some basics - sdl vs. fmg, page-60

Hi Andrew1234,

Mate it's good if you are able to gain a bit from the indicative info from the above table. Based on your question, you really have some sort of deep understanding on the pricings and realities of IO over the market in relation to time and supply & demand.

Usually this Pricing number (as specified for SDL @63.12) is determined by a price-supply-demand-price economic model used by the Feasibility Study Engineers and Mine-Economics Modellers - which is then fed to the overall DFS Economic Model for final consideration. The structure of the model to determine this price depends on the location of the project, the local currency exchange, the historical and future supply & demand, the historical price moving averages, weighted price averages over various periods of time, and the projections of the future price directions of IO. In most cases, the more intelligent models would try to estimate as best or as accurate as possible the supply and demand of IO for medium and long terms that match the timeline when the Project starts to deliver IO, over the mine life. This would then be used as a factor to direct the level of expected IO average pricing for the period of the Project.

It sounds complicated, which is true indeed. However, with the powerful mathematical and economic modeling computers nowadays, it becomes more and more accurate and less and less complicated.

You will find that BHP, RIO, and Vale would have their own different numbers, and one would argue and brag about how accurate their own number is, as opposed to the other.

In the case of the SDL vs. FMG Table above, FMG did not release any price number on their DFS, so I just noted there and assumed the same price as of that used by SDL - "for the sake of comparison". I am sure FMG had their own IO average price number, but did not release that (or I could not locate that from the released reports available from ASIC Files). In 2006 FMG's time, they would definitely have a different outlook than SDL's 2010-2011 numbers. Anyway, this number becomes relative and considered to be just a baseline pricing for the calculation of the most conservative scenario on the profitability of the mining Project.

This low $63.12/ton average price number is a sort of "economic Insurance policy" for the DCFROR (Discounted Cash Flow Rate Of Return), NPV (Net Present Value), and Payback Period Calculations. The upsides of current high or increasing IO Prices right now only make the Project significantly more profitable. However, if the actual pricings would be lower than this $63.12/ton, then the IO Mining Operations would definitely be in trouble. In this case, the commercial and trading terms would cater for this, by hedging some of the pricings on the higher levels "if they can" and minimise the "spot price' deals going forward.

Yes you are right when you said that the $63.12/ton price is weighted towards the lower end to provide a "good margin of safety" which in this case being considered and used "officially" for SDL. This is a very important number, and very good if the Chinese can guarantee that this is the lowest price they would buy the IO - even if - the 'spot prices' would be lower. Let us hope the SDL management would be able to strike favourable commercial and trading deals for this Project.

Cheers,

RVINTL