Basket case, page-6

Stumpy it is very hard to get a handle on the likely cash balance of the merged entity as we know so little about the expenditure profile for Grieve. But I have made an attempt using a couple of assumptions. But on the numbers I have, it is likely to be much lower than 9 million - probably around half this.

MEL's quarterly expenditure has been running very high - in the last five reported quarterlys Admin expenditure has only been less than $700K in two of those (Sep 13 $549K and Mar 14 $359K). It is very difficult to understand why it has been so high but I have assumed that it will probably remain around the $700K level through to completion of the merger at 30 June 2015. While there will almost certainly be a blip (upwards) in Admin costs due to the Supreme Court action last year I have not included anything extra to cover this. I have also assumed that MEL will not incur any additional Admin costs due to the proposed merger (very unlikely). However I have assumed that ELK will incur an additional $250K solely relating to merger costs - (Independent Expert Report, Court and Meeting costs). I have taken this number from the Break Fee specified in the MIA which is supposed to represent a pre-estimate of those costs.

Even after the merger we are still left with organisations supporting two listed ASX companies and a quarterly Admin expenditure alone of around AUD1.15 million. It would even be interesting to know what was the plan for the two CEOs who are both on contracts with 6 months notice.

On my calculations, at the date of the merger June 30, 2015, the merged entity will only have around AUD3.5 million cash on hand without the additional funds that MEL propose to raise. If ELK does manage to complete the sale of the crude oil pipeline, the total could be up to a maximum of AUD6.0 million.

This is far short of what would be required to support a Grieve project that is unlikely to deliver any cash flow until 2018 or to underwrite the start of any new project - say Singleton.

As I have noted before, I believe it will be very difficult for ELK to dispose of the Grieve pipeline - Denbury has not yet agreed to use it to transport their share of the crude from Grieve, in any event there will be no revenue from the pipeline till March 2017 and it still requires work to complete the refurbishment. And on any reasonable time line, 30 June 2015 is way too early to assume for the payment of a settlement (if any) from the NSW Government.