AnaeCo : Response to ASX Listing Rule 12.2 Query

8 September 2017

Ms A Sinniah

Senior Adviser, Listings Compliance (Perth) ASX Compliance Pty Limited

Level 40, Central Park

152 - 158 St Georges Terrace

Perth WA 6000

Dear Anjuli,

RE: AnaeCo Limited (AnaeCo or the Company)

We refer to your letter dated 4 September 2017 (your letter) and respond to your questions below. The numbering of our responses follows the numbering of the questions in your letter.

Unless expressed to the contrary, capitalised terms used in this letter have the same meaning given to those terms in your letter.

Throughout this letter XEPT Transaction means the purchase by Xiaoqing Environmental Protection Technology Co Ltd (XEPT) of the major portion of a loan owed by AnaeCo to Monadelphous Group Limited (MND) and the conversion of that loan, and the residual loan owed to Monadelphous, into equity, as is more fully described in the Notice of Extraordinary General Meeting (Notice of EGM) of AnaeCo shareholders dated 15 September 2016.

Responses to ASX questions

1. We confirm that, in the directors' opinion, the 2017 Annual Financial Report

2. complies with the relevant Accounting Standards, and

3. gives a true and fair view of the financial performance and financial position of the Company.

4. Not a question.

5. Not a question.

6. The directors consider the Company to be a going concern because:

7. whilst the Tripartite Deed of Sale and Cooperation remains current AnaeCo's funding requirements will be met through the MND loan facility;

8. whilst the Tripartite Deed of Sale and Cooperation remains current MND must not dispose or agree to dispose of its right, title or interest in the loan; take any enforcement action under the loan or security; or terminate, enforce or waive the terms of the loan or security, in each case without the prior written consent of XEPT;

9. pursuant to the terms of the Tripartite Deed of Sale and Cooperation, at completion all indebtedness to MND will either be converted to equity or forgiven, resulting in AnaeCo being debt free with free cash on hand of $3.7 million; and

10. we have no evidence that either MND as Seller or XEPT as Buyer, does not intend to complete the transaction.

    1

11. As at the date of this letter, the parties continue to work towards completion of the XEPT Transaction, with the only certain steps remaining under the Tripartite Deed of Sale and Cooperation, being:

    • XEPT as Buyer satisfying regulatory requirements under MOFCOM's (Ministry of Commerce of the People's Republic of China) Administrative Measures for Overseas Investment (2014) and NDRC's (National Development and Reform Commission of the People's Republic of China) Administrative Measures for Verification and Registration on Overseas Projects, and

    • the parties proceeding to settlement.

    Regarding the second part of question 5, the Company is not in a position to make 'anticipations' in respect of the activities of MND as Seller and XEPT as Buyer, being separate entities to AnaeCo, and in particular we do not speculate whether the XEPT Transaction will complete by 30 September.

12. Having taken advice from our legal advisers and the Independent Expert who prepared the Independent Expert's Report (IER) for the October 2016 shareholder meeting, the AnaeCo board does not intend to seek to refresh the shareholder approvals. The reasons for this approach are:

13. there is no cut-off date for the approvals to remain valid;

14. other than extensions to the date for completion there have been no material changes or variations to the terms and conditions of the XEPT Transaction;

15. the underlying facts and circumstances surrounding the XEPT Transaction remain materially the same as they were in October 2016 other than the fact that AnaeCo's indebtedness to MND has increased; and

16. the terms and structure of the transaction mean that the increased indebtedness has no bearing on the debt to equity conversion and the outcome for non-associated shareholders. After consulting with the Independent Expert we have concluded that a further IER would not alter any of the opinions as to the fairness or reasonableness of the transaction relative to the original IER.

    Given all of the above, and the Company's current financial circumstances, the Company considers the cost and expense of seeking to refresh the shareholder approvals would be a waste of shareholder funds and time.

17. If the XEPT Transaction completes AnaeCo will not need to undertake a capital raising in the short term because AnaeCo will be debt free and will have $3.7 million in free cash which should be sufficient to meet the Company's business objectives for the succeeding 12 months.

18. If the XEPT Transaction is terminated AnaeCo's ability to remain a viable business and a going concern will be dependent on the continued support of MND as secured lender.

19. Completion of the XEPT Transaction is expected to have significant consequences for the Company's ability to commercialise its intellectual property and generate future sales. Precisely how AnaeCo and XEPT will collaborate on business development, marketing and execution of work has yet to be settled, but we expect there to be substantial interaction between the two organisations. In the Australian market AnaeCo continues to seek out opportunities to provide project and engineering solutions to the solid waste industry, leveraging off our technical expertise and experience in completing the Shenton Park AWT Plant.

20. This development expenditure is being amortised over a 10 year period and will be fully amortised by 2020. The development expenditure should be recovered by commercialisation of the intellectual property over this term, subject of course to the annual impairment review in accordance with the accounting policies.

    We note that the auditor's statement regarding being unable to obtain sufficient audit evidence regarding recovery of this intangible asset (being a non-current asset) is an extension of its conclusion regarding whether the Company is a going concern. In future reporting periods it will be AnaeCo's intention to demonstrate to the auditor that it is a going concern.

21. The receivable of $400,000 is due from XEPT for design engineering services performed during May and June 2017 pursuant to a separate agreement. If the XEPT Transaction does not complete this receivable may need to be provided for as a doubtful debt.

22. AnaeCo fully appreciates that its financial condition is heavily dependent on the outcome of the XEPT Transaction. In the absence of evidence to the contrary we consider it reasonable and appropriate to present the financial statements on the basis that we expect the transaction to proceed (subject to completion of the remaining steps noted in our response to question 5). We have made every effort to ensure that our shareholders and the market in general has access to information to properly understand the XEPT Transaction, including the risks and consequences of the transaction failing to proceed. Given the adequacy of the disclosure we see no reason why users of this information should be prevented from making their own investment or divestment decisions regarding a shareholding in AnaeCo.

23. Not applicable.

24. We shall endeavour to execute all of our business objectives, commercialise our intellectual property and win revenue generating business to become cash flow positive.

25. We confirm that the Company is in compliance with the Listing Rules and, in particular Listing Rule 3.1.

26. Yours sincerely

    David Lymburn Managing Director

    4 September 2017

    Mr David Lymburn Managing Director Anaeco Limited

    3 Turner Avenue

    BENTLEY WA 6102

    By email: [e-mail]

    Dear Mr Lymburn

    ANAECO LIMITED (the "Company")

    ASX Limited ("ASX") refers to the following.

27. The Company's financial statements for the Year ended 30 June 2017, released to the market on 30 August 2017 (the "2017 Annual Report").

28. The Independent Auditor's Report on pages 47-49 of the Accounts ("Auditor's Report") which includes the following Disclaimer of Opinion ("2017 Disclaimer of Opinion"):

"Disclaimer of opinion

We were engaged to audit the financial report of AnaeCo Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2017, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors' declaration. We do not express an opinion on the accompanying financial report of the Group. Because of the significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on this financial report.

Basis for Disclaimer of review conclusion:

We draw attention to Note 2(a) in the financial report which indicates that the Group incurred losses of

$5,824,167 during the year ended 30 June 2017 and at that date, its current liabilities exceeded its current assets by $20,259,885. As at the date of this report, we have been unable to obtain evidence which would provide sufficient appropriate audit evidence as to whether the Group can achieve the

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