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Keh - Keaton Energy Holdings Limited - Preliminary Summarised Audited Group

Release Date: 22/06/2011 10:55:02      Code(s): KEH
KEH - Keaton Energy Holdings Limited - Preliminary summarised audited group     
results for the year ended 31 March 2011                                        
Keaton Energy Holdings Limited                                                  
(Incorporated in the Republic of South Africa)                                  
(Registration number: 2006/011090/06)                                           
JES share code: KEH ISIN: ZAE000117420                                          
(Keaton Energy) or (the company) or (the group)                                 
Preliminary summarised audited group results for the year ended 31 March 2011   
Key features                                                                    
Excellent safety performance                                                    
Vanggatfontein Project                                                          
* fast-track, simultaneous development of Phases 1 and 2                        
* Phase 1 completed on time, within budget                                      
* 5 Seam coal well received by domestic metallurgical customers                 
* possible re-scheduling of Phase 2 completion                                  
* 24% increase in coal reserve to 32.2Mt                                        
Leeuw Mining and Exploration refinancing, acquisition                           
* new major shareholder                                                         
* producing anthracite colliery (Vaalkrantz)                                    
* two advanced development projects                                             
* access to export markets, wider customer base                                 
Sterkfontein Project                                                            
* approaching feasibility stage                                                 
Summarised Consolidated Statement of Comprehensive Income                       
for the year ended 31 March 2011                                                
R`000                                  Note Year to        Year to              
                                           31 March       31 March              
2011           2010                
                                                                                
Revenue                                3            35 163       21 957         
Cost of sales                                     (23 095)     (21 191)         
Gross profit                                        12 068          766         
Other income                           4               383        2 023         
Administrative and other operating     5          (17 411)     (13 219)         
expenses                                                                        
Mining and related expenses            5          (10 925)     (11 453)         
Share appreciation rights (expense) /  6           (2 191)        4 346         
income                                                                          
Impairment and net realisable value    7                 -      (7 813)         
losses                                                                          
Operating loss before net finance                 (18 076)     (25 350)         
income                                                                          
Net finance income                     8            18 699       29 107         
Net profit before taxation                             623        3 757         
Income taxation credit / (expense)     9             6 574      (7 279)         
Profit / (Loss) and total                            7 197      (3 522)         
comprehensive income for the year                                               
Profit / (Loss) and total                                                       
comprehensive income attributable to:                                           
Owners of the company                               15 186        5 974         
Non-controlling interest                           (7 989)      (9 496)         
7 197      (3 522)          
Earnings per share (cents)                                                      
Basic                                  10             10.3          4.1         
Diluted                                10             10.3          4.1         
Summarised Consolidated Statement of Financial Position                         
at 31 March 2011                                                                
R`000                                 Note   31 March 2011  31 March 2010       
                                                                                
Assets                                                                          
Non-current assets                    11            689 079        129 698      
Current assets                        12             94 328        343 710      
Total assets                                        783 407        473 408      
Equity and liabilities                                                          
Total equity attributable to owners                 591 304        456 117      
of the Company                                                                  
Non-controlling interest                            (9 757)        (1 768)      
Total equity                                        581 547        454 349      
Non-current liabilities               13             46 051              -      
Current liabilities                   14            155 809         19 059      
Total equity and liabilities                        783 407        473 408      
Summarised Consolidated Statement of Cash Flows                                 
for the year ended 31 March 2011                                                
R`000                                          Year to        Year to           
                                            31 March 2011  31 March 2010        

Cash flows from operating activities                   2 976            9 916   
Cash flows from investing activities               (368 261)         (48 533)   
Cash flows from financing activities                  57 205                -   
Net decrease in cash and cash                      (308 080)         (38 617)   
equivalents                                                                     
Cash and cash equivalents at the                     335 080          373 698   
beginning of the year                                                           
Cash and cash equivalents at the end of               27 000          335 081   
the year                                                                        
Summarised Consolidated Statement of Changes in Equity                          
for the year ended 31 March 2011                                                
Transactions with owners                                           
R`000         Share      Share-   Retained    Total    Non-          Total      
             capital    based    earnings/            controlling   equity      
             and        payment  (Accumu-             interest                  
premium    reserve  lated loss)                                    
Balance at    432 780    4 550    (141)       437 189  -             437 189    
31 March                                                                        
2009                                                                            
Profit /      -          -        5 974       5 974    (9 496)       (3 522)    
(Loss) and                                                                      
total                                                                           
comprehensiv                                                                    
e income for                                                                    
the year                                                                        
Share-based   17 300     (4 346)  -           12 954   -             12 954     
payments                                                                        
Non-          -          -        -           -        7 728         7 728      
controlling                                                                     
interest                                                                        
resulting                                                                       
from                                                                            
acquisition                                                                     
of a                                                                            
subsidiary                                                                      
Balance at    450 080    204      5 833       456 117  (1 768)       454 349    
31 March                                                                        
2010                                                                            
Profit /      -          -        15 186      15 186   (7 989)       7 197      
(Loss) and                                                                      
total                                                                           
comprehensiv                                                                    
e income for                                                                    
the year                                                                        
Ordinary      65 179                          65 179                 65 179     
shares                                                                          
issued for                                                                      
cash                                                                            
Ordinary      55 000                          55 000                 55 000     
shares                                                                          
issued for                                                                      
consideratio                                                                    
n other than                                                                    
cash                                                                            
Share-based   -          2 191    -           2 191    -             2 191      
payments                                                                        
Share issue   (2 369)    -                    (2 369)                (2 369)    
expenses                                                                        
Balance at    567 890    2 395    21 019      591 304  (9 757)       581 547    
31 March                                                                        
2011                                                                            
Notes                                                                           
1    The financial results are presented for the year ended 31 March 2011. Prior
period figures represent the year ended 31 March 2010.                      
2    The preliminary summarised consolidated results for the year ended 31 March
    2011 incorporate extracts of the group`s unqualified audited financial      
    statements. The summarised consolidated results have been prepared in       
accordance with the recognition and measurement requirements of IFRS and    
    the presentation and disclosure requirements of IAS 34: Interim Financial   
    Reporting and are presented in accordance with the South African Companies  
    Act, 61 of 1973 (as amended) and the AC 500 standards as issued by the      
Accounting Practices Board. The accounting policies applied are consistent  
    with those applied in the annual financial statements for the year ended 31 
    March 2010, except for:                                                     
*    Amendments to IFRS 2: Group Cash-settled Share-based Payments : the impact 
is at a individual company level and does not have an impact on these group 
    results.                                                                    
    For a better understanding of the group`s financial position and results of 
    operations, these summarised consolidated results are to be read in         
conjunction with the group`s audited annual financial statements for the    
    year ended 31 March 2011, which include all disclosures required by IFRS,   
    and which are expected to be posted on or about 30 June 2011.               
3    The group`s Vanggatfontein Project generated mining revenue of R35.2       
million (2010: R21.8 million generated from Klip Colliery), resulting in a  
    gross profit of R12.1 million (2010: R0.8 million).                         
4    Other income includes an amount of R0.4 million comprising of rental income
    received from a sublease. The decrease in other income of R1.6 million is   
as a result of the once-off damages claim in 2010.                          
5    Administration, other operating and mining related expenses for the year   
    increased with R3.7 million or 14.8%. Major items included in the R28.3     
    million (2010: R24.7 million) are (prior year figures in brackets):         
*    employee benefit costs (excluding the share appreciation rights expense) of
    R18.5 million (R9.8 million).;                                              
*    consulting, legal, audit and professional fees of R3.4 million (R4.2       
    million);                                                                   
*    non-executive directors` fees of the company of R1.8 million (R2.0         
    million);                                                                   
*    listing and investor relations costs of R1.6million (R1.6 million);        
    head office lease costs of R 0.8 million (R0.7 million); and                
*    depreciation charges not included in cost of sales of R0.5 million (R0.7   
    million).                                                                   
Note: Mining and related expenses mainly include that portion of management and 
employee time spent directly on mining subsidiaries, direct consulting fees by  
mining contractors, and compensation paid to surface right holders.             
Administration and other operating expenses mainly include the remainder of the 
employee benefit costs, non-executive directors` fees, and listing and investor 
relations costs.                                                                
6    Share appreciation rights (expense) / income                               
    The group issued 3.8 million share appreciation rights during the year      
    resulting in an expense of R2.2 million. The prior year income of R4.3      
    million was as a result of lapsed share appreciation rights.                
7    Impairment and net realisable value losses                                 
    The group did not incur any impairment or net realisable value losses       
    during the year. Operations at Klip Colliery, forming part of Keaton Mining 
    (Pty) Limited (74% subsidiary of Keaton Energy), had been downscaled during 
the previous financial year resulting in a sharp decrease in the remaining  
    life of the mine.  The 2010 decrease resulted in the weighted average cost  
    per ton increasing significantly, and low quality stockpiles having to be   
    written down by R4.9 million to their net realisable value. An additional   
impairment of R1.1 million resulted from capitalised mine development. As a 
    result of the regulatory uncertainty regarding the two remaining prospects  
    in Amalahle Exploration (Pty) Limited (74% subsidiary of Keaton Energy), an 
    impairment loss of R1.8 million was raised in the previous financial year   
to fully impair the associated exploration and evaluation expenditure.      
8    Net finance income of R18.7 million was significantly lower than the R29.1 
    million in 2010 mainly as a result of the investment of the company`s cash  
    resources in the development of the Vanggatfontein Project and lower        
interest rates.                                                             
9    Income taxation changed by R13.9 million from a R7.3 million charge in the 
    prior year to a R6.6 million credit in the current year. The income         
    taxation credit was as a result of the first time recognition of a deferred 
tax asset in Keaton Mining (Pty) Ltd (R5.3 million) and the reversal of the 
    prior year accruals for Secondary Taxation of Companies (STC) (R2.9         
    million). STC will be replaced with withholding tax on 1 April 2012. As     
    this new legislation is currently enacted and whilst it is reasonably       
expected that no dividends will be declared by the company`s subsidiaries   
    before 1 April 2012, the accruals for STC have been reversed during the     
    year. This was offset by the company`s current taxation charge of R2.7      
    million, albeit much lower than the 2010 charge of R5.7 million (a direct   
result of the lower net finance income).                                    
10   Earnings per share                                                         
    The calculation of basic earnings per share is based on the profit for the  
    year (attributable to owners of the company) of R15 186 005 (2010 - R5 974  
510) and a weighted average of 148 102 328 (2010 - 144 172 800) ordinary    
    shares in issue during the year.                                            
    The reconciliation to headline earnings is as follows:                      
R`000                                        Year to            Year to         
31 March 2011      31 March 2010    
                                                                                
Profit for the year (attributable to owners              15 186          5 974  
of the company)                                                                 
Add back: Impairment losses attributable to                   -          2 163  
owners of the company *                                                         
Headline earnings for the year                           15 186          8 137  
* Headline earnings          Gross     Tax           Non-          Net          
adjustments : 2010                                   controlling                
                                                   interest                     
Impairment losses                2 923             -          760        2 163  
attributable to owners of                                                       
the company                                                                     
                                            Year to          Year to            
                                            31 March         31 March           
                                            2011               2010             
Earnings per share (cents)                                                 
     Headline                                           10.3               5.6  
     Headline diluted                                   10.3               5.6  
    The calculation of diluted earnings per share is based on the profit of     
R15.2 million (2010: R6.0 million) and headline earnings of R15.2 (2010:    
    R8.1 million) million, with the weighted average number of ordinary shares  
    not being adjusted as the potential ordinary shares are anti-dilutive.      
11   The non-current assets increased by R559.4 million from R129 7 million to  
R689.1 million during the year. The increase relates to the development     
    costs of the Vanggatfontein Project of R431.5 million and the refinancing / 
    acquisition of Leeuw Mining and Exploration (Pty) Ltd of R131.6 million. A  
    more detailed discussion is included under `Commentary`.                    
12   Current assets of R94.3 million (2010: R343.7 million) mainly include:     
*    inventory of R7.9 million (2010: Rnil);                                    
*    cash and cash equivalents of R39.0 million (2010: R335.1 million) of which 
    R12.0 million is restricted in terms of various ceded and pledged deposits. 
The decrease of R296.1 million was mainly as a result of the development of 
    the group`s Vanggatfontein Project. During the year cash inflows mainly     
    comprised shares issued for cash (R65.0 million), coal sales at the         
    Vanggatfontein Project (R15.2 million) and interest received (R18.0         
million);                                                                   
*    trade and other receivables of R31.4 million (2010: R6.4 million) which    
    includes R5.6 million relating to deferred transaction costs for financing  
    obtained after year end (refer Subsequent events below); and                
*    value-added tax recoverable of R16.0 million (2010: R2.3 million).         
13   Non-current liabilities of R46.1 million (2010: R0.3 million) mainly       
    include the current estimate of cash flows that will be needed to           
    rehabilitate the Vanggatfontein Project.                                    
14   Current liabilities of R155.8 million (2010: R18.7 million) mainly include:
*    amounts payable to the Vanggatfontein Project`s property, plant and        
    equipment vendors of R121.3 million (2010: R10.2 million);                  
*    other trade payables of R26.3 million (2010: R3.7 million);                
*    employee benefits accruals of R7.3 million (2010: R1.4 million); and       
*    taxation of R0.6 million (2010: R3.4 million).                             
15   Issues of equity during the year:                                          
                                  31 March 2011         31 March 2010           
Number of shares      Number of shares        
                                  (000)                 (000)                   
Issued share capital                                                            
At beginning of year               144 841               142 841                
Issued for cash during the year    14 484                -                      
Issued for consideration other     12 222                -                      
than cash during the year                                                       
Share-based payments               -                     2 000                  
At end of year                     171 547               144 841                
During the financial year, a total of 26 706 351 ordinary shares were issued at 
a price of R4.50 per ordinary share.  The shares were issued in three tranches  
as follows:                                                                     
*    5 555 556 ordinary shares, representing 3.84% of the issued ordinary share 
    capital of Keaton Energy, issued and listed on the JSE on 30 December 2010  
    (issue for cash to Plusbay Limited (Plusbay));                              
*    8 928 573 ordinary shares, representing 6.16% of the issued ordinary share 
capital of Keaton Energy, issued and listed on the JSE on 25 February 2011  
    (issue for cash to Plusbay); and                                            
*    12 222 222 ordinary shares, representing 7.12% of the issued ordinary share
    capital of Keaton Energy, issued and listed on the JSE on 2 March 2011      
(issued for financial instruments acquired). These shares were subsequently 
    bought by Plusbay and Plusbay has therefore become a non-public             
    shareholder. Also refer to Commentary for a further discussion in this      
    regard.                                                                     
The above ordinary shares were issued at a premium of 10 cents (2.19%) over 
    Keaton Energy`s 30 day volume weighted average market price prior to 23     
    December 2010, being the date the board of directors of Keaton Energy       
    approved the issues.                                                        
16   No dividends have been declared nor are any proposed for the year ended 31 
    March 2011 (year ended 31 March 2011: Rnil).                                
17   The group`s net asset value per share (total equity / issued ordinary      
    shares as at 31 March) is R3.39 (2010: R3.14).                              
18   Segment information                                                        
    Refer to the Commentary below for a description of the segments of the      
    group.                                                                      
R`000                                      31 March 2011  31 March 2010         

Total segment assets                                                            
Vanggatfontein Project                           554 043             63 472     
Sterkfontein Project                              65 426             62 374     
Klip Colliery                                      1 849              3 286     
Keaton Administrative and Technical                1 807              1 504     
Services (Pty) Limited                                                          
Keaton Energy Holdings Limited -                 632 091            474 773     
investments and cash resources                                                  
Total operating segments` assets               1 255 216            605 409     
Assets not allocated to segments                  16 417              3 668     
Consolidation adjustments - investments        (488 226)          (135 669)     
in subsidiaries                                                                 
Total assets                                     783 407            473 408     
R`000                                      Year to        Year to               
                                          31 March 2011  31 March 2010          

Segment revenue                                                                 
Vanggatfontein Project(all external coal          35 163                  -     
sales)(1)                                                                       
Klip Colliery (all external coal                       -             23 401     
sales)(1)                                                                       
Keaton Administrative and Technical                9 998             10 639     
Services (Pty) Limited                                                          
(intersegment revenues)                                                         
Keaton Energy Holdings Limited                     4 460              2 274     
(intersegment revenues)                                                         
Total operating segments` revenue                 49 621             36 314     
Klip Colliery - damages claim disclosed                -            (1 594)     
under other income                                                              
Consolidation adjustments                       (14 458)           (12 763)     
Revenue                                           35 163             21 957     
Segment profit or loss - Year   Operating Depreciation   Net      Net profit    
to                              profit /  / impairment   finance  / (loss)      
31 March 2011 (R`000)           (loss)    losses         income   before        
                                                                 taxation       
Vanggatfontein Project (since      12 426       (3 870)     (28)       8,528    
1 December 2010) *                                                              
Keaton Mining (Pty) Limited -     (8 670)             -      343     (8 327)    
loss after excluding the                                                        
Vanggatfontein Project                                                          
Keaton Energy Holdings           (16 141)           498   19 877       4 234    
Limited                                                                         
Keaton Administrative and            (50)         (512)       12       (550)    
Technical Services (Pty)                                                        
Limited                                                                         
Other segments                    (1 153)             -        -     (1 153)    
Total operating segments`        (13 589)       (3 884)   20 204       2 732    
(loss) / profit                                                                 
Consolidation adjustments           (198)         (405)  (1 505)     (2 109)    
As per Statement of              (13 787)       (4 289)   18 699         623    
comprehensive income - group                                                    
Segment profit or loss - Year to                                                
31 March 2010 (R`000)                                                           
Keaton Energy Holdings Limited      (5 623)    (3 679)  28 894       19 592     
Keaton Administrative and               638      (757)     444          325     
Technical Services (Pty) Limited                                                
Keaton Mining (Pty) Limited           3 367   (18 070)       -     (14 703)     
Other segments **                   (2 891)    (1 834)       -      (4 725)     
Total operating segments` (loss)    (4 509)   (24 340)  29 338          489     
/ profit                                                                        
Non-cash flow items                   (179)          -       -        (179)     
Consolidation adjustments                 -      3 679   (231)        3 448     
As per Statement of                 (4 688)   (20 661)  29 107        3 758     
comprehensive income - group                                                    
                                                                                
* Reported as part of Keaton Mining (Pty) Ltd up to 30 November 2010.           
** For comformity with the current year`s reporting, Other segments             
include the subsidiaries Amalahle Exploration (Pty) Limited and Labohlano       
Trading 46 (Pty) Limited. These were reported on separately on in 2010.         
19   The group`s capital commitments are:                                       
R`000                                      31 March 2011   31 March 2010        
Guarantees issued to the Department of              19 880            19 592    
Mineral Resources                                                               
Guarantees issued in terms of farm                   8 000            50 000    
acquisitions (subsequent to year-end)                                           
Authorised but not contracted                       42 219            58 829    
Authorised and contracted                           42 118            31 539    
All contracted amounts will be funded through the project finance agreement     
entered into with Nedbank Limited.                                              
20   Significant events after 31 March 2011 up to the date of this report       
    On 28 March 2011 Keaton Mining (Pty) Limited (a 74%-held subsidiary)        
    concluded a project financing agreement to the value of R230 million with   
    Nedbank Limited (Nedbank) to further fund the development of its            
Vanggatfontein Project. On 1 April 2011 the final conditions precedent were 
    reached / waived, and R138.7 million was drawn. The remainder of the R230   
    million will be drawn as the Vanggatfontein Project develops. A further R25 
    million was made available by Nedbank as a standby debt facility.           
Transaction costs of R5.6 million were incurred during the year in securing 
    the above project finance and have been deferred as a prepayment. This will 
    be offset against the financial liability in the 2012 financial year,       
    together with any other additional transaction costs.                       
In terms of the circular mailed to shareholders on 17 May 2011 and the      
    general meeting held on 21 June 2011, the following ordinary resolutions    
    were approved by the shareholders present or represented by proxy thereat:  
*    Ordinary Resolution No.1 -    16 622 222 of the authorised but unissued    
ordinary shares placed under the control of the directors.                  
*    Ordinary Resolution No.2 -    Adoption of the amendments to the Keaton     
    Energy Long-Term Performance Incentive Scheme.                              
*    Ordinary Resolution No.3 -    General authority to issue a further 5% of   
the issued ordinary shares for cash.                                        
Also refer to the Commentary regarding a recent incident at the Vanggatfontein  
Project.                                                                        
21   KPMG Inc`s unqualified auditors` reports, included in the annual financial 
statements and in the summarised financial statements contained in this     
    summarised report, are available for inspection at the company`s registered 
    office.                                                                     
COMMENTARY                                                                      
Key features of the period under review were:                                   
*    the fast-track, simultaneous development of Phases 1 and 2 of the group`s  
    first major coal mining project, Vanggatfontein, near Delmas in South       
    Africa`s Mpumalanga province; and                                           
*    the agreement to refinance and acquire 74% of Leeuw Mining and Exploration 
    (Pty) Limited.                                                              
Safety, health and the environment                                              
The group`s safety performance in the period under review was exemplary, with   
862 705 hours worked at the Vanggatfontein Project with no lost time injuries   
recorded. Further, the group experienced no reportable health or environmental  
issues in the period. Significant additional information relating to safety,    
health and the environment will be contained in the group`s integrated Annual   
Report.                                                                         
Vanggatfontein Project                                                          
A number of significant milestones were reached at Vanggatfontein during 2011:  
*    An on-mine operating team was established led by Isak Nkosi, who was       
appointed Mine Manager in August 2010.                                      
*    All service providers, across all 27 outsourced service areas, were        
    selected and appointed.                                                     
*    The 5 Seam coal plant and related infrastructure were developed on time and
within budget, with the first washed coal delivered to metallurgical        
    customers on 2 December 2010.                                               
*    Eskom mainline power reached the project and went live during April 2011,  
    allowing the project to switch from using diesel-powered generators.        
*    The East Resource Block Coal reserve was increased by 24% to 32.2 million  
    tonnes.                                                                     
*    The R230 million project finance facility was secured, with the first draw-
    down occurring on 1 April 2011.                                             
*    The 4 and 2 Seam thermal coal plant construction was well under way and    
    nearing completion by financial year end.                                   
*    The supply contract with South African power utility Eskom was extended to 
    supply 26% more thermal coal - a total of 20.8 million tonnes - over 10     
years instead of the original seven years.                                  
Phase 1: No 5 Seam coal                                                         
During the period under review, a total of 3.3 million cubic metres of          
overburden was removed and 145 107 tonnes of 5 Seam run-of-mine coal was mined. 
Run-of-mine production started in October 2010 and the 5 Seam plant was fully   
commissioned during November 2010. A total of 56 886 tonnes of saleable 5 Seam  
coal was produced. There was excellent acceptance of the coal product by the    
domestic metallurgical market and consequent strong sales of 48 397 tonnes of   
product during the first four months of production, limited only by the slower  
than expected ramp-up of plant production due to the exceptionally wet weather  
in December 2010. Production has stabilised at targeted levels since the end of 
the financial year, with the run-of-mine stockpile having been cleared. This    
improvement in plant performance is due to better run-of-mine coal qualities,   
fresh run-of-mine coal being fed to the plant directly from the pit and better  
plant management.                                                               
Phase 2: Nos 4 and 2 Seam thermal coal                                          
The construction and commissioning of the 4 and 2 Seam plant was on track to    
deliver the full ramp-up commitment of thermal coal to Eskom by the end of July 
2011. However, the project`s ability to meet this commitment may be affected by 
the failure of the support structure of one of the Dense Medium Separation unit 
feed bins during pre-commissioning on 28 May 2011. Management is working closely
with DRA Mineral Projects (Pty) Limited, the lump-sum turnkey contractor        
responsible for construction of the plant, and a mitigation plan has been       
implemented which has allowed production to resume while the structure is being 
rehabilitated.  The first Eskom coal stockpile has been prepared and coal       
deliveries are expected to begin as soon as all quality management procedures   
have been completed.                                                            
Coal Reserve and Resource Statement                                             
On 9 November 2010, the company declared a 24% increase in the coal reserve of  
its 74%-held Vanggatfontein Project to 32.2 million tonnes - 22.3 million tonnes
in the proved category and 9.9 million tonnes in the probable category. The     
declaration is contained in an updated SAMREC-compliant East Resource Block:    
Coal Reserve and Resource Statement, released by the company following further  
exploration drilling on the project and completion of a feasibility update      
report. The updated gross tonnes in situ coal resource estimate for the East    
Resource Block is 84.2 million tonnes. The coal reserve has been reduced by the 
145 107 tonnes of 5 Seam mined during the period.                               
Leeuw Mining and Exploration (Pty) Limited - refinancing and acquisition        
On 14 February 2011, Keaton Energy announced that it plans - in a two-stage     
transaction - to refinance and acquire a 74% interest in South African export   
coal producer Leeuw Mining and Exploration (Pty) Limited (LME). The acquisition 
will give Keaton Energy:                                                        
*    a new major shareholder in Plusbay, an affiliate of Gunvor Group Limited   
    (Gunvor) one of the world`s leading energy trading companies;               
*    a controlling interest in an existing operating anthracite colliery,       
    Vaalkrantz, which has been in production since 2003;                        
*    more advanced development projects, specifically:                          
    *     the Koudelager anthracite project, which will provide a future        
run-of-mine anthracite supply to the existing Vaalkrantz plant; and    
    *    the Braakfontein thermal coal project, near Newcastle.                 
*    two exploration projects:                                                  
    *    the Balgray anthracite project near Utrecht; and                       
*    the Mpati project near Dundee.                                         
*    access to export markets and a wider customer base through:                
    *    a 207 000 tpa participation in Richards Bay Coal Terminal`s (RBCT)     
         Quattro export programme; and                                          
*    a dedicated railway siding facility near Vaalkrantz.                   
    Further, it will help to safeguard more than 400 jobs in LME`s operations.  
    LME`s founding shareholders will retain a 26% interest in LME. The          
    refinancing consideration of LME has been settled with the issue of 12 222  
222 new Keaton Energy shares at a price of R4.50 per share, and R65 million 
    has been raised to recapitalise the Vaalkrantz Colliery and as initial      
    development capital for the Koudelager and Braakfontein projects. The       
    acquisition consideration for LME will be settled with the issue of 16 622  
222 new Keaton Energy shares. This will also see Gunvor, through Plusbay,   
    increase its shareholding in Keaton Energy to approximately 25%. The        
    refinancing and technical support provided to LME has already seen          
    anthracite production recover and sales increase. The transaction remains   
dependent on certain conditions precedent being met, including competition  
    authority approvals and consent for the change of control of LME by the     
    Minister of Mineral Resources.                                              
    Other activities during the reporting period                                
Sterkfontein Project, Bethal                                                
    The second phase of the Sterkfontein Extension drilling programme,          
    comprising 56 holes totaling over 9 000 metres of drilling and the          
    associated geological modelling, was completed during the reporting period. 
An updated SAMREC-compliant resource statement will be released in due      
    course. The execution of a number of granted "in-fill" prospecting rights   
    is awaited. Once the remaining prospecting rights are executed, it is the   
    company`s intention to consolidate all the prospecting rights held by       
Keaton Mining (Pty) Ltd and Labohlano Trading 46 (Pty) Ltd into a single    
    project company.                                                            
    The Sterkfontein Project is now approaching feasibility stage and capital   
    estimates for its development are expected in Q2 2012.                      
Corporate governance                                                        
    During the financial year Mr JN Wallington resigned as a director on 31 May 
    2010 and Mrs Z Mostert resigned as a director on 31 July 2010. Mr OP Sadler 
    was appointed as an independent non-executive director with effect from 1   
October 2010. Subsequent to year end, Mr D Jonker was appointed as a non-   
    executive director with effect from 31 May 2011.                            
    Routledge Modise Inc. practising as Eversheds resigned as company and group 
    secretary with effect from 30 September 2010 and Michelle Louise Taylor was 
appointed in its stead with effect from 1 October 2010.                     
    Looking ahead                                                               
    The Vanggatfontein Project is expected to contribute substantially to group 
    earnings in 2011/12 and the focus at the project will be on safely ramping  
up 4 and 2 Seam plant production to meet the contracted coal supply         
    commitment to Eskom as soon as possible, while maintaining the production   
    rate and market acceptance of the 5 Seam coal product. Once steady-state    
    production is achieved, the next step will be to achieve technical and      
financial completion in terms of the Nedbank Capital project financing      
    arrangements and thereby formally reach full commercial production. The     
    group will also focus on getting all remaining approvals and consents for   
    the LME acquisition so that the turnaround of the Vaalkrantz Colliery can   
be completed, the development of the Braakfontein Project can be advanced   
    and LME consolidated into the group. With two operating collieries -        
    Vanggatfontein producing thermal coal for Eskom and 5 Seam coal for the     
    domestic metallurgical market and Vaalkrantz producing                      
low-ash anthracite for the domestic market and higher-ash anthracite for    
    export markets - 2012 should see the group make significant advances in     
    becoming a robust and sustainable enterprise, and in achieving its longer-  
    term target of becoming a mid-tier coal producer.                           
On behalf of the Board                                                          
David Salter                       Paul Miller                                  
(Chairman)                         (Managing Director)                          
22 June 2011                                                                    
Registered Office:                                                              
Ground Floor, Eland House, The Braes, 3 Eaton Avenue,                           
Bryanston, South Africa                                                         
(Postnet Suite 464, Private Bag X51, Bryanston, 2021)                           
Transfer Secretaries:                                                           
Computershare Investor Services South Africa (Pty) Limited                      
Ground Floor, 70 Marshall Street, Johannesburg, South Africa                    
(PO Box 61051, Marshalltown, 2107)                                              
Auditors:                                                                       
KPMG Inc.                                                                       
1226 Schoeman Street, Hatfield, Pretoria                                        
Directors:                                                                      
Dr JD Salter (chairman)*++, PBM Miller (managing director), AB Glad, D          
Jonker**+, LX Mtumtum++, P Pouroulis***+, OP Sadler++, JG Schonfeldt, APE       
Sedibe+, PCCH Snyders.                                                          
*British **Dutch ***South African / Cypriot                                     
+non-executive, ++independent non-executive                                     
telephone: +27 11 317 1700                                                      
telefax: +27 11 463 4759                                                        
email: info@keatonenergy.co.za                                                  
www.keatonenergy.co.za                                                          
Date: 22/06/2011 10:55:01 Supplied by www.sharenet.co.za                     
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