR	African Energy Resources Limited	34.2	2.12
ASX:AGE	Alligator Energy Limited	13.3	1.95
ASX:AEK	Anatolia Energy Limited	18.7	1.29
ASX:ATU	Atrum Coal NL	93.6	2.71
ASX:AEE	Aura Energy Limited	6.92	0.73
ASX:BRL	Bathurst Resources Limited	19.1	1.62
ASX:BGG	Blackgold International Holdings Limited	57.7	0.99
ASX:CZA	Coal of Africa Limited	104.6	1.26
ASX:CKA	Cokal Limited	42.4	1.01
ASX:EME	Energy Metals Limited	19.3	0.89
ASX:LAM	Laramide Resources Ltd.	13.3	3.51
ASX:PDN	Paladin Energy Ltd	445.2	0.69
ASX:PNL	Paringa Resources Limited	53.7	3.79
ASX:PEN	Peninsula Energy Limited	194.9	1.26
ASX:REY	Rey Resources Limited	42.7	1.01
ASX:TIG	Tigers Realm Coal Limited	44.8	0.86
ASX:WEC	White Energy Company Limited	62.4	0.96
ASX:WHE	WildHorse Energy Ltd.	19.1	1.37
		Average	1.59
		Median	1.26

Source: Capital IQ and DMR Corporate analysis

After reviewing the above information we have concluded that a beta in the range of 1.25 to 1.60 is appropriate before considering the impact of gearing.

The impact of gearing is discussed in Section 3 below. In that Section we have concluded that a long term gearing of approximately 20% is realistic and we therefore re-geared the beta using this level of gearing.

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Appendix A-3

1.4 Country Risk

An additional risk factor is required to reflect the risks of investing in certain jurisdictions. The country risk factor is intended to reflect the political, economic and currency risks specific to the jurisdiction in question.

Until 1990 Mongolia was for many decades a one party state under the control of the Soviet Union. Since the early 1990’s Mongolia has transitioned to a multi party democracy and a market economy. Mongolia is sparsely populated with a population of less than 3 million inhabitants. Some 30% of the population continues to lead a nomadic existence.

The estimated GDP per capita in 2015 was US$4,353. Mongolia is reported to have an external debt to GDP ratio was 51.7%.

There are a number of sources of country risk ratings, including credit agencies and the OECD. Set out below is a comparison of the ratings for Kazakhstan, with a number of other countries:

Country	OECD	S&P	Moody's
Mongolia	6	B+	B2
China	2	AA-	Aa3
Russia	4	BB+	Ba1
Indonesia	3	BB+	Baa3
USA	-	AA+	Aaa
Canada	-	AAA	Aa3
Australia	-	AAA	Aa2
India	3	BBB-	Baa3
Kazakhstan	5	BBB	Baa2

Sources:

OECD - Country risk classification published on 30 October 2015 S & P – Capital IQ web site Moody’s - Moody’s web site

The above risk assessments suggest that there is a considerable country risk associated with a long-term investment in Mongolia. In our judgment an addition of a 5.5% country risk premium is reasonable.

1.5 Project Specific Risks

As explained in Section 7.5 of the report, the cash flows for the BNU mine are supported by JORC compliant resources, however there are no reserves. Furthermore, there is currently significant uncertainty as to the future direction of coal prices, which in our opinion are not reflected in the assessment of Beta. For this reason we have increased the cost of equity in a range of 2.0% to 4.0% to allow for these risks.

1.6 Conclusion – Cost of Equity

Using the above inputs we have assessed the cost of equity to be in a range of 17.0% to 19.0%.

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Appendix A-4

2. Cost of Debt

2.1 Interest cost

TerraCom has substantial existing liabilities, however conversion of the existing Convertible Notes is a condition precedent to the Proposed SPG Placement.

TerraCom is proposing to replace existing borrowings with a new US$115 million facility. The placement agreement between SPG and TerraCom provides for the interest cost to be no higher than 12.5%.

Based on our experience with similar companies we have adopted an interest rate of 12% as the likely cost of debt.

2.2 Corporate tax rate

We have adopted a tax rate of 25%, being the current corporate tax rate in Mongolia on profits in excess of MNT 3 billion (Approximately A$2.1 million).

2.2 Conclusion – Cost of Debt

Using the above inputs we have assessed the cost of debt at 9%.

3. WACC

3.1 Gearing

The cost of debt and the cost of equity must be combined in proportion in which these are expected to contribute to the funding of the business. This is commonly referred to as gearing. The gearing is determined based on the market value of debt and equity.

The gearing ratio should reflect an appropriate long term funding mix and not necessarily the mix currently used by the entity being valued.

The selection of an appropriate gearing ratio is subjective and the typical ratios differ between industries and within industries over time as market conditions change.

Generally mineral exploration and early stage mining companies have limited borrowing capacity and rely on equity as a source of capital and even established mining companies have relatively low gearing ratios (compared to other industries).

We have reviewed the gearing for all the companies on which we have based our selection of beta (see table at 1.3 above). Many of the companies have no debt however Paladin Energy has a gearing of approximately 50%. Excluding Paladin Energy the gearing of the companies in the sample is 12% and this increases to 30% when Paladin Energy is included.

After considering the above information, we have concluded that an appropriate long term gearing structure for TerraCom is 20% debt and 80% equity.

3.2 Conclusion - WACC

Using the above gearing and the cost of equity and the cost of debt, we have assessed the WACC to be in a range of 15.4% to 17.0%.

The above WACC is a nominal WACC that is it includes an allowance for inflation. As the cash flow model has been prepared constant currency, the discount rate should be reduced to eliminate the impact of inflation.

As the cash flows cover only a five year period with no residual value and are estimated in US$, we have reduced the discount rate to a range of 15.0% to 18.0%.

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Appendix B

TerraCom Limited

Sources of Information

The key documents we have relied upon in preparing this report are:

Subscription Agreement between TerraCom Coal Limited and SPG Investment Holdings Ltd;;
TerraCom’s 2015 Annual Report;;
Half year accounts as at 31 December 2014;;
Auditors Impairment Memorandum dated 28 August 2015;;
TerraCom ’s announcements to the ASX since 1 January 2015;;
ASIC Company Search - TerraCom Coal Limited – 28 October 2015;;
Rights issue prospectus – 27 January 2015;;
Notice of meeting and Explanatory Statement dated 28 September 2015;;
TerraCom’s Board Report dated 27 October 2015;;
BNU Mine Financial Model dated August 2015;;
TerraCom ’s share register as at 30 September 2015;;
Och-Ziff Option Summary between Terra Energy LLC and Oz Master Fund, lTd;; Oz Asia Master Fund, Ltd;; and Oz Global Special Investments Master Fund, LP and TerraCom;;
TerraCom ’s ASX share price and trade volumes for the period from 1 October 2014 to 27 October 2015 supplied by Capital IQ and ASX;;
Research data from Capital IQ and other publically accessible web sites;;
Draft Notice of General Meeting and Explanatory Memorandum;;
Xenith Consulting Pty Ltd report dated 10 November 2015;; and
Discussions with the Chief Financial Officer and the Managing Director.

Appendix C

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TerraCom Limited

Declarations, Qualifications and Consents

1. Declarations

This report has been prepared at the request of the Directors of TerraCom pursuant to Section 611 of the Act to accompany the notice of meeting of shareholders to approve the Proposed Restructuring Transactions. It is not intended that this report should serve any purpose other than as an expression of our opinion as to whether or not the Convertible Note conversion and the Proposed SPG Placement are fair and reasonable.

This report has also been prepared in accordance with the Accounting Professional and Ethical Standards Board professional standard APES 225 – Valuation Services.

The procedures that we performed and the enquiries that we made in the course of the preparation of this report do not include verification work nor constitute an audit in accordance with Australian Auditing Standards.

2. Qualifications

Mr Derek M Ryan and Mr Paul Lom, directors of DMR Corporate prepared this report. They have been responsible for the preparation of many expert reports and are involved in the provision of advice in respect of valuations, takeovers, capital reconstructions and reporting on all aspects thereof.

Mr Ryan has had over 40 years experience in the accounting profession and he is a Fellow of the Institute of Chartered Accountants in Australia and an Accredited Business Valuation Specialist. He has been responsible for the preparation of many expert reports and is involved in the provision of advice in respect of valuations, takeovers and capital reconstructions and reporting on all aspects thereof.

Mr Lom is a Fellow of the Institute of Chartered Accountants in Australia and an Accredited Business Valuation Specialist with more than 35 years experience in the accounting profession. He was a partner of KPMG and Touche Ross between 1989 and 1996, specialising in audit. He has extensive experience in business acquisitions, business valuations and privatisations in Australia and Europe.

3. Consent

DMR Corporate consents to the inclusion of this report in the form and context in which it is included in the Explanatory Memorandum.

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Attachment A - 1

Executive Summary – Xenith Independent Technical Report

9[th] November 2015

The Directors DMR Corporate Pty Ltd Level 12, 440 Collins Street Melbourne, Vic Australia

Dear Sirs,

RE: INDEPENDENT TECHNICAL REVIEW

This Independent Technical Review (ITR) has been prepared by Xenith Consulting Pty Ltd (“Xenith”) at the request of DMR Corporate Pty Ltd (DMR) for inclusion in the Independent Expert’s report being prepared by DMR in relation to a placement of TerraCom Limited (“TerraCom” or “the Company”). shares to SPG Investment Holdings Ltd (“SPG”).

The report’s purpose is to confirm Resource and Reserve Estimates and to assess the fairness of mine production budgets and forward estimates. In addition, DMR required Xenith to prepare valuations of the TerraCom coal assets located in Mongolia and Queensland. Xenith has conducted its technical review in recognition of the requirements of the “Australasian Code for Reporting of Mineral Resources and Ore Reserves” (2012) published by the Joint Ore Reserves Committee (“JORC”) of the Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and the Minerals Council of Australia (the “JORC Code”) and also with the requirements of the Code and Guidelines for Assessment and Valuation of Mineral Assets and Mineral Securities for Independent Expert Reports as adopted by the Australasian Institute of Mining and Metallurgy (the “Valmin Code”).

Xenith has not audited the information provided to it, but has aimed to satisfy itself that all of the information has been prepared in accordance with proper industry standards and is based on data that Xenith considers to be of acceptable quality and reliability. Where Xenith has not been so satisfied, Xenith has included comment in this ITR and made modifications in the Production Cases provided to DMR.

All monetary figures in this report are expressed in 2015 Australian dollars ($ or AUD) or United States dollars (USD), unless otherwise noted. Costs are presented on a cash cost basis unless otherwise specified. The TerraCom assets (Relevant Assets) include:

Mongolian Assets

South Gobi Project,
Mid Gobi Project,

Queensland Assets

Hughenden Project,
Clyde Park Project,
Pentland Project,
Springsure Project,
Kolan Project, and
Sierra Project.

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Attachment A - 2

Executive Summary – Continued

Xenith concludes from the TerraCom review that:

TerraCom has established a portfolio of coal exploration tenement areas in Queensland, Australia and in Mongolia. TerraCom’s Queensland tenements cover approximately 16,000 km[2]
TerraCom’s Baruun Noyon Uul (BNU) Mine in the South Gobi Region of Mongolia is now fully commissioned and coal is being transported along the new haul road via a border crossing to Ceke in China. TerraCom are in the process of negotiating long-term coal supply contracts for the BNU coals.
The valuation for the BNU mine only includes the coal stated in the JORC compliant Resource Statement and accompanying mine plan. Xenith notes the coal seams appear to be continuous across lease boundaries into some of the adjacent leases/areas which has the potential of increasing total coal production and mine life, leading to potential upside. This potential upside has not formed part of this report as the geological confidence and technical work on the surrounding areas has not been undertaken to a sufficient level to carry out a detailed assessment.
The Queensland Projects are at various stages of exploration. Several of the projects areas are located in close proximity to key supporting infrastructure.
Total Coal Resources are 2,417 Mt over all of the identified project areas (2,044 Mt attributable to TerraCom). Resources have been reported in accordance with the JORC code.
The Queensland and Mid Gobi projects are predominantly thermal coal. The coal identified within the South Gobi projects are predominantly high quality coking coals.
Additional exploration is required to improve the geological confidence at several of the identified project areas.
No Coal Reserves reported in accordance with JORC Code exist for any of the identified project areas.
BNU Mine is the only project upon which significant mine planning has taken place.
TerraCom’s Mongolian subsidiary Terra Energy LLC (Terra Energy) was granted a mining licence (Khar Servegen MV- 019149). The mining licence covers part of the 12600X exploration licence. The proximity of the licence to the existing BNU operation makes it the next key development step in the South Gobi Coking Coal basin Development strategy.
Coal washability data appears to be inadequate at all project locations. Additional large diameter holes are necessary to obtain more reliable coal washability data and a better sense of the yield and product coal qualities expected over life-of-mine.
Hughenden, Clyde Park and Springsure Project are the only Queensland assets with Resources reported in accordance with the JORC code. A significant quantity of these Resources are at depth.

This Mineral Asset Valuation included in this ITR has been prepared to conform to the Australian VALMIN Code (2005).

The valuation of Mineral Assets is not a precise science and the conclusions arrived at in many cases will of necessity be subjective and dependent on the exercise of individual judgement. There is therefore no indisputable single value and Xenith normally expresses an opinion on the value as falling within a likely range, as required by the Code.

Xenith has adopted various valuation methods to estimate the current market value of TerraCom’s coal assets. Using these methods, Xenith estimates the market value of TerraCom’s coal assets resides between AUD 104 M and AUD 241 M, with a preferred value of AUD 172.5 M, as summarised in the table below. The wide range in value reflects current uncertainty in the coal market as well as uncertainty in technical assumptions.

The South Gobi Project comprises the bulk of Xenith’s estimated value, and ranges from AUD 73 M to AUD 202 M, with a preferred value of 137 AUD M.

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Attachment A - 3

Executive Summary – Continued

Of Xenith’s total preferred value of AUD 172.5 M, Resources account for almost AUD 162 M while the exploration assets have a value of approximately AUD 10.5 M.

Valuation Summary

Project	Xenith Preferred Method Applied	TerraCom Ownership	Attributed Resources (Mt)	Valuation Low (AUD)	Valuation High (AUD)	Valuation Preferred (AUD)
South Gobi
BNU North Inside Mine Plan Out Side Mine Plan Hovguun East (MV 016971) EL 13780X EL 016972X EL 005264 EL 005262X EL 14522X EL 13352X El 12600	DCF Comparative Transaction Comparative Transaction Past Exploration Expenditure Past Exploration Expenditure Past Exploration Expenditure Past Exploration Expenditure Past Exploration Expenditure Past Exploration Expenditure Comparative Transaction	100% 100% 83.87% 100% 100% 100% 83.87% 100% 100% 100%	10 17 34 15	56.5 0.9 0.9 4.1 0.03 1.9 0.2 0.2 0.3 8.5	182.2 1.1 1.0 5.7 0.04 2.7 0.3 0.2 0.4 8.5	118.6 1.0 0.9 4.9 0.03 2.3 0.2 0.2 0.3 8.5
Mid Gobi
	Comparative Transaction	100%	221	2.2	2.6	2.4
Queensland
Hughenden Project Clyde Park Project Pentland Project Springsure Project Kolan Project Sierra Project	Comparative Transaction Comparative Transaction Past Exploration Expenditure Comparative Transaction Past Exploration Expenditure Past Exploration Expenditure	100% 64% 100% 36% 100% 100%	1,209 469 69	15.4 9.5 0.6 2.1 0.4 0.9	19.3 11.5 1.3 2.7 0.8 1.2	17.7 10.4 0.9 2.4 0.6 1.0
			2,044	104.4	241.4	172.5

Xenith has agreed to be paid, professional fees by DMR for its preparation of this Report. None of Xenith or its directors, staff or specialists who contributed to this report has any interest or entitlement, direct or indirect, in the Company, the relevant Assets;; or the outcome of this report.

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Attachment A - 4

Executive Summary – Continued

The signatory to this ITR, Mr. Grant Walker, BE (Mining) MAusIMM, is a member of the Australasian Institute of Mining and Metallurgy, and is an employee of Xenith. He has over 20 year experiences in the mining industry with significant experience in technical reviews, audits, due diligence assessments and valuation of mining assets. He has sufficient experience which is relevant to the style of mineralisation and types of coal deposits under consideration, and to the activity he is undertaking in this IQPR, to qualify him as a Competent Person (as defined in the 2012 Edition of the JORC Code).

Yours sincerely Grant Walker MAusIMM (CP) Manager – NSW

AI assistant

TERRACOM LIMITED — Proxy Solicitation & Information Statement 2015

65910_rns_2015-12-09_56dc8b55-d76a-4be3-9f0a-08fe3c8b3e23.pdf

TerraCom Limited

ACN 143 533 537

Notice of Extraordinary General Meeting to be held on 12 January 2016 Explanatory Memorandum for the Notice of Extraordinary General Meeting

and

Prox Form y

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

TO BE HELD AT

AT

Table of Contents

Section A – Chairman’s Letter

10 December 2015

Dear Shareholder,

Resolution 1: Approval of the issue of Shares to Morning Crest Capital pursuant to the conversion of Convertible Notes

Resolution 2: Placement

Interconditionality

Independent Expert’s Report

Business of the EGM

1. Definitions

2. Interpretation

Section C – Notice of Extraordinary General Meeting

BUSINESS

1. Resolution 1: Approval of the issue of Shares to Morning Crest Capital pursuant to the conversion of Convertible Notes

2. Resolution 2: Approval of Placement

By order of the Board

10 December 2015

NOTES

1. Determination of membership and voting entitlement

2.

Votes of members

3. Proxies

1. Introduction

2. Resolution 1

2.1 Background to Resolution 1

2.2 Regulatory background to Resolution 1

collectively the ( Takeover Prohibition ).

2.3 Relevant information

2.4 Independent Expert’s Report

3. Resolution 2

3.1 Background to Resolution 2

3.2 Regulatory background to Resolution 2

3.3 Resolution 2: Approval of the issue of Shares to SPG

3.4 Independent Expert’s Report

4. Recommendation of the Board

5. Voting Exclusion

LODGE YOUR VOTE

SIGNATURE OF SHAREHOLDERS – THIS MUST BE COMPLETED

YOUR NAME AND ADDRESS

LODGEMENT OF A PROXY FORM

APPOINTMENT OF PROXY

DEFAULT TO CHAIRMAN OF THE MEETING

CORPORATE REPRESENTATIVES

DMR CORPORATE

______

Independent Expert’s Report

1. Introduction

(2) Proposed SPG Placement

2. The Proposed Transaction

1. Approval of the issue of Shares to Morning Crest Capital pursuant to the conversion of Convertible Notes

2. Approval of the Placement of Shares to SPG

3. Summary Opinions

Fairness

Reasonableness

4. Structure of this Report

5. Purpose of the Report

• Corporations Act 2001

• ASIC Regulatory Guides

• General

Proposed SPG Placement

6. TerraCom -­ Key Information

6.1 Background

Mongolian Operations

Queensland, Australia

Northern Galilee Projects

Key Highlights:

Springsure Project -­ 35.78%

Key highlights:

6.2 Directors

TERRACOM LIMITED Proxy Solicitation & Information Statement 2015

6. TerraCom - Key Information

Springsure Project - 35.78%

Appendix A-1

Appendix A-2

Appendix A-3

Appendix A-4

3.2 Conclusion - WACC