EastCoal Announces Fiscal Second Quarter 2013 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Aug 29, 2013) - EastCoal Inc. (TSX VENTURE:ECX)(AIM:ECX) ("EastCoal" or the "Company") announces its unaudited interim condensed consolidated financial statements for the three and six months ended June 30, 2013. These are provided in two sections below:

1. Management Discussion and Analysis of East Coal; and
2. Unaudited interim condensed consolidated financial statements for the three and six months ended June 30, 2013.

A copy of the above can be found on the Company's website: www.eastcoal.ca.

About EastCoal Inc.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

This press release contains projections and forward-looking information that involve various risks and uncertainties regarding future events. Such forward-looking information can include without limitation statements based on current expectations involving a number of risks and uncertainties and are not guarantees of future performance. There are numerous risks and uncertainties that could cause actual results to differ materially from those expressed in the forward looking information. These and all subsequent written and oral forward-looking information are based on estimates and opinions on the dates they are made and are expressly qualified in their entirety by this notice. Except as required by law, the Company assumes no obligation to update forward-looking information should circumstances or management's estimates or opinions change.

Management Discussion and Analysis

For the Three and Six Months Ended June 30, 2013

This Management Discussion and Analysis ("MD&A") of EastCoal Inc. (the "Company" or "EastCoal") provides analysis of the Company's financial results for the three and six months ended June 30, 2013 and should be read in conjunction with the accompanying unaudited interim condensed consolidated financial statements and notes thereto for the three and six months ended June 30, 2013 ("Financial Statements") and the Company's Annual Information Form ("AIF") all of which are available on SEDAR at www.sedar.com. The MD&A is current as at August 29, 2013, the date of preparation.

The June 30, 2013 financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") applicable to the preparation of interim financial statements. All amounts are expressed in Canadian dollars, unless otherwise stated.

Certain statements made may constitute forward-looking statements. Such statements involve a number of known and unknown risks, uncertainties and other factors. Actual results, performance and achievements may be materially different from those expressed or implied by these forward-looking statements.

1 Highlights

• Loss of $1,233,134 for continued operations during the three months ended June 30, 2013 (2012: $101,466). Loss from discontinued operations during the same period of $18,365,659 mainly resulting from further impairment of and accounting adjustments for the Menzhinsky operation. These losses do not have any cash impact on the Company.
• Loss per share of $0.02 for the three month period ended June 30, 2013 (2012: $0.00), excluding losses from discontinued operations.
• The insolvency application process for Inter-Invest LLC ("Inter-Invest") is ongoing and it is expected that Inter-Invest will formally enter liquidation in September 2013. Upon entering liquidation, it is expected that the liabilities of Inter-Invest included in the consolidated accounts totaling $18,774,000 will no longer be recognized in the Company's financial statements resulting in a one-off gain for accounting purposes equal to the amount of these consolidated liabilities.
• On June 7, 2013 the Company completed a private placement of 385,000,000 shares on a pre-consolidation basis for gross proceeds of $7,700,000;
• Production at the Company's Verticalnaya North Project ("VNP") commenced in late July 2013. The Company is now planning to ramp up production to an initial 4,000 tonnes per month and then to 11,000 tonnes per month in Q4 2013 by applying conventional mining methods and locally manufactured equipment. The delay in ramp up to the 11,000 tonne per month level is due to the employment of mining staff taking longer than expected but this process is now well underway.
• The Company is in the process of preparing an updated technical report in compliance with the requirements of National Instrument 43-101 ("NI43-101") for its Verticalnaya property, which it expects to file shortly. Subject to the filing of the updated 43-101, the Company will proceed with its rights offering to existing shareholders, though there can be no certainty on the outcome of the rights offer. If unsuccessful the Company will have to pursue alternative sources of funding.
• On August 8, 2013 the Company consolidated its shares on a ratio of ten (10) pre-consolidation common shares to one (1) post-consolidation common share, consolidating the Company's 728,048,493 then issued and outstanding common shares to 72,804,849 common shares following the consolidation (the "Consolidation").

2 Business Overview

EastCoal Inc. is quoted on the TSX Venture Exchange ("TSX-V" or the "Exchange") and traded on AIM under the symbol "ECX". The Company has one major asset, the Verticalnaya Mining Complex ("Verticalnaya") in South Eastern Ukraine. Verticalnaya comprises two operations; the existing H8 Deep Mine ("Verticalnaya Mine") and the Verticalnaya North Project ("VNP"), a newly developed incline mine just north of the Verticalnaya Mine. In October 2010, following a period of planning, permitting, and detailed improvements, the Company commenced construction of the VNP as a source of early coal production. To date, 2.7 kilometers of drift development has been completed at VNP. These drifts access the shallower H₁₁ and H₁₁^B coal seams.

Production from VNP commenced in July, 2013. Target production from the both the Verticalnaya Mine and the VNP is circa 2.5 million tonnes per annum ("Mtpa") in aggregate of high quality anthracite for domestic and export markets.

In 2011, the Company, after commencing to de-water the lower levels of the Verticalnaya Mine, began rehabilitating previously flooded roadways. The roadways are generally in good condition, requiring only minor repair in some sections. As the water level is lowered, the Company will re-establish a ventilation circuit and repair the current conveyor route that will eventually transport coal by high-speed conveyor from the deep H₈ seam to surface.

From the outset, the Company has required the introduction and maintenance of safety procedures in line with best global industry practice. International safety consultants have visited Ukraine operations and their recommendations have been and are being implemented. Safety standards are being received favorably by the workforce. Verticalnaya Mine and VNP are categorized as non-gassy, with low explosive risk.

As previously disclosed, on May 22, 2013 the Board resolved to place Inter-Invest LLC ("Inter-Invest"), the wholly owned subsidiary that owns the Menzhinsky operations into liquidation. The insolvency application process is ongoing and it is expected that Inter-Invest will formally enter liquidation in September 2013.

2.1 The vision

The Company's vision is to become a leading producer of high quality coal in Ukraine.

The Company, deploying a strong and experienced team to develop value from Verticalnaya, is the leader of western investment into the Donbass coal basin - an area which has been identified as having tremendous potential.

2.2 Verticalnaya

2.2.1 Introduction

Verticalnaya comprises two operations, the Verticalnaya Mine accessing the lower level H₈ seam and VNP, an incline mine in development accessing the upper level H₁₁ and H_11B seams.

At VNP, the Company has completed the portals and in excess of 2,700 meters of drift and roadway development and commenced the drivage of the two surface drifts to access the H₁₁ and H₁₁^B seams where first coal production commenced in July 2013.

The Company is in the process of preparing an updated technical report in compliance with the requirements of National Instrument 43-101 ("NI43-101") for its Verticalnaya property (the "Updated Report"). This report will be made available on SEDAR at www.sedar.com and the Company's website at www.eastcoal.ca in due course.

The Company filed the "Amended Pre-Feasibility Study Report on the Verticalnaya Mine, Ukraine" by IMC Group Consulting Ltd. ("IMC"), dated June 2012 (the "Previous Report") on July 9, 2012. As part of the Company's admission to trading on the AIM market of the London Stock Exchange plc and in accordance with the AIM rules, the Company filed a Competent Persons Report (the "CPR"). The CPR discloses a 26% increase (from the Previous Report) in JORC-compliant total resources (inclusive of reserves), and an amended economic analysis, with a downgrade of some reserves from proved to probable class. The financial evaluation included inter alia a lower assumed sales price for coal, resulting in a reduction in net present value.

Since the Company disclosed amended estimates and analysis in the CPR and in investor materials, for NI43-101 purposes the Previous Report is no longer current and the aggregate changes are material changes in relation to the Company which have triggered a requirement to file an updated technical report in compliance with the requirements of NI43-101.

The Company has retained IMC who are in the process of preparing and filing the Updated Report which should be available in due course. Because of the material changes in relation to the Company detailed in the CPR which have required an update to the Previous Report, investors and shareholders should not place undue reliance on the Previous Report.

Upon publication of the Updated Report, the Company will re-file this MD&A, the MD&A for the three months ended June 30, 2013 and also re-file its Annual Information Form for the year ended December 31, 2012 on SEDAR to reflect the changes to the Company's technical disclosure set out in the Updated Report.

2.2.2 Location

Verticalnaya is located in the Donbass region. A number of settlements lie in the vicinity including the towns of Lunacharsk, Leninskiy, Volodarsk, Ustinovka and the villages of Malomedvezhje and Fedorovka; the latter is located only 1.5 kilometers from the mine.

EastCoal has been issued a mining license which allows the Company to extract coal from seams H₁₁, H₁₁^B, H₁₀^B, H₈ and H₈^B within the license area. This license is valid for 20 years from the date of issue and expires on July 19, 2027.

EastCoal leases a land area totaling 23.73 Ha on which the main mine and process facilities, rail and road infrastructure and waste storage areas are located. The site leased for the VNP mine access and surface facilities occupies a slightly elevated position approximately 1.5 kilometers north-west of the main Verticalnaya Mine site.

2.2.3 Infrastructure

The shaft mine industrial surface covers some 10.4 Ha including 3.0 Ha of approach roads. Located in a rural area it has electrical power supply, mains water, mains sewage, and good access roads already established.

The VNP mine and surface facilities are easily accessible by road from the main Verticalnaya site and located nearby is a rail line with facilities for wagon loading. A new 6 kV power supply has been installed from the main Verticalnaya mine surface sub-station to the VNP site.

The Verticalnaya Mine has two shafts. The materials shaft was installed and has been operational for the transportation of men and material since 1975. The sinking of the second shaft was completed just prior to the mine closure in 1998 and was not fully equipped or commissioned.

2.2.4 Mine History

Mining operations began initially during 1912 when coal was accessed from its outcrop point on the surface via inclined drifts locally known as "number 10 mine". In 1975, mainly for ventilation purposes, a vertical shaft was sunk down to the then lower workings at the -600 meters horizon, approximately 845 meters below surface. This shaft was then used for the transportation of men and materials. Also installed within the same shaft is a second winding facility designed to wind out waste rock from development drivage.

Several phases of exploration drilling have been completed by the ministry since 1930, the most extensive phase being during the 1970s when over 200 cored boreholes were drilled in the area of the Verticalnaya and adjacent mines.

As the mine working progressed even deeper to -1,000 meters level, approximately 1,245 meters below surface, the government provided capital investment for the sinking of a second shaft for improved ventilation and also to be utilized for the winding of material (Skip shaft). The main objective of the new shaft was to replace the long string of conveyor belts installed along the length of the existing inclined drifts.

In 1998, due to a lack of the investment required to complete the new infrastructure and maintain the mine's equipment, the managers of the Verticalnaya mine were unable to achieve the mine's coal output target. The Verticalnaya mine was considered unprofitable and closed and passed to the State Enterprise Ukruglerestructurizatsiya ("UDKR"). UDKR is responsible for the liquidation of closed mines and the management of those mines on a care and maintenance basis to enable them to act as water pumping stations to protect adjacent operating mines from increased water inflows from the closed mines.

EastCoal has leased the Verticalnaya mine until 26 May 2029 from the State Property fund. The H₈ seam was mined until the closure of the mine in 1998. No coal was previously mined from the H₁₁^B and H₁₀^B seams.

The original mine site has two existing vertical shafts through which mine water is currently being pumped in order to maintain the mine water at its current level and to protect the mine entry workings from the flooded workings below. Access to H₈ seam will eventually be gained when the water level is lowered by increased pumping.

The second site, known as the Verticalnaya North Project (VNP) site, is being used to develop two surface drifts to access the H11 seam. The VNP site is approximately 1.5 km north of the main mine site. This work commenced in 2010, the drifts have now accessed the H11 seam and work has commenced on the development of the East 1 and West 1 coal faces.

First coal from VNP was produced from the East 1 block in late July 2013, three weeks later than scheduled due to a delay in obtaining certain regulatory approvals. Initial production will be extracted using simple mining techniques and the coal produced will be toll treated at a wash plant adjacent to the mine. The Company is expected to ramp up to an initial 4,000 tonnes per month increasing to 11,000 tonnes per month during Q4 2013 applying conventional mining methods and locally manufactured equipment.

2.3 Menzhinsky

As previously disclosed, the Board of Directors resolved on 22 May 2013 to place Inter-Invest into liquidation. The insolvency application process is ongoing and it is expected that Inter-Invest will formally enter liquidation in September 2013. The Menzhinsky cash generating unit was recorded as a discontinued operation in the Company's unaudited interim condensed consolidated financial statements for the three and six months ended June 30, 2013.

2.4 Results of Operations

General and administrative expenses increased in the six months ended June 30, 2013 over the same period in 2012 predominantly as a result of the recording of various corporate and consulting costs through the income statement, which were capitalized prior to the acquisition of Menzhinsky in Q2 2012. In addition, legal and consulting fees increased as a result of the dual quotation of the Company on both the TSX-V and the AIM.

The loss for the period from discontinued operations relates to the Company's wholly owned subsidiary, Inter-Invest, which owns the Menzhinsky Mine. The recognition of the Menzhinsky cash generating unit as a discontinued operation follows the resolution by the Board of directions on May 22, 2013 to place Inter-Invest into liquidation. The assets of Inter-Invest, excluding cash, have been impaired to a value of nil to reflect the Board's view that the Company may not be able to gain any value from the disposal of the assets in liquidation. As at June 30, 2013 Inter-Invest was in the process of being placed into liquidation. Upon entering liquidation, it is expected that the consolidated liabilities of Inter-Invest totaling $18,774,000 will no longer be recognized in the Company's financial statements resulting in a one-off gain for accounting purposes.

For the three months ended June 30, 2013 the Company earned $nil of interest on its excess cash deposits compared to $7,550 for the same period in the prior year.

For the three months ended June 30, 2013 the Company incurred $25,792 of financing costs compared to $37,132 for the same period in the prior year. The decrease in financing costs was due to a reduction in the Company's convertible debt.

2.5 Development mine - Verticalnaya

The development of VNP continues as expected, although there were delays in the development as a result of the working capital challenges experienced during the quarter.

First coal production occurred in July 2013 and the Company's is planning to ramp up production in Q3 and Q4 2013.

Development costs to date at Verticalnaya are as follows:

3 Selected Annual Information

No cash dividends have been declared or paid since the date of incorporation and the Company has no present intention of paying dividends on its common shares. The Company anticipates that all available funds will be invested to finance the growth of its business.

4 Summary of Quarterly Results

Selected financial information for each of the eight most recently completed quarters are as follows:

On August 8, 2013 the Company consolidated its shares on a ratio of ten (10) pre-consolidation common shares to one (1) post-consolidation common share, consolidating the Company's 728,048,493 then issued and outstanding common shares to 72,804,849 common shares following the consolidation. The post-consolidation number of shares has been retrospectively applied for the purpose of calculating earnings per share.

5 Liquidity and Capital Resources

Production at Verticalnaya is forecast to ramp up over the remainder of 2013 and 2014. Recovery of the carrying value of the Verticalnaya assets depends on the attainment of profitable production on time and within budget, its profitable disposition and/or the introduction of a joint venture partner.

Due to operational failure and ongoing technical challenges the Board of Directors resolved on May 22, 2013 to place Inter-Invest, the wholly owned subsidiary that owns the Menzhinsky operations, into liquidation.

The Company has experienced recurring operating losses and has accumulated a deficit of $60,438,343 at June 30, 2013. For the six month period ended June 30, 2013 the Company incurred a loss of $37,654,402 and used cash in operating activities totaling $6,426,616. The loss incurred includes losses relating to discontinued operations of $37,111,000, of which $26,070,000 represents impairment of assets and a further $4,747,000 of loan adjustments. The losses relating to impairment and loan adjustments do not have a cash flow impact on the business. The Company had a working capital deficit of $16,315,173 at June 30, 2013. The working capital deficit includes liabilities of $18,773,534 relating to the discontinued operations. Upon entering liquidation, it is expected that the liabilities of Inter-Invest will no longer be recognized in the Company's financial statements. Working capital is defined as current assets less current liabilities and provides a measure of the Company's ability to settle liabilities that are due within one year with assets that are also expected to be converted into cash within one year.

The Company's continued operations are dependent upon its ability to raise additional funding, the Verticalnaya mine being able to increase production on budget and on time, and Inter-Invest being successfully placed into liquidation. The Company is currently in the process of putting together a rights offering to existing shareholders, though there can be no certainty on the outcome of the rights offer. The Company does not have any financing facilities in place. Management has taken steps to mitigate the liabilities relating to Inter-Invest and it is expected that Inter-Invest will be placed into liquidation during September 2013. Upon entering liquidation, it is expected that the liabilities of Inter-Invest will no longer be recognized in the Company's financial statements resulting in a one-off gain for accounting purposes.

There are no assurances that the Company will be successful in securing further equity financing as and when required. As a result, there are material uncertainties that the entity will be able to continue as a going concern, and realize its assets and discharge its liabilities in the normal course of business. The Financial Statements do not include adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. These adjustments may be material.

The market capitalization of the Company on August 28, 2013 was approximately $8.7 million (based on the closing price of the Company's shares recorded on the TSX-V on that date), which is significantly lower than the carrying value of the Verticalnaya mine recorded on the Company's balance sheet at June 30, 2013. Management believes that no impairment of the carrying value of the Verticalnaya mine is necessary as internal valuations support the recorded value.

Debt financing has not been used to fund the Company's property acquisitions and development activities, apart from the convertible debentures. The Company expects to make arrangements for debt financing in future. The Company does not have "standby" credit facilities, or off-balance sheet arrangements and it does not use hedges or other financial derivatives.

At June 30, 2013, the Company held cash and cash equivalents of $3,858,137 (2012 - $983,210); while short term investments in Guaranteed Investment Certificates were $nil (2012 - $10,500,000).

6 Off-Balance Sheet Arrangements

The Company does not utilize off-balance sheet arrangements.

7 Transactions with Related Parties

During the three and six months ended June 30, the Company paid or accrued:

Included in accounts payable and accrued liabilities is a total of $106,703 (December 31, 2012 - $151,224) due to related parties for office costs, directors' fees, and consulting fees and expenses. The amounts due to related parties are unsecured, non-interest bearing and have no specific terms of repayment.

On May 31, 2013 the Company entered into a short term loan agreement with Salida Capital International Corp for $350,000 to fund some immediate obligations at Verticalnaya pending completion of the private placement. The loan was repaid in June 2013 following the private placement.

8 Significant Accounting Policies and Critical Accounting Estimates

The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses for the periods reported. The Company's accounting policies are described in Note 3 to the December 31, 2012 audited consolidated financial statements.

9 Forward-Looking Statements

This MD&A contains certain forward‐looking statements. These statements relate to future events or future performance and reflect management's expectations and assumptions regarding the growth, results of operations, performance, prospects and opportunities of the Company. When used in this MD&A, such statements use words such as "may", "would", "could", "will", "expect", "believe", "plan", "anticipate", "forecast", "estimate", "predict", "potential", "budget", or the negative of these terms or other similar expressions concerning matters that are not historical fact. In particular, statements regarding the Company's future operating plans including reactivation of the development work on the ventilation and conveyor roadways and the expected timing of commencement of commercial production at the Company's Verticalnaya Mine, the expected average price of coal to be received by the Company from any off‐take arrangements, the liquidation in Ukraine of Inter-Invest and the legal and financial implications of the liquidation process to the Company, economic performance and product development efforts are or involve forward‐looking statements. These statements reflect management's expectations as of the date of such forward‐looking statement regarding the Company's future operational or financial performance and should not be read as guarantees of future performance or results. Forward‐looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward‐looking statements, including, but not limited to, the risk factors disclosed in the Company's AIF and in certain documents incorporated by reference herein. Although the Company has attempted to identify important factors that could cause actual results, performance or achievements to differ materially from those described in forward‐looking statements, there may be other factors that cause results, performance or achievements not to be as anticipated, estimated or intended. There can be no assurance that actual events, performance or results will be consistent with these forward‐looking statements and accordingly readers should not place undue reliance on forward‐looking statements. The Company assumes no obligation to update or revise forward‐looking statements to reflect new events or circumstances, except as required by law.

10 Outstanding Share data as at August 29, 2013:

a) Authorized and issued share capital:

b) Summary of warrants outstanding:

c) Summary of options outstanding:

11 Subsequent Events

11.1 Share consolidation

On August 8, 2013 the Company consolidated its shares on a ratio of ten (10) pre-consolidation common shares to one (1) post-consolidation common shares, consolidating the Company's 728,048,493 issued and outstanding common shares to 72,804,849 common shares following the consolidation.

The Company also consolidated its outstanding options and warrants on a ratio of ten (10) to one (1), with the result that each consolidated option and warrant will now entitle the holder to acquire one common share in the capital of the Company at an exercise price equal to ten (10) times its original exercise price.

12 Internal Control and Disclosure Controls Over Financial Reporting:

On November 23, 2007, the British Columbia Securities Commission exempted Venture Issuers, such as the Company, from certifying disclosure controls and procedures, as well as internal controls over financial reporting as of December 31, 2007 and thereafter. The Company is now required to file basic certificates. The Company makes no assessment relating to establishment and maintenance of disclosure controls and procedures as defined under National Instrument 52-109 as at December 31, 2012.

13 Other Information:

For additional disclosures concerning the Company's general and administrative expenses and mineral properties, please refer to the audited consolidated annual financial statements for the year ended December 31, 2012, which are available on the Company's website at www.eastcoal.ca or on SEDAR at www.sedar.com.

On August 8, 2013 the Company consolidated its shares on a ratio of ten (10) pre-consolidation common shares to one (1) post-consolidation common shares, consolidating the Company's 728,048,493 issued and outstanding common shares to 72,804,849 common shares following the consolidation. These financial statements reflect the pre-consolidated figures, however, the post-consolidation number of shares has been retrospectively applied for the purpose of calculating loss per share.

1. Corporate information and going concern

EastCoal Inc. (the "Company") was incorporated on December 15, 1986 under the laws of the Province of British Columbia, CANADA. Its principal business activity is the acquisition and development of mineral properties and its registered address is 20^th floor, 250 Howe Street, Vancouver, British Columbia, CANADA, V6C 3R8 and its head office is located at Suite 130, 889 Harbourside Drive, North Vancouver, British Columbia, CANADA, V7P 3S1.

The Company is focused on the Verticalnaya Mine located in the Donbass Region of Ukraine. The Verticalnaya Mine is an advanced anthracite coal project in the construction phase. Recovery of the carrying value of the Verticalnaya assets depends on the attainment of profitable production on time and within budget, its profitable disposition or the introduction of a joint venture partner. Due to operational failure and ongoing technical challenges the Board of Directors resolved on May 22, 2013 to place Inter-Invest LLC ("Inter-Invest"), the wholly owned subsidiary that owns the Menzhinsky operations, into liquidation.

The Company has experienced recurring operating losses and has accumulated a deficit of $60,438,343 at June 30, 2013. For the six month period ended June 30, 2013 the Company incurred a loss of $37,654,402 and used cash in operating activities totaling $6,426,616. The loss incurred includes losses relating to discontinued operations of $37,111,000, of which $26,070,000 represents impairment of assets and a further $4,747,000 of loan adjustments. The losses relating to impairment and loan adjustments do not have a cash flow impact on the business. The Company had cash and cash equivalents of $3,858,137 and a working capital deficit of $16,315,173 at June 30, 2013. The working capital deficit includes liabilities of $18,773,534 relating to the discontinued operations. Upon entering liquidation, it is expected that the liabilities of Inter-Invest will no longer be recognized in the Company's financial statements. Working capital is defined as current assets less current liabilities and provides a measure of the Company's ability to settle liabilities that are due within one year with assets that are also expected to be converted into cash within one year.

The Company's continued operations are dependent upon its ability to raise additional funding, the Verticalnaya mine being able to increase production on budget and on time, and Inter-Invest being successfully placed into liquidation. The Company is currently in the process of putting together a rights offering to existing shareholders, though there can be no certainty on the outcome of the rights offer. The Company does not have any financing facilities in place. Management has taken steps to mitigate the liabilities relating to Inter-Invest and it is expected that Inter-Invest will be placed into liquidation during September 2013. Upon entering liquidation, it is expected that the liabilities of Inter-Invest will no longer be recognized in the Company's financial statements resulting in a one-off gain for accounting purposes.

There are no assurances that the Company will be successful in securing further equity financing as and when required. As a result, there are material uncertainties that the entity will be able to continue as a going concern, and realize its assets and discharge its liabilities in the normal course of business. These consolidated financial statements do not include adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. These adjustments may be material.

2. Basis of presentation

These interim condensed consolidated financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting ("IAS 34") and follow the same accounting policies and methods of application as contained in the annual financial statements for the year ended December 31, 2012 with the exception of those outlined below. Accordingly, they should be read in conjunction with the Company's most recent annual financial statements. These interim condensed consolidated financial statements were approved by the Board of Directors on August 28, 2013.

2.1 New IFRS Pronouncements

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Company's annual consolidated financial statements for the year ended December 31, 2012, except for the adoption of new standards and interpretations effective as of January 1, 2013.

IFRS 7, "Financial instruments: Disclosure" has been amended to require additional disclosure on offsetting of financial assets and financial liabilities.

IFRS 13, "Fair Value Measurement" sets out in a single IFRS a framework for measuring fair value. IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This definition of fair value emphasizes that fair value is a market-based measurement, not an entity-specific measurement. In addition, IFRS 13 also requires specific disclosures about fair value measurement.

Amendments to IAS 19, "Employee Benefits" outlines the accounting requirements for employee benefits, including short-term benefits (e.g. wages and salaries, annual leave), post-employment benefits such as retirement benefits, other long-term benefits (e.g. long service leave) and termination benefits.

There was no material impact on the consolidated financial statements from the adoption of any of these accounting pronouncements.

Several other new standards and amendments apply for the first time in 2013. However, they do not impact the annual consolidated financial statements of the Company or the interim condensed consolidated financial statements of the Company.

2.2 Presentation of condensed consolidated interim statements

The presentation of the interim condensed consolidated statements of financial position, the interim condensed consolidated statements of loss and the interim condensed consolidated statements of cash flows have changed from the year ended December 31, 2012 as the Menzhinsky cash generating unit has been reported as a discontinued operation following the resolution by the Board of Directors on May 22, 2013 to place Inter-Invest, the wholly owned subsidiary that owns the Menzhinsky operations, into liquidation.

3. Inventory

4. Mineral properties

4.1 Verticalnaya Coal Mine, Ukraine

The Verticalnaya Coal Mine is an anthracite coal mine located on the Eastern side of Ukraine. The Company acquired the rights to Verticalnaya in 2009.

4.2 Menzhinsky Coal Mine, Ukraine

5. Property, plant and equipment

Of the depreciation of $470,513 (2012 - $233,794) for the six months ended June 30, 2013, $1,145 (2012 - $10,502) was charged to the statement of loss as part of Depreciation, $337,110 (2012 - $175,936) was capitalized to mineral properties, and $132,258 (2012 - $47,356) related to discontinued operations.

6. Discontinued Operation

On May 22, 2013 the Board of directions resolved to place Inter-Invest, the wholly owned subsidiary of EastCoal Inc., that owns and operated the Menzhinsky Mine and wash plant, into administration and/or liquidation. The reason for the board decision was the continued geological and technical challenges at these operations and the resulting operating losses that the Company could no longer finance. As a result, the assets of Inter-Invest, excluding cash, have been impaired to a value of nil to reflect the Board's view that the Company may not be able to gain any value from the disposal of the assets in the administration and/or liquidation process. These financial statements do not include any future benefit from the expected derecognizing of the liabilities relating to Inter-Invest upon its liquidation. As at June 30, 2013 Inter-Invest was in the process of being placed into liquidation.

At acquisition, Inter-Invest had certain liabilities owing to a Ukrainian financial institution. The loan is unsecured, repayable in quarterly instalments of US$583,333 and bears no interest. As a result of the non-payment of instalments for the quarters ended March 31, 2013 and June 30, 2013, the Company recognised an expense of $4,746,409, in period ended June 30, 2013 which reflects additional payments required by Inter-Invest under the loan agreement.

The accumulated other comprehensive income balance at June 30, 2013 relating to Menzhinsky was $1,362,294.

7. Borrowings

7.1 Convertible debentures

7.1.1 Surrey Dynamics

On November 26, 2009, the Company acquired a 49% interest in East Coal Company from Surrey Dynamics Limited ("Surrey Dynamics") of the United Kingdom. Consideration paid was 5,000,000 common shares and an unsecured, three year, convertible US$3,000,000 debenture ("Original Debenture"), maturing on 26 November 2012 ("Original Maturity Date").

The debenture could be converted at any time during the term into 8.0 million common shares of the Company at a conversion price of US$0.3739. The principal amount bore interest at the rate of 2% over the three month USD Libor rate per annum, payable quarterly.

As the debenture was considered to be a compound financial instrument, the principal amount was allocated between liability and equity components. The equity component was determined to be a derivative liability as the conversion price of the loan is denominated in a currency other than the Company's functional currency. The fair value of the equity component was initially valued at issuance at $2,476,000 using the Black-Scholes option pricing model assuming a risk free rate of 1.88%, expected life of 3 years, volatility of 183.66% and share price of US$0.35. The debt component was initially valued at $702,500 and was accreted up to the principal balance over the term of the debenture using the effective interest method.

On November 26, 2012, by way of a Supplemental Indenture (the "Supplemental Indenture"), the Company and Surrey Dynamics amended the Original Debenture to extend the Original Maturity Date to December 17, 2012 at which point the Company would repay US$1,500,000 and enter into a new debenture for US$1,500,000 plus outstanding accrued interest on the Original Debenture (the "New Debenture"). Further on December 14, 2012, the Company paid US$800,000, plus a financing charge of $50,000, to Surrey Dynamics and agreed to extend the Original Maturity Date to January 3, 2013, at which point the Company made further payment of US$700,000 to Surrey Dynamics.

On January 3, 2013, following the repayment of US$700,000 to Surrey Dynamics, the Company and Surrey Dynamics rolled over the outstanding balance of the Original Debenture (US$1,517,174) into a new convertible debenture for a term of 2 years, an interest rate of 10%, and a conversion price of $0.23 per share ("New Debenture"). The remaining terms of the New Debenture are the same as the Original Debenture.

Under the terms of the convertible debenture, the Company may elect to prepay it prior to its maturity upon provision of 90 days written notice to the holder. Should the Company choose to issue prepayment of the debenture, Surrey Dynamics has the right to elect to (a) receive payment in cash of the principal amount and all unpaid accrued interest or (b) convert the principal and all unpaid accrued interest into common shares of the Company at a conversion price of $0.23 per share.

As the New Debenture is considered to be a compound financial instrument, the principal amount has been allocated between liability and equity components. The fair value of the equity component was valued at issuance at $614,817 using the Black-Scholes option pricing model assuming a risk free rate of 1.19%, expected life of 2 years, volatility of 80.25% and share price of $0.22. The debt component was initially valued at $902,357 and will accrete up to the principal balance over the term of the debenture using the effective interest method.

7.1.2 Aponet

On May 31, 2012, the Company acquired a 100% interest in Inter-Invest Coal LLC ("Inter-Invest") from Aponet Enterprises Limited ("Aponet") of Cyprus. Consideration paid was 4,000,000 common shares, $2 million cash, options to purchase 4,000,000 common shares of the Company at a price of $0.70 and an unsecured, four-year, convertible $4,000,000 debenture. The debenture may be converted at any time during the term into 6,153,846 common shares of the Company at a conversion price of $0.65. The principal amount bears interest at the rate of 2% over the three month USD Libor rate per annum, payable quarterly.

As the debenture is considered to be a compound financial instrument, the principal amount has been allocated between liability and equity components. The debt component was initially valued at $3,091,684 and will accrete up to the principal balance over the term of the debenture using the effective interest method. The fair value of the equity component was valued at issuance at $908,316 using the Black-Scholes option pricing model assuming a risk free rate of 1.34%, expected life of 4 years, volatility of 73.22% and share price of $0.36.

On March 11, 2013 the Company and Aponet agreed to amend the conversion price of the convertible debenture in Note 7.1 from $0.65 to $0.23 per share and to convert the debenture into 17,391,305 common shares, effective March 12, 2013. The market price on the date of conversion was $0.06 and this resulted in a gain on settlement of $2,375,644. Accordingly, no liability remained at June 30, 2013.

7.2 Other loans

7.2.1 Directors' Loan

On November 28, 2012 three of the Company's directors agreed to provide bridging finance to the Company for general working capital. The loan amounted to $600,000 with a term of 12 months. The loan bore an interest rate of 12.0% per annum compounded annually and payable at the time that the principal becomes due and payable.

In order to secure the performance of the Company's obligations to the lenders under the loan agreement, the Company executed GSAs, pursuant to which the Company granted to the lenders security interests in all present and future undertaking and property, both real and personal located in the province of British Columbia, of the Company, as described in the GSA.

On December 31, 2012, $400,000 plus accrued interest of $4,077 was repaid to two of the directors. As at June 30, 2013, $200,000 of the $600,000 loan was payable and is included in borrowings.

7.2.2 Salida Loan

On May 31, 2013 the Company entered into a short term loan agreement with Salida Capital International Corp for $350,000 to fund some immediate obligations at Verticalnaya pending completion of the private placement. The loan was repaid in June 2013 following the private placement.

8. Share capital

8.1 Share issue

On January 3, 2013, the Company issued 88,271 common shares priced at $.193675 per share as full settlement for $17,095.89 of accrued interest due pursuant to the terms of a $2,000,000 loan provided by Salida Capital LP to the Company.

On June 7, 2013, the Company issued 351,900,000 common shares through a private placement priced at $.02 per share, and separate to the placing, certain directors of the Company subscribed for an aggregate 33,100,000 shares priced at $.02 per share. The aggregate gross proceeds of the Fundraising were $7,700,000.

Fees relating to the private placement were $1,196,605 and included cash commissions totalling $1,000,000 and a fee of $78,065 paid to Cenkos Securities Plc. Cenkos also subscribed for 50,000,000 shares in the private placement.

8.2 Conversion of Convertible Debt

On March 12, 2013, the Company reached an agreement with Aponet Enterprises Limited to amend the $0.65 conversion price of its US$4 million debenture, issued as part of the acquisition of Inter Invest, to CDN$0.23, and to convert the debenture into 17,391,305 common shares of EastCoal Inc. effective on that date. The closing market price of the Company's shares on the day of the conversion was $0.06.

8.3 Warrants

At June 30, 2013 and December 31, 2012 the following share purchase warrants were outstanding:

8.4 Stock options

The Company has established a stock option plan (the "Plan") to provide incentives to employees, directors, officers, and consultants to carry out the business of the Company. The Board of Directors may grant up to a total of 25,009,244 options, not to exceed 20% of the issued and outstanding capital stock to employees, directors, officers, and consultants. The maximum term of any option is ten years. The exercise price of an option is fixed at the time of grant and is not less than the closing price on the TSX-V on the last trading day preceding the grant date, less any discounts permitted by the TSX-V.

At June 30, 2013, a total of 8,075,000 options had been granted to directors, officers, employees and consultants under the Plan, and were outstanding as summarized below:

All stock options have exercise prices that are higher or equal to market prices at the date of grant.

9. Related party transactions

During the period ended June 30, 2013, the Company paid or accrued $30,000 (2012 - $14,550) to a related party for office costs, of which $30,000 (2012 - $12,000) was paid or accrued to a company with a director in common and $nil (2012 - $2,550) was paid to a director.

Consulting fees totalling $127,351 (2012 - $197,490) were paid or accrued to directors and officers of the Company, of which $nil (2012 - $140,175) was capitalized to the Verticalnaya mine project and $127,351 (2012 - $57,315) was expensed.

Included in accounts payable and accrued liabilities is a total of $106,703 (December 31, 2012 - $151,224) due to related parties for office costs, directors' fees, and consulting fees and expenses. Excluding interest payable in accordance with the director's loan (Note 7.2.1), the amounts due to related parties are unsecured, non-interest bearing and have no specific terms of repayment.

On May 31, 2013 the Company entered into a short term loan agreement with its major shareholder, Salida Capital International Corp for $350,000 (Note 7.2.2). The loan was repaid in June.

10. Supplemental cash flow information

11. Segmented information

The Company's Verticalnaya and Menzhinsky mines are operated as separate business units and are considered to be distinct operating segments based on geographic location. The Company's identifiable property, plant and equipment are located primarily in Ukraine. Geographic information is as follows:

12. Subsequent Events

12.1 Share consolidation

On August 8, 2013 the Company consolidated its shares on a ratio of ten (10) pre-consolidation common shares to one (1) post-consolidation common shares, consolidating the Company's 728,048,493 issued and outstanding common shares to 72,804,849 common shares following the consolidation.

The Company also consolidated its outstanding options and warrants on a ratio of ten (10) to one (1), with the result that each consolidated option and warrant will now entitle the holder to acquire one common share in the capital of the Company at an exercise price equal to ten (10) times its original exercise price.