the sleeping giant

Royalco Resources – Overview

Royalco Resources is to raise $12 million through an underwritten IPO and list on the ASX in June. Royalco offers the balance of a highly prospective exploration land package in the Philippines and a royalty bank with identifiable future cash flows from two mining operations.

Augmenting raised funds with royalty streams ensures a well-funded ongoing exploration programme and significantly reduces the need to raise further capital for early stage exploration.

As part of the Royalco IPO, Oxiana is vending in its entire Philippine exploration tenement package in exchange for shares.

This allows a dedicated focussed approach to assessing mineral potential. Royalco will also be earning an interest in one of Phelps Dodge’s Philippine exploration interests.

Key Points

• Royalco is issuing 24 million shares at an issue price of $0.50 per share to raise $12 million. Shares will be offered to existing Oxiana shareholders. Royalco aims to list on the ASX in June 2006.

• Royalco’s main assets upon listing will consist of the Philippines exploration tenements of Oxiana, one held by a subsidiary of Phelps Dodge, and Royalco’s existing royalty bank.

• Oxiana’s Philippine explorations assets are to be vended into Royalco in exchange for A$5m in shares whilst Royalco is earning a 100% interest in Phelps Dodge’s property by spending US$1.45m. Both Oxiana and Phelps Dodge retain claw back options if a “company maker” size copper or gold deposit is discovered. Oxiana has a strong track record in dealing with junior exploration companies.

• Retention of Oxiana’s Philippine exploration teams means work continuity and intellectual property retention. The Philippines is a highly prospective country for exploration. The mineral endowment ranks amongst the highest globally. Exploration drilling to commence immediately upon listing.

• Royalco holds royalty right over 10 properties of which two have projected cash flows. Royalty revenues are expected to commence from Oceana Gold’s (OGD) Reefton mine in 2007 and Kagara Zinc’s (KZL) Mt Garnet mine in 2009.

Brief History and Strategy

Since incorporation in April 2001 Royalco has acquired rights to some 10 individual royalty streams of which 2 have imminent cashflow potential. The first royalties were acquired in November 2001 over projects in NSW. Further royalties were acquired in January 2002 and an additional royalty was created in 2004.

The strategy has been gain access to strategic, low risk investments in the resource sector whilst maintaining upside potential, which is a character of Over Riding Royalties (ORR) and Net Smelter Royalties (NSR). The benefit of a royalty bank is that it provides identifiable fundamental value and avoids risks associated with a single project company.

Other benefits of royalties include: the operator’s propensity to optimize mine life and metal recoveries, and no requirement of the royalty holder to fund further capital expenditure. In addition royalties are leverage to metal price movements, sometimes with escalators as in Royalco’s Reefton gold royalty.

Royalco has a database of some 500 royalties over various mining/exploration interests in Australia a Southeast Asia and may look to enhance cashflow through acquiring additional royalties.

Royalco’s royalty portfolio is presently heavily weighted towards gold, a commodity which is generally easily financed and developed meaning earlier royalty revenue streams. Royalco’s first source of royalty revenues is from the Reefton gold project, which is due for commissioning late 2006. Despite a portfolio bias towards gold, the second royalty stream will be from the Mt Garnet zinc and copper project.

Royalco’s royalty bank is now suitably mature and provides a solid foundation for taking on a higher risk exploration portfolio without jeopardizing the ongoing viability of the company. To this end Royalco has agreed to acquire Oxiana’s exploration assets and team in the Philippines, a deal that was initiated in Nov 2004 prior to the High Court of the Philippines approving the foreign investment law which means the deal terms represent excellent value to the acquirer. More recently Royalco has augmented this Philippine package with a joint venture with Phelps Dodge on an additional epithermal gold play.

Royalco IPO Details and Capital Structure

Royalco is issuing 24 million shares at an issue price of $0.50 per share to raise $10 million through an IPO. Oxiana shareholders will receive a priority offer.

Seed Shareholders

Seed shareholders will represent 43% of issued capital post the IPO of which Rio Tinto will hold 6.4%.

Use of funds Royalco plans to spend $3.9 million per annum on exploration (incl. administration) for the first two years.

Royalco’s Assets

Royalco’s current royalty bank is listed below of which 2 projects are under development:

Reefton – is located in the South Island of New Zealand. Ore won from the mine will be concentrated on site and treated at the Oceana Gold’s facility at the Macraes plant which has recently been upgraded. The Reefton operation is set to commence production in late CY06 and royalties will commence in CY07 at a 70kozpa production basis after a six month grace period. 580koz in reserves

The Reefton royalty, which covers the Globe Progress mine, has reserves of 580oz (7.2mt @ 2.60g/t) and resources of 1.6moz (18.8mt @ 2.72g/t). Oceana is actively proving up additional reserves. The Reefton royalty also covers the Sams Creek project where Oceana has identified a resource of 13.5mt @ 1.78 g/t (800,000 ounces)

An initial royalty applies at the rate of 250oz per quarter irrespective of the production rate. There is an incremental addition to this royalty should the New Zealand gold price rise above NZ$700/oz up to NZ $900/oz. For each NZ$10 increment above NZ$700 a further 50 ounces per quater.

Reefton is worth $3,500,000 per annum, with gold at $550USD.

Royalco’s Philippine Exploration Assets

Upon Listing, Royalco’s Philippine exploration assets will comprise those of Oxiana Philippines Incorporated and the Samay project from Phelps Dodge Philippines Incorporated.

Royalco is acquiring 100% of the Oxiana subsidiary, Oxiana Philippines Inc, for a consideration of A$5.0 million of scrip (expected to be escrowed for 2 years) on listing plus reimbursement of exploration expenditure from 1st July 2005 to the listing date (approx A$220,000). Oxiana will retain a 51% buyback option for each resource discovered which is greater than 800k tonnes contained copper metal or greater than 2.0Moz of gold. Consideration for buyback exercise is US$8 million and a free-carry of Royalco to develop the project up to BFS stage.

Oxiana Philippines Inc (OPI) has been exploring for copper-gold and gold deposits in the Philippines since the mid 1990s. An impressive array of mineral exploration projects has been assembled over a period of almost ten years by OPI in known mineralised regions including the Central Cordillera of Northern Luzon, The Sierra Madre of eastern Luzon, in Southern Leyte and in North-eastern Mindanao.

OPI’s tenement portfolio comprises ten separate titles, seven in Northern Luzon, two in northeast Mindanao and one in southern Leyte, covering an aggregate area of approximately 109,300 hectares.

Why is Oxiana selling down?

The obvious question to ask is “why is Oxiana selling down its Philippine interests”? By vending its Philippine exploration ground into a separate listed structure Oxiana is allowing a dedicated team to focus purely on this asset. Royalco’s management and exploration team’s interest will be completely aligned allowing exploration potential to be maximized.

Oxiana has a 50.1% buyback option for each resource discovered which is greater than 800,000 tonnes contained copper metal or greater than 2.0Moz of gold. A deposit of this size would be a company maker for Royalco, even with 49.9% interest. The additional attraction to Royalco is that Oxiana will pay US$8 million and free-carry Royalco to develop the project to a BFS stage.

It is worth noting Oxiana’s track record in dealing with small exploration companies and their shareholders. In late 2004 Oxiana offered Minotaur shareholders, via scrip and cash, a price of $2.29ps for their shares which was 48% over the 30 day VWAP. At the time Minotaur Resources controlled the Prominent Hill project in which Oxiana was part way through earning a 65% interest. More recently Oxiana and Minotaur Exploration raised $18m through an IPO for Toro Energy which is an amalgamation of both companies’ South Australian uranium interest. The IPO was heavily over subscribed.