Lodgement of Open Briefing

Date of lodgement: 28-Dec-2003

Title: Open Briefing. Magnesium Int. MD on Progressing SAMAG

Record of interview:

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CRU International forecasts that an additional 160,000 tonnes per annum of magnesium metal will be needed from Western producers over the next ten years to satisfy demand growth. Why then has Magnesium International Limited (MIL) found it hard to get share market support for its SAMAG project (MIL 100%)?

Managing Director Gordon Galt

I think there are a number of reasons for the poor market performance of all magnesium stocks in Australia this year. Firstly the industry is not a traditional industry in this country and is therefore not really understood by the investment public. It does take a bit of effort to understand that magnesium is not a homogeneous market like gold or nickel or copper. The pricing structures in the industry are also not well understood.

Second the industry has suffered a number of supply side setbacks in the last three years, including the closure of five Western smelters and the collapse of the Stanwell project in Queensland. These have cast a lot of uncertainty across the industry. The Stanwell event has caused a lot of investors who were willing to back a new industry a lot of pain and they are reluctant to give another project a go in the same industry, even if it has totally different fundamentals. But the fact that, for example, the Murrin Murrin project has been such a problem doesn't mean that   nickel is a bad industry. They tried to commercialise a different technology and found out that it was a big problem. Stanwell was trying to do the same. We are intending to use an absolutely proven technology so we are quite different.

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MIL announced a Shareholder Share Purchase Scheme (SSPS) in November, which closes in mid December 2003. What has been the response so far?

Managing Director Gordon Galt

The SSPS only opened last week. There has been a steady inflow from shareholders already and I'm confident we'll get a good response by the time the offer closes. The funds raised will be used for work that will ensure that MIL has the very best economic case available for the smelter in this country.

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Earlier this year, the South Australian Government confirmed its commitment to the provision of $25 million of infrastructure support for SAMAG and you also attracted the first cornerstone investor with Thiess committing $20 million. What progress have you made with attracting other cornerstone investors for SAMAG? What are the concerns of potential investors?

Managing Director Gordon Galt

We've been pretty constantly involved in project presentations since the details of the SA Government's Business Case Review were made public in July. The Review came back with positive results for SAMAG and for MIL as we expected. Having said this, the fact that the Government carried out the review at all really gave us a setback with cornerstone investors and we've spent a lot of time and effort revitalizing their interest. The Review also proved a major setback in our discussions regarding support by the Federal Government.

The cornerstone investors we are talking to now are concerned about the market and the effect of the Chinese and about the economic case for the smelter, including the effect of the rise in the A$'s value. We've been successful in presenting our view of the market to them and we are now busy confirming that we have the best economic case by undertaking the site review that we announced at our AGM.

As we've previously announced we regard the search for these investors as our top corporate priority. We already have one cornerstone investor in Thiess Ltd, who will be our construction contractor. Thiess have agreed to provide up to $20 million in equity funding for the project.

As far as the A$ is concerned, we've seen an appreciation this year of some 28% against the greenback. This affects our economics but we are seeing some rise in the price of magnesium to offset the rise in the A$. The major magnesium producing country is China which has a currency tied to the USD so it isn't as affected as we are in Australia. In due course we, and many others, expect to see a gradual float of the yuan so in the future prices for magnesium will reflect the value of the USD more closely. This of course will mean that we'll be significantly better off as we'll be at the absolute bottom of the production cost curve when we get our smelter started.

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You've stated that the global magnesium industry has continued to grow strongly over the past year. Can you elaborate? Also, which new world projects have made progress towards start up and what threat does increased Chinese supply pose to market balance?

Managing Director Gordon Galt

The global magnesium industry has already grown by about 6% already this year compared to 2002. On an annualized basis this equates to around 30,000 tonnes of extra consumption. In addition we've had the closure of the Magnola smelter in Canada which had been producing at 25,000 tonnes per year, so the industry will have to find another 55,000 tonnes of new primary production in the next twelve months. With no extra capacity being added in the West, this has to all come from China. As a result we've had a lot of new capacity building in China and this has put pressure on raw materials and prices have risen.

According to CRU International, the industry is expected to maintain the 6% growth rate for at least the next ten years, and if this occurs we'll need an additional 350,000 tonnes per year compared to the 2002 production rate. CRU predicts that 160,000 tonnes per year of this will have to come from the West because most of the growth will be in the diecasting sector where high quality magnesium alloys are what is required, rather than the lower quality grades of magnesium where the Chinese have been so successful in their penetration. At present the extra diecasting tonnages are being satisfied by remelting Chinese primary ingots in the West.

As far as the Western World is concerned, there are no projects as advanced as SAMAG. Stanwell is now out of the equation and although projects have been mooted for Canada, the Congo and Victoria, all are still at the preliminary feasibility stage and need to establish pilot plants etc before they can advance to their next stage of evaluation.

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During the year, both the Magnola project and the Stanwell project were suspended. What are the major differences between those projects and SAMAG?

Managing Director Gordon Galt

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've 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.

Because of these features we have a low risk development strategy. The main risk we'll face, as with all commodity producers, will be market risk. To mitigate this we've negotiated a unique fully committed 100% sales offtake agreement with major European trading company, ThyssenKrupp Metallurgie. Under this agreement, ThyssenKrupp will pay us at least a minimum price for our production which covers all operating costs plus senior debt principal and interest repayments. ThyssenKrupp have extended their agreement into 2004 and so they're just as

committed as ever.

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The catalyst ultimately leading to the suspension of Australian Magnesium's Stanwell project was a blow out in capital costs. Can you give more detail on how you will manage that risk for SAMAG?

Managing Director Gordon Galt

Firstly, as noted above we'll have a fixed price EPC contract before we start building the smelter. In fact we'll have the price fixed before we raise the final equity funding for the project. Thiess have been working on our project now for over three years and know it backwards.

Secondly our process is much simpler than the process proposed by Stanwell so it is much easier to estimate costs.

Thirdly our debt funding package will be locked in at Financial Close rather than floating with no real commitment until the EPC price was fixed, which is what happened at Stanwell.

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In order to improve the economics of SAMAG, MIL is reviewing potential smelter development sites around Australia. You have been running with Port Pirie in South Australia as the development site for some time. What are the benefits and detractions of relocating at this stage?

Managing Director Gordon Galt

The site review will look at smelter sites in Queensland and Victoria. It will concentrate on capital costs and the major operating costs which include power, gas and ore. The intention of the site review is to see whether there is a site available where the mix of lower capital and/or operating costs will deliver a better economic result for the smelter than we can achieve in South Australia.

I would like to reiterate that there is absolutely nothing wrong with our site at Port Pirie and that we'll only consider moving the smelter if there is a demonstrable and significant economic advantage in doing so. All our approvals for Port Pirie are in place and the SA Government has reiterated its infrastructure support package of $25 million as late as this week. If it ends up being confirmed as the best site then we'll be delighted to build at Port Pirie.

In Victoria we would be looking primarily for lower power and gas prices and there are quite a few potential power providers available. There is potential for the Dow process to use flyash as a feedstock but magnesite from our current leases in South Australia could also be used in total, or as a makeup ore source. We haven't begun to look at available sites or at the capital aspect in Victoria yet.

In Queensland there is also potential for lower power prices and gas prices via coal seam gas and there are extensive deposits of what appears to be reasonably good quality magnesite ore just north of Rockhampton and close to the main rail line. At least two deposits could be available as ore sources from that general area and we've already ascertained that we can obtain ore from one of these sources at a competitive cost. We know that industrial parks with suitably sized site areas are established in the Gladstone, Rockhampton and Townsville regions but as yet we don't know what services are laid on at these sites. There are numerous power sources in the Central Queensland area while Townsville has a new power station on the drawing board.

The ability to interrupt our smelter's power supply is also something which has a different value in each of these locations and we'll have to examine this separately.

Thiess will be a great help to us in assessing the capital costs for the different locations as they have extensive data bases on relevant construction costs throughout Australia.

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Will that include a review of AMC's site at Stanwell in Queensland? Can MIL work with AMC in any way?

Managing Director Gordon Galt

Both Queensland and Victoria have proposed magnesium smelter projects which have established relationships with their local communities and their respective State Governments. What they don't have is a proven technology for production of magnesium metal, or a 100% offtake agreement, or a fixed price EPC contract. If there are synergies which can be captured, or if the time taken to complete the evaluation can be compressed by discussing matters of common interest with them, then we would seek to take advantage of that. The degree of commonality could be very restricted, eg they may just become suppliers of ore to our smelter, but it could also be much wider and deeper. The review is going to be fairly detailed so we are ruling nothing out at this stage.

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How long do you expect the review to take and how much will it cost?

Managing Director Gordon Galt

We think it will take around six months to complete the work with the main factor being the environmental impact assessments. Clearly we don't see this aspect as in any way problematic because we've already received environmental approval for our smelter in South Australia and their requirements are similar to other states. We've already engaged Sinclair Knight Merz to commence work on this aspect in Queensland and will be able to extend the brief when we do a bit more work in Victoria.

The cost of the review will not be high as we'll have very little additional engineering work to do. Essentially the smelter is a "plug and play" design as long as we can get suitable inputs such as good quality ore and other consumables to the plant. There are very little in terms of liquid or solid waste streams from the plant.

If we were to use different feedstock source for the smelter we would have to do some leach testing, but the cost of this would be quite low.

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The latest plan was to build SAMAG in modules with the first being 41,000 tonnes at a capital cost of $230 million. Is the project scope under review as well as the location?

Managing Director Gordon Galt

We are not reviewing the project scope and still intend to build in the two modules previously proposed. This strategy reduces the risk to investors markedly, ie

• We need less initial equity and debt;
• We enter the market more gradually;
• We will get lower priced debt for Module 2;
• We will incorporate lessons learned from the first module into the second module.

We'll be undertaking further engineering work in the next few months as well, however, 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. But we'll still be building in two modules.

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MIL is still pursuing the Magsheet initiative with the CSIRO and one possibility is a separate listing of Magsheet with MIL having a significant carried interest. Why would the equity market support that concept?

Managing Director Gordon Galt

Investors interested in the Magsheet business would be able to invest directly under this concept. Their returns would not be diluted by existing MIL shareholders except to the extent that MIL has a free carried interest, so new investors' returns will be maximized. MIL shareholders would still benefit to the extent of their carried interest and we'll investigate incorporating a mechanism to allow MIL to claw back ownership at a later stage.

We believe, as we said last June, that the Magsheet business is a potentially superb opportunity. The technology is well developed and there is strongly growing demand. Hitachi Metals have indicated they wish to purchase a substantial quantity of sheet metal if testing proves positive. CSIRO have continued developing the technology since mid year and recently announced that they've completed successful installation of a new coil line in the magnesium sheet plant (which already exists) and the first coils of magnesium sheet of 60 kg each have been supplied to Japan for rolling and forming trials.

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How much cash does MIL hold and for how long will that sustain the company?

Managing Director Gordon Galt

MIL has almost $4 million in cash and we expect to raise a reasonable amount additionally through the SSPS. We've reduced our burn rate and are concentrating on the main issues. Even with a moderate takeup in the SSPS and in the absence of any further raisings we'll have enough funding to sustain the company till the end of 2004.

As I explained in the AGM 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 and I have recently been in Europe talking to AIM brokers.They like the MIL story, especially our strategic position in the production of what they regard as a strong growth industry and are ready to introduce MIL to the market there whenever we wish to start the process.

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Thank you Gordon.

For previous Open Briefings by Magnesium International visit

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For further information on Magnesium International visit www.mgil.com.au