The following address was given to the AGM on 25 November 2003.  A corporate file interview was also completed on 28 November 2003, this document can be found under FAQ and elaborates on issues discussed in the Managing Director's Address.  It is suggested that Investors read both documents.

Managing Director's Address to AGM - 25 November 2003

Ladies and Gentlemen

The year which has passed since I spoke to you at the last Annual General Meeting has been a particularly challenging one for Magnesium International Limited (MIL).   We have not been able to progress the company's SAMAG magnesium smelter project through the final stages of financing and into construction as we had hoped.  

However, we have made significant and worthwhile progress, and this is noted in detail in the Managing Director's section in the Annual Report.   I do not intend to go over that ground again, and in my remarks today I will concentrate on:

• an analysis of the matters which have affected us through the year; and

• resetting our goals for the future.

The major factors which have affected us, and which to a varying extent still are affecting us, are:

• two significant Western supply side industry events, namely the closure of Noranda's Magnola smelter in Canada and the suspension of construction of Australian Magnesium Corporation's Stanwell smelter in Queensland;

• the undersubscription of capital to our company's rights issue in June of this year;

• the rising value of the Australian dollar, especially compared to the US dollar; and

• the overall magnesium market outlook

One of the supply side events was foreshadowed in last year's AGM speech.   The Magnola smelter was well short of achieving its design capacity of 63,000 tonnes per year and did not appear to be making sufficient progress in commissioning.   Noranda confirmed these observations when it announced in January 2003 that the smelter would be mothballed.   Production ceased in April and it now seems clear that the smelter is permanently closed.   The technology used in the smelter cost far too much to build and simply did not work to design.

The suspension of construction at AMC's Stanwell project finally occurred in June 2003 after numerous announcements of capital cost overruns and of the failure of the project to secure a suitable fixed PC construction price for the project.   As the final design progressed, it was seen that more equipment would be needed to make the smelter operational and costs escalated accordingly.   The cost to complete the project significantly exceeded AMC's funding capacity, nor did AMC have the support of a large balance sheet.

The predominant cause of both of these project failures is that they were attempting to introduce new, unproven process technologies, on a very large scale based on limited demonstration plants.   This is a very high risk project strategy.

MIL has spent a lot of time this year differentiating our smelter from the Magnola and Stanwell projects.   In stark contrast to these projects, we have pointed out that our smelter development strategy embraces:

• an absolutely proven technology;

• a two stage construction plan which starts small and then builds up capacity over time;

• a fixed price EPC construction contract, whose value is known before we commit to building, so that we don't get ourselves into the situation where we run out of funds and fail to complete what we start; and

• a fully committed 100% sales offtake agreement with major European trading company, ThyssenKrupp Metallurgie.

The AMC and Magnola failures were mostly negative for the equity market during the year, but they now present the major long-term positive of a significant market opportunity for MIL.   Current industry forecasts predict that 160,000 tonnes per year of new Western supply is needed by 2012.   SAMAG is now regarded by the magnesium industry as the most likely greenfields magnesium smelter project anywhere in the Western world which could be able to fulfil any major portion of this requirement.   We are certainly in an excellent strategic position.

The second matter which has affected us through the year was the under subscription of our rights issue in June.   We believe that three main matters contributed to this undersubscription;

• the general state of the equity market, which at the time of issue was very risk averse;

• the smelter failures previously discussed, with the timing of the AMC announcement being especially damaging by causing very negative industry press at exactly the same time as the rights issue was in progress; and

• the decision of the South Australian Government to conduct a Business Case review of our project, also during the issue period.  

We were aware of the first of these matters and delayed the issue as long as possible in an attempt to encounter more positive market conditions, but we were not aware that the others would occur when they did.  

The SA Government review in particular was a major surprise and we are still at a loss to understand why the review was initiated at that time.   MIL has always gone to considerable effort to keep the SA Government informed about the project with very regular meetings and written communications.   We believe that the need for a public review of the sort which occurred was totally unnecessary.   We indicated this view to the South Australian Government at the time.

The review was completed in June, did not uncover any previously unknown matters, and, as we predicted, was positive for SAMAG and for MIL.   The SA Government's commitment to the provision of $25m of infrastructure support was confirmed and maintained.   MIL subsequently received a letter from the SA Government outlining the conditions attaching to the SA Government's commitment.   The conditions are consistent with those previously established, subject to an extension to the end of 2004 of the time allowed for the project to reach Financial Close.

Unfortunately however, the damage was done, and our failure to raise the required funding from the rights issue has significantly affected our ability to progress our company's objectives as we had planned.   We could not complete the Magsheet initiative we had negotiated with the CSIRO and we have had to delay the fixing of a new EPC construction price for our two stage construction strategy.

The under subscription has brought into very clear focus the matters which are most critical to completing the company's mission to commercialise the Dow magnesium smelting technology.   We have therefore decided, as our priority, that we must concentrate on identifying parties who can become cornerstone investors with us for the future.

We have been conducting this search and have presented the investment case for the smelter to a number of parties during the year.   We are advancing our prospects with some of these organisations at present.   Their timing is their own, but they have also been affected by the matters I have already addressed above.  

The parties we are talking to have focused on the need to present the best possible economic case for the smelter so that the project has the greatest chance of success before they will commit to an investment.   The economic case has been significantly influenced during the year by the third major factor I cited at the start of this speech, namely the rise in the value of the Australian dollar.   Since January of 2003 the A$ has risen by 28% against the US dollar, which s the main currency used for the trading of magnesium products.   By contrast the competing supplier nations in the magnesium industry have experienced the following currency changes:

• China - no change as the yuan is pegged to the USD;

• Canada - 20% rise;

• Israel - 6% rise; and

• Russia - 7% rise

This A$'s rise has made all current and potential exporters in Australia less competitive, although some commodities have experienced a rise in their USD price which has partially compensated for the rise.   We have seen some increases in the magnesium price driven by internal cost pressures in China but these have not fully compensated for the A$.   We need to look very closely at the cost structure for the SAMAG project as a result of the currency situation.

Turning now to the market situation, - we see that demand for magnesium and magnesium alloys is continuing to grow strongly.   Magnesium consumption in the first six months of 2003 was up 6% compared to 2002.   The reduction in Western world magnesium production, caused by the closure of the Magnola smelter in Canada, will hit home in the second half of this year and will bring on additional exports from China.

The strong demand appears set to continue.   CRU International, a leading commodities forecasting company in London, reported in its new 10-year forecast for magnesium, issued in May 2003, that it expects the magnesium market to grow by 6% per year compound over the 10 years to 2012.   This growth rate would require an increase in primary production from the 420,000 tonnes delivered in 2002, to 770,000 tonnes in 2012, a rise of 350,000 tonnes.   With the majority of growth forecast to be in SAMAG's target market of the diecasting alloy sector, CRU believes that an additional 160,000 tonnes of this capacity will be needed from new Western world smelters, which need to commence production within that ten year period.  

CRU also forecasts, in its Base Case prediction, that there will be a rising trend in prices over the next three years.   If cost pressures continue within China, as they are currently doing, with increased costs for coal, transport and other raw materials, or if the yuan floats even to a small extent, these price rises could be even greater.

Growth in the diecasting alloy sector has been further supported by a forecast from Hydro Magnesium, the world's largest magnesium producer.   Hydro expects the demand for diecasting alloys in Europe to grow by 12% per year for the next five years driven mainly by increased automotive usage.  

I would now like to move on to our future plans for MIL.

Our major goal remains firmly the building of a primary magnesium smelter based on the Dow technology for which we hold the global exclusive licence.

With respect to the smelter project:

• we will be concentrating on securing appropriate cornerstone investors for the smelter as our top priority;

• as a result of our review of the economic case and the requirements of potential cornerstone investors, MIL is today announcing that it intends to conduct a formal review of all potential smelter development sites in Australia, including our current site at Port Pirie in South Australia; and

• we will be undertaking further engineering work with a view to incorporating some improvements to the technology which Dow had been pursuing into our smelter design.   These will not in any way compromise the bankability of the smelter but will be aimed at enhancing the cost structure of the project and perhaps making some upwards revision to planned smelter capacity.

The major site specific parameters we will be reviewing are those which influence the project's economic attractiveness, particularly capital cost, power price, gas cost and ore cost.   Finding the right mix of these costs is critically important for our existing shareholders and potential investors.

The primary areas we will be examining, in addition to South Australia, are Queensland and Victoria.   Queensland has a number of ore sources and different power and gas options between Gladstone and Townsville.   In Victoria, MIL will investigate potential sites in the Latrobe Valley.   For these, ore could be supplied from MIL's South Australian leases, if other factors are favourable.   MIL may also seek to discuss options with other proposed magnesium project owners in Australia.  

Movement of the project within Australia would entail a minimal amount of additional engineering work or physical testing.   New capital cost estimates will be carried out in conjunction with our construction partner, Thiess Ltd.

We expect that it may take up to six months to fully complete the review.   A major timing factor would be the requirement to undertake another Environmental Impact Study in a new location, but as we have already passed this process in one Australian state, we would not expect it to be a significant hurdle.   MIL has pared back its cost base to essential engineering and commercial staff and will contain corporate costs during the period of site evaluation.

We are also still vigorously pursuing the Magsheet initiative, because we firmly believe that the technology which CSIRO has developed will lead to a significant expansion in the value added use of magnesium alloys.   We are currently discussing the possibility of an alternative structure and funding arrangement with CSIRO.   We have proposed that this will involve a separate listing of Magsheet with MIL having a significant carried interest.   More information will be provided if we can successfully progress this matter over the coming months.

In order to fund the above work we have recently announced that we are conducting a Shareholders Share Purchase Scheme (SSPS) for MIL.   If appropriate, MIL will also use some of the funds raised in the SSPS to undertake a listing on the Alternative Investment Market (AIM) in London.   The AIM has recently changed its entry rules to allow easier listing for ASX companies and has also significantly reduced entry costs.   The AIM has access to more providers of capital for ventures like SAMAG than the Australian market.

Clearly we intend to be very busy over the next half year in particular to accomplish these tasks.

Ladies and gentlemen, last year I reiterated MIL's strengths at the conclusion of my speech.   These strengths are worth repeating here.

SAMAG will be a low risk project.   It has extremely well defined capital and operating cost structures, it will use tried and proven technology and we already have one of the world's largest companies signed up to buy all the output.   It is environmentally safe and will contribute to an overall reduction in global greenhouse gas emissions.

There is a strongly growing market for our intended products and our project can become the lowest total cost electrolytic magnesium smelter in the world.   It will certainly not be beaten for reliability and quality of production.   As a financial investment it will be attractive.

In the next year we expect to make further substantial progress and to gather more support in what we expect to be better conditions in the equity market.   We will keep you well informed as we progress towards realizing our vision of a significant presence in the world's magnesium industry.

For further information contact:

Gordon Galt

Managing Director

Magnesium International Limited