SMC Gold Limited ABN 45 071 349 249 PO Box 313 Spring Hill Queensland 4004 Telephone 07 3839 4166 Facsimile 07 3839 7644 Dear Shareholders, You will shortly receive a notice of meeting for a General Meeting, which I recommend you read carefully. Most of the resolutions to be put to the General Meeting relate to the transformation process upon which the Company has recently embarked. It had become clear that SMC Gold was not performing as expected, and that changes were needed to position the Company better to fully utilise the assets and capital invested in the business. I am pleased to advise that in the two months since this transformation process began, we have been particularly busy, and I summarise the advances made as follows: Executive Management Changes Mr Peter Evans resigned as Non-Executive Chairman of the Company and has remained on the Board to facilitate the handover process. On behalf of shareholders, I record our thanks to Peter for his contribution to the Company through often difficult times. The extent of the loans Peter has made to the Company, and which will, if approved, be retired at this General Meeting, bear testament to Peter’s commitment to the Company. As Non-Executive Chairman going forward, I am delighted to be working with an outstanding Executive Management Team: • Mr Michael Fischer was appointed as Managing Director in August, and as I write, is on-site in Chile, completing the restructuring of the operational management team. Mike’s deep experience in Australian, PNG, and South African base and precious metals mines is extensive and brings to us, proven and impeccable credentials in senior management, with a focus on disciplined planning, budgeting, execution and control of strategic outcomes. • In August, the Company also appointed Mr Steven Playford as General Manager of Punitaqui operations. This represents a return to Chile for Steven, whose career included a spell working for a large mining contractor in Santiago. Steven’s career has focused on highly disciplined, rigorous project management and organizational change management, skills which are essential to our immediate future in Chile. Steven intends to make his long term future in Chile, and will play a key role going forward in our delivery of operational and project success. • Mr Simon Brodie has played a vital role in recent years as Chief Financial Officer (CFO), often carrying great workloads and responsibilities. Simon’s contribution as CFO has been immense, and I personally have greatly appreciated his tenacity, determination and unflagging enthusiasm as difficult changes have been made in recent months. The Executive Team is currently reorganizing the operational management team in Chile, and key specialist appointments have been made to bring suitable skills to bear on mining, planning and metallurgical performance. Operational Performance: on-track for turnaround The Company has embarked upon a vigorous campaign of operational improvement, with a focus on expansion and improvement of the metallurgical facilities at Punitaqui, Chile. The most pressing need at present is to introduce a culture of planning, budgeting, focus on execution against budget, with rigorous controls and accountability for performance. This is a process that will take some time to complete, but the response from operational managers to date has been most encouraging. The new Executive Management Team is committed to delivering on the performance, and shareholder value that has not been satisfactory in recent years. The process of improvements and change is ongoing, and regular reports will be made to you on progress. Performance in the first quarter of the 2007 Financial Year has been most encouraging to date. • Throughput at the Punitaqui Mill has increased from an average of 728 tonnes per day in FY 2006, to levels in August which have consistently been in the range of 880 – 920 tonnes per day, representing increases in excess of 20%. • Copper recoveries from the Punitaqui concentrator averaged 67.48% in FY 2006, and thus far in the new financial year, recoveries have typically ranged between 70.4% and 71.7%, representing increases of 4% or greater. The impact of these improvements on the bottom line will be readily apparent, and I feel confident will be improved upon with the current mill and concentrator upgrade project. Mill and Concentrator Upgrade The Company recently announced a significant upgrade to the mill and concentrator, which have for over a year, been the source of considerable frustration and value erosion. Operating at the historical levels recorded in the 2006 financial year is not an economic proposition in the long term. The Punitaqui facility, when the company bought it, was old, and not suited to the harder Cinabrio ores. Management believe the current upgrade will address both throughput and metallurgical recovery value drivers, by focusing on delivering a finer grind of ore for enhanced recoveries in large flotation cells with improved residence times for greater recovery. Throughput of a minimum 1250 tonnes per day is targeted, at a recovery of 80% or higher. Management believes that the impact this will have on both enhanced production, and lower operating costs, is expected to be considerable. The project is costed at US$3.5m (approximately A$4.7m) and will be funded from cash flow, to avoid further shareholder dilution. It is important to stress that this is an interim stage of the operation’s development, and that several key pieces of equipment are being ‘oversized’ to allow for a rapid and relatively cheap further expansion to a minimum of 2500 tonnes per day throughput. The timing of this is not yet certain, and much will depend on the development of a mine plan, based on an enhanced reserve and resource position. It is hoped this will be effected by the end of calendar 2007. Exploration Programme Since the purchase of the Chilean suite of ore bodies, the Company’s drilling programs have been limited by allocation of funds to other priorities, but the impact of each programme on the reserves and resources have been quite outstanding. The recent programme, which was announced in early August, will take most of the 2007 financial year to complete, and its cost of US$1.8m (approximately A$2.4m) will be funded from cashflow. The key objective of the programme is to increase the reserves and resources at Cinabrio, and to establish an oxide resource over several exciting oxide prospects at Dalmacia, and Santa Elvira in particular. While an updated JORC reserve and resource position will be published soon as part of our annual reporting, it is expected that the resources will be rapidly converted to reserves as appropriate mine planning and design is undertaken. The Company is fast-tracking the implementation of best practice mine planning systems to expedite this reserve development. Australian assets The Company has set-up a separate project team to actively review and progress value enhancing strategies for the Australian assets of SMC Gold. As you are aware, we have a number of exploration leases as well as an option over the mill at Rishton. We will shortly be announcing plans as to how we will manage this aspect of the business going forward, and how this will impact on shareholder value. Management is confident that we will have a number of options that are value accretive for our shareholders. Outlook for SMC Gold The copper industry is undergoing a period of exciting demand and supply dynamics; with the outlook for copper as good as it's been in several decades. With extensive supply side disappointments and robust demand, this environment is expected to continue for some time. We will focus our attention on expanding production, reducing costs, and securing the next projects as part of a project pipeline to underpin continued growth in shareholder value. Yours sincerely, Hugh Callaghan Non-Executive Chairman 30 August 2006
SMO Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
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