Ann: Quarterly Activities/Appendix 5B Cash Flow Report, page-63

The current facts as I see them (so they may not be facts - ha).

The SFX quarterly has revealed greater uncertainty about the direction of the company. No one, including Bruce Griffin (BG), currently knows where the OS, zircon price, TiO2 issues are heading. The market now appears to agree with me that production risks are higher post quarterly than previously (of course this could change). Share price 47c now, just before qrtly was 56.5c.

It would be reasonable to assume based on OS, zircon price and TiO2 issues that revenue will not be as high as hoped in the short term. We have no idea how production costs will end up at this time. Overall though it is now less likely that feasibility study cash forecasts will be met in the short term (next 12 months). Right now, no one knows where they will end up, but it is not unreasonable to assume the free cash flow shortfall could be significant and difficult to overcome in the medium term (next 2-3 years). There is a strong possibility money will need to be spent to fix the OS problem.

No one on these posts, or BG in his presentation, has provided me with an adequate explanation for the very low zircon price received so far and whether this is cyclical or structural. The feasibility study was US$1609 fob at A$/US$ 75c exchange rate. The price received so far is US$702 (presumably fob) at more like 65c exchange rate. I note this is the first time we get to see how their pricing with Yansteel is working. I also note that zircon, over time, is meant to be 59% of SFX revenue and the Iluka quarterly price across all its zircon was US$1873. Clearly I am missing something important.

BG is a highly skilled mineral sands executive. I dont think he is interested in spending the rest of his life taking care of Thunderbird alone. Indeed in his latest presentation he made clear that SFX is 'focussed on becoming a multi asset mineral sands company'. That is fine if the free cash flows from Thunderbird are at feasibility study levels. He can pay back the debt, (my est is $250 to $270m) within 5 or 6 years then use the free cash to create more mineral sands wealth elsewhere. But what if the free cash flows are significantly more subdued for a longer period? Will he wait, or take opportunities in South America and Asia when he can. If he waits opportunities may be lost, if he goes, here comes more uncertainty and dilutive capital raisings. My view is he wont wait. Life is too short and taking care of Thunderbird alone just does not fit with his ability and aspirations.

What does all this mean? The key importance of quickly (within the next year or so) matching the feasibility study forecasts, married with the huge uncertainty that it can be done. This is against the background that any ongoing clarity, may not be forthcoming until the last days of July when production is clarified in the qrtly.

I note some wont like my comments above. I certainly dont want to 'spook' investors or 'worry them' unnecessarily. SFX is not going broke and has been underpriced significantly on the basis of probability of production risks right up until the recent quarterly. It may soon and comfortably overcome current problems. But the risk in owning SFX has increased significantly and the shareholder rewards appear more distant.