Libra Natural Resources

Special Situations Libra Natural Resources

Buy Strategy Bearing Fruit

20 December 2006

Libra Natural Resources is a renewable
energy company with a focus on the
‘waste to energy’ sector of the market

Market cap £18.1m
Ticker LNR.L
Price 11.25p
Shares in issue
Fully diluted 167.5m
5 day volume 1.3m
52 week high/low 18.75p/8.13p
NAV/Share 6.7p
Top shareholders
Broughton Ltd 32.6%
Peter Greensmith 6.8%
Maitland Investments 5.9%
Princeton Vendors 4.4%
Other Directors 1.3%

What’s New — Since we last wrote on the company it has made a
number of significant developments both in terms of strategy and of
projects and investments.

Strategy Developments — Whilst Libra retains its overall strategy of
investing in the ‘waste to energy’ portion of the renewable energy
market, it has moved from taking 100% or majority stakes in companies in
the area to a position of making significant strategic investments in
companies which will then retain their independence and may even come
to market via IPOs of their own. The first example of this is Prometheus,
a company which we first highlighted in April when Libra was intending to
acquire it. Since then Prometheus has listed on AIM in its own right, by
way of an introduction, with Libra retaining a near 12% holding.

Project and Investment Updates — Since the Prometheus deal
Libra has reported significant progress on its two other main projects,
waste coal to ‘renewable fuel’ in the US and wood pellet manufacturing
in Canada. In the case of the wood pellet business, Westwood, Libra
recently increased its stake from 55% to 75%. Now the company has
announced a further acquisition in the wood pellet industry, Princeton,
which will be combined with its existing business and spun out.

The coal waste to energy subsidiary LNR Kincaid has begun production.
Initially it will be sell recovered coal fines, but we expect the company to
move towards full briquette production next year. We expect Libra to
seek to spin off this company too in time. Libra also holds a 1.86% stake
in Coal International.

Valuation — We believe that the current share price does not fully
reflect the value of the company, which we believe, on a full-value sum-
of-the-parts basis, is worth closer to £34m. The stake in Prometheus
alone represents £6.6m of this at the current market cap, which in turn
we believe does not reflect the potential of Prometheus.

Triggers — We expect further significant news on investments over the
next few months which will further enhance shareholder value.

Princeton Acquisition

Libra has announced the acquisition of 75% of Princeton Co-Generation
Corporation, a Canadian-based wood pellet manufacturer, for a total
consideration of £1.8m (C$4m). Of this, half will be paid in cash, with the
balance in new Libra shares issued to the vendors at a price of
12.52p/share, representing a premium to the current share price.
Princeton produces some 70,000t of wood pellets pa. In the 8 months to
31 October, Princeton made net income of C$940,000 on turnover of
C$8.9m, which annualised implies over C$1.4m for the full year to
February 2007, or a prospective P/E of just 4x. Princeton is based 150
miles from Libra’s existing wood pellet business, Westwood Fibre
Products, in British Columbia.

Combining the Businesses

The new acquisition gives Libra total production of wood pellets in excess
of 125,000tpa, making it one of the top five wood pellet businesses in
North America. The board’s intention is to combine the two businesses,
which should provide significant synergies and makes good commercial
sense given the proximity of the two companies.

A Separate Quote

Following the combining of the Westwood and Princeton businesses it is
Libra’s intention to seek a separate stock market quotation for the
combined entity. To this end Libra has entered into a heads of terms
agreement with Fortfield, an AIM-quoted investment company, who,
subject to due diligence, will buy Libra’s stake in the wood pellet
business in 1Q07. The consideration will be paid in new shares of Fortfield
to Libra. At the same time the minority investor in the wood pellet
business, Tetreau Group, will also sell its 25% to Fortfield. The strategy
for a separate quotation follows on from the successful flotation of the
Prometheus group earlier in the year, in which Libra had initially made an
investment early in 2006.


Prometheus

Prometheus Energy specialises in the production, sale and distribution of
Liquid Natural Gas (LNG), which is used as a clean burning alternative
fuel primarily in the domestic vehicle and commercial transport sectors.
The company collects the gas from landfill sites, stranded wells and
disused mines. Its technology has allowed it to develop a portable plant
which includes the conversion of the gas to its liquid form. This allows for
collection of gas from sites which are too remote for conventional pipe
networks or to connect to the main electricity grid, using the gas to
generate electricity on site, as, for example UK-based Alkane do.

Libra initially invested US$4m in Prometheus earlier in 2006. The
company was subsequently floated on AIM in September by way of an
introduction. Libra holds just short of 12% on the shares in Prometheus.
The deal represented the first fruits of a change in strategy by Libra
which had until then made investments in renewable energy projects with
the intention of taking majority stakes or complete ownership of the
projects, or minority stakes in the companies owning the projects, and
managing the projects going forward.

However, Libra re-evaluated its strategy during 1H06 and the board
decided that greater value for shareholders could be obtained by seeking
separate quotations for the companies in which it would retain a stake.

LNR Kincaid

Libra’s other current investment in the renewable energy sector is via its
joint venture LNR Kincaid, which makes fuel briquettes for the power
industry in the US. These briquettes are formed from coal extracted from
the waste piles of disused mines which is combined with 10% biomass in a
patented process. The briquettes qualify as renewable fuel under US
legislation and attract significant tax breaks as a result. The first mine
site went operational in November. We believe that Libra will seek a
separate flotation for the business in time.

Future Investments

Libra has announced that it is actively seeking further opportunities in
the renewable energy sector, including evaluation of a further acquisition
in the wood pellet industry. Other areas under consideration are biofuels
technologies, water treatment and carbon sequestration.

Risk Factors

Libra’s strategy of making investments in proven technologies in the
renewable energy sector and subsequently spinning the businesses off in
separately-quoted vehicles leave it with relatively low exposure to risk,
provided the initial due diligence is thoroughly done. We believe the
track record to date of substantial uplift in value to shareholders proves
the case for the change in strategy earlier in the year.