Scheme Booklet Excel Coal Limited ABN 18 002 818 by Dupree Design Group

Scheme Booklet Excel Coal Limited ABN 18 002 818 699 For the scheme of arrangement between Excel and Excel Shareholders in relation to the recommended proposal for the transfer of Excel Shares to Peabody Pacific Pty Limited, a subsidiary of Peabody Energy Corporation.

THE EXCEL DIRECTORS UNANIMOUSLY RECOMMEND THAT, IN THE ABSENCE OF A SUPERIOR PROPOSAL, YOU VOTE IN FAVOUR OF THE RESOLUTIONS TO APPROVE THE SCHEME

Financial Adviser

Legal Adviser

THIS IS AN IMPORTANT DOCUMENT AND REQUIRES YOUR IMMEDIATE ATTENTION. IT SHOULD BE READ IN ITS ENTIRETY. IF YOU ARE IN DOUBT AS TO WHAT YOU SHOULD DO, YOU SHOULD CONSULT YOUR INVESTMENT OR OTHER PROFESSIONAL ADVISER.

0 running head

important notices This Scheme Booklet This Scheme Booklet is the explanatory statement required to be given to Excel Shareholders under subsection 412(1) of the Corporations Act. You should read this Scheme Booklet in its entirety before making a decision as to how to vote on the resolutions to be considered at the Scheme Meeting. If you are in doubt as to what you should do, you should consult your investment or other professional adviser. Capitalised terms used in this Scheme Booklet are defined in the glossary in section 9. Responsibility for information The Excel Information, including financial information and information as to the opinions and recommendations of the Directors, has been provided by Excel and is the responsibility of Excel. None of Peabody or its advisers or Excel’s advisers assume any responsibility for the accuracy or completeness of the Excel Information. The Peabody Information has been provided by Peabody and is the responsibility of Peabody. None of Excel or its advisers or Peabody’s advisers assume any responsibility for the accuracy or completeness of the Peabody Information. The Independent Expert has prepared the Independent Expert’s Report contained in Annexure A to this Scheme Booklet in relation to the Scheme. None of Excel, Peabody or their respective advisers assume any responsibility for the accuracy or completeness of the Independent Expert’s Report. However, Excel has provided factual information that the Independent Expert has relied on in preparing the Independent Expert’s Report and the accuracy and completeness of that information is the responsibility of Excel. ASIC and ASX involvement A copy of this Scheme Booklet (including the Independent Expert’s Report) has been given to ASIC for the purposes of subsection 411(2) of the Corporations Act. ASIC has been asked to provide a statement in accordance with paragraph 411(17)(b) of the Corporations Act that ASIC has no objection to the Scheme. If ASIC provides that statement, then it will be produced at the Second Court Hearing. A copy of this Scheme Booklet has also been given to ASX. Neither ASIC, ASX nor any of their respective officers takes any responsibility for the contents of this Scheme Booklet. Court involvement The orders of the Court that the Scheme Meeting be convened are not and should not be treated as an endorsement by the Court of, or any other expression of opinion by the Court, on the Scheme. Disclosure regarding forward looking statements This Scheme Booklet contains historical and forward looking statements in connection with Excel and Peabody. The forward looking statements in this Scheme Booklet are not based on historical facts. They reflect the current expectations of Excel or, in relation to the Peabody Information, Peabody, concerning future results and events and generally may be identified by the use of forward looking words or phrases such as ‘believe’, ‘aim’, ‘expect’, ‘anticipated’, ‘intending’, ‘foreseeing’, ‘likely’, ‘should’, ‘planned’, ‘may’, ‘estimated’, ‘potential’, or other similar words and phrases. Similarly, statements that describe Excel and Peabody’s objectives, plans, reserves and resources, goals or expectations are, or may be, forward looking statements. These forward looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause either Excel or Peabody’s actual results, performance or achievements to differ materially from the anticipated results, performance or achievements expressed, projected or implied by these statements. Deviations in future results, performance and achievements are normal and to be expected. Excel Shareholders should review carefully all of the information, including the financial information, included in this Scheme Booklet. The forward looking statements included in this Scheme Booklet are made only as of the date of this Scheme Booklet. Neither Excel nor Peabody give any representation, assurance or guarantee to Excel Shareholders that projected or implied results or events will actually occur or be achieved. Privacy and personal information Excel will need to collect personal information to implement the Scheme. The personal information may include the names, contact details and details of shareholdings of Excel Shareholders plus contact details of individuals appointed by Excel Shareholders as proxies, corporate representatives or attorneys at the Scheme Meeting. The collection of some of this information is required or authorised by the Corporations Act. Excel Shareholders who are individuals, and other individuals in respect of whom personal information is collected, have certain rights to access the personal information collected about them and can contact Excel’s Company Secretary by calling (02) 9247 2900 if they wish to exercise those rights. The information may be disclosed to print and mail service providers, and to Excel and Peabody and their respective advisers and agents to the extent necessary to effect the Scheme. If the information outlined above is not collected, Excel may be hindered in, or prevented from, conducting the Scheme Meeting or implementing the Scheme. Excel Shareholders who appoint an individual as their proxy, corporate representative or attorney to vote at a Scheme Meeting should inform that individual of the matters outlined above. Interpretation All financial amounts shown in this Scheme Booklet are expressed in Australian dollars unless otherwise stated. Date This Scheme Booklet is dated 30 August 2006.

important dates for excel shareholders For the Proposal to succeed, the Scheme must be approved by Excel Shareholders at the Scheme Meeting and then by the Court. The Notice of the Scheme Meeting is set out in Annexure E to this Scheme Booklet. The Scheme Meeting will be held in the AGL Theatre at the Museum of Sydney, Corner of Bridge and Phillip Streets, Sydney NSW on Wednesday, 4 October 2006 at 3.00pm (EST). If the requisite majorities at the Scheme Meeting approve the Scheme, it is currently anticipated that the Second Court Hearing will take place on Tuesday, 10 October 2006. Event Date*

Date and time for determining eligibility to vote at Scheme Meeting

3.00pm (EST) on Monday, 2 October 2006

Last date and time to lodge proxies for Scheme Meeting

3.00pm (EST) on Monday, 2 October 2006

Scheme Meeting

3.00pm (EST) on Wednesday, 4 October 2006

Second Court Date Tuesday, 10 October 2006 Effective Date

Wednesday, 11 October 2006

Excel Shares suspended from quotation on ASX

Wednesday, 11 October 2006 (at close of trading on ASX)

Record Date**

Wednesday, 18 October 2006

Implementation Date (despatch of Scheme Consideration to Scheme Shareholders and transfer of Scheme Shares to Peabody)

Wednesday, 25 October 2006

* All dates following the Scheme Meeting are indicative only and are subject to change. Any changes to the above timetable will be announced through ASX. All references to time in this Scheme Booklet are to Sydney time (Eastern Standard Time). ** Excel Shareholders on the register at 5.00pm on this date will be entitled to the Scheme Consideration.

contents Important Notices

Inside front cover

Important Dates for Excel Shareholders

Letter from the Chairman of Excel

Some Frequently Asked Questions

How to Vote

1 Key Features of Scheme

2 Recommendations and Matters Relevant to your Vote

3 Information About Excel

4 Information About Peabody

5 Tax Implications of the Scheme for Australian Residents

6 Implementation of the Scheme

7 Key Terms of the Merger Implementation Agreement

8 Additional Information

9 Glossary

Annexure A Independent Expertâ&#x20AC;&#x2122;s Report

Annexure B Merger Implementation Agreement

130

Annexure C Scheme of Arrangement

157

Annexure D Deed Poll

164

Annexure E Notice of Scheme Meeting

170

Corporate Directory

Inside back cover

letter from the chairman of excel

Dear Shareholder, On 6 July 2006, Excel Coal Limited announced a proposal from Peabody Energy Corporation to acquire all of the shares in Excel for $8.50 cash per share via a scheme of arrangement (the Scheme). The Scheme is subject to a number of conditions, including approval by Excel Shareholders and the Federal Court of Australia. Your Directors believe that the Peabody proposal is in the best interests of Excel Shareholders. We are pleased to put this proposal before you for consideration, and recommend that, in the absence of a superior proposal, you vote in favour of the Scheme at the forthcoming Scheme Meeting on Wednesday, 4 October 2006. The reasons for the Directors’ recommendation in favour of the Peabody proposal are set out in section 2 of this Scheme Booklet. Excel was listed on the ASX in May 2004 following an initial public offer at $2.00 per share. The prospectus outlined a plan to substantially expand production capacity and volumes from both its existing mines and new projects. I am pleased to report that since listing, Excel has achieved all of its growth objectives. In doing so Excel has increased profits and created considerable value for its Shareholders. Your Directors believe that Peabody’s offer price fully reflects the value of Excel’s mines, development projects and growth prospects. The Directors believe that if the Peabody proposal does not proceed, and no alternative proposal emerges, it is likely that the Excel share price will fall below both the Peabody offer price and the levels at which Excel Shares were trading before announcement of the Peabody proposal. The Directors have appointed Deloitte Corporate Finance to prepare an independent expert’s report. Deloitte Corporate Finance has concluded that the Peabody proposal is in the best interests of Excel shareholders. The full report of the Independent Expert is set out in Annexure A. On behalf of the Board of Directors, I invite you to consider the Peabody proposal. I encourage you to read this Scheme Booklet carefully in full and, if required, to seek your own investment or other professional advice. The Directors unanimously recommend that, in the absence of a superior proposal, Excel Shareholders vote in favour of the Scheme either in person or by proxy. Each of the Directors intends to vote in favour of the Scheme at the Scheme Meeting in relation to Excel Shares held or controlled by them. I urge you to attend the Scheme Meeting or, if you are unable to attend, to complete and return the enclosed proxy form. Information on how to vote is provided in this Scheme Booklet on page 6. If you have any questions about the Peabody proposal or the Scheme, please call the Excel Shareholder Information Line on 1300 658 099 during business hours. Yours sincerely,

Roger Massy-Greene Chairman

some frequently asked questions

What will I receive if the Scheme is approved and implemented?

If the Scheme proceeds, you will receive $8.50 cash for every Excel Share that you hold on the Record Date.

When and how will I receive my Scheme Consideration?

If the Scheme is approved by Excel Shareholders and the Court, the Scheme Consideration will be paid to Scheme Shareholders on the Implementation Date, which is anticipated to be 25 October 2006. Scheme Shareholders who have registered their bank details with Excel’s Share Registry will receive the Scheme Consideration directly into their bank account. If you have not registered your bank details, your Scheme Consideration will be forwarded by cheque to the address on the Share Register. Accompanying this Scheme Booklet is a form that allows you to change or register your bank details with Excel’s Share Registry.

Will this be a taxable transaction for Australian tax purposes?

The transfer of your Scheme Shares pursuant to the Scheme may be a taxable transaction. If you are an Australian resident, further details of the general tax consequences of the Scheme are set out in section 5 of this Scheme Booklet. You should seek your own professional advice regarding your particular circumstances and the Scheme.

Will I have to pay brokerage fees or stamp duty?

No brokerage or stamp duty will be payable by you in connection with the transfer of Scheme Shares to Peabody if the Scheme proceeds. You will receive $8.50 cash per Excel Share that you hold on the Record Date.

When and where will the Scheme Meeting be held?

The Scheme Meeting will be held in the AGL Theatre at the Museum of Sydney, Corner of Bridge and Phillip Streets, Sydney NSW on Wednesday, 4 October 2006 at 3.00pm (EST). The Notice of Scheme Meeting set out in Annexure E contains information on the Scheme Meeting.

Am I entitled to vote at the Scheme Meeting?

If you are registered as an Excel Shareholder as at 3.00pm (EST) on Monday, 2 October 2006, you will be entitled to vote at the Scheme Meeting. You may vote in person at the Scheme Meeting or by completing and lodging the proxy form accompanying this Scheme Booklet by 3.00pm (EST) on Monday, 2 October 2006. You may also vote by attorney or, in the case of a body corporate, by a duly appointed corporate representative.

What voting majority is required to approve the Scheme?

For the Scheme to be approved, votes in favour of the Scheme must be received from: • a majority in number (more than 50%) of Excel Shareholders present and voting at the Scheme Meeting (in person, by proxy, by attorney or, in the case of a body corporate, by corporate representative); and • at least 75% of the total votes which are cast on the resolution to approve the Scheme at the Scheme Meeting.

some frequently asked questions

Should I vote?

You do not have to vote. However, the Directors believe that the Scheme is an important opportunity for all Excel Shareholders and urge you to read this Scheme Booklet carefully and vote in favour of the Scheme, in the absence of a superior proposal. If you are not able to attend the Scheme Meeting in person, a proxy form is included with this Scheme Booklet to enable you to cast your vote by proxy. The proxy form contains details about lodgement that need to be followed.

What happens to my Excel Shares if I do not vote or if I vote against the Scheme, and the Scheme is approved?

If you are an Excel Shareholder as at 5.00pm (EST) on the Record Date and the Scheme is approved, your Excel Shares will be transferred pursuant to the Scheme and you will receive the Scheme Consideration of $8.50 cash for each of your Excel Shares. If the Scheme is approved, this will occur even if you did not vote or you voted against the Scheme.

What do the Directors of Excel recommend?

The Directors believe that the Scheme is in the best interests of Excel Shareholders and unanimously recommend that Excel Shareholders vote in favour of the Scheme, in the absence of a superior proposal.

What is the opinion of the Independent Expert?

The Independent Expert has concluded that, in the absence of a superior proposal, the Scheme is in the best interests of Excel Shareholders. The Independent Expert has provided a valuation range for Excel Shares of between $7.00 to $7.60 per share. The full report of the Independent Expert is set out in Annexure A.

When will the result of the Scheme Meeting be known?

The result of the Scheme Meeting will be available shortly after the conclusion of the Scheme Meeting and will be provided to the ASX once available. You should be aware that the Scheme is subject to the approval of the Court. The Court hearing to approve the Scheme is expected to be held after the Scheme Meeting on Tuesday, 10 October 2006.

What are Peabodyâ&#x20AC;&#x2122;s intentions in relation to the business, assets and employees of Excel if the Proposal proceeds?

Please see section 4.3.

What happens if the Scheme is not approved?

If the Scheme is not approved then the Proposal will not proceed. Excel will continue to operate as a stand alone company with its current Directors and management in place. Section 2.5 provides further detail on the implications for Excel Shareholders if the Scheme is not approved.

EXCEL COAL LIMITED Scheme booklet

Will I receive any future dividends on my Excel Shares?

If you are an Excel Shareholder on Friday, 8 September 2006, you will be eligible to receive the Declared Dividend for the six months to 30 June 2006. This dividend will be paid to Excel Shareholders on or around Friday, 15 September 2006. If the Scheme is approved, the Proposal will be implemented and all Excel Shares will be transferred to Peabody before the next interim dividend date. Accordingly, Excel Shareholders will not receive any further future dividends if the Scheme proceeds. If the Scheme is not approved, Excel Shareholders may continue to receive dividends from their Excel Shares. However, neither the payment nor amount of future dividends on Excel Shares is certain or can be assured by the Directors.

What happens if another bid or proposal is made?

If another bid or proposal is made, it will be announced to the ASX and the Directors will carefully consider the proposal (including Excel’s ‘no shop’ and ‘no talk’ obligations under the Merger Implementation Agreement which are detailed in section 7.3 of this Scheme Booklet and its potential liability to pay the Reimbursement Fee which is detailed in section 7.4 of this Scheme Booklet) and advise you of their recommendation.

Who can help answer my questions about the Proposal?

If you have any questions about the Proposal or the Scheme, or you would like additional copies of this Scheme Booklet or relevant proxy forms, please contact the Excel Shareholder Information Line on 1300 658 099. For information about your individual financial or taxation circumstances, please consult your investment, legal or other professional adviser.

how to vote

Your Vote is Important For the Scheme to proceed, it is necessary that sufficient Excel Shareholders vote in favour of the Scheme at the Scheme Meeting which is to be held on Wednesday, 4 October 2006 at 3.00pm (EST). If you are registered as an Excel Shareholder as at 3.00pm (EST) on Monday, 2 October 2006, then you will be entitled to vote on the resolution to approve the Scheme at the Scheme Meeting. Voting You may vote either in person by attending the Scheme Meeting or by proxy, attorney or corporate representative (as appropriate). Information setting out how you may vote by proxy is contained in the Notice of Scheme Meeting accompanying this Scheme Booklet. If you are unable to attend the Scheme Meeting in person, you can appoint a proxy to attend and vote at the Scheme Meeting on your behalf. To do so, please use the proxy form accompanying this Scheme Booklet and follow the instructions set out on the proxy form. Proxy forms, completed in accordance with the instructions set out on the proxy form, must be returned by posting them in the reply paid envelope (for use in Australia) or by delivering or faxing them to: Mail to: Proxy Administrator – Excel Scheme Meeting Link Market Services Locked Bag A14 Sydney South NSW 1235 Australia Deliver to: Proxy Administrator – Excel Scheme Meeting Link Market Services 680 George Street Sydney NSW 2000 Australia Fax to:

Attn: Proxy Administrator – Excel Scheme Meeting +612 9287 0309

ALL PROXY FORMS MUST BE RECEIVED BY THE SHARE REGISTRY BY NO LATER THAN 3.00pm (EST) ON MONDAY, 2 OCTOBER 2006.

1 key features of the scheme

1.1 Overview On 6 July 2006, Excel and Peabody entered into the Merger Implementation Agreement. Further details of the terms and conditions of the Merger Implementation Agreement are set out in section 7 of this Scheme Booklet and a copy of the Merger Implementation Agreement is contained in Annexure B. Peabody proposes to acquire all Excel Shares through a scheme of arrangement. If the Scheme is implemented: (a) Excel Shareholders will receive $8.50 cash per Excel Share held by them at the Record Date; (b) all Excel Shares will be transferred to Peabody; and (c) Excel will be delisted from the ASX. A copy of the Scheme is set out in Annexure C of this Scheme Booklet. 1.2 What you will receive If the Scheme proceeds, Excel Shareholders will receive $8.50 cash for each Excel Share held by them at the Record Date. If you are an Excel Shareholder on Friday, 8 September 2006, you will also be eligible to receive the Declared Dividend for the six months to 30 June 2006 whether or not the Scheme proceeds. 1.3 Directors’ Recommendation The Directors unanimously recommend that, in the absence of a superior proposal, Excel Shareholders vote in favour of the Scheme. 1.4 Independent Expert’s report conclusion Excel commissioned the Independent Expert, Deloitte Corporate Finance Pty Limited, to prepare a report for Excel Shareholders to provide an opinion as to whether the Proposal contemplated by the Scheme is in the best interests of Excel Shareholders. The Independent Expert has concluded in its report that, in the absence of a superior proposal, the Scheme is in the best interests of Excel Shareholders. The Independent Expert’s Report is set out in Annexure A of this Scheme Booklet. 1.5 Shareholder and Court approvals required Shareholder Approval In order for the Scheme to be approved, the resolution to approve the Scheme must be passed by: (a) a majority in number (more than 50%) of Excel Shareholders present and voting at the Scheme Meeting (in person or by proxy, attorney or corporate representative); and (b) at least 75% of the votes cast on the resolution. Court Approval If the Shareholder approvals set out above in relation to the Scheme are obtained, the application for the Court to approve the Scheme is expected to be heard on Tuesday, 10 October 2006. 1.6 Conditions Precedent Implementation of the Scheme is subject to the following Conditions Precedent: (a) Excel Shareholders and the Court approving the Scheme. (b) All necessary regulatory approvals being obtained. (c) There being no Excel Prescribed Occurrence.

KEY FEATURES OF SCHEME

(d) There being no injunction or other order issued by any Court or other legal restraint or prohibition preventing the Scheme. (e) There being no Peabody Prescribed Occurrence. (f) There being no Excel Material Adverse Change. (g) Excel obtaining third party consents under a number of agreements. (h) The Excel Representations and Warranties and the Peabody Representations and Warranties being true and correct in all material respects. (i) Peabody executing funding documentation to fund the provision of the Scheme Consideration and any condition precedent to the funding contemplated by the funding documentation being satisfied or waived. Further details on the Conditions Precedent are set out in section 7.2 of this Scheme Booklet. 1.7 ‘No shop’ and ‘no talk’ obligations Excel has agreed with Peabody that it will not: (a) solicit alternative proposals or competing transactions with third parties; (b) respond to unsolicited approaches unless to not respond would be in breach of fiduciary duties owed by any Director or would otherwise be unlawful. Further details about these provisions are set out in section 7.3 of this Scheme Booklet. 1.8 Reimbursement Fee Excel has agreed to pay the Reimbursement Fee to Peabody if Excel does not comply with particular obligations under the Merger Implementation Agreement and the Proposal does not proceed. Further details about the Reimbursement Fee are set out in section 7.4 of this Scheme Booklet. 1.9 Tax implications The tax implications of the Scheme are set out in section 5 of this Scheme Booklet.

2 recommendations and matters relevant to your vote 2.1 Directorsâ&#x20AC;&#x2122; recommendation

The Directors unanimously recommend that, in the absence of a superior proposal, Excel Shareholders vote in favour of the Scheme. In the absence of a superior proposal, each of the Directors intends to vote in favour of the Scheme at the Scheme Meeting in relation to Excel Shares held or controlled by them. The interests of the Directors are disclosed in sections 3.4 and 8.1 of this Scheme Booklet. The Directors believe that the reasons for Excel Shareholders to vote in favour of the Scheme clearly outweigh the reasons to vote against the Scheme. These reasons and other relevant considerations for Excel Shareholders are set out below. You should also read the Independent Expertâ&#x20AC;&#x2122;s Report which is set out in Annexure A of this Scheme Booklet. 2.2 Reasons to vote in favour of the Scheme The Directors believe that the scheme consideration of $8.50 per Excel Share represents a premium over fair value for Excel Shares and accordingly, the Proposal is in the best interests of Excel Shareholders. The Directors recommend that Excel Shareholders vote in favour of the Scheme for the following reasons: Coal prices are near to all-time highs The Proposal comes at a time when coal prices are near to all-time highs, and substantially above long term averages, in both US$ and A$ (converted) terms. The values of coal assets are particularly sensitive to changes in coal prices and foreign exchange rates, so the share prices of coal companies generally have benefited substantially from buoyant coal prices over the last two years.

US$ per tonne FOB

2006

2005

2004

2003

2002

2001

2000

1999

A$/t FOB

1998

1997

20 1996

20 1995

1994

1993

1992

1991

100

1990

120

100

1989

120

1988

140

1987

140

1986

160

1985

180

160

1984

180

1983

US$/t FOB

Australian hard coking coal prices to Japan â&#x20AC;&#x201C; 1982 to 2006 (Japanese fiscal years commencing 1 April)

A$ per tonne FOB

Source: Barlow Jonker, IRESS

RECOMMENDATIONS AND MATTERS RELEVANT TO YOUR VOTE

US$ per tonne FOB

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

10 1990

10 1989

1988

1987

1986

1985

1984

50 40

A$/t FOB

1983

US$/t FOB

Australian thermal coal prices to Asia – 1983 to 2006 (financial years ended 30 June)

A$ per tonne FOB

Source: Barlow Jonker, IRESS

Underlying value of Excel’s mines, projects and tenements The Directors believe that the underlying value of Excel’s mines, projects and tenements on a stand-alone basis represents less than $8.50 per Excel Share. The Independent Expert has valued Excel’s mines, projects and tenements at $1,780.9 – 1,920.81 million which corresponds to $7.00–7.60 per Excel Share after accounting for other assets and liabilities. The Directors note that mining by its nature (and particularly underground mining) has inherent risks. In order for Excel to achieve the production, revenue and profit growth targets that underpin its value, a number of milestones remain to be achieved in terms of infrastructure development, mine commissioning, coal preparation plant commissioning and securing new coal sales agreements. In addition, there are industry risks that are outside of Excel’s control that could impact the value of its operations. For example, escalating fuel and other mining costs over recent years have impacted all Australian coal producers. Other prevalent industry risks that could materially impact value include: •

shortages of equipment, mining supplies and skilled labour;

•

delays and overruns in mine and mine infrastructure development; and

•

transport and loading infrastructure bottlenecks.

The Directors believe that the Peabody offer price of $8.50 per Excel Share represents full value, particularly in light of these risks. Premium earnings multiple Earnings multiples implied by the Scheme Consideration of $8.50 cash per Excel Share represent substantial premiums to average trading multiples (which generally do not include premiums for control) for listed Australian and overseas coal companies and diversified resources companies. The forecast 2007 price earnings multiple implied by the offer price of $8.50 per Excel Share represents premiums to average trading multiples of 31% for Australian coal companies, 48% for overseas coal companies, and 62% for large diversified resources companies. These premiums exceed the premium for control used by the Independent Expert of 30% (refer to Section 7.3 of the Independent Expert’s Report).

1. Comprises the Independent Expert’s adjusted enterprise value range for Excel plus the value it attributes to Excel’s exploration tenements (refer to Table 15 and Table 17 of the Independent Expert’s Report).

EXCEL COAL LIMITED Scheme booklet

Premium to average sharemarket ratings for comparable companies (forecast price to earnings multiples)

31%

48%

62%

15.2 x

11.6x

10.3 x

9.4 x

Excel 30 June 2007 implied P/E multiple at $8.50 per share

Average 2007 P/E multiple of Australian coal mining companies

Average 2007 P/E multiple of overseas coal mining companies

Average 2007 P/E multiple of large diversified resources companies

Notes: 1. Price to earnings multiples are based on simple averages for each data group. 2. Australian coal mining companies include Centennial Coal, Coal and Allied, Felix Resources, Gloucester Coal, MacArthur Coal, New Hope Corporation and Resource Pacific Holdings. Multiples for the companies are based on data from Appendix 4 of the Independent Expert’s Report, available broker reports and Bloomberg earnings estimates. 3. Overseas coal mining companies include Alpha Natural Resources, Arch Coal, China Shenhua, Consol Energy, Fording Canadian Coal Trust, Foundation Coal Holdings, Massey Energy, Peabody and Yanzhou Coal Mining. Multiples are based on data from Appendix 4 of the Independent Expert’s Report. 4. International diversified resource companies include Anglo American, BHP Billiton, Rio Tinto, Teck Cominco and Xstrata. Multiples are based on data from Appendix 4 of the Independent Expert’s Report, available broker reports and Bloomberg earnings estimates.

Premium to share market prices The Scheme Consideration of $8.50 cash per Excel Share payable under the Scheme represents: •

a premium of 10.2% to the volume weighted average price of $7.71 for Excel Shares sold on the ASX for the 30 day period prior to the announcement of the Proposal on 6 July 2006;

•

a premium of 24.1% to the subscription price of $6.85 for Excel’s $100 million capital raising completed in February 2006; and

•

a premium of 325.0% to the subscription price of $2.00 for Excel’s initial public offer completed in May 2004.

The volume weighted average trade price for Excel Shares on the ASX on 5 July 2006, the day before the Proposal was announced, was $8.33 per Share. While the Scheme Consideration represents a small premium to this closing trade price, the Directors do not believe it is a particularly relevant reference point for evaluating the Scheme Consideration because: •

trading prices for Excel Shares in the month leading to the announcement of the Proposal ranged from $6.61 to $8.50. Given the high levels of daily volatility in Excel Shares in the period leading up to the announcement of the Proposal, the Directors believe that a volume weighted average price for the Excel Shares over a period of 30 days prior to the announcement is a more appropriate reference point; and

•

on the date that Excel announced the Proposal, it provided preliminary guidance for net profit attributable to Excel Shareholders of around $120 million for the 12 months ending 30 June 2007. This preliminary guidance was based on the company’s draft budget for the 2007 financial year, which was considered by the Directors at a board meeting held on 5 July 2006. The Directors confirm that this guidance remains relevant as at the date of this Scheme Booklet. The Directors note that most equity analysts’ net profit forecasts for the 2007 financial year at the time of the announcement were substantially higher than Excel’s guidance. The broker consensus net profit forecast was $161 million, or 34% higher than Excel’s guidance of $120 million.

RECOMMENDATIONS AND MATTERS RELEVANT TO YOUR VOTE

No alternative proposal has emerged From the time of Excel’s announcement of the Proposal up to the date of this Scheme Booklet, no alternative proposal has emerged. However there remains the possibility that one or more third parties could make an alternative proposal that is superior to the Peabody Proposal prior to the Scheme Meeting. The Merger Implementation Agreement restricts Excel from soliciting alternative proposals or competing transactions or responding to unsolicited approaches (the No Shop and No Talk provisions) unless to not respond would be in breach of fiduciary duties owed by a Director or would otherwise be unlawful. However, these restrictions do not in any way prevent or restrict a third party from making an alternative proposal. The Directors believe that Excel’s agreement to the No Shop and No Talk provisions of the Merger Implementation Agreement was appropriate on the basis that: •

they were part of the broader commercial negotiations between Excel and Peabody that enabled the Peabody Proposal to be presented to Excel Shareholders;

•

they do not prevent the Directors from considering an alternative proposal should one emerge; and

•

the market is fully informed and aware of the opportunity to submit an alternative proposal.

In the absence of a superior proposal emerging prior to the Scheme Meeting, the Excel Directors consider the Scheme to be in the best interests of Excel Shareholders. If the Scheme is not approved, it is likely that the Share price will fall As noted above, Excel announced preliminary profit guidance for the 2007 financial year on 6 July 2006 that was substantially below the net profit after tax expectations of most equity analysts. The Directors believe that if the Scheme is not approved and Peabody withdraws, and no alternative proposal emerges, it is likely that Excel’s share price will fall below both the Peabody offer price and the levels at which the Excel Shares had been trading in the period leading up to the announcement of the Proposal. The Independent Expert has concluded that the Scheme is in the best interests of Excel Shareholders The Independent Expert has reviewed the terms of the Scheme and considers that, in the absence of a superior proposal, it is fair and reasonable and is therefore in the best interests of Excel Shareholders as a whole. The total amount to be received by Scheme Shareholders of $8.50 cash per Excel Share exceeds the Independent Expert’s valuation range of $7.00 to 7.60 per Excel Share. The Independent Expert’s Report is set out in Annexure A of this Scheme Booklet. 2.3 Possible reasons not to vote in favour of the Scheme You might not agree with the Directors’ recommendation and Independent Expert’s conclusions The Directors recommend that Excel Shareholders vote in favour of the Scheme for the reasons set out in Section 2.2. The Independent Expert has concluded that the Scheme is in the best interests of Excel Shareholders as a whole. However, Excel Shareholders may hold a different view, and are not obliged to follow the recommendation of the Directors or agree with the Independent Expert’s conclusions. If the Scheme is completed, Scheme Shareholders will no longer be shareholders in Excel If the Scheme is completed, Scheme Shareholders will transfer their Scheme Shares to Peabody in return for $8.50 cash per Excel Share. Consequently, Scheme Shareholders will no longer receive dividends or participate in any future growth opportunities for Excel (it should be noted that there is no guarantee of any future dividends and there is no assurance that future growth in production and/or earnings will be obtained because there are various risks associated with the company’s existing operations, growth prospects, future coal prices and exchange rates).

EXCEL COAL LIMITED Scheme booklet

Tax consequences If the Scheme proceeds, there are likely to be be tax consequences to Scheme Shareholders which may include tax payable on any gain on the disposal of Scheme Shares. Further information on the relevant tax consequences for Australian residents is contained in section 5 of this Scheme Booklet. However, Scheme Shareholders should seek their own professional advice regarding the individual tax consequences applicable to them. 2.4 Other relevant considerations The Scheme may be implemented even if you vote against it You should be aware that even if you do not vote, or vote against the Scheme, the Scheme may still be implemented if it is approved by the requisite majority of Excel Shareholders and the Court. If this occurs, your Excel Shares will be transferred to Peabody and you will receive $8.50 cash per Excel Share even though you did not vote on, or voted against, the Scheme. Major Shareholder support for the Scheme In the absence of a superior proposal emerging, the Directors intend to vote in favour of the Proposal at the Scheme Meeting, in relation to the Excel Shares held or controlled by them. In aggregate, the Directors hold or control approximately 100.5 million Excel Shares, which equates to approximately 46.7% of Excelâ&#x20AC;&#x2122;s voting capital. No brokerage or stamp duty Scheme Shareholders will not incur any brokerage or stamp duty in connection with the Scheme. 2.5 Implications of failure to approve the Proposal If the Proposal is not approved by Excel Shareholders and the Court, Excel Shareholders will retain their shares in Excel. Under this scenario, and in the absence of a superior proposal, the Directors believe that the market price for Excel Shares is likely to fall. Section 2.2 of this Scheme Booklet sets out a discussion of the Directorsâ&#x20AC;&#x2122; considerations in relation to the likely trading price for Excel Shares if the Scheme is not approved. The Directors are unable to say when or if the market price would again reach the $8.50 Scheme Consideration.

3 INFORMATION ABOUT EXCEL

3.1 Introduction to Excel and description of operations Excel is one of Australia’s largest independent coal companies and is based in Sydney. Excel operates three coal mines and has three substantial coal development projects underway in Australia and one overseas. Excel produces a diverse range of coking and thermal coal products and metallurgical coke, most of which is sold under contract to major customers in both export and domestic markets. Excel’s export production is currently shipped through the Port of Newcastle, Port Kembla and Dalrymple Bay. Excel’s coal mining operations and development projects are summarised below: Mine/Project

Coal product Type

Mining Method

JORC resources1 (estimated as at 30 June 2006) (Mt)

JORC reserves1 (estimated as at 30 June 2006) (Mt)

Excel’s % ownership (equity interest)

Wambo

Export thermal and semi soft coking coal

Opencut and Underground

659

127 2

100%3

Metropolitan

Hard coking and PCI

Underground longwall

102

100%

Chain Valley

Export and domestic thermal

Underground bord and pillar

80%

Millennium5

Hard coking and PCI

Opencut

394

–

84.6%

Wilpinjong5

Domestic and export thermal

Opencut

473

150

100%

Cosila

Thermal and PCI

Opencut

–

49%

Notes: 1. Refers to ‘Measured and Indicated Resources’ and ‘Marketable Reserves’ per JORC compliant resource and reserve statements. For further information on Excel’s resources and reserves, refer to the Technical Expert’s report contained in the Independent Expert’s Report in Annexure A. 2. Excel is in the process of updating its opencut reserve statement for Wambo. Indications are that Recoverable Reserves for the opencut will increase to between 145 and 150 Mt (which corresponds to Marketable Reserves of between 95 and 99 Mt). Refer to Technical Expert’s report section 3.1. 3. While Excel owns 100% of the voting equity in the company that operates the Wambo mine, it is entitled to 75% of the net profits from the mine. Sumitomo Coal Mining Limited holds non voting shares in Wambo which entitle it to an annual distribution equal to 25% of the net profit after tax from the mine. Sumitomo also has limited rights to participate in future underground developments (not including North Wambo). 4. This does not include the Mavis Downs, North Poitrel, Wotonga and Morambah tenements, title of which will be transferred to Excel upon completion of the Millennium coal handling and preparation plant. Collectively, these tenements contain an additional 57 Mt of indicated resources. 5. Wilpinjong and Cosila are under development, and are not yet producing any coal.

In addition to the coal assets outlined above, Excel has a 50% interest in Illawarra Coke, a company that operates two coke plants, approximately 80 km south of Sydney. Collectively, the coke plants produce approximately 240,000 tonnes of metallurgical and foundry coke per annum. Excel has a number of exploration tenements which, in the medium to long term, the company may seek to develop (subject to a number of factors, including market conditions, coal prices, governmental and regulatory approvals and technical and economic viability studies): (a) Wambo additional exploration area – Excel has commenced the process of applying to the New South Wales Government for an extension of its tenements to the north of its existing Wambo mine. If granted, this may provide additional opencut and underground resources; (b) Millennium additional exploration area – In addition to the Millennium deposit, Excel will own the Mavis Downs, North Poitrel, Morambah and Wotonga tenements once it fulfils its obligations under its arrangements with BHP Mitsui Coal Pty Ltd. These additional areas have the potential to expand Millennium’s production capacity and mine life, subject to confirmation of technical and economic viability; (c) Middlemount tenement – Excel owns a number of tenements near the Middlemount area in Queensland’s Bowen Basin. These tenements are currently being explored to assess the potential for a development to produce low volatile PCI coal; and (d) Conarco farm-in interest – Excel has recently entered into a heads of agreement with respect to a farm-in agreement with Conarco over two large exploration areas in Queensland’s Bowen Basin. This agreement provides Excel with exploration potential for a relatively small initial investment, which would increase with each development milestone. 14

EXCEL COAL LIMITED Scheme booklet

In September 2005, Excel announced a restructuring of its coal marketing activities by forming an associate company, Excel Coal Marketing Pty Ltd (ECM), to coordinate the marketing of Excel’s export coal production and to trade third party coal. ECM is jointly owned by Excel, AMCI International AG and Corrobare Coal Pty Ltd (a private company owned by the chief executive of ECM). ECM acts as agent for Excel in the promotion, marketing, sale and distribution of its export coal, with Excel continuing to hold direct sales contracts with all customers and retaining control over coal sales contract terms and conditions. Excel is listed on the ASX and is subject to continuous disclosure requirements. The company’s IPO prospectus, quarterly, half yearly and annual reports and ASX announcements provide detailed information on each of Excel’s operations and development projects. In addition, the Independent Expert’s Report in Annexure A to this Scheme Booklet contains a detailed description of Excel’s business. Section 3.2 below provides a summary of key information that Excel has announced over the past 24 months in relation to its major operations and projects. 3.2 Update on Excel’s operations and projects Wambo mine Excel is well advanced in the process of implementing a range of expansion plans at its Wambo mine. Excel has achieved a number of expansion milestones to date, including significant additions to its overburden fleet, completion of a new rail spur, loop and loadout facility and commencement of development of the North Wambo underground mine (anticipated to begin coal production in 2007). Excel also secured $140 million in funding via a US senior unsecured note issue and restructured its debt facilities with Societe Generale Australia Branch to accommodate (among other things) the Wambo expansion. During 2006 Excel entered into a number of long term coal supply contracts over part of its anticipated coal production from Wambo: (a) a contract with Taipower announced in January 2006 to supply 3 million tonnes of coal over six years (0.5 million tonnes per annum); (b) a contract with Cargill announced in January 2006 to supply 1.8 million tonnes of blended coal over three years, at an annual rate of 0.3 million tonnes in 2006, 0.6 million tonnes in 2007 and 0.9 million tonnes in 2008. The majority of coal specified under this contract is from the Wambo mine, with the remainder from Excel’s other New South Wales thermal coal operations; and (c) two additional coal supply contracts announced in June 2006 to supply 5.65 million tonnes of thermal coal over a four year period, in equal annual amounts from January 2007 to December 2010. Coal under these contracts will be sourced from the Wambo and Wilpinjong mines. These contracts are expected to supplement Excel’s existing sales arrangements for the Wambo mine. Metropolitan mine Excel’s efforts in relation to the Metropolitan mine since it was acquired in 2002 have been focussed on improving the mine’s productivity. Measures that have been implemented include widening the longwall face from 135 metres to 158 metres and upgrading the drift conveyor system. Chain Valley mine Excel doubled the production of its Chain Valley mine during 2004/05 by acquiring a second continuous miner production unit and optimising other mining systems. In February 2006, Excel increased its equity interest in the mine from 72% to 80% by acquiring minority interests. Millennium project The Millennium project in the Bowen Basin is one of Excel’s major growth projects. During development of the mine, as previously disclosed, the company experienced delays in the completion of the mine’s coal handling and preparation plant (CHPP) and capital cost overruns. In March 2005, Excel entered into a joint venture agreement (Red Mountain Joint Venture) with BHP Mitsui Coal Pty Ltd (BMC) to share coal preparation and transport infrastructure with BMC’s adjacent Poitrel project. BMC has also agreed to the transfer of various BMC tenements to Millennium (Mavis Downs, North Poitrel, Wotonga and Morambah). Excel has 15

INFORMATION ABOUT EXCEL

EXCEL – WORLDWIDE OPERATIONS

MILLENNIUM PROJECT (85% INTEREST)

WILPINJONG PROJECT (100% INTEREST)

WAMBO MINE (100% INTEREST)

CHAIN VALLEY MINE (80% INTEREST)

METROPOLITAN MINE (100% INTEREST)

ILLAWARRA COKE (100% INTEREST)

COSILA PROJECT (49% INTEREST)

VENEZUELA

PORT BOWEN BASIN SURAT BASIN HUNTER COALFIELD NEWCASTLE COALFIELD WESTERN COALFIELD SOUTHERN COALFIELD

EXCEL COAL LIMITED Scheme booklet

Abbot Point PACIFIC OCEAN

Mackay 1 Middlemount EPC 726

Dalrymple Bay Coal Terminal

Foxleigh North EPC 855 Rockhampton

Brisbane

QUEENSLAND

NEW SOUTH WALES

2 Mudgee

Singleton

3 4 5 6

AUSTRALIA

Newcastle Sydney

Port Kembla TASMAN SEA

INFORMATION ABOUT EXCEL

planned for capacity of this infrastructure to be 6 million tonnes per annum of saleable coal (with Millennium and BMC each proposing to process 3 million tonnes through the plant from their respective adjacent mining operations). In early 2006, Excel announced a restructuring of the contract for the design and construction of Millennium’s CHPP and transferred control of the development of the CHPP away from the contractor to Excel. Cost increases, changes in design and timing delays relating to the CHPP resulted in an increase in Excel’s capital cost estimate for the plant. Since Excel assumed direct control of the plant’s development, it has been steadily progressing its revised plan, with expected commissioning by the end of September 2006. The Millennium project is now producing raw coal from its open pit mine, which is being shipped to buyers through the Dalrymple Bay Coal Terminal port. Wilpinjong project Development of the Wilpinjong project is progressing to plan. The project is on track to produce 3.7 million tonnes of coal in the 2007 financial year, 1.5 million tonnes of which is expected to be suitable for the export thermal coal markets. Excel has announced it has achieved a number of development milestones over the past 24 months including receipt of development approval and a mining lease for the project, and the conclusion of a native title agreement over the project area. More recently, Excel has announced that construction of the project is on schedule for first delivery of coal in October 2006. In addition to the Macquarie Generation coal supply agreement which requires the supply of approximately 3 to 7 million tonnes of coal per year to Macquarie Generation from 2007 to 2026 (calendar years), in September 2005 Excel entered into an additional contract with Macquarie Generation to supply a further 500,000 tonnes of coal for each of the 2007, 2008 and 2009 calendar years. Cosila project Over the past 24 months Excel has continued to progress preparatory work for this mine development. In 2006, the State Development Corporation of Zulia (Corpozulia), the Venezuelan state in which Cosila is located, expressed an interest in acquiring an equity interest in the Cosila project. Preliminary discussions are in progress with Corpozulia in this regard. 3.3 Summary financial information Excel’s financial results for the 12 months ended 30 June 2005 (actual), 30 June 2006 (actual) and 30 June 2007 (guidance) are summarised below. Consolidated Financial Performance ($ millions) Year ended 30 JunE

2005 (actual)1

2006 (actual)2

2007 (guidance)3

Total Revenue EBITDA Depreciation & amortisation EBIT Net interest Share of associates Profit before tax Tax expense Minority interest NPAT

358.0 129.0 (22.2) 106.8 (4.9) 6.2 108.1 13.7 (26.7) 95.1

517.9 187.1 (24.6) 162.5 (10.6) 0.4 152.3 (45.3) (8.9) 98.1

860 265

120

Notes: 1. Based on Excel’s audited accounts prepared on the basis of Australian Generally Accepted Accounting Principals (AGAAP), as reported in Excel’s 2005 Annual Report. 2. Based on Excel’s audited accounts prepared on the basis of Australian Equivalent International Financial Reporting Standards (AIFRS). 3. Based on AIFRS. Excel’s guidance for the year ended 30 June 2007 is based upon a number of estimates and assumptions that, while considered reasonable by Excel, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the control of Excel. The guidance presented in this Scheme Booklet may vary from actual results, and these variations may be material.

EXCEL COAL LIMITED Scheme booklet

Consolidated Financial Position ($ millions)

As at 30 June 2006

Current assets Cash Receivables Other

39.8 85.0 115.0

Total current assets

239.8

Non-current assets Property, plant and equipment Intangibles Other

538.7 113.2 71.5

Total non-current assets

723.4

TOTAL ASSETS

963.2

Current liabilities Payables Interest-bearing liabilities Provisions

106.3 24.3 62.4

Total current liabilities

193.0

Non-current liabilities Interest-bearing liabilities Provisions Other non-current liabilities

275.5 14.5 87.5

Total non-current liabilities

377.5

TOTAL LIABILITIES

570.5

NET ASSETS

392.7

Excel announced its annual results for the 2006 financial year on 21 August 2006. This announcement contained further detail on the company’s financial performance over the past 12 months and its guidance for the 2007 financial year. Excel Shareholders are able to access this announcement, as well as an investor presentation on the 2006 end of year results, on Excel’s website at: www.excelcoal.com.au, or on the ASX website at: www.asx.com.au. 3.4 Further Information Excel’s Board The current Directors of Excel are: • Roger Massy-Greene (Non-Executive Chairman) •

Richard Chadwick (Non-Executive Deputy Chairman)

•

Anthony Haggarty (Managing Director)

•

John Conde AO (Non-Executive Director)

•

Allan Davies (Executive Director – Operations)

• Christopher Ellis (Executive Director – Project Development) •

Andrew Plummer (Executive Director – Business Development)

• Terry Williamson (Non-Executive Director)

INFORMATION ABOUT EXCEL

Issued excel Shares As at the date of this Scheme Booklet, there were 214,977,360 Excel Shares on issue. Excel has no other issued shares, share options or share rights. The table below set out Excel Shares held or controlled by the Directors and substantial shareholders as at the date of this Scheme Booklet. Number of Shares

Directors Richard Chadwick Anthony Haggarty Christopher Ellis Roger Massy-Greene Andrew Plummer Allan Davies Terry Williamson John Conde AO

% of Shares

29,000,000 13.5% 23,435,000 10.9% 18,900,000 8.8% 11,850,000 5.5% 9,000,000 4.2% 8,150,000 3.8% 75,744 Less than 0.1% 50,000 Less than 0.1%

Substantial Shareholders* Newton Investment Management Ltd 21,971,176

10.2%

Other Shareholders 92,545,440

43.1

TOTAL 214,977,360

100.0%

* Source: Substantial shareholder filings with the ASX

Excel Share price performance from IPO to 5 July 2006

$10.00

PRICE

$8.00

$6.00

$4.00

$2.00

APR-04

AUG-04

NOV-04

FEB-05

JUN-05

SEP-05

DEC-05

MAR-06

JUL-06

4 INFORMATION ABOUT PEABODY

4.1 Introduction to Peabody and available information Company overview Peabody Pacific Pty Limited will be the legal entity acquiring Excel, if the Scheme is approved. Peabody is a wholly owned subsidiary of Peabody Energy Corporation that currently owns all of Peabody Energy Corporation’s Australian mining and trading operations. Peabody Energy Corporation is the largest private-sector coal company in the world. During the year ended December 31, 2005, the company sold 239.9 million tons (217.6 million tonnes) of coal. During this period, Peabody Energy Corporation sold coal to over 350 electricity generating and industrial plants in 15 countries. Peabody Energy Corporation’s coal products fuel approximately 10% of all U.S. electricity generation and 3% of worldwide electricity generation. At December 31, 2005, the company had 9.8 billion tons (8.9 billion tonnes) of proven and probable coal reserves. Peabody Energy Corporation is engaged in the production, distribution and sale of coal to electricity generating and industrial plants throughout the world. It owns, through its subsidiaries, majority interests in coal operations located throughout all major U.S. coal producing regions and in Australia. Additionally, the company owns minority interests in mines through joint venture arrangements. Most of Peabody Energy Corporation’s production in the western United States is low-sulphur coal from the Powder River Basin. In the western United States, Peabody Energy Corporation owns and operates mines in Arizona, Colorado, New Mexico and Wyoming. In the eastern United States, the company owns and operates mines in Illinois, Indiana, Kentucky and West Virginia. Peabody Energy Corporation also owns mines in Queensland, Australia. Most of the company’s Australian production is low-sulphur, metallurgical coal. In addition to its mining operations, Peabody Energy Corporation markets, brokers and trades coal. In 2005, the company opened a business development, sales and marketing office in Beijing, China to pursue potential long-term growth opportunities in this market. Other energy related commercial activities include the development of mine-mouth coal fuelled generating plants, the management of substantial coal reserve and real estate holdings, coalbed methane production, transportation services, and, more recently, BTU conversion. Peabody Energy Corporation’s BTU conversion initiatives include participation in technologies that convert coal into natural gas, liquids and hydrogen. Peabody Energy Corporation’s headquarters and principal executive offices are located in St. Louis, Missouri, USA. As of December 31, 2005, the company and its subsidiaries had approximately 8,300 employees. Available information Peabody Energy Corporation files annual, quarterly and event-driven current reports, and amendments to those reports, proxy statements and other information with the SEC. SEC filings may be accessed without charge via the internet at www.peabodyenergy.com or the SEC’s website at www.sec.gov. 4.2 Source of Scheme Consideration If the Scheme is implemented, Peabody will pay Scheme Shareholders a total of approximately $1,827 million. Peabody Energy Corporation intends to provide the necessary funding to Peabody so that it can pay the Scheme Consideration. To ensure that Peabody has sufficient funds to pay the Scheme Consideration, Peabody Energy Corporation has a financing commitment from Morgan Stanley Senior Funding, Inc. (together with any assignees of the financing commitment, collectively the ‘Financiers’) for up to US$1,500 million (being approximately A$1,970 million (at an exchange rate of A$1.00 to US$0.76)) (‘Debt Funding’). At the date of this Scheme Booklet, Peabody Energy Corporation has executed a commitment letter with the Financiers, pursuant to which the Financiers have agreed to provide the Debt Funding to pay the Scheme Consideration subject to the satisfaction of a number of conditions precedent. The conditions precedent are usual for a facility of this nature and include (without limitation) receipt by the Financiers of the following in form and substance satisfactory to them: •

the executed Merger Implementation Agreement and copies of other related documents that have not, without the Financiers’ consent, been amended or otherwise changed in any respect that is materially adverse to the Financiers;

•

evidence that none of the conditions to the Merger Implementation Agreement have been waived in a manner materially adverse to the Financiers without the Financiers’ consent;

•

evidence that the proposed refinancing of existing debt of Excel has occurred or will occur concurrently with the initial draw down of Debt Funding or as soon as practicable thereafter; 21

INFORMATION ABOUT PEABODY

•

executed formal documentation of the Debt Funding agreements (‘Loan Documentation’) which incorporate the terms and conditions set out in the commitment letter;

•

evidence that a Material Adverse Change (as defined in the Merger Implementation Agreement) has not occurred;

•

evidence that there is no default under the Loan Documentation;

•

evidence that each of the representations and warranties made in the Loan Documentation remains true and correct in all material respects;

•

other procedural conditions precedent usual for a facility of this nature (including solvency certificates in respect of Peabody Energy Corporation and opinions on the execution and enforceability of the debt funding agreements);

•

evidence that all fees and expenses of the Financiers have been paid; and

•

information required to assist with the syndication of loans or the issuance of debt securities in connection with the Debt Funding.

Peabody Energy may elect to obtain funding for the Scheme Consideration from reputable financiers other than Morgan Stanley. In that event the funding from such financiers would not contain conditions to funding more onerous that those described above. At the date of this Scheme Booklet, Peabody is not aware of any reason why the conditions precedent will not be satisfied in time to allow the proceeds to be available to pay the Scheme Consideration as and when it is due under the terms of the Scheme. Peabody Energy Corporation has executed a deed poll dated 30 August 2006 in favour of each Scheme Shareholder. In summary, Peabody Energy Corporation undertakes (subject to the Scheme becoming effective) to procure that Peabody pays the Scheme Consideration to each Scheme Shareholder on the Implementation Date. A copy of the Deed Poll is contained at Annexure D of this Scheme Booklet. 4.3 Peabody’s intentions This section sets out Peabody’s intentions in relation to the: •

the continuation of the business of Excel;

•

any major changes to the business of Excel and any redeployment of the fixed assets of Excel; and

•

the future employment of the present employees of Excel,

in circumstances where the Scheme is implemented. Peabody’s current intention, if the Scheme is approved, is to: •

seek to have Excel removed from the official list of the ASX;

•

appoint nominees of Peabody to the Excel Board. These nominees have not yet been identified and their identity will depend on the circumstances at the relevant time;

•

not make any major changes to the business of Excel. It is Peabody’s intention to focus on continuing the growth of Excel;

•

continue to own and operate and not redeploy any of Excel’s material assets;

• continue the employment of the majority of Excel’s present employees. Peabody intends to replace the existing board of directors with its nominees and may undertake a review of Excel’s operations which may result in either redundancies or new hires, however Peabody expects the majority of Excel’s current employees will be retained; and •

refinance Excel’s existing debt facilities and pay off Excel’s notes with funds from Peabody Energy Corporation.

These statements of intention are based only on the information concerning Excel, its business and the general business environment which is known to Peabody at the time of preparation of this Scheme Booklet. Final decisions will only be made by Peabody once it has had an opportunity to undertake a detailed review of Excel’s operations. Accordingly the statements are statements of current intentions only and may change as new information becomes available or circumstances change.

5 TAX IMPLICATIONS OF THE SCHEME FOR AUSTRALIAN RESIDENTS Introduction The following is a general summary of the potential Australian capital gains tax (‘CGT’) consequences for Scheme Shareholders of disposing of Scheme Shares under the Scheme. This summary is based on the law and practice in effect on the date this Scheme Booklet was lodged with ASIC. However, the summary is not intended to be an authoritative or complete statement of the law applicable to the particular circumstances of every Scheme Shareholder. In particular, the summary is only relevant to Australian resident Scheme Shareholders who hold Scheme Shares on capital account for investment purposes. All Excel Shareholders are advised to seek independent professional advice in relation to their particular circumstances. In particular, non-resident Excel Shareholders should seek their own advice on the Australian and foreign tax consequences. CGT consequences on disposal of Scheme Shares Pre-CGT Scheme Shares Any Scheme Shareholder who acquired their Scheme Shares before 20 September 1985 should seek independent professional advice as to the Australian CGT consequences on the disposal of Scheme Shares under the Scheme. Post-CGT Scheme Shares Any Scheme Shareholder who acquired their Scheme Shares on or after 20 September 1985 will make a capital gain equal to the amount by which the Scheme Consideration exceeds the cost base of the Scheme Shares the subject of the Scheme. Subject to the availability of the CGT discount (see below) and any losses available to be offset against the capital gain, this amount will be included in the Scheme Shareholder’s taxable income. A Scheme Shareholder will alternatively make a capital loss equal to the amount by which the reduced cost base of the Scheme Shares the subject of the Scheme exceeds the Scheme Consideration. A capital loss may be used to offset a capital gain made in the same income year or be carried forward to offset a capital gain made in a future income year, subject to the satisfaction of certain loss recoupment tests applicable to companies and trusts. Cost base of Scheme shares The cost base of Scheme Shares will generally be equal to the cost of acquiring the Scheme Shares, including any stamp duty and brokerage fees. scheme Shares acquired before 21 September 1999 Any Scheme Shareholder who acquired their Scheme Shares before 11.45am (by legal time in the Australian Capital Territory) on 21 September 1999 and held them for at least 12 months prior to transfer to Peabody under the Scheme may index the cost base of their Scheme Shares to take account of inflation between the calendar quarter in which the Scheme Shares were acquired and the calendar quarter ended 30 September 1999. If a Scheme Shareholder who is an individual, the trustee of a trust or a complying superannuation entity chooses to index the cost base of Scheme Shares, then the CGT discount will not be available (see below). Note that the cost base of Scheme Shares cannot be indexed in working out the amount of any capital loss. CGT discount Any Scheme Shareholder who is an individual, the trustee of a trust or a complying superannuation entity may be entitled to claim the CGT discount in calculating any capital gain provided that: (a) the Scheme Shares were acquired at least 12 months prior to disposal under the Scheme; (b) the Scheme Shareholder did not choose to index the cost base of their Scheme Shares (see above); and (c) the CGT discount is applied to the capital gain after any available capital losses are first offset against that capital gain. A Scheme Shareholder who is an individual or the trustee of a trust may discount the capital gain by 50% and include 50% of the capital gain in the taxable income of that individual or trust.

TAX IMPLICATIONS OF THE SCHEME FOR AUSTRALIAN RESIDENTS

A Scheme Shareholder who is a complying superannuation entity may discount the capital gain by 331/3 % and include 66 2/3 % of the capital gain in the taxable income of that complying superannuation entity. The CGT discount is not available to a Scheme Shareholder that is a company. Goods and services tax and stamp duty No Australian goods and services tax or stamp duty will be payable by Scheme Shareholders under the Scheme.

6 IMPLEMENTATION OF THE SCHEME

6.1 Scheme Meeting On or about the date of this Scheme Booklet, the Court ordered that the Scheme Meeting be convened in accordance with the Notice of Scheme Meeting and appointed Roger Massy-Greene to chair the Scheme Meeting. The Notice of Scheme Meeting is set out as Annexure E to this Scheme Booklet. Each Excel Shareholder who is registered on the Share Register at 3.00pm on Monday, 2 October 2006 is entitled to attend and vote at the Scheme Meeting, either in person or by proxy or attorney or, in the case of a body corporate, by its corporate representative appointed in accordance with section 250D of the Corporations Act. Voting at the Scheme Meeting will be by poll. To be approved under paragraph 411(4)(a) of the Corporations Act, the resolution in favour of the Scheme must be passed at the Scheme Meeting by: (a) a majority in number of Excel Shareholders present and voting (in person or by proxy); and (b) votes representing at least 75% of the total votes cast at the Scheme Meeting. Instructions on how to attend and vote at the Scheme Meeting (in person or by proxy), are set out in the section entitled ‘How to Vote’ on page 6 of this Scheme Booklet and in the notes for the Notice of Scheme Meeting in Annexure E to this Scheme Booklet. 6.2 Second Court Hearing In the event that: (a) the Scheme is approved by the requisite majorities of Excel Shareholders at the Scheme Meeting; and (b) all Conditions Precedent have been satisfied or waived (if they are capable of being waived), then Excel will apply to the Court for orders approving the Scheme. Each Excel Shareholder has the right to appear at the Second Court Hearing. 6.3 Effective Date The Scheme will become effective on the Effective Date, being the date an office copy of the Court order from the Second Court Hearing approving the Scheme is lodged with ASIC. Excel, will upon the Scheme becoming effective, give notice of that event to the ASX. Excel intends to apply to ASX for Excel Shares to be suspended from official quotation on ASX from close of trading on the Effective Date. 6.4 Record Date Those Excel Shareholders on the Share Register on the Record Date (ie at 5.00pm on the fifth Business Day after the Effective Date) will become entitled to the Scheme Consideration in respect of the Excel Shares they hold at that time (in this Scheme Booklet, those Excel Shareholders and the Excel Shares that they hold are referred to as ‘Scheme Shareholders’ and ‘Scheme Shares’ respectively). 6.5 Determination of persons entitled to Scheme Consideration Dealings on or prior to the Record Date For the purposes of establishing who the Scheme Shareholders are, dealings in Excel Shares will only be recognised if: (a) in the case of dealings of the type to be effected by CHESS, the transferee is registered in the Share Register as a holder of Excel Shares on the Record Date; and (b) in all other cases, registrable transmission applications or transfers are received on or before the Record Date at the place where the Share Register is kept. Subject to the Corporations Act, ASX Listing Rules and the Constitution, Excel must register transmission applications or transfers which it receives by the Record Date. Excel will not accept for registration or recognise for any purpose any transmission application or transfer in respect of Excel Shares received after the Record Date. 25

IMPLEMENTATION OF THE SCHEME

Dealings after the Record Date For the purposes of determining the entitlement to Scheme Consideration, Excel will, until the Scheme Consideration has been provided, maintain the Share Register in this form. The Share Register in this form will solely determine entitlements to Scheme Consideration. From the Record Date: (a) all statements of holding in respect of Excel Shares cease to have effect as documents of title in respect of such Excel Shares; and (b) each entry on the Share Register will cease to be of any effect except as evidence of entitlement to Scheme Consideration in respect of the Scheme Shares relating to that entry. 6.6 Implementation Date The Implementation Date is the fifth Business Day after the Record Date. On the Implementation Date, Peabody will pay each Scheme Shareholder the Scheme Consideration for the Scheme Shares held by that Scheme Shareholder and the Scheme Shares will be transferred to Peabody. In the case of Scheme Shares held in joint names, the Scheme Consideration shall be paid to the holder whose name appears first in the Share Register as at the Record Date. 6.7 Delisting Excel On a date after the Implementation Date to be determined by Peabody, Excel will apply: (a) for termination of the official quotation of Excel Shares on the ASX; and (b) to have itself removed from the official list of the ASX. 6.8 Stamp duty Excel does not expect that any stamp duty will be payable on the transfer of the Scheme Shares to Peabody. However, if stamp duty is payable, Peabody has an obligation under the Merger Implementation Agreement to pay the stamp duty.

7 key terms of the merger implementation agreement 7.1 Overview Excel and Peabody Energy Corporation entered into the Merger Implementation Agreement on 6 July 2006. The terms of the Merger Implementation Agreement included the following: (a) the Conditions Precedent to the Scheme (refer to section 7.2); (b) the steps that each party must take to implement the Scheme (refer to section 6); (c) the ‘no shop’ and ‘no talk’ arrangements (refer to section 7.3); (d) Excel’s agreement to pay Peabody Energy Corporation a Reimbursement Fee in certain circumstances (refer to section 7.4); and (e) the ability to terminate the Merger Implementation Agreement (refer to section 7.5). The Merger Implementation Agreement is set out in full as Annexure B to this Scheme Booklet. 7.2 Conditions Precedent Implementation of the Scheme is subject to the Conditions Precedent which must be satisfied before the Second Court Date, including the following: (a) Excel Shareholders resolving to approve the Scheme at the Scheme Meeting. The resolution in favour of the Scheme must be passed by:

(i) a majority in number of Excel Shareholders present and voting (in person or by proxy) at the Scheme Meeting; and

(ii) votes representing at least 75% of the total votes cast at the Scheme Meeting.

(b) Foreign Investment Review Board and all other necessary regulatory approvals being obtained. Excel and Peabody are currently in the process of procuring these regulatory approvals. (c) There being no Excel Prescribed Occurrence. (d) There being no temporary, preliminary or permanent injunction or other order issued by any Court or other legal restraint or prohibition preventing the Proposal from being completed. (e) There being no Peabody Prescribed Occurrence. (f) There being no Excel Material Adverse Change. (g) Excel obtaining third party consents under a number of agreements to which Excel or one of its subsidiaries is a party. This Condition Precedent relates only to agreements that are material to Excel’s business and which contain change of control provisions that will be triggered once the Scheme is implemented. Consent has been provided by Macquarie Generation in relation to coal supply agreements with respect to Excel’s Wilpinjong project. (h) The Excel Representations and Warranties and the Peabody Representations and Warranties being true and correct in all material respects. (i) Peabody executing funding documentation (the key terms of which have been provided to Excel) to fund the provision of the Scheme Consideration to the Scheme Shareholders, and any condition precedent (other than a condition requiring court approval for the Scheme) to the funding contemplated by the funding documentation being satisfied or waived. The Scheme also requires Court approval. The terms ‘Excel Prescribed Occurrence’, ‘Peabody Prescribed Occurrence’, ‘Excel Material Adverse Change’, ‘Excel Representations and Warranties’ and ‘Peabody Representations and Warranties’ are defined in clause 1.1 of the Merger Implementation Agreement. Excel is not aware of any reason why the Conditions Precedent will not be satisfied by the Second Court Date.

KEY TERMS OF THE MERGER IMPLEMENTATION AGREEMENT

7.3 ‘No shop’ and ‘no talk’ obligations No shop Excel has agreed that it will not solicit, encourage (including by providing information concerning Excel to any person), initiate or communicate any intention to do any of those things, in response to any expression of interest, offer or proposal by any person in relation to any competing transaction. Excel’s ‘no shop’ obligation commenced on 6 July 2006 and will terminate on the earlier of: (a) the date on which the Merger Implementation Agreement is terminated in the manner set out in section 7.5 of this Scheme Booklet; and (b) the End Date. No talk Excel has also agreed that it will not participate in any negotiations or discussions, provide or make available any information (including by providing information and access to perform due diligence), or communicate any intention to do any of those things, in response to any expression of interest, offer or proposal by any person in relation to a competing proposal, unless to not respond would be in breach of fiduciary duties owed by any Director or would otherwise be unlawful. Prior to undertaking an act under this exception, Excel must provide Peabody with a copy of the written legal opinion relied on by its Directors. Excel’s ‘no talk’ obligation commenced on 6 July 2006 and will terminate on the earlier of: (a) the date on which the Merger Implementation Agreement is terminated in the manner set out in section 7.5 of this Scheme Booklet; and (b) the End Date. Notification of approaches Excel must notify Peabody promptly if it becomes aware of any: (a) negotiations or discussions; (b) approach or attempt to initiate any negotiations or discussions; or (c) intention to make such an approach or attempt to initiate any negotiations or discussions, in respect of any expression of interest, offer or proposal in relation to a competing transaction and provide in writing to Peabody the identity of the relevant person to do any of those things. 7.4 Reimbursement Fee Excel has agreed to pay a Reimbursement Fee to Peabody Energy Corporation, equal to $18 million, if: (a) the Directors change, withdraw or modify their recommendation that Excel Shareholders vote in favour of the Scheme or make a public statement indicating that they no longer support the Proposal or that they support some other proposal (unless the Directors have withdrawn or modified their recommendation where there has been a Peabody Prescribed Occurrence and Excel has commenced termination of the Merger Implementation Agreement); (b) Excel breaches its obligations under the ‘no shop’ or ‘no talk’ provisions summarised in section 7.3 of this Scheme Booklet; (c) a third party:

(i) announces a Competing Transaction; or

(ii) who at the date of the Merger Implementation Agreement does not have at least 10% voting power in Excel becomes entitled to such voting power, or gains an economic exposure to at least 10% of Excel Shares,

in each case prior to the termination of the Merger Implementation Agreement (in the manner set out in section 7.5 of this Scheme Booklet) and that third party gains a relevant interest in at least 50% of Excel Shares or acquires, acquires control of or merges with, Excel within 12 months. 28

EXCEL COAL LIMITED Scheme booklet

(d) the Merger Implementation Agreement is terminated by Peabody as a result of certain Excel Prescribed Occurrences occurring before the Second Court Date. Excel will only be obliged to pay the Reimbursement Fee to the extent that such payment would not: (a) breach the fiduciary or statutory duties of the Directors; (b) constitute unacceptable circumstances as declared by the Takeovers Panel; or (c) be unlawful. In the event that the Reimbursement Fee becomes payable, Excel must pay the Reimbursement Fee within three Business Days after receiving a written demand from Peabody Energy Corporation. Excel and Peabody Energy Corporation have agreed that the Reimbursement Fee of $18 million is a genuine and reasonable pre-estimate of the loss that would actually be suffered. 7.5 Termination The Merger Implementation Agreement may be terminated at any time prior to the Second Court Date in the following circumstances: (a) By either party if:

(i) the other party is in material breach of the Merger Implementation Agreement;

(ii) a court or government agency has taken any action permanently restraining or otherwise prohibiting the Scheme from proceeding, or has refused to do any thing necessary to permit the Scheme to proceed (and the action or refusal is final); or

(iii) a Condition Precedent is not satisfied and Excel and Peabody cannot reach agreement to proceed by way of alternative means.

(b) By Peabody Energy Corporation if:

(i) the Directors change, withdraw or modify their recommendation that Excel Shareholders vote in favour of the Scheme or make a public statement indicating that they no longer support the Proposal or that they support some other proposal; or

(ii) Excel breaches its obligations under the ‘no shop’ or ‘no talk’ provisions detailed in section 7.3 of this Scheme Booklet.

(i) changed, withdrawn or modified their recommendation in a manner permitted by the Merger Implementation Agreement;

(ii) by the end of the 21 day period, that recommendation has not been reinstated; and

(iii) the Reimbursement Fee has been paid to Peabody Energy Corporation.

7.6 End Date Under the terms of the Merger Implementation Agreement, Excel and Peabody Energy Corporation have committed to implement the Scheme on or before the End Date, being 1 December 2006. If the Scheme is not effective by the End Date, Excel and Peabody are obliged to consult in good faith and determine whether the Proposal can proceed by way of the Scheme or alternative means. If the parties are unable to reach agreement, either party may terminate the Merger Implementation Agreement. If the Merger Implementation Agreement is terminated, the Proposal will not proceed. 7.7 Deed Poll Under the terms of the Deed Poll, Peabody Energy Corporation has undertaken, subject to the Scheme becoming effective, to procure that Peabody pays the Scheme Consideration to the Scheme Shareholders as and when it is due under the terms of the Scheme. A copy of the Deed Poll is attached at Annexure D of this Scheme Booklet.

8 additional information

8.1 Interests of Directors Except as set out below, no Director has any material interest in relation to the Scheme. Excel Shares Excel Shares held by or on behalf of each Director as at the date of this Scheme: Director Excel Shares Voting power in Excel

Richard Chadwick Anthony Haggarty Christopher Ellis Roger Massy-Greene Andrew Plummer Allan Davies Terry Williamson John Conde AO

29,000,000 13.5% 23,435,000 10.9% 18,900,000 8.8% 11,850,000 5.5% 9,000,000 4.2% 8,150,000 3.8% 75,744 Less than 0.1% 50,000 Less than 0.1%

Peabody securities There are no marketable securities of Peabody Energy Corporation held by or on behalf of any Directors as at the date of this Scheme Booklet. Payments or other benefits to Directors, secretaries or executive officers No payment or other benefit is proposed to be made or given to any Director, secretary or executive officer of Excel or of its related bodies corporate as compensation for loss of, or as consideration for or in connection with their retirement from, office in Excel or any related bodies corporate. Agreements or arrangements with Directors There are no other agreements or arrangements made between any Director and another person, including Peabody, in connection with or conditional upon the outcome of the Scheme. Interests of Directors in contracts entered into by Peabody No Director has any interest in a contract entered into by Peabody. 8.2 Peabodyâ&#x20AC;&#x2122;s relevant interests in Excel Shares As at the date of this Scheme Booklet: (a) no Excel Shares are held by or on behalf of any Peabody directors; (b) Peabody has no relevant interest in any of the Excel Shares on issue; (c) Peabody has no voting power in Excel. 8.3 Dealings in Excel Shares Except as disclosed elsewhere in this Scheme Booklet, neither Peabody nor any Associate has provided, or agreed to provide, consideration for any Excel Shares under a purchase or agreement during the four months ended on the day immediately before the date of this Scheme Booklet. During the period of four months ended on the day immediately before the date of this Scheme Booklet, neither Peabody nor any Associate has given or offered to give or agreed to give a benefit to another person where the benefit was likely to induce the other person, or an Associate, to: (a) vote in favour of the Scheme; or (b) dispose of Excel Shares, and the benefit has not been offered to all Excel Shareholders. 30

EXCEL COAL LIMITED Scheme booklet

8.4 Material changes in Excel’s financial position Within the knowledge of the Directors there has been no material change to the financial position of Excel since 30 June 2005, other than as disclosed elsewhere in this Scheme Booklet or to the ASX. Excel’s annual report, containing its financial position as at 30 June 2006, will be dispatched to Shareholders on or around 29 September 2006 and will be available from that date on Excel’s website at: www.excelcoal.com.au, or on the ASX website at: www.asx.com.au. 8.5 Directors’ intentions for the Company If the Scheme is implemented, the existing Directors will retire and Peabody nominees will reconstitute the Board (see section 4.3 of this Scheme Booklet). Accordingly, the existing Directors are not able to make any statements on intentions regarding: (a) the continuation of the Company’s business or how business will be conducted after implementation of the Scheme; (b) any major changes to the business, including any redeployment of the fixed assets; or (c) the future employment of present employees. Peabody has provided an outline of its intentions for Excel’s operations at section 4.3 of this Scheme Booklet. 8.6 Consents to be named Deloitte Corporate Finance Pty Ltd (the ‘Independent Expert’) has consented to the inclusion of the Independent Expert’s Report in Annexure A and to the references to the Independent Expert’s Report in this Scheme Booklet being made in the form and context in which each such reference is included and has not withdrawn that consent before the date of this Scheme Booklet. Other than in respect of the Independent Expert’s Report and any other statements attributed to the Independent Expert, the Independent Expert has not authorised or caused the issue of this Scheme Booklet, and has not made, or purported to make, any statement in this Scheme Booklet. Grant Samuel Corporate Finance Pty Limited has given and has not withdrawn its consent to be named as financial adviser to Excel in the form and context in which it is named and has not withdrawn that consent before the date of this Scheme Booklet. Other than in respect of those statements attributed to Grant Samuel Corporate Finance Pty Limited, Grant Samuel Corporate Finance Pty Limited has not authorised or caused the issue of this Scheme Booklet, and has not made, or purported to make, any statement in this Scheme Booklet. McCullough Robertson has given and has not withdrawn its consent to be named as legal adviser to Excel in the form and context in which it is named and has not withdrawn that consent before the date of this Scheme Booklet. Other than in respect of those statements attributed to McCullough Robertson, McCullough Robertson has not authorised or caused the issue of this Scheme Booklet, and has not made, or purported to make, any statement in this Scheme Booklet. Peabody and Peabody Energy Corporation have consented to the inclusion of the Peabody Information in the form and context in which that information appears and has not withdrawn that consent before the date of this Scheme Booklet. Other than in respect of those statements attributed to Peabody and Peabody Energy Corporation, neither Peabody nor Peabody Energy Corporation has authorised or caused the issue of this Scheme Booklet, and has not made, or purported to make, any statement in this Scheme Booklet. Link Market Services Limited has given and has not withdrawn its consent to be named as the share registry of Excel in the form and context in which it is named and has not withdrawn that consent before the date of this Scheme Booklet. Other than in respect of those statements attributed to Link Market Services Limited, Link Market Services Limited has not authorised or caused the issue of this Scheme Booklet, and has not made, or purported to make, any statement in this Scheme Booklet. 8.7 Information disclosed to ASX and documents lodged with ASIC Excel is a ‘disclosing entity’ for the purposes of the Corporations Act and as such is subject to periodic reporting and continuous disclosure obligations. Publicly disclosed information about all listed entities, including Excel, is available on the ASX website, www.asx.com.au. Publicly disclosed information about Excel is also available at its website, www.excelcoal.com.au. 31

ADDITIONAL INFORMATION

In addition, Excel is also required to lodge various documents with ASIC. Copies of documents lodged with ASIC by Excel may be obtained from, or inspected at, ASIC offices. 8.8 Lodgement of this Scheme Booklet This Scheme Booklet was given to ASIC on 14 August 2006 in accordance with paragraph 411(2)(b) of the Corporations Act. 8.9 No unacceptable circumstances The Directors believe that the Scheme does not involve any circumstances in relation to the affairs of any Excel Shareholder that could reasonably be characterised as constituting â&#x20AC;&#x2DC;unacceptable circumstancesâ&#x20AC;&#x2122; for the purposes of section 657A of the Corporations Act. 8.10 Other material information Other than as contained or referred to in this Scheme Booklet there is no information material to the making of a decision by Excel Shareholders whether or not to vote in favour of the Scheme that is known to any Director and which has not previously been disclosed to Excel Shareholders.

9 glossary

$ means Australian dollars, except where used in a context that clearly indicates US$. Annexure means an annexure to this Scheme Booklet. ASIC means the Australian Securities and Investments Commission. Associate has the meaning given to that term for the purposes of section 636(1) of the Corporations Act. ASX means the Australian Stock Exchange Limited ABN 98 008 624 691. Board means the board of directors of Excel. BTU means British Thermal Units being the amount of heat required to raise the temperature of 1 pound of water 1 degree Fahrenheit. BTU Conversion means processes to allow energy stored in coal to be converted into other energy forms including electricity, gas and hydrogen. Business Day means a business day as defined in the Listing Rules. CGT means capital gains tax. CHESS means Clearing House Electronic Sub-Register System operated by SCH. Competing Transaction means a transaction or arrangement pursuant to which a person other than Peabody Energy Corporation and its subsidiaries will, if the transaction or arrangement is entered into or completed: (a) acquire (whether directly or indirectly) or become the holder of, or otherwise acquire, have a right to acquire or have an economic interest in all or a substantial part of the business of Excel and its subsidiaries; (b) becomes a substantial holder in Excel (as determined in accordance with section 9 of the Corporations Act); (c) acquire control (as determined in accordance with section 50AA of the Corporations Act) of Excel; (d) otherwise acquire or merge with Excel; or (e) enter into any agreement, arrangement or understanding requiring Excel to abandon, or otherwise fail to proceed with, the Transaction, whether by way of: (f) takeover offer; (g) scheme of arrangement; (h) shareholder approved acquisition; (i) capital reduction or buy back; (j) purchase of assets; (k) joint venture; (l) dual-listed company structure (or other synthetic merger); or (m) other transaction or arrangement. Conditions Precedent means the conditions precedent in clause 3.1 of the Merger Implementation Agreement and set out in Annexure B, a summary of which are set out in section 1.6 of this Scheme Booklet. Constitution means Excelâ&#x20AC;&#x2122;s constitution. Corporations Act means the Corporations Act 2001 (Cth). Court means the Federal Court of Australia.

9 GLOSSARY

Declared Dividend means the final dividend of Excel for the six months ended 30 June 2006. Deed Poll means the deed poll dated 30 August 2006 executed by Peabody Energy Corporation and set out as Annexure D, under which Peabody Energy Corporation covenants in favour of the Excel Shareholders to procure that Peabody pay the Scheme Consideration. Deloitte Corporate Finance means Deloitte Corporate Finance Pty Ltd ABN 19 003 833 127. Director means a director of Excel (from time to time). Due Diligence means the enquiries Peabody Energy Corporation has made into the affairs of Excel and its subsidiaries prior to the entry into the Merger Implementation Agreement. EBIT means earnings before net interest (interest expense less interest revenue) and tax. EBITDA means earnings before net interest (interest expense less interest revenue), tax, depreciation and amortisation. Effective Date means the date on which an office copy of a Court order under subsection 411(10) of the Corporations Act approving the Scheme is lodged with ASIC. End Date means 1 December 2006. EPS means earnings per share. EST means Eastern Standard Time Excel means Excel Coal Limited ABN 18 002 818 699. Excel Information means the information in this Scheme Booklet, other than the Peabody Information and the Independent Expertâ&#x20AC;&#x2122;s Report in Annexure A. Excel Material Adverse Change has the meaning given to that term in clause 1.1 of the Merger Implementation Agreement. Excel Prescribed Occurrence has the meaning given to that term in clause 1.1 of the Merger Implementation Agreement. Excel Representations and Warranties has the meaning given to that term in clause 1.1 of the Merger Implementation Agreement. Excel Share means a fully paid ordinary share of Excel. Excel Shareholders means each person who is registered as the holder of Excel Shares. Implementation Date means the fifth Business Day after the Record Date. Independent Expert means Deloitte Corporate Finance Pty Ltd ABN 19 003 833 127. Independent Expertâ&#x20AC;&#x2122;s Report means the report of the Independent Expert in relation to the Proposal, set out in Annexure A. Listing Rules means the official listing rules of ASX. Merger Implementation Agreement means the merger implementation agreement dated 6 July 2006 between Peabody Energy Corporation and Excel, set out in Annexure B. Notice of Scheme Meeting means the notice of meeting set out in Annexure E. NPAT means net profit after tax.

EXCEL COAL LIMITED Scheme booklet

PCI coal means pulverised coal injection coal. Peabody means Peabody Pacific Pty Limited and, where the context requires, includes Peabody Energy Corporation. Peabody Energy Corporation means Peabody Energy Corporation, a Delaware corporation. Peabody Information means information in section 4, 8.2 and 8.3 of this Scheme Booklet. Peabody Prescribed Occurrence has the meaning given to that term in clause 1.1 of the Merger Implementation Agreement. Peabody Representations and Warranties has the meaning given to that term in clause 1.1 of the Merger Implementation Agreement. Proposal means the proposed acquisition of Excel by Peabody under the Scheme. Record Date means 5.00pm on the fifth Business Day after the Effective Date. Reimbursement Fee means $18,000,000. SCH means ASX Settlement and Transfer Corporation Pty Limited ABN 49 008 504 532. Scheme means the scheme of arrangement under Part 5.1 of the Corporations Act between Excel and the Excel Shareholders, the form of which is set out in Annexure C. Scheme Booklet means this scheme booklet, issued under section 412 of the Corporations Act. Scheme Consideration means $8.50 cash in respect of each Scheme Share. Scheme Meeting means the meeting of Excel Shareholders ordered by the Court to be convened under subsection 411(1) of the Corporations Act. Scheme Share means an Excel Share held by a Scheme Shareholder. Scheme Shareholders means Excel Shareholders as at the Record Date. SEC means the U.S. Securities and Exchange Commission. Second Court Date means the first day on which the Second Court Hearing is heard. Second Court Hearing means the application made to the Court for an order under paragraph 411(4)(b) of the Corporations Act approving the Scheme. Share Register means the register of members of Excel maintained by the Share Registry. Share Registry means Link Market Services Limited ABN 54 083 214 537. Ton means short ton and equals 2,000 pounds, or approximately 0.90718 tonnes. Tonne means metric tonne and equals 1,000 kilograms, or approximately 1.10232 short tons. U.S. means United States of America. US$ means United States dollars.

Annexure A Independent Expertâ&#x20AC;&#x2122;s Report

independent expertâ&#x20AC;&#x2122;s report

Excel Coal Limited Independent expertâ&#x20AC;&#x2122;s report 29 August 2006

Annexure A

Financial services guide 29 August 2006 What is a Financial Services Guide? This Financial Services Guide (FSG) is an important document the purpose of which is to assist you in deciding whether to use any of the general financial product advice provided by Deloitte Corporate Finance Pty Limited (ABN 19 003 833 127). The use of “we”, “us” or “our” is a reference to Deloitte Corporate Finance Pty Limited as the holder of Australian Financial Services Licence (AFSL) No. 241457. The contents of this FSG include: who we are and how we can be contacted what services we are authorised to provide under our AFSL how we (and any other relevant parties) are remunerated in relation to any general financial product advice we may provide details of any potential conflicts of interest details of our internal and external dispute resolution systems and how you can access them. Information about us We have been engaged by Excel Coal Limited to give general financial product advice in the form of a report to be provided to you in connection with a proposed scheme with Peabody Energy Corporation. You are not the party or parties who engaged us to prepare this report. We are not acting for any person other than the party or parties who engaged us. We are required to give you an FSG by law because our report is being provided to you. You may contact us using the details located above. Deloitte Corporate Finance Pty Limited is ultimately owned by the Australian partnership of Deloitte Touche Tohmatsu. The Australian partnership of Deloitte Touche Tohmatsu and its related entities provide services primarily in the areas of audit, tax, consulting, and financial advisory services. Our directors may be partners in the Australian partnership of Deloitte Touche Tohmatsu. The Australian partnership of Deloitte Touche Tohmatsu is a member firm of the Deloitte Touche Tohmatsu Verein. As the Deloitte Touche Tohmatsu Verein is a Swiss Verein (association), neither it nor any of its member firms has any liability for each other's acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names "Deloitte", "Deloitte & Touche", "Deloitte Touche Tohmatsu" or other related names. The financial product advice in our report is provided by Deloitte Corporate Finance Pty Limited and not by the Australian partnership of Deloitte Touche Tohmatsu, its related entities, or the Deloitte Touche Tohmatsu Verein. We do not have any formal associations or relationships with any entities that are issuers of financial products. However, you should note that we and the Australian partnership of Deloitte Touche Tohmatsu (and its related bodies corporate) may from time to time provide professional services to financial product issuers in the ordinary course of business. What financial services are we licensed to provide? The AFSL we hold authorises us to provide the following financial services to both retail and wholesale clients: to provide financial product advice in respect of securities, debentures, stocks or bonds issued or proposed to be issued by the government and interests in managed investment schemes including investor directed portfolio schemes to deal in a financial product by arranging for another person to apply for, acquire, vary or dispose of financial products in respect of securities and debentures, stocks or bonds issued or proposed to be issued by the government. Information about the general financial product advice we provide The financial product advice provided in our report is known as “general advice” because it does not take into account your personal objectives, financial situation or needs. You should consider whether the general advice contained in our report is appropriate for you, having regard to your own personal objectives, financial situation or needs. We recommend you obtain and read carefully the scheme booklet provided by Excel. The purpose of this documents is to help you make an informed decision about the proposed scheme to implement with Peabody Energy Corporation’s proposed acquisition of Excel.

Deloitte Corporate Finance Pty Limited A.B.N. 19 003 833 127 AFSL 241457 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia

How are we and our employees remunerated? Our fees are usually determined on an hourly basis; however they may be a fixed amount or derived using another basis. We may also seek reimbursement of any out-of-pocket expenses incurred in providing the services. Fee arrangements are agreed with the party or parties who actually engage us, and we confirm our remuneration in a written letter of engagement to the party or parties who actually engage us. Neither Deloitte Corporate Finance Pty Limited nor its directors and officers, nor any related bodies corporate or associates and their directors and officers, receives any commissions or other benefits, except for the fees for services rendered to the party or parties who actually engage us. Our fee is estimated at A$190,000, excluding GST. All of our employees receive a salary. Our employees are eligible for annual salary increases and bonuses based on overall performance but do not receive any commissions or other benefits arising directly from services provided to you. The remuneration paid to our directors reflects their individual contribution to the company and covers all aspects of performance. Our directors do not receive any commissions or other benefits in connection with our advice. We do not pay commissions or provide other benefits to other parties for referring prospective clients to us. What should you do if you have a complaint? If you have any concerns regarding our report, you may wish to advise us. Our internal complaint handling process is designed to respond to your concerns promptly and equitably. Please address your complaint in writing to: The Complaints Officer Practice Protection Group PO Box N250 Grosvenor Place Sydney NSW 1220 If you are not satisfied with the steps we have taken to resolve your complaint, you may contact the Financial Industry Complaints Service (FICS). FICS provides free advice and assistance to consumers to help them resolve complaints relating to members of the financial services industry. Complaints may be submitted to FICS at: Financial Industry Complaints Service PO Box 579 Collins Street West Melbourne VIC 8007 Telephone: 1300 780 808 Fax: +61 3 9621 2291 Internet: http://www.fics.asn.au If your complaint relates to the professional conduct of a person who is a Chartered Accountant, you may wish to lodge a complaint in writing with the Institute of Chartered Accountants in Australia (ICAA). The ICAA is the professional body responsible for setting and upholding the professional, ethical and technical standards of Chartered Accountants and can be contacted at: The Institute of Chartered Accountants GPO Box 3921 Sydney NSW 2001 Telephone: +61 2 9290 1344 Fax: +61 2 9262 1512 Specific contact details for lodging a complaint with the ICAA can be obtained from their website at http://www.icaa.org.au/about/index.cfm. The Australian Securities and Investments Commission (ASIC) regulates Australian companies, financial markets, financial services organisations and professionals who deal and advise in investments, superannuation, insurance, deposit taking and credit. Their website contains information on lodging complaints about companies and individual persons and sets out the types of complaints handled by ASIC. You may contact ASIC as follows: Info line: 1 300 300 630 Email: infoline@asic.gov.au Internet: http://www.asic.gov.au/asic/asic.nsf

independent expert’s report

Deloitte Corporate Finance Pty Limited A.B.N. 19 003 833 127 AFSL 241457 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia

The Directors Excel Coal Limited Level 9, 1 York Street Sydney NSW 2000

DX 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au

29 August 2006 Dear Directors

Independent expert’s report Introduction On 6 July 2006 (the Announcement Date), Excel Coal Limited (Excel or the Company), together with Peabody Energy Corporation (Peabody), announced a proposal under which Peabody would acquire 100% of the issued ordinary shares in Excel via a scheme of arrangement (the Proposed Scheme). If the Proposed Scheme is approved holders of Excel shares (Shareholders) will receive consideration of A$8.50 per Excel ordinary share upon completion, which is expected to occur in October 2006. Upon completion of the Proposed Scheme, Excel will become a wholly owned subsidiary of Peabody and will be delisted from the Australian Stock Exchange (ASX). Excel has prepared a scheme booklet containing the detailed terms of the Proposed Scheme (Scheme Booklet) and an overview of the Proposed Scheme is provided in Section 1 of our detailed report.

Purpose of the report Whilst this report is not required to meet any statutory obligations, the directors of Excel have nonetheless engaged Deloitte Corporate Finance Pty Limited (Deloitte) to prepare an independent expert’s report advising whether, in our opinion, the Proposed Scheme is in the best interest of Shareholders. This report is to be included in the Scheme Booklet to be sent to Shareholders and has been prepared exclusively for the purpose of assisting Shareholders in their consideration of the Proposed Scheme. The report should not be used for any other purpose.

Basis of evaluation There is no statutory or regulatory definition of the expression “in the best interest”. The interpretation of “in the best interest” is a matter of judgment for the expert having regard to the guidance and alternatives available. In this case, the Proposed Scheme has the same effect as a takeover offer for Excel. Section 640 of the Corporations Act 2001 (Section 640) requires an independent expert’s report in connection with a takeover offer to state whether, in the expert’s opinion, the takeover offer is fair and reasonable. ASIC Policy Statement 75, which is directed primarily towards reports prepared under Section 640, implies that if the Proposed Scheme is fair and reasonable it will be in the best interest of Shareholders.

Liability limited by a scheme approved under Professional Standards Legislation

Annexure A

Under ASIC Policy Statement 75, an offer is: x

fair, when the value of the consideration is equal to or greater than the value of the shares subject to the scheme. The comparison must be made assuming 100% ownership of the target company

reasonable, if it is fair, or despite not being fair, after considering other significant factors, Shareholders should accept the offer under the scheme, in the absence of any higher bids. Our analysis of these reasonableness factors is set out in Section 8.2.

In interpreting the meaning of “in the best interest” we have considered ASIC Policy Statement 75, Practice Note 43 and common market practice. To assess whether the Proposed Scheme is in the best interest of Shareholders, we have adopted the test of whether the Proposed Scheme is either fair and reasonable, not fair but reasonable, or neither fair nor reasonable as set out in ASIC Policy Statement 75.

Summary and conclusion In our opinion the Proposed Scheme is fair and reasonable to Shareholders and is therefore in their best interest. In arriving at this opinion, we have had regard to the following factors.

The Proposed Scheme is fair In order to assess whether the Proposed Scheme is fair we have compared the value of an Excel share with the consideration offered by Peabody in the following table.

Table 1: Assessment of fairness

Section

Estimated fair market value of an Excel share1 Consideration offered by Peabody

7.6

Low value (A$)

High value (A$)

7.00 8.50

7.60 8.50

Source: Deloitte analysis Notes: 1.

The fair market value of an Excel share is ex-dividend since we have incorporated the 30 June 2006 dividend declared in the net debt of Excel. This is consistent with the consideration offered by Peabody which is also exdividend.

In determining the estimated fair market value of an Excel share we have used the discounted cash flow method incorporating the following key assumptions: x

a long-term thermal coal price of US$42/t and a long term hard coking coal price of US$72/t

a long-term US$/A$ exchange rate of 0.72

a real after-tax discount rate in the range of 7.5% to 8.0%.

As set out in Section 7.2.6 of the body of the report, in determining the fair market value of an Excel share we have applied a premium in the range of 10% to 15% to the net present value of Excel’s projected cashflows in order to reflect additional sources of potential value not otherwise reflected in the discounted cash flow analysis. These additional sources of potential value include: x

the likelihood of proving additional reserves through expansion of existing mines and development projects

obtaining cost and revenue synergies through implementing strategic initiatives

ability of management to identify and enhance the value of future acquisition opportunities

the strategic benefits associated with acquiring the portfolio of assets owned by Excel.

We note that the estimated fair market value of an Excel share is highly sensitive to the above factors. As a result, we have prepared a sensitivity analysis applying higher and lower assumptions for these inputs as set out in Section 7.2.6 of the detailed report. 2 Deloitte: Excel Coal

independent expert’s report

We have also considered the reasonableness of this value by reference to recent trading in Excel shares as well as the implied earnings before interest, tax, depreciation and amortisation (EBITDA) and price to earnings (P/E) multiples as well as the implied value per unit of annual production capacity. As the consideration offered by Peabody is above the range of our assessed value of an Excel share, in our opinion the Proposed Scheme is fair.

The Proposed Scheme is reasonable In accordance with ASIC Policy Statement 75, an offer is reasonable if it is fair. On this basis, in our opinion the Proposed Scheme is reasonable. We have also considered the following advantages and disadvantages of the Proposed Scheme.

Advantages of the Proposed Scheme Excel’s share price would likely fall below current levels In the absence of another offer for Excel, it is likely that Excel shares would trade at prices below those recently achieved if the Proposed Scheme is not successful. Since the Proposed Scheme was announced on 6 July 2006 no other offers for Excel have been received. In addition, we note that when the Proposed Scheme was announced, Excel also provided profit guidance for the 2007 financial year which was substantially lower than the consensus broker forecasts. We are of the opinion that Excel’s share price would have declined from the levels achieved prior to the Announcement Date as a result of this guidance in the absence of the Proposed Scheme.

Directors intend to vote in favour of the Proposed Scheme Excel’s directors hold or control in aggregate approximately 47% of Excel’s ordinary shares. These individuals have indicated their intention to vote in favour of the Proposed Scheme in the absence of a superior offer. As the directors intend to vote in favour of the Proposed Scheme in respect of their shares, this is a strong signal that the Proposed Scheme is attractive.

Disadvantages of the Proposed Scheme Inability to participate in possible future growth potential of Excel Shareholders will no longer collectively control or hold a direct interest in Excel and accordingly will not participate in the future growth of Excel to the extent that it may generate a future value above the Proposed Scheme offer price. For example, increases in coal prices substantially above those currently assumed in our valuation may result in additional future value not fully factored into the consideration offered by Peabody.

Taxation implications If the Proposed Scheme is successful Shareholders may incur a tax expense. Individual investors should consult their tax advisor in relation to their personal circumstances.

Conclusion Based on the foregoing, we are of the opinion that the Proposed Scheme is fair and reasonable to Shareholders and therefore it is in their best interest.

3 Deloitte: Excel Coal

Annexure A

This opinion should be read in conjunction with our detailed report which sets out our scope and findings. Yours faithfully DELOITTE CORPORATE FINANCE PTY LIMITED

Mark Pittorino

Stephen Reid

Director

Note: All amounts stated in this report are Australian dollars unless otherwise stated.

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Contents 1

Overview of Proposed Scheme

1.1

Background

1.2

Terms

1.3

Approval

Scope of the report

2.1

Purpose of the report

2.2

Basis of evaluation

2.3

Limitations and reliance on information

Coal mining industry

3.1

Industry background

3.2

Coking coal

3.3

Thermal coal

3.4

Pricing

Profile of Excel

4.1

Company history

4.2

Major Assets

4.3

Management

4.4

Capital structure and shareholders

4.5

Share price performance

4.6

Financial performance

4.7

Financial position

Valuation methodology

5.1

Valuation methodologies

5.2

Selection of valuation methodologies

Future cash flows

6.1

Financial model

6.2

Foreign exchange rate

6.3

Coal prices

6.4

Saleable production volumes

6.5

Operating costs

6.6

Management fees

6.7

Capital expenditure

6.8

Other

Valuation of Excel

7.1

Introduction

7.2

The discounted cash flow method

7.3

Capitalisation of maintainable earnings

5 Deloitte: Excel Coal

Annexure A

7.4

Industry rules of thumb

7.5

Analysis of recent share trading

7.6

Conclusions

Evaluation and conclusion

8.1

Fairness

8.2

Reasonableness

8.3

Conclusion

Appendices Appendix 1: Glossary

Appendix 2: Discount rate

Appendix 3: Comparable companies

Appendix 4: Multiples analysis

Appendix 5: Comparable transactions

Appendix 6: Industry rule of thumb

Appendix 7: Sources of information

Appendix 8: Qualifications, declarations and consents

Appendix 9: Minarco report

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independent expert’s report

Overview of Proposed Scheme 1.1

Background

On 6 July 2006 Excel and Peabody announced a proposal under which Peabody Pacific Pty Limited, a wholly owned subsidiary of Peabody, would acquire all of the ordinary shares in Excel by way of a scheme of arrangement. Full details of the Proposed Scheme are provided in Section 1 of the Scheme Booklet.

1.2

Terms

If the Proposed Scheme is approved Shareholders will receive A$8.50 in cash for each Excel share held, ex 30 June 2006 final dividend declared of A$0.105 per share. The consideration is to be paid to Shareholders following approval of the Proposed Scheme, which is expected to occur in October 2006. Excel and Peabody have entered into a Merger Implementation Agreement (MIA) dated 6 July 2006 in relation to the Proposed Scheme. The MIA sets out the obligations of Excel and Peabody in relation to the Proposed Scheme. The key terms include: (1) Conditions precedent Implementation of the Proposed Scheme is subject to a number of conditions precedent which include: x

shareholder approval

regulatory approval

no Excel prescribed occurrences

restraints

no Peabody prescribed occurrences

no material adverse change.

The Proposed Scheme also requires court approval. (2) No solicitation and no talk Under the MIA, Excel has agreed that it will not solicit alternative proposals or co mpeting transactions with third parties. Excel has also agreed that it will not respond to unsolicited approaches unless to not respond would be in breach of fiduciary duties owed by any Excel director or would otherwise be unlawful. (3) Reimbursement fee Excel has agreed to pay a reimbursement fee to Peabody, equal to A$18 million, if: x

the Excel Board changes, withdraws or modifies its recommendation that Excel Shareholders vote in favour of the Proposed Scheme or makes a public statement indicating that it no longer supports the transaction or that it supports some other transaction

Excel breaches its obligations under the ‘no solicitation and no talk’ provisions as set out above

a competing transaction is announced by a third party, or a third party who at the date of the MIA does not have at least 10% voting power in Excel becomes entitled to voting power, or gains an economic exposure, to at least 10% of the Excel shares, and that third party gains a relevant interest in at least 50% of Excel shares or acquires control of or merges with Excel within 12 months, or

the MIA is terminated by Peabody as a result of certain Excel prescribed occurrences occurring before the second court date.

7 Deloitte: Excel Coal

Annexure A

(4) Termination The MIA may be terminated at any time prior to the second court date in certain circumstances. By either party if: x

the other party is in material breach of any provision of the MIA

a court or government agency has taken any action permanently restraining or otherwise prohibiting the Proposed Scheme from proceeding, or has refused to do anything necessary to permit the Proposed Scheme to proceed (and the action or refusal has become final and cannot be appealed), or

a condition precedent is not satisfied and Excel and Peabody cannot reach agreement to proceed by way of alternative means.

By Peabody if: x

the Excel board changes, withdraws or modifies its recommendations that Excel Shareholders vote in favour of the Proposed Scheme or makes a public statement indicating that it no longer supports the transaction or that it supports some other transaction, or

Excel is in breach under the â&#x20AC;&#x2DC;no solicitation and no talkâ&#x20AC;&#x2122; provisions.

Excel may also terminate the MIA by giving 21 days notice in writing to Peabody, if the Excel board has changed, withdrawn or modified its recommendation in accordance with the terms of the MIA and by the end of the 21 day notice period, that recommendation has not been reinstated and the reimbursement fee has been paid to Peabody.

1.3

Approval

The Proposed Scheme will need to be approved at a meeting of Shareholders. Approval of the Proposed Scheme requires both a majority of Shareholders present and voting at the meeting to vote in its favour, and more than 75% of the total votes cast on the offer to be cast in its favour. The Proposed Scheme also requires approval by the Federal Court of Australia before it can be implemented. Full details of the offer are provided in the Explanatory Statement.

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Scope of the report 2.1

Purpose of the report

The proposed acquisition by Peabody of all the shares in Excel is to be implemented through a scheme of arrangement. Part 3 of Schedule 8 of the Corporations Regulations 2001 (Cwlth) which prescribes the information to be provided to shareholders in relation to schemes of arrangement, requires the preparation of a report by an independent expert stating whether a proposed scheme is in the best interest of shareholders of the company subject to the scheme where either: x

the corporation which is the other party to the scheme (Peabody) has a director in common with the company which is subject to the scheme (Excel)

the corporation which is the other party to the scheme (Peabody) is entitled to more than 30% of the voting shares in the company which is the subject of the scheme (Excel).

As Peabody and Excel do not have any common directors and Peabody does not have more than 30% of the voting shares in Excel, there is no legal or regulatory requirement for an independent expert’s report to be prepared in relation to the Proposed Scheme. However, the directors of Excel have appointed Deloitte to prepare an independent expert’s report, as if the requirements under Part 3 of Schedule 8 of the Corporations Regulations 2001 (Cwlth) mentioned above applied to the Proposed Scheme, to advise whether the Proposed Scheme is in the best interest of Shareholders. This report is to be included in the Explanatory Statement which will be sent to Shareholders and has been prepared exclusively for the purpose of assisting Shareholders in their consideration of the Proposed Scheme. It should not be used for any other purpose.

2.2

Basis of evaluation

2.2.1

Guidance

Schemes of arrangement can include many different types of transactions and the basis of evaluation selected by the expert must be appropriate for the nature of each specific transaction. As there is no statutory or regulatory definition of the expression “in the best interest” the interpretation is a matter of judgement for the expert, having regard to the nature of the transaction and the guidance available. In determining how to assess whether the Proposed Scheme is in the best interest of Shareholders we have considered the following guidance.

ASIC Policy Statement 74 This policy statement relates to independent expert’s reports prepared in the context of acquisitions of shares in a company that must be agreed to by shareholders. This situation occurs where an individual shareholder acquires an interest in excess of 20% in the company without making a takeover offer. Independent expert’s reports prepared in these circumstances are required to provide an opinion on whether the proposed transaction is “fair and reasonable” to non-associated shareholders. ASIC notes in the policy statement that the assessment of what is fair and reasonable in these circumstances is not as straightforward as in the circumstances discussed in Policy Statement 75. The policy statement does not provide a specific definition of the meaning of “fair and reasonable”. However, it does contain the following guidance: ‘the report must compare the likely advantages and disadvantages for the non-associated shareholders if the proposal is agreed to, with the advantages and disadvantages to those shareholders if it is not’. The policy statement also requires the expert to state whether the proposed transaction ‘may deter the making of a takeover bid for the company’.

9 Deloitte: Excel Coal

Annexure A

ASIC Policy Statement 75 This policy statement provides guidance in relation to independent expert’s reports prepared in relation to: x

related party takeover offers

related party schemes of arrangement

proposed acquisitions of non-voting shares, renounceable options and convertible notes following a takeover.

The policy statement provides detailed guidance on the interpretation of the phrase “fair and reasonable” in the context of related party takeover offers, but does not provide guidance on the interpretation of the phrase “in the best interest”. In the context of takeover offers, the policy statement separates the concepts of fairness and reasonableness. The policy statement defines a takeover offer as being fair if the value of the consideration is equal to or greater than the value of the securities subject to the offer, with the assessment being made on the assumption of 100% ownership of the target company (i.e. including a control premium). The policy statement defines an offer as being reasonable if either the offer is fair or despite not being fair shareholders should accept the offer in the absence of a higher bid before the close of the offer.

Market practice Schemes of arrangement frequently have the same effect as a takeover offer and are commonly evaluated as such. In these circumstances, the expression “in the best interest” is commonly treated as being equivalent to “fair and reasonable” as defined in ASIC Policy Statement 75.

2.2.2

Selected approach

In order to determine whether the Proposed Scheme is in the best interest of Shareholders we have evaluated whether it is “fair and reasonable”. This is consistent with general market practice. Our definitions of fairness and reasonableness, in the context of the Proposed Scheme, are set out below.

Fairness We have adopted the guidance provided by ASIC Policy Statement 75 in relation to related party takeover offers in assessing whether the Proposed Scheme is fair. Accordingly, we have assessed the Proposed Scheme as being fair if the consideration offered by Peabody is equal to or greater than the value of an Excel share including a control premium. The shares in Excel have been valued at fair market value, which we have defined as the amount at which the shares would be expected to change hands between a knowledgeable willing buyer and a knowledgeable willing seller, neither of whom is under any compulsion to buy or sell. Special purchasers may be willing to pay higher prices, to reduce or eliminate competition, to ensure a source of material supply or sales, or to achieve cost savings or other synergies arising on business combinations, which could only be enjoyed by the special purchaser. Our valuation of Excel has not been premised on the existence of a special purchaser.

Reasonableness In accordance with ASIC Policy Statement 75 we have defined the Proposed Scheme as being reasonable if either: x

the offer is fair, or

despite not being fair, but considering other significant factors, Shareholders should vote in favour of the Proposed Scheme in the absence of a superior proposal.

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independent expertâ&#x20AC;&#x2122;s report

To assess the reasonableness of the Proposed Scheme we have considered the following significant factors in addition to determining whether it is fair: x

significant shareholding blocks in Excel

the likely price and market liquidity of Excel shares in the absence of the Proposed Scheme

the likelihood of an alternative offer

other implications for Shareholders of rejecting the Proposed Scheme.

2.2.3

Individual circumstances

We have evaluated the Proposed Scheme for Shareholders as a whole and have not considered the effect of the Proposed Scheme on the particular circumstances of individual investors. Due to their particular circumstances, individual investors may place a different emphasis on various aspects of the Proposed Scheme from the one adopted in this report. Accordingly, individuals may reach different conclusions to ours on whether the Proposed Scheme is fair and reasonable. If in doubt investors should consult an independent adviser.

2.3

Limitations and reliance on information

The opinion of Deloitte is based on economic, market and other conditions prevailing at the date of this report. Such conditions can change significantly over relatively short periods of time. This report should be read in conjunction with the declarations outlined in Appendix 8. Our procedures and enquiries do not include verification work nor constitute an audit in accordance with Australian Auditing Standards (AUS), nor do they constitute a review in accordance with AUS 902 applicable to review engagements. To the extent that this report refers to prospective financial information we have considered the prospective financial information and the basis of the underlying assumptions. The procedures involved in Deloitte's consideration of this information consisted of enquiries of Excel personnel and analytical procedures applied to the financial data. These procedures and enquiries did not include verification work nor constitute an audit in accordance with Australian Auditing Standards, nor did they constitute a review in accordance with AUS 902 applicable to review procedures. Based on these procedures and enquiries, Deloitte considers that there are reasonable grounds to believe that the prospective financial information for Excel included in this report has been prepared on a reasonable basis. In relation to the prospective financial information, actual results may be different from the prospective financial information of Excel referred to in this report since anticipated events frequently do not occur as expected and the variation may be material. The achievement of the prospective financial information is dependent on the outcome of the assumptions. Accordingly, we express no opinion as to whether the prospective financial information will be achieved.

11 Deloitte: Excel Coal

Annexure A

Coal mining industry 3.1

Industry background

Coal is a relatively common and widely distributed natural resource, mined by both open-cut and underground mining. In the 2005 financial year (FY05) 78% of the raw coal mined in Australia was extracted using the open-cut method. Open-cut mining involves using a dragline, truck/shovel fleet, or a combination of these methods to remove waste rock (overburden). The uncovered coal is then removed using excavators and trucks. Underground mines use either the bord and pillar or the longwall method. In bord and pillar mines, underground roadways are cut into the coal seam, with pillars of coal left to support the roof. Later the pillars are removed and the roof allowed to collapse. Under good conditions this method can remove 55-65% of the coal within the area of mining. The longwall method of mining again involves underground roadways being cut into the coal to expose blocks of coal that can be up to several hundred metres wide by several kilometres long. Hydraulic roof supports then allow an automated shearer and conveyor to cut coal from the face (width) of the block. As a cut is made the supports move forward and the roof is allowed to collapse behind the supports. Under consistent mining conditions, the longwall method is the most efficient form of underground mining and can typically recover up to 80% of the coal within the area of mining. Typically, there are two main types of coal produced in NSW and Queensland, hard coking coal and thermal coal, both of which fall into the broad category of black or hard coal. Hard coking coal, also commonly referred to as metallurgical coal, is used to produce coke, which is used as a reductant in the manufacture of iron and steel. To a lesser extent, coke is also used in the casting and smelting of base metals Thermal coal, also referred to as steaming coal, has certain chemical and physical properties which render it unsuitable for steel making. Thermal coal is primarily used as an energy source in the generation of electricity. The markets for coking and thermal coal operate relatively independently of each other. However, a degree of substitution can occur between some specific thermal coals and lower quality coking coals. The majority of world coal production is consumed in the country in which it is produced. Although exports represent a relatively small amount of total world coal production, the Australian coal industry depends heavily on export trade. During FY05 exports constituted approximately 77% of Australiaâ&#x20AC;&#x2122;s saleable volume of coal and approximately 83% of the value. This heavy dependence on exports differentiates Australia from other coal producing countries, most of which have significant domestic markets for coal. The United States (US) and China are the largest coal producers in the world. However, the majority of coal produced in both countries is consumed domestically. Australia is the worldâ&#x20AC;&#x2122;s largest exporter of coal, ranking first in coking coal and second (behind Indonesia) in thermal coal in 2005, with total coal exports of 231 million tonnes (Mt). In the same year, Australian exports accounted for 20% and 56% respectively of the international trade in thermal coal and coking coal. Other significant exporting countries include Indonesia, South Africa, China, Russia and Colombia.

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Total annual Australian thermal and coking coal exports are outlined in the figure below.

Figure 1: Australian coal exports Forecast

140 120 100

80 60

40 20

0 1996

1997 Thermal

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Coking

Source: Barlow Jonker

3.2

Coking coal

Broadly speaking, there are three major types of coking coal, being: hard coking coal (HCC), semi-soft coking coal (SSCC) and Pulverised Coal Injection (PCI) coal. HCC produces the highest strength coke and SSCC has some coking properties, but not all the properties necessary for making hard coke. SSCC can either be blended with HCC, or used in the PCI process where it is used to increase the effectiveness of a blast furnace. PCI coal is being increasingly used to partially replace more expensive HCC and SSCC coals in the blast furnace process. The use of PCI coal by blast furnace operators has lower operating costs, extends coke oven lives and lowers greenhouse emissions.

13 Deloitte: Excel Coal

Annexure A

Coking coal demand Demand for coking coal is driven by world blast furnace and steel production levels. World coking coal demand is represented by the volumes of the major importers summarised in the table below.

Table 2: World coking coal imports by volume

China European Union Japan South Korea Taiwan Other World

FY02 Actual Mt

FY03 Actual Mt

FY04 Actual Mt

FY05 Actual Mt

FY06 Forecast Mt

FY07 Forecast Mt

0.3 44.9 79.0 17.6 7.3 52.9 202.0

2.6 45.4 79.6 17.1 7.8 55.2 207.7

6.8 51.0 79.7 18.5 8.2 58.8 223.0

7.2 49.9 78.7 16.1 8.3 60.2 220.4

10.0 50.9 74.7 22.1 8.4 66.0 232.1

11.2 51.7 75.0 22.0 8.4 68.0 236.3

Source: Barlow Jonker

Japan is the world’s largest coking coal importer, representing 36% of demand in FY05.

Coking coal supply In 2005, over 80% of the world’s coking coal exports were provided by three countries being Australia (125Mt), Canada (27Mt) and the US (26Mt). Over 90% of the world’s imported coking coal is represented by seaborne trade. As a result, the costs associated with ocean freight represent a significant portion of the cost of delivering coking coal to the end user. Australia’s proximity to the Asian markets relative to the other major producers provides it with a significant competitive advantage. Japan, the world’s largest importer of coking coal, accounted for 28% of Australia’s coking coal exports in 2005, with a further 38% of Australia’s export coking coal going to other Asian countries. Australia’s coking coal exports for the last 5 years are summarised in the table below.

Table 3: Australian coking coal exports

HCC Volume Value Implied Price Non-HCC Volume Value Implied Price Total Volume Value Implied Price

FY01

FY02

FY03

FY04

FY05

Mt A$m A$/t

62.0 4,241 68.40

65.5 5,353 81.73

66.5 5,122 77.02

67.6 4,340 64.20

80.7 7,692 95.32

Mt A$m A$/t

43.6 2,356 54.04

40.4 2,685 66.46

41.3 2,325 56.30

44.2 2,169 49.07

44.2 3,067 69.39

Mt A$m A$/t

105.6 6,597 62.47

105.9 8,038 75.90

107.8 7,447 69.08

111.8 6,509 58.22

124.9 10,759 86.14

Source: Australian Commodity Statistics

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The volume and value of Australiaâ&#x20AC;&#x2122;s coking coal exports are also presented graphically below.

9,000

160

8,000

140

7,000

120

6,000

100

5,000

4,000

3,000

2,000

1,000

180

$Am

Figure 2: Australian total coking coal exports by volume and value

1998

1999

Volume (LHS)

2000

2001

2002

2003

2004

2005

Value (RHS)

Source: Australian Commodity Statistics

Whilst there was a large increase in the value of Australian coking coal exports in 2005, this was primarily price rather than volume driven. An important issue in the coking coal market is the relative demand for the different types of coking coal. HCC tends to be less plentiful and has inherent properties that allow producers to demand a premium for it relative to SSCC or PCI coal. HCC accounted for over 65% of coking coal exports by volume and 71% by value in 2005.

3.3

Thermal coal

Thermal coal is primarily used by the power generation industry, but it is also used in the cement industry and other major energy intensive industries which use heat and/or steam in their production processes. As a result, thermal coal is generally sold at prices which reflect its energy content.

Thermal coal demand The global demand for thermal coal is primarily determined by the level of economic output in industrialised countries and the utilisation of coal fired power stations. Global thermal coal imports have almost doubled in the last ten years, with Asia providing the majority of the growth, as set out in the following table.

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Annexure A

Table 4: World thermal coal imports by volume FY02 Actual Mt

FY03 Actual Mt

FY04 Actual Mt

FY05 Actual Mt

FY06 Forecast Mt

FY07 Forecast Mt

10.6 134.7 79.6 52.5 43.9 125.0 446.3

8.2 153.9 87.4 54.6 47.2 147.0 498.3

11.8 161.8 100.3 60.5 52.9 148.0 535.3

18.9 159.9 102.0 60.7 52.8 162.1 556.4

5.0 157.3 105.7 61.8 54.8 150.8 535.4

5.0 158.1 107.9 63.0 56.5 153.4 543.9

China European Union Japan South Korea Taiwan Other World Source: Barlow Jonker

As with coking coal, Japan is both the world’s largest importer of thermal coal, and Australia’s largest customer, accounting for 54% of Australian thermal coal exports in FY05. In addition to this, Japan’s influence as a buyer has implications for dealings with other customers, in particular South Korea and Taiwan, for whom prices are benchmarked against the prices negotiated with the Japanese. Whilst China is a large consumer of thermal coal, it only imported 18.9Mt in FY05, given it also has significant domestic supplies of thermal coal, and was actually a net exporter of thermal coal in FY05 of 48Mt. Given the extent of China’s demand for and consumption of thermal coal, any future changes in China’s domestic consumption could have a material impact on global supply levels and pricing.

Thermal coal supply In 2005, approximately 64% of the world’s thermal coal exports were provided by three countries being Indonesia (120Mt), Australia (106Mt) and South Africa (71Mt). There are a large number of countries that supply thermal coal, with the other major exporters including China, Russia, Colombia and the US. Australia’s geographic advantage is not as strong in the thermal coal market as it is in the coking coal market, with both China and Indonesia providing viable alternatives to Australian thermal coal for Asian importers. Australia’s thermal coal exports for the last five years are summarised in the table below.

Table 5: Australian thermal coal exports

Volume Value Implied Price

Mt A$m A$/t

2001

2002

2003

2004

2005

88.0 4,204 47.8

92.0 5,294 57.5

100.0 4,448 44.5

106.7 4,372 41.0

106.4 6,336 59.5

Source: Australian Commodity Statistics

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The volume and value of Australiaâ&#x20AC;&#x2122;s thermal coal exports are also presented graphically below.

Figure 3: Australian thermal coal exports by volume and value 7,000

180 160

6,000

140 5,000 120 4,000

3,000

$Am

100

60 2,000 40 1,000

20 0

1998

1999

Volume (LHS)

2000

2001

2002

2003

2004

2005

Value (RHS)

Source: Australian Commodity Statistics

The increase in the value of Australian thermal coal exports in 2005 was price driven, with export volumes remaining relatively flat. Regulation governing the discharge of pollutants from power stations is a major concern facing the thermal coal industry. Under the Kyoto protocol, most developed countries have agreed to reduce their aggregate emission levels of greenhouse gases including carbon dioxide (CO2) and oxides of sulphur (SOx) and nitrogen (NOx). The major thermal coal import markets have implemented ceilings on the emission of CO2, SOx and NOx. This has created a significant marketing advantage for coals that are low in sulphur and nitrogen, which Australian thermal coal generally is. Despite these initiatives, coal is, and is expected to remain, an important fuel for power generation, particularly in the Asian region. The relatively low cost and high supply security of thermal coal will continue to make it an attractive fuel source.

3.4

Pricing

Coal has traditionally tended to be sold as a cost-plus commodity, with prices falling above or below the marginal cost of production for high cost producers only temporarily in cases of extreme short-term over or under-supply. Thermal coal prices are dependent on the energy level that the coal can provide, with the base price set for an energy level of 6,700 thousand calories per kilogram (kcal/kg) and then adjusted pro rata, whereas coking coal prices are dependent on the coking characteristics of the coal. The international coal market can be divided between the Asia Pacific and the Atlantic market regions, where significantly different market forces influence coal prices.

17 Deloitte: Excel Coal

Annexure A

The Asia Pacific market is characterised by a lack of natural resources resulting in a high dependence on imported fuels and raw materials and reliance on trading partners for energy supply. Asian customers have traditionally been prepared to maintain an annual reference price to ensure security of supply. In addition Asian market participants continue to invest in overseas coal projects. Asian customers have historically contracted the majority of their tonnage requirements and supplement these with limited purchases on the spot market. The Atlantic market is highly competitive with numerous coal suppliers from a large number of supplier countries. In addition, thermal coal competes against established gas, hydroelectric and nuclear power sectors in this region. The inter-fuel competition combined with market deregulation of the European electricity sector has eroded benchmark pricing within the region, resulting in a spot-oriented market. In the Asia Pacific market, coal is predominantly purchased and sold pursuant to term contracts, with volumes and prices renegotiated each year. The contracts generally specify factors such as coal quality specifications, tonnages, cargo sizes, delivery arrangements and prices agreed between the purchaser and the supplier. Japanâ&#x20AC;&#x2122;s historically dominant position in the Asian coal markets has meant that Japanese contract negotiations with their Australian suppliers establish benchmark prices for coking coal and thermal coal that become market reference prices for the region. Prices are set on an annual basis during negotiations that generally take place in advance of the Japanese fiscal year (JFY) commencing 1 April. Because of their relative dominance in their respective markets, Rio Tinto Limited (Rio Tinto) and Xstrata plc (Xstrata) generally set the benchmarks for thermal coal, while BHP Billiton Limited (BHP Billiton) tends to lead price setting for hard coking coal. While the market has witnessed buyers in non-Japanese markets negotiating contracts based on specific qualities and volumes of coal rather than being guided by the Japanese-Australian benchmark price, the Japanese-Australian pricing structure is expected to remain the largest influence on Asian coal prices in the medium term. Historically only a small proportion of coal has been traded on the spot market, and this has mostly been in the thermal coal market where supply is more fragmented. The spot market is more active in Europe, generally trading lower quality thermal coals at lower prices than contracted prices. There is only a very limited futures market outside of Europe. There are numerous coal indices for different global regions and types of coal. Those applicable to the Australian market include the Barlow Jonker Index, the ACR Asian Index and the QJHCI A$ PT Index as set out below.

Barlow Jonker Index The Barlow Jonker Index (BJI) is an indicator of the spot price of thermal coal in the Asian market. It reflects the spot price for a prompt cargo of thermal coal loaded free on board (FOB) Port of Newcastle, NSW. Newcastle is the worldâ&#x20AC;&#x2122;s largest export coal loading facility and Newcastle coal is the reference coal in the Asian thermal coal market. The thermal coal type specifications for the BJI are as follows: x

calorific value of 6,700 kcal/kg

ash 15%

sulphur 0.80%

volatile matter 30%.

ACR Asian Index The ACR Asian Index tracks the average price in A$/t FOB for thermal coal from Australia to Japan, Korea, Taiwan and Hong Kong. The calculation of price is made by dividing the total value of exports in A$ by the total monthly quantity in tonnes. No adjustment is made for quality.

18 Deloitte: Excel Coal

independent expertâ&#x20AC;&#x2122;s report

QJHCI A$ PT Index The QJHCI A$ PT Index tracks the average price in A$/t FOB for HCC from Queensland to Japan. The calculation of price is made by dividing the total value of exports in A$ by the total monthly quantity in tonnes. No adjustment is made for quality. The main determinants of price are perceptions of the supply and demand balance in the shorter term and perceptions regarding cost of production in the longer term. This can be expected to result in cyclical coal prices with upward pressure in the short term but a general downward trend in the long-term as costs of production decline on an inflation adjusted basis. As coal contracts are generally written in US$, the impact of changes in the US$/A$ foreign exchange rate is also an important factor in price setting.

19 Deloitte: Excel Coal

Annexure A

Profile of Excel 4.1

Company history

Excel is a coal mining company with its head office based in Sydney. The company formed in November 2002 with the merger of Excel Holdings Pty Ltd (EHPL) and Eureka Capital Partners Limited (ECPL) and was listed on the ASX following an initial public offering (IPO) in May 2004. An overview of the Company history is provided in Table 6 below.

Table 6: Company history

1984

1993 1994

x x x

1996

1998 2001 2002

x x x x

2003

x x x x

2004

2005

2006

x x x x x x x x x x x x x

Resource Finance Corporation Limited (RFC), which later changed its name to ECPL, was founded operating as a boutique merchant bank in the resources industry. EHPL was founded and purchased the Stratford and Duralie coal projects. RFC acquired 17% of EHPL. The Stratford project was successfully developed in a joint venture between CIM Resources Limited and EHPL. EHPL sold its stake in the Stratford and Duralie joint ventures to CIM Resources Limited. EHPL acquired a 50% stake in Illawarra Coke. EHPL and RFC acquired a stake in the Las Carmelitas (Cosila) Project. EHPL and RFC acquired a 75% interest in the Wambo mine (Wambo). Excel and RFC acquired a 42% interest in the Metropolitan coal mine (Metropolitan). EHPL and RCF acquired a 72% interest in Chain Valley. RFC changed its name to ECPL. EHPL and ECPL merged in July to form Excel Coal Limited. Excel successfully tendered for the development of the Wilpinjong coal project (Wilpinjong). Excel acquired the remaining 58% interests in Metropolitan. Excel listed on the ASX on 4 May 2004. An exploration licence was granted for Wilpinjong, reserves were defined and mine planning and base studies began. Excel acquired the remaining 25% of ordinary shares in Wambo. Excel received development approval for the expansion of Wambo. Excel acquired 51% of the Millennium coal mine (Millennium). Excel commenced expansion at Wambo. Excel increased its ownership in Millennium to 85% and entered into an infrastructure joint venture with BHP Mitsui Coal Pty Limited (BMC). Excel lodged a development application for Wilpinjong. Wilpinjong gained development approval and construction started. Excel increased its interest in Chain Valley to 80% by acquiring minority interests. Excel completed a A$100 million equity placement at A$6.85 per share. In July 2006 the board announced the Proposed Scheme.

Source: Excel, ASX

20 Deloitte: Excel Coal

independent expert’s report

4.2

Major Assets

Excel owns interests in the following coal mines and coal projects in NSW, Queensland, and Venezuela.

Table 7: Excel mining assets

Asset

Excel share

Status

Mine type

75%* 75%* 100% 80% 100% 85% 49%

Coal mine Coal project Coal mine Coal mine Coal project Coal project Coal project

Open-cut Underground Underground Underground Open-cut Open-cut Open-cut

Wambo open-cut (NSW) Wambo underground (NSW) Metropolitan (NSW) Chain Valley (NSW) Wilpinjong (NSW) Millennium (Queensland) Cosila (Venezuela)

* Sumitomo Coal Mining Co Ltd holds a non-voting interest entitling it to 25% of net profit after-tax from Wambo Source: Excel

In addition, Excel owns a number of exploration interests in Australia and Northern Ireland. Figure 4 below is a simplified legal structure, showing Excel’s ownership interest in its major assets.

Figure 4: Simplified legal structure Excel Coal Limited

100% Sumitomo Coal (Australia) Pty Ltd

100%

Hunter Coal Pty Ltd

SouthCoal Pty Ltd

75% *

LakeCoal Pty Ltd

100%

85%

Wilpinjong Coal Pty Ltd

Millennium Coal Pty Ltd

Wilpinjong

Millennium

80%

Wambo Coal Pty Ltd

Wambo

100%

Wallarah Coal Joint Venture

Metropolitan

Chain Valley

* Sumitomo Coal Mining Pty Ltd holds a non-voting interest entitling it to 25% of net profit after tax from Wambo.

Source: Excel

These assets are discussed in more detail below.

4.2.1

Wambo

Excel owns 100% of Wambo Coal Pty Ltd. However, Sumitomo Coal Mining Co Ltd (Sumitomo) holds a non-voting interest in Wambo, which entitles it to an annual distribution equal to 25% of the mine’s net profit after-tax (but no capital rights). Wambo is currently Excel’s largest operating mine and is located in the heart of the Hunter Valley. The mine tenements cover an area of over 5,300 hectares and contain recoverable reserves in the Whybrow, Wambo, Redbank Creek, Whynot, Arrowfield and Bowfield seams of 182Mt and resources of 659Mt.

21 Deloitte: Excel Coal

Annexure A

Wambo started operations in 1969 as both an open-cut and underground mine. When Excel acquired its initial interest in Wambo in 2001, the open cut had been closed and only an underground longwall mine was operating within the Whybrow seam. This existing mine had a limited life due to geological constraints and property boundaries, although the Wambo resource generally held a substantial economically viable reserve base of coal across a number of seams. Accordingly, during its first 18 months of ownership, Excel suspended the underground operations and reopened the open cut operations, using larger equipment contract operated by Roche Mining (a subsidiary of Downer EDI Limited). New underground operations will be commencing in early 2007, with the development of a longwall mining operation in the Wambo, Whybrow, Arrowfield and Bowfield seams to produce high quality thermal coal and SSCC. These new operations are expected to generate Run of Mine (ROM) production of approximately 6.9 million tonnes per annum (Mtpa) of thermal coal and SSCC in FY07.

4.2.2

Metropolitan

Excel owns 100% of Metropolitan. Metropolitan is a longwall mine located in the Southern Coalfields of NSW, approximately 50 kilometres (km) south of Sydney. The coal leases cover an area of 5,195 hectares and contain total resources in the Bulli and Balgownie seams of approximately 102Mt. The mine currently produces approximately 1.5 million saleable tonnes of HCC, SSCC and PCI per year. Since it acquired the mine in 2002, Excel has upgraded the underground mining equipment and surface infrastructure, including the extension of the longwall face width from 135 metres to 158 metres and the recent upgrade of the drift conveyor systems to 600 tonnes per hour. Approximately 90% of coal produced at Metropolitan is exported under contract to customers in Japan, South America and Europe. The remaining product is trucked to domestic customers, including Excel’s 50% owned Illawarra Coke.

4.2.3

Chain Valley

Excel owns 80% of Chain Valley, through the Wallarah Coal Joint Venture. The remaining 20% is owned by a wholly owned subsidiary of Sojitz Corporation, a Japanese trading house. Chain Valley is a bord and pillar, thermal coal mine located in the Newcastle coalfield on the southern shore of Lake Macquarie, approximately 100km north of Sydney. The mine is immediately adjacent to Delta Electricity’s Vales Point power station, one of Chain Valley’s major customers. The mine lease covers an area of 2,100 hectares, with access to two mineable seams (Great Northern and Fassifern) containing in-situ reserves of approximately 11Mt and resources of 79Mt. The mine produces some 0.7 million saleable tonnes of thermal coal per year. The underground operations have been expanded to include the Fassifern seam, 30 metres below the current workings in the Great Northern seam. This expansion is intended to extend Chain Valley’s life by up to 20 years. Chain Valley services both the domestic and export thermal coal markets.

4.2.4

Wilpinjong

Excel owns 100% of Wilpinjong, which comprises a large open-cut thermal coal resource located approximately 110km west of Muswellbrook in the Hunter Valley. Project approval was obtained in early February 2006, with development approval commencing at the same time. First production from the mine is expected in late 2006. Wilpinjong’s Ulan seam contains 173Mt of recoverable reserves. Excel has signed a contract with Macquarie Generation to provide up to 7 Mtpa of Wilpinjong coal to its Bayswater and Liddell power stations for a period of 19 years, commencing in January 2007. At its peak production of approximately 9.3Mtpa, some 2.8Mtpa of high quality thermal coal will be exported through Newcastle port facilities. Thiess Pty Ltd has been contracted to undertake coal mining and processing operations for the first five years of Wilpinjong’s operations. 22 Deloitte: Excel Coal

independent expert’s report

4.2.5

Millennium

Excel owns an 84.6% stake in the Millennium mine, located in Queensland’s northern Bowen Basin, near the township of Moranbah. Millennium is an open-cut coking coal mine and is expected to commence full production in August 2006 of at least 1.5 Mtpa in saleable production which is expected to increase to 3.0 Mtpa as port constraints are eased at the Dalrymple Bay Coal Terminal. Millennium will produce hard coking coal and PCI for the export markets. Millennium is located adjacent to BMC’s Poitrel Project. Through the Red Mountain Infrastructure Joint Venture, Excel and BMC have agreed to share coal infrastructure with a total capacity of 6 Mtpa. The joint venture involves Millennium transferring a 50% interest in its infrastructure facilities (i.e. the coal handling and preparation plant (CHPP) and rail transport infrastructure) to BMC upon commissioning of the facilities. BMC will also transfer certain coal tenements to Millennium, namely the Mavis Downs, North Poitrel, Morambah and Wotonga tenements. These tenements adjoin Millennium’s existing tenements and will be developed by Millennium as part of its integrated, long-term mine plan.

4.2.6

Illawarra Coke

Excel owns 50% of Illawarra Coke, which operates coke plants at Corrimal and Coalcliff, approximately 80km south of Sydney. The remaining 50% is held by Cottenham Investments Pty Ltd. Collectively, the two plants produce approximately 240,000 tonnes of metallurgical and foundry coke per year. Illawarra Coke has been a stable supplier of coke to the domestic Australian market for over 80 years and also has an international customer base.

4.2.7

Cosila Project

Since 1998, Excel has managed the Cosila Project in the Guasare coal basin, located in the state of Zulia in north-western Venezuela. The project area contains resources of approximately 40Mt of high quality thermal and PCI coal. Excel owns an effective 49% interest in the Cosila Project via a subsidiary, Exceleven Pty Ltd, which owns 96.69% of the project. Excel owns 51% of Exceleven Pty Ltd, with the remaining 49% of the capital held by Triangle Resource Fund (Cayman) LDC as General Partner of Triangle Resource Fund (Cayman) LP and Alpha Natural Resources Inc. Excel is currently in negotiations with an agency of the Venezuelan state of Zulia, which is seeking to acquire a major stake in the project. Development of the project has been put on hold until these negotiations have been completed.

4.2.8

Exploration and Tenements

In addition to the above assets, Excel has a number of exploration and tenement interests, which are outlined below.

Wambo additional exploration area Wambo Pty Ltd has applied for an extension of its tenements to the north of the Wambo mine. If granted, this may provide additional open-cut and underground resources. No exploration has yet occurred.

Middlemount tenements Millennium owns tenements near Middlemount in Central Queensland which are currently being explored to assess the potential for a development to produce low-volatile PCI coal. No exploration has yet occurred.

23 Deloitte: Excel Coal

Annexure A

Conarco Farm-In Excel has recently entered into a farm-in agreement with a private group of investors (Conarco Group) over two large coal exploration areas in Queensland. This agreement provides Excel with exploration potential for an investment cost which increases with each development milestone. No drilling has yet occurred.

4.3

Management

Excel’s key management include: x

Tony Haggarty – Managing Director

Andy Plummer – Executive Director, Business Development

Chris Ellis – Executive Director, Project Development

Allan Davies - Executive Director, Operations

Nigel Jones – Chief Financial Officer.

4.4

Capital structure and shareholders

As at the date of this report Excel had 214,977,360 fully paid ordinary shares outstanding.

Substantial shareholders The substantial shareholders of the Company based on ASX filings, are set out in Table 8 below.

Table 8: Substantial shareholders based on ASX filings

Shareholder

Directors Rick Chadwick Tony Haggarty Chris Ellis Roger Massy-Greene Andy Plummer Allan Davies Sub-total Newton Investment Management Ltd Other Shareholders TOTAL

Number of shares

% of total shares on issue

29,000,000 23,435,000 18,900,000 11,850,000 9,000,000 8,150,000 100,335,000

13.5% 10.9% 8.8% 5.5% 4.2% 3.8% 46.7%

21,971,176

10.2%

92,671,184 214,977,360

43.1% 100.0%

Source: ASX

At 30 June 2006 directors held or controlled a combined total of approximately 100.5 million shares, or 46.7% of the Company.

24 Deloitte: Excel Coal

independent expertâ&#x20AC;&#x2122;s report

4.5

Share price performance

A summary of Excelâ&#x20AC;&#x2122;s share price performance since its IPO in May 2004 is provided in Table 9 below.

Table 9: Excel quarterly share price information

Quarter end date

High

Low

Last Trade

30-Jun-2004 30-Sep-2004 31-Dec-2004 31-Mar-2005 30-Jun-2005 30-Sep-2005 31-Dec-2005 31-Mar-2006 30-Jun-2006 07-Aug-2006

2.70 3.85 5.37 8.55 7.90 8.32 7.95 7.97 8.76 8.82

1.93 2.63 3.82 4.67 5.80 7.07 6.10 5.98 7.09 7.94

2.65 3.85 4.67 7.50 7.49 7.87 6.38 7.50 8.07 8.74

Volume

46,778,579 32,517,094 44,903,061 48,937,163 48,075,156 51,220,891 48,154,534 100,234,763 50,000,646 49,636,976

Source: Bloomberg

These share price movements and trading volumes are presented graphically in the figure below.

Figure 5: Excel stock activity on ASX from IPO to 7 August 2006 25

$10.00 $9.00

$8.00

$6.00 $5.00

$4.00

Volume (million)

Share price ($)

$7.00

$3.00 5

$2.00 $1.00

Jul-06

May-06

Apr-06

Mar-06

Jan-06

Nov-05

Dec-05

Sep-05

Aug-05

Jun-05

Apr-05

May-05

Jan-05

Feb-05

Oct-04

Volume (million)

Nov-04

Sep-04

Jul-04

Jun-04

0 May-04

Daily VWAP

Source: Bloomberg

The volume weighted average share price (VWAP) for the month prior to the Announcement Date was A$7.71.

25 Deloitte: Excel Coal

Annexure A

4.6

Financial performance

The audited financial results of Excel for the years ended 30 June 2004 and 30 June 2005 and the audited results for the year ended 30 June 2006 are summarised in the table below.

Table 10: Financial results A-GAAP FY04 audited (A$’000)

A-GAAP FY05 audited (A$’000)

A-IFRS FY06 audited (A$’000)

180,022 36,916 216,938 56.7%

312,077 45,882 357,959 65.0%

511,683 6,238 517,921 44.7%

46,507 21.4%

129,057 36.1%

187,100 36.1%

(14,144) 32,363 14.9%

(22,211) 106,846 29.8%

(24,627) 162,473 31.4%

Net interest expense Share of associates Profit before tax and minority interests

(3,489) 7,026 35,900

(4,933) 6,214 108,127

(10,604) 443 152,313

Tax (expense) / benefit Minority interests

(3,061) (7,149)

13,653 (26,686)

(45,342) (8,908)

Net profit after tax

25,690

95,094

98,063

Revenue from the sale of coal Other revenue Total Revenue Revenue growth (%) EBITDA Margin (%) Depreciation and amortisation EBIT Margin (%)

Source: Excel annual report 2004, 2005 and 30 June 2006 audited accounts

There has been a significant increase in both revenue and profits for the past three years as a result of increased coal sales volumes and significantly higher coal prices. Revenue grew by 45% in FY06 while production costs increased by 27% (A$61 million). Net interest expense increased to A$10.6 million as a result of the increase in borrowings to finance Excel’s expansion discussed in Section 4.7.

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independent expertâ&#x20AC;&#x2122;s report

The allocation of Excelâ&#x20AC;&#x2122;s ROM production by operation was as follows: Figure 6: ROM coal production by operation (whole of mine) 9 8 7 6

5 4 3 2 1 0 2004 Wambo

Metropolitan

2005

2006

Chain Valley

Source: Excel 2004 and 2005 annual reports and 30 June 2006 audited accounts

27 Deloitte: Excel Coal

Annexure A

4.7

Financial position

The audited consolidated statements of financial position for Excel as at 30 June 2004, 30 June 2005 and audited position at 30 June 2006 are summarised in the table below.

Table 11: Financial position A-GAAP FY04 audited (A$’000)

A-GAAP FY05 audited (A$’000)

A-IFRS FY06 audited (A$’000)

Cash Receivables Other Total current assets

60,790 19,855 33,276 113,921

105,005 35,122 63,902 204,029

39,802 84,963 115,050 239,815

Property, plant and equipment Exploration, evaluation and development expenditure Intangibles Other Total non-current assets

121,752 26,271 17,865 43,403 209,291

146,246 119,126 137,759 69,334 472,465

538,747 32,217 80,988 71,421 723,373

Payables Interest bearing liabilities Provisions Other Total current liabilities

30,687 17,149 10,011 15,122 72,969

69,101 14,154 11,564 38,539 133,358

106,278 24,262 3,436 59,022 192,998

Interest bearing liabilities Provisions Other Total non-current liabilities

54,103 10,157 10,799 75,059

168,695 14,355 18,622 201,672

275,508 14,483 87,472 377,463

175,184

341,464

392,727

Net assets Source: Excel annual report 2004, 2005 and 30 June 2006 audited accounts

The significant movements during the year ended 30 June 2006 include a A$392.5 million increase in property, plant and equipment as a result of significant expenditure at Wambo (re-opening the underground operations), Millennium (constructing the CHPP and commencement of mining) and Wilpinjong (commencement of mining operations). This expansion was funded by a A$111.5 million increase in long-term debt, a A$103 million new equity issue and operating cash flow. In addition, the results for FY06 were prepared under A-IFRS accounting standards which resulted in the following accounting adjustments: x

property, plant and equipment included A$89.9 million transferred from exploration, evaluation and development expenditure

intangibles decreased by A$57 million

non-current deferred tax liabilities increased by A$31.6 million which has been included in other non-current liabilities.

28 Deloitte: Excel Coal

independent expert’s report

Valuation methodology 5.1

Valuation methodologies

To estimate the fair market value of the shares in Excel we have considered common market practice and the valuation methodologies recommended by ASIC Practice Note 43 regarding valuation reports of independent experts. These are discussed below.

5.1.1

Market based methods

Market based methods estimate a company’s fair market value by considering the market price of transactions in its shares or the market value of comparable companies. Market based methods include: x

capitalisation of maintainable earnings

analysis of a company’s recent share trading history

industry specific methods.

The capitalisation of maintainable earnings method estimates fair market value based on the company’s future maintainable earnings and an appropriate earnings multiple. An appropriate earnings multiple is derived from market transactions involving comparable companies. The capitalisation of maintainable earnings method is appropriate where the company’s earnings are relatively stable. The most recent share trading history provides evidence of the fair market value of the shares in a company where they are publicly traded in an informed and liquid market. Industry specific methods estimate market value 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.

5.1.2

Discounted cash flow methods

Discounted cash flow methods estimate market value by discounting a company’s future cash flows to a net present value. These methods are appropriate where a projection of future cash flows can be made with a reasonable degree of confidence. Discounted cash flow methods are commonly used to value early stage companies or projects with a finite life.

5.1.3

Asset based methods

Asset based methods estimate the market value of a company’s shares based on the realisable value of its identifiable net assets. Asset based methods include: x

orderly realisation of assets method

liquidation of assets method

net assets on a going concern basis.

The orderly realisation of assets method estimates 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 liquidation method is similar to the orderly realisation of assets method except the liquidation method assumes the assets are sold in a shorter time frame. Since wind up or liquidation of the company may not be contemplated, these methods in their strictest form may not necessarily be appropriate. 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 realisation costs.

29 Deloitte: Excel Coal

Annexure A

These asset based methods ignore the possibility that the company’s value could exceed the realisable value of its assets as they ignore the value of intangible assets such as customer lists, management, supply arrangements and goodwill. Asset based methods are appropriate when companies are not profitable, a significant proportion of a company’s assets are liquid, or for asset holding companies.

5.2

Selection of valuation methodologies

We are of the opinion that the most appropriate methodology to value Excel is the discounted cash flow method due to the following factors: x

Excel’s management has prepared long-term cash flow projections which are considered reliable and satisfy the requirements of ASIC Policy Statement 170, Prospective Financial Information

Excel’s operating assets have finite lives and thus it is not appropriate to use a capitalisation of maintainable earnings approach as the primary valuation method.

Since the discounted cash method estimates the value of a company on a control basis, we have not separately added a premium for control in deriving our estimate of the value of an Excel share. We have used the capitalisation of maintainable earnings method, value per tonne of saleable production industry rule of thumb and an analysis of recent share trading to provide additional evidence of the fair market value of shares in Excel. We have valued Excel’s exploration assets based on historical cost for the following reasons: x

insufficient testing has been done to determine the likelihood of locating an ore body capable of being developed economically. As a result of this uncertainty, cash flow projections for these assets are not available

the relatively small potential value of the portfolio of exploration assets compared to the total value of Excel.

30 Deloitte: Excel Coal

independent expert’s report

Future cash flows 6.1

Financial model

Excel management has prepared a detailed financial model based on the life of mine (LOM) plans for the mine assets and business plans for the non-mine assets (the Model). The Model includes projections of real, ungeared, after-tax cash flows for each project / mine up to and including the year ending 30 June 2026. The Model was built by Excel using budgeted figures for FY07 and FY08. Deloitte has made some adjustments to the cash flows in the Model provided by Excel where it was considered appropriate. These adjustments included, but were not limited to, costs, volumes, pricing assumptions and foreign exchange rate assumptions. Deloitte engaged Minarco Asia Pacific Pty Limited (Minarco), an independent mining expert, to prepare a report providing a technical assessment of Excel’s operating mines and developments. Minarco has provided us with projections of production parameters, operating costs and capital costs up to and including 30 June 2026 in real A$ terms. The scope of Minarco’s work was controlled by Deloitte. In preparing its report, Minarco conducted site visits, held discussions with Excel management and utilised LOM plans provided by Excel. We have valued Excel’s operating mines and developments based on the inputs provided by Minarco and our assessment of commodity prices, foreign exchange rate and discount rate. Due to the commercial sensitivity of the agreement between Excel and Macquarie Generation, only net cash flows have been included in the Model in relation to Wilpinjong. The underlying production parameters, operating costs and capital costs for Wilpinjong have been subject to the scope of Minarco’s work as discussed above. We have undertaken an analysis of Excel’s projections that has included: x

analysing the Model provided by Excel management, including limited procedures regarding the mathematical accuracy of the Model (but have neither reviewed nor audited the Model)

analysing the reasonableness of assumptions such as depreciation, royalties and taxes

obtaining commentary from Minarco with respect to the reasonableness of the production, operating costs and capital expenditure assumptions. Many of the key assumptions in the Model have been analysed by Minarco as set out Appendix 9

holding discussions with Excel’s management concerning the preparation of the projections and their views regarding the assumptions on which they are based.

We have not undertaken a review of the projections in accordance with AUS 804 – The Audit of Prospective Financial Information. However, nothing has come to our attention as a result of our analysis that suggests the assumptions on which the projections are based have not been prepared on a reasonable basis. The main assumptions underpinning the Model relate to: x

foreign exchange rate (Section 6.2)

coal prices (Section 6.3)

saleable production volumes (Section 6.4)

operating costs (Section 6.5)

capital expenditure (Section 6.7)

other (Section 6.8).

Each of these assumptions are described in the following sections. All figures are quoted on a total mine basis. Refer to Table 7 for Excel’s direct equity share of saleable production for each mine. 31 Deloitte: Excel Coal

Annexure A

6.2

Foreign exchange rate

Excel’s coal sales are denominated in US$. Excel hedges these US$ sales by entering into matching forward currency contracts. The operating cost and capital costs provided to us by Minarco are denominated in A$. The spot price as at 8 August 2006 was US$/A$0.76 and the five year Australian forward curve and Economic Intelligence Unit (EIU) projections were indicating a weakening of the A$. Based on the above, coal price projections in US$ have been converted at the exchange rates shown in the table below.

Table 12: Foreign exchange rate projections

US$/A$

FY07

FY08

FY09

FY10

0.75

0.73

0.72

Thereafter

0.72

Source: Deloitte analysis

The exchange rates adopted in the valuation are consistent with the spot price and the five year Australian forward curve as at 8 August 2006 which reflects existing interest rate differentials between Australian and the US and all information currently available to the market. The rates adopted are also consistent with the rates at which Excel has hedged its coal sales from FY07 to FY11.

6.3

Coal prices

Deloitte has adopted the following coal price projections for Excel’s uncontracted volumes for the purposes of our valuation:

Table 13: Coal price projections (real FY06 FOB)

Thermal coal price (US$/t) Hard coking coal price (US$/t) US$/A$ exchange rate Thermal coal price (A$/t) Hard coking coal price (A$/t)

FY07

FY08

FY09

FY10

Thereafter

50.00 116.00

49.00 108.00

45.00 97.00

42.00 72.00

0.75

0.73

0.72

66.67 154.67

67.12 147.95

61.64 132.88

58.33 100.00

Source: Deloitte analysis

Excel has contracts in place for a portion of its NSW thermal coal production between FY07 and FY11. These contracted volumes are priced at the weighted average contract prices. Excel’s coking coal contracts are typically one year evergreen contracts. Unless otherwise indicated coal prices are quoted in real US$ per tonne (US$/t) and average prices are projected for the year to 30 June. The above price projections are in real terms and do not include coal premiums or discounts achieved by Excel in the market. The Model makes quality, coal sub-types (e.g. SSCC and PCI) and energy content adjustments to these base hard coking and thermal coal prices to project sales prices for the various coal types from each of the mines. As the Model uses real cash flows in FY06 A$, we have estimated thermal and hard coking coal price projections in real FY06 US$ and converted these at the US$/A$ exchange rates as set out in Section 6.2.

32 Deloitte: Excel Coal

independent expertâ&#x20AC;&#x2122;s report

It should be noted that the value of Excel may vary with changes in commodity price projections. Commodity prices are subject to volatility resulting from factors such as perceived shortages, leading economic indicators and political instability. In forming our view of coal prices, we have taken the following into account: x

broker forecasts for Australian thermal and hard coking coal prices into Asia

historical export contract prices into Asia

current price settlements for JFY07

historical spot prices for Australian thermal and hard coking coal into Asia.

Although prices are expected to decline, it is anticipated that the demand / supply outlook is likely to keep coal prices above the long-term average from FY07 through to FY09. Our long-term coal price projections take account of expanding global supply and a slowdown of demand growth which is consistent with the downward trend in contract prices.

6.3.1

Historical prices

Historical thermal and hard coking coal contract prices and spot prices are shown in the following figure.

Figure 7: Historical thermal and hard coking prices (US$/t FOB) 140 120

US$/t FOB

100 80 60 40 20

19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06

Hard coking contracts

Thermal contracts

BJI

ACR Asian

QJHCI

Source: Coal 2005 report, Coalportal website

Thermal and hard coking coal contract prices have increased by 51% and 58% respectively since 2004, while thermal coal spot prices have increased by 18% (BJI) and 68% (ACR Asian) and hard coking coal spot prices by 168% (QJHCI) over the same period.

6.3.2

Thermal coal price projections

While thermal coal contract prices negotiated for the JFY06 were approximately 20% higher than the previous year, expected increases in production by the major players in Australia, South Africa and Indonesia, and modest growth in world demand is expected to lead to price declines in the short to medium term. This sentiment is reflected in various broker forecasts available, the majority of which support a decline in thermal coal prices in the short term, as demonstrated in Figure 8.

33 Deloitte: Excel Coal

Annexure A

The average of broker forecasts indicates that thermal coal prices are projected to reduce to US$50/t in 2007, US$49/t in 2008 and US$46/t in 2009 (real 2006 dollars). We note that these projections are for a standard quality of thermal coal. Given the benchmark pricing system operating in Australia, price settlements by the major players, namely Rio Tinto and Xstrata, for JFY07 are a reliable indicator of short term thermal coal prices for FY07. Price settlements are later than usual this year with Xstrata settling a benchmark pricing agreement in July 2006 with Japanese power utilities at US$52.50/t for the JFY07. The market is still awaiting announcements of price settlements from Rio Tinto in relation to their thermal coal contracts for JFY07. Since the beginning of the year Excel has announced four thermal coal sales contracts to supply coal into Asia and Europe. The Asian contracts, announced in January 2006, are with Taiwan Power Company (Taipower) to supply 3Mt of coal at a rate of 500,000tpa for six years and with Cargill International (Cargill) to supply 1.8Mt of Excel Blend over three years (300,000t in 2006, 600,000t in 2007 and 900,000t in 2008) with partial prepayment by Cargill of US$40 million. Taipower is being supplied at market rates while the Cargill prices were not announced. The European contracts, announced in June 2006, are fixed price thermal coal contracts supplying coal from Excel’s NSW operations. Matching forward currency contracts have also been entered into. The coal will be sold FOB under Global Coal Standard Coal Trading Agreement (SCoTA) terms (15% ash and 6,000kcal/kg). The terms of each of these contracts are set out in Table 14 below.

Table 14: Recent contract price settlements for Excel Purchaser

Term

Cargill Taipower European contract European contract

6 yrs - Jan 06 to Dec 11 3 yrs - Jan 06 to Dec 08 3 yrs - Jan 07 to Dec 09 4 yrs - Jan 07 to Dec 10

Volume

US$ price

FX rate

A$ price

3.00Mt 1.80Mt 3.57Mt 2.08Mt

Not public Market US$51.00/t US$51.50/t

0.7290 0.7223

Not public Market A$70.00 A$71.45

Source: Excel announcements

We note that the above contract prices are higher than the price projections assumed in the Model for Excel’s uncontracted volumes as the above volumes relate to sales into Europe and are not considered reflective of the prices obtainable for Excel’s remaining production.

34 Deloitte: Excel Coal

independent expertâ&#x20AC;&#x2122;s report

Current available projections for thermal coal prices extend to approximately 2009. Due to the inherent uncertainty in projecting commodity prices, selecting long-term coal prices to use in the Model is subjective. We note that broker long-term projections (post-2009) released from April to July 20061 range from approximately US$35-45/t (flat real, 2006 dollars) for thermal coal with an average of US$41/t. While historical prices have fallen below US$30/t in some instances, thermal coal prices averaged US$33/t and US$35/t over the past 10 and 25 years as shown in the figure below.

Figure 8: Historical and forecast thermal coal prices (forecast in real FY06 US$/t FOB) 60

Forecast

USS/t FOB

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

25 Yr Avg

Avg thermal contracts

10 Yr Avg

Xstrata JFY07

Avg Excel contract

Avg brokers forecasts

Source: Coal 2005 report, broker forecasts, Excel Notes: 1.

Excel European fixed price settlement from Jan 2007 to Dec 2010 which Excel have advised are in real FY06 US$.

Broker short term forecasts deflated by 2.5% to convert to real FY06 US$.

Rising thermal coal prices since 2004 reflect: x

the impact of strong seasonal demand in the northern hemisphere (Asia and Europe)

supply constraints in South Africa and Australia

China retaining a larger share of its production for domestic use and

continued strength in US import demand.

The thermal coal market is unlikely to experience excess supply in the near future due to the risk of delays in projected growth in Indonesian and Australian supply and reduced exports from China due to increasing domestic demand. Given the cyclical nature of the industry, historical price spikes and troughs have generally been temporary. Market forces, through a combination of A$ exchange rate movements, labour unions or government pressure, have historically corrected high or low prices, resulting in industry margins remaining within a relatively constant band. While 25 year average prices were previously a reasonably reliable measure of future thermal coal contract pricing, consolidation in the industry and changing market forces are now showing a move away from this benchmark for future long-term thermal coal prices.

Based on the seven available broker projections extracted from information sources available to Deloitte.

35 Deloitte: Excel Coal

Annexure A

On the basis that thermal coal companies would probably react to oversupply and that future productivity gains and economies of scale may not be fully captured in cost estimates, we have adopted a long-term average price range of US$42/t, in real FY06 dollars, for determining longterm thermal coal price projections from 2010 which is consistent with available long-term projections of thermal coal prices. We have considered broker forecasts and recent price settlements in selecting our price projections for FY07 to FY09 of US$50/t, US49$/t and US$45/t respectively.

6.3.3

HCC price projections

The hard coking coal market returned to quality differentiated pricing in JFY06 as a result of the following: x

the effects of production cuts in Japan and Europe in 2005 adversely impacted demand

increased supplies of HCC and direct injection coals from Australia

export HCC prices from China remained weak.

The market for HCC has shown evidence of increased stock levels, caused by recent over commitment by buyers in the short term and delayed buying due to on-going negotiations regarding carry-over tonnage pricing. This market weakness appears to be temporary given increasing coke and steel prices which suggest strengthening demand for steel making raw materials. A key driver of higher hard coking prices will also be the level of Indian demand as India lacks domestic resources. The majority of brokers forecast a decline in HCC prices in the short term as demonstrated in Figure 9. Broker consensus is that HCC prices are projected to reduce to US$116/t for FY07, US$108/t for FY08 and US$97/t for FY09 and long-term projections (post-2009) released from April to July 20062, range from approximately US$60-90/t (real, 2006 dollars) with an average of US$75/t. These projections are for a standard quality of HCC. We note that the market is still awaiting announcements of price settlements from BHP Billiton in relation to its hard coking contracts for JFY07. While historical prices have fallen below US$40/t in some instances, historical HCC prices have averaged US$64/t and US$56/t over the past 10 and 25 years as shown in the figure below. Figure 9: Historical and forecast HCC prices (FY, US$/t FOB, forecast in real 2006 dollars) 140

Forecast

120

US$/t FOB

100 80 60 40 20

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Avg coking contracts

25 Yr Avg

10 Yr Avg

Avg brokers forecasts

Source: Coal 2005 report, broker forecasts

Based on the seven available broker projections extracted from information sources available to Deloitte.

36 Deloitte: Excel Coal

independent expertâ&#x20AC;&#x2122;s report

Given the cyclical nature of the industry, historical price spikes and troughs have generally been temporary. Market forces, through a combination of A$ exchange rate movements, labour unions or government pressure, have historically corrected high or low prices, resulting in industry margins remaining relatively constant over the long-term. While 25 year average prices were previously a reasonably reliable measure of future HCC contract pricing, consolidation in the industry and changing market forces are now showing a move away from this benchmark for future long-term HCC prices. On the basis that coal companies would likely react to oversupply and that future productivity gains and economies of scale may not be fully captured in cost estimates, we have adopted a longterm average price of US$72/t, in real terms, for determining long-term HCC price projections from 2010 which is consistent with available long-term projections of HCC prices. We have considered broker forecasts and recent price settlements in selecting our price projections for FY07 to FY09 of US$116/t, US$108/t and US$97/t respectively.

6.4

Saleable production volumes

The figure below outlines projected total saleable coal production on a whole of mine basis until 2016.

Figure 10: Projected saleable coal production by mine 25,000 Actual

20,000

15,000

10,000

5,000

2004

2005

2006

Wambo Opencut Millennium

2007

2008

2009

2010

Wambo Underground Wilpinjong

2011

2012

Metropolitan Thermal Coal

2013

2014

2015

2016

Chain Valley Coking Coal

Source: The Model

From FY09 the Model assumes that saleable production is equal to the coal sold. The Model assumes that Millennium, Wilpinjong and the Wambo underground operations will begin producing saleable coal in FY07. The Wambo open-cut operation is projected to produce its last saleable coal in FY21, with saleable production of coal projected to peak at approximately 23Mtpa in FY15. A detailed analysis of production volumes is provided in Minarcoâ&#x20AC;&#x2122;s technical report in Appendix 9.

37 Deloitte: Excel Coal

Annexure A

6.5

Operating costs

FOB costs represents all the costs incurred by each mine to bring a tonne of coal to the point where the customer takes possession / control. In the case of exported coal, this is the port from which the coal is exported. Currently, the majority of Excel’s coal is exported through Newcastle and the Port Kembla Coal Terminal. FOB costs include: x

all ROM and processing costs

administration costs (including insurance)

marketing costs

state royalties

freight costs (road and rail)

port costs (including demurrage).

The major assumptions impacting FOB costs per tonne are: x

administration costs associated with operating the mine, which is a relatively fixed amount

each mine pays up to 1% of total export revenue to Excel Coal Marketing Pty Ltd (ECM), a company in which Excel holds a 30% interest. The other shareholders in ECM are AMCI International AG (40%) and Corrobare Coal Pty Ltd (30%). Millennium and Wambo also make additional payments to other third party marketing and coal trading entities

Millennium commences production in FY07 with FOB costs rising initially in FY08 as a result of higher overburden costs per tonne and reduced saleable yield in that year, relative to future years as the mine output increases to full production. FOB costs rise over the life of the mine as the stripping ratio increases

the state royalties are a function of coal price. In NSW royalties are 5-7% of the coal value depending on the mine type and depth and in Queensland they are 7% of the coal value. In both states the coal value is adjusted for port costs and various other allowances

from FY09 the assumed FOB costs per tonne for underground mines (Wambo underground, Metropolitan and Chain Valley) remain reasonably stable, with a constant ROM and processing costs per tonne assumed

the assumed FOB cost per tonne for the open-cut mines (Wambo open-cut and Millennium) continues to fluctuate over the lives of these mines as a result of changes in the stripping ratios from year to year (which have been estimated based on life of mine plans). Consequently, while the processing costs per tonne and the costs per cubic metre for overburden removed are projected to remain constant for these operations, the cost of production at these mines increases over time because the amount of overburden that must be removed per tonne of coal (the stripping ratio) fluctuates with the local geology, generally increasing over time under the mine plan.

Detailed analysis of operating cost projections is provided in Minarco’s technical report in Appendix 9.

6.6

Management fees

Management fees are paid to Excel’s corporate division by each mine and are a combination of a fixed fee and a percentage of FOB net revenue. The management fee paid to Excel varies between the mines, depending on the shareholder’s agreement. No management fee is included for Millennium at present as a fee has not yet been decided. Management fees are an internal charge and have no net impact on the valuation as the cost incurred in each mine is offset by revenue recognised in the corporate division in the Model.

38 Deloitte: Excel Coal

independent expertâ&#x20AC;&#x2122;s report

6.7

Capital expenditure

Minarco has assessed the assumptions made in the Model in respect of the capital expenditure estimates and concluded that they were appropriate and in line with industry trends. We note that significant capital expenditure has occurred in FY06 and remains to be spent in FY07 as part of the development and construction of Wilpinjong, the development and construction of Millennium, and the expansion of the Wambo underground and surface infrastructure, including the new rail line and CHPP module. The projected capital expenditure to complete these projects is expected to be approximately A$200 million in FY07 and A$26 million in FY08.

6.8

Other

In addition to the above assumptions, the Model assumes the following: x

a corporate tax rate of 30% over the life of the mines and that all taxes are paid as they are incurred

Wambo has carried forward tax losses of A$65 million which are expected to be utilised in FY07 and FY08. These losses were in the entity acquired from Sumitomo on acquisition of Wambo by Excel

book depreciation equals tax depreciation

there are no working capital movements after FY08. Movements are projected to occur in FY07 and FY08 to ensure that the Model matches the short term budgets provided by the mines.

39 Deloitte: Excel Coal

Annexure A

Valuation of Excel 7.1

Introduction

Deloitte has estimated the fair market value of an Excel share before the Proposed Scheme to be in the range of A$7.00 to A$7.60 on a control basis. For the purpose of our opinion fair market value is defined as the amount at which the shares would change hands between a knowledgeable willing buyer and a knowledgeable willing seller, neither being under a compulsion to buy or sell. We have not considered special value in this assessment. In determining the valuation range, we estimated the fair market value of Excel before the Proposed Scheme using the discounted cash flow method. We have cross checked the valuation using the following methods: x

the capitalisation of maintainable earnings method

industry rules of thumb

analysis of recent share trading.

These are discussed in Sections 7.2 to 7.5 respectively.

7.2

The discounted cash flow method

The discounted cash flow method estimates market value by discounting a companyâ&#x20AC;&#x2122;s future cash flows to their net present value. To value Excel using the discounted cash flow method requires the determination of the following: x

future cash flows

an appropriate discount rate to be applied to the cash flows

an estimate of the terminal value

the value of any surplus assets

the level of net debt outstanding.

Our considerations on each of these factors are presented below.

7.2.1

Future cash flows

The future cash flows relied on for the purposes of the valuation have been described in Section 6.

7.2.2

Discount rates

The discount rate used to equate the future cash flows to a present value reflects the risk adjusted rate of return demanded by a hypothetical investor. We have selected a real after-tax discount rate of between 7.5% and 8.0% to discount the future cash flows of Excel to their present value. In selecting this range we have considered the following: x

the required rates of returns for comparable listed Australian and international coal mining and coal exploration companies

the debt to equity ratios of comparable listed Australian and international coal mining and coal exploration companies

asset specific issues with respect to the Excelâ&#x20AC;&#x2122;s mine developments (Wambo underground expansion, Millennium and Wilpinjong) including operating, environmental and technical risks

the specific business and financing risks of Excel 40

Deloitte: Excel Coal

independent expert’s report

Excel’s current cost of debt and level of financial gearing.

A detailed consideration of these matters is provided in Appendix 2.

7.2.3

Terminal value

The Model reflects Excel’s currently proven and probable reserves, which are sufficient to match production commitments over the life of the mines. However, Excel has extensive resources which have not yet been proven and it is reasonably likely that a significant proportion of these resources will be converted to reserves, either towards the end of the projection period to extend the life of certain mines, or earlier to underpin an expansion project. In particular, these potential reserves include: x

potential resources of approximately 40Mt bordering the Wilpinjong site. These reserves have not been included in the Model as these resources are currently vested with the state government. However, it is unlikely that anyone other than Excel will mine these reserves since the location and size of these reserves would not justify a competitor establishing mining operations in the area

resources at the Metropolitan mine in excess of the 20 year useful life estimated in the Model

expansion potential of the open-cut mine at Wambo as further exploration of the site continues. Whilst no permits have been obtained by Excel, it is expected that additional production after the existing estimate of the useful life could be in the range of 5Mtpa

further reserves expected from Chain Valley as a result of the potential coal that could be extracted from the Fassifern seam.

The extent to which these resources can be converted into reserves depends on the outcomes of future exploration drilling, analysis of the geology of the reserves, the capacity of the company’s plant and downstream infrastructure and future coal prices. Due to this uncertainty, there has been no reflection of these cash flows in the Model either through extending the cash flow period or incorporating a terminal value. These resources therefore represent additional upside potential for Excel which is not reflected in the discounted cash flow analysis. To estimate the upside potential of these reserves on the fair market value of Excel we have prepared a high level financial model in conjunction with Minarco and management of Excel which estimates the impact on extending the life of Excel’s mines to reflect the above. This assessment indicates that the value of the above opportunities may increase the discounted cash flow value of Excel by approximately 5%. We have incorporated this assessment into the premium to the discounted cash flow value as discussed in Section 7.2.6.

7.2.4

Surplus assets

Excel has the following assets that do not contribute to the projected cash flow included in the Model. For this reason they have been treated as surplus assets and have been valued separately.

Table 15: Surplus assets

(A$’000)

Exploration assets Investments Total

602 1,157 1,759

Source: Excel

Exploration assets Exploration assets have been valued at their historical cost to date being A$0.6 million for the reasons set out in Section 5.2. 41 Deloitte: Excel Coal

Annexure A

Investments At 30 June 2006, Excel held investments in Mount Thorley Coal and Port Kembla Coal Terminal. These investments have been valued at cost for the reasons set out in Section 5.2.

7.2.5

Net debt

Excel’s net debt as at 30 June 2006 was as follows:

Table 16: Net debt

(A$’000)

Current interest bearing liabilities: - Lease liabilities - Loans Non-current interest bearing liabilities: - Loan notes (secured) - Lease liabilities Cash Dividend payable1

219,406 56,102 (39,802) 22,573

Net debt

282,541

8,978 15,284

Source: Deloitte analysis Note: 1.

Final dividend declared (214,977,360 shares at A$0.105 per share).

We have included the A$0.105 per share dividend (A$22.6 million in total) declared 21 August 2006 and to be paid prior to the implementation of the Proposed Scheme since this was not included in the 30 June 2006 statement of financial position which has been used as the basis for the net debt determination.

7.2.6

Premium to discounted cash flow value

We note that the Model represents the net cash flows attributable to the currently proven and probable reserves of Excel, which are sufficient to match production commitments over the life of the mines. However, there are a number of items which may contribute to the future cash flows of Excel which are not included in the Model. These items include: x

additional resources not included in the Model which are reasonably likely to generate future cash flows either during the period of the Model or after the end of the discrete cash flow period in 2026, as discussed in Section 7.2.3

further discovery of resources from developing existing tenements which will likely result in value in excess of the historical cost of these assets set out in Section 7.2.4

the ability of Excel, or most other trade purchasers in the region, to extract further benefits in excess of the projected cash flows through future strategic options pursued. These options, whilst not included in the Model, may include extracting cost and revenue synergies through strategic alliances/transactions with other coal companies. These synergies may be in the form of increased revenues from blending coal output to achieve higher prices and/or through shared infrastructure to reduce operating costs

Excel’s management has a strong track record in acquiring, operating and developing coal mines. As a result, there may be future value attributable to management’s ability to enhance the value of the existing assets and future acquisitions made by Excel which are not fully captured in the Model 42

Deloitte: Excel Coal

independent expertâ&#x20AC;&#x2122;s report

a potential purchaser of Excel may also be willing to pay a premium in excess of the discounted cash flow value for the diversification benefits offered by Excel. These benefits include diversity of coal types, customer base and mining operations

additional upside potential from existing mine production over the period of the Model as actual reserves over the life of their mines are generally in excess of original estimates as evidenced by the extension of the useful lives of a number of Excelâ&#x20AC;&#x2122;s mines, such as Chain Valley.

Whilst all of the above factors are not capable of precise estimation, we have had regard to the potential value impact of each factor and exercised our professional judgement to estimate the overall impact on the value of Excel. Based on this analysis we have added a premium of 10% to 15% to our discounted cash flow valuation of Excel.

7.2.7

Valuation: discounted cash flow method

The key assumptions incorporated in the discounted cash flow analysis are set out below. x

long-term real coal prices (midpoint) of US$42/t for thermal and US$72/t for HCC price projections from 2010. We have considered broker forecasts and recent price settlements in selecting our price projections for FY07 to FY09

a long-term US$/A$ exchange rate of 0.72

a real after-tax discount rate of between 7.5% and 8.0% to discount the future cash flows of Excel to their present value

a premium to the discounted cash flow value in the range of 10% to 15%.

43 Deloitte: Excel Coal

Annexure A

The value of Excel derived from the discounted cash flow method incorporating the above assumptions is set out in the table below:

Table 17: Summary – discounted cash flow method Low value (A$’000)

High value (A$’000)

Wambo Metropolitan Chain Valley Millennium Wilpinjong Illawara Coking Coal Excel Coal Marketing Cosila Corporate overheads Value of assets and projects

516,424 268,704 6,162 381,472 413,468 17,074 16,059 38,500 (39,398) 1,618,465

533,941 277,014 6,323 392,630 427,604 17,726 16,532 38,500 (40,559) 1,669,711

Premium to discounted cash flow value Adjusted enterprise value Surplus assets Net debt Equity value - control basis

10% 1,780,311 1,759 (282,541) 1,499,529

15% 1,920,167 1,759 (282,541) 1,639,385

214,977

Per share

6.98

7.63

Assessed value of an Excel share

7.00

7.60

Number of shares

Source: Deloitte analysis

We note that the value per share determined using the discounted cash flow method above represents a control value for Excel. The above values are highly sensitive to the discount rate, coal price, foreign exchange projections and premium to the discounted cash flow value assumed in the discounted cash flow valuation of Excel. The assessed value per share applying higher and lower long-term thermal and coking coal price projections as well as higher and lower discount rates and foreign exchange rates to the fair market value of Excel are summarised in the tables below. Table 18: Sensitivity of equity value per share (midpoint) to changes in long-term coal prices Long-term thermal coal price Long-term coking coal price

US$68.00 US$70.00 US$72.00 US$74.00 US$76.00

US$40.00

US$41.00

US$42.00

US$43.00

US$44.00

6.36 6.58 6.81 7.03 7.25

6.61 6.83 7.06 7.28 7.51

6.85 7.08 7.30 7.52 7.75

7.09 7.32 7.54 7.76 7.99

7.34 7.56 7.78 8.01 8.23

Source: Deloitte analysis

44 Deloitte: Excel Coal

independent expertâ&#x20AC;&#x2122;s report

Table 19: Sensitivity of Excel equity value per share (high) to changes in long-term foreign exchange and discount rate assumptions Long term US$/A$ rate Discount rate

0.68

0.70

0.72

0.74

0.76

7.0% 7.5% 8.0% 8.5%

8.95 8.61 8.30 8.00

8.42 8.11 7.82 7.54

7.91 7.63 7.35 7.09

7.43 7.16 6.91 6.66

6.95 6.70 6.46 6.24

Source: Deloitte analysis

Table 20: Sensitivity of Excel equity value per share (high) to changes in the premium to discounted cash flow value and discount rate assumptions Premium to discounted cash flow value Discount rate

10%

15%

20%

7.0% 7.5% 8.0% 8.5%

6.71 6.46 6.22 6.00

7.11 6.85 6.60 6.36

7.51 7.24 6.98 6.73

7.91 7.63 7.35 7.09

8.32 8.01 7.73 7.46

Source: Deloitte analysis

7.3

Capitalisation of maintainable earnings

We consider a discounted cash flow analysis to be the most appropriate methodology for valuing Excel. However, to provide additional support of the reasonableness of our assessed value of Excel we have considered the earnings multiples implied by our discounted cash flow valuation of Excel. Future maintainable earnings represents the level of earnings that the existing operations could reasonably be expected to generate. We have selected EBITDA and NPAT as appropriate measures of earnings for Excel. Earnings multiples based on EBITDA are less sensitive to different financing structures, depreciation accounting policies and effective tax rates than multiples based on EBITA, EBIT or NPAT. Multiples based on NPAT make allowance for differing capital expenditure and financing requirements. This comparison requires the determination of the following: x

the forecast EBITDA and NPAT of Excel

calculation of implied EBITDA and P/E multiples

calculation of comparable company trading and transaction EBITDA and P/E multiples.

45 Deloitte: Excel Coal

Annexure A

The following table sets out the implied EBITDA and P/E multiples for Excel on a control basis. Table 21: Implied EBITDA and P/E multiple for Excel

Assessed enterprise value1 FY07 EBITDA2 Implied EBITDA multiple

Low (A$’000)

High (A$’000)

1,782,070 242,120 7.4x

1,921,926 242,120 7.9x

Assessed equity value FY07 NPAT Implied P/E multiple

Low (A$’000)

High (A$’000)

1,499,529 120,000 12.5x

1,639,385 120,000 13.7x

Source: Deloitte analysis Notes: 1.

Assessed enterprise value represents the adjusted enterprise value plus surplus assets as set out in Section 7.2.7.

Represents FY07 EBITDA attributable to Excel after adjusting for minority interests.

Table 22 and Table 23 below set out a comparison of the average comparable trading and transactions multiples and the multiples implied by our valuation. A more detailed analysis of Table 23 can be found in Appendix 4 and Appendix 5. Table 22: Comparable trading multiples

Minority basis EBITDA P/E multiple multiple

Trading multiples1 Average Australian coal mining companies Average International coal mining companies Average Global diversified mining companies

5.3x 5.9x 6.8x

8.8x 10.3x 10.8x

Assessed value of Excel (midpoint)

Control basis EBITDA P/E multiple multiple

6.7x 7.5x 8.6x

11.4x 13.4x 14.0x

7.7x

13.1x

Source: Bloomberg and Deloitte analysis Notes: 1.

Trading multiples are based on FY07 forecast earnings for the comparable companies and FY07 earnings guidance provided by Excel.

We have assumed a notional equity control premium of 30% based on the average one day and one week control premium for comparable transactions as set out in Appendix 5.

Table 23: Comparable transaction multiples

EBITDA multiple

P/E multiple

Transaction multiples1 Average transaction multiples

7.4x

17.7x

Assessed value of Excel (midpoint) 2

9.9x

16.0x

Source: Bloomberg and Deloitte analysis Notes: 1.

Transaction multiples are based on historical earnings at the date of the transaction.

Excel multiples based on the assessed enterprise value and FY06 earnings of Excel as set out in Appendix 4.

46 Deloitte: Excel Coal

independent expert’s report

We note that the EBITDA and P/E multiples implied by our discounted cash flow valuation of Excel have been derived on a control basis whereas the comparable trading multiples are calculated on a minority basis. As a result we have made a notional adjustment to the comparable company trading multiples to reflect a 30% control premium to facilitate comparison with our assessed value for Excel. The EBITDA and P/E multiples implied by our discounted cash flow valuation of Excel are broadly consistent with the average of transaction multiples (which incorporate a premium for control) as well as average trading multiples after incorporating a notional premium for control. We believe that this provides additional support for our value derived from the discounted cash flow methodology.

7.4

Industry rules of thumb

We have cross checked our valuation to a coal industry rule of thumb, being the value per unit of annual production capacity. This measure can be calculated for brownfield operations and also for greenfield operations by adding the expected mine development investment to the price paid. However we note that this comparison does not accurately reflect the differing levels of profitability or economic life across different mines. The mid-point of our assessed valuation range implies a value per tonne of saleable coal attributable to Excel of A$165 based on Excel’s reported FY07 production of 11.2 Mt. However, since Excel is going through a transitionary phase, with a number of mines starting and expanding over FY06 and FY07, this figure does not capture expected future growth in production. The Model assumes that production attributable to Excel will increase from 11.2Mtpa in FY07 to 20.2Mtpa by FY15. The mid-point of our assessed valuation range implies a value per tonne of A$92 based on the FY15 production attributable to Excel of 20.2Mtpa. The comparable asset transactions detailed in Appendix 6 range from A$40 to A$80 per tonne of annual production, with the recent Australian benchmarks trending towards the upper end of this range. We note that our assessed value of A$92 per tonne is slightly above the comparable transaction range noted above but can be explained by the following factors: x

as set out in Section 6.3, coal prices are currently at or near all-time highs so it would be likely that transactions would occur at prices per tonne in excess of those observed historically

there is additional upside production potential for Excel which is not included in the production attributable to Excel above, but is included in our assessed value of Excel as discussed in Section 7.2.3 which would have the effect of increasing this metric

the higher profitability of a number of Excel’s mines relative to the comparable transactions.

Based on the considerations above we believe that our assessed value range derived from the discounted cash flow method is broadly consistent with the implied value per tonne.

7.5

Analysis of recent share trading

Where the market is well informed and liquid, the market can be expected to provide an objective assessment of the fair market value of a listed entity. Market prices incorporate the influence of all publicly known information relevant to the value of an entity’s securities. We believe that the share price is an appropriate measure of the fair market value of Excel’s shares for the following reasons: x

Excel’s audited financial statements for the six months ended 31 December 2005 were released to the market on 20 February 2006 and Excel’s third quarter activities report for the three months ended 31 March 2006 was released on 28 April 2006. These announcements provided recent updates regarding Excel’s financial performance

Excel is followed by a number of equities analysts including ABN AMRO, Citigroup, Deutsche Bank, GoldmanSachs JB Were, Macquarie, Merrill Lynch, Morgan Stanley, UBS and Wilson HTM.

47 Deloitte: Excel Coal

Annexure A

Accordingly, we believe that it is reasonable to assume that the share price represents an objective assessment of the value of Excel’s shares. We have compared the daily VWAP of Excel prior to the announcement of the Proposed Scheme to our assessed value of an Excel share in the figure below. Figure 11: Comparison of share trading with assessed value 9.50 9.00 Announcement date 8.50 8.00 7.50 $ 7.00 6.50 6.00 5.50

6F 13 eb-F 06 20 eb-F 06 27 eb-F 06 e 6- b-0 M 6 13 ar-M 06 20 ar-M 06 27 ar-M 06 a 3- r-0 A 6 10 pr-A 06 17 pr-A 06 24 pr-A 06 1- pr-0 M 6 a 8- y-0 M 6 15 ay -M -06 22 ay -M -06 29 ay -M -06 a 5- y-0 J 6 12 un-J 06 19 un-J 06 26 un-J 06 un 3- -06 J 10 ul-0 -J 6 17 ul-0 -J 6 24 ul-0 -J 6 31 ul-0 -J 6 ul -0 6

5.00

VWAP

Low

High

Source: Deloitte analysis

The figure above indicates that the daily VWAP trading range of Excel, on a minority basis, was in the range of A$6.52 to A$8.71 in the six months prior to the announcement of the Proposed Scheme. Since our assessed value is on a control basis, we would expect this to be above the daily VWAP range, which reflects a portfolio or minority holding. Possible reasons for our assessed value not being above the upper end of this daily trading range may include: x

recent speculation that a number of resource companies were potential takeover targets including Excel

expectation for continued growth in Excel’s earnings

the market pricing in future expansion and development opportunities of Excel which are not fully captured in our valuation of Excel.

However, we note that when the Peabody offer announcement was made, Excel also provided profit guidance of A$120 million for the 2007 financial year which was substantially lower than the consensus broker forecasts. Therefore it appears likely that Excel’s share price would have declined as a result of the guidance in the absence of the Proposed Scheme.

7.6

Conclusions

The valuation of the equity in Excel derived using the discounted cash flow method was A$1,499.5 million to A$1,639.4 million in total or A$7.00 to A$7.60 per share. Our analysis of the implied EBITDA and P/E multiples, industry rule of thumb metrics and recent trading prices of Excel shares (prior to the announcement of the Proposed Scheme) supports the fair market value of the shares derived.

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independent expert’s report

Evaluation and conclusion 8.1

Fairness

In order to assess whether the Proposed Scheme is fair we have compared the value of an Excel share with the consideration offered by Peabody in the following table.

Table 24: Assessment of fairness

Section

Estimated fair market value of an Excel share Consideration offered by Peabody

7.6

Low value (A$)

7.00 8.50

High value (A$)

7.60 8.50

Source: Deloitte analysis Notes: 1.

As the consideration offered by Peabody is above the range of our assessed value of an Excel share on a control basis, in our opinion the Proposed Scheme is fair

8.2

Reasonableness

In accordance with ASIC Policy Statement 75, an offer is reasonable if it is fair. On this basis, in our opinion the Proposed Scheme is reasonable. We have also considered the following advantages and disadvantages of the Proposed Scheme.

Advantages of the Proposed Scheme Excel’s share price would likely fall below current levels In the absence of another offer for Excel, it is likely that Excel shares would trade at prices below those recently achieved if the Proposed Scheme is not successful. Since the Proposed Scheme was announced on 6 July 2006 no other offers for Excel have been received. In addition, we note that when the Proposed Scheme was announced, Excel also provided profit guidance for the 2007 financial year which was substantially lower than the consensus broker forecasts. Therefore we are of the opinion that Excel’s share price would have declined from the levels achieved prior to the Announcement Date as a result of this guidance in the absence of the Proposed Scheme.

Directors intend to vote in favour of the Proposed Scheme Excel’s directors hold or control in aggregate approximately 47% of Excel’s ordinary shares. These individuals have indicated their intention to vote in favour of the Proposed Scheme in the absence of a superior offer. As the directors intend to vote in favour of the Proposed Scheme in respect of their own shares this is a strong signal that the Proposed Scheme is considered attractive.

49 Deloitte: Excel Coal

Annexure A

Taxation implications If the Proposed Scheme is successful Shareholders may incur a tax expense. Individual investors should consult their tax advisor in relation to their personal circumstances.

8.3

Conclusion

Based on the foregoing, we are of the opinion that the Proposed Scheme is fair and reasonable to Shareholders and therefore it is in their best interest.

50 Deloitte: Excel Coal

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Appendix 1: Glossary Reference

Definition

A$ A$/t AGSM Alpha Natural Resources AMCI Anglo American Announcement Date Arch Coal ASIC ASX AUS AFSL Č&#x2022; BJI bps BHP Billiton BHP Mitsui Coal Cargill CAPM Centennial Coal Chain Valley China Shenhua CO2 Company, the Consol Energy Cosila Cwlth Deloitte EBIT EBITDA ECM ECPL EHPL EIU EMRP Eureka Capital Partners Limited Excel Scheme Booklet

Australian dollar Australian dollar per tonne Australian Graduate School of Management Alpha Natural Resources Inc. AMCI International AG Anglo American plc 6 July 2006 Arch Coal, Inc. Australian Securities and Investments Commission Australian Stock Exchange Limited Australian Auditing Standards Australian Financial Services Licence Beta Barlow Jonker Index Basis points BHP Billiton Limited BHP Mitsui Coal Pty Limited Cargill International Capital Asset Pricing Model Centennial Coal Company Limited Chain Valley coal mine China Shenhua Energy Company Limited Carbon Dioxide Excel Coal Limited CONSOL Energy Inc. Las Carmelitas Project Commonwealth Deloitte Corporate Finance Pty Limited Earnings before interest and tax Earnings before interest, tax, depreciation and amortisation Excel Coal Marketing Pty Limited Eureka Capital Partners Limited Excel Holdings Pty Ltd Economic Intelligence Unit Equity Market Risk Premium Previously known as Resources Finance Corporation Limited

Felix Resources FICS FOB Fording Foundation Coal FY FSG Gloucester Coal HCC IBIS

Excel Coal Limited Scheme booklet prepared by the Board of Excel containing the detailed terms of the Proposed Scheme Felix Resources Limited Financial Industry Complaints Service Free on board Fording Canadian Coal Trust Foundation Coal Holdings, Inc. Financial year Financial Services Guide Gloucester Coal Ltd mines Hard coking coal IBIS World Pty Ltd

51 Deloitte: Excel Coal

Annexure A

Reference

Definition

IPO JFY Kcal/kg Kd Ke m Macarthur Coal Massey Energy Metropolitan MIA Millennium Minarco Mt Mtpa NOx NPAT NSW NTA PCI Peabody Proposed Scheme Rf Rio Tinto ROM S&P/ASX 200 SCoTA Section 640 Shareholders SOx SSCC Sumitomo SWOT Proposed Scheme

Initial public offering Japanese fiscal year Thousand calories per kilogram Cost of debt capital Cost of equity capital million Macarthur Coal Limited Massey Energy Company Metropolitan coal mine Merger Implementation Agreement Millennium coal mine Minarco Asia Pacific Pty Limited Million tonnes Million tonnes per annum Oxide of nitrogen Net profit after-tax New South Wales Net tangible assets Pulverised Coal Injection Peabody Energy Corporation Scheme of Arrangement Risk free rate Rio Tinto Limited Run of Mine Standard & Poors /ASX 200 Index Global Coal Standard Trading Agreement Section 640 of the Corporations Act 2001 Existing holders of Excel shares Oxide of sulphur Semi-soft coking coal Sumitomo Coal Mining Pty Limited Strengths, weaknesses, opportunities and threats Peabodyâ&#x20AC;&#x2122;s offer to acquire all of the outstanding shares in Excel for A$8.50 per share United States United States dollar Weighted Average Cost of Capital Wambo mine Wesfarmers Limited Wilpinjong mine Xstrata plc Yanzhou Coal Mining Company Limited

US US$ WACC Wambo Wesfarmers Wilpinjong Xstrata Yanzhou Coal

52 Deloitte: Excel Coal

independent expertâ&#x20AC;&#x2122;s report

Appendix 2: Discount rate The discount rate used to equate the future cash flows to their present value reflects the risk adjusted rate of return demanded by a hypothetical investor. Discount rates are determined based on the cost of an entityâ&#x20AC;&#x2122;s debt and equity weighted by the proportion of debt and equity used. This is commonly referred to as the weighted average cost of capital (WACC). The WACC can be derived using the following formula:

WACC

E * Ke V

D * Kd (1 tc ) V

The components of the formula are: Ke

cost of equity capital

cost of debt

corporate tax rate

E/V

proportion of company funded by equity

D/V

proportion of company funded by debt

The adjustment of Kd by (1- tc) reflects the tax deductibility of interest payments on debt funding. The corporate tax rate has been assumed to be 30%. A nominal WACC has been calculated in the following sections and then converted to real for the purposes of our valuation.

Cost of equity capital (Ke) The cost of equity, Ke, is the rate of return that investors require to make an equity investment in a firm. We have used the Capital Asset Pricing Model (CAPM) to estimate the Ke for Excel. CAPM calculates the minimum rate of return that the company must earn on the equity-financed portion of its capital to leave the market price of its shares unchanged. The CAPM is the most widely accepted and used methodology for determining the cost of equity capital. Under the â&#x20AC;&#x153;classicalâ&#x20AC;? system of double taxation of dividends which existed in Australia until the introduction of dividend imputation in 1987 (and which still applies in many countries), the cost of equity capital under CAPM is determined using the following formula:

Rf E ( Rm Rf ) a

The components of the formula are: Ke

required return on equity

the risk free rate of return

the expected return on the market portfolio

Č&#x2022;

beta, the systematic risk of a stock which can be objectively measured by the responsiveness of company returns to movements in returns earned on the market portfolio

ÄŽ

specific company risk premium

Each of the components in the above equation is discussed below.

Risk free rate (Rf) The risk free rate compensates the investor for the time value of money and the expected inflation rate over the investment period. The frequently adopted proxy for the risk free rate is the longterm government bond rate. 53 Deloitte: Excel Coal

Annexure A

In determining Rf we have taken the 10-year Australian Government Bond yield on 8 August 2006 of 5.84%. The 10-year bond rate is a widely used and accepted benchmark for the risk free rate. This rate represents a nominal rate and thus includes inflation.

Equity market risk premium (EMRP) The Equity Market Risk Premium (EMRP) (Rm â&#x20AC;&#x201C; Rf) represents the risk associated with holding a market portfolio of investments, that is, the difference between the expected return on holding the market portfolio and the risk free rate. It is the excess return above the risk free rate that investors demand for their increased exposure to risk when investing in equity securities. In selecting an appropriate EMRP to include in the estimation of the cost of equity a number of factors need to be considered: x

whether to use historical or prospective measures

the use of arithmetic or geometric averaging for historical data

selection of an appropriate benchmark risk free rate

the impact of franking tax credits

time periods for use in historical analysis

exclusion or inclusion of extreme observations.

Historical and prospective EMRP In evaluating the EMRP, we have considered both the historically observed and the prospective EMRP. The most appropriate EMRP to use in our analysis is the prospective risk premium that investors are using to evaluate current investment opportunities. However, while being theoretically preferable, it is not possible to reliably measure prospective EMRP. The historically observed EMRP is typically used as a proxy for the prospective EMRP. The historical EMRP is estimated by comparing the historical returns on equities against the returns on risk free assets such as Government bonds. The historical EMRP has the benefit of being capable of estimation from reliable data; however it is possible that historical returns achieved on stocks were different from those that were expected by investors when making investment decisions in the past and thus the use of historical market returns to estimate the EMRP would be inappropriate. It is also likely that the EMRP is not constant over time. The forward-looking EMRP will be influenced by several factors such as population demographics, savings rates and the increased globalisation of world markets. In particular, relatively pessimistic investors believe that the days of high EMRPs have passed and that in the future, the market will perform similarly to the bond market. However, these views are balanced by optimistic investors who believe that the returns on shares will continue to outperform the returns on bonds by a similar margin to the past. It does seem likely that equity investors will continue to be rewarded for the additional risk of their investment and so, in the absence of any conclusive evidence to the contrary, we have placed most emphasis on the historically observed risk premium in our analysis and choice of EMRP. We have used the historically observed EMRP as a guideline in determining the appropriate EMRP to use in this report. In particular, we have considered a recent study undertaken by the Centre for Research in Finance at the Australian Graduate School of Management (AGSM) which gives detailed estimates of the EMRP for investors in Australian listed equity, calculated using data from January 1974 to June 2004.

Arithmetic or geometric averaging of historical returns Empirical studies seeking to measure the historical EMRP typically average the results using either an arithmetic or geometric averaging process. Geometric averaging assumes that returns are reinvested in later periods and will be less than the arithmetic average if the returns show some variance between periods.

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We consider the arithmetic average equity risk premium to be more appropriate when discounting future cash flows. The geometric average is more appropriate when reporting past performance, since it represents the compound average return, but we believe that investors today would demand a higher premium than that calculated using a geometric average.

Risk free rate used in the analysis of historical returns Risk free securities of different maturities can be used to measure the historical EMRP. For example, the AGSM reports the EMRP calculated over both 13 week Government notes and 10 year Government bonds. To match the risk free rate included in the CAPM and discussed above, we have considered the premium calculated over the return on 10 year Government bonds.

Franking tax credits The return on the market portfolio used in calculating the EMRP may include a return that shareholders receive through franking tax credits. The evidence on franking tax credits is inconclusive and therefore we have not adjusted the cost of capital for the impact of dividend imputation. The AGSM estimated that the inclusion of franking tax credits increased the historically observed EMRP by approximately 75 basis points (bps), based on short-maturity risk free assets. As we have used the EMRP calculated over longer term securities, we have assumed the same estimated increase of 75 bps to determine the illustrative EMRP including franking tax credits.

Time period for observations In empirical studies seeking to measure the EMRP, it is necessary to select a time period over which observations are considered. In general a longer time period is preferred as a larger number of observations are available which narrows the confidence intervals for the observed EMRP. However, it is possible that the EMRP does not remain stable over time and therefore a shorter observation period could be used to incorporate the recent observed risk premium only. As noted above, we have used the results calculated using data from January 1974 as this is the longest period covered in the AGSM survey and data from a shorter period would be less reliable.

Extreme observations â&#x20AC;&#x201C; October 1987 Some observers consider that the severe market movement in October 1987 (and shown in the graph of the ASX 100 Accumulation Index below) was an extreme observation, which is unlikely to repeat itself. Figure 12:ASX 100 Accumulation Index 4,500

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

0 January 1984

January 1986

January 1988

January 1990

January 1992

January 1994

January 1996

January 1998

January 2000

January 2002

January 2004

Source: Bloomberg

55 Deloitte: Excel Coal

Annexure A

A large fall in value, such as in October 1987, will decrease the returns to equity holders and therefore the EMRP. Accordingly, ignoring this observation tends to increase the historically observed EMRP by approximately 1.4% based on the AGSM study. On balance, we favour the inclusion of October 1987 within the observations as it appears that this movement merely returned the market to its longer term trend.

Selected EMRP The recent study undertaken by the Centre for Research in Finance at the AGSM detailed a number of estimates for the EMRP. The EMRP calculated using arithmetic averaging of returns between January 1974 and June 2004, including October 1987, without adjusting for franking credits was 5.81%. On this basis, we have adopted 6% as the EMRP. This EMRP is consistent with other studies in developed markets. In particular, Roger Ibbotson and Peng Chen, of Ibbotson Associates and the Yale School of Management respectively, estimated the expected long-term equity risk premium in the US (relative to the long-term government bond yield) to be about 6% arithmetically and 4% geometrically (Financial Analysis Journal, Vol. 59, No.1, February 2003).

Beta estimate ( ) Description The beta coefficient measures the systematic risk of a company in comparison to the market as a whole. A beta of greater than one indicates greater market related risk than average, while a beta of less than one indicates less risk than average. The betas of various Australian industries listed on the ASX are reproduced below. Figure 13: Betas for various Industries (as at March 2006) 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2

Source: AGSM Risk Management Service

The differences are related to the business risks associated with the industry. For example, the above diagram indicates the media industry is riskier than the utilities industry. The beta for an asset can be estimated by regressing the returns on any asset against returns on an index representing the market portfolio, over a reasonable time period.

56 Deloitte: Excel Coal

Utilities

Telecommunications services

Food beverage & tobacco

Real estate investment trusts

Banks

Food & drug retail + house & personal products

Automobile & components

Consumer services

Paper & forest products + containers & packaging

Real estate excl investment trusts

Retailing

Transportation

Technology hardware & equipment

Capital goods

Health care equipment & services

Construction materials

Diversified financials

Energy

Commercial services & supplies

Media

Chemicals

Consumer durables & apparel

Insurance

Pharmaceuticals & biotechnology

Metals & mining

Software & services

0.0

independent expert’s report

Market evidence In estimating an appropriate beta for Excel we have considered the betas of listed companies that are comparable to Excel. These betas, which are presented below, have been calculated based on weekly returns, over a two year period, compared to the S&P/ASX 200 index. Table 25: Analysis of Betas for listed companies with comparable operations to Excel

Company Name

Excel Australian coal mining companies: Centennial Coal Felix Resources Gloucester Coal Macarthur Coal Mean Median International coal mining companies: Alpha Natural Resources Arch Coal China Shenhua Consol Energy Fording Canadian Coal Trust Foundation Coal Massey Energy Peabody Energy Yanzhou Coal Mining Mean Median Australian and international diversified resources companies2: Anglo American BHP Billiton Rio Tinto Wesfarmers Xstrata Mean Median Overall mean Overall median

Enterprise value (A$’m)

Levered 3 Beta

Unlevered Beta

1,8521

1.2

1.1

1,695 441 297 871

1.0 1.0

0.7 1.0

0.8

1.2

826 656

1.0 1.0

0.9 0.9

2,027 7,505 50,841 9,863 5,348 3,057 4,339 17,664 3,981

n/a 1.6 n/a

n/a 1.5 n/a

1.6 1.3 n/a

1.6 1.8

1.3 1.8

1.3

11,625 5,348

1.5 1.6

1.4 1.4

91,162 172,811 106,823 15,268 36,515

1.7 1.6 1.4 1.0 1.6

1.6 1.5 1.4 0.9 1.4

84,516 91,162

1.5 1.6

1.4 1.4

29,473 6,427

1.4 1.4

1.3 1.3

Source: Bloomberg Notes: 1.

Excel’s enterprise value is equal to the midpoint of our valuation range.

Coal mining represents between 10% and 40% of revenues.

The observed beta is a function of the underlying risk of the cash flows of the company, together with the capital structure and tax position of that company. This is described as the levered beta.

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The capital structure and tax position of the entities in the table above may not be the same as Excel. The levered beta is often adjusted for the effect of the capital structure and tax position. This adjusted beta is referred to as the unlevered beta. The unlevered beta is a reflection of the underlying risk of the pre-financing cash flows of the entity.

Selected beta (ȕ) In selecting an appropriate beta for Excel we have considered the following: x

Excel’s levered beta is 1.2

coal mines and exploration assets have varying risk profiles depending on the maturity of the asset and the stage of its development

current debt to equity levels are below historical levels due to high commodity prices resulting in mining companies having low (or negative) net debt positions and high market capitalisations

the average unlevered beta for the Australian and international coal mining companies that are comparable to Excel are 0.9 and 1.4 respectively, while the average unlevered beta for diversified Australian and international companies with some coal mining operations is 1.3

Wambo, Metropolitan and Chain Valley have been successfully operated for a number of years, therefore, the associated operational risks are relatively limited

Excel is currently implementing expansion plans to significantly increase production, hence is subject to higher operational and development risk than some of the comparables

Excel’s debt levels are at historical highs due to its expansion plans

the comparable companies’ coal mining and exploration assets are at different stages of maturity.

Assuming an unlevered beta of 0.85 to 0.95, a corporate tax rate of 30% and the debt to equity mix of 25% gives a relevered beta of 1.00 to 1.12. This relevered beta is in line with the levered betas observed for Excel and the companies that are comparable to it. On this basis we have selected a levered beta of 1.00 to 1.10 for Excel.

Dividend imputation Dividends paid by Australian corporations may be franked, unfranked, or partly franked. A franked dividend is one that is paid out of company profits which have borne tax at the company rate, currently 30%. Where the investor is an Australian resident individual or complying superannuation fund, it will generally be entitled to a tax credit (called an imputation credit) in respect of the tax paid by the company on the profits out of which the dividend was paid. If the recipient of the dividend is another company, the dividend will give rise to a credit in that company’s franking account thereby increasing the potential of the company to pay a franked dividend at a later stage. Imputation credits represent the prepayment of company tax and when utilised result in the investor receiving dividends that are effectively “untaxed” at the company level. Imputation credits result in the investor receiving a higher tax cashflow than would otherwise be the case under the classical taxation system. We have not adjusted the cost of capital or the projected cash flows for the impact of dividend imputation due to the diverse views as to the value of imputation credits and the appropriate method that should be employed to calculate this value. Determining the value of franking credits requires an understanding of investors’ personal tax profiles to determine the ability of investors to use franking credits to offset personal income. Furthermore, the observed EMRP already includes the value that shareholders ascribe to franking credits in the market as a whole. In our view, the evidence relating to the value that the market ascribes to imputation credits is inconclusive.

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Conclusion on cost of equity Based on the above factors we arrive at a cost of equity, Ke, as follows: Table 26: Ke applied to valuation of Excel

Input

Low

High

Risk free rate (%) EMRP (%) Beta

5.84 6.00 1.00

5.84 6.00 1.10

Cost of equity capital (Ke)

11.8

12.4

Source: Deloitte analysis

Cost of debt capital (Kd) We have calculated Excel’s cost of debt to be 6.9%. The calculation is derived from the following: Table 27: Kd applied to valuation of Excel As at 30 June 2006

Loans and loan notes Finance leases Total

Balance (A$’000)

Weighting (%)

Interest rate (%)

Weighted Interest rate (%)

234,690 65,080 299,770

78% 22%

6.70% 7.73%

5.2% 1.7% 6.9%

Source: Excel 30 June 2006 audited accounts

Debt and equity mix Current gearing levels of coal mining companies have been distorted compared to long-term historical trends due to the current high commodity prices. Coal mining companies traditionally have gearing levels of approximately 20% to 30%. We have therefore, adopted a debt to enterprise value ratio of 25%.

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Annexure A

Calculation of WACC Based on the above, we have assessed the nominal post-tax WACC for Excel to be: Table 28: WACC applied to valuation of Excel

High

Low

11.8% 6.9% 25% 30% 10.1%

12.4% 6.9% 25% 30% 10.5%

Weighted average cost of capital â&#x20AC;&#x201C; real1

7.4%

7.8%

Selected WACC

7.5%

8.0%

Cost of equity capital Cost of debt capital (Pre-tax) Debt to enterprise value ratio Tax rate (%) Weighted average cost of capital - nominal

Source: Deloitte Note: 1.

Adjusted using the Fisher equation for estimated inflation of 2.5%.

Based on the above we have applied a real post-tax discount rate range of 7.5% to 8.0% to the valuation of Excel.

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Appendix 3: Comparable companies Australian coal companies Centennial Coal Company Limited Centennial Coal Company Limited (Centennial Coal) is a thermal and coking coal producer with operations in the Western and Southern Coalfields of New South Wales and in Central Queensland. Centennial Coal 's coal mines include Berrima, Anvil Hill, Newstan and Ivanhoe. Centennial Coal also operates the Cook Colliery and exports its product throughout the world.

Felix Resources Limited Felix Resources Limited (Felix Resources) is a coal exploration and development company in Australia. Felix Resources is also involved in developing the Ultra Clean Coal Technology, a process that cleans coal that's directly fed into gas turbines.

Gloucester Coal Ltd Gloucester Coal Ltd (Gloucester Coal) mines and explores coal throughout eastern Australia. Gloucester Coal’s projects include the Duralie Coal Project located in the Gloucester Basin. Gloucester Coal, through the Stratford Joint Venture, produces coking coal and thermal coal for use in the production of steel.

Macarthur Coal Limited Macarthur Coal Limited (Macarthur Coal) is a coal mining, production and exploration company operating in Australia. Macarthur Coal’s projects include the Coppabella Coal Mine and the Moorvale project in the Bowen Basin of Central Queensland.

International coal mining companies Alpha Natural Resources, Inc. Alpha Natural Resources, Inc. (Alpha Natural Resources) extracts, processes, and markets steam and metallurgical coal. Alpha Natural Resources conducts operations from surface and underground mines located in the northern and central Appalachian regions and Colorado, all located in the United States. Alpha Natural Resources markets its coal to electric utilities, steel and other industrial producers.

Arch Coal Inc Arch Coal, Inc. (Arch Coal) mines, processes, and markets low-sulphur coal from surface, underground, and auger mines located in the western United States and in the central Appalachian region. Arch Coal markets its coal primarily to electric utilities.

China Shenhua Energy Company Limited China Shenhua Energy Company Limited (China Shenhua) is an integrated coal-based energy company focusing on the coal and power businesses in China. China Shenhua also owns and operates an integrated coal transportation network consisting of dedicated rail lines and port facilities.

CONSOL Energy Inc CONSOL Energy Inc. (Consol Energy) produces high-BTU bituminous coal, and also coalbed methane gas. Consol Energy markets coal primarily to the electric power generation industry, and secondarily to other consumers of coal in the United States. The majority of Consol Energy 's mines employ longwall mining systems, which are highly mechanized, capital intensive operations with a low variable cost structure.

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Fording Canadian Coal Trust Fording Canadian Coal Trust (Fording) is a trust that owns metallurgical coal producing assets for export, and produces the industrial mineral wollastonite. Fording has operations in Canada, the United States, and Mexico.

Foundation Coal Holdings, Inc Foundation Coal Holdings, Inc. (Foundation Coal) produces coal in the United States. Foundation Coal operates in the Powder River Basin, Northern Appalachia, Central Appalachia, and the Illinois Basin. Foundation Coal produces, processes, and sells steam coal to electricity producers and sells metallurgical coal to steel manufacturers.

Massey Energy Massey Energy Company (Massey Energy) produces, processes, and sells bituminous, low sulphur coal of steam and metallurgical grades through its processing and shipping centres. Massey Energy currently operates coal mines in West Virginia, Kentucky, and Virginia. Massey Energy provides its coal to utility, industrial, and metallurgical customers.

Peabody Peabody Energy Corporation (Peabody) mines and markets predominantly low-sulphur coal, primarily for use by electric utilities. Peabody also trades coal and emission allowances.

Yanzhou Coal Mining Company Limited Yanzhou Coal Mining Company Limited (Yanzhou Coal) operates underground mining and coal preparation and operation businesses. Its products are sold in domestic and international markets. Yanzhou Coal also provides railway transportation services.

Australian and international diversified mining companies Anglo American plc Anglo American plc (Anglo American) is a global mining and natural resources company, which has interests in platinum, gold, diamonds, coal, base metals, ferrous metals, industrial minerals, and paper and packaging. Anglo American is geographically diverse, with operations in Africa, Europe, North and South America, Australia, and Asia.

BHP Billiton Limited BHP Billiton Limited (BHP Billiton) is an international resources company. BHP Billitonâ&#x20AC;&#x2122;s principal business lines are mineral exploration and production, including coal, iron ore, gold, titanium, ferroalloys, nickel a copper concentrate, as well as petroleum exploration, production, and refining.

Rio Tinto Limited Rio Tinto Limited (Rio Tinto) is an international mining company. Rio Tinto has interests in mining for aluminium, borax, coal, copper, gold, iron ore, lead, silver, tin, uranium, zinc, titanium dioxide feedstock, diamonds, talc and zircon. Rio Tinto's various mining operations are located in Australia, New Zealand, South Africa, the United States, South America, Europe and Indonesia.

Wesfarmers Limited Wesfarmers Limited (Wesfarmers) is a diversified company. Wesfarmers activities include home improvement products and building supplies, coal mining, gas processing and distribution, industrial and safety product distribution, chemical and fertilizer manufacturing, insurance and rail transport.

62 Deloitte: Excel Coal

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independent expertâ&#x20AC;&#x2122;s report

Xstrata plc Xstrata plc, (Xstrata) a diversified mining group, explores for and mines copper, coking coal, thermal coal, ferrochrome, vanadium, zinc, gold, lead, and silver. Xstrata conducts operations in Australia, South Africa, Germany, Argentina, and the United Kingdom.

63 Deloitte: Excel Coal

101

102 4

2,172 8,173 51,902 9,976 5,918 2,727 3,923 18,485 3,839 11,902 5,918

International coal mining companies: Alpha Natural Resources 1,558 Arch Coal 7,216 China Shenhua 44,062 Consol Energy 9,716 Fording Canadian Coal Trust 5,752 Foundation Coal 1,914 Massey Energy 2,870 Peabody Energy 17,286 Yanzhou Coal Mining 4,804 Average - simple 10,575 Median 5,752

Deloitte: Excel Coal

1,668 479 307 794 812 637

1,030 466 268 884 662 675

Australian coal mining companies: Centennial Coal Felix Resources Gloucester Coal Macarthur Coal Average - simple Median

1,8522

1,5691

EV A$m

Excel

Company

Market Cap A$m

11.3 25.3 10.4 14.7 5.4 6.4 6.9 19.8 4.2 11.6 10.4

11.1 39.4 5.7 6.9 15.8 9.0

13.8

Historical FY05

5.0 10.0 8.8 7.2 5.8 5.3 5.6 12.2 4.1 7.1 5.8

9.9 11.7 4.6 3.5 7.4 7.3

9.9

Current FY06

EBITDA multiple

Table 29: Analysis of EBITDA and p/e multiples for listed companies with comparable operations to Excel

4.1 6.6 7.8 6.2 7.6 4.5 4.4 8.2 4.0 5.9 6.2

5.2 5.5 5.1 5.4 5.3 5.3

7.73

Forecast FY07

47.6 n/m 15.1 12.6 5.2 19.1 N/m 30.4 10.0 20.0 15.1

14.8 20.2 9.1 12.4 14.1 13.6

16.5

Historical FY05

The following table provides analysis of EV/EBITDA and p/e multiples for companies with comparable activities to Excel:

Appendix 4: Multiples analysis

10.2 18.5 14.1 15.6 6.6 16.2 11.8 20.8 8.9 13.6 14.1

46.8 21.3 6.7 5.7 20.1 14.0

16.0

Current FY06

p/e multiple

7.4 10.7 12.1 12.3 8.5 11.6 7.2 13.6 9.1 10.3 10.7

9.4 11.0 6.1 8.8 8.8 9.1

13.1

Forecast FY07

Annexure A

10.3 9.5

11.0 9.5 9.4 15.1 8.9 10.8 9.5

65 Deloitte: Excel Coal

Enterprise values were calculated by summing the total of the net borrowings at each companyâ&#x20AC;&#x2122;s most recent reporting date and the market capitalisation at 8 August 2006. Earnings were taken from the last annual report.

14.6 12.2

10.8 12.2 10.0 14.1 8.9 11.2 10.8

Forecast FY07

17.8 15.1

17.3 21.2 14.9 21.0 14.5 17.8 17.3

Current FY06

p/e multiple

Based on EBITDA attributable to Excel as set out in Section 7.3.

6.1 6.0

6.4 6.0 6.2 9.5 5.8 6.8 6.2

Historical FY05

The enterprise value of Excel represents the midpoint of our assessed enterprise value as set out in Section 7.3.

7.3 6.4

6.2 7.5 6.4 9.0 5.7 7.0 6.4

Forecast FY07

13.0 10.4

9.5 13.0 10.2 13.6 9.5 11.2 10.2

Current FY06

EBITDA multiple

28,471 5,918

97,319 169,694 107,833 14,772 38,992 85,722 97,319

Historical FY05

The market capitalisation of Excel represents the midpoint of our equity valuation range as set out in Section 7.2.7.

26,040 5,752

85,386 156,578 105,269 13,061 34,772 79,031 85,386

EV A$m

Notes:

Source: Bloomberg

Average - simple Median

Diversified Australian and international companies Anglo American BHP Billiton Rio Tinto Wesfarmers Xstrata Average - simple Median

Company

Market Cap A$m

independent expertâ&#x20AC;&#x2122;s report

103

Annexure A

Table 30: Analysis of margins for listed companies with comparable operations to Excel EBITDA margins

Company Name

Excel Australian coal mining companies: Centennial Coal Felix Resources Gloucester Coal Macarthur Coal Mean Median International coal mining companies: Alpha Natural Resources Arch Coal China Shenhua Consol Energy Fording Canadian Coal Trust Foundation Coal Massey Energy Peabody Energy Yanzhou Coal Mining Mean Median Australian and international diversified resources companies1: Anglo American BHP Billiton Rio Tinto Wesfarmers Xstrata Mean Median Mean Median

EV (A$â&#x20AC;&#x2122;m)

Historical FY05

Current FY06

Forecast FY07

1,852

36%

31%

1,695 441 297 871 826 656

23% 10% 37% 31% 25% 27%

22% 20% 40% 43% 31% 31%

32% 29% 39% 31% 33% 32%

2,027 7,505 50,841 9,863 5,348 3,057 4,339 17,664 3,981 11,625 5,348

9% 10% 56% 15% 44% 24% 19% 15% 44% 26% 19%

18% 24% 58% 28% 41% 25% 21% 21% 46% 31% 25%

19% 30% 57% 31% 34% 28% 24% 26% 43% 32% 30%

91,162 172,811 106,823 15,268 36,515 84,516 91,162

26% 33% 42% 14% 38% 31% 33%

33% 36% 40% 18% 46% 35% 36%

32% 40% 40% 17% 45% 35% 40%

29,473 6,427

27% 25%

32% 31%

33% 32%

Source: Bloomberg Note: 1.

The enterprise value of Excel represents the midpoint of our assessed enterprise value range as set out in Section 7.3.

66 Deloitte: Excel Coal

104

Oct-03

Jun-03 Jan-01

May-01

Jun-03

Apr-03 Aug-00

Jan-01 7.4 6.6

6.0

5.2 6.7

n/a

n/m 6.6 12.7

67 Deloitte: Excel Coal

Asset purchase.

4,838

5,163 1,281

150

421 9,632 659

Enterprise Value (A$M)

Date WMC announced it had received an acquisition proposal from Xstrata, BHP Billiton subsequently announced a bid in March 2005.

Centennial Coal Company Ltd BHP Billiton Cleveland-Cliffs Australia Pty Ltd LionOre Mining International Ltd Xstrata PLC MetCoal Holdings (Qld) Pty Ltd Xstrata PLC

Acquirer

Glencore International AG1

Dalrymple Resources Ltd MIM Holdings Ltd QCT Resources Ltd

Austral Coal Limited WMC Resources Ltd Portman Limited

Target

Historical EBITDA multiple

Source: Mergerstat Notes:

Average Median

Nov-05 Jun-05 Apr-05

Effective date

Feb-05 Oct-042 Jan-05

Announcement date

Table 31: Comparable market transactions

The following table provides the details of comparable market transactions.

Appendix 5: Comparable transactions

17.7 20.2

n/a

20.2 n/a

n/a

n/a 12.3 20.7

Historical p/e multiple

27% 29%

n/m

7% 33%

48%

-3% 53% 26%

1 day prior

32% 36%

n/m

12% 34%

54%

-7% 59% 37%

5 days prior

Premium

37% 36%

n/m

20% 37%

59%

26% 46% 36%

1 month prior

independent expertâ&#x20AC;&#x2122;s report

105

Annexure A

Appendix 6: Industry rule of thumb The following table provides the details of comparable transactions of individual mines. Table 32: Comparable asset transactions

Date

Asset

Jul-06 Jul-06 Oct-04 Apr-04 Dec-03

Koornfontein1 Minerva and Athena2 Southland3 Cook4 Burton & North Goonyella Wilkie Creek

Dec-02 Average

Implied value A$m

Production Mtpa

Implied value per tonne A$/t

Mine type

Coal type

Price A$m

Interest

UG OC UG UG

T T C C/T

100.0 33.0 31.3 8.5

100% 15% 100% 45%

100.0 200.0 131.3 18.9

3.6 2.5 2.0 0.6

27.8 80.0 65.7 31.5

OC/UG

C/T

350.0

100%

350.0

7.0

50.0

28.3

100%

28.3

1.3

21.8 46.1

Source: Deloitte Key: OC = Open-cut, UG = Underground, T = Thermal, C = Coking, Notes: 1.

This transaction has not been completed. The Koornfontein mine is located in the Mpumalanga province in South Africa.

This transaction has not been completed. Athena is an exploration area adjacent to Minerva, with approximately 560Mt of inferred resources.

The implied value includes an estimated A$100m required to bring the mine to an operating condition.

This transaction took Xstrataâ&#x20AC;&#x2122;s holding the colliery to 95%.

Brownfield: Price paid per unit of annual production

Price paid Annual capacity of mine

Price paid + mine development investment Expected annual capacity of mine

Greenfield: Price paid per unit of annual Production

68 Deloitte: Excel Coal

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independent expert’s report

Appendix 7: Sources of information In preparing this report we have had access to the following principal sources of information: x

Excel’s ASX announcements, including the announcement dated 6 July 2006 announcing the Proposed Scheme

publicly available information on Excel and comparable companies

other publicly available information, including information published by Bloomberg, Connect4, IBIS World, Barlow Jonker, Australian Coal Association, Coalportal, Mergerstat and SDC Platinum

Barlow Jonker Coal 2005 report

ABARE’s Australian Mineral Statistics and Australian Commodities publications

The Mining Valuation Handbook, 2nd Edition, Dr Victor Rudenno

various broker forecasts

discussions with Excel Management

report prepared by Minarco

Excel’s monthly management report as at 31 May 2005 and audited accounts as at and for the year ended 30 June 2006

Excel cash flow model for the period 30 June 2006 to 30 June 2026

publicly available information on historical coal prices and forecasts.

69 Deloitte: Excel Coal

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Annexure A

Appendix 8: Qualifications, declarations and consents The report has been prepared at the request of the Directors of Excel and is to be included in the Explanatory Statement to be given to Shareholders for approval of the Proposed Scheme. Accordingly, it has been prepared only for the benefit of the Directors and those persons entitled to receive the Explanatory Statement in their assessment of the Proposed Scheme outlined in the report and should not be used for any other purpose. Further, recipients of this report should be aware that it has been prepared without taking account of their individual objectives, financial situation or needs. Accordingly, each recipient should consider these factors before acting on the Proposed Scheme. The report represents solely the expression by Deloitte of its opinion as to whether the Proposed Scheme is in the best interest of the Shareholders as a whole. Deloitte consents to this report being included in Excelâ&#x20AC;&#x2122;s Explanatory Statement. Statements and opinions contained in this report are given in good faith but, in the preparation of this report, Deloitte has relied upon the information provided by the directors and executives of Excel which Deloitte believes, on reasonable grounds, to be reliable, complete and not misleading. Deloitte does not imply, nor should it be construed, that it has carried out any form of audit or verification on the information and records supplied to us. Drafts of our report were issued to Excel management for confirmation of factual accuracy. Furthermore, recognising that Deloitte may rely on information provided by Excel and its officers and/or associates, Excel has agreed to make no claim against Deloitte to recover any loss or damage which Excel may suffer as a result of that reliance and also has agreed to indemnify Deloitte against any claim arising out of the assignment to give this report, except where the claim has arisen as a result of any proven wilful misconduct by Deloitte. In preparing our report we have not had access to the management of the Cosila Project. We may not have become aware of all information that may be relevant to our valuation of this entity. Accordingly the conclusions reached in our valuation report could differ to those reached had we had full access to the management of the Cosila Project, although we consider it unlikely that such differences would be material to the value of Excel as a whole. Deloitte also relied on the technical report prepared by Minarco Asia Pacific Pty Limited. Deloitte has received consent from Minarco Asia Pacific Pty Limited for reliance on its report in the preparation of this report. To the extent that this report refers to prospective financial information we have considered the prospective financial information and the basis of the underlying assumptions. The procedures involved in Deloitte's consideration of this information consisted of enquiries of Excel personnel and analytical procedures applied to the financial data. These procedures and enquiries did not include verification work nor constitute an audit in accordance with Australian Auditing Standards, nor did they constitute a review in accordance with AUS 902 applicable to review procedures. Based on these procedures and enquiries, Deloitte considers that there are reasonable grounds to believe that the prospective financial information for Excel included in this report has been prepared on a reasonable basis. In relation to the prospective financial information, actual results may be different from the prospective financial information of Excel referred to in this report since anticipated events frequently do not occur as expected and the variation may be material. The achievement of the prospective financial information is dependent on the outcome of the assumptions. Accordingly, we express no opinion as to whether the prospective financial information will be achieved.

70 Deloitte: Excel Coal

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independent expertâ&#x20AC;&#x2122;s report

Deloitte holds the appropriate Australian Financial Services licence to issue this report and is owned by the Australian Partnership Deloitte Touche Tohmatsu. The employees of Deloitte principally involved in the preparation of this report were Mark Pittorino B.Comm, M.App.Fin, CA; Stephen Reid B.Ec, M.App.Fin, CA, F.Fin; Richard Norris BA (Hons), M.App.Fin, ACA, F.Fin; AnnMarie Mahony BA (Hons), M.Acc (Hons), ACA and David Baker B.E, B.Comm. Mark Pittorino and Stephen Reid are Directors of Deloitte and have many years experience in the provision of corporate financial advice, including specific advice on valuations, mergers and acquisitions, as well as the preparation of expert reports. Deloitte & Touche LLP in the US has recently entered into a contract to provide global SAP implementation services to Peabody. It is anticipated that Deloitte & Touche LLP will subcontract the Australian component of the SAP implementation to the Australian partnership Deloitte Touche Tohmatsu, the Australian partnership that owns Deloitte. Deloitte & Touche LLP and the Australian partnership Deloitte Touche Tohmatsu are affiliated through common membership of a Swiss verein also known as Deloitte Touche Tohmatsu. The members of this Swiss verein do not have any profit sharing arrangements. We do not believe that these relationships impair our ability to provide an independent assessment of the Proposed Scheme. Neither Deloitte, Deloitte Touche Tohmatsu, nor any partner or executive or employee thereof has any financial interest in the outcome of the proposed transaction which could be considered to affect our ability to render an unbiased opinion in this report. Deloitte will receive a fee estimated at A$190,000 exclusive of GST in relation to the preparation of this report. This fee is based upon time spent at our normal hourly rates and is not contingent upon the success or otherwise of the Proposed Scheme.

71 Deloitte: Excel Coal

109

Annexure A

Appendix 9: Minarco report Refer to the report from Minarco attached.

About Deloitte ‘Deloitte’ refers to the Australian partnership of Deloitte Touche Tohmatsu and its subsidiaries. Deloitte, one of Australia’s leading professional services firms, provides audit, tax, consulting, and financial advisory services through around 3000 people across the country. Focused on the creation of value and growth, and known as an employer of choice for innovative human resources programs, we are dedicated to helping our clients and our people excel. For more information, please visit Deloitte’s web site at www.deloitte.com.au. Deloitte is a member of Deloitte Touche Tohmatsu (a Swiss Verein). As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other’s acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names “Deloitte,” “Deloitte & Touche,” “Deloitte Touche Tohmatsu,” or other, related names. Services are provided by the member firms or their subsidiaries and affiliates and not by the Deloitte Touche Tohmatsu Verein. Liability limited by a scheme approved under Professional Standards Legislation. Confidential - this document and the information contained in it are confidential and should not be used or disclosed in any way without our prior consent. © Deloitte Touche Tohmatsu. May, 2006. All rights reserved.

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independent expertâ&#x20AC;&#x2122;s report

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129

Annexure B Merger Implementation Agreement

merger implementation agreement

Merger Implementation Agreement Date: July 6, 2006 Between the parties Peabody

Peabody Energy Corporation of 701 Market Street, St Louis, Missouri, USA (Peabody)

Excel Excel Coal Limited ABN 18 002 818 699 of Level 9, 1 York Street, Sydney, NSW, 2000 (Excel) Background

1 The Parties have agreed that Peabody Sub will acquire Excel by means of a scheme of arrangement under Part 5.1 of the Corporations Act between Excel and Excel Shareholders.

2 The Parties have agreed in good faith to implement the scheme of arrangement on the terms of this agreement.

The parties agree as set out in the Operative part of this agreement, in consideration of, among other things, the mutual promises contained in this agreement. Operative part 1 Definitions and interpretation 1.1 Definitions The meanings of the terms used in this document are set out below. Term Meaning

Agreed Dividend

the final dividend of Excel for the year ended 30 June 2006 of no more than the amount determined in accordance with Excelâ&#x20AC;&#x2122;s dividend policy as at the date of this agreement of paying out 50% of net profits after tax.

AIFRS

the International Financial Reporting Standards as adopted in Australia.

ASIC

the Australian Securities and Investments Commission.

ASX

the Australian Stock Exchange Limited (ABN 98 008 624 691).

Business Day

a business day as defined in the Listing Rules.

Competing Transaction

transaction or arrangement pursuant to which a Third Party will, if the transaction or arrangement is entered into or completed: 1 acquire (whether directly or indirectly) or become the holder of, or otherwise acquire, have a right to acquire or have an economic interest in all or a substantial part of the business of the Excel Consolidated Group; 2 become a Substantial Holder in Excel; 3 acquire control (as determined in accordance with section 50AA of the Corporations Act) of Excel; 4 otherwise acquire or merge with Excel; or 5 enter into any agreement, arrangement or understanding requiring Excel to abandon, or otherwise fail to proceed with, the Transaction 131

Annexure B

Term Meaning

Competing Transaction (continued)

whether by way of: 6 takeover offer; 7 scheme of arrangement; 8 shareholder approved acquisition; 9 capital reduction or buy back; 10 purchase of assets; 11 joint venture; 12 dual-listed company structure (or other synthetic merger); or 13 other transaction or arrangement.

Confidentiality Deed

the deed so entitled between Excel and Peabody

Consolidated Group

has the same meaning as in the Tax Act.

Corporations Act

the Corporations Act 2001 (Cth).

Court

the Supreme Court of New South Wales or such other court of competent jurisdiction under the Corporations Act agreed to in writing by Excel and Peabody.

Disclosed Transactions

the transactions listed and matters in the Disclosure Letter.

Disclosure Letter

the letter so entitled provided by Excel to Peabody and countersigned by Peabody.

Due Diligence

the enquiries Peabody has made into the business, finances and affairs of Excel and its subsidiaries prior to the entry into this agreement.

Effective

when used in relation to the Scheme, the coming into effect, under section 411(10) of the Corporations Act, of the order of the Court made under section 411(4)(b) in relation to the Scheme.

Effective Date

the date the Scheme becomes Effective.

End Date

December 1, 2006.

Excel Board

the board of directors of Excel.

Excel Consolidated Group

Excel and each of its subsidiaries.

Excel Consolidated Tax Group

the Consolidated Group of which Excel is the head company (as defined for the purposes of the Tax Act).

Excel Indemnified Parties

Excel and its subsidiaries and their respective directors, officers and employees.

Excel Material Adverse Change

either: 1 one or more changes, events, occurrences or matters which has had or is likely to have the effect of a diminution in the:

132

â&#x20AC;˘ consolidated net assets of Excel and all its subsidiaries, taken as a whole (calculated on the basis of AIFRS), of at least $50,000,000; or

â&#x20AC;˘ consolidated annual net profit after tax (calculated on the basis of AIFRS), in any financial year after the one ending 30 June 2006 of Excel and all its subsidiaries, taken as a whole, of at least $12,500,000,

other than as a consequence of changes in coal prices or currency exchange rate changes; or

merger implementation agreement

Term Meaning

Excel Material Adverse Change (continued)

2 an event takes place or is reasonably likely to take place which would prevent Excel from operating its existing mines, completing its development activities or entering into arrangements in relation to the Wambo Underground, Wilpinjong or Millennium projects in the manner currently contemplated by Excel and such event is sufficiently adverse to the financial position, profitability or prospects of Excel so as to affect the commercial viability of the Transaction for Peabody in a material respect, having regard to the Scheme Consideration.

Excel Prescribed Occurrence

(other than as required by or as a consequence of this agreement, the Scheme or a Disclosed Transaction or as agreed to in writing by Peabody) the occurrence of any of the following between the date of this agreement and 8.00am on the Second Court Date: 1 Excel converting all or any of its shares into a larger or smaller number of shares; 2 Excel resolving to reduce its share capital in any way or reclassifying, combining, splitting or redeeming or repurchasing directly or indirectly any of its shares; 3 Excel: • entering into a buy-back agreement; or

• resolving to approve the terms of a buy-back agreement under the Corporations Act;

4 Other than the Agreed Dividend, Excel declaring, paying or distributing any dividend, bonus or other share of its profits or assets or agreeing to return any capital to its members; 5 Excel or a subsidiary of Excel issuing shares, or granting an option over its shares, or agreeing to make such an issue or grant such an option, other than to a member of the Excel Consolidated Group; 6 Excel or a subsidiary of Excel issuing or agreeing to issue securities convertible into shares, other than to a member of the Excel Consolidated Group; 7 Excel or a subsidiary of Excel making any change to its constitution; 8 The Excel Consolidated Group disposing, or agreeing to dispose, of the whole, or a substantial part, of its business or property; 9 Excel or a subsidiary of Excel:

•

acquiring or disposing of;

•

agreeing to acquire or dispose of; or

•

offering, proposing, announcing a bid or tendering for,

any business, assets, entity or undertaking, the value of which exceeds $10,000,000;

10 Excel or a subsidiary of Excel entering into a contract or commitment restraining Excel or a subsidiary of Excel from competing with any person or conducting activities in any market; 11 Excel or a subsidiary of Excel creating, or agreeing to create, any mortgage, charge, lien or other encumbrance over the whole, or a substantial part, of its business or property otherwise than:

•

i n the ordinary course of business; and

• a lien which arises by operation of law or legislation securing an obligation that is not yet due;

133

Annexure B

Term Meaning

Excel Prescribed Occurrence (continued)

12 Excel or a subsidiary of Excel:

• entering into any contract or commitment (including in respect of Financial Indebtedness) requiring payments by Excel and its subsidiaries taken as a whole in excess of $10,000,000 or any other contract or commitment that cannot be terminated on less than 12 months’ notice without penalty;

• (without limiting the foregoing) agreeing to incur capital expenditure from the date of this agreement of more than $10,000,000;

• waiving any material third party default where the financial impact upon Excel and its subsidiaries taken as a whole will be in excess of $10,000,000; or

• accepting as a compromise of a matter less than the full compensation due to Excel or a subsidiary of Excel where the compromise is more than $10,000,000;

13 Excel or a subsidiary of Excel providing financial accommodation other than to members of the Excel Consolidated Group (irrespective of what form of Financial Indebtedness that accommodation takes) in excess of $10,000,000; 14 Excel or a subsidiary of Excel entering into any agreement, arrangement or transaction with respect to derivative instruments (including, but not limited to, swaps, futures contracts, forward commitments, commodity derivatives or options) or similar instruments, except foreign currency hedges made in the ordinary course of business and in accordance with existing policy as at the date of this agreement; 15 Excel or a subsidiary of Excel resolving that it be wound up or the making of an application or order for the winding up or dissolution of Excel or a subsidiary of Excel other than where the application or order (as the case may be) is set aside within 14 days; 16 a liquidator or provisional liquidator of Excel or of a subsidiary of Excel being appointed; 17 the Court making an order for the winding up of Excel or of a subsidiary of Excel; 18 an administrator of Excel or of a subsidiary of Excel being appointed under the Corporations Act; 19 Excel or a material subsidiary of Excel ceases, or threatens to cease to, carry on the business conducted as at the date of this agreement; 20 Excel or a subsidiary of Excel is or becomes unable to pay its debts when they fall due within the meaning of the Corporations Act or is otherwise presumed to be insolvent under the Corporations Act; 21 Excel or a subsidiary of Excel executing a deed of company arrangement; 22 a receiver, or a receiver and manager, being appointed in relation to the whole, or a substantial part, of the property of Excel or of a subsidiary of Excel; 23 Excel or a subsidiary of Excel entering into or resolving to enter into a transaction with any related party of Excel (other than a related party which is a member of the Excel Consolidated Group) as defined in section 228 of the Corporations Act; 24 Excel or a material subsidiary of Excel being deregistered as a company or otherwise dissolved;

134

merger implementation agreement

Term Meaning

Excel Prescribed Occurrence (continued)

25 Excel or a subsidiary of Excel entering into or materially amending any employment, consulting, severance or similar agreement or arrangement with officers, directors, other executives or employees of Excel or a subsidiary of Excel or otherwise materially increasing compensation or benefits for any of the above other than in the ordinary course of business or pursuant to contractual arrangements in effect on the date of this agreement; 26 Excel or a subsidiary of Excel entering into any enterprise bargaining agreement other than in the ordinary course or business or pursuant to contractual arrangements in effect on the date of this agreement; 27 Excel amending in any material respect any arrangement with its Financial Adviser, or entering into arrangements with a new Financial Adviser, in respect of the Transaction; 28 Excel or a subsidiary of Excel voluntarily changing any accounting policy applied by them to report their financial position; 29 Excel or a subsidiary of Excel doing anything that would result in a taxable gain in excess of $5,000,000 for the Excel Consolidated Tax Group by either causing a subsidiary to cease being a member of the Excel Consolidated Group or causing the Excel Consolidated Tax Group to cease being a Consolidated Group; or 30 Excel or a subsidiary of Excel changes its business or enters into a new business or transaction of a kind that it has not previously entered into in such a manner that tax losses (whether of a revenue or capital nature) in excess of $5,000,000 in Excel or a subsidiary of Excel (including the Excel Consolidated Tax Group) stop being available to Excel or a subsidiary of Excel (including the Excel Consolidated Tax Group).

Excel Representations and Warranties

the representations and warranties of Excel set out in Schedule 2.

Excel Shareholders

each person who is registered as the holder of Excel Shares.

Excel Share

a fully paid ordinary share of Excel.

FATA

the Foreign Acquisitions and Takeovers Act 1975 (Cth).

Fee Trigger Event

either: 1 a Competing Transaction is announced; or 2 a Third Party who at the date of this agreement does not have at least 10% Voting Power in Excel, has such Voting Power, or has entered into swaps or similar arrangements giving economic exposure to at least 10% of Excel Shares, in each case prior to the termination of this agreement, and, within one year of the event in 1 or 2 above (and irrespective of whether 1 or 2 applies) the relevant Third Party or an associate of that Third Party: 3 completes a Competing Transaction of the kind referred to in paragraph 1, 3 or 4 of the definition of Competing Transaction; or 4 (without limiting 3 above) acquires a relevant interest in at least 50% of Excel Shares.

Finance Documentation

the formal finance documentation contemplated by the bridge commitment letter referred to in clause 3.1(k)(1) or such other subsequent financing arranged by Peabody to pay the Scheme Consideration.

Financial Adviser

any financial adviser retained by Excel in relation to the Scheme from time to time. 135

Annexure B

Term Meaning

Financial Indebtedness

any debt or other monetary liability (whether actual or contingent) in respect of moneys borrowed or raised or any financial accommodation including under or in respect of any: 1 bill, bond, debenture, note or similar instrument; 2 acceptance, endorsement or discounting arrangement; 3 guarantee; 4 finance or capital lease; 5 agreement for the deferral of a purchase price or other payment in relation to the acquisition of any asset or service; or 6 obligation to deliver goods or provide services paid for in advance by any financier.

Government Agency

any foreign or Australian government or governmental, semi-governmental, administrative, fiscal or judicial body, department, commission, authority, tribunal, agency or entity, or any minister of the Crown in right of the Commonwealth of Australia or any state.

Implementation Date

the fifth Business Day after the Scheme Record Date.

Independent Expert

the independent expert in respect of the Scheme appointed by Excel.

Listing Rules

the official listing rules of the ASX.

No-Shop Period and No-Talk Period

the period from and including the date of this agreement to the earlier of: 1 the termination of this agreement; and 2 the End Date.

Peabody Board

the board of directors of Peabody.

Peabody Indemnified Parties

Peabody, its subsidiaries and their respective directors, officers and employees.

Peabody Information

information regarding Peabody and its subsidiaries provided by Peabody to Excel in writing for inclusion in the Scheme Booklet.

Peabody Material Subsidiary

any subsidiary of Peabody that as at the date of this agreement had net assets of more than US$250 million and includes Peabody Sub.

Peabody Prescribed Occurrence

(other than as required by or as a consequence of this agreement or the Scheme or as agreed to in writing by Excel) the occurrence of any of the following between the date of this agreement and 8.00am on the Second Court Date: 1 Peabody or a Peabody Material Subsidiary commencing or permitting to be commenced any proceeding for any liquidation, dissolution, or winding up of Peabody or such Peabody Material Subsidiary, including but not limited to initiating any bankruptcy proceedings on its or any Peabody Material Subsidiaryâ&#x20AC;&#x2122;s behalf, but not as a result of any internal reconstruction undertaken by Peabody whilst Peabody is solvent; or 2 Peabody or a Peabody Material Subsidiary is or becomes unable to pay its debts when they fall due.

Peabody Representations and Warranties

the representations and warranties of Peabody set out in Schedule 1.

Peabody Sub

a directly or indirectly wholly owned subsidiary of Peabody.

PS 142

Policy Statement 142 issued by ASIC on 4 November 1999 (as amended).

136

merger implementation agreement

Term Meaning

Regulatory Approvals

has the meaning given to that term in clause 3.1(a).

Reimbursement Fee

$18,000,000.

Scheme

the scheme of arrangement under Part 5.1 of the Corporations Act between Excel and the Excel Shareholders, the form of which is attached as Annexure A.

Scheme Booklet

the information described in clause 5.1(a) to be approved by the Court and despatched to the Excel Shareholders and which must include the Scheme, an explanatory statement complying with the requirements of the Corporations Act, an independent expertâ&#x20AC;&#x2122;s report, notices of meeting and proxy forms in the form the parties agree.

Scheme Consideration

the consideration to be provided at the request of Peabody by Peabody Sub to each Scheme Shareholder for the transfer to Peabody Sub of each Excel Share, as set out in clause 4.2 of this agreement

Scheme Meeting

the meeting of Excel Shareholders ordered by the Court to be convened under section 411(1) of the Corporations Act.

Scheme Record Date

5.00pm on the fifth Business Day after the Effective Date.

Scheme Shareholders

Excel Shareholders as at the Scheme Record Date.

Scheme Share

an Excel Share held by a Scheme Shareholder.

Second Court Date

the first day on which an application made to the Court for an order under section 411(4)(b) of the Corporations Act approving the Scheme is heard.

Substantial Holding

has the meaning given in section 9 of the Corporations Act

Tax Act

the Income Tax Assessment Act 1997 (Cth).

Third Party

a person other than Peabody and its subsidiaries.

Timetable

The indicative timetable for the implementation of the Transaction set out in Annexure C.

Transaction

the acquisition of Excel by Peabody Sub through implementation of the Scheme in accordance with the terms of this agreement

Voting Power

has the meaning given in section 610 of the Corporations Act.

1.2 Interpretation In this agreement, headings are for convenience only and do not affect interpretation and, unless the context requires otherwise: (a) words importing the singular include the plural and vice versa; (b) words importing a gender include any gender; (c) other parts of speech and grammatical forms of a word or phrase defined in this agreement have a corresponding meaning; (d) a reference to a person includes an individual, the estate of an individual, a corporation, an authority, an association or a joint venture, a partnership, a trust and any Government Agency; (e) a reference to a clause, party, attachment, exhibit or schedule is a reference to a clause of, and a party, attachment, exhibit and schedule to this agreement, and a reference to this agreement includes any attachment, exhibit and schedule; (f) a reference to a statute, regulation, proclamation, ordinance or by law includes all statutes, regulations, proclamations, ordinances or by laws amending, consolidating or replacing it, whether passed by the same or another Government Agency with legal power to do so, and a reference to a statute includes all regulations, proclamations, ordinances and by laws issued under that statute; 137

Annexure B

(g) a reference to any document (including this agreement) is to that document as varied, novated, ratified or replaced from time to time; (h) the word ‘includes’ in any form is not a word of limitation; (i) a reference to ‘$’ or ‘dollar’ is to Australian currency; (j) a reference to ’US$’ is to the currency of the United States of America; (k) a reference to any time is, unless otherwise indicated, a reference to that time in Sydney, Australia; (l) a term defined in or for the purposes of the Corporations Act has the same meaning when used in this agreement; and (m) a reference to the Listing Rules includes any variation, consolidation or replacement of these rules and is to be taken to be subject to any waiver or exemption granted to the compliance of those rules by a party. 1.3 Business Day Where the day on or by which any thing is to be done is not a Business Day, that thing must be done on or by the next Business Day. 2 Agreement to proceed with the Transaction (a) Excel agrees to propose the Scheme upon and subject to the terms of this agreement. (b) Peabody agrees with Excel to assist Excel to propose the Scheme, and to procure Peabody Sub to assist Excel propose the Scheme, upon and subject to the terms of this agreement. 3 Conditions precedent and pre-implementation steps 3.1 Conditions precedent Subject to this clause 3, the Scheme will not become Effective, and the obligations of Peabody under clause 4.2 are not binding, until each of the following conditions precedent is satisfied or waived to the extent and in the manner set out in clauses 3.2 and 3.3. (a) Regulatory Approvals: Subject to clause 3.6: (1) the Treasurer of the Commonwealth of Australia either (i) issues a notice stating that the Commonwealth Government does not object to Peabody or Peabody Sub entering into and completing this agreement or (ii) becomes, or is, precluded (at the date of this agreement or at any time before the Transaction becomes Effective) from making an order in respect of the entry into or completion by Peabody or Peabody Sub of this agreement under the FATA; and

(2) all other mandatory approvals of Government Agencies to the Transaction are obtained, including (in the case of Peabody) approval or waiver of the Federal Cartel Office in Germany),

(together Regulatory Approvals) before 8.00am on the Second Court Date.

(b) Court approval: the Court approves the Scheme in accordance with section 411(4)(b) of the Corporations Act. (c) Shareholder approval: Excel Shareholders approve the Scheme at the Scheme Meeting by the requisite majorities under the Corporations Act. (d) Restraints: No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the Transaction is in effect at 8.00am on the Second Court Date. (e) Excel Material Adverse Change: No Excel Material Adverse Change occurs or is discovered between the date of this agreement and 8.00am on the Second Court Date. (f) Excel Prescribed Occurrence: No Excel Prescribed Occurrence has occurred between the date of this agreement and 8.00am on the Second Court Date. (g) Excel’s representations and warranties: The representations and warranties of Excel set out in this agreement that are qualified as to materiality are true and correct, and the representations of Excel set out in this agreement that are not so qualified are true and correct in all material respects, in each case at the times set out in clause 6.7. 138

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(h) Peabody Prescribed Occurrence: No Peabody Prescribed Occurrence has occurred between the date of this agreement and 8.00am on the Second Court Date. (i) Peabodyâ&#x20AC;&#x2122;s representations and warranties: The representations and warranties of Peabody set out in this agreement that are qualified as to materiality are true and correct, and the representations of Peabody set out in this agreement that are not so qualified are true and correct in all material respects, in each case at the times set out in clause 6.7. (j) Third party consents: before 8.00am on the Second Court Date, every person who has or will have a right or rights (whether subject to conditions or not) under any agreement or arrangement:

(1) which agreement or arrangement is material in the context of Excelâ&#x20AC;&#x2122;s business;

(2) to which Excel or any subsidiaries of Excel is a party; and

(3) which results, or could result, in any such agreement or arrangement being terminated or varied or any action being taken or arising thereunder as a result of the implementation of the Scheme (including the exercise of a pre-emptive or similar right),

provides to Excel or any subsidiary of Excel (as the case may be) their consent to the change in control which will occur if the Scheme is implemented, any consent which is required to implement the Scheme or an enforceable, irrevocable and unconditional waiver or release in writing of such right or rights to Excel and Excel provides a copy of that waiver or release to Peabody. (k) Financing:

(1) f unding documentation: Peabody or Peabody Sub and its or their financiers execute the Finance Documentation on substantially the terms contemplated by the bridge commitment letter provided to Peabody by its financier prior to the date of this agreement in relation to funding the Scheme Consideration, on or before 8.00am on the Second Court Date and the Finance Documentation remains in force as at that date; and

(2) f unding conditions: any condition precedent (other than a condition requiring Court approval for the Scheme) to the funding contemplated by the Finance Documentation is satisfied or waived on or before 8.00 am on the Second Court Date.

3.2 Best endeavours (a) Excel must use its best endeavours to procure that the conditions precedent in clauses 3.1(e), (f), (g) and (j) are satisfied. (b) Peabody must use its best endeavours (including, in respect of clause 3.1(k), having Peabody provide the funding it obtains, as contemplated by that clause, to Peabody Sub) to procure that the conditions precedent in clauses 3.1(h), (i), and (k) are satisfied. (c) Each party must use its best endeavours to procure that:

(1) the conditions precedent in clauses 3.1(a), (b), (c) and (d) are satisfied; and

(2) there is no occurrence within the control of Excel or Peabody or their subsidiaries that would prevent the conditions precedent in clause 3.1 being satisfied (as the context requires).

(d) Without limiting this clause 3.2, each party must:

(1) promptly apply for all relevant Regulatory Approvals (as applicable) and provide to the other a copy of all those applications;

(2) take all steps it is responsible for as part of the Regulatory Approval process, including responding to requests for information at the earliest practicable time;

(3) provide the other party with all information reasonably requested in connection with the applications for Regulatory Approval; and

(4) consult with the other in advance in relation to the progress of obtaining Regulatory Approvals.

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3.3 Waiver of conditions precedent (a) The conditions precedent in clauses 3.1(a), (b) and (c) cannot be waived. (b) The conditions precedent in clause 3.1(d) is for the benefit of Peabody and Excel and any breach or non-fulfilment of this condition may only be waived with the written consent of Peabody and Excel (in their absolute discretion). (c) The conditions precedent in clauses 3.1(e), (f), (g), (j), and (k), are for the sole benefit of Peabody and may be waived by Peabody (in its absolute discretion) in writing. (d) The conditions precedent in clauses 3.1(h) and (i) are for the sole benefit of Excel and may be waived by Excel (in its absolute discretion) in writing. (e) If a party waives the breach or non-fulfilment of any of the conditions precedent in clause 3.1, that waiver does not prevent it from suing the other party for any breach of this agreement that resulted in the breach or non-fulfilment of the condition precedent. 3.4 Consultation on failure of condition precedent (a) Consultation: If:

(1) any event occurs which would prevent any of the conditions precedent in clause 3.1 being satisfied, or there is an occurrence that will prevent the condition precedent being satisfied by the date specified in this agreement for its satisfaction (except as the result of a deliberate action of Excel or Peabody); or

(2) the Scheme has not become Effective by the End Date,

the parties must consult in good faith to:

(3) consider and if agreed determine whether the Transaction may proceed by way of alternative means or methods;

(4) consider and if agreed change the date of the application made to the Court for an order under section 411(4)(b) of the Corporations Act approving the Scheme or adjourning that application (as applicable) to another date agreed to in writing by Excel and Peabody (being a date no later than 5 Business Days before the End Date); or

(5) consider and if agreed extend the relevant date or End Date.

(b) Termination: If the parties are unable to reach agreement under clause 3.4(a) within 5 Business Days of becoming aware of the relevant occurrence or relevant date or by the End Date, then unless that condition precedent is waived by Excel or Peabody as provided in clause 3.3, either of them may terminate this agreement without any liability to the other party because of that termination, unless the relevant occurrence or the failure of the condition precedent to be satisfied, or of the Scheme to become Effective, arises out of a breach of clauses 3.2 or 3.5 by the terminating party of this agreement. (c) Effect of Termination: Subject to clauses expressed to survive termination, upon termination of this agreement, no party shall have any rights against or obligations to any other party under this Agreement except for those rights and obligations which accrued prior to termination. 3.5 Certain notices (a) Notice of failure of condition precedent:

(1) If, before the time specified for satisfaction of a condition precedent, any event that will prevent that condition precedent being satisfied occurs, the party with knowledge of that event must immediately give the other party written notice of that event.

(2) If the condition precedent is not set out in clauses 3.1(a), (b) or (c), the party that has the right to waive the condition must give written notice to the other as soon as possible (and in any event no later than ten Business Days) after giving or receiving notice of the relevant event, as to whether or not it waives the breach or non-fulfilment of any condition precedent resulting from the occurrence of that event, specifying the condition in question.

(b) Waiver: waiver of a breach or non-fulfilment in respect of one condition precedent does not constitute:

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(1) a waiver of breach or non-fulfilment of any other condition precedent resulting from the same event; or

(2) a waiver of breach or non-fulfilment of that condition precedent resulting from any other event.

(c) Notice of changes: Excel and Peabody (as the case may be) must promptly advise each other orally and in writing of any change or event causing, or which, so far as can reasonably be foreseen, would cause:

(1) a representation or warranty provided by the party in this agreement to be false;

(2) a breach or non-fulfilment of any of the conditions precedent; or

(3) a material breach of this agreement by the party.

3.6 Regulatory approval For the purposes of clause 3.1(a), a Regulatory Approval will be regarded as having been obtained even though a condition has been attached to that Regulatory Approval, if the parties agree in writing to treat the approval as having been obtained. 4 Transaction steps 4.1 Scheme Excel must propose a scheme of arrangement under which all of the Scheme Shares will be transferred to Peabody Sub and the Scheme Shareholders will be entitled to receive the Scheme Consideration. 4.2 Scheme Consideration Peabody undertakes and warrants to Excel (in Excel’s own right and separately as trustee or nominee for each of the Scheme Shareholders) that in consideration of the transfer to Peabody Sub of each Excel Share held by a Scheme Shareholder under the terms of the Scheme, Peabody will procure that on the Implementation Date Peabody Sub will: (a) accept that transfer; and (b) pay each Scheme Shareholder A$8.50 cash for each Scheme Share held by that Scheme Shareholder. 4.3 Timetable The parties acknowledge the Timetable as an indicative timetable and acknowledge that unless otherwise agreed in writing the Second Court Date will occur after 30 September 2006. 5 Implementation 5.1 Excel’s obligations Excel must take all necessary steps to implement the Scheme as soon as is reasonably practicable having regard to the Timetable, including doing any acts on behalf of Excel Shareholders, and including each of the following: (a) Preparation of Scheme Booklet: Excel must prepare and despatch the Scheme Booklet in accordance with all applicable laws and in particular with the Corporations Act, PS 142 and the Listing Rules in consultation with Peabody as to the content and presentation of the Scheme Booklet. This consultation must include obtaining Peabody’s consent to the inclusion of the Peabody Information. The Scheme Booklet must include a statement by the Excel Board unanimously recommending that Excel Shareholders vote in favour of the Scheme in the absence of any superior offer; (b) Preparation of US GAAP Financial Statements: for the purpose of the requirements of the US Securities and Exchange Commission as well as in connection with the arrangement and acquisition of any financing undertaken by Potion in connection with the Transaction, Excel must use, and must cause its subsidiaries to use, all commercially reasonable efforts to provide such information requested by Peabody from time to time and to assist Peabody and its representatives in the timely preparation of audited annual financial statements for Excel (including for the year ended 30 June 2006), as well as unaudited interim financial statements and pro forma financial statements, as are reasonably requested by Peabody, each in accordance with applicable requirements of the US Securities and Exchange Commission and with the material provisions of US GAAP;

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(c) access to information; cooperation: provide to Peabody, its authorised representatives, and its prospective financing sources, reasonable access to employees, offices and other facilities, and to the books and records, of Excel and its subsidiaries for the purpose of implementing the Transaction and in connection with any financing undertaken by Peabody in connection with the Transaction. Excel shall provide, and shall cause its subsidiaries and the respective officers and employees of Excel and its subsidiaries to provide, all cooperation as may be reasonably requested by Peabody in connection with any such financing, including:

(1) participation in due diligence sessions and sessions with rating agencies;

(2) assisting with the preparation of materials for rating agency presentations, offering documents, bank information memoranda, prospectuses and any similar documents that may be used in connection with any such financing; and

(3) executing and delivering any certificates or legal opinions as may reasonably be requested by Peabody,

provided always that Peabody takes such steps, and procures that its authorised representatives and its prospective financing sources take such steps, as reasonably requested by Excel to protect the confidentiality of any information provided under this clause,

(d) section 411(17)(b) statement: apply to ASIC for the production of a statement under section 411(17)(b) of the Corporations Act stating that ASIC has no objection to the Scheme; (e) court direction: apply to the Court for orders directing Excel to convene the Scheme Meeting; (f) Scheme Meeting: convene the Scheme Meeting to approve the Scheme in accordance with the orders made by the Court pursuant to section 411(1) of the Corporations Act; (g) shareholder approval: seek the approval of Excel Shareholders for the Scheme; (h) Court approval: (subject to all conditions precedent in clause 3.1 being satisfied or waived) apply to the Court for orders approving the Scheme as approved by the Excel Shareholders at the Scheme Meeting; (i) lodge copy of Court order: lodge with ASIC an office copy of the Court order approving the Scheme as approved by the Excel Shareholders at the Scheme Meeting on the day such office copy is received (or such later date as agreed in writing by Peabody); (j) information: provide all necessary information, or have the share registrar of Excel provide all necessary information, in each case in a form reasonably requested by Peabody, about the Scheme and Excel Shareholders to Peabody which Peabody reasonably requires in order to:

(1) canvass approval of the Scheme by Excel Shareholders (including the results of directions by Excel to Excel Shareholders under Part 6C.2 of the Corporations Act); or

(2) facilitate the provision by Peabody Sub of the Scheme Consideration.

Excel must comply with any reasonable request of Peabody for Excel to give directions to Excel Shareholders pursuant to Part 6C.2 of the Corporations Act from time to time; (k) registration: register all transfers of Excel Shares to Peabody Sub on or as soon as practicable after the Implementation Date; (l) Independent Expert: promptly appoint the Independent Expert and provide assistance and information reasonably requested by the Independent Expert to enable it to prepare its report for the Scheme Booklet as soon as practicable; (m) Peabody Information: obtain written approval from Peabody for the form and content in which the Peabody Information appears in the Scheme Booklet; (n) Excel Prescribed Occurrence: Excel must ensure that no Excel Prescribed Occurrence (other than an Excel Prescribed Occurrence in items 16 to 20 and 22 of the definition of that term) occurs between the date of the agreement and 8.00am on the Second Court Date; (o) listing: Excel must not do anything to cause Excel Shares to cease being quoted on the ASX or to become permanently suspended from quotation prior to completion the Transaction unless Peabody has agreed in writing; and

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(p) appeal process: if the Court refuses to make any orders directing Excel to convene the Scheme Meetings or approving the Scheme, appeal the Court’s decision to the fullest extent possible (except to the extent that the parties agree otherwise, or an independent Queen’s Counsel or Senior Counsel acceptable to Peabody (acting reasonably) indicates that, in his view, an appeal would have no reasonable prospect of success). 5.2 Peabody’s obligations Peabody must take all necessary steps, and must procure that Peabody Sub takes all necessary steps, to implement the Scheme as soon as is reasonably practicable having regard to the Timetable, including doing each of the following: (a) Peabody Information: Peabody must prepare and provide to Excel the Peabody Information for inclusion in the Scheme Booklet; (b) Independent Expert’s report: Subject to the Independent Expert entering into arrangements with Peabody including in relation to confidentiality in a form reasonably acceptable to Peabody, Peabody must provide any assistance or information reasonably requested by Excel or by the Independent Expert in connection with the preparation of the Independent Expert’s report to be sent together with the Scheme Booklet; (c) Representation: Peabody must procure that it is represented by counsel at the Court hearings convened for the purposes of section 411(4)(b) of the Corporations Act, at which through its counsel, Peabody will undertake (if requested by the Court) to do all such things and take all such steps within its power as are necessary in order to ensure the fulfilment of its obligations under this agreement and the Scheme; (d) Deed Poll: Prior to despatch of the Scheme Booklet, Peabody will enter into a deed poll in favour of the Scheme Shareholders in the form of Annexure B; (e) Accuracy of Peabody Information: Peabody must confirm to Excel the accuracy of the Peabody Information in the Scheme Booklet; (f) Share Transfer: Peabody must procure that Peabody Sub accepts a transfer of the Excel Shares as contemplated by clause 4.1; (g) Peabody Scheme Consideration: Peabody must pay the Scheme Consideration in the manner and amount contemplated by clause 4 on the Implementation Date. 5.3 Conduct of business (a) From the date of this agreement up to and including the Implementation Date, Excel and each of its subsidiaries must conduct their respective businesses in the ordinary and proper course of business and make all reasonable efforts to:

(1) keep available the services of their directors, officers and employees;

(2) preserve their relationships with customers, suppliers, licensors, licensees and others having business dealings with Excel and any subsidiary of Excel; and

(3) not enter into any lines of business or other activities in which Excel and its subsidiaries are not engaged as of the date of this agreement.

(b) Excel must consult with Peabody in good faith immediately after execution of this Agreement to discuss and agree a transition plan. 5.4 Appointment of directors Excel must, as soon as practicable: (a) after the Second Court Date (provided the Scheme is approved), take all actions necessary to cause the appointment of that number of nominees of Peabody to the Excel Board which gives those nominees acting together control of the Excel Board; and (b) after the Scheme Consideration has been paid, ensure that all directors on the Excel Board other than the Peabody nominees resign.

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5.5 Excel Board recommendation (a) Subject to clause 5.5(b), the Excel Board must unanimously recommend that the Excel Shareholders vote in favour of the Scheme in the absence of a superior proposal and all of the resolutions in the Scheme Booklet at the Scheme Meeting and the Scheme Booklet must include a statement by the Excel Board to that effect. (b) The Excel Board must not change, withdraw or modify its recommendation in favour of the Scheme unless the Excel Board in good faith has first obtained written advice from Excel’s lawyers that the Excel Board, is by virtue of its fiduciary duties, required to change, withdraw or modify its recommendation. A copy of the written advice must be provided to Peabody prior to the change, withdrawal or modification of the Excel Board’s recommendation. By way of example, the Excel Board may change, withdraw or modify its recommendation if:

(1) the Independent Expert does not conclude that the Transaction is in the best interests of the Excel Shareholders; or

(2) it receives a proposal which is superior to the Transaction.

5.6 Access to information (a) Between the date of this agreement and the Implementation Date, Excel must provide Peabody with:

(1) monthly management reports for Excel and its subsidiaries;

(2) details of any material contracts which are proposed to be entered into during that period; and

(3) reasonable access to the records, premises and key personnel of Excel and its subsidiaries at times mutually agreed in order to allow Peabody to plan for the transition of the business of Excel when the Transaction completes.

(b) Between the date of this agreement and the Implementation Date, Excel must, attend and participate in monthly meetings with Peabody and its officers and employees to provide updates on the matters referred to in clause 5.6(a) and promptly provide Peabody with any other updates and information reasonably requested by Peabody in respect of those matters. (c) Excel must consult with Peabody and provide regular updates as reasonably requested by Peabody in relation to its derivative instruments (including, but not limited to, swaps, futures contracts, forward commitments, commodity derivatives or options) or similar instruments including foreign currency hedges made in the ordinary course of business in accordance with existing policy. Updates on these matters must be provided at the monthly meetings referred to in clause 5.6(b). 6 Representations and undertakings 6.1 Peabody’s representations Peabody represents and warrants to Excel (in its own right and separately as trustee or nominee for each of the other Excel Indemnified Parties) each of the Peabody Representations and Warranties. 6.2 Peabody’s indemnity Peabody agrees with Excel (in its own right and separately as trustee or nominee for each of the other Excel Indemnified Parties) to indemnify the Excel Indemnified Parties against any claim, action, damage, loss, liability, cost, expense or payment of whatever nature and however arising which any of the Excel Indemnified Parties suffers, incurs or is liable for arising out of any breach of any of the representations and warranties in clause 6.1. 6.3 Excel’s representations Excel represents and warrants to Peabody (in its own right and separately as trustee or nominee for each of the other Peabody Indemnified Parties) each of the Excel Representations and Warranties. 6.4 Excel’s indemnity Excel agrees with Peabody (in its own right and separately as trustee or nominee for each Peabody Indemnified Party) to indemnify Peabody and each of the other Peabody Indemnified Parties from any claim, action, damage, loss, liability, cost, expense or payment of whatever nature and however arising which Peabody or any of the other Peabody Indemnified Parties suffers, incurs or is liable for arising out of any breach of any of the representations and warranties in clause 6.3.

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6.5 Survival of representations Each representation and warranty in clauses 6.1 and 6.3: (a) is severable; and (b) survives the termination of this agreement. 6.6 Survival of indemnities Each indemnity in this agreement (including those in clauses 6.2 and 6.4): (a) is severable; (b) is a continuing obligation; (c) constitutes a separate and independent obligation of the party giving the indemnity from any other obligations of that party under this agreement; and (d) survives the termination of this agreement. 6.7 Timing of warranties Each representation and warranty made or given under clauses 6.1 or 6.3 is given: (a) at the date of this agreement; and (b) at 8.00 am on the Second Court Date; or (c) where expressed, at the time at which the representation or warranty is expressed to be given. 7 Releases 7.1 Excel directors and officers (a) Peabody releases its respective rights, and agrees with Excel that it will not make a claim, against any Excel Indemnified Party as at the date of this agreement in connection with:

(1) any breach of any representations, covenants and warranties of Excel or any member of the Excel Consolidated Group in this agreement; or

(2) any disclosures containing any statement which is false or misleading whether in content or by omission,

except where the Excel Indemnified Party has not acted in good faith or has engaged in wilful misconduct.

(b) This clause is subject to any Corporations Act restriction and will be read down accordingly. Excel receives and holds the benefit of this clause to the extent it relates to each Excel Indemnified Party as trustee for them. 7.2 Peabody directors and officers (a) Excel releases its rights, and agrees with Peabody that it will not make a claim, against any Peabody Indemnified Party as at the date of this agreement in connection with:

(1) any breach of any representations, covenants and warranties of Peabody in this agreement; or

(2) any disclosure containing any statement which is false or misleading whether in content or by omission,

except where the Peabody Indemnified Party has not acted in good faith or has engaged in wilful misconduct.

(b) This clause is subject to any Corporations Act restriction and will be read down accordingly. Peabody receives and holds the benefit of this clause to the extent it relates to each Peabody Indemnified Party as trustee for them.

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7.3 Excel officers and directors (a) Subject to the Scheme being Effective and the Transaction completing, Peabody undertakes that it will:

(1) for a period of 7 years from the Implementation Date, ensure that the constitutions of Excel and each of the members of the Excel Consolidated Group continues to contain such rules which provide for each of them to indemnify each of their officers against any liability incurred by that officer in his or her capacity and to any person other than Excel or a related body corporate of Excel; and

(2) procure that Excel and each member of the Excel Consolidated Group comply with the deeds of indemnity, access and insurance made by them in favour of their respective directors and officers from time to time and without limiting the foregoing, shall ensure that directors and officers run off insurance cover for such directors and officers is maintained for a period of 6 years from the Implementation Date, provided that the cost of such cover does not exceed twice the cost of such cover paid by Excel per annum prior to the date of this agreement.

(b) The undertakings contained in this clause 7.3 are subject to any Corporations Act restriction and will be read down accordingly. Excel receives and holds the benefit of this clause 7.3, to the extent it relates to the directors and officers of Excel and other members of the Excel Consolidated Group, as trustee for them. 8 Public announcement Immediately after the execution of this agreement, Excel and Peabody must issue public announcements in a form previously agreed to in writing between them including a unanimous recommendation by the directors of Excel to Excel Shareholders in the absence of a superior proposal that the Scheme be approved. 9 Confidentiality 9.1 Confidentiality Deed Excel and Peabody acknowledge and agree that they continue to be bound by the Confidentiality Deed after the date of this agreement. 9.2 Survival of obligations The rights and obligations of the parties under the Confidentiality Deed survive termination of this agreement. 10 No-talk and no-shop obligations 10.1 No-talk During the No-Talk Period, Excel must ensure that neither it nor any of its subsidiaries, nor any of their respective directors, employees, officers or agents directly or indirectly participate in any negotiations or discussions, provide or make available any information (including by way of providing information and access to perform due diligence), or communicate any intention to do any of these things, in respect of or in response to any expression of interest, offer or proposal by any person in relation to any Competing Transaction. 10.2 No-shop During the No-Shop Period, Excel must ensure that neither it nor any of its subsidiaries, nor any of their respective directors, employees, officers or agents directly or indirectly solicit, encourage (including by way of providing information concerning Excel to any person), initiate or communicate any intention to do any of these things, in respect of or in response to any expression of interest, offer or proposal by any person (other than Peabody or a subsidiary of Peabody) in relation to any Competing Transaction. 10.3 Limitation to No-talk Clause 10.1 does not prevent Excel from undertaking an act otherwise prohibited by clause 10.1 if not undertaking that act would, in the opinion of the Excel Board determined in good faith (based on the written opinion of Excelâ&#x20AC;&#x2122;s lawyers), involve a breach of the fiduciary duties owed by any Excel director or:

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(a) would otherwise be unlawful; or (b) prevent Excel continuing to make normal presentations to brokers, portfolio investors and analysts in the ordinary course of business.

Prior to undertaking an act otherwise prohibited by clause 10.1 but that is permitted by this clause 10.3, Excel must provide Peabody with a copy of the written legal opinion.

10.4 Notification of approaches During the No-Shop Period, Excel must notify Peabody promptly if it becomes aware of any: (a) negotiations or discussions; (b) approach or attempt to initiate any negotiations or discussions; or (c) intention to make such an approach or attempt to initiate any negotiations or discussions,

in respect of any expression of interest, offer or proposal of a kind referred to in clause 10.1 or 10.2 and provide in writing to Peabody the identity of the relevant person.

10.5 Warranty and representation Excel represents and warrants to Peabody that, as at the date of this agreement, no agreement, arrangement or understanding exists in relation to any expression of interest, offer or proposal of the kind referred to in clause 10.1 or 10.2. 11 Payment of costs 11.1 Background (a) Excel and Peabody acknowledge that, if they enter into this agreement and the Scheme is subsequently not implemented, Peabody will have incurred significant costs, including significant opportunity costs. (b) In the circumstances referred to in clause 11.1(a), Peabody has requested that provision be made for the payment outlined in clause 11.2(b), without which Peabody would not have entered into this agreement. (c) The Excel Board acknowledges that it has received legal advice in relation to this clause 11 and believes that the Scheme will provide benefit to Excel and Excel Shareholders and that it is reasonable and appropriate for Excel to agree to the payments referred to in this clause 11 in order to secure Peabodyâ&#x20AC;&#x2122;s participation in the Transaction. 11.2 Payment of Reimbursement Fee (a) The parties acknowledge and agree that the costs actually incurred by Peabody under clause 11.1(a) will be of such nature that they cannot accurately be ascertained, but that the Reimbursement Fee is a genuine and reasonable pre-estimate of the cost and loss that would actually be suffered by Peabody. (b) Subject to clause 11.3, if:

(1) the Excel Board changes, withdraws or modifies its recommendation that Excel Shareholders vote in favour of the Scheme or makes a public statement indicating that it no longer supports the Transaction or that it supports some other transaction or Excel terminates this agreement pursuant to clause 13.1(c) (unless there has been a Peabody Prescribed Occurrence prior to that change, withdrawal or modification and Excel has commenced the process of terminating this agreement on the basis of the Peabody Prescribed Occurrence pursuant to clause 3.4(b));

(2) Excel is in breach of its obligations under clause 10.1 and 10.2;

(3) a Fee Trigger Event occurs; or

(4) this agreement is terminated by Peabody as a result of an Excel Prescribed Occurrence occurring (other than an Excel Prescribed Occurrence in items 16 to 20 and 22 of the definition of that term) between the date of this agreement and 8.00am on the Second Court Date,

Excel must within three Business Days after receiving a written demand from Peabody pay to Peabody, without set-off or withholding, the Reimbursement Fee. The demand may only be made after the occurrence of an event referred to in clause 11.2(b). Excel can only ever be liable to pay the Reimbursement Fee once.

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11.3 Compliance with law This clause 11 imposes obligations on Excel only to the extent that the performance of those obligations would not: (a) breach the fiduciary or statutory duties of the Excel Board; (b) constitute unacceptable circumstances as declared by the Takeovers Panel; or (c) be unlawful. 11.4 Other claims Excel will have no liability whatsoever for any breach of this agreement if any event or occurrence referred to in clause 11.2(b)(1), (3) or (4) or any breach referred to in clause 11.2(b)(2) occurs, other than for its liability to pay Peabody the Reimbursement Fee. 12 Conduct of Court proceedings (a) Excel and Peabody are entitled to separate representation at all Court proceedings affecting the Transaction. (b) This agreement does not give Excel or Peabody any right or power to give undertakings to the Court for or on behalf of the other party without that partyâ&#x20AC;&#x2122;s consent. (c) Excel and Peabody must give all undertakings to the Court in all Court proceedings which are reasonably required to obtain Court approval and confirmation of the Transaction as contemplated by this agreement. 13 Termination 13.1 Termination (a) Without prejudice to any other rights of termination under this agreement, either party may terminate this agreement by written notice to the other party:

(1) at any time before 8.00am on the Second Court Date if the other party is in material breach of any provision of this agreement, the party wishing to terminate has given written notice to the other party in a timely manner setting out the relevant circumstances and stating an intention to terminate, and the relevant circumstances continue to exist 10 Business Days (or any shorter period ending at 5.00pm on the day before the Second Court Date) from the time the notice is given;

(2) at any time before 8.00am on the Second Court Date if a Court or Government Agency has taken any action permanently restraining or otherwise prohibiting the Transaction, or has refused to do any thing necessary to permit the Transaction, and the action or refusal has become final and cannot be appealed; or

(3) in the circumstances set out in, and in accordance with, clause 3.4(b).

(b) Peabody may terminate this agreement by written notice to Excel if at any time before 8.00am on the Second Court Date:

(2) Excel is in breach of its obligations under clause 10.1 and 10.2.

(c) Excel may terminate this agreement by 21 days notice in writing to Peabody if at any time before the Scheme Meeting because of the reasons set out in clauses 5.5(b)(1) or 5.5(b)(2), the Excel Board has changed, withdrawn or modified its recommendation as permitted under clause 5.5(b) and if by the end of that 21 day period the Excel Board does not reinstate its recommendation and has paid Peabody the Reimbursement Fee. After Excel has issued a notice pursuant to this clause the parties must discuss in good faith whether the recommendation can be reinstated.

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13.2 Effect of termination (a) Subject to clause 13.2(b), if this agreement is terminated by either party under clauses 3.4(b) or 13.1, except to the extent that the termination results from a breach by either party of its obligations under this agreement, this agreement will become void and have no effect, without any liability or obligation on the part of any party, other than in relation to rights and obligations that accrued prior to termination and other than in relation to the provisions of this clause 13 and of clauses 6.5 to 6.7, 11, 14.1, 14.2, 15, 16.2, 16.4 and 16.5, which will remain in force after termination. (b) Despite any other term of this agreement (including clause 3.3(e)), the sole remedy:

(1) of Peabody in relation to a breach of an Excel Representation and Warranty, or in relation to a breach of clause 5.1(n), is its right of termination resulting from the non-satisfaction of the condition precedent in clause 3.1(g) or clause 3.1(f), as the case may be;

(2) of Excel in relation to a breach of a Peabody Representation and Warranty is its right of termination resulting from the non-satisfaction of the condition precedent in clause 3.1(i).

13.3 Terminable in writing This agreement is terminable if agreed to in writing by Peabody and Excel. 14 Duty, costs and expenses 14.1 Stamp duty Peabody must pay all stamp duties and any fines and penalties with respect to stamp duty in respect of this agreement or the Scheme or the steps to be taken under this agreement or the Scheme. 14.2 Costs and expenses Except as otherwise provided in this agreement, each party must pay its own costs and expenses in connection with the negotiation, preparation, execution and performance of this agreement and the proposed, attempted or actual implementation of this agreement and the Transaction. 15 GST (a) Any consideration or amount payable under this agreement, including any non-monetary consideration (as reduced in accordance with clause 15(e) if required) (Consideration) is exclusive of GST. (b) If GST is or becomes payable on a Supply made under or in connection with this agreement, an additional amount (Additional Amount) is payable by the party providing consideration for the Supply (Recipient) equal to the amount of GST payable on that Supply as calculated by the party making the Supply (Supplier) in accordance with the GST Law.(c) The Additional Amount payable under clause 15(b) is payable at the same time and in the same manner as the Consideration for the Supply, and the Supplier must provide the Recipient with a Tax Invoice. However, the Additional Amount is only payable on receipt of a valid Tax Invoice. (d) If for any reason (including the occurrence of an Adjustment Event) the amount of GST payable on a Supply (taking into account any Decreasing or Increasing Adjustments in relation to the Supply) varies from the Additional Amount payable by the Recipient under clause 15(b):

(1) the Supplier must provide a refund or credit to the Recipient, or the Recipient must pay a further amount to the Supplier, as appropriate;

(2) the refund, credit or further amount (as the case may be) will be calculated by the Supplier in accordance with the GST Law; and

(3) the Supplier must notify the Recipient of the refund, credit or further amount within 14 days after becoming aware of the variation to the amount of GST payable. Any refund or credit must accompany such notification or the Recipient must pay any further amount within 7 days after receiving such notification, as appropriate. If there is an Adjustment Event in relation to the Supply, the requirement for the Supplier to notify the Recipient will be satisfied by the Supplier issuing to the Recipient an Adjustment Note within 14 days after becoming aware of the occurrence of the Adjustment Event.

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(e) Despite any other provision in this agreement:

(1) if an amount payable under or in connection with this agreement (whether by way of reimbursement, indemnity or otherwise) is calculated by reference to an amount incurred by a party, whether by way of cost, expense, outlay, disbursement or otherwise (Amount Incurred), the amount payable must be reduced by the amount of any Input Tax Credit to which that party is entitled in respect of that Amount Incurred; and

(2) no Additional Amount is payable under clause 15(b) in respect of a Supply to which s 84-5 of the GST Law applies.

(f) Any reference in this clause to an Input Tax Credit to which a party is entitled includes an Input Tax Credit arising from a Creditable Acquisition by that party but to which the Representative Member of a GST Group of which the party is a member is entitled. (g) Any term starting with a capital letter that is not defined in this agreement has the same meaning as the term has in the A New Tax System (Goods & Services Tax) Act 1999 (Cth). 16 General 16.1 No representation or reliance (a) Each party acknowledges that no party (nor any person acting on its behalf) has made any representation or other inducement to it to enter into this agreement, except for representations or inducements expressly set out in this agreement. (b) Each party acknowledges and confirms that it does not enter into this agreement in reliance on any representation or other inducement by or on behalf of any other party, except for any representation or inducement expressly set out in this agreement. (c) Each party acknowledges and confirms that clauses 16.1(a) and (b) do not prejudice any rights a party may have in relation to information which has been filed by the other party with ASIC, the ASX, the US Securities and Exchange Commission or the New York Stock Exchange. 16.2 No merger The rights and obligations of the parties do not merge on completion of the Transaction. They survive the execution and delivery of any assignment or other document entered into for the purpose of implementing the Transaction. 16.3 Consents Any consent referred to in, or required under, this agreement from any party may not be unreasonably withheld, unless this agreement expressly provides for that consent to be given in that partyâ&#x20AC;&#x2122;s absolute discretion. 16.4 Notices Any communication under or in connection with this agreement: (a) must be in writing; (b) must be addressed as shown below: Excel

Name: Mr Anthony Haggarty Managing Director

Address: Level 9, 1 York Street Sydney NSW 2000

Fax no: +61 2 9247 2099

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Peabody

Name: Mr Rick Navarre Executive Vice President & CFO

Address: 701 Market Street St Louis Missouri USA 63101-1850

Fax no: +1 (314) 342 7597

with a copy to:

Name: Mr Joseph W. Bean Vice President & Associate General Counsel

Address: 701 Market Street St Louis Missouri USA 63101-1850

Fax no: +1 (314) 342 3419

(or as otherwise notified by that party to the other party from time to time);

(c) must be signed by the party making the communication or by a person duly authorised by that party; (d) must be delivered or posted by prepaid post to the address, or sent by fax to the number, of the addressee, in accordance with clause 16.4(b); and (e) is regarded as received by the addressee:

(1) if sent by prepaid post, on the third Business Day after the date of posting to an address within Australia, and on the fifth Business Day after the date of posting to an address outside Australia;

(2) if sent by fax, at the local time (in the place of receipt of that fax) which then equates to the time at which that fax is sent as shown on the transmission report which is produced by the machine from which that fax is sent and which confirms transmission of that fax in its entirety, unless that local time is not a Business Day, or is after 5.00pm on a Business Day in the place of receipt, when that communication will be regarded as received at 9.00am on the next Business Day; and

(3) if delivered by hand, on delivery at the address of the addressee as provided in clause 16.4(b), unless delivery is not made on a Business Day, or after 5.00pm on a Business Day, when that communication will be regarded as received at 9.00am on the next Business Day.

16.5 Governing law and jurisdiction (a) This agreement is governed by the laws of New South Wales. (b) Each party irrevocably submits to the non-exclusive jurisdiction of the courts of New South Wales and courts competent to hear appeals from those courts. 16.6 Waivers (a) Failure to exercise or enforce, a delay in exercising or enforcing, or the partial exercise or enforcement of any right, power or remedy provided by law or under this agreement by any party does not in any way preclude, or operate as a waiver of, any exercise or enforcement, or further exercise or enforcement, of that or any other right, power or remedy provided by law or under this agreement. (b) Any waiver or consent given by any party under this agreement is only effective and binding on that party if it is given or confirmed in writing by that party. (c) No waiver of a breach of any term of this agreement operates as a waiver of another breach of that term or of a breach of any other term of this agreement. 16.7 Variation This agreement may only be varied by a document signed by or on behalf of each of the parties.

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16.8 Assignment A party may not assign, novate or otherwise transfer any of its rights or obligations under this agreement without the prior written consent of the other party. 16.9 No third party beneficiary This agreement shall be binding upon and inure solely to the benefit of each party to it and each of their respective permitted successors and assigns, and nothing in this agreement, express or implied, is intended to or shall confer upon any other person, other than the Peabody Indemnified Parties and the Excel Indemnified Parties, to the extent set forth in clause 6, and any third party beneficiary rights. 16.10 Further action Each party will do all things and execute all further documents necessary to give full effect to this agreement. 16.11 Entire agreement This agreement supersedes all previous agreements in respect of its subject matter and embodies the entire agreement between the parties. 16.12 Counterparts (a) This agreement may be executed in any number of counterparts. (b) All counterparts, taken together, constitute one instrument. (c) A party may execute this agreement by signing any counterpart.

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Schedule 1 Peabody Representations and Warranties Peabody represents and warrants to Excel (in its own right and separately as trustee or nominee for each of the other Excel Indemnified Parties) that: (a) Peabody Information: the Peabody Information provided to Excel for inclusion in the Scheme Booklet will be provided in good faith and on the understanding that each of the Excel Indemnified Parties will rely on that information to prepare the Scheme Booklet and to propose and implement the Scheme in accordance with the Corporations Act; (b) Not misleading: the Peabody Information provided for inclusion in the Scheme Booklet, as at the date the Scheme Booklet is despatched to Excel Shareholders, will not contain any statement which is materially misleading or deceptive including by way of omission from that statement; (c) New information: it will, as a continuing obligation, provide to Excel all further or new information which arises after the Scheme Booklet has been despatched until the date of the Scheme Meeting which is necessary to ensure that there would be no breach of clause 6.1 if it applied as at the date on which that information arose; (d) Validly existing: it is a validly existing corporation registered under the laws of its place of incorporation; (e) Authority: the execution and delivery of this agreement has been properly authorised by all necessary corporate action of Peabody; (f) Power: it has full corporate power and lawful authority to execute, deliver and perform this agreement; (g) No default: this agreement does not conflict with or result in the breach of or a default under:

(1) Peabodyâ&#x20AC;&#x2122;s certificate of incorporation or bylaws;

(2) except as set forth in the Disclosure Letter, any other agreement; or

(3) any writ, order or injunction, judgment, law, rule or regulation to which it is party or by which it is bound,

other than such exceptions in the case of clauses (2) and (3) as would not be reasonably expected to have a material adverse effect on Peabodyâ&#x20AC;&#x2122;s ability to consummate the Transaction; and (h) No Shareholder Approval: no shareholder approval of Peabody is required to complete the Transaction.

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Schedule 2 Excel Representations and Warranties Excel represents and warrants to Peabody (in its own right and separately as trustee or nominee for each of the other Peabody Indemnified Parties) that: (a) Scheme Booklet: no information (other than the Peabody Information) contained in the Scheme Booklet, as at the date the Scheme Booklet is despatched to Excel Shareholders, will contain any statement which is materially misleading or deceptive, including by way of omission from that statement; (b) Validly existing: it is a validly existing corporation registered under the laws of its place of incorporation; (c) Authority: the execution and delivery of this agreement has been properly authorised by all necessary corporate action of Excel; (d) all information: it has provided all information actually known to it (having made reasonable enquiries) as at the date of this agreement regarding matters affecting or relating to it and its subsidiaries which is not already in the public domain and the disclosure of which might reasonably be expected to have resulted in Peabody not entering into this agreement at all or only entering into this agreement on materially different terms other than agreements identified in the Disclosure Letter; (e) Not misleading: all information it has provided to Peabody (whether under the Due Diligence or otherwise) is, to the best of its knowledge (having made reasonable enquiries), accurate and not misleading and it has not omitted any information required to make the information provided to Peabody not misleading, noting that certain of the agreements identified in the Disclosure Letter have not been provided to Peabody; (f) Capital structure: its capital structure, including all issued securities as at the date of this agreement is as set out in Schedule 3 and it has not issued any other securities, options or instruments which are still outstanding and may convert into Excel Shares other than as set out in Schedule 3; (g) Interest: any company, partnership, trust or other enterprise in which Excel or an Excel subsidiary owns or has an interest in is as set out in the Disclosure Letter; (h) Authority: Excel has full corporate power and lawful authority to execute and deliver this agreement and to perform or cause to be performed its obligations under this agreement; (i) No default: this agreement does not conflict with or result in the breach of or default under any provision of Excelâ&#x20AC;&#x2122;s constitution or any material term or provision of any material agreement (other than the agreements identified as doing so in the Disclosure Letter) or any writ, order or injunction, judgment, law, rule or regulation to which it is party or subject or by which it or any of its subsidiaries is bound; (j) Restrictions on business activities: except as disclosed by Excel to Peabody in writing, there is no agreement, judgment, injunction, order or decree binding on Excel or any of its subsidiaries that has or would be likely to have the effect prohibiting, restricting or materially impairing after the Effective Date any business of Excel or any of its subsidiaries; (k) Litigation: except as disclosed by Excel to Peabody in writing:

(1) there are no material actions, suits, arbitrations, legal or administrative proceedings pending or, so far as Excel is aware after due enquiry, threatened against Excel or any of its subsidiaries;

(2) neither Excel nor any of its subsidiaries is the subject of any material pending or, so far as Excel is aware after making due enquiries, material threatened investigation; and

(3) neither Excel nor any of its subsidiaries nor the respective assets, properties or business of Excel or any of its subsidiaries is subject to any judgment, order, writ, injunction or decree of any court, Government Agency or arbitration tribunal;

(l) Environmental: except as disclosed by Excel to Peabody in writing:

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(1) neither Excel nor any subsidiary of Excel has been convicted of any material offence under any Environmental Law and there are no orders issued by any Government Agency or any claims relating to the breach of any Environmental Law or Environmental Permit against Excel or any of its subsidiaries;

merger implementation agreement

(2) Excel and its subsidiaries have complied in all material respects with all applicable Environmental Laws, all Environmental Permits necessary for the conduct and operation of their businesses as presently conducted have been obtained, are in force and effect and are being complied with in all material respects.

In this warranty:

Environmental Law means any law or regulation relating to the environment including relating to:

(3) the discharge or emission of substances (whether sold, liquid or gaseous) to air, water or land;

(4) contamination of air, water or land;

(5) the production, use, handling, storage, disposal or transport of waste, hazardous substances; and

(6) the presence of asbestos; or

(7) any other aspect of protection of the environment or the enforcement or administration of any such law.

Environmental Permit means any permit, licence, authority, approval, certificate of approval, consent or authorisation required by Environmental Laws;

(m) Compliance: except as disclosed by Excel to Peabody in writing. Excel and its subsidiaries have complied in all material respects with all Australian and foreign laws and regulations applicable to them and orders of Australian and foreign Government Agencies having jurisdiction over them and have all material licenses, permits and franchises necessary for them to conduct their respective businesses as presently being conducted; (n) Filings and undisclosed liabilities:

(1) other than for this Transaction it has since January 1, 2003 filed with ASIC and ASX all required reports, schedules, prospectuses, forms, statements, notices and other documents required to be filed with ASIC and ASX, including any notices required to be filed by Listing Rule 3.1 (all of those documents being the Excel Reporting Documents) and it is not relying on the carve-out in Listing Rule 3.1 to withhold any information from public disclosure;

(2) as of its date, each Excel Reporting Document complied in all material respects with the requirements of the Corporations Act and the Listing Rules and all rules, regulations and policy statements under the Corporations Act and the Listing Rules;

(3) none of the Excel Reporting Documents contains any untrue statement of a material fact or omits to state a material fact required to be stated in it, except to the extent that such statements have been modified or superseded by a later filed Excel Reporting Document;

(4) the consolidated financial statements of Excel included in the Excel Reporting Documents comply as to form in all material respects with the Corporations Act and all applicable accounting requirements applicable to the preparation of financial statements, have been prepared in accordance with generally accepted accounting principles in Australia (Australian GAAP) or AIFRS as applicable at the relevant date and fairly present in all material respect the consolidated financial position of Excel as of the dates of the relevant financial statements and the consolidated results of its operations and cash flows for the periods then ended;

(5) there has not been any event, change, effect or development which, individually or in aggregate, is required to be included in Excel Reporting Documents in accordance with the requirements of the Corporations Act, the Listing Rules and all rules and regulations promulgated under the Corporations Act and the Listing Rules which has not been included in the Excel Reporting Documents;

The warranties in (j) to (n) above are given subject to matters fairly disclosed in Excel Reporting Documents publicly filed prior to the date of this agreement. Schedule 3 Excel details The only securities of Excel on issue, or options or other instruments that may convert into Excel Shares, are 214,977,360 ordinary shares.

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Signing page Executed as an agreement: Peabody Signed for Peabody Energy Corporation

(Signature) Officer Signature Gregory H. Boyce (Signature) Witness Joseph W. Bean

Excel Signed for Excel Coal Limited

(Signature) Secretary/Director Roger B. Massy-Greene (Signature) Director Anthony J. Haggarty

Annexure A – Scheme of Arrangement (see Annexure C of this Scheme Booklet) Annexure B – Deed Poll (see Annexure D of this Scheme Booklet) Annexure C – Timetable (see page1 of this Scheme Booklet)

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Annexure C Scheme of Arrangement

Annexure C

scheme of arrangement Pursuant to section 411 of the Corporations Act 2001. BETween Excel Coal Limited ABN 18 002 818 699 of Level 9, 1 York Street, Sydney, NSW, 2000 (Excel) and The holders of fully paid ordinary shares in Excel as at the Scheme Record Date 1 Definitions and interpretation 1.1 Definitions The meanings of the terms used in this document are set out below. Term Meaning

ASIC

the Australian Securities and Investments Commission.

ASX

the Australian Stock Exchange Limited (ABN 98 008 624 691).

Business Day

a business day as defined in the Listing Rules

CHESS

the clearing house electronic sub-register system of share transfers operated by ASX Settlement and Transfer Corporation Pty Ltd (ABN 49 008 504 532).

Corporations Act

the Corporations Act 2001 (Cth).

Court

the Supreme Court of New South Wales or such other court of competent jurisdiction under the Corporations Act agreed to in writing by Excel and Peabody.

Deed Poll

the deed poll dated 30 August 2006 executed by Peabody in favour of the Scheme Shareholders.

Effective

when used in relation to the Scheme, the coming into effect, under section 411(10) of the Corporations Act, of the order of the Court made under section 411(4)(b) in relation to the Scheme.

Effective Date

the date on which the Scheme becomes Effective.

End Date

December 1, 2006.

Excel Board

the board of directors of Excel.

Excel Share

a fully paid ordinary share of Excel

Excel Shareholder

a person who is registered as the holder of an Excel Share.

Excluded Shareholder

Peabody or any Excel Shareholder who holds an Excel Share on behalf of, or for the benefit of, Peabody and its subsidiaries.

Implementation Date

the fifth Business Day after the Scheme Record Date.

Listing Rules

the official Listing Rules of the ASX.

Marketable Parcel

a marketable parcel as defined by the Market Rules of the ASX.

Merger Implementation Agreement

the Merger Implementation Agreement dated 6 July 2006 between Excel and Peabody.

Nominee

a nominee chosen by Peabody.

Peabody Sub

a directly or indirectly owned subsidiary of Peabody

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Term Meaning

Registered Address

in relation to an Excel Shareholder, the address shown in the Share Register.

Scheme

t his scheme of arrangement under Part 5.1 of the Corporations Act between Excel and the Excel Shareholders.

Scheme Consideration

the consideration to be provided at the request of Peabody by Peabody Sub to each Scheme Shareholder for the transfer to Peabody Sub of each Excel Share, as set out in clause 4.2 of the Merger Implementation Agreement

Scheme Meeting

the meeting of Excel Shareholders ordered by the Court to be convened under section 411(1) of the Corporations Act.

Scheme Record Date

5.00pm on the fifth Business Day after the date on which the Scheme becomes Effective.

Scheme Shareholder

each Excel Shareholder as at the Scheme Record Date (taking into account registration of all registrable transfers and transmission applications as required by clause 6).

Scheme Share

an Excel Share held by a Scheme Shareholder (other than by an Excluded Shareholder).

Share Register

the register of members of Excel.

1.2 Interpretation In this Scheme, headings and bold type are for convenience only and do not affect interpretation and, unless the context requires otherwise: (a) words importing the singular include the plural and vice versa; (b) words importing a gender include any gender; (c) other parts of speech and grammatical forms of a word or phrase defined in this Scheme have a corresponding meaning; (d) a reference to a person includes an individual, the estate of an individual, a corporation, an authority, an association or a joint venture, a partnership, a trust and any government agency; (e) a reference to a clause, party, attachment or schedule is a reference to a clause of, and a party, attachment and schedule to this Scheme, and a reference to this Scheme includes any attachment and schedule; (f) a reference to a statute, regulation, proclamation, ordinance or by law includes all statutes, regulations, proclamations ordinances or by laws amending, consolidating or replacing it, whether passed by the same or another government agency with legal power to do so, and a reference to a statute includes all regulations, proclamations, ordinances and by laws issued under that statute; (g) a reference to any document (including this Scheme) is to that document as varied, novated, ratified or replaced from time to time; (h) the word ‘includes’ in any form is not a word of limitation; (i) a reference to ‘$’ or ‘dollar’ is to Australian currency; (j) a reference to any time, unless otherwise indicated, is a reference to that time in Sydney, Australia; and (k) a term defined in or for the purposes of the Corporations Act has the same meaning when used in this Scheme.

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2 Preliminary (a) Excel is a public company registered in New South Wales and is a company limited by shares. Excel is admitted to the official list of the ASX and Excel Shares are officially quoted on the financial market conducted by the ASX. (b) At 30 August 2006 214,977,360 Excel Shares were on issue. There is no other class of shares in the capital of Excel. (c) Peabody is a company incorporated under the laws of Delaware, the United States of America and is a company limited by shares. (d) Peabody Sub is a company registered in New South Wales, Australia and is a company limited by shares. (e) If the Scheme becomes Effective:

(1) Peabody Sub will provide or procure the provision of the Scheme Consideration to Scheme Shareholders in accordance with the Scheme; and

(2) all the Scheme Shares held by Scheme Shareholders will be transferred to Peabody Sub, and Excel will enter the name of Peabody Sub in the Share Register in respect of the Scheme Shares held by Scheme Shareholders.

(f) Peabody and Excel have agreed by executing the Merger Implementation Agreement to implement this Scheme. (g) Peabody has agreed by executing the Deed Poll to procure that Peabody Sub will pay the Scheme Consideration to Scheme Shareholders in accordance with the terms of the Deed Poll. 3 Conditions (a) The Scheme is conditional on all the conditions in clause 3.1 of the Merger Implementation Agreement having been satisfied or waived in accordance with the terms of the Merger Implementation Agreement by 8.00am on the Second Court Date. (b) The satisfaction of clause 3(a) is a condition precedent to the operation of clauses 4.2 and 5. (c) The Scheme will lapse and be of no further force or effect if the Effective Date does not occur on or before the End Date or any later date Excel and Peabody agree in writing. (d) Peabody and Excel will provide to the Court at the Second Court Date a certificate confirming (in respect of matters within their knowledge) whether or not the conditions precedent in the Merger Implementation Agreement and this Scheme (other than the condition in clause 3.1(b)) have been satisfied or waived. 4 Implementation 4.1 Lodgement of Court orders Excel will lodge with ASIC office copies of the Court orders under section 411 of the Corporations Act approving the Scheme by 5.00pm on the Business Day on which the Court approves the Scheme (or 5.00pm on the next Business Day, if such approval is received after 4.00pm on the relevant day). 4.2 Transfer of Scheme Shares On the Implementation Date: (a) subject to the payment of the Scheme Consideration in the manner contemplated by clause 5.3, the Scheme Shares, together with all rights and entitlements attaching to the Scheme Shares as at the Implementation Date, will be transferred to Peabody Sub, without the need for any further act by any Scheme Shareholder, upon Excel receiving written confirmation from Peabody that the Scheme Consideration has been paid in the manner contemplated by clause 5.3 by:

(1) Excel delivering to Peabody Sub duly completed and executed share transfer form or forms to transfer all the Scheme Shares to Peabody Sub; and

(2) Peabody Sub duly executing such transfer form or forms and delivering it or them to Excel for registration;

(b) immediately after receipt of the Scheme Transfer, Excel will enter the name of Peabody Sub in the Share Register in respect of the Scheme Shares.

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5 Scheme Consideration 5.1 Consideration under the Scheme The obligation of Peabody Sub to provide each Scheme Shareholder with the Scheme Consideration is satisfied by Peabody Sub providing to that Scheme Shareholder on the Implementation Date the Scheme Consideration. 5.2 Joint holders In the case of Scheme Shares held in joint names the Scheme Consideration shall be payable to and be forwarded to the holder whose name appears first in the Share Register as at the Scheme Record Date. 5.3 Peabody Sub’s obligations The obligation of Peabody Sub to provide the Scheme Consideration will be satisfied by Peabody Sub, on the Implementation Date doing any of the following at its election: (a) sending the consideration to the Scheme Shareholders’ Registered Address as shown in the Share Register by cheque in Australian currency drawn on an Australian Bank; or (b) depositing or procuring the Excel Registry to deposit it into an account with any Australian ADI (as defined in the Corporations Act) notified to Excel (or Excel’s agent who manages the Excel Register) by an appropriate authority from the Scheme Shareholders; or (c) such other payment method as agreed in writing between Peabody and Excel. 6 Dealings in Excel Shares (a) To establish the identity of the Scheme Shareholders, dealings in Excel Shares will only be recognised if:

(1) in the case of dealings of the type to be effected using CHESS, the transferee is registered in the Share Register as the holder of the relevant Excel Shares on or before the Scheme Record Date; and

(2) in all other cases, registrable transmission applications or transfers in respect of those dealings are received on or before the Scheme Record Date at the place where the Share Register is kept.

(b) Excel must register registrable transmission applications or transfers of the kind referred to in clause 6(a)(2) on the Scheme Record Date (provided that for the avoidance of doubt nothing in this clause 6(b) requires Excel to register a transfer that would result in an Excel Shareholder holding a parcel of Excel Shares that is less than a Marketable Parcel). (c) Excel will not accept for registration or recognise for any purpose any transmission application or transfer in respect of Excel Shares received after the Scheme Record Date. (d) For the purpose of determining entitlements to the Scheme Consideration, Excel must maintain the Share Register in accordance with the provisions of this clause 6 until the Scheme Consideration has been paid to the Scheme Shareholders. The Share Register in this form will solely determine entitlements to the Scheme Consideration. (e) All statements of holding for Excel Shares will cease to have effect from the Scheme Record Date as documents of title in respect of those shares and, as from that date, each entry current at that date on the Share Register will cease to have effect except as evidence of entitlement to the Scheme Consideration in respect of the Excel Shares relating to that entry. (f) As soon as possible after the Scheme Record Date and in any event at least 2 Business Days before the Implementation Date, Excel will ensure that details of the names, Registered Addresses and holdings of Excel Shares for each Scheme Shareholder are available to Peabody in the form Peabody reasonably requires.

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7 Quotation of Excel Shares (a) It is expected that suspension of trading on the ASX in Excel Shares will occur from the close of trading on the day Excel notifies the ASX that the Court has approved the Scheme under section 411(4)(b) of the Corporations Act. (b) On a date after the Implementation Date to be determined by Peabody, Excel will apply:

(1) for termination of the official quotation of Excel Shares on the ASX; and

(2) to have itself removed from the official list of the ASX.

8 General Scheme provisions 8.1 Consent If the Court proposes to approve the Scheme subject to any alterations or conditions, Excel may by its counsel consent on behalf of all persons concerned to those alterations or conditions to which Peabody has consented in writing. 8.2 Agreement of Scheme Shareholders Scheme Shareholders agree to the transfer of their Excel Shares in accordance with the Scheme and agree to the variation, cancellation or modification of the rights attached to their Excel Shares constituted by or resulting from the Scheme. 8.3 Warranties by Scheme Shareholders Each Scheme Shareholder is deemed to have warranted to Excel, in its own right and for the benefit of Peabody and Peabody Sub that all of the their Excel Shares which are transferred to Peabody Sub under the Scheme will, at the date of transfer of them to Peabody Sub, be fully paid and free from all mortgages, charges, liens, encumbrances and interests of third parties of any kind, and that they have full power and capacity to sell and to transfer their Excel Shares to Peabody Sub. 8.4 Beneficial entitlement to Excel Shares Peabody Sub will be beneficially entitled to the Excel Shares transferred to it under the Scheme pending registration by Excel of Peabody Sub in the Share Register as the holder of the Excel Shares. 8.5 Authority given to Peabody (a) Scheme Shareholders will be deemed to have authorised Excel to do and execute all acts, matters, things and documents on the part of each Scheme Shareholder necessary to implement the scheme, including (without limitation) executing, as agent and attorney of each Scheme Shareholder, a share transfer or transfers in relation to Scheme Shares as contemplated by clause 8.6. (b) Each Scheme Shareholder, without the need for any further act, irrevocably appoints Excel and all of its directors, secretaries and officers (jointly and severally) as its attorney and agent for the purpose of executing any document necessary to give effect to the Scheme including without limitation, a proper instrument of transfer of its Scheme Shares for the purposes of section 1071B of the Corporations Act which may be a master transfer of all the Scheme Shares. 8.6 Appointment of sole proxy Upon the Scheme becoming Effective and until Excel registers Peabody Sub as the holder of all Excel Shares in the Share Register, each Scheme Shareholder: (a) is deemed to have irrevocably appointed Peabody Sub as attorney and agent (and directed Peabody Sub in such capacity) to appoint an officer or agent nominated by Peabody as its sole proxy and, where applicable, corporate representatives to attend shareholdersâ&#x20AC;&#x2122; meetings, exercise the votes attaching to the Scheme Shares registered in their name and sign any shareholdersâ&#x20AC;&#x2122; resolutions, whether in person, by proxy or by corporate representative (other than as pursuant to this clause 8.6(a)); and (b) must take all other actions in the capacity of a registered holder of Scheme Shares as Peabody reasonably directs.

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scheme of arrangement

9 General 9.1 Stamp duty Peabody Sub will pay all stamp duty payable in connection with the transfer of the Scheme Shares to Peabody Sub. 9.2 Definition of ‘sending’ For the purposes of clause 5.3 the expressions ‘sending’ means: (a) sending by ordinary pre-paid post or courier to the Registered Address of the Scheme Shareholder at the Scheme Record Date; or (b) delivery to the address by any other means at no cost to the recipient. 9.3 Notices If a notice, transfer, transmission application, direction or other communication referred to in this Scheme is sent by post to Excel, it will not be taken to be received in the ordinary course of post or on a date and time other than the date and time (if any) on which it is actually received at the place where Excel’s Share Registry is kept. 9.4 Governing law This Scheme is governed by the laws of New South Wales. 9.5 Further action Excel will execute all documents and do all things necessary to implement and perform its obligations under this Scheme.

163

Annexure D deed poll

deed poll

this deed poll is made on 30 August 2006 by

Peabody Energy Corporation of 701 Market Street, St Louis, Missouri, USA (Peabody)

in favour of

Each holder of ordinary shares in Excel Coal Limited ABN 18 002 818 699 as at the Scheme Record Date (Scheme Shareholders)

Background A. The directors of Excel consider that it is in Excel’s interests that Excel Shareholders approve the Scheme. B. The directors of Excel have resolved that Excel should propose the Scheme. C. The Scheme will see all Scheme Shares transferred to Peabody Sub. D. On 6 July 2006, Excel and Peabody entered into the Merger Implementation Agreement. E. Peabody is entering into this deed poll for the purpose of covenanting in favour of Scheme Shareholders to ensure that the Scheme Consideration is paid to Scheme Shareholders. This deed poll provides 1 Definitions and interpretation 1.1 Definitions (a) The meanings of the terms used in this deed poll are set out below. Term Meaning

Merger Implementation Agreement

the Merger Implementation Agreement dated 6 July 2006 between Excel and Peabody.

Words and phrases used in this deed poll have the same meaning given to them in the Merger Implementation Agreement. 1.2 Interpretation Clause 1.2 of the Merger Implementation Agreement applies to the interpretation of this deed poll, except that references to ‘Merger Implementation Agreement’ are to be read as references to ‘deed poll’. 1.3 Nature of deed poll Peabody acknowledges that this deed poll may be relied on and enforced by any Scheme Shareholder in accordance with its terms even though the Scheme Shareholders are not party to it.

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Annexure D

2 Conditions 2.1 Conditions Peabody’s obligations under clause 3 are subject to the Scheme becoming Effective. 2.2 Termination The obligation of Peabody under this deed poll to Scheme Shareholders will automatically terminate and the terms of this deed poll will be of no further force or effect if: (a) the Merger Implementation Agreement is terminated in accordance with its terms; or (b) the Scheme is not Effective by the End Date. 2.3 Consequences of termination If this deed poll is terminated under clause 2.2, in addition and without prejudice to any other rights, powers or remedies available to it: (a) Peabody is released from its obligations to further perform this deed poll except those obligations under clause 6.1; and (b) Scheme Shareholders retain the rights they have against Peabody in respect of any breach of this deed poll which occurred before it was terminated. 3 Payment of Scheme consideration (a) Subject to clause 2, Peabody undertakes in favour of each Scheme Shareholder to procure that Peabody Sub provides the Scheme Consideration to each Scheme Shareholder. (b) The obligation of Peabody Sub to provide the Scheme Consideration will be satisfied by Peabody Sub, on the Implementation Date doing any of the following at its election:

(1) sending the consideration to the Scheme Shareholders’ Registered Address as shown in the Share Register by cheque in Australian currency drawn on an Australian Bank; or

(2) depositing or procuring the Excel Registry to deposit it into an account with any Australian ADI (as defined in the Corporations Act) notified to Excel (or Excel’s agent who manages the Excel Register) by an appropriate authority from the Scheme Shareholders; or

(3) such other payment method as agreed in writing between Peabody and Excel.

(c) In the case of Scheme Shares held in joint names the Scheme Consideration shall be payable to and be forwarded to the holder whose name appears first in the Share Register as at the Scheme Record Date. 4 Warranties Peabody represents and warrants that: (a) it is a corporation validly existing under the laws of its place of registration; (b) it has the corporate power to enter into and perform its obligations under this deed poll and to carry out the transactions contemplated by this deed poll; (c) it has taken all necessary corporate action to authorise its entry into this deed poll and has taken or will take all necessary corporate action to authorise the performance of this deed poll and to carry out the transactions contemplated by this deed poll; and (d) this deed poll is valid and binding on it. 5 Continuing obligations This deed poll is irrevocable and, subject to clause 2, remains in full force and effect until: (a) Peabody has fully performed its obligations under this deed poll; or (b) the earlier termination of this deed poll under clause 2.

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deed poll

6 General 6.1 Stamp duty Peabody will: (a) pay or procure the payment of all stamp duties and any related fines and penalties in respect of the Scheme and this deed poll, the performance of this deed poll and each transaction effected by or made under the Scheme and this deed poll; and (b) indemnify each Scheme Shareholder against any liability arising from failure to comply with clause 6.1(a). 6.2 Notices Any notice or other communication to Peabody in respect of this deed poll must be in legible writing and in English and: (a) addressed as shown below:

Name: Mr Rick Navarre Executive Vice President & CFO

Address: 701 Market Street St Louis Missouri USA 63101-1850

Fax no: +1 (314) 342 7597

with a copy to:

Name: Mr Joseph W. Bean Vice President & Associate General Counsel

Address: 701 Market Street St Louis Missouri USA 63101-1850

Fax no: +1 (314) 342 3419

(b) must be signed by the person making the communication or by a person duly authorised by that person; (c) must be delivered or posted by prepaid post to the address, or sent by fax to the fax number, of Peabody in accordance with clause 6.2(a); (d) will be regarded as received by Peabody:

(1) if sent by prepaid post, on the fifth Business Day after the date of posting;

(2) if sent by fax, at the time at which that fax is sent as shown on the transmission report which is produced by the machine from which that fax is sent and which confirms transmission of that fax in its entirety, unless that local time is a not a Business Day, or is after 5.00pm on a Business Day, when that communication will be regarded as received at 9.00am on the next Business Day; and

(3) if delivered by hand, on delivery at the address of the addressee as provided in clause 6.2(a).

6.3 Definition of ‘sending’ For the purposes of clause the expressions ‘sending’ means: (a) sending by ordinary pre-paid post or courier to the Registered Address of the Scheme Shareholder at the Scheme Record Date; or (b) delivery to the address by any other means at no cost to the recipient. 6.4 Governing law and jurisdiction (a) This deed poll is governed by the laws of New South Wales. (b) Peabody irrevocably submits to the non-exclusive jurisdiction of the courts of New South Wales.

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Annexure D

6.5 Waiver If a Scheme Shareholder does not exercise a right arising from a breach of this deed poll at a given time, it may, unless it has waived that right in writing, exercise the right at a later point in time. 6.6 Variation A provision of this deed poll may not be varied unless the variation is agreed to by Excel, in which event Peabody will enter into a further deed poll in favour of the Scheme Shareholders giving effect to the amendment. 6.7 Cumulative rights The rights, powers and remedies of Peabody and the Scheme Shareholders under this deed poll are cumulative and do not exclude any other rights, powers or remedies provided by law independently of this deed poll. 6.8 Assignment The rights of each Scheme Shareholder under this deed poll are personal and must not be assigned or otherwise dealt with at law or in equity without the prior written consent of Peabody.

168

deed poll

Signing page Executed as A DEED POLL: Signed sealed and delivered by Peabody Energy Corporation by

(Signature) Director

(Signature) Witness

169

Annexure E Notice of Scheme Meeting

notice of scheme of meeting

Notice of Court ordered Scheme Meeting of members of Excel Coal Limited ABN 18 002 818 699 Notice is hereby given that, by an order of the Federal Court of Australia, a meeting of members of Excel Coal Limited (Excel) will be held in the AGL Theatre at the Museum of Sydney, Corner of Bridge and Phillip Streets, Sydney NSW on Wednesday, 4 October 2006 at 3.00pm. Business The purpose of the Scheme Meeting is to consider, and if thought fit, to approve a scheme of arrangement (with or without modification) (Scheme) between Excel and the holders of ordinary shares in Excel as at the Record Date (Scheme Shareholders) pursuant to Part 5.1 of the Corporations Act 2001 (Cth) (Corporations Act). The Scheme is proposed to be made in respect of the Excel Shares held by Scheme Shareholders (Scheme Shares) in the form contained in Annexure C to the Scheme Booklet. To assist you in making an informed voting decision, further information on the Scheme is set out in the Scheme Booklet accompanying this notice. A copy of the Scheme is set out in Annexure C to the Scheme Booklet and its purpose and effect is explained throughout that document. Terms used in this notice, including in the resolution set out below, have the same meaning as set out in the glossary in section 9 of the Scheme Booklet which accompanies this notice. Resolution To consider and, if thought fit, to pass the following resolution: That, pursuant to and in accordance with section 411 of the Corporations Act, the scheme of arrangement proposed to be entered into between Excel Coal Limited and holders of its fully paid ordinary shares (Scheme) is approved and the board of directors of Excel is authorised to agree to such modifications or conditions as are thought fit by the Federal Court of Australia (Court) and, subject to approval of the Scheme by the Court, to implement the Scheme with any such modifications or conditions. The Scheme is subject to the approval of the Court under paragraph 411(4)(b) of the Corporations Act. If the resolution put to the meeting is passed by the requisite majority (described below), Excel intends to apply to the Court for approval of the Scheme. Requisite majority In accordance with subparagraph 411(4)(a)(ii) of the Corporations Act, the resolution must be passed by a majority in numbers of holders of Excel Shares present and voting (either in person or by proxy) and representing at least 75% of the votes cast on the resolution. The vote will be conducted by poll. Court approval The Scheme (with or without modification) is subject to the approval of the Federal Court of Australia. Dated: 30 August 2006.

Nigel Jones Company Secretary

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Annexure E

NOTES Voting entitlement Excel Shares will be taken to be held by the persons who are the registered holders at 3.00pm on Monday, 2 October 2006. All Excel Shareholders at that time are entitled to vote at the Scheme Meeting. How to vote Excel Shareholders entitled to vote at the Share Scheme Meeting can vote: •

by attending the meeting and voting in person; or

•

by appointing an attorney to attend the meeting and vote on their behalf, or, in the case of corporate shareholders, a corporate representative to attend the meeting and vote on its behalf; or

•

by appointing a proxy to attend and vote on their behalf in their place, using the proxy form accompanying this Notice of Scheme Meeting.

Voting in person (or by attorney or corporate representative) Excel Shareholders or their attorneys who plan to attend the meeting are requested to arrive at the venue at least 30 minutes prior to the time of the meeting so that shareholdings may be checked against the register and attendances noted. Attorneys should bring with them the original or a certified copy of the power of attorney under which they have been authorised to attend and vote at the meeting. To vote in person at the Scheme Meeting, a corporation which is an Excel Shareholder may appoint an individual to act as its representative. The appointment must comply with the requirements of section 250D of the Corporations Act. The representative should bring to the meeting evidence of their appointment, including the authority under which it is signed. Voting by proxy •

A proxy form accompanies this Notice of Scheme Meeting.

•

An Excel Shareholder has a right to appoint a proxy.

• The proxy need not be an Excel Shareholder. •

An Excel Shareholder who is entitled to cast 2 or more votes may appoint 2 proxies to attend and vote instead of themselves. If you want to appoint 2 proxies, an additional proxy form will be supplied by Excel on request by contacting Link Market Services on the number set out in the Scheme Booklet. Where 2 proxies are appointed, both forms should be completed with the nominated proportion or number of votes each proxy may exercise. Otherwise each proxy may exercise half of the votes.

•

Proxy forms must be signed by the Excel Shareholder or the Excel Shareholder’s attorney. If the Excel Shareholder is a corporation, the proxy form must be signed by 2 directors or by a director and a secretary, or if it is a proprietary company that has a sole director who is also the sole secretary, by that director, or under hand of its attorney or duly authorised officer. If the proxy form is signed by a person who is not the registered holder of Excel Shares (eg an attorney), then the relevant authority (eg in the case of proxy forms signed by an attorney, the power of attorney or a certified copy of the power of attorney) must either have been exhibited previously to Excel or be enclosed with the proxy form.

• The proxy form sent to you with this Notice of Scheme Meeting should be used for the Scheme Meeting. To be effective, the proxy form must be sent, delivered or faxed to: Mail to: Deliver to: Link Market Services Link Market Services Locked Bag A14 Level 12, 680 George Street SYDNEY SOUTH NSW 1235 SYDNEY NSW 2000

Fax to: (02) 9287 0309 or international: (+61 2) 9287 0309

by 3.00pm on Monday, 2 October 2006.

172

corporate directory

Directors

Share Registry

Richard Chadwick Non Executive Deputy Chairman

Link Market Services Limited

John Conde AO Non Executive Director Allan Davies Executive Director – Operations Christopher Ellis Executive Director – Project Development Roger Massy-Greene Non Executive Chairman Anthony Haggarty Managing Director Andrew Plummer Executive Director – Business Development Terry Williamson Non Executive Director Chief Financial Officer and Company Secretary Nigel Jones Financial Adviser Grant Samuel Corporate Finance Pty Limited Level 19 Governor Macquarie Tower 1 Farrer Place SYDNEY NSW 2000 Lawyers McCullough Robertson Lawyers Level 11 Central Plaza II 66 Eagle Street BRISBANE QLD 4000 Web Site www.excelcoal.com.au Excel shareholder information line 1 300 658 099

Level 12, 680 George Street SYDNEY NSW 2000 Locked Bag A14 SYDNEY SOUTH NSW 1235 Telephone: 1300 554 474 or (02) 8280 7111 International: (+61 2) 8280 7111 Facsimile: (02) 9287 0303 International (+61 2) 9287 0303 Facsimile for proxy voting: (02) 9287 0309 International (+61 2) 9287 0309