To manage reagent costs, Proto Resources aims to incorporate these lower cost leaching methods with innovative recycling technology. Processing nickel laterite involves leaching the nickel with acid, which forms the primary operating cost. Acid prices have been unusually volatile of late. After ranging between US$40-90/t since 1980, acid prices spiked to unprecedented levels in 2008, reaching a peak of US$390/t in September. By late 2009 the acid price eased to US$100/t, but over recent months it has since rebounded to US$150/t. Being the primary operating cost of the Barnes Hill project, the acid price will have a major impact on its economics. Figure 2: After decades of relative inactivity, acid prices have become very volatile over the last two years. As the main operating cost driver for leach based ore processing, the volatility has caused enormous headaches for nickel laterite projects. Proto aims to mitigate acid price risks by recycling it. Source: Bloomberg, Purchasing Magazine. To minimise the associated risks, Proto Resources aims to utilise a new technology that recycles acid and water used in processing, which could potentially reduce the projects acid bill by 80%. This recycling technology is controlled by Barrier Bay Pty Ltd (Barrier Bay), in which Proto is the major shareholder. Commercial testing is well underway and a scalable pilot plant could be operating by years end. Patent applications for the technology have been submitted. Iron Ore Potential This recycling technology also extracts iron and magnesium from the ore, turning otherwise waste into potentially valuable by-products. Iron ore revenues have the potential to significantly enhance the economics of Barnes Hill. In addition to iron extracted from lateritic ore via processing, the iron rich nature of the projects overburden could also become a revenue generator. 2008 drilling confirmed the presence of an iron cap atop of the nickel ore body. Intersections of 7-19m were encountered from surface, grading 35-45% Fe. Highlights are shown below: 16m @ 43.1% Fe from 0m 10m @ 42.1% Fe from 0m volatile acid price has impacted economics of laterite projects in the past new recycling technology could cut acid bill by 80% iron rich overburden could be sold to TEMCO Page 4 of 12 14 April 2010 On tenements adjacent to the Barnes Hill project, iron ore of similar grade to these assays is currently being mined and sold to the TEMCO smelter at Bell Bay. Offering further credence to Barnes Hills iron potential is that Tasmanias two other operating magnetite iron ore mines, Savage River and Kara, are based on similar resource grades of between 30-35% Fe. Preliminary Economics Through selling Barnes Hills iron rich overburden to BHP Billitons nearby TEMCO smelter, Proto could effectively turn a large portion of its mining costs into revenues. However this enhancement along with savings possible through Barrier Bays recycling technology have not been incorporated in economic modelling conducted to date. Proto Resources completed an in house scoping study on Barnes Hill in June 2008, and provided updated modelling in October 2009. The remodelled capex figure of $85m was consistent with initial estimates, of which around $25-30m will be required up front, and the balance for expanding output once in production. The project is not sufficiently advanced to carry out a rigorous financial analysis and sensitivity study, but acid prices and nickel prices are the main X-factors to consider. The companys base case production scenario assuming a 12 year mine life, US$7/lb nickel price, US$112.50/t acid price, and applying a 15% discount rate, yielded a net present value (NPV) of $165m. Proto Resources has suggested that every US$1/lb change in the nickel price impacts this valuation by ~ $50m, while every US$20/t move in the acid price has a $20m impact on NPV. Under these guidelines, recent movements in the nickel price towards US$11/lb appear to offset appreciation in the acid price to US$149/t. Its important to emphasise that this modelling doesnt take into account potential savings arising from reagent recycling methods which Proto aims to adopt, nor the possibility of additional revenue streams via iron ore by-products. Table 1: Results of the remodelled 2009 Barnes Hill scoping study using base case assumptions. These outcomes do not incorporate potential savings in acid consumption which Proto Resources new processing technology has to offer, nor additional revenue from iron ore by-products. Source: Proto Resources. Barnes Hill Scoping Study - Base Case Scenario Available Material 8.6 Mt Average Ni Content 1.1 % Average Co Content 0.06 % Projected Leach Recovery Ni 80 % Projected Leach Recovery Co 70 % Life of Mine 12 Years Ni Price 7 $US/lb Acid Price 90 A$/t delivered Exchange Rate 0.8 US/Au Total Projected Capex 85 A$ million Total Projected Revenue 1526 A$ million Operating Costs 672 A$ million Contingency Costs 15 % Projected Surplus 854 A$ million Project IRR 55 % Project NPV (using 15% discount rate) 165 A$ million scoping study doesnt incorporate positive impacts of recycling technology or iron ore production
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