update

ADMIRALTY UPDATE

Our MD, Phillip Thomas reported to the Board today that the trip to China to
visit Shougang, WISCO, Shandong and other steel mills and our major
equipment supplier for plant expansion was a major success. Two additional
financing facilities were discussed and the framework established around future
joint ventures, post Admiralty moving to 100% ownership of CMSB, its Chilean
iron ore Joint Venture, and a closer relationship with Santander Bank, WISCO
and Shougang. The details are as follows:
Shipping
• The MV Cape Nelson loaded 27,640 tonnes to WISCO under the 06
Sales Agreement and MV Abkhazia loaded 31,756 to Shougang under
the spot sales agreement. The Shougang shipment quality exceeded the
contract Fe by 0.77% and a $120,000 bonus was realized.
• The provision for loss was reduced by $520,000 as WISCO were able to
accept a smaller ship than budgeted. The Cape Nelson was the ninth of
10 handymax shipments under this contract. There are 4 panamax
shipments for 2009, although this is subject to negotiation (see below).
This 06 Sales agreement was renegotiated down to 14 from 17
shipments last year, and the price then increased by 9.5%.
• There will be approximately 42,000 tonnes available for a FOB 20-30
August laycan spot shipment or 50,000 tonnes for a 11-30 September
laycan. Revenue for August todate is US$7,140,000. This does not
include the US$6.5m recently raised for working capital. Admiralty has
an unrealized profit on this currency as it is held in $US, from the rapid
depreciation of the Australian dollar, although most of its liabilities are in
US$.
• While the iron ore spot market is soft at the moment, due primarily to the
iron and steel factories around Beijing being closed for the Olympics and
some 50 million tonnes of iron ore at the Chinese Ports, Cia Minera
Santa Barbara iron ore still commands a premium due to extremely low
sulphur (0.01%), low aluminium and high FeO (iron oxide). The Chinese
Page | 2
government are very concerned about sulphur pollution, and low sulphur
ores are preferred.
WISCO
• Detailed negotiations were held last Thursday and Friday with senior
executives of WISCO and ITOCHU Corporation regarding a possible
investment joint venture where WISCO would fund the development of a
tenement. CMSB has at least eight existing mines currently not
operating that would be suitable for such a co-development, allowing us
to increase production via equity, and providing shareholders with
additional profits, apart from our own expansion.
• Given Admiralty Resources is at an advanced stage of negotiations with
Wyndham Explorations to acquire their remaining 40% of the Cia Minera
Santa Barbara joint venture, WISCO will further negotiations after this
has been achieved.
• The lack of profitability of the 06 sales agreement due to lack of supply of
iron ore by Santa Fe, and shipping costs rising rapidly since September
2007 was discussed and a solution was put forward to terminate this
contract immediately and replace it with a new five year contract which is
profitable for CMSB.
• WISCO have indicated they will provide support to Admiralty in their
efforts to enforce this Santa Fe contract where approximately 410,000
tonnes are still to be delivered at $28 per tonne ex mine. This has a FOB
value to Admiralty at 63.5% Fe of US$30m. Arbitration and legal action
is pending.
Sales Contracts and Funding
• Shougang - A very productive meeting was held last Monday and
Tuesday with the Executive Director and corporate banking staff of
Santander Bank, China and key executives of Shougang where the
framework and documentation was discussed for the US$40m standby
letter of Credit. The issues holding up the facility were discussed and
various plans have been initiated to bring the transaction to conclusion.
Due to the duration of the SBLC, a five year take off contract was
negotiated, with some final detail yet to be provided by Santander and
Shougang before it is executed. The agreement will then be ratified by
the board of Shougang.
• Further communication has been received this week from Santander,
who are also banker to CMSB in Santiago, Chile in regards to the
Shougang US$40m security facility.
• Detailed negotiations were held with the Shougang Logistics group and
iron ore purchasing group regarding the spot and five year supply
contracts. Most issues were resolved and agreed upon with one key
issue to be resolved when the Banking offer/drawdown/repayment
schedule is finalized. The contract is a combination of CFR and FOB to
Page | 3
suit CMSB’s 2009 and onward production schedules.
• Shipping prices have dramatically fallen over the past few weeks and this
is good news for both clients and CMSB. The cost of a cape size vessel
during the week was quoted as $36 per tonne ex Chile to China for a five
year contract which is competitive with Australian iron ore, given the
premium Brazilian/Latin American iron ore commands on a CFR basis
over Australian iron ore. The trip to China from Chile is three days
shorter than that from Brazil.
• WISCO - Discussions were held regarding a longer term supply contract
over a five or ten year period. A binding MOU is in place for the supply of
one million tonnes per annum over a three year period which is subject to
our increase in production. We are waiting on comments from WISCO
regarding this five year sales contract, that was provided to them last
week, before finalization and execution.
• WISCO indicated they wanted to support our financing arrangements as
per the MOU signed in October last year. To this end, a Memorandum of
Understanding document was signed by the President of WISCO and
Phillip Thomas indicating that they would like to invest in a project jointly
with Admiralty via Cia Minera Santa Barbara now that it has access
(subject to final agreements with CMP) to a Cape Size port in 2009. This
project will be scheduled for 2009 when Admiralty has 100% ownership
of CMSB.
• Shandong Iron and Steel – Phillip Thomas met with their Deputy
Director and Director of Purchasing to discuss joint participation
opportunities in Chile regarding supply of iron ore, financing and
investment opportunities. Shandong are the now the second largest iron
and steel producer in China behind Baosteel.
The State-owned Shandong Iron and Steel Group Co Ltd was created
out of the restructuring of Jinan Iron and Steel Group and Laiwu Steel
Group -- the sixth- and seventh-largest steel makers in China -- and
Shandong Metallurgical Industry Corp. The three belong to the
Shandong provincial state assets management commission.
Shandong Iron and Steel Co has a registered capital of 10 billion yuan
($1.4 billion) and is fully government-owned. Under the provincial steel
industry plan, the new group is to have an annual output of 31.6 million
tonnes, second to Shanghai-based Baosteel, the country's largest steel
maker. Last year, Jinan produced 12.12 million tons of crude steel and
Laiwu turned out 11.7 million tons.
Price hikes aside, demand for iron ore by steel-makers is set to grow by
26 percent a year until 2010, Wang Jionghui, an official with China
Minmetals Corp, the largest Chinese metals and minerals producer,
said.
Page | 4
Capital
• Work on our US$200m note issue is proceeding well. Yesterday, we had
a third due diligence meeting with senior executives from Merrill Lynch
who had come from Sydney, Singapore and Hong Kong. They reported
bullish conditions for the placement of “hot” iron ore company paper in an
otherwise difficult prime market. The business plan is currently being
updated for possible joint ventures described above. A key deliverable is
the resources summary from the Chillan Veijo deposit where SRK will be
asked to provide this estimate. This is required to demonstrate to
investors CMSB has sufficient indicated and proven reserves to deliver
both its five year sales contracts. Some additional drilling maybe
required. To-date we have drilled seven holes to a depth of 220 metres.
• We put in place a converting note with YA Global Investors that has a
non-dilutive period to 31 October where we intend to repay both the
Hawkswood loan on 30 September and the YA Global facility. This will
be replaced by the Shougang/Santander or other facilities we are
working on.
Our preference is not to do any more placements, if possible as we have
at least US$240m of debt facilities close to settlement, and the possibility
of up to three joint venture arrangements in 2009.
Under the Admiralty/CMSB joint venture agreement CMSB is required to
repay to Admiralty the 4 year cumulative debt, currently US$38.99m
outstanding in February 2009, otherwise all the assets go to Admiralty
under a security charge arrangement.
Production – Action Against Besalco Maquinarias
• In early 2007, CMSB signed a production agreement with Besalco
Maquinarias. They gave us repeated undertakings during 2007 that they
could increase production to 90,000 tonnes per month which is the
amount of iron ore required for two average size handymax ships. As a
important and critical backup strategy, Admiralty reached an agreement
with Santa Fe to provide 500,000 tonnes of the one million tonne order
Admiralty placed with its then (minority held) joint venture CMSB. Santa
Fe delivered 90,000 tonnes of this contract during 2007.
• The plant had been constructed for more than 100,00 tonnes production
but due to Besalco’s design and equipment specification it fell short of
this amount.
• CMSB has taken this breach of specific performance and contract to an
arbitrator for adjudication and claimed that it is owed 600,000 tonnes of
iron ore and is owed US$83million. The Chilean arbitrator has to-date
Page | 5
been in support of CMSB claims but it is still being arbitrated. CMSB has
until Monday, August 17th to provide the Judge Arbitrator with a written
response to the Besalco document lodged last week contesting our
claims and evidence.
• In the event CMSB is successful with the claim it will be ratified by a
higher court and then CMSB will be able to apply for charges or a lien to
be placed on assets of the subsidiary and parent public company until
payment is received.
• Last Wednesday, we spent the day examining the plant design, layout
throughput mass balance and upgrade of the Japonesa-Japonesita plant
and our planned 3 million tonne plant at Chillan Veijo. When both Caleta
and Totoralillo ports are operational, shipping capacity will be
approximately 3.4m tonnes per annum. At 2,500 tonnes per hour
crushing capacity per plant we will achieve production of 2.0-2.2m tonnes
per annum. With two plants we will reach our current environmental
permit and 2009 shipping capacity.
Yours sincerely,
Phillip Thomas
Managing Director
Further information on Admiralty Resources NL can be found on our Internet site:
www.ady.com.au
Australia
Investor Relations
Tel: +61 3 9642 8787
Email: [email protected]