from the horses mouth

The Explorer chats to Matt Gauci,
the Managing Director of Heron’s
uranium listing Epsilon Energy,
which listed on the ASX on 13
December, 2006.
Epsilon Energy
Volume 1, Issue 4, December 2006
Page 1 of 4

Can you explain to investors why an IPO was
chosen as a vehicle for Heron’s uranium assets, as
opposed to the assets remaining in the Company or
being sold or joint ventured to another Company?

Despite their prospectivity, the market hasn’t fully valued
the assets alongside the nickel projects inside Heron. The
legislative framework surrounding uranium mining in
Australia is currently being reviewed and is expected to
be met with positive change for the industry.
So with the uranium assets in a dedicated company, run
by experienced management and with adequate funding
we believe that is the best corporate vehicle for the
uranium assets to be recognised to extract their true
value.

How will Epsilon’s proposed capital structure work
and how will Heron shareholders gain from their
involvement in the new Company?

The company has recently listed on the ASX at a 50%
premium.
Heron will continue to hold 37.5% of the Company and
intends to distribute these Shares to its shareholders on a
pro-rata basis. The record date for the in-specie
distribution was 11 December 2006. Heron intends to
undertake the in specie distribution of the Shares to its
shareholders within 12 months after Epsilon’s Shares
were quoted on ASX, being the 13 December.
A key element of any new listing is management,
and the Epsilon board includes some well-known
names in the resources and uranium sectors. What
do you see as the key strengths of the board?

A key strength of our board and management team is its
uranium industry experience. We are fortunate to have
substantial uranium mining and exploration experienced
people involved directly in the Company. Chairman Bruce
Larson and I have previously worked with Rio Tinto on
their uranium assets and the board has the objective of
delivering growth and yield returns for shareholders.
My experience in the uranium industry, includes
operational management roles at the Kintyre Uranium
Project in Western Australia with the Rio Tinto Group and
as a founding Director of uranium explorer Scimitar
Resources Limited (ASX:SIM). Mr Larson, also with the
Rio Tinto Group for more than 20 years, held various
senior management roles in business development and
exploration, as well as in project development, particularly
at the Kintyre Uranium Project, and is currently a Director
of Wildhorse Energy Limited (ASX:WHE) as well as the
newly formed industry leadership group the Australian
Uranium Association.
Other board members also have strong uranium
backgrounds including University of Western Australia
Professor of Geophysics in the School of Earth &
Geographical Sciences Mike Dentith, who has 20 years
experience in minerals and petroleum industry including
research on sandstone-hosted uranium mineralisation.
Heron COO, Mathew Longworth is also a Non-Executive
Director while senior geologist Stefan Gawlinski takes up
the role as Exploration Manager for the Company. Both
Mat and Stefan have significant experience with major
through to junior mining and exploration companies in
Australia. Stefan has a record of achievements in all
facets of exploration including resource discoveries and
delineations, project management, recruitment,
environment and safety gained with companies, including
Rio Tinto Zinc Ltd, Mt Martin Gold Mines, Normandy
Mining Ltd, Newmont Australia Ltd and Oxiana Ltd.
Epsilon controls a large tenement holding across
Australia prospective for uranium. Can you tell us a
little about the key projects located?
The Company controls the rights to uranium
mineralisation at seven key projects covering 8,851km2
of prospective tenements in four Australian States. There
are over 50 tenements in total under Epsilon’s
management.
The focus is on geological environments that are suitable
for large tonnage-low operating cost uranium systems,
primarily sandstone-hosted, calcrete-hosted deposits,
using the Beverley, Mulga Rock and Yeelirrie deposits as
appropriate models, three of Australia’s largest uranium
deposits.
The Balladonia Uranium Project in the Eucla Basin (WA)
represents a large scale uranium exploration concept
seeking sandstone-hosted deposits within a project area
covering 6,563km2. The geological environment is
comparable to the Frome Basin in SA, and the Gunbarrel
Basin in WA, host to more than ten sandstone-hosted
uranium deposits. The favourable features are adjoining
radiogenic granite uranium sources, large extensive
palaeochannels containing rock types favourable for
accumulation of uranium, and an encouraging suite of
previous uranium exploration results.
The Mt Phillips Project in the Gascoyne Complex (WA),
represents a more targeted exploration and development
project, focusing on delineated calcrete – hosted uranium
deposits. The project area contains known uranium
mineral inventories over an area of 392km2 with recent
grab samples returning values of 0.024% to 0.708%
U3O8 in pits. A drilling program is planned on the granted
tenements, to expand the continuous high-grade
carnotite uranium mineralisation. The highest values from
material in valleys were reported to be at 1.18% U3O8,
with the target model being the Yeelirrie, that has a
contained resource of 52,500t U3O8.
The remaining assets in Epsilon’s portfolio are located in
more established uranium provinces and states,
particularly the West Frome Project in the Frome Basin,
South Australia, the Mt Denison Project in the Ngalia
Basin, Northern Territory and the Pandanus West Project
in the Georgetown–Townsville uranium field, Queensland.
These projects are targeting sandstone-hosted uranium
deposits, intrusive-related and volcanic-related uranium
mineralisation.
What is the advantage of such a diverse project
portfolio?
The diverse project portfolio is a representation of our
exploration and development strategy which has
considered geopolitical certainty, geological variation and
mineral economics. As a second mover in this cycle of
the expansion of the uranium industry, it is important to be
cognisant of all relevant factors that have recently effected
the industry and those that are likely to continue to be an
influential force.
From a geopolitical perspective, a recent Federal
Government taskforce into uranium mining, processing
and nuclear energy in Australia found that government
policies are restricting the expansion of the Australian
mining and export industry. Australia's eight state and
territory governments currently limit uranium mining to
three sites in only two states, with divergent views
towards uranium mining across the governing landscape.
While the taskforce report has called for these restrictive
policies to be addressed and Epsilon supports this view,
the Company has also sort to disperse its risk by
maintaining an extensive portfolio across both states
where uranium mining and processing is supported, such
as NT and SA, and those states where we believe a
change in policy is evolving, such as WA and QLD.
In terms of Geological variation, Epsilon is primarily
seeking large tonnage low operating cost uranium
systems. In Australia, these predominantly occur within
either Sandstone hosted deposits or Calcrete hosted
deposits.
Sandstone deposits constitute about 18% of world
uranium resources and 7% of Australia’s total resources.
Orebodies of this type are commonly low to medium
grade (0.05 - 0.4% U3O8) and individual orebodies are
small to medium in size (ranging up to a maximum of
50,000 tonnes U3O8). Conventional mining/milling
operations of sandstone-hosted deposits have been
progressively undercut by lower cost ISL mining methods.
Calcrete deposits comprise about 4% of world uranium
resources. Calcrete deposits represent 5% of Australia’s
total reserves and resources of uranium, and 25% of
WA’s, with Yeelirrie in WA by far the world's largest
calcrete deposit. Other significant deposits in WA include
Minindi Creek, Lake Way, Centipede, Thatcher Soak and
Lake Maitland. Calcrete deposits are commonly
associated with high tonnage near-surface mineralization
and this is the target style at our Mt Phillips and Ida Valley
projects.
In terms of mineral economics of the various styles of
uranium mineralization we are seeking, a recent study on
the development of the sandstone-hosted Honeymoon
Project in SA, estimated an operating cash cost of
US$12.40/lb over the projected mine life, using ISL as
the mining method. While a recent study of the
development of the Lakeway and Centrepede deposits in
WA, have projected an operating cost of US$21.00/lb,
using conventional open pit mining as a method. This is
consistently below the industry cash cost curve of
operating mines, given a of U3O8 spot price of
approximately US$65/lb, and presents robust project
economics, once Epsilon delineates and develops a
resource.

In summary we feel we are targeting the style of uranium
mineralisation in the right Australian states with the
appropriate exploration models, that will provide
shareholders with both growth and yield returns.
Where do you initially plan to spend the money you
are raising in the float?
Proceeds from the Offer will fund an active exploration
strategy initially focussing on our two lead projects, Mt
Phillips in the Gascoyne Region, WA, and Balladonia in
the Eucla Basin, WA. Field and Desktop work has
commenced and drill rigs are booked for both projects
early in the new year. We are very pleased to have
commenced exploration so soon after listing, and this is
indicative of the pace we intend to move at and the
commitment we have for uranium exploration in Australia.
At Mt Phillips, field exploration has been completed,
which has optimised drill hole siting and a preliminary rock
chip and stream sediment sampling program is currently
been assayed. Historical results indicate high grade
calcrete uranium with results ranging from 0.024% to
0.708% U3O8. This will be followed by a targeted drill
program in January to confirm the extensions of the
known uranium mineral inventories within and nearby the
tenement boundaries.
At Balladonia, desktop exploration work has commenced,
so to optimise drill hole siting with a follow-up drill program
of historical uranium work completed by Rio Tinto
Exploration at the Balladonia Uranium Project, planned for
January. This will allow the Company to better understand
the regional system of adjoining radiogenic granite
uranium sources, the large extensive palaeochannels and
the rock types that are favourable for accumulation and
supergene enrichment of uranium.
What are your thoughts on the outlook for the
uranium market?
Epsilon is bullish on the outlook for the uranium industry,
particularly in Australia. We support some of the recent
analysts reports on the price of uranium breaching the
US$100/lb in the next 12 months.
Moreover, to better understand the importance of the
Australia’s uranium resources to global energy
requirements, one must consider current global energy
policy, which is now seeing the need for clean, secure
and economic energy sources as critical. Developing and
developed nations such as China, India, Russia, Europe
and North America, are leading the development of the
Nuclear Energy industry and its this demand that will drive
the industry.
A recent government report on the development of the
Australian Uranium industry quoted Australia’s in ground
resources of Uranium to worth a staggering US$275
billion. The Olympic Dam project in South Australia alone
contains more than four times the energy resources than
the entire North West Shelf in WA. A phenomenal
statistic, given our states focus on the importance of
LNG.
What we are experiencing in the development of the
uranium industry and the nuclear energy industry
worldwide is not, by any stretch of the imagination, a
boom cycle that will subside soon. This is undoubtedly a
step change in global energy policy, which along with
sentiments, drives economics, and we as Australians are
fortunate to be better positioned than any country in the
world to capitalise on this global shift in policy.