Level 4, 5 Mill StPerth WA 6000PO Box 7752Cloisters Square WA...

Level 4, 5 Mill St
Perth WA 6000
PO Box 7752
Cloisters Square WA 6850
ABN 46 008 942 809 Phone: (+61 8) 9322 2288
Fax: (+61 8) 9324 2164
Email: [email protected]
www.austresources.com.au
31 July 2008
QUARTERLY REPORT FOR THE PERIOD ENDING 30 JUNE 2008
HIGHLIGHTS
Major events and achievements during the quarter were as follows:
CORPORATE
�� The Company has received a proposal from Resource Development International Ltd (RDI) which proposes a merger between ARH and RDI. RDI will offer to acquire all shares in ARH for shares in RDI by means of a scheme of arrangement. The proposal places a notional price of A$2.20 on each ARH share.
�� Pending the outcome of the RDI opportunity, the Company has placed negotiations with Mineralogy Pty Ltd to acquire additional iron ore assets adjacent to its current Balmoral South Iron Ore Project and the proposed demerger of its 100% owned subsidiary, International Exploration Ltd (IEL), on hold.
�� The Company has appointed Mr Ian Zlatnik to the role of Health, Safety, Environment and Community (HSEC) Manager.
BALMORAL SOUTH IRON ORE PROJECT
�� The Company finalised its Feasibility Study during the Quarter which demonstrated the economic viability of the Project. Detailed information was released to the ASX on 18 June 2008.
�� The Company issued a Feasibility Notice to Shougang on 20 June 2008.
�� Further progress achieved towards the Company’s objective of submitting a Public Environmental Review (PER) document to the Environmental Protection Authority (EPA) in the near future for up to a 24 Mtpa Project.
�� Verification test work completed in China on a 16 tonne sample is consistent with previous test work and has provided confidence in the Project’s process design parameters and demonstrated the high quality and value of the proposed concentrate product.
�� Additional in-fill diamond drilling commenced in April – 4,370 metres of a 10,000 metre programme completed to date.
�� Continued work towards resource and reserve updates.
�� Beijing Shougang International Engineering Technology Co. Ltd (BSIET) engaged to present a full Engineering Procurement Construction (EPC) submission to construct and locate the proposed pellet plant in China.
�� The deep water port study work is on track to deliver a port design solution for review by the IM Board in August 2008.
�� The Company and Shougang have appointed BNP Paribas (BNPP) as its Advisory Bank. BNPP will review the Bankable Feasibility Study (BFS) for the Balmoral South Iron Ore Project, in the context of the likely requirements of Chinese policy banks that are expected to be the primary source of project funding.
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CORPORATE
RDI PROPOSAL
The Company recently received a proposal from Resource Development International Ltd which proposes a merger between ARH and RDI.
RDI is a company which has recently been formed to acquire substantial iron ore, nickel, exploration and energy interests, including rights to 20 billion tonnes of iron ore on the Balmoral tenements held by Professor Clive Palmer. It has announced plans to raise up to A$5 billion through an Initial Public Offering in late 2008 and to list on the Hong Kong Stock Exchange (HKSE) and/or the Australian Securities Exchange.
Professor Clive Palmer, who holds approximately 66.37% of the shares in ARH, currently controls RDI. RDI’s directors are Professor Palmer and Messrs Domenic Martino and Clive Mensink, who are directors of ARH.
An Independent Board Committee (IBC) of non-associated directors of ARH comprising Messrs Andrew Caruso, Nicholas Jukes and Paul Piercy has been formed to consider the proposal and conduct negotiations on behalf of the board.
The IBC is currently reviewing the proposed Scheme Implementation Agreement between RDI and ARH which would need to be executed to progress the opportunity. If executed, the IBC will consider the implications for all ARH shareholders, and will make a recommendation to ARH’s shareholders in due course.
The following group of advisors have been appointed by the IBC as a part of a Due Diligence team to assist with its recommendation:
�� McKenzie Moncrieff Lawyers (legal);
�� Ernst & Young (commercial, taxation); and
�� RFC Corporate Finance Ltd (corporate advisory).
BDO Kendalls Corporate Finance (WA) Pty Ltd has been appointed as the Independent Expert with respect to the scheme.
Additional advisors may be appointed at the discretion of the IBC.
At present, the key terms of the merger proposal are:
�� RDI will offer to acquire all shares in ARH for shares in RDI by means of a scheme of arrangement;
�� The proposal places a notional price of A$2.20 on each ARH share. The proposal provides that the consideration to be offered to ARH shareholders will consist of RDI shares, with the number of RDI shares to be issued for each ARH share to be determined by dividing the sum of A$2.20 by the A$ equivalent of the price of an RDI share offered under RDI’s disclosure document for its proposed initial public offer;
�� The total number of RDI shares proposed to be offered to the public and to ARH shareholders has yet to be determined. If the proposal is implemented, ARH shareholders would exchange their ARH shares for RDI shares and collectively hold a minority interest in the total RDI shares on issue;
�� The proposed merger would be conditional on RDI listing on the Hong Kong Stock Exchange. It is understood RDI may also consider applying to list on the Australian Securities Exchange;
�� Details of the timing of the proposed merger and the listing of RDI have yet to be determined. It is proposed that the merger and the listing would be completed by late 2008;
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�� The merger would be conditional on capital gains tax rollover relief being available to ARH’s shareholders;
�� Any scheme would be subject to the approval of ARH’s non-associated shareholders, Court approval and any other necessary regulatory approvals;
�� Should terms of a proposed merger be agreed between RDI and ARH, ARH shareholders would be provided with an independent expert’s report as to whether the proposal is in the best interests of ARH shareholders.
Further information and updates will be provided to shareholders via future ASX announcements and the link on the website www.austresources.com.au
PLANS TO ACQUIRE ADDITIONAL TONNAGE
Pending the outcome of the RDI opportunity, the Company has placed negotiations with Mineralogy Pty Ltd to acquire additional iron ore assets adjacent to its current Balmoral South Iron Ore Project on hold.
DEMERGER OF NON-IRON ASSETS
Pending the outcome of the RDI opportunity, the Company has placed the proposed demerger of its 100% owned subsidiary, International Exploration Ltd, on hold.
Any proposed demerger would require the approval of Australasian shareholders.
PROPOSED CAPITAL RAISING
Per its ASX announcement dated 17 July 2008, subject to an ongoing review of prevailing market conditions and the Company’s working capital levels, the Company plans to complete an equity raising within the next three months to support the continuing development of the Balmoral South Iron Ore Project.
The amount raised will be limited to funds required to sustain the business in advance of the anticipated election and funding by Shougang.
PERSONNEL
The Company has appointed Mr Ian Zlatnik to the role of Health, Safety, Environment and Community (HSEC) Manager. Ian will commence with Australasian Resources on 1 September 2008.
Ian was previously employed by Barrick Gold and has over twelve years experience working in relevant fields with the government and resource companies.
HEALTH AND SAFETY
The Company is currently upgrading its occupational health and safety management system.
A site visit was carried out during June to review the current procedures.
BALMORAL SOUTH IRON ORE PROJECT
The Company continues to advance key requirements to develop its flagship Balmoral Project Iron Ore Project, located to the west of Karratha, in the Pilbara region of Western Australia.
The Company finalised its Feasibility Study during the Quarter which demonstrated the economic viability of the Project.
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The Company continues to develop its strategic relationship with entities associated with China’s 4th largest steelmaker, Shougang Corporation.
ENVIRONMENT AND COMMUNITY
Further progress was achieved towards the Company’s objective of submitting a Public Environmental Review (PER) document to the Environmental Protection Authority (EPA) in the near future for up to a 24 Mtpa Project.
An Environmental Scoping Document (which describes the full scope and intent of the PER document) was submitted to the EPA.
The Project was also referred to the Commonwealth Department of Environment, Water, Heritage and the Arts under the Environment Protection and Biodiversity Conservation Act 1999 (EPBC Act). The Department requested that additional information be included in an updated Environmental Scoping Document
An updated Environmental Scoping Document will now be submitted in advance of the PER document which is substantially complete and expected to be submitted during August 2008. The normal time for PER approval is 26-28 weeks from the date submitted, which indicates that project environmental approvals are likely by first Quarter 2009.
Final environmental approval for the proposed port facility is the subject of a separate submission and process through Mineralogy Pty Ltd.
HERITAGE
Meetings have been held with registered claimant groups over the Balmoral South area to discuss ongoing heritage requirements with respect to the Project. Further dialogue will occur to develop a working relationship and relevant agreements with the associated groups.
BANKABLE FEASIBILITY STUDY (BFS)
The Company has completed its Bankable Feasibility Study and released detailed information to the ASX on 18 June 2008.
In summary:
�� BFS for 12 Mtpa project (including 7 Mtpa of pellets) completed, showing a real after tax NPV8% of $5,075M and IRR of 20.8% based on extensive engineering studies, consultant and vendor input.
�� Based on proposed Shougang funding model, the real NPV8% of projected cash flows for the Company (50% of total free cash flow) is $3,010M after tax over life of Project.
�� Capital cost of A$2.7B (excluding owners’ costs and contingency).
�� Product operating costs (excluding royalties and fees) have been estimated Concentrate - $49 per tonne (FOB) and Pellets - $61 per tonne (FOB).
�� Commissioning of plant commencing 1 October 2011 and continuing for three months.
�� Production of concentrate and pellets commencing on 1 January 2012 and continuing for 25 years until 31 December 2036.
�� Forecast prices based on an iron ore industry report entitled “Iron Ore – Oligopolies Attract” dated 3 March 2008 (“Citi Report”) produced by Citi Investment Research (a division of Citigroup Global Markets Inc.). Constant concentrate and pellet prices were used based on Citi Report projections for the 2008/9 iron ore year. Freight differential for pellet prices based on principals described in a CRU Strategies Limited report and quantified by Australasian Resources Ltd at US$20.00 per tonne.
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�� Opportunity for further project enhancement via Shougang construction proposal, including pellet plant located in China and additional construction and procurement from China.
The key components of the Bankable Feasibility Study are:
�� An initial 7-year mining services agreement with one of several leading Australian mining contractors (with option for renewal) involving an annual average production rate of 42 Mtpa ore and 30 Mtpa waste;
�� A concentrator capable of producing 12 Mtpa of concentrate (of which 5.2 Mtpa would be exported);
�� A pellet plant capable of producing 7 Mtpa supplied by one of several leading international vendors;
�� A gas-fired power station supplied by one of several leading international vendors;
�� Process and other water provided by a borefield adjacent to the Fortescue River;
�� A 30 km long conveying system from the processing plant to a stockpile location at Cape Preston; and
�� A trans-shipping facility at Cape Preston which is an extension of the proposed CITIC Pacific Mining Management Pty Ltd trans-shipping facility.
FEASIBILITY NOTICE
As announced to the ASX on 23 June 2008, the Company has issued a Feasibility Notice to Shougang that requires the delivery of a Finance Offer to the Company by 20 September 2008.
Discussions are ongoing with Shougang towards the objective of obtaining a Finance Offer.
GEOLOGY AND MINING
�� Further assay work is being undertaken to confirm the quality assurance in relation to previous test work undertaken for the revised Mineral Resource estimate. The validated data will then be added to the Company’s project database in August 2008 to allow an updated Mineral Resource estimate to be completed and independently verified under the JORC Code.
�� An upgrade to the existing resource base will provide the opportunity for the Company to increase the reported Ore Reserve estimate of 680 Mt (Probable Reserve) towards its target of 1 Bt.
�� An in-fill diamond drilling program is in progress that is designed to further upgrade the classification of the Project's Mineral Resource.
�� Since April 2008, 4,370 metres of drilling has been completed within the current programme and a further 5,630 metres is proposed (10,000 metres total).
�� Further discussions have taken place with the mining contractors with a view to nominating a preferred contractor with whom the Company will seek to negotiate a 7-year mining contract. Two contractors remain in contention with a third contractor advised of their unsuccessful bid, based on an evaluation of their original tender submission completed for the Feasibility Study.
TEST WORK
Independent Chinese laboratory test work has been completed on a 16 tonne representative sample of iron ore from the Project by the Changsha Research Institute of Mining and Metallurgy, in China, which produced a four tonne representative sample of iron ore concentrate.
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IM and Shougang have accepted the results from the tests performed on the 4 tonnes of concentrate produced, demonstrating that the target product quality of Fe >67.5% and SiO2 <4.5% has been achieved using the proposed concentrator plant process design.
This verification test work is consistent with previous test work and has provided confidence in the Project’s process design parameters and clearly demonstrates the high quality and value of the proposed concentrate product.
CONCENTRATOR AND PELLET PLANT
�� Full design, engineering, procurement, construction and cost estimates were completed by Promet Engineers Pty Ltd for the 12 Mtpa concentration plant as a part of the BFS.
�� A commercial proposal from a leading international vendor was received to construct a 7 Mtpa grate-kiln pellet plant at the Balmoral South site which became the foundation of BFS estimates for the pellet plant.
�� Beijing Shougang International Engineering Technology Co. Ltd (BSIET) has been engaged by IM to present a full Engineering Procurement Construction (EPC) submission to construct and locate the proposed pellet plant in China. This is expected in August 2008.
SERVICES, UTILITIES AND INFRASTRUCTURE
�� The Company and Shougang held discussions with potential and current gas suppliers in the North West Shelf area – a commercial gas deal is a key priority for the Company as a part of Project financing efforts.
�� 250MW gas fired power plant package included in BFS
�� Water supply estimates in the BFS based on proposals received for a 12GLpa desalination plant and estimates for a borefield adjacent to the Fortescue River. The design indicates the potential to establish a commercially attractive borefield to supply water to the project in conjunction with a desalination plant, subject to the Company obtaining the necessary rights and approvals.
�� Full design, engineering, procurement, construction and cost estimates were completed for all other services and utilities as a part of the BFS
EXPORT SYSTEM
CCCC First Harbor (FH), China’s largest port construction and design company, is finalising a study for the development of a deep water port at Cape Preston to support the Project. This represents an alternative to the base case barge loading and trans-shipping port option included in the Feasibility Study.
A progress/review meeting was held with FH in Tianjin, China recently.
The deep water port study work is on track to deliver a port design solution for review by the IM Board in August 2008.
In parallel, an internal deep water port development strategy and implementation framework is being finalised with consideration of technical and commercial elements.
A consulting firm was engaged during the quarter to advise on the development of a deep water port option with reference to:
�� review of commercial agreements and technical reports;
�� “high level” structuring and financing options;
�� recommendations based on economic modelling and risk assessment; and
�� presentation of a “high level” framework.
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A report has now been received which is being reviewed by the Company.
SHOUGANG
Beijing Shougang International Engineering Technology Co. Ltd has been engaged by IM to:
�� present a full Engineering Procurement Construction submission to construct and locate the proposed pellet plant in China; and
�� to assist China Shougang International Trading and Engineering Corporation (CSITEC) with the preparation of their Construction Proposal to support the Finance Offer.
Within the Construction Proposal, IM anticipates that Shougang will propose additional enhancements to the Project based on its extensive experience in magnetite mining and processing.
A high level review meeting was recently held in Beijing involving Company and Shougang executives to discuss and agree the necessary steps towards the achievement of a Finance Offer.
COMMERCIAL
The Company is progressing work with Shougang in relation to commercial issues associated with the proposed joint venture arrangements contemplated by current agreements with Shougang if they elect to proceed.
ADVISORY BANK
The Company and Shougang have appointed BNP Paribas as its Advisory Bank.
BNPP will review the Bankable Feasibility Study for the Balmoral South Iron Ore Project in Western Australia, in the context of the likely requirements of Chinese policy banks that are expected to be the primary source of project funding.
As a leading finance institution BNPP has extensive experience in the structuring and financing of mining projects and has a close working relationship with key Chinese policy banks, including China EXIM bank, who has previously shown strong interest in the Project.
SHERLOCK BAY NICKEL PROJECT
The Company’s Sherlock Bay Nickel Project is located east of Karratha, in the Pilbara region of Western Australia.
Work undertaken during the Quarter included:
�� Re-logging of core targeting identification of ~300kg of sample for further metallurgical testing. It is apparent that past sampling programmes have selectively sampled through the ore zone. Intervals that have not been sampled will need to be sampled and a review of how these intervals were treated in the resource estimate is required.
�� A review of the dataset was completed which identified limited elements assayed in past programmes. Additional test work may be undertaken for further elements.
EXPLORATION
A site visit of the Company’s exploration tenements in the Pilbara region was undertaken in early July. The purpose of the visit was to formulate a view on the potential and development options moving forward.
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SHERLOCK EXTENDED
A site visit to Sherlock Extended was carried out in July. The next programme of work is currently being determined.
ANDOVER (BASE METALS)
Andover is located near the Sherlock Bay Nickel Project and the tenement covers a magnetic feature which is interpreted as being the feeder channel for the Andover layered mafic – ultra mafic intrusive complex.
Electromagnetic work is currently being carried out. Interpretation of the data is expected to be completed in the coming months.
MT SALT (URANIUM)
The Mt Salt uranium prospect is located near the Pilbara coast, immediately to the west of the Balmoral South Project area.
Potential for Banded Iron Formation (BIF) hosted magnetite mineralization on this tenement was identified in June. The potential was established via ground reconnaissance of the areas and the available aeromagnetic data. The data suggests that understanding the depth of transported cover will be an important factor and work is being undertaken to determine the best low impact method for determining this. A detailed proposal for future work is being prepared.
A report on continued uranium prospectivity will be prepared on completion of the Isotope analysis.
CAT CAMP (Base Metals)
The Cat Camp prospect, lies within the Lake Johnston Greenstone Belt and is located approximately 170km south west of Kalgoorlie. It contains lithologies that are consistent with the nickel sulphide deposits that are being mined at the nearby Emily Ann and Maggie Hays operations.
No work was undertaken at Cat Camp during the quarter. A drilling programme is currently being planned.
COPPER BORE WELL (URANIUM)
A visit to Copper Bore Well was undertaken as part of the Pilbara tenement review carried out in early July.
EAST BULONG
A Partial Surrender Notice was received during the month with 50% of the tenement to be surrendered. Work to identify the area to be retained is required.
SIGNIFICANT UPCOMING ACTIVITIES
Significant activities for the period June – September will include:
CORPORATE
�� Subject to Board approval, progressing the RDI merger proposal through the signing of a Scheme Implementation Agreement and the completion of Due Diligence work required for any recommendation made by the Board to shareholders.
�� Progressing capital raising efforts, subject to an ongoing review of prevailing market conditions and the Company’s working capital levels.
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�� Completion of financial statements and external audit for the year ending 30 June 2008.
BALMORAL SOUTH IRON ORE PROJECT
�� Working in collaboration with Shougang towards the presentation of a Finance Offer to the Company as required under existing agreements between the parties;
�� Submission of the Public Environmental Report to the EPA;
�� Continuation of in-fill diamond drilling activities;
�� Completion of resource and reserve updates subject to independent review;
�� Completion of the deep water port study for a proposed facility at Cape Preston;
�� Shougang’s construction arm, CSITEC, is planning a visit to Perth to continue discussions with local companies and government representatives towards the completion of their Construction Proposal;
�� Continue implementation planning for the project in conjunction with Shougang; and
�� Completion of a review of the BFS with BNP Paribas in the context of likely financing requirements.
For and on behalf of Australasian Resources Limited
Andrew Caruso
Managing Director