Ann: Chairman's Letter to Noteholders, page-7

Dear ASX,

I write to you in relation to the following:

• The inability for Noteholders of Antares Energy Limited (AZZ) to make an informed decision on whether or not to approve the Resolutions scheduled for the Meeting on 31 March 2016 (including the information requirements to make such a decision based on a Noteholders’ risk appetite)
• The possible referral to ASIC (ref xxx)

I refer to the following documents:

• ‘RE Breach of ASX Listing Rule 3.1.’ - Emails to ASX (attached)
• ‘RE Breach of ASX Listing Rule 3.1 Response’ – Email from ASX to xxx (ref Cxxx) (attached)
• Announcement 1 – ‘ANTARES ENERGY EXECUTES PURCHASE AND SALE AGREEMENTS NORTHERN STAR 148,788,560 USD BIG STAR 105,069,420 USD’, Antares Energy Limited , 07/09/15
• Announcement 2 – ‘PURCHASE AND SALE AGREEMENTS NORTHERN STAR & BIG STAR CLARIFICATION OF TERMS’, Antares Energy Limited, 10/09/15
• Announcement 3 – ‘ANTARES ENERGY LIMITED (COMPANY OR ANTARES OR AZZ): ASX AWARE QUERY’, Antares Energy Limited, 22/03/16
• Announcement 4 – ‘COMPANY UPDATE AND ADDENDUM TO NOTICE OF NOTEHOLDERS MEETING’, Antares Energy Limited, 24/03/16
• Announcement 5 – ‘CHAIRMAN’S LETTER TO NOTEHOLDERS’ - Antares Energy Limited, 28/03/16

Background

• AZZ released an announcement to the market stating that ‘There are no conditions precedent to be effected prior to settlement.’ on 10/09/2015 (refer to Announcement 2, and ref XXX from ASX to Xxx).
  • Based on a 38.4 (Announcement 3) it appears as though ASX are of the belief that there were in fact conditions precedent. ASX requested “statement correcting the Company's previous disclosure that completion of the sale of the Assets was not subject to any conditions precedent and including in the Draft Shareholders Notice of Meeting the conditions precedent to completion contained in the Sale Agreements.”
  • I believe it is therefore imperative that AZZ disclose a full copy of the executed sale and purchase to the market, so that market participants are able to understand whether or not there were conditions precedent upon which they based their investment decision.
• Announcement 3 indicates that the 'agreements remain on foot' with Wade Energy Corporation (Wade).
  • What are the material terms to this agreement (further reasoning as to why a copy of this US$250M agreement should be disclosed to the market)
  • Is AZZ aware of the terms that Wade are having difficulty agreeing (e.g. are they not happy with the quality of AZZ’s assets, are they having difficulty raising financing).
  • Has AZZ asked Wade, at what price they would be willing to purchase the assets? Given the liquidity issues that AZZ are having, it is imperative that noteholders and shareholders understand whether AZZ has rejected a reasonable offer that would alleviate its liquidity concerns
• Other information that AZZ should be required to disclose that a reasonable person would expect to have a material effect on the price or value of the entity’s securities:
  • Capital expenditure forecasts required to maintain its leases. AZZ’s value is dependent on it being able to maintain its leases – therefore it is important to understand what this capital expenditure requirements are in order to assess the likelihood of AZZ being able to maintain then, given its current liquidity position
  • Lease expiry dates – It is important that market participants are able to understand when AZZ’s leases lapse to ascertain the impact this has on AZZ’s asset value
  • How AZZ plans to fund the capital expenditure on leases, and net operating outflow.
  • What due diligence was conducted on the counterparty (Wade) prior to announcing a US$250M sale and purchase agreement to the market (given that AZZ was trading at a market cap of AUD$24M prior to this announcement) (specifically in relation to the ability for Wade to fund the acquisition with cash) given the reset date of 31 October 2015. A reasonable person would expect the actions (or inactions) of management to have a bearing on the riskiness and therefore price of a security. The likelihood of completion is also a risk that could be assessed based on any information made available on counterparty due diligence conducted.
• In Announcement 4, AZZ state “The sales process was extremely thorough and KLR was proactive in bringing in over 250 Permian Basin pre-qualified potential buyers. The process proceeded from December 2015 through January and February 2016; months in which an oil price of less than US$27 a barrel was endured. The process yielded significant interest in the Company's assets and a great deal of positive feedback. However, the low and volatile oil price meant that receipt of a bid was not achieved”
  • AZZ announced an executed sale and purchase agreement for US$250M on 07,09/15 and now the above statements alludes to the assets having an indeterminable market value (based on the non-receipt of a bid). This suits AZZ in achieving a favourable vote for Resolution 1 (the extension of the notes). As such, I believe it would be prudent that AZZ release to the market any Information Memorandum presented to prospective purchasers including any price expectations that were imposed on prospective buyers (that may have resulted in not a single bid being received).
• In Announcement 5, AZZ state “The Board of Directors and I believe Noteholders should vote against Resolution Two for the following reasons: 1. The Resolution will not achieve a sale. 2.The Resolution will not achieve a joint venture. 3.The Resolution will not achieve a refinance.”
  • AZZ should be requested to clarify the above statement as Resolution 2 relates to the Appointment of the Independent Investigator to conduct an independent business review and written report to the Trustee to be completed within fifteen (15) Business Days of the initial appointment of the Independent Investigator, or such further time as the Trustee may determine. The inference that the appointment of the Independent Investigator will not achieve a sale does not follow, given the scope of engagement of 15 days.

Summary

In order for Noteholders to be able to make an informed decision about the risk / reward of voting for (or against) the Resolution at the Noteholder’s meeting on the 31st March 2016, the following material information should be disclosed.

1. A full copy of the executed sale and purchase agreement with Wade Energy Corporation for US$250M dated on or around 07/09/15 including any amendments to the original agreement to the one that is ‘still on foot’
2. Correspondence between AZZ and Wade Energy Corporation showing that have at least asked Wade Energy Corporation at what price they would be willing to complete the executed sale and purchase agreement
3. Details of any counterparty due diligence conducted on Wade Energy Corporation
4. Capital expenditure forecasts required for AZZ to maintain its leases
5. Lease expiry dates by acreage and location
6. How AZZ plans to fund the capital expenditure on leases, and net operating outflow (specifically the dilutionary impact this would have to Noteholders)
7. A copy of any Information Memorandum or material provided by KLR Group to the 250 Permian Basin pre-qualified potential buyers including what pre-conditions were imposed on prospective buyers in submitting a formal offer.
8. Clarification from AZZ as to the reasons why the approval of Resolution for the appointment of an Independent Investigator (conducted over a 15 Business Day period) would result in AZZ definitely not being able to achieve a sale.

In the absence of the above information, Noteholders would be voting without fully understanding the implications to their risk appetite.

In the correspondence received from ASX (ref XXX), ASX alluded to the possible referral to ASIC. Given that I made my investment decision based on Announcement 1, Announcement 2 and the response from ASX (ref XXX), if this matter were to be referred to ASIC I would be more than willing to liaise directly with them to assist in their investigation.

To this extent, I still feel there are many unanswered questions that AZZ should ultimately be held accountable in order to uphold the market integrity of financial markets:

• What counterparty due diligence (if any) was conducted on Wade Energy Corporation, particularly before making a material announcement in regards to a US$250M executed sale and purchase agreement.
• Were there any conditions precedent to the executed sale and purchase agreement? At an absolute minimum is appears as though the approval of the material asset sale should have been a condition precedent, as well as the ability to Wade Energy Corporation to fund the consideration.
• What material risks were evident at the time of making Announcement 1 or Announcement 2?
• Why details of any material clauses in the sale and purchase agreement were not released to the market. Specifically, the termination rights and whether (or not) AZZ or Wade Energy Corporation had termination rights.
• Confirmation as to why the quarterly report as at 30 June 2015 (or any prior or subsequent quarterly reports) did not state that the convertible notes have a reset date of 31 October 2015 in the notes to the convertible notes?
• AZZ only informed the market in relation to an update of the sale process (including the inability to pay Noteholders on the reset date of 31 March 2015) via announcement ‘Antares Energy Limited (AZZ)- Noteholder Notice of Meeting’, 04/04/15. However, ABW stated the following on 29/02/16 “The Master Fund holds Antares Energy Limited Convertible Notes (ASX Code: AZZG)(Antares Notes) which have been suspended from trading and are, consequently, currently illiquid. The note is due to be repaid on 31st March 2016, but information has become available to us which leads us to believe there is a possibility that repayment will not occur on this date and therefore we are unable to accurately determine a value for the Antares Notes”. Did AZZ release information to ABW prior to releasing to the market?

Until these questions are answered I do feel that the market integrity has been breached at the expense of market participants. The onus should neither be on finance professionals nor the ASX to ensure sufficient due diligence is conducted by management prior to making announcements with a materiality of over 10x a security’s market capitalisation. It is time that ASIC seek full accountability to ensure that sufficient due diligence is exercised in future and set a strong precedent to restore and uphold market integrity for the reasonable market participant that does not have knowledge of the ASX Listing Rules.

Happy to discuss further on xxxxx or via email

Kind Regards
Xxx