Open Briefing Magnesium Int CEO on Funding SAMAG ASX Report 10:07:0251 13/11/2002 Issuer: MIL MAGNESIUM INTERNATIONAL LIMITED 2002-11-13 ASX-SIGNAL-G
HOMEX - Sydney
+++++++++++++++++++++++++ CORPORATEFILE.COM.AU
Magnesium International Limited (MIL) has completed the Bankable Feasibility Study (BFS) for its SAMAG magnesium project (MIL 100 percent) and recently announced that the financing stage of the project is now changed to Q2 2003 from end 2002. Why the delay?
CEO GORDON GALT
When we outlined our equity strategy in September we said that locking in strategic investors was desirable before we proceed with our equity raising on market. The financing stage has been delayed because we have yet to complete this step. Several major companies are presently undertaking due diligence on the SAMAG project and we would expect some form of commitment within the next several months.
CORPORATEFILE.COM.AU
You've described the technical and financial results in the BFS as excellent. Do potential equity investors have any major concerns with the BFS?
CEO GORDON GALT
Investors who have looked at the BFS are most complimentary about the standard of engineering and financial evaluation that has been completed. The BFS showed that the SAMAG Project generates an internal rate of return of 14.8 percent real after tax, a 5.6 year capital pay-back and a net present value of $750 million using a 10 percent discount rate.
In addition, the sensitivity analysis shows that the project remains robust. At US$1.15/lb, for example, Project IRR is still +13 percent nominal after tax in large part due to the scope for achieving considerable savings. Of course we don't expect to be negotiating contracts with die casters at these levels but it's a comfort to know there's adequate cover on the downside.
CORPORATEFILE.COM.AU
The BFS assumes capital expenditure of $760 million plus financing costs, or around $1 billion in total. You expect funding to be in the proportion of approximately 70 percent debt and 30 percent equity, assuming the debt consists of both senior and mezzanine debt. When do you expect to finalise the debt Information Memorandum?
CEO GORDON GALT
We're currently in the negotiation phase with several major banks. Four separate debt providers will tender to become lead arrangers for senior debt and two for mezzanine debt. The results of the BFS have been confirmed by Behre Dolbear, the Independent Engineer employed by the proposed senior debt banks. There seems to be considerable debt capacity in the market for this Project, driven off its low risk profile. The latest draft of the debt Information Memorandum is complete except for the section on equity and we've circulated the document on a limited basis. We won't distribute the final IM until we've made definite arrangements for equity.
CORPORATEFILE.COM.AU
How would you now describe the risk profile of the SAMAG Project?
CEO GORDON GALT
The Project is a low-risk project in a new business for Australia. Some of the low-risk aspects are the proven Dow process technology, which has already produced over 5 million tonnes of magnesium metal, the fixed price construction contract, our already signed power agreement and our 100 percent sales agreement with ThyssenKrupp Metallurgie. So we know what it will cost to build and operate the smelter and we know we can sell our product with a guaranteed minimum price.
These factors substantially reduce the downside risk for the project without restricting the upside potential in any way. I suspect that the positive returns major banks have earned from financing Australian aluminium projects over recent decades may also be a factor given the SAMAG magnesium project uses a proven technology which is more legitimately comparable to such projects.
CORPORATEFILE.COM.AU
What's been the trend in terms of aluminium taking market share from steel as the preferred metal used in car components and what implications does that have for magnesium metal demand?
CEO GORDON GALT
Aluminium is still not the most-used metal in autos but usage is growing very rapidly. In the US for example, the average car used 97 lbs of aluminium in 1977 (2.6 percent of car weight), 165 lbs in 1990 (5.4 percent) and 255lbs in 1999 (7.8 percent). The growth is expected to continue.
This strong trend towards usage of light metal is a continuing good sign for magnesium as magnesium is a superior metal to aluminium in many applications and is lighter than aluminium. Magnesium is only produced in small volume at present, however, and hasn't enjoyed the R&D funding aluminium has historically enjoyed to enable it to achieve such rapid growth in usage - but this is being overcome. Many more applications are being pioneered each year and with them we confidently see magnesium growth in the order of 7 percent per year for at least the next decade.
CORPORATEFILE.COM.AU
Magnesium's prospects are considered so bright and it has been described as the metal of the 21st century. If this is so, why is the current magnesium market price as low as it is?
CEO GORDON GALT
When you look at the market for magnesium you find it is in two usage sectors. First you have the low value add, low growth sector comprising the steel desulphurization and aluminium alloying markets. This is the sector where the price has gone down in recent years. For this sector quality and reliability of supply are not so important and a lot of the magnesium used is sourced from China. Markets are becoming terminal and are subject to the world commodity cycle and stiff competition from other materials. But even here, the price is rising again with the very low inventories currently around.
The second sector is high growth and high value add. In this market, die casters are sourcing high quality alloys from reliable supply sources in the Western world. For these users, magnesium is the only metal that can provide them with what they want - for them it's the metal of the 21st century. Users need to have, and sign up for, long term contracts in large quantities. The market is far from terminal and prices are certainly not depressed as they are in the first sector. Chinese penetration into this market is minimal. Our offtake partner, ThyssenKrupp, would not consider Chinese suppliers for the markets we intend to service with them. It should also be noted that a number of new uses for magnesium are emerging in this sector in addition to die casting. R&D put into magnesium alloy sheet over the past few years, for example, will see a new major market emerge in the near future.
Australia is in the box seat to become the world centre of stable, quality primary metal production over the long term and therefore can capture the lion's share of better priced metal applications. The Chinese can remain the major supplier to the lower-priced markets as long as they keep getting cheap materials for their smelters, but there are many factors capable of pushing their costs up in future. Rising electricity costs and the currency valuation are just two of these. In contrast, our costs will remain low and very stable once we start production.
CORPORATEFILE.COM.AU
Thank you Gordon.
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