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Level 4, 5 Mill St
Perth WA 6000
PO Box 7752
Cloisters Square WA 6850
Sherlock Bay Nickel Corporation Limited Phone: (+61 8) 9322 2288
ABN 46 008 942 809 Fax: (+61 8) 9324 2164
Email: [email protected]
www.sbnc.com.au
ASX ANNOUNCEMENT
3 May 2006
The Manager
Company Announcements Office
Australian Stock Exchange Limited
4th Floor, 20 Bridge Street
SYDNEY NSW 2000
Dear Sir/Madam
MINERALOGY CONFIRMS ITS WILLINGNESS TO DEAL AND PROCEED WITH SHERLOCK ON MAJOR IRON ORE DEVELOPMENT IN THE PILBARA AS THEY INCREASE THE TONNAGE UNDER NEGOTIATION TO 1 BILLION TONNES
The Chairman of Mineralogy Pty Ltd, Professor Clive F Palmer, has written to the Board of Sherlock Bay Nickel Corporation Ltd (“Sherlock” or “Company”) and proposed the following which is an extract of the Mineralogy Pty Ltd letter:
“I attach an announcement by Citic Pacific Limited (Citic) to the Hong Kong stock exchange in respect of a major transaction in which we are proceeding with Citic. As a result, we are of the view that Citic will proceed with the immediate development of the new Port at Cape Preston and other necessary infrastructure. In those circumstances we suggest we change the project for our forthcoming negotiations with Sherlock as follows:
1. That instead of proceeding at this time with the blended option involving Cane River and part of the Southern Block at Balmoral we concentrate on a fully integrated project at the Southern Block at Balmoral by increasing the tonnages available for delineation and subsequent negotiation from 400Mt to 1 billion tonnes. To do this eliminates the cost of the railway and allows for the production of much higher revenue producing products. It may also allow cost savings to be realised from any Citic investment in the Port and other infrastructure at Cape Preston.
2. That Mineralogy grants a right to mine to a project company owned by our chairman or Mineralogy for 1,000,000,000 tonnes of iron ore subject to certain conditions. It would be proposed this 1,000,000,000 tonnes of magnetite forms the core of a project which Mineralogy and/or its chairman would enter into negotiations and discussions with Sherlock after the current drilling program is complete. Mineralogy acknowledges that this 1 billion tonnes is potential mineralisation in terms of section 18 of the JORC Code and is currently being drilled by Sherlock as part of its due diligence program.
3. Mineralogy proposes that such negotiations and discussions commence the first week in June 2006 and take place in Brisbane with the aim of having an agreement executed by the second week of July 2006.
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4. We would also suggest that any project consists of the production of iron ore pellets of around 68% Fe and iron ore concentrate of around 71% Fe with the option of including some production of hot briquetted iron to take advantage of the energy prices in the Pilbara region of Western Australia.
Please accept this letter as a formal variation to the scope of the “Exclusive Negotiation and Due Diligence Agreement” between Mineralogy and Sherlock and confirm Sherlock’s agreement or otherwise to the above and willingness to proceed with negotiations as foreshadowed.”
BACKGROUND
On 28 December 2005 the Company announced it had entered into an exclusive negotiation and due diligence agreement to purchase the Cane River Project from Mineralogy Pty Ltd via its 100% ownership of Cane River Mining Pty Ltd. Cane River Mining holds the rights to 400Mt of magnetite iron ore from granted mining leases on the Balmoral Southern Block and 100% of any iron ore on the Cane River tenement.
In this same announcement was an independent report from Hellman & Schofield detailing the potential mineralisation on the Southern Block in terms of section 18 of the JORC reporting code. It defined the potential magnetite mineralisation of between 2.0 and 3.5 billion tonnes down to 200m depth. Full details of this report can be found on the Company or ASX website. It is a portion of this potential mineralisation that is the subject of the current drill program being undertaken by the Company.
In summary, this new project proposal which now forms the revised scope of the “Due Diligence and Negotiation Agreement” purely focuses on drilling and delineating 1 billion tonnes of magnetite mineralisation on the Southern Block at Balmoral. This is adjacent to the existing 2.5 billion tonne JORC resource on the Central Block, for which Citic has announced its intentions to purchase. This 1 billion tonnes on the Southern Block is an exploration target in accordance with section 18 of the JORC Code and the Company is well advanced in its drilling program to verify these tonnages. It is expected that a first stage JORC compliant resource will be released in the near future.
CONCLUSION
The Board of the Company has considered Mineralogy’s proposal and has resolved to proceed with further negotiations as outlined.
The Board’s decision was based on the following:
1. The project as proposed by Mineralogy would, once established, allow the Company to be a world class producer of iron ore products on a competitive basis.
2. The elimination of the production centre at Cane River removes the cost of a railway and allows the company to focus on one area that is closer to the coast and has a significantly larger tonnage of iron ore.
3. The Southern Block allows for a more rapid path to production compared to the Cane River tenement as they are already granted mining leases, and certain baseline studies have been completed.
4. The Company is already well advanced with its drilling program at the Southern Block and can easily and quickly extend this program to allow for the increased tonnages under negotiation.
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5. The proposed products should produce greater revenue as processed iron ore products as compared to the option of the blended iron ore concept previously announced.
6. The new single location, adjacent to the already announced Citic Pacific Project, should enhance the development of the project with access to the new port to be developed at Cape Preston.
7. The close proximity of the North West Shelf gas reserves and the Perth to Karratha gas pipeline should allow for adequate gas supplies at relatively low cost.
Your Board is encouraged by this positive development with Mineralogy confirming its seriousness of entering into meaningful discussions with the company following Mineralogy’s major deal with Citic Pacific Limited. The Company intends to continue its aggressive pursuit of this opportunity.
Yours sincerely
Darren Hedley
Managing Director