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Buffalo Coal Corp - Interim Managements Discussion And Analysis - Quarterly Highlights - For The 3 And 6 Months Ended 30 June 2016

Release Date: 26/08/2016 09:21:00      Code(s): BUC     
BUFFALO COAL CORP.
Registration number: 001891261
External company registration number: 2011/011661/10
Share code on the TSX Venture Exchange: BUF
Share code on the JSE Limited: BUC
ISIN: CA1194421014
"Buffalo Coal" or "the Company"

INTERIM MANAGEMENT'S DISCUSSION AND ANALYSIS - QUARTERLY HIGHLIGHTS
For the three and six months ended June 30, 2016
(Presented in South African Rands)



BASIS OF PREPARATION
The following Interim Management's Discussion and Analysis - Quarterly Highlights ("Interim MD&A") relates to the financial position and results of operations of Buffalo Coal Corp. and its subsidiaries ("our", "BC Corp", the "Company"
or collectively the "Group") for the three and six months ended June 30, 2016 and should be read in conjunction with the audited annual consolidated financial statements for the years ended December 31, 2015 and December 31, 2014, the
Management's Discussion and Analysis for the year ended December 31, 2015 and the unaudited condensed interim consolidated financial statements for the three and six months ended June 30, 2016. The condensed interim consolidated
financial statements ("Interim Results") and related notes have been prepared in accordance with International Financial Reporting Standards ("IFRS") and are in compliance with IAS 34, Interim Financial Reporting. Certain non-IFRS
measures are discussed in this Interim MD&A which are clearly disclosed as such. Additional information and press releases have been filed electronically through the System for Electronic Document Analysis and Retrieval ("SEDAR") and
are available online under the Buffalo Coal Corp. profile at www.sedar.com.

This Interim MD&A reports our activities through August 25, 2016 unless otherwise indicated. References to FY2016 refer to the financial year ending December 31, 2016 and FY2015 refers to the financial year ended December 31, 2015.
References to Q2 2016 and Q1 2016 refer to the three months ended June 30, 2016 and March 31, 2016 and Q2 2015 refers to the three months ended June 30, 2015.

Unless otherwise noted all amounts are recorded in South African Rands ("R" or "Rands"). References to "C$" mean Canadian Dollars and to "US$" mean United States Dollars. Amounts stated in Canadian Dollars or US Dollars are translated
at the date of transaction, unless otherwise stated. These other amounts stated in Canadian Dollars were translated at C$1:R11.4096 and amounts in US Dollars were translated at US$1:R14.7838.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Interim MD&A contains forward-looking information under Canadian securities legislation. Forward-looking information includes, but is not limited to, information with respect to the Company's expected production from, and further
potential of, the Company's properties; financial and operational planning and strategic goals; the Company's ability to raise additional funds; the timing and amount of advances under existing loan facilities; the future price of
minerals, particularly coal and overall market conditions for resource issuers; the estimation of mineral reserves and mineral resources; conclusions of economic evaluations; the realization of mineral reserve estimates; the timing and
amount of estimated future production; costs of production; capital expenditures; success of exploration activities; mining or processing issues; currency exchange rates; government regulation of mining operations; labour relations and
future collective agreements; and environmental risks. In general, forward-looking information can be identified by the use of forward-looking terminology such as "plans", "expects" or "does not expect", "budget", "scheduled",
"estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words and phrases or statements that certain actions, events or results "may", "could", "would", "might" or "will be
taken", "occur" or "be achieved". Forward-looking information is based on the opinions, estimates and assumptions of management as of the date such statements are made and the Company can give no assurance that such opinions, estimates
and assumptions are correct. Estimates regarding the anticipated timing, amount and cost of exploration, and development and production activities are based on assumptions underlying mineral reserve and mineral resource estimates and
the realization of such estimates. Capital and operating cost estimates are based on extensive research of the Company, purchase orders placed by the Company to date, recent mining costs and other factors.

Forward-looking information involves known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance
or achievements expressed or implied by the forward-looking information. Such factors include: risks relating to the requirement for additional capital; production estimate risks; the price of coal; labour and employment risks; cost
estimate risks; mineral legislation risks; title to mineral holdings risks; power supply risks; risks relating to the depletion of mineral reserves; litigation risks; South Africa country risks; infrastructure risks; environmental
risks and other hazards; risks relating to dependence on key personnel; dependence on outside parties; exploration and development risks; risks relating to foreign mining tax regimes; insurance and uninsured risks; competition risks;
the Company's securities may experience price volatility; risks relating to owning foreign assets; currency fluctuation risks; and the Company's directors and officers may have conflicts of interests. Although management of the Company
has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking information, there may be other factors that cause results not to be as anticipated, estimated or
intended. There can be no assurance that such information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such information. Accordingly, readers should not place undue
reliance on forward-looking information. The Company does not undertake to update any forward-looking information, except in accordance with applicable securities laws.

OVERVIEW OF THE COMPANY
BC Corp is a coal mining and supply company operating in South Africa. The Company is listed on the TSX Venture Exchange ("TSXV") and the Alternative Exchange ("AltX") operated by JSE Limited ("JSE"). BC Corp trades under the symbol
"BUF" on the TSXV and "BUC" on the AltX.

The Company owns 100% of the shares in Buffalo Coal Dundee Proprietary Limited ("BC Dundee"), a South African company, with an interest in two operating coal mines in South Africa ("BC Dundee Properties"). The BC Dundee Properties
comprise the Magdalena bituminous mine ("Magdalena") and the Aviemore anthracite mine ("Aviemore").  BC Dundee's Magdalena opencast operation reached the end of its life in March 2015 and the Group is now engaged only in underground
coal mining.  BC Dundee indirectly holds a 70% interest in the BC Dundee Properties through its 70% interest in Zinoju Coal Proprietary Limited ("Zinoju"), which holds all of the mineral rights with respect to the BC Dundee Properties.
The remaining 30% interest in Zinoju is held by South African Black Economic Empowerment ("BEE") partners.

OVERVIEW OF THE PERIOD AND OUTLOOK FOR THE GROUP

Markets

The Group supplies high quality bituminous coal and anthracite to both the export and domestic markets.

Bituminous
The API 4 coal index, the benchmark pricing index for coal exports meeting the RB1 specification, is currently at levels of around US$67 per ton and has steadily increased from US$51 per ton since the beginning of 2016.  The short-to-
medium term outlook for the API 4 coal price index is in contango (source IHS/McCloskey). Currently the majority of the Company's export bituminous contracts are priced in fixed Rand terms and are expected to be completed towards the
end of 2016.

Anthracite
The domestic anthracite market remains weak in terms of demand and is expected to remain depressed throughout 2016. During Q1 2016 the Group negotiated a short-term blended anthracite and bituminous contract with a major export
customer, as well as a contract for sized anthracite of which the majority of the contracted tons were railed in Q1 2016. Furthermore, during Q2 2016 the Group secured an additional contract for sized anthracite product which will be
railed in Q3 2016. These contracts will reduce the existing built-up anthracite stockpiles. The Group continues to pursue various marketing opportunities for all anthracite and calcine products with a number of parties, although at
reduced prices when compared to historic levels.

Investec Bank Limited ("Investec") Borrowings
On December 2, 2015, BC Dundee closed a second amended and restated term loan and revolving credit facility with Investec ("Second Amended Investec Agreement"), whereby Investec agreed to extend BC Dundee's working capital facility
from R30.0 million to R80.0 million, in two tranches of R25.0 million each. The conditions to the first tranche, which included the conclusion of the funding arrangements with Resource Capital Fund V L.P. ("RCF") were fulfilled on
signing of the Second Amended Investec Agreement, and R25.0 million was drawn by BC Dundee from the facility in December 2015. The second tranche remained subject to the Company demonstrating its plan to sell the majority of its
anthracite stockpile, which built-up as a result of depressed markets both domestically and globally. The condition was fulfilled to Investec's satisfaction during Q1 2016 and R25.0 million was drawn by BC Dundee in March 2016.

Due to continued cash constraints, Investec was approached during the first quarter of 2016 for a deferral of the term loan facility repayment due on March 31, 2016.  On March 31, 2016, BC Dundee entered into a fourth amendment to the
Investec term loan and revolving credit agreement in terms of which the repayment schedule for the term loan facility was replaced with a new schedule with principal repayments commencing on June 30, 2016. In addition, surplus cash at
quarter-end in excess of R30.0 million will be used to reduce the R80.0 million working capital facility back to R30.0 million and a clause was included restricting outflows of funds from BC Dundee to BC Corp between April 1, 2016 and
June 30, 2016, unless prior written consent was obtained from Investec.

Investec was again approached for a deferral of the term loan facility repayment due on June 30, 2016. On June 30, 2016, BC Dundee entered into a fifth amendment to the term loan and revolving credit agreement in terms of which the
repayment schedule for the term loan facility was replaced with a new schedule with principal repayments commencing on September 30, 2016. Investec has extended the restriction on the outflows of funds from BC Dundee to BC Corp to
September 30, 2016, unless prior written consent is obtained from Investec.

BC Dundee was required to meet specified debt covenants at March 31, 2016 and June 30, 2016 and was in breach of certain of these covenants at these dates. Upon breach, Investec is entitled to request early payment of the outstanding
debt, however when it became apparent that the covenants were to be breached, Investec was approached and has waived the breach of the covenants as at March 31, 2016 and June 30, 2016.

Current borrowings of R30.0 million comprise capital repayments of R7.5 million per quarter for the next 12 months.

RCF Loan
On April 6, 2016, the Company issued common shares of the Company ("Common Shares") to RCF in settlement of interest owing on the RCF convertible loan for the period January 1, 2016 to March 31, 2016. An additional 42 009 840 Common
Shares were issued at C$0.05.

RCF waived the settlement of interest owing for the quarter ended June 30, 2016 and waived any event of default as a result of not settling the interest owing. The interest will continue to accrue and will become due and payable at
September 30, 2016, in cash or Common Shares.

Issuance of Common Shares to STA Coal Mining Company Proprietary Limited ("STA")
On April 25, 2016 and July 8, 2016, the Company issued shares to STA pursuant to an equity settlement agreement entered into with STA in FY2015 ("STA Equity Settlement Agreement"). An additional 6 136 353 and 4 459 284 Common Shares
were issued at C$0.05 respectively.

TSXV Delisting Review
In January 2016, the Company was notified by the Compliance and Disclosure Department of the TSXV that it had been placed on notice for transfer to the NEX Board of the TSXV ("NEX") for failure to meet the public float continued
listing requirements of the TSXV. On July 13, 2016, the Company received notice from the TSXV that it had met the continued listing requirements of the exchange and that the TSXV had withdrawn the notice of transfer to the NEX.

South African Revenue Service ("SARS") Correspondence
During Q2 2016, BC Dundee received a letter of demand from SARS with regards to an investigation conducted by them on diesel refunds claimed by BC Dundee under the South African Customs and Excise Act, 91 of 1964. As per the
notification, the SARS Commissioner has disallowed diesel refunds in the amount of R13.8 million (including interest) for the period December 2012 to February 2016. The Company has disputed the disallowance of diesel refunds and
believes it has a defendable case.

Subsequent to June 30, 2016, Zinoju received correspondence from SARS after conducting an audit of the 2012 to 2014 tax returns, intending to disallow an expense claimed in the 2012 tax return. The total exposure is R3.0 million plus
penalties and interest. SARS has given until August 31, 2016 to respond.

Resignation of Director and Officers
On July 4, 2016, the Company announced the resignation of Mr. John Wallington as director of the Company, effective July 3, 2016.

On July 26, 2016, the Company announced the resignation of Mr. Malcolm Campbell as Chief Executive Officer and Ms. Sarah Williams as Chief Financial Officer and Corporate Secretary of the Company. Mr. Campbell and  Ms. Williams will
continue in their current roles for a period of up to three months to facilitate the implementation of an orderly succession plan.

CONSOLIDATED OPERATIONAL RESULTS FOR THE QUARTERS ENDED JUNE 30, 2016 AND JUNE 30, 2015
The operational highlights for the quarter ended June 30, 2016 compared to the quarters ended June 30, 2015 and March 31, 2016 are presented below. The Group achieved run of mine ("ROM") production of 416kt, saleable production
(excluding calcine) of 249kt and sales of 229kt for the quarter ended June 30, 2016.

                                                       6 months ended                      3 months ended
Operational results                           June 30, 2016   June 30, 2015  June 30, 2016  June 30, 2015  March 31, 2016
ROM (t)                                             792 734         995 108        415 655        522 266         377 079
- Aviemore (t)                                      244 737         240 366        126 386        121 135         118 351
- Magdalena (t)                                     547 997         754 742        289 269        401 131         258 728

Saleable production (excluding calcine) (t)         477 996         518 060        248 511        281 119         229 485
- Anthracite (t)                                    182 528         150 235         94 979         77 429          87 549
- Bituminous (t)                                    295 468         367 825        153 532        203 690         141 936

Yield on plant feed (excluding calcine) (%)           59,7%           54,6%          60,6%          57,0%           58,6%
- Anthracite (%)                                      70,4%           61,5%          72,7%          61,0%           68,1%
- Bituminous (%)                                      55,2%           53,7%          55,0%          55,6%           54,0%

Sales (t)                                           426 260         521 900        228 508        276 842         197 752
- Anthracite (t)                                    139 292         120 357         79 726         52 169          59 566
- Bituminous (t)                                    278 743         381 959        144 847        216 279         133 896
- Calcine (t)                                         8 225          19 584          3 935          8 394           4 290

Saleable inventory tons (t)                         100 859          44 849        100 859         44 849          91 875
- Anthracite (t)                                     83 980          35 215         83 980         35 215          77 678
- Bituminous (t)                                     15 020           8 697         15 020          8 697          13 659
- Calcine (t)                                         1 859             937          1 859            937             538



An analysis of the operational results for the quarter ended June 30, 2016 compared to the quarter ended  June 30, 2015 is discussed below:

ROM Production
Total ROM production for Q2 2016 was 416kt compared to 522kt produced in Q2 2015, a decrease of 20.4%.

ROM production from Magdalena underground for Q2 2016 was 289kt compared to 401kt produced in Q2 2015, a decrease of 27.9%. The decrease was mainly as a result of difficult mining conditions and pitroom constraints encountered 
during Q2 2016.

ROM production from Aviemore for Q2 2016 was 126kt compared to 121kt produced in Q2 2015, an increase of 4.3%. Aviemore continues to perform in line with historic and budgeted performance levels.

Saleable Production
Saleable coal production for Q2 2016 was 249kt (excluding calcine) compared to 281kt in Q2 2015, a decrease of 11.6%, which is in line with the decrease in bituminous ROM production and offset by an improved yield achieved on
anthracite.

Saleable calcine product was 4.9kt for Q2 2016 compared to 6.7kt in Q2 2015, a decrease of 26.5%, primarily as a result of market demand.

The total calculated yield from plant feed was 60.6% for Q2 2016 compared to 57.0% for Q2 2015. The increase in the yield is due to an improved yield achieved on anthracite.

Sales
Total sales of bituminous coal and anthracite products for Q2 2016 were 229kt compared to 277kt sold in Q2 2015, a decrease of 17.5%.

Bituminous sales for Q2 2016 were 145kt, of which 59.4% were export sales and 40.6% were domestic sales compared to 216kt sold in Q2 2015 of which 73.9% were export sales and 26.1% were domestic sales, a decrease of 33.0% which is in
line with a decrease in the bituminous production as well as a result of a constraint with regards to the availability of trains for the export market.

Anthracite sales (including calcine) for Q2 2016 were 84kt, of which 77.7% were export sales and 22.3% were domestic sales compared to 61kt sold in Q2 2015 of which 53.7% were export sales and 46.3% were domestic sales, an increase of
38.1%. The increase in anthracite sales is mainly as a result of the conclusion of a bituminous/anthracite blend contract with an export customer. Domestic sales demand remains depressed, and the Company continues to negotiate with
export customers to maintain and improve sales levels.

Health and Safety
The Group runs an integrated Safety, Health and Environment ("SHE") management system, established using the OHSAS18001 and ISO14001 frameworks as well as minimum standards, and fully supports the co-existence of safety, occupational
health and the environment within which the Group operates, in order to ensure compliance and to work towards the achievement of zero harm. The Group values the contribution of a safe and healthy workforce to its overall productivity
and is continually striving towards an incident and injury free workplace. The Group undertakes training and development initiatives and related ventures on a regular basis in order to improve each individual's outlook on safety,
health and the environment. The Group currently employs 533 employees, and has 376 contractors on site.

The Group has achieved more than five thousand fatality free production shifts at Magdalena, six thousand fatality free production shifts at the Coalfields wash plant as well as nine hundred and fifty fatality free production shifts at
Aviemore Colliery. The last fatality recorded for both Magdalena and Coalfields was in 2004. Aviemore had one fatal incident during September 2014.

The Group's safety performance has been disappointing, with nine Lost Time Injuries ("LTIs") having been reported to the date of this Interim MD&A, compared to four accidents for FY2015. An external review is currently underway and
the Group is working with the reviewers to turn this safety trend around.

CONSOLIDATED FINANCIAL RESULTS FOR THE QUARTERS ENDED JUNE 30, 2016 AND JUNE 30, 2015

                                                               6 months ended                        3 months ended
Financial results                                       June 30, 2016   June 30, 2015  June 30, 2016  June 30, 2015  March 31, 2016
Revenue (R'millions)                                            298,5           343,9          156,1          179,2           142,5
Net Revenue (R'millions) (*)                                    287,9           315,5          149,7          163,5           138,3
Adjusted EBITDA (R'millions) (*)                                 (1,5)          (32,5)          (6,1)         (12,5)            4,6

Average selling price per ton sold (R)                            700             659            683            647             721
Cash cost of sales per ton (R)                                    633             650            644            636             620

Cash utilized in operating activities (R'millions)              (23,8)          (14,5)          (6,0)         (16,6)          (17,7)
Cash utilized in investing activities (R'millions)              (11,9)          (31,5)          (5,5)         (12,3)           (6,4)
Cash generated from financing activities (R'millions)            25,0            57,5              -              -            25,0

CAD:ZAR (average)                                               11,58            9,65          11,64           9,83           11,52
USD:ZAR (average)                                               15,41           11,91          15,01          12,09           15,82

* See Non-IFRS Performance Measures section of this Interim MD&A.

An analysis of the financial results for the quarter ended June 30, 2016 compared to the quarter ended June 30, 2015 is discussed below:

Net Revenue
The Group restructured several of its offtake contracts during Q1 2016 from a free on board shipping ("FOB") basis to short-term Rand denominated free carrier ("FCA") contracts, resulting in revenue not being directly comparable
quarter on quarter. The Group has therefore compared net revenue after railage, port handling and wharfage costs, which has been defined under the Non-IFRS Performance Measures section of this Interim MD&A. Net revenues earned during
Q2 2016 were R149.7 million compared to R163.5 million earned during Q2 2015, a decrease of 8.5%. During Q2 2016, the Group's sales tons were 229kt compared to sales of 277kt for Q2 2015.

Net bituminous revenue for Q2 2016 was R91.0 million, of which R40.7 million was domestic (59kt) and R50.3 million was export (86kt), compared to R126.7 million in Q2 2015, of which R38.8 million was domestic (56kt) and R87.9 million
was export (160kt), a decrease of 28.2%.

Anthracite revenue (including calcine) for Q2 2016 was R58.7 million, of which R17.9 million was domestic (19kt) and R40.8 million was export (65kt), compared to R36.7 million in Q2 2015, of which R27.5 million was domestic (28kt) and
R9.2 million was export (33kt), an increase of 60.0%.

The decrease in net revenue for Q2 2016 compared to Q2 2015 is primarily due to an overall decrease in sales tons during the current quarter, particularly in respect of export bituminous sales as a result of lower production, offset by
an increase in export anthracite sales as noted above.

Average selling prices for Q2 2016 were R683 per ton compared to an average selling price of R647 per ton for Q2 2015.  In Q2 2016, the overall selling price per ton improved due to the negotiations of new contracts with the Group's
significant export customers.

Cost of Sales
Cost of sales for Q2 2016 was R163.9 million (cash cost of sales of R644 per ton sold) compared to R195.8 million (cash cost of sales of R636 per ton sold) for Q2 2015, a decrease of 16.3%. The Group has succeeded in reducing fixed
costs as a result of restructuring initiatives and continues to be cost conscious in ensuring expenditure is kept to a minimum in order to ensure the sustainability of the Group. Salaries and wages decreased by R16.4 million due to the
restructurings implemented during the prior year, offset by an increase in mining contractor fees of R10.9 million due to the introduction of STA as a mining contractor. Railage, port handling and wharfage costs decreased by R9.3
million, which was due to the restructuring of several offtake contracts from a FOB to FCA basis.

Cost of sales includes mining and processing costs, salaries and wages, depreciation, transportation, railage, port handling and wharfage costs.

General and administration expenses
The Company recorded general and administration expenses of R15.8 million during Q2 2016 compared to R18.2 million during Q2 2015, a 13.0% decrease quarter on quarter. The expenses include general and administration expenses relating
to BC Dundee's head office at Coalfields and the Company's corporate office in Johannesburg including Canadian expenses. The reduction in general and administration expenses is due to the restructurings implemented during the prior
year and cost control measures in place at both an operational and at a corporate level.

Other Income/(Expense) - net
During Q2 2016 the Group recorded net other income amounting to R57.3 million compared to net other expenses of R47.2 million during Q2 2015, an increase of 221.4%. Other income and expense comprises of profit on sale of assets,
foreign exchange gains/losses, discounts received, commissions paid and fair value adjustments on financial assets and conversion option liabilities.

The Company recorded a fair value adjustment gain of R56.3 million for Q2 2016 with regards to the valuation of the conversion option liability (RCF convertible loan), the warrant liability (Investec warrants) and financial assets
compared to a gain of R65.5 million recorded in Q2 2015.

A net foreign currency exchange profit of R0.3 million was recorded in Q2 2016 compared to a R2.9 million loss recorded in Q2 2015.

During Q2 2015, the Group recorded a loss on extinguishment of debt of R111.8 million relating to the RCF convertible loan. This was due to an amendment of the terms of the RCF convertible loan. No such entry has been recorded in Q2
2016.

Finance Costs/Income-net
The Group recorded net interest and accretion expense of R21.1 million during Q2 2016 compared to a net interest and accretion expense of R18.5 million for Q2 2015, an increase of 13.7%.  The majority of the increase in interest and
accretion related to the RCF convertible loan which increased in Rand terms from R339.9 million (US$27.7 million) as at June 30, 2015 to R399.2 million (US$27.0 million) as at June 30, 2016 as a result of a weaker Rand in Q2 2016 as
compared to Q2 2015.

FINANCIAL CONDITION REVIEW
A summary of the Company's financial position is shown below:

                                  June 30, 2016  December 31, 2015
                                          R'000              R'000
Property, plant and equipment           321 598            340 650
Other long-term receivables              46 015             41 517
Cash and cash equivalents                 9 648             20 365
Trade and other receivables              74 764             75 633
Other short-term receivables              1 847              1 698
Inventories                              49 922             42 226
Restricted cash                          11 200             11 200
Non-current assets held for sale              -             25 000
Total assets                            514 994            558 289

Trade and other payables                128 873            161 401
Total borrowings                        197 084            171 395
RCF loan                                357 821            424 132
Other liabilities                        22 166             17 656
Total liabilities                       705 944            774 584
Total equity                           (190 950)          (216 295)


Assets
Total assets were R515.0 million at June 30, 2016 compared to R558.3 million at December 31, 2015, a 7.8% decrease.

The most significant movement related to the sale of mining equipment which was previously disclosed as non-current assets held for sale. During the prior year, the Company entered in an agreement to sell two continuous miners to STA,
which were subsequently reclassified as non-current assets held for sale, of which one was sold in the prior financial year and the second one in Q1 2016.

Liabilities
Total liabilities were R705.9 million at June 30, 2016 compared to R774.6 million at December 31, 2015, a decrease of 8.9%.

The most significant movement related to the decrease in the RCF convertible loan, which was mainly as a result of a gain recognized on the revaluation of the conversion option liability at quarter-end, which decreased the conversion
option liability.  Borrowings increased by the R25.0 million drawn from the Investec working capital facility in Q1 2016, offset by a decrease in trade and other payables, due to the use of funds drawn from the Investec working capital
facility to settle outstanding amounts with creditors.

At June 30, 2016, the Group had outstanding debt with Investec of R216.0 million and US$28.6 million (R423.1 million) (including accrued interest) outstanding on the RCF convertible loan. The Investec debt consists of R90.0 million
outstanding on the term loan facility, R45.5 million on the bullet facility and R80.5 million outstanding on the working capital facility, all of which were fully drawn at quarter-end.

CASH FLOW REVIEW

The condensed consolidated statements of cash flows are summarized below:

                                                       6 months ended
                                               June 30, 2016  June 30, 2015
                                                       R'000          R'000
Net cash utilized in operating activities            (23 777)       (14 472)
Net cash utilized in investing activities            (11 941)       (31 538)
Net cash generated from financing activities          25 000         57 522
Change in cash and cash equivalents                  (10 718)        11 512

Operating activities
Cash utilized in operating activities during the six months ended June 30, 2016 was R23.8 million compared to R14.5 million utilized during the six months ended June 30, 2015.

The net loss for the six months ended June 30, 2016 was R0.6 million compared to a net loss of R122.3 million for the six months ended June 30, 2015. Non-cash items included in the net profit for the six month period were: depreciation
of R33.2 million (June 30, 2015: R38.1 million); net gains on the fair value adjustment on financial assets, conversion option liability and warrant liability of R66.3 million (June 30, 2015: R72.4 million); profit on disposal of
property, plant and equipment of a negligible amount (June 30, 2015: loss of R3.6 million) and net unrealized foreign exchange gains of R12.9 million (June 30, 2015: loss of R3.3 million); loss on extinguishment of debt of RNil (June
30, 2015: loss of R111.8 million).

The Group's net working capital decreased by R17.1 million for the six months ended June 30, 2016, contributing to the net cash utilized from operations, in comparison to a R19.9 million increase for the six months ended June 30, 2015.
The net change in working capital reported on the cash flow statement identifies the changes in current assets and current liabilities that occurred during the period. An increase in a liability (or a decrease in an asset) is a source
of funds; while a decrease in a liability (or an increase in an asset) is a use of funds.

Investing activities
Investing activities utilized R11.9 million in cash during the six months ended June 30, 2016 compared to cash utilized of R31.5 million during the six months ended June 30, 2015.

During the six months ended June 30, 2016, the Group spent R9.2 million on property, plant and equipment relating to sustaining capital compared to expenditure of R34.5 million for the six months ended June 30, 2015 relating to
sustaining capital and the purchase of additional equipment financed by RCF under the RCF convertible loan agreement.

Financing activities
Financing activities generated R25.0 million during the six months ended June 30, 2016 and R57.5 million during the six months ended June 30, 2015. During the six months ended June 30, 2016, the Group drew down R25.0 million from the
Investec working capital facility, which was used for working capital purposes. During the comparative period, the Group received approximately R57.5 million from RCF under the RCF convertible loan agreement which was used to purchase
additional equipment and for working capital purposes.

RELATED PARTY TRANSACTIONS

During the three months ended June 30, 2016 and June 30, 2015, the Company entered into the following transactions in the ordinary course of business with related parties:

                                        3 months ended
                                 June 30, 2016  June 30, 2015
Payments for services rendered
RCF 1                                  175 725      1 546 941


The following balances were outstanding as at June 30, 2016 and June 30, 2015:

                                        3 months ended
                                 June 30, 2016  June 30, 2015
Related party payables
RCF 1                                1 246 661      1 572 210

These amounts are unsecured, non-interest bearing with no fixed terms of repayment.

1 RCF is a related party to the Company as a result of owning a controlling investment in the Company and having a representative, Mr. David Thomas on the Board of Directors of the Company. As set out in the third amended and restated
convertible loan agreement with RCF, RCF has invoiced the Company for costs incurred relating to the loan facilities, which are disclosed above. In addition to these costs, the Company incurred interest on the RCF convertible loan
during the quarter ended June 30, 2016, which amounted to R9.8 million (June 30, 2015: R9.0 million), which has not been settled in Common Shares subsequent to quarter-end (refer to Overview of the Period and Outlook for the Group for
additional information).

Compensation of Key Management Personnel

In accordance with IAS 24 - Related-Party Disclosures, key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company directly or indirectly,
including any directors (executive and non-executive) of the Company.

The remuneration of directors and other key members of management personnel (officers) during the three months ended June 30, 2016 and June 30, 2015 was as follows:

                              3 months ended
                       June 30, 2016  June 30, 2015
Short-term benefits        3 972 926      6 171 967
Share-based payments         225 889        491 840
Total                      4 198 815      6 663 807


Amounts owing to directors and other members of key management personnel were R0.7 million as of June 30, 2016 (June 30, 2015: R8.4 million).

OUTSTANDING LEGAL PROCEEDINGS
On March 20, 2015, the Association of Mineworkers and Construction Union ("AMCU") brought an application against BC Dundee and Zinoju in the Labour Court of South Africa pertaining to the retrenchment process undertaken in terms of
Section 189A of the South Africa Labour Relations Act ("LRA") which was concluded in March 2015. The matter was heard by the Labour Court on April 14, 2015, and on April 24, 2015, the Labour Court dismissed the application brought by
AMCU with costs. AMCU appealed the judgment and the appeal was heard by the Labour Appeal Court on November 4, 2015. On May 11, 2016, the Labour Appeal Court dismissed AMCU's appeal with no order as to costs. This matter is now closed.

On April 20, 2015, the trustees of the Avemore Trust brought an application in the High Court of South Africa against, among others, the South African Minister of Mineral Resources ("The Minister"), BC Dundee and Zinoju in respect of
MR174. In terms of the application, the trustees of the Avemore Trust challenged the decision by the Minister, subsequent to an internal appeal process concluded during September 2014, to grant a converted mining right to BC Dundee and
to grant consent for the cession of the converted mining right to Zinoju. There have been various settlement offers between the parties, but should settlement not be reached, BC Dundee and Zinoju intend to oppose the application.  The
Company's external legal team, including senior counsel have advised of a defendable case in terms of Avemore Trust's approach to the matter.  The legal process on this matter is currently ongoing.

On August 27, 2015, notice was received from the Minister that Mining Right 301 ("MR301") had been withdrawn together with the approval by the Regional Manager of the Environmental Management Plan in respect of MR301 (the "Ministerial
Decision").  The reasons given by the Minister for the Ministerial Decision are procedural issues in respect of the award process, in relation to an objection received from Avemore Trust in October 2013 against the awarding of the
right. On September 15, 2015, an urgent court order was granted, pending final determination, for the Ministerial Decision to be of no force and effect, to interdict the Minister from awarding MR301 to any other party and for the
Company to continue to mine in terms of MR301. A review application was instituted by the Company in October 2015 to obtain final relief in the form of an order setting aside the Ministerial Decision. On March 23, 2016, Avemore Trust
filed a counter application for the Ministerial Decision to be remitted for consideration by the Minister.  The Company's external legal team, including senior counsel have indicated a strong likelihood of the review application being
successful. The legal process on this matter is currently ongoing.

SUBSEQUENT EVENTS

Issuance of Share Capital
Subsequent to June 30, 2016, the Company issued shares to STA pursuant to the STA Equity Settlement Agreement. An additional 4 459 284 Common Shares were issued at C$0.05.

SARS Correspondence
Subsequent to June 30, 2016, Zinoju received correspondence from SARS after conducting an audit of the 2012 to 2014 tax returns, intending to disallow an expense claimed in the 2012 tax return. The total exposure is R3.0 million plus
penalties and interest. SARS has given until August 31, 2016 to respond.

TSXV Delisting Review
In January 2016, the Company was notified by the Compliance and Disclosure Department of the TSXV that it had been placed on notice for transfer to the NEX for failure to meet the public float continued listing requirements of the
TSXV.  On July 13, 2016, the Company received notice from the TSXV that it had met the continued listing requirements of the exchange and that the TSXV had withdrawn the notice of transfer to the NEX.

Resignation of Director and Officers
On July 4, 2016, the Company announced the resignation of Mr. John Wallington as director of the Company, effective July 3, 2016.

On July 26, 2016, the Company announced the resignation of Mr. Malcolm Campbell as Chief Executive Officer and Ms. Sarah Williams as Chief Financial Officer and Corporate Secretary of the Company. Mr. Campbell and Ms. Williams will
continue in their current roles for a period of up to three months to facilitate the implementation of an orderly succession plan.

Other Matters
Except for the matters discussed above, no other matters which management believes are material to the financial affairs of the Company have occurred between the statement of financial position date and the date of approval of the
Interim Results.

OTHER RISKS AND UNCERTAINTIES

Investing in the Company involves risks that should be carefully considered. The business of the Company is speculative due to the high-risk nature of coal mining and exploration. Investors should be aware that there are various risks,
that could have a material adverse effect on, among other things, the operating results, earnings, properties, business and condition (financial or otherwise) of the Company. Refer to the annual Management's Discussion and Analysis for
the year ended December 31, 2015 for a list of the Company's risks and uncertainties.

In terms of risks relating to Mineral Legislation, a new draft South African Mining Charter was gazetted for public comment on April 15, 2016. Interested and affected parties were given 30 days to comment.  There has been no further
draft released. Consequently, the draft Mining Charter remains in draft form only and the Broad-Based Socio Economic Empowerment Charter for the Mining and Minerals Industry as amended in 2010, remains in force. This remains a risk to
the Group.

The Group has commenced salary and wage negotiations with the unions for the forthcoming year. There remains a risk of labour disruptions which could have an adverse effect on the Company's business, results of operation and financial
condition.

The Company has applied for a renewal of its export allocation at Richards Bay Coal Terminal ("RBCT") for the forthcoming year. If the export allocation is not renewed at RBCT for the forthcoming year, this may have an adverse effect
on the Company's business, results of operation and financial condition.

NON-IFRS PERFORMANCE MEASURES

The Company has included in this document certain non-IFRS performance measures that are detailed below. These non-IFRS performance measures do not have any standardized meaning prescribed by IFRS and, therefore, may not be comparable
to similar measures presented by other companies. The Company believes that, in addition to conventional measures prepared in accordance with IFRS, certain investors use this information to evaluate the Company's performance.
Accordingly, they are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. The definition for these performance measures
and reconciliation of the non-IFRS measures to reported IFRS measures are as follows:

Working Capital

Working capital includes current assets and current liabilities, excluding provisions and non-financial instruments.

                                        June 30, 2016        December 31, 2015 
                                                R'000                    R'000
Current assets
Cash and cash equivalents                       9 648                   20 365
Trade and other receivables                    74 764                   75 633
Inventories                                    49 922                   42 226
Non-interest bearing receivables                1 848                    1 698
                                              136 182                  139 922
Current liabilities
Trade and other payables                      128 874                  161 401
Current portion of borrowings                  30 000                   25 714
                                              158 874                  187 115
Net working capital                           (22 692)                 (47 193)

The Company had a working capital deficit of R22.7 million as at June 30, 2016 compared to a working capital deficit of R47.2 million at December 31, 2015. Working capital has improved due to the settlement of trade and other payables.

Consolidated Adjusted EBITDA

Consolidated adjusted EBITDA is defined as earnings before interest, tax, depreciation and adding back the following: Impairment or reversal of an impairment of an asset, fair value adjustments to financial instruments, stock-based
compensation, foreign exchange gains and losses, and non-recurring transaction expenses or income.

The reconciliation of operating profit/(loss) to adjusted EBITDA is as follows:
     
                                                                                   6 months ended                          3 months ended
R'000                                                                        June 30, 2016   June 30, 2015  June 30, 2016   June 30, 2015 March 31, 2016
Operating profit/(loss) for the period                                              44 272        (113 817)        33 634        (81 950)         10 638

Depreciation                                                                        33 183          38 112         16 840         19 781          16 343
Impairment of receivables                                                                -              (1)             -              -               -
Fair value adjustments of financial assets and conversion option liability         (66 264)        (72 387)       (56 308)       (65 543)         (9 956)
Loss on extinguishment of debt                                                           -         111 843              -        111 843               -
Stock-based compensation                                                               226             492             76            492             150
Foreign exchange (gains)/losses- net                                               (12 867)          3 307           (330)         2 868         (12 537)
Adjusted EBITDA                                                                     (1 450)        (32 452)        (6 090)       (12 508)          4 639

Net Revenue

The Group restructured several of its offtake contracts during Q1 2016 from an FOB shipping basis to short-term Rand denominated FCA contracts, resulting in revenue not being directly comparable quarter on quarter.  Below is a
reconciliation of revenue as disclosed in the Interim Results for the quarters ended June 30, 2016 and June 30, 2015 to net revenue which excludes all railage, port handling and wharfage related costs:

                                            6 months ended                         3 months ended
R'000                                 June 30, 2016   June 30, 2015  June 30, 2016  June 30, 2015  March 31, 2016
Revenue                                     298 547         343 920        156 059        179 220         142 488
Railage, port handling and wharfage          10 621          28 392          6 400         15 692           4 221
Net revenue                                 287 927         315 528        149 659        163 528         138 267

Headline earnings/(loss) per share

Headline earnings/(loss) is a profit measure required for JSE-listed companies as defined by the South African Institute of Chartered Accountants. Headline earnings/(loss) per share is a basis for measuring earnings/(loss) per share
which accounts for all the profits and losses from operational, trading, and interest activities, that have been discontinued or acquired at any point during the year. Excluded from this figure are profits or losses associated with the
sale or termination of discontinued operations, fixed assets or related businesses, or from any permanent devaluation or write off of their values.

Reconciliation of (loss)/profit for the periods to headline (loss)/profit is disclosed below:

                                                                        6 months ended                3 months ended
                                                                 June 30, 2016   June 30, 2015  June 30, 2016  June 30, 2015
(Loss)/profit for the period                                          (612 458)   (122 327 809)    11 481 103    (88 355 819)
Net (profit)/loss on disposal of property, plant and equipment           6 053       3 612 660              -        647 631
Headline (loss)/profit for the period                                 (606 406)   (118 715 149)    11 481 103    (87 708 188)

Headline (loss)/profit per share - basic and diluted                     (0,00)          (1,72)          0,03          (1,15)

SUMMARY OF SECURITES AS AT AUGUST 25, 2016

As at August 25, 2016 the following Common Shares, share options and share purchase warrants were issued and outstanding:

- 348 324 926 Common Shares;
- 5 514 048 Common Share purchase options with exercise prices ranging from C$0.0387-C$1.80 with a weighted average remaining contractual life of 3.35 years;
- 34 817 237 warrants with a strike a price of C$0.1446 maturing on July 3, 2019.

LIST OF DIRECTORS AND OFFICERS

Craig Wiggill                     Director, Chairman of the Board of Directors
Robert Francis                    Director
Edward Scholtz                    Director
David Thomas                      Director
Malcolm Campbell                  Chief Executive Officer
Sarah Williams                    Chief Financial Officer and Corporate Secretary


August 25, 2016

Sponsor: Questco Proprietary Limited


Date: 26/08/2016 09:21:00 Supplied by www.sharenet.co.za                     
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