latest research - spells it all out.

The following latest Independant Mining Research on Heron Resources clearly shows the current state of affairs at Heron.
If one takes the time to read then one can draw his/her conclusions at Heron's true value.

Author: John Macdonald.
As found on Heron's newly updated website.

Summary:
Among nickel laterites the Kalgoorlie Nickel Project offers a
rare combination of size, amenability to pressure acid
leaching, political security, and environmental stability.
A recent technical discovery relating to the KNP’s main ore
type could mean that high average grade can be added to
the list of the KNP’s attributes; effectively fulfilling the major
mining company wish list for new nickel projects.
Inco has committed over $US17 million to the KNP on the
strength of Heron’s results to date.
Few if any other nickel projects around the world appear
capable of diverting capital from the KNP.
To earn an interest, Inco must free carry Heron’s 40% of the
KNP through to capital payback, except for a token expense at
project finance. Heron bears almost none of the project risk and
will share in 40% of the upside.
BHP Billiton bought 11% of Heron’s shares a week after the
KNP JV was announced, further endorsing the KNP’s merits.
The conflicting goals of Inco and BHPB could turn in Heron
shareholders’ favour.
At minimum return rates and a 60% probability of successful
development, Heron’s stake in the KNP can be valued at 80
cents per share. Upward revisions will be required as Inco achieves each JV milestone.
Company Background
Heron Resources Limited (Heron) began acquiring tenements over nickel laterite deposits in the
Kalgoorlie region in 1997. The subsequent operational woes of Murrin Murrin, Cawse and Bulong
effectively discouraged competing prospectors and Heron opportunistically acquired most of the
nickel laterite prospects in the arc between the three operations, including the Bulong mineral rights
in April 2004. Heron pegged nearly 5,000 square kilometres of tenure covering the ultramafic
sequences north and east of Kalgoorlie that now comprise the Kalgoorlie Nickel Project (KNP). In
September 2004 Heron estimated aggregate nickel resources, in four main project areas, of 903
million tonnes at 0.74% nickel and 0.05% cobalt.
At the end of March 2005, Heron announced that Inco Limited (Inco) had agreed to earn up to 60% of
the KNP. A week later, in a separate move, BHP Billiton Limited (BHPB) bought 11.2% of Heron on
market. Inco responded within seven days by subscribing to a placement in Heron, paying $A12.4
million for a 10.5% stake and diluting BHPB back to a 10.1% interest in the process. Heron and Inco
signed the KNP joint venture agreement in July 2005, officially launching one of the most ambitious mineral development programs underway in Australia.

Nickel from laterites – The KNP in context.
Despite the generally painful financial experience associated with nickel laterite projects worldwide in
the past, all of the major nickel producers are persisting with efforts to convert more laterite resources
into nickel mines. The common threads running through each producer’s strategy are the underlying
convictions that:
a) Growth in sulphide ore sources will be insufficient to meet nickel demand,
b) Refinement in the technology of extraction will force down the basic cost of extracting nickel
from laterite ore, and
c) The process technology most likely to be refined to a competitive level is Pressure Acid
Leach (PAL), a hydrometallurgical process that enables high metal recovery rates and
relatively efficient energy use.
Although there has been broad agreement on the above, the companies diverged when it came to
how and where to tackle the nickel laterites. Each of Inco, BHPB, Falconbridge and Rio Tinto have
assessed every known nickel laterite on the planet and proceeded cautiously with only a few, without
at all collectively narrowing down the style of laterite that can be developed with a high rate of return,
and not too much risk. Against this background, the convergence of the two major producers on the
KNP speaks volumes about what has been learned about nickel laterites from experience in the past
decade.
Firstly it has become apparent that there are very few undeveloped nickel laterites in politically and
environmentally stable locations that can meet the technical requirements for development. Only two
tropical nickel laterite projects qualify as low cost producers today (Sorowako in Indonesia and Cerro
Matoso in Colombia), on account of long and costly project gestation periods, high grades, attendant
low energy costs, and political continuity. Even with the benefit of technical advances through
experience, finding a virtuous set of circumstances elsewhere is increasingly difficult.
A second discovery influencing future investment plans for new nickel supplies is a purely technical
one that has led Inco and BHP to Heron and the KNP. The unexpected success of certain screening
practices could convert the KNP’s massive low grade laterites into high grade autoclave feed. If
successful the KNP could prove to be a nickel producer’s holy grail; a low cost, long life, PAL project
in a politically and environmentally stable location.
KNP and the screening breakthrough.
Over the last few years, work at Cawse (OMG) and Ravensthorpe (BHPB) has discovered that oxidesilica
ores grading sub 1% nickel can be routinely and practically upgraded to +1.5% nickel through a
physical process alone. The project set to benefit most from this finding is the KNP, which contains
the largest known resource of oxide-silica type nickel laterite. Heron and Inco have set out to
replicate the ore upgrade effects with KNP ore, and design a mining and treatment operation to take
advantage of the findings.
Most of the known resources of oxide-silica nickel laterites in Australia are derived from a unit within the Walter
Williams Formation, a vertically dipping ultramafic lava flow that extends from west of Kalgoorlie to Ghost
Rocks, north of Menzies. A portion of the formation called olivine adcumulate is comprised of a single mineral,
which is low in aluminium and weathers to a consistent silica-goethite-kaolinite profile enriched in nickel and
cobalt. The Walter Williams Formation is unique in terms of the extent of deeply weathered olivine
adcumulates. The nearest known analog is the Bandalup Ultramafics at Ravensthorpe, which extends over 30
kilometres of strike compared to the Walter Williams Formation strike length of over 170 kilometres.
Heron dominates ownership of the Walter Williams Formation adcumulates, with about 125
kilometres or 75% of the known prospective strike. Most of the remainder forms the basis for the
OMG Group’s Cawse operation. Although Cawse is a pilot scale project producing about 8,000
annual tonnes of nickel in intermediate form, Heron’s confidence in proceeding with the Kalgoorlie
Nickel Project is in large part based on the performance of the Cawse process train, in particular Cawse's success with upgrading siliceous ores by screening.

Cawse was commissioned in 1998 with a resource of 275 million tonnes at 0.7% nickel and 0.04% cobalt, of
which 80% comprised laterites over Walter Williams Formation intended for upgrade by screening prior to
treatment in an autoclave. Cawse’s screening practices have evolved with experience and technical
development. Initially higher grade (1%+ Ni) siliceous ore was mined preferentially and screened through a
relatively coarse mesh (212 micron), achieving an average upgrade in the order of 40% and a leach feed grade
of about 1.7%. Improved upgrade rates have since been achieved at lower ore grades and finer mesh sizes, so
that on average a 0.8% mined grade is screened through a sub 100 micron mesh to deliver material grading
1.6% to the autoclave. BHP Billiton has drawn heavily on the Cawse experience in designing the Ravensthorpe
screening circuit, adding an attritioning unit to remove more goethite from the silica surfaces and improve nickel
recovery. In the first six years of operation Ravensthorpe plans to mine siliceous laterite grading 0.89% and
upgrade it to a leach feed grade of 1.87%. At each of Cawse and Ravensthorpe predictive models have been
developed to guide mine planning in achieving a consistent leach feed grade.
Heron’s testing of KNP laterites has so far been consistent with the Cawse and Ravensthorpe findings. As
expected due to the geological closeness to Cawse, the same broad mineralisation types with analogous
screen upgrade responses have been identified. In accordance with early Cawse practice Heron has tested
over 5,500 KNP drill samples by bottle roll (to emulate the washing process) followed by screening through a
500 micron mesh. The average upgrade of the screened siliceous samples has been 54%. The more recent
success of both Cawse and Ravensthorpe with finer mesh sizes and lower grade material encouraged Heron
to test 180 micron screens across a range of cutoff grades in August 2004. The results confirmed the trend of
improving upgrades of siliceous mineralisation with lower grades and finer mesh sizes; a finding which has
added impetus to the KNP. The possibility that a lower cutoff grade (down to 0.5% Ni) can be applied to the
KNP resources, while still delivering a leach feed grade of up to 1.5% Ni, has the potential to greatly improve
the mining continuity of the deposits and thus enhance the conversion of resources to reserves.
Further tests of KNP resource screen upgrading are planned. Larger sample sizes are required to test 75
micron mesh screening because of the reduced screened product.
The determination of the screening upgrade behaviour to be expected from KNP resources is an important first
step to establishing the viability of the project. One of the lessons of the first generation of Australian PAL
developments is that a leach feed grade of at least 1.3% nickel is required to cover the capital and running
costs of the leaching circuit, considering long run nickel prices of $US3.50/lb. The costs of the mechanical
mining and screening processes are insignificant relative to the expense of running and maintaining a set of
autoclaves and the associated pipe work under high temperature, high pressure, acidic conditions. As long as
the tonnages are available, any means of increasing the leach feed grade is likely to improve project
economics, regardless of the mass of nickel lost from the starting resource during mining and screening.
The Kalgoorlie Nickel Project JV
In July 2005 Inco signed a joint venture agreement with Heron for the purpose of developing the
KNP. To earn a 60% JV interest, Inco must fund all evaluation costs up to a decision to mine (Inco
has estimated the evaluation process will cost at least $US68 million). Inco must also lend Heron all
but 4.5% of Heron’s share of project equity finance required after the decision to mine. Inco will be
entitled to purchase Heron’s 40% share of KNP output on commercial terms. The agreement
received regulatory and Heron shareholder approvals in October 2005.
The terms under which Inco must carry the KNP through a decision to mine and project finance in order to
earn an interest, are included as provisions in the joint venture agreement. The first of four steps on the
way to completing a feasibility study is for Inco to check Heron’s data and assumptions, upon which Heron
has estimated that the KNP can produce at least 120 million tonnes of material at a leach feed grade of
1.5% nickel or better. The estimated cost to Inco of the program is US$2.4 million.
As in any earn-in joint venture agreement, Inco is spending the money and can withdraw from the joint
venture before a decision to mine is made. Heron will retain 100% of the KNP in that event. Heron can
also terminate the agreement if Inco fails to meet certain deadlines specified in the agreement. Inco’s
current checking program must be finished by July 2006, initial metallurgical testing and flow sheet
selection must be completed by September 2007, all pre-feasibility study work including infill and
extension drilling must be completed by January 2009, the feasibility study must be finished by July 2011,
and if a positive BFS results a decision to mine must be made before July 2013 (otherwise Heron has certain rights to bank the project and so increase equity and secure off take rights)
In the context of nickel laterite projects six years is a reasonably tight assessment schedule.
Breakneck BFS speeds set by earlier projects such as Murrin Murrin resulted in high prices paid in
terms of retro-engineering. The large size of the KNP resource base dictates an extensive drilling
requirement (step three) which under the current timetable must be completed between September
2007 and January 2009. An early start to step three drilling would ease pressure on the timetable.
The JV agreement gives Inco flexibility on the project’s timing, which is likely to be dictated by
progressive results from the KNP, Inco’s reading of nickel supply and demand, and Inco’s refinery
requirements. Inco plans to commission Voisey’s Bay in 2006, Goro in 2007, and expand PT Inco by
2009, spending about $US3 billion in the process. The KNP is Inco’s next most likely green fields
investment, and could be in production as early as 2013 if Inco believed it was the best available
option for meeting demand growth. Both Goro and Voisey’s Bay will have hydrometallurgical refining
facilities to which the KNP could be designed to supply intermediate nickel product.
Inco established a team in Kalgoorlie in April 2005. The immediate tasks undertaken include relogging
previous drilling and auditing the effects of the RC drilling process on the samples. Diamond
drilling, twinned against Heron’s previous holes, commenced in October 2005 as part of the program.
Heron expects (step two) metallurgical diamond drilling (delivering undisturbed samples to the laboratory)
to commence immediately upon completion of the current confirmatory (step 1) diamond drilling
For Heron, a free carried 40% of the KNP, all the way to payback, with only a token capital
requirement at financing stage, is a dream agreement that could only reflect Inco’s enthusiasm for
the project. Heron bears virtually none of the project risk and will enjoy 40% of the upside. BHPB
appears to have been impressed, perhaps by both the project and the JV terms, when choosing to
take an equity stake in Heron.
BHPB’s interest in Heron
Although BHPB’s intentions with regard to its Heron stake are unclear, the effect is to introduce some
competitive tension into the future ownership of both Heron and the KNP. BHPB could increase its
stake in Heron with a view to eventually becoming Inco’s 40% partner. Heron’s feasibility study free
carry and the terms of the JV are certainly attractive enough for BHPB to entertain the possibility.
Moreover BHPB will have plenty to offer the JV through its experience at Ravensthorpe. The only
obvious sticking point would be Inco’s rights to the offtake.
BHPB may also be prepared to act as fall back partner, ready to step in should Inco not proceed to
development under the agreement.
From Inco’s perspective the presence of BHPB on Heron’s register will be disconcerting, especially in
the light of BHPB’s takeover of WMC Resources Limited. The prospect of a major competitor seeking
to take over a JV partner is not generally accepted in markets such as nickel, where technical
advantages are closely guarded. Since Inco carries all of the JV responsibilities through to BFS, the
technical exchange could be a one way street. Inco’s decision to take a placement in Heron is
ostensibly a warning to BHPB that Inco will not tolerate BHPB hitching a ride on the JV through any
sort of board control of Heron.
Valuation issues
Inco has committed at least A$17.4 million to Heron via the placement and KNP JV expenditure to
date, while BHP has spent A$5.6 million on shares in Heron. At one end of the scale of significance
the amount of money involved will not blow out the respective annual corporate development or
exploration budgets. At the other, Heron owns a large nickel project that two major nickel producers
are prepared to enter into open competition for. The odds of its eventual development have
shortened as a consequence.
For the KNP to eventually be developed with a real terms capital cost of over A$1.4 billion, an NPV of
at least A$580 million would need to be demonstrated, assuming a minimum 15% hurdle rate of
return on capital. If development were assured, Heron’s share of the NPV, which is greater than 40%
by virtue of the free carry, would be at least A$240 million. At a 60% probability of successful
development an initial valuation of 80 cents per share (fully diluted) is reasonable. The probability will climb as Inco achieves each JV milestone.

The relatively open timeline within which Inco can develop the KNP reflects Inco’s general attitude
which dictates that green field PAL nickel projects take 8-10 years from exploration to
commissioning. Inco may be over cautious on the timing in view of its experience in New Caledonia
and elsewhere. Certainly, if the KNP stacks up Inco could conceivably shorten the timetable, taking
into account improved contractor response times and its own greater confidence in HPAL processes.
At any rate Heron’s equity participation terms more than make up for any caution that Inco might
bring to the project. Also the time to cash flow returns from the project is balanced by the scale of the
investment, which withstands even heavy discount rates.
The real value of the KNP lies in its capacity to attract capital away from competing projects.
Project comparison
The pace of nickel demand growth suggests 40-50,000 tonnes of new nickel capacity, or the
equivalent of one green fields project, will need to be added each year. Assuming sulphide source
production can be maintained in the face of resource depletion pressures, all of the growth will need
to come from laterite sources.
The two main competing nickel laterite project ‘types’ are smelting and PAL. In general the deposit
mineralogy determines which of the two apply to any particular project. Laterite smelting projects are
relatively energy intensive, requiring a combination of high grade ore and cheap power to be
competitive. Dwindling high grade ore sources and increasing power costs are reducing the viability
of new laterite smelting projects relative to PAL nickel projects.
Because of the constraints facing future nickel production worldwide, a comparison of the KNP with
other PAL projects can give a sense of its likelihood of development. If the KNP can be ranked among the best
of the PAL projects then it can be reasonably assured of development.


Of the active PAL projects identified, only Goro, Vermelho, KNP and probably Gag Island appear
capable of delivering a 1.5% average nickel leach feed grade to the autoclaves at a +40,000 tpa
scale, over a +20 year project life.
All projects, other than those in Australia, occur in tropical climates with attendant environmental
issues of tailings and effluent disposal. Projects in Madagascar, New Caledonia, Cuba, PNG, and
Indonesia also contend with some potential for social or political unrest.
The KNP is at an earlier stage of assessment than most, as the potential for upgrading of the KNP
laterites has only recently been quantified.
Examination of the list of active HPAL projects tends to support Inco’s statement after entering into
the KNP JV, that “finding a project of this scale with established infrastructure in a politically attractive
location is extremely difficult”. Realisation of Heron and Inco’s initial expectations of the KNP would
elevate the KNP to the top tier of green field nickel projects in the world.

Heron’s other assets

Since the mid 1990s Heron has been one of the most active tenement acquirers in Western
Australia, concentrating on but not restricted to the greenstone belts of the Eastern Goldfields.
Except for some tenements over Walter Williams Formation in the KNP, Heron has compiled its
tenement portfolio entirely through application for vacant leases and by land swap arrangements with
other tenement holders. The minerals industry downturn from 1999 to 2002 enabled Heron to secure
regional scale holdings at negligible cost. A significant number of the tenements are held under
application, awaiting grant following the native title process.
Although the final boundaries of the KNP will depend on Inco’s nomination by March 2006 of
tenements likely to contribute to the KNP, the designated area of interest from which Inco must make
its choice contains less than 20% of Heron’s total holdings by area. The total portfolio, including the
area to be allotted to the KNP, covers nickel sulphide, gold, iron ore, copper and uranium prospects.
In addition to the KNP joint venture, Inco and Heron have agreed to form a separate joint venture to
explore for nickel sulphides on Heron’s tenements.

At Kalpini, laterite and sulphide nickel mineralisation occur in close association. Heron’s Kalpini
tenements surround the Emu Lake and Acra prospects of Jubilee Mines led joint ventures, where
basal contact massive sulphides have been discovered. Heron found and sampled a gossan
coincident with a magnetic anomaly north of Jubilee’s Emu Lake prospect in 2004. Elevated nickel,
copper and PGE values confirmed the prospectivity for nickel sulphides. Plans for EM surveys over
up to 12 nickel sulphide targets in the broader Kalpini district were put on hold pending negotiations
with Inco in 2005.
A second region of interest for nickel sulphides exploration is Heron’s Transfind-Cowarna Downs
block, south of the Silver Swan and Acra nickel sulphide belts.
The terms and scope of the nickel sulphide exploration joint venture between Inco and Heron are yet
to be finalised. The announced intent is for Inco to fund all exploration with minimum Department of
Industry and Resources expenditure commitments, and that any development will be owned 60% by
Inco and 40% by Heron upon Decision-to-Mine.
In October 2005 Heron announced the discovery of gossanous material within ultramafic sequences
at Ghost Rocks. Samples taken from malachite rich stringers over a 400 metre strike length assayed
up to 6.5% copper with elevated nickel, platinum and palladium. A ground electromagnetic survey of the Ghost Rocks sulphide prospect will be completed in 2006
in prepearation for drilling.

To allow a nickel laterite focus and help finance exploration and development of project areas outside
of the core nickel laterite holdings, as they take shape and progress through to grant, Heron has
floated separate companies and distributed the vendor shares to Heron shareholders. Gold and
nickel sulphide prospects were transferred to Avoca Resources (ASX code AVO) and Pioneer Nickel
(PIO) in 2002 and 2003. In each case the shares that Heron received as consideration for the
prospects were distributed pro rata to Heron shareholders. The strategy has delivered effective
dividends to Heron shareholders of $16 million (at February 2006 share prices), as well as provided
for external project finance and management. Heron also received 6 million options in Avoca which it
sold, and still holds 6 million options in Pioneer.
In February 2006 Heron had three subsidiaries at various stages of preparedness for initial public
offers. Ochre Resources, comprising a portfolio of iron ore projects, is the most advanced of the
three. Regent Resources was established to hold Heron’s gold and copper assets in the Eastern
Goldfields, post the KNP and nickel sulphide joint venture carve out. Balladonia Energy has pegged
oil shale, mineral sands and uranium prospects.
Heron employs seven experienced geoscientists based in Kalgoorlie. Four work on new project
generation and three are seconded to Inco for the KNP laterite work. After ten continuous years of
operating out of Kalgoorlie, Heron’s knowledge of the Eastern Goldfields delivers a competitive edge in tenement acquisition and exploration.