+++++++++++++++++++++++++ OPEN BRIEFING OXIANA RESOURCES MD ON ADVANCING SEPON
CORPORATEFILE.COM.AU
Last quarter, Oxiana Resources N.L. announced development drilling results for Discovery West, which is scheduled as the first pit for the Sepon Gold Project. The drilling outlined several high-grade intercepts outside the gold resource used in the Bankable Feasibility Study (BFS). You've also announced some drill results from the Luang prospect 500 metres from Discovery. How might these results alter your production, cash cost and mine life assumptions used in the BFS?
MANAGING DIRECTOR OWEN HEGARTY
Infill and pit optimisation drilling results at Discovery West have been excellent and it's likely that the reserve assumptions we've used in the BFS will prove conservative. Those assumptions resulted in an average of 125,000 ounces per annum at a cash cost of around US$150 per ounce over a mine life of eight years. We are now evaluating ways to achieve more ounces at a lower cash cost while recent drilling indicates that the mine life could be considerably longer than the eight years in the BFS. We still have to do the definitive technical work to assess what higher production levels we could achieve.
It was always our intention to firstly define a reserve which was large enough to satisfy the requirements of a BFS. After that, we planned to proceed to development and then work on expanding the reserve base and production potential. Also, the gold price has risen around US$50 per ounce since we completed the BFS and that automatically translates to a higher reserve.
The infill and optimisation drilling has returned several high grade and wide intersections right at the western end of the orebody. We will eventually calculate revised resources and reserves but we now view the Sepon Gold Project as a long-life project. Getting into production is still our primary objective, however we're now starting planning for the longer term.
CORPORATEFILE.COM.AU
What stage are you at with construction of the Gold Project and when do you expect first gold production?
MANAGING DIRECTOR OWEN HEGARTY
We're now around two months away from production. We should start commissioning the various sequences of the plant during November/December. Our original forecasts were for first production by the end of 2002 so we're basically on schedule, even though we lost a little time because of the early wet season.
CORPORATEFILE.COM.AU
Oxiana recently completed the BFS for the Sepon Copper Project (Khanong resource). How does the project compare with your original expectations?
MANAGING DIRECTOR OWEN HEGARTY
The project has quite clearly exceeded our original expectations. The original concept was for an operation producing around 40,000 to 45,000 tonnes per annum of copper metal however the BFS, which was completed in October, is based on production of 60,000 tonnes per annum of LME grade copper cathodes. The mining reserve is 13.5 million tonnes at a grade of 5.1 percent copper within a resource of 26 million tonnes at 4.1 percent copper (1.0 percent cut off) containing 1.1 million tonnes of copper metal. The capital cost estimate of US$167 million and the cash operating cost estimate of US$0.38 per pound are both extremely competitive on a world scale. Estimated recoveries into the 90 percent range are higher than we'd anticipated.
At a long-term copper price of US$0.85 cents per pound, the copper project will give an internal rate of return of better than 20 percent, average operating cash flows of US$50 - 60 million per annum and provide a capital payback in 3 years.
The resource is larger than the earlier pre-feasibility basis and we've now proven the process design through a pilot plant which processed ore under a matrix of processing alternatives resulting in pilot scale cathodes to LME specification.
CORPORATEFILE.COM.AU
How does that copper reserve compare with other world copper projects?
MANAGING DIRECTOR OWEN HEGARTY
We haven't seen a better mining reserve at the BFS stage. In other words, we think it's the world's best undeveloped copper orebody. The grades are world class. There are very few copper resources in the world with grades this high and particularly with readily extractable metal. The resource base containing 1.1 million tonnes of copper metal is sizeable and we expect to substantially add to this. As with the gold project, we've so far only proved up enough resources and reserves to satisfy the BFS. We've so far concentrated on the high-grade chalcocite section of the orebody. The orebody is open in a number of directions and at depth. We've methodically explored only one of the six known mineralised systems in the Sepon mineral field. Khanong copper and the gold orebodies are located in the first mineralised system.
CORPORATEFILE.COM.AU
So what potential upside is there for gold and copper reserves?
MANAGING DIRECTOR OWEN HEGARTY
The mineralised corridor seems large enough to host a resource of in excess of 5 million ounces compared with the current Sepon resource of 3.5 million ounces. The drilling of Discovery West and Luang demonstrates that there's every prospect for incremental growth in resources and reserves as we develop the projects and explore the mineral field.
We currently have copper resources containing 1.1 million tonnes of metal. We believe there is the opportunity to at least double the amount of contained copper metal from the current level over time.
Apart from expansion of the Khanong copper resource, there are several ways we can add to our copper inventory in the district. Drilling at the Thengkham copper prospect already indicates we may have another separate copper resource. In the future we'll do a more detailed assessment of Thengkham and there's potential to delineate new copper resources within the other four mineralised systems in the district. Time will tell. Finally, we'll explore for large copper deposits around the peripheries of the various intrusive systems.
CORPORATEFILE.COM.AU
Oxiana had arranged a US$10 million equivalent short term bridging loan with ANZ Bank. The loan was guaranteed by Rio Tinto. Why did you take out a facility with ANZ when you already had a US$30 million debt facility with the International Finance Corporation (IFC)?
MANAGING DIRECTOR OWEN HEGARTY
The ANZ facility was a bridging facility we used while negotiating the IFC facility and before options, which raised $59 million, were exercised. Having that interim facility enabled us to fund the gold project purely with equity. Project debt could have involved parting with some equity and could have required us to take out some gold price hedging. Being unhedged and debt free is a major advantage for our shareholders. We paid back the ANZ facility as soon as we received the proceeds from the options.
CORPORATEFILE.COM.AU How will you fund the Sepon Copper Project, also Oxiana 80 percent - Rio 20 percent?
MANAGING DIRECTOR OWEN HEGARTY Funding the gold project with equity gives us the capacity to largely debt fund the copper project.
The gold project will generate strong operating cash flow early in its life. This may then provide an equity contribution towards the balance of the copper project funding as we construct it over 2003 and 2004.
The copper project is extremely robust. The capital and operating costs are in the lowest quartile of world copper producers and banks will be willing to write debt facilities, particularly when we've already got a significant amount of equity in the gold project, and will soon have a producing asset. We've already had many banks showing interest in debt funding the copper project.
Another funding advantage is that the copper project is situated within a region of high copper demand growth. We will produce high quality LME-grade copper cathode. We can supply China, Thailand, Vietnam and other Asian and south-east Asian countries. That opens the possibility of securing working capital facilities from the copper buyers and traders, or some form of longer-term subordinated debt.
The copper growth rates in Asia, China in particular, have astounded us. Copper demand growth rates in China are double digit per annum and that's from a country which already consumes around 2 million tonnes of copper metal per annum and imports around 1 million tonnes per annum.
CORPORATEFILE.COM.AU
Rio has given the impression it's a passive investor in the Sepon projects but then it guaranteed the ANZ debt facility. Why the change? Why didn't Rio do this earlier?
MANAGING DIRECTOR OWEN HEGARTY
Although Rio sold the project to Oxiana they have been happy to maintain a 20 percent interest and support. But it's also been in their interest to protect and grow the value of their remaining 20 percent stake. As the value of the Sepon projects have been enhanced, it's fair to say Rio has taken a less passive role. Rio agreed with us that under the circumstances it would be wiser funding the gold project through equity and the best way to achieve that was by Rio supporting Oxiana's ANZ facility.
CORPORATEFILE.COM.AU
What future role will IFC play in funding the Sepon projects?
MANAGING DIRECTOR OWEN HEGARTY
Although we'd originally planned to use the IFC facility for the gold project, we've had preliminary discussions about transferring and expanding the facility on the copper project.
CORPORATEFILE.COM.AU
What potential equity could the Lao government or the IFC acquire in the Sepon projects?
MANAGING DIRECTOR OWEN HEGARTY
Under the Mineral Exploration and Production Agreement (MEPA) we have with the Lao Government, it has the option to purchase up to 10 percent of the equity of the operating company, currently owned 80 percent by Oxiana and 20 percent by Rio.
We're working through the project financials with the Government so it can decide whether it will exercise that option. We've encouraged the Government to take a stake in the project.
The IFC also had the right to buy a minor stake in the operating company, as part of the debt facility. It's standard IFC practice to purchase equity in projects it finances. But nothing has been agreed.
CORPORATEFILE.COM.AU
How will you calculate what the Lao Government will pay if they do take a stake in the project? Is it a commercial project evaluation calculation?
MANAGING DIRECTOR OWEN HEGARTY
Under the MEPA the Lao Government will pay an amount based on the amount of capital Rio and Oxiana have spent on the project since 1992.
CORPORATEFILE.COM.AU
Thank you Owen.
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