SMC Gold LimitedABN 45 071 349 249PO Box 313Spring...

SMC Gold Limited
ABN 45 071 349 249
PO Box 313
Spring Hill
Queensland 4004
Telephone 07 3839 4166
Facsimile 07 3839 7644
Dear Shareholders,
You will shortly receive a notice of meeting for a General Meeting, which I recommend
you read carefully.
Most of the resolutions to be put to the General Meeting relate to the transformation
process upon which the Company has recently embarked. It had become clear that SMC
Gold was not performing as expected, and that changes were needed to position the
Company better to fully utilise the assets and capital invested in the business.
I am pleased to advise that in the two months since this transformation process began, we
have been particularly busy, and I summarise the advances made as follows:
Executive Management Changes
Mr Peter Evans resigned as Non-Executive Chairman of the Company and has remained
on the Board to facilitate the handover process. On behalf of shareholders, I record our
thanks to Peter for his contribution to the Company through often difficult times. The
extent of the loans Peter has made to the Company, and which will, if approved, be
retired at this General Meeting, bear testament to Peter’s commitment to the Company.
As Non-Executive Chairman going forward, I am delighted to be working with an
outstanding Executive Management Team:
• Mr Michael Fischer was appointed as Managing Director in August, and as I
write, is on-site in Chile, completing the restructuring of the operational
management team. Mike’s deep experience in Australian, PNG, and South
African base and precious metals mines is extensive and brings to us, proven and
impeccable credentials in senior management, with a focus on disciplined
planning, budgeting, execution and control of strategic outcomes.
• In August, the Company also appointed Mr Steven Playford as General Manager
of Punitaqui operations. This represents a return to Chile for Steven, whose career
included a spell working for a large mining contractor in Santiago. Steven’s career
has focused on highly disciplined, rigorous project management and
organizational change management, skills which are essential to our immediate
future in Chile. Steven intends to make his long term future in Chile, and will play
a key role going forward in our delivery of operational and project success.
• Mr Simon Brodie has played a vital role in recent years as Chief Financial Officer
(CFO), often carrying great workloads and responsibilities. Simon’s contribution
as CFO has been immense, and I personally have greatly appreciated his tenacity,
determination and unflagging enthusiasm as difficult changes have been made in
recent months.
The Executive Team is currently reorganizing the operational management team in Chile,
and key specialist appointments have been made to bring suitable skills to bear on
mining, planning and metallurgical performance.
Operational Performance: on-track for turnaround
The Company has embarked upon a vigorous campaign of operational improvement, with
a focus on expansion and improvement of the metallurgical facilities at Punitaqui, Chile.
The most pressing need at present is to introduce a culture of planning, budgeting, focus
on execution against budget, with rigorous controls and accountability for performance.
This is a process that will take some time to complete, but the response from operational
managers to date has been most encouraging.
The new Executive Management Team is committed to delivering on the performance,
and shareholder value that has not been satisfactory in recent years. The process of
improvements and change is ongoing, and regular reports will be made to you on
progress.
Performance in the first quarter of the 2007 Financial Year has been most encouraging to
date.
• Throughput at the Punitaqui Mill has increased from an average of 728 tonnes per
day in FY 2006, to levels in August which have consistently been in the range of
880 – 920 tonnes per day, representing increases in excess of 20%.
• Copper recoveries from the Punitaqui concentrator averaged 67.48% in FY 2006,
and thus far in the new financial year, recoveries have typically ranged between
70.4% and 71.7%, representing increases of 4% or greater.
The impact of these improvements on the bottom line will be readily apparent, and I feel
confident will be improved upon with the current mill and concentrator upgrade project.
Mill and Concentrator Upgrade
The Company recently announced a significant upgrade to the mill and concentrator,
which have for over a year, been the source of considerable frustration and value erosion.
Operating at the historical levels recorded in the 2006 financial year is not an economic
proposition in the long term.
The Punitaqui facility, when the company bought it, was old, and not suited to the harder
Cinabrio ores. Management believe the current upgrade will address both throughput and
metallurgical recovery value drivers, by focusing on delivering a finer grind of ore for
enhanced recoveries in large flotation cells with improved residence times for greater
recovery.
Throughput of a minimum 1250 tonnes per day is targeted, at a recovery of 80% or
higher. Management believes that the impact this will have on both enhanced production,
and lower operating costs, is expected to be considerable. The project is costed at
US$3.5m (approximately A$4.7m) and will be funded from cash flow, to avoid further
shareholder dilution.
It is important to stress that this is an interim stage of the operation’s development, and
that several key pieces of equipment are being ‘oversized’ to allow for a rapid and
relatively cheap further expansion to a minimum of 2500 tonnes per day throughput. The
timing of this is not yet certain, and much will depend on the development of a mine plan,
based on an enhanced reserve and resource position. It is hoped this will be effected by
the end of calendar 2007.
Exploration Programme
Since the purchase of the Chilean suite of ore bodies, the Company’s drilling programs
have been limited by allocation of funds to other priorities, but the impact of each
programme on the reserves and resources have been quite outstanding.
The recent programme, which was announced in early August, will take most of the 2007
financial year to complete, and its cost of US$1.8m (approximately A$2.4m) will be
funded from cashflow. The key objective of the programme is to increase the reserves
and resources at Cinabrio, and to establish an oxide resource over several exciting oxide
prospects at Dalmacia, and Santa Elvira in particular.
While an updated JORC reserve and resource position will be published soon as part of
our annual reporting, it is expected that the resources will be rapidly converted to reserves
as appropriate mine planning and design is undertaken. The Company is fast-tracking the
implementation of best practice mine planning systems to expedite this reserve
development.
Australian assets
The Company has set-up a separate project team to actively review and progress value
enhancing strategies for the Australian assets of SMC Gold. As you are aware, we have a
number of exploration leases as well as an option over the mill at Rishton. We will
shortly be announcing plans as to how we will manage this aspect of the business going
forward, and how this will impact on shareholder value. Management is confident that
we will have a number of options that are value accretive for our shareholders.
Outlook for SMC Gold
The copper industry is undergoing a period of exciting demand and supply dynamics;
with the outlook for copper as good as it's been in several decades. With extensive supply
side disappointments and robust demand, this environment is expected to continue for
some time.
We will focus our attention on expanding production, reducing costs, and securing the
next projects as part of a project pipeline to underpin continued growth in shareholder
value.
Yours sincerely,
Hugh Callaghan
Non-Executive Chairman
30 August 2006