Ann: Notice of Meeting, Executive Incentive Plan and option issue, page-69

1. Farjoy holds almost 11% of the share capital of FAR.
2. It has the most to lose from dilution.
3. It supports the grant of options to Directors, in the terms proposed.
4. All other things being equal, the dilutive effect upon exercise (i.e. conversion to shares) will be up to 2%.
5. The options will not be converted unless two events occur: commerciality of Senegal, and an increase in share price above a price to be fixed at 130% of July's price (the conversion price). The second event is discretionary, because in theory once the first hurdle is mounted the option holder could convert for less but would not do so if she or he acted rationally, as the shares must be purchased for the conversion price. The options are 'free' (in reality they come at a price), but the shares are not.
6. The option holders cannot behave as any other shareholder, because as Directors they are required to disclose to the market immediately any conversion, purchase or sale of shares. An unexplained sale of a converted share by a Director (and particularly an executive Director) will cause the share price to plummet. Option arbitrage (e.g. conversion and sale once the options are in the money) is therefore out of the question. Already, the Directors are deprived of a property right, because they are not 'free' to deal with the asset like others.
7. The Directors, acting rationally, would only convert where a. the share price is higher than the conversion price, b. that higher price is likely to be sustained, as the Director must hold not sell and c. at the latest possible time, as time is money.
8. There is an evidence base for this hypothesis if you examine the behaviour of executives etc holding unlisted options in FAR, which have been in the money for months but are only now being exercised as the option expiry date looms.
9. It is therefore in the best interests of the Directors to a. exercise their options close to expiry (2018), b. maintain and increase the share price for as long and as high as possible (there may be some unforeseeable event such as a takeover, illness etc requiring immediate conversion, and hence an incentive to maintain the price throughout the option life) and c. continue in office.
10. A well-constructed option is a handcuff as well as a handshake.
11. The maintenance of a share price at 30% above present over 3 years is also at or above the hurdle rate of return for most investments, if those kind of comparisons excite.

For these reasons, Farjoy considers that the grant of the Director options will be a powerful incentive to increase the value of the company, far exceeding the minute dilution involved.

Tim Robertson
Managing Director/Secretary
Farjoy Pty Ltd