Gastar Exploration to acquire brown coal assets in Victoria, Australia

Gastar Exploration to acquire brown coal assets in Victoria, Australia

Gastar Exploration Ltd. has executed a Letter of Intent to acquire up to a 50% interest in rights attaching to brown coal discoveries within the area of Exploration License 4416. EL 4416 is located in the Latrobe Valley, Victoria, Australia. The Latrobe Valley is recognized as one of the world’s largest brown coal deposits. EL 4416 covers approximately 1.0 million acres that have been independently estimated to contain in excess of 10 billion metric tons of economic brown coal resources.

The terms of the non-binding Letter of Intent call for Gastar to pay the sellers and current holders of certain brown coal rights to EL 4416, CBM Resources PTY LTD and Victoria Coal Resources, LLC (together referred to as “VCR”), both subsidiaries of Geostar Corporation, a substantial shareholder in Gastar, $30 million in cash in a series of payments commencing with a $7.5 million payment that has been placed in escrow and will be released upon the satisfaction of certain conditions including the perfection of security interests for Gastar’s senior secured notes holders. The initial payment would be followed by a $7.5 million payment on or before October 1, 2006 and a final $15 million payment on or before February 15, 2007. Gastar’s percentage interest will increase with each payment, up to the 50% level.

Under the proposed arrangement, VCR would initially act as Project Operator, providing Gastar with independent third-party feasibility studies for the development of demonstration and/or pilot projects to utilize various portions of the brown coal resources. These project feasibility studies will examine the economic and commercial viability of certain technologies for the production and sale of upgraded low-moisture coal products, the manufacture of high grade steel using treated and reformed brown coals as feedstock in a low cost, single step process, and various other clean coal technologies. If Gastar elects to pursue one of these projects, based upon its independent assessment of the feasibility studies, Gastar would fund up to the initial $50 million for such things as the development and expansion of the current pilot facilities for upgraded low-moisture coal production and a pilot retort for high grade steel production. Further, if Gastar elects to participate in a Coal-to-Liquids (CTL) project based on a feasibility study required to be provided by VCR, Gastar would fund up to the initial $150 million for engineering and development of such a CTL project, along with a $1 per metric ton Participation Payment (based upon the gross brown coal reserves attributable to the applicable feasibility studies), payable to VCR upon completion of the spending commitment. The first $100 million of any such participation Payment to VCR would be paid in cash over a two year period, with the next $150 million to be paid, at Gastar’s election, in either cash or Gastar common shares, with the balance, if any, to be paid as a 2.5% royalty on the gross value of the end products from the project or projects. Gastar and VCR intend to involve larger industry partners in the development of potential CTL projects.

Should Gastar elect not to make any of the subsequent acquisition payments for brown coal rights beyond the initial $7.5 million payment, VCR will have the option to re-acquire the initial interests assigned to Gastar at Gastar’s $7.5 million acquisition cost plus any development cost incurred by Gastar to that time. If Gastar has made the subsequent acquisition payments and thereafter elects not to participate in the initial project, Gastar is obligated to reimburse VCR for one half of certain costs of the initial feasibility study, limited to $5 million.


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