African Energy Resources Guernsey : Annual Report to Shareholders

africanenergyresources.com

Corporate Directory

DIRECTORS

Mr Alasdair Cooke Executive Chairman

Dr Charles (Frazer) Tabeart CEO/Executive Director

Mr Gregory (Bill) Fry Executive Director

Mr Valentine Chitalu Non-Executive Director

Mr Vincent (Ian) Masterton-Hume Non-Executive Director

Mr John Dean Non-Executive Director

Mr Philip Clark Non-Executive Director (retired 31 March 2018)

Mr Wayne Richard Trumble Non-Executive Director (retired 31 March 2018)

COMPANY SECRETARY

Mr Daniel Davis

REGISTERED OFFICE

Granite House

La Grande Rue

St Martin, Guernsey GY1 3RS

REPRESENTATIVE OFFICE IN AUSTRALIA

Suite 1, 245 Churchill Avenue Subiaco, Western Australia, 6008

SHARE REGISTER

Link Market Services Limited

Level 12, QV1 Building, 250 St Georges Terrace Perth, Western Australia, 6000

STOCK EXCHANGE LISTINGS

Australian Securities Exchange (ASX: AFR)

AUDITOR

BDO Audit (WA) Pty Limited 38 Station Street

Subiaco, Western Australia, 6008

SOLICITORS

Fairweather Corporate Lawyers 595 Stirling Highway

Cottesloe, Western Australia, 6011

BANKERS

Westpac Banking Corporation Level 6, 109 St Georges Terrace Perth, Western Australia, 6000

WEBSITEwww.africanenergyresources.com

Table of Contents

Chief Executive's Letter

Dear Shareholder

Your Company remains focused on the development of the Sese Power Project, to provide a reliable source of low-cost base-load power into the Southern Africa Power Pool. First Quantum Minerals Ltd (FQM) continued to invest in the Sese JV Project, increasing its stake to 65%. FQM must invest a further A$3 million to reach a 75% interest by 12 July 2019, following which African Energy's 25% interest in any coal-to-power project developed at the site will be loan carried by First Quantum through to production.

Progress at Sese included;

Environmental approvals for Sese were increased to 500MW of power generation (up from 300MW) plus associated increases in coal mining volumes and coal processing activities.

The resettlement action plan (RAP) was implemented at Sese to re-settle 28 households that had grazing rights and minor property within the Land Rights area leased by the project.

The Southern Africa power market continues to be volatile, as evidenced by recent widespread power cuts throughout southern Africa during industrial action at several South African power stations. Eskom's situation remains the main variable in this market.

The financial crisis within Eskom continues to dominate both the political and economic agendas with South Africa, with far reaching implications for the regional power market. With planned closures of older power stations as they reach the end of their lives, the supply side is likely to remain stretched for several years, providing opportunities for new projects to enter the market.

The urgent requirement to stop ongoing losses at Eskom is also expected to see continued rapid increases in electricity tariffs.

The increasing uncertainty over the future of Eskom has raised the interest in Zambia and Botswana to obtain alternatives for secure, low-cost generation. Both countries continued to net importers of electricity during the year, putting upward pressure on local retail electricity tariffs. In Zambia an inquiry is underway into the cost of service and is expected to recommend an increase in tariffs to reflects the cost of new generation, to ensure the financial viability of the local utility Zesco and prevent continued subsidies from government.

These ongoing problems with loss making utilities are unsustainable and steep increases in electricity tariffs seem inevitable. The increasing risk of higher prices and certainty of supply have improved the fundamentals for the development of Sese. Negotiations are in progress for the sale of power and associated transmission agreements.

In addition to power generation projects, the Company continues to evaluate coal export opportunities. Global coal price increases have led to the re-emergence of South Africa as a potential market for coal exports with positive implications for the Company's Mmamabula West project which can produce export quality coal at low prices once developed.

African Energy remains well funded, carries no debt and has low corporate overheads. Coupled with a strong development partner at the Sese JV Project, and a high-quality portfolio, the Company is well placed to develop major power projects for the region and develop an export coal business.

Frazer Tabeart,

Chief Executive Officer

Sese JointVenture

INTRODUCTION

African Energy's large coal projects in Botswana are situated close to the interconnected regional transmission grid (Figure 1), and are all capable of providing secure, low cost fuel for large-scale base-load power projects.

Figure 1. Location of African Energy's Botswana coal and power projects and the existing and planned regional transmission interconnectors

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REGIONAL POWER MARKETS

The key power markets of relevance to African Energy are Zambia, Botswana and South Africa (Figure 2). The current installed capacity in Zambia appears to exceed demand but given that some 80% of Zambia's capacity is from hydro-electric plants which are not always available, Zambia has become a net importer of power from South Africa and Mozambique.

UTILITY	OPERATING CAPACITY (MVW)	PEAK DEMAND (MW)	PEAK PLUS RESERVE MARGIN (MW)	BALANCE (MW)
ESKOM	48,463	38,897	44,732	+3,731

ZESKO	2,734	2,194	2.523	+211
PBC	489	610	702	-243

Figure 2. Capacity vs demand for key utilities (SAPP published data 2017)

Botswana has also become a net importer of power from South Africa and frequently needs to run its diesel peaking plants at great cost. Botswana's forecast operating capacity includes the yet to be fully refurbished Morupule-A plant, 100MW of solar and solar storage which has yet to be awarded and continued use of expensive diesel emergency plants (Figure 3).

BPC Forecast Supply & Demand

Figure 3. BPC Forecast supply and demand (BPC Annual Report 2017)

Eskom's current surplus is being sold to regional utilities including Zambia, Botswana and Namibia, but is coming under increasing pressure due to Eskom's financial position. This is likely to lead to significant short-term tariff increases and much lower availability of power for export, placing severe pressure on Zambia and Botswana to meet domestic demand, and providing an opportunity for new, low-cost generation to enter the market.

SESE JV PROJECT

First Quantum Minerals Ltd (FQML) became a majority equity partner at the Sese Joint Venture in 2014 and have since directly invested AUD $15m for a 65% project interest and committed to invest a further AUD $3m to increase its stake to 75%. Once this 75% interest has been earned, FQML is responsible for arranging the funds required to build the Sese integrated power project and will loan carry African Energy's residual 25% interest through to commercial production.

Over the last few years, AFR and FQML have completed several technical studies covering mining, coal preparation and power generation. A conceptual study of the proposed power station layout and design has determined that Sese coal is a suitable fuel for all common power station boiler technologies and can readily meet the required air quality and emissions standards set in the environmental approvals for the project.

These studies have also established the operating costs, capital costs and a robust financial model for a 450MW power project and the associated coal mine and coal processing facilities and have demonstrated that power from Sese could be delivered to the Zambian Copperbelt where FQML operates a large copper mining and smelting business.

The project has secured the majority of licences, permits and stakeholder approvals that are required for such an operation (see Figure 4), including:

A large-scale mining licence has been granted for an initial period of 25-years over an area of approximately 51 km2 which contains 650Mt of coal in Block-C.

A Development Approval Order which sets the fiscal framework for the project, including a 5-year tax holiday from the commencement of commercial operations followed by a 15% corporate tax rate.

Land Rights and an associated 50-year Land Lease

Agreement.

Water extraction rights from Shashe Dam.

Environmental approval for the project, which was recently increased to 500MW of power generation and the associated coal mining and coal processing volumes.