$3.92Major Transition of the Company?s Business Model to...

$3.92

Major Transition of the Company?s Business Model to Generate Revenue in Short Term
Australia-based Macquarie Harbour Mining Limited (?MHM? or ?the Company?) is a resource company involved in the aluminium and mineral exploration business, presently in Australia and Africa. The Company through its wholly-owned operating subsidiary, Alreco Pty Ltd, purchased the Aluminum Salt Slag processing business located in Moolap, Victoria from Sims Aluminum Pty Ltd. This transaction heralded the Company?s diversification into the Aluminum Salt Slag business thereby transitioning the Company from mineral exploration into an income producing, diversified resources company. The diversification into the aluminum industry has provided important income and growth opportunity to the Company. The operating model largely insulates the Company from fluctuations in the aluminum price and currency.
Apart from Aluminum, the Company, during the past one year, has focused on Silica. The income from the Aluminum business is reinvested to develop the mineral division. The mineral division of the Company concentrates on exploration of silica and gold prospects in the Tasmanian region of Australia. MHM is also in discussions with other parties for the development of the Tasmanian silicon smelting concept, and also for the export of silica as a feedstock for existing international operations.
The Company, whilst developing its Aluminum and Silica projects, will also continue with ground-based exploration and aerial geophysical survey of gold and base metal targets.
We value the Company based on PV of cash flows that would be generated from its Aluminum project in Australia and the United States. We assume that, MHM would set up three plants in the U.S. with an initial investment of about US$70 million, discussed in detail in the ?Valuation & Investment View? section of the report. Assuming a discounting factor of 13.4% and a span of 30 years of production, we have arrived at a new target price of A$3.92, which provides an upside potential of 188% to the current market price.
Investment Arguments
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Diversified into the Revenue Generating Aluminum Salt Slag Processing: The Company?s 100% owned subsidiary, Alreco has entered into a processing agreement with Sims Aluminum Pty Ltd that commenced on 15 January 2010. The agreement provides for the processing of material by Alreco including Aluminum Salt Slag, Aluminum Non-Salt Slag and Aluminum Dross thereby providing a growing revenue stream for the Company. Alreco also entered into a contract that provided the rights to process the Moolap Salt Slag landfill, owned by Alcoa that contains 160,000 tonnes of Salt Slag. Lately, Alreco has entered into an agreement with Smelter Service Corporation (SSC), the US-based aluminum company, to conduct a joint feasibility study for salt slag processing in the US. The feasibility study is scheduled for completion by June 30, 2010. MHM aims to enter a significant period of growth over the next five years to become a major player in the aluminum and resource industries
Exclusive Global Rights to a Proprietary Technology: Alreco Pty. Ltd., a wholly- owned operating subsidiary of MHM, now owns the exclusive global rights to a proprietary technology for the processing of Aluminum Salt Slag. Alreco acquired the exclusive global rights to this ALNAK technology during January 2010. Alreco processes all of the Aluminum Salt Slag produced in Australia under contracts with Alcoa Australia Rolled Products Pty. Ltd., a wholly-owned subsidiary of Alcoa, Inc., and Sims Aluminum Pty. Ltd., a wholly-owned subsidiary of Sims Metal Management Limited (ASX:SGM)
Oct-09 Jan-10 Apr-10
Jul-10 Oct-10
Macquarie Harbour Mining Limited
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Global Opportunities: The Company is in ongoing negotiations with smelters in the United States with a number of parties now positively engaged in discussions for Salt Slag processing. With Alreco?s proprietary technology, the ALNAK technology, Salt Slag can be processed and separated into its individual components of aluminum metal (10-20%), aluminum oxide (30-40%) and a salt and potassium chloride blend (50%). Senior representatives of Alcoa, Inc (USA) will be visiting the Alreco operation during October to further discussions for operations in the United States. Salt slag landfill is not permitted in Canada and Europe, hence several aluminum companies have approached Macquarie Harbour Mining to conduct feasibility study for salt slag processing in their countries, thus providing MHM an opportunity for global growth in coming years
Tasmania - more to explore, discover and develop: Following discussions with other interested parties, MHM is planning to extend its investigations into the viability of establishing a Tasmanian silicon smelter industry. The Company believes that its 100%-owned silica targets can support a number of offtake partners and that silicon smelting will become a cornerstone industry for the Tasmanian state
Sound technical expertise of the management team: The Company has a strong management team with vast experience in the management of mining companies. The depth, competence and global experience of the Company?s management team are expected to be the key factor behind the success of the project
Company Overview
Diversified Resources Company Striving to Grow Shareholder
Wealth
Incorporated in 2007, ASX-listed Macquarie Harbour Mining Limited is a diversified mineral resource company. The Company is a multi-commodity exploration and development company with operations aligned with the aluminum industry. MHM has identified four highly prospective regional targets on the west coast of Tasmania, namely the Sorell Silica Project, the Double Cove Iron Ore Project, the Hibbs Nickel Province and the Thomas Creek Copper Gold Project.
During the twelve months ended June 2010, Macquarie Harbour Mining Limited (MHM), transitioned from mineral exploration into an income producing, diversified resources company. The mineral exploration assets that were held at the Company?s Initial Public Offer in 2007 are still largely retained and under development, and the diversification into the aluminum industry has provided important income and opportunity for growth. The Company, through its wholly-owned operating subsidiary Alreco Pty Ltd., purchased a Aluminum Salt Slag processing business from Sims Aluminum Pty Ltd (Sims), a wholly- owned subsidiary of Sims Metal Management Limited (ASX:SGM). This was a significant event for the Company, the culmination of an extensive assessment and negotiating period for the business acquisition, and signifying the Company?s development into an income producing entity with significant growth potential. The Company has utilized the income from the Aluminum business to further explore and develop the silica, gold and copper targets.
MHM?s primary silica project area is the 100%-owned Sorell Silica Project, contained within exploration area EL61/2007. This exploration area was previously owned by Comalco (now Rio Tinto Aluminum), which conducted a full feasibility on the construction of a silicon smelter in Tasmania. MHM also secured two additional silica exploration areas during the last 12 months, to secure any potentially economic silica deposits located within Tasmania. MHM is conducting a number of ongoing offtake negotiations, concerning both the development of a Tasmanian silicon smelter and the export of silica to feed existing and proposed smelters located overseas. Negotiation for silica export also continues, with samples provided to a number of parties for analysis. The results of all analysis conducted by third parties to date has been positive, and offtake price discussions continue with a number of parties.
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Exhibit 1: Organization Structure
MHM
Aluminum Division
(Alreco Pty. Ltd.)
Technology driven conversion of waste into valuable commodities Exclusive global rights to the technology
Mineral Division
(Goldstock Mining)
Silica Project Miyabi Gold Project Gold, Copper, Nickel and Iron Ore exploration
Silica Project - ongoing negotiation
Miyabi Gold Project - pre-feasibility Other exploration targets ? reinvestment of income for self-funded development
Silica Project- potential returns in perpetuity Miyabi- advanced, low cast acquisition Divestment/project partner introduction at appropriate times to maximize returns
Commenced production Jan 2010 Full capacity expected Q4 2010 100% Australian Salt Slag processed under contracts with Alcoa and Sims Aluminum
Significant opportunities to expand overseas, discussions with producers in USA, Canada, Europe, South Africa
Source: Company
Business Overview
Macquarie Harbour Mining owns an Aluminum Salt Slag processing business in Victoria, Australia, that is operated by a wholly-owned subsidiary Alreco Pty. Ltd. (Alreco). This business treats a waste product from the secondary aluminum industry, Aluminum Salt Slag, and separates it into its individual components of aluminum metal (10-20%), aluminum oxide (30-40%) and a salt & potassium chloride blend (50%).
Alreco holds the exclusive global rights to a proprietary technology that provides a closed- loop treatment of this waste ? one in which all recovered materials are valuable and there is no resultant landfill. Alreco processes material for Alcoa Australia Rolled Products Pty. Ltd., a wholly-owned subsidiary of Alcoa Inc., and Sims Aluminum Pty. Ltd., a wholly-owned subsidiary of Sims Metal Management Limited ? the world?s largest recycling company.
Alreco processes all of the salt slag produced in Australia and has a program to progressively process previously landfilled material and recover all valuable commodities.
Alreco owns an Aluminum Salt Slag Processing facility in Moolap, Victoria. The facility is located within 2 kilometers of Alcoa?s aluminum smelter at Point Henry, and within 60 kilometers of Sims Aluminum Pty. Ltd.?s operations at Laverton.
The operations were acquired by Alreco in January 2010 and are presently undergoing a technology upgrade. The facility continues to process Aluminum Salt Slag and Aluminum Dross during this upgrade, and the process will be completed during the fourth quarter of 2010.
Aluminum Project has anticipated EBITDA profit of $8.6 million per annum once operating at full capacity, and minimum $230,000 per month during plant upgrade. From the commencement of operations to June 30, 2010, Alreco processed 13,627 tonnes of Salt Slag and Aluminum Dross under the contracts with Alcoa and Sims. During August 2010, gross revenues were $511,824, slightly down from $521,648 in July, with the technology upgrade well advanced and remaining on budget.
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Aluminum Project Update
On January 18 2010, MHM ? through wholly-owned operating subsidiary, Alreco Pty. Ltd. ? commenced operation of the Company?s Aluminum Salt Slag business located in Moolap, Victoria. This was a significant event for the Company, representing the culmination of an extensive assessment and negotiation period for the business acquisition and signifying the Company?s development into an income producing entity with significant growth potential.
Overview
Alreco Pty. Ltd. holds the exclusive global rights to a proprietary technology for the processing of Aluminum Salt Slag.
Aluminum Salt Slag is a waste stream that results from the recycling of aluminum, a by- product from recyclers that has traditionally been placed in landfills. Due to regulatory changes by the Environmental Protection Authority (EPA), this material can no longer be disposed of in landfills, presenting a major problem for the industry. Without a viable solution to this challenge, the secondary aluminum industry cannot continue to operate using the existing highly-efficient, yet waste-generating processes it currently employs.
Alreco?s proprietary technology, the ALNAK technology, processes Salt Slag and separates it into its individual components of aluminum metal (10-20%), aluminum oxide (30-40%) and a salt & potassium chloride blend (50%). The technology results not only in total waste treatment but also in the production of aluminum and other saleable products. The technology essentially removes the need for any portion of the Salt Slag to be sent to landfill.
The ALNAK technology has significant environmental benefits including:
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Reduced energy consumption: the energy used in the recycling of aluminum recovered from Salt Slag is 95% less than the energy required to produce aluminum from bauxite ore
The recycling of salt, potash and aluminum oxide, all of which are valuable commodities that were previously consigned to landfills
Avoidance of hazardous material in landfills
Alreco processes all of the Aluminum Salt Slag produced in Australia under contracts with Alcoa Australia Rolled Products Pty. Ltd. (Alcoa), a wholly-owned subsidiary of Alcoa, Inc., and Sims Aluminum Pty. Ltd. (Sims), a wholly-owned subsidiary of Sims Metal Management Limited. Alreco also processes other wastes for Sims, including Non-Salt Slag and Aluminum Dross.
Alreco also has a program to progressively process previously land-filled Salt Slag in order to recover valuable commodities. The first landfill that will be reprocessed is owned by Alcoa and contains 160,000 tons of Salt Slag.
There is significant potential to expand the business overseas, with opportunities under consideration in the USA, Canada, Europe and South Africa. Alcoa, Inc. has publicly stated that by 2015 the Company wishes to end the landfilling of aluminum Salt Slag throughout their global operations. Alreco and Alcoa, Inc. are in discussions for Alreco to be Alcoa?s global partner to assist in achieving this goal.
Aluminum Salt Slag
Aluminum Salt Slag (also known as Aluminum Salt Cake) is the waste material remaining after the recycling of aluminum dross (a by-product of the aluminum production process caused by partial oxidation of the molten metal surface) or aluminum scrap metal in a rotary furnace. Salt Slag typically has a high aluminum oxide, salt and potassium chloride content.
The disposal of Salt Slag is a key issue for the aluminum industry due to its hazardous nature. Salt Slag has been classified as hazardous waste in all States of Australia and most countries of Europe due to the leachable chloride content in Salt Slag. It has traditionally
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been disposed of in landfills. However, increasing costs of landfilling and restrictions on landfilling have increased the desire of the industry for an alternative solution. Within Australia the EPA no longer permits the landfilling of Aluminum Salt Slag and other environmental agencies around the world have either banned or have tightened the limits on what can be dumped into landfills. In the United States, Aluminum Salt Slag (or Salt Cake as it is known locally) can be landfilled. However, aluminum companies are now becoming increasingly aware of the environmental legacy this creates and the value of the materials that can be recovered from the Salt Cake through application of the ALNAK technology.
The technology employed by Alreco removes the need for any of this material to be landfilled, resulting in significant financial benefits for industry and environmental benefits for society at large. The dumping of Salt Slag presents an environmental and financial liability in perpetuity and for this reason the Alreco process will revolutionize the industry with regard to this significant waste stream.
The aluminum industry has an inherent desire to reprocess aluminum dross and to recycle aluminum as the energy cost is only 5% of the cost to produce aluminum from bauxite ore. It has been stated by the Australian Aluminum Council that in 2006 primary aluminum production resulted in 3.1 tons of CO2 per ton of metals produced. At these levels the ALNAK process will reduce CO2 output by approximately 2.945 tons per ton of metal produced to 0.15 tons of CO2 per ton of aluminum produced. Furthermore, by engaging in recycling the industry projects an image of being environmentally responsible.
Alreco acquired the exclusive global rights to the ALNAK technology during January 2010. Prior to this, the technology and associated relationship with Alcoa was developed through a Joint Venture of three companies (the Three Party JV) including two companies associated with two Directors of MHM (Frank Rogers and Peter Robertson).
In January 2005, Alcoa of Australia Pty. Limited, trading as Alcoa World Alumina Australia (Alcoa), and the Three Party JV entered into a contract that permitted up to 2,000 tons of Salt Slag and aluminum dross from Alcoa's Moolap landfill site to be used to determine the feasibility of full-scale recovery and remediation of all Salt Slag and associated material at Moolap. This contract included the intention that, should the initial trial be successful and approved by Alcoa, the Environmental Protection Authority (EPA) and Council, the parties would negotiate an agreement for the recovery and remediation of all Point Henry Salt Slag landfill areas on the same principles.
In April 2006, the results of the initial trial were presented to Alcoa and Alcoa agreed with the viability of the ALNAK technology. In October 2007, the Three Party JV executed a formal agreement with Alcoa regarding the removal of the Salt Slag at the Alcoa Moolap landfill, containing around 160,000 tons of Salt Slag.
During 2009, the Independent Directors of MHM approached the two Directors associated with the Three Party JV to consider an acquisition of the rights to the technology and to the ability to process the Moolap landfill and ongoing Salt Slag produced by Alcoa. The Independent Directors appointed Grant Thornton to act as corporate advisor for the transaction and further commissioned the Carnot Group to provide an independent technical report regarding the ALNAK process. Concurrently, the Independent Directors engaged in negotiations with Sims Aluminum Pty. Ltd. to acquire one of Sims? businesses in Moolap that held the necessary permits for the processing of Aluminum Salt Slag. Sims had been attempting to develop a closed-loop, landfill-free solution for Salt Slag without success and the Independent Directors identified an opportunity to acquire this business from Sims and upgrade the operation to the specifications of the ALNAK technology.
In January 2010, a simultaneous transaction occurred whereby MHM acquired the Sims Salt Slag business; the exclusive global rights to the ALNAK technology; the rights to process the Alcoa landfill at Moolap; the rights to a contract with Alcoa to process ongoing Salt Slag production; a contract with Sims to process Aluminum Salt Slag and Aluminum Dross; and the first right of refusal to acquire two additional technologies under
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development for processing Spent Pot Lining and Non-Metallic Product (two additional aluminum industry waste streams).
MHM, through wholly-owned operating subsidiary Alreco Pty. Ltd., recommenced operations on January 18, 2010 at the Moolap Salt Slag processing facility with the aim of progressively upgrading the technology at the plant without interruptions to ongoing operations.
Development Strategy for Financial Year 2011
The development strategy for Alreco for Financial Year 2011 is as follows:
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Finalize ALNAK upgrade at Moolap plant, increasing plant throughput to 60,000 tpa Commence processing the Moolap Salt Slag landfill
Commence expansion into USA where 1.0MT of salt slag is produced annually and significant opportunity presents itself to reprocess already landfilled material
Assess acquisition of Three Party JV rights for the Australia operations
Assess ongoing development of additional technologies for Spent Pot Lining and Non- Metallic Product
Joint Feasibility Study to Conduct Salt Slag Processing
The Company, on 20 October 2010, announced that Alreco Pty Ltd has signed a deal with an American aluminium company, Smelter Service Corporation (SSC), conduct a joint feasibility study to conduct salt slag processing in the United States, and also announced plans to raise $12 million for an expansion into the United States.
The feasibility study, which is scheduled for completion by June 30, 2011, will assess issues such as plant location, permitting, availability of grants and government concessions and availability for reclamation from landfill.
As part of this rapid U.S. expansion, MHM intends to raise $12 million through the issuance of 12 million new fully paid ordinary shares at $1.00 per share via a private placement. The capital raising will help fund the feasibility study with SSC, the rapid expansion of MHM into the U.S. market and for working capital. SSC produces approximately 90,000 tonnes of salt slag p.a. and has a 350,000 tonne single purpose (?mono-fill?) salt slag landfill that may be suitable for reprocessing. SSC producing around one million tonnes of slat slag is nearly four times the 25,000 tonnes per annum salt slag produced by the entire secondary aluminum industry in Australia. Alreco processes 100% of the salt slag that is produced in Australia and aims to achieve similar outcome in the U.S., and ultimately globally.
Macquarie Harbour Mining Limited' has also been approached by several aluminum companies from the Canada and Europe where salt slag landfill is not permitted to conduct feasibility study to conduct salt slag processing in their countries.
Silica Project Overview
Silica Exploration Areas
MHM?s primary silica project area is the Sorell Silica Project, a wholly MHM owned project located within exploration area EL61/2007. This exploration area was previously owned by Comalco (now Rio Tinto Aluminum) which conducted a full feasibility study on the construction of a silicon smelter in Tasmania. The full results of the study have been made available to MHM which has provided valuable information to support the present proposal for the development of a Tasmanian silicon smelter.
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Exhibit 2: Silica Project
Source: Company
MHM plans to conduct additional drilling of the Sorell Silica Project with the aim of determining a JORC Resource, however, this remains subject to the finalization of contract(s) for offtake. Unlike many other commodities, silica is not readily tradeable and the viability of the project is very much dependent upon confirmation of suitable offtake agreements. It is for this reason that the Company intends to secure offtake agreements prior to any drilling.
MHM also secured two additional silica exploration areas during 2010, with the aim of securing any potentially economic silica deposits located within Tasmania.
The Maydena Silica Project was secured under option by MHM. This project had been previously mined to produce silica used as feedstock for a now defunct silicon smelter previously located in Electrona, Tasmania. This project does not contain a formal JORC Resource, as all work that has been conducted is pre-JORC Code. The option agreement provides a mechanism for MHM to acquire 100% of the project area, subject to the payment of a royalty to the present owner.
The Marrawah Silica Project is a greenfield exploration area in North Eastern Tasmania that shows potential for silica production. This project area is 100%-owned by MHM. Analysis of the viability of the Marrawah Silica Project area is ongoing.
Offtake Negotiations
MHM is conducting a number of ongoing offtake negotiations concerning both the development of a Tasmanian silicon smelter and the exportation of silica to feed existing and proposed smelters located overseas.
All offtake negotiations are incomplete and ongoing though it has been reported by the Tasmanian Minister for Industry, Hon. Michael Aird, that a second multi-national chemical company is engaged with the Tasmanian silicon smelter proposal. MHM has not provided comment on this commercial-in-confidence matter.
Negotiation for silica export also continues, with samples provided to a number of parties for analysis. The results of all analysis conducted by third parties to date has been positive and offtake price discussions continue with a number of parties.
Silica project has potential to generate returns in perpetuity.
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Macquarie Harbour Mining Limited
Located within Historic Gold Mining Belt with Significant Growth Potential - African Gold Project
On 14 May 2010, MHM has signed a binding Letter of Intent (LOI) that specifies the terms of a Joint Venture between MHM and AIM-listed African Eagle Resources Plc (AIM:AFE) (African Eagle) relating to the Miyabi Gold Project, located in the Lake Victoria Goldfields of northern Tanzania.
Miyabi has a JORC compliant resource containing 520,000 ozs of gold, summarized in the table below.
Miyabi Mineral Resource Estimate (0.5g/t cut off)
Exhibit 3: Producing Mines in the Lake Victoria Goldfields
Source: Company
The Miyabi Gold Project is located in the Lake Victoria Goldfields of northern Tanzania. Miyabi has an indicated and inferred JORC compliant resource of 12.2MT at 1.3g/t containing 520,000 oz using a 0.5g/t cut off, which decreases to 6.3MT at 1.82g/t containing 370,000 oz using a higher 1g/t cut off. The resource is 71% indicated and 29% inferred.
The resource occurs in four main deposits over a distance of 3.5 km in discrete lenses within Archaean age greenstones. The delineated resource commences at surface and continues to depths of at least 100 meters. African Eagle, through its wholly-owned subsidiary Twigg Gold Ltd. (Twigg), discovered the deposits in 1999 using geochemistry and has since explored a part of the hinge zone linking the Siga-Mabale greenstone belt and the Nzega greenstone belt. Within this hinge zone, Twigg located a 14 sq.km. gold anomalous zone named the Miyabi Structural Corridor (MSC).
The mineralized lenses fall within the MSC, that trend North East. There is upside potential for discovering new extensions along strike and at depth for all of the four mineralized deposits as well as potential for developing other early stage prospects nearby.
Classification
Tonnage
Grade
Ounces
(Mt)
g/t Au
Moz
Indicated
7.88
1.45
0.37
Inferred
4.49
1.01
0.15
Total
12.37
1.29
0.52
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Macquarie Harbour Mining Limited
Exhibit 4: Location of Miyabi
Source: Company
Exhibit 5: Geology of Miyabi Project
Source: Company The development program for the Miyabi Gold Project is anticipated as follows: Initial Evaluation
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Due diligence examination of previous exploration
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Review of Tanzanian Mining Law and agreements between Twigg and local interests Review of metallurgical test work Preliminary feasibility study of operating costs to be conducted by SRK Consulting Decision to proceed
Project Development
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Infill drilling
Detailed metallurgical study
Mine planning
Costing of Operating and Capital costs
Feasibility study
Decision to Mine
MHM intends to self-fund the development via income derived from the Company?s aluminum division. Following a decision to mine, MHM will evaluate the most appropriate method of funding the development of the mine.
Terms of the Agreement with African Eagle Resources Plc
MHM and African Eagle (the Parties) have entered into a binding LOI that specifies the terms for a Joint Venture between the companies, whereby MHM will acquire 75% of African Eagle?s interest in the Miyabi Gold Project following MHM making a ?Decision to Mine.? MHM will not make any up-front payment to African Eagle nor is there any minimum expenditure requirement that MHM must meet. Under the LOI, MHM will progress the project, incurring all costs, until a Decision to Mine is made at which point the Joint Venture agreement commences and MHM acquires 75% of African Eagle?s interest in the project. In addition to African Eagle's ownership, a minor interest has been retained by local landowners.
At the inception of the Joint Venture, African Eagle will be deemed to have contributed its current exploration expenditure of USD 6.5 million to the Joint Venture, and this sum shall operate as a credit against any cash calls made by the Joint Venture against African Eagle occurring after the Decision to Mine and until that credit has been extinguished.
African Eagle has granted MHM an exclusive period of three months, extendable by a further three months at MHM?s sole discretion, to review and conduct due diligence on the Miyabi title, data and other relevant information. MHM intends to commission a concept mining and economic study using SRK Consulting (UK) Ltd., to assist in defining a path forward for further exploration and pre-feasibility studies.
Following a Decision to Mine, the Parties will invest a minimum of 12% of pre-tax net revenue into exploration of the Miyabi Gold Project Area, contributed pro rata to their respective interests.
Tasmanian Gold and Base Metal Exploration
MHM continues to conduct exploration of Tasmanian gold and base metal targets. During the last twelve months, extensive ground based mapping and sampling programs were conducted throughout the suite of Tasmanian projects and a helicopter-borne geophysical survey (VTEM) was carried out over West Coast Tasmanian targets.
West Coast Tasmania
The Company?s projects located on Tasmania?s West Coast contain targets for gold, copper, nickel, iron ore and silica.
During March 2010, a helicopter-borne geophysical survey (VTEM) was conducted over the West Coast targets, identifying a large number of targets for follow up in the summer field
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season in late 2010. The survey completed 1,404 line kilometers of high resolution VTEM, divided over 6 blocks, throughout each of MHM?s West Coast Tasmanian tenements.
The results have also drawn particular attention to the Thomas Creek Copper-Gold Project and Hill 99 Polymetallic Project areas.
Thomas Creek Copper Gold Project
Thomas Creek was first recognized as a potential porphyry style copper-gold deposit in 1993 by Plutonic Operations after soil sampling and geochemical surveys returned typical porphyry-type signatures. However, a determination on the nature and style of the deposit has remained ambiguous even after 8 diamond drill holes were carried out in 1996. MHM?s recent VTEM survey reinterpretation of existing data and new techniques for analyzing deposits of this nature have suggested that Thomas Creek is highly prospective.
Inspection of the Plutonic Operations drill core from Thomas Creek has revealed several observations not noted by previous companies which support that an alkali porphyry copper-gold system is present.
The first observation is that most of the copper minerals (mostly chalcopyrite) are very fine- grained and not visible to the naked eye. Possibly for this reason, much of the core has never been sampled or assayed, despite the intersections that were sampled being strongly anomalous in copper and sometimes gold. Thin section analysis shows that most of the copper-sulphides are very fine and are associated with magnetite and pyrite as separate discreet, grains.
A second important observation not noted by previous companies is that the host rocks have extensive hematite dusting of feldspars which is typical of some porphyry alteration envelopes, especially at Newcrest?s Cadia-Ridgeway Mine in New South Wales.
A third observation made of the host rock at Thomas Creek is the alteration of high temperature actinolite to chlorite, which in a typical porphyry model is classified as propylitic alteration. This type of alteration usually rims a porphyry system for several hundred meters together with pyrite, epidote and ferroan calcite. The alteration of actinolite to chlorite demonstrates retrogressive metamorphism by hydrothermal fluids typical of the outer shell of a porphyry system.
The fourth and vital observation was made from core from hole TC-5 in Thomas Creek. This observation was that there are significant hydrothermal breccias present in the core, with highly altered casts within a matrix of more mafic composition. Highly altered zones containing strongly anomalous copper and gold mineralization confirm that this event was a mineralizing event. This indicates that there was strong hydrothermal activity in this system derived from an as of yet undefined source, deeper down.
MHM will apply for approvals for a drilling program in 2011 to test the extent of the mineralization.
Hill 99 Zinc-Lead Project
The VTEM survey identified a number of strong anomalies approximately 2.5 km along strike from Hill 99 which are planned for field examination in November. The anomalies lie between Hill 99 and the old Noddy Creek prospect explored by BHP in the early 1970s. The existence of these anomalies within such a prospective zone is considered highly encouraging.
Hill 99 is a base metal (zinc-lead) target that was tested by a fan of three diamond drill holes from a single site in the late 1990s by a previous explorer. The target was selected based on anomalous stream sediment and soil samples and also by a geophysics (IP) anomaly. The IP target was not intersected due to difficult ground conditions. Recent re-examination of the core has confirmed that the anomalous Zn-Pb values are associated with strongly altered mafic volcanic rocks with similarities to other economic Zn-Pb deposits within the Mt Read Volcanic belt (Que River and Hellyer). Work is ongoing to test for further comparisons with known economic deposits to establish whether further drilling is warranted at Hill 99.
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North East Tasmania
The Company?s gold and tin exploration targets in North Eastern Tasmania were relinquished during the last 12 months, as none of these project areas were deemed to have economic potential.
Tasmanian Exploration Update
The MHM exploration team continues to interpret the results of the recently completed helicopter-borne geophysical survey (VTEM) over Western Tasmania.
The survey was designed to locate conductive targets within prospective ground holding gold, copper, nickel and iron ore mineralization.
The Company has indicated, while the interpretation of the results is ongoing, that a large number of new targets have become apparent. Of particular note is a substantial concentration of anomalies over an area with a 3km strike length that contains known nickel sulphide occurrences.
Future Strategy
Australian Plant Upgrade
o Upgrade due for completion by end of September with commissioning scheduled for October
o Revenues substantially increase after this due to commencement of landfill processing
USA Market Potential
o Alreco will seek expansion into the USA in 2011 o Around 1 million tpa of Salt Slag is produced in the USA (25,000 tpa produced in
Australia)
o MHM plans to build three processing facilities in the United States with a combined capacity of 525,000 tpa
o There are 8 Salt Slag landfills that present immediate targets for reclamation o Robust profit margins strengthen the case for debt financing of future growth to
reduce shareholder dilution and maximize returns o Offtake contract preliminary discussions with Alcoa USA have commenced
Europe, Canada and South Africa Expansion Opportunities
Silica Project
o Development of the Tasmanian silicon smelter- Advanced stages of off-take negotiation and project development with multi-national chemical company
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Additional Technologies
Aluminum Oxide Processing
MHM has acquired the exclusive rights to a technology under development for the conversion of the aluminum oxide residue from the Salt Slag technology into aluminum metal! In Australia, over 50,000 tpa of NMP is produced, which would produce nearly 25,000 tons of aluminum metal with a value of $50.0 million at today?s prices.
USA produces 10 times the volume of NMP produced by Australia.
SPL Processing
MHM has acquired the exclusive rights to a technology under development to process Spent Pot Lining (?SPL?) into valuable commodities. Australia produces 38,000 tons of Spent Pot Lining per annum while USA produces some 230,000 tons.
The process to be used by MHM converts SPL into carbon, fluorine products and refractories for reuse in the aluminum industry. The revenue potential from the treatment of SPL is substantial.
Environmental Benefits
Landfilled salt slag causes significant environmental problems ? releasing ammonia into the air and metals into groundwater. No landfill means no contamination issues.
MHM?s technology has significantly reduced energy consumption by producing aluminum from Salt Slag waste, as compared to primary sources. Aluminum from Salt Slag production requires 95% less energy than that required to produce aluminum from bauxite.
Australian Aluminum Council states that primary aluminum production results in 3.1 tons of CO2 per ton of metal. Alreco Process uses 95% less energy and, as such, will reduce CO2 output by approximately 2.945 tons of CO2 per ton of metal. The Alcoa landfill alone contains between 16,000 and 32,000 tons of aluminum, resulting in a savings of between 47,000 and 94,000 tons of CO2 from emission. When the Alcoa processing agreement and Sims processing agreement is taken into consideration, this figure increases further.
The Australian Aluminum Industry has been promoting the ?Green Can? concept ? an infinitely recyclable product with no resultant waste. This is only achievable due to the technology being implemented by Alreco.
Alreco is looking to implement an evaporation plant into the circuit that will utilize Alcoa?s waste heat from the Point Henry Smelter to produce a crystalline salt from the Salt Slag treatment (as opposed to the use of evaporation ponds). This will result in the saving of approximately 120,000,000 liters of water per year.
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Macquarie Harbour Mining Limited
Industry Overview Aluminum Industry
Aluminum is the third most abundant element of the earth?s crust, behind oxygen and silicon, and the second largest metals market in the world. It is one of the lightest known metals. Aluminum is mostly found in nature in the form of oxides or silicates. Aluminum is so widely used in today?s modern society that it is almost impossible to imagine a world without it. The amazing, unique qualities of this fundamental metal give it a huge array of possible applications ranging from transport to packaging, electrical applications, medicine and the construction of homes & furniture. Alloys of aluminum are widely used in the airline industry for manufacturing airplanes and spacecraft. Aluminum makes up 80% of an aircraft?s unloaded weight. Even more amazing, the space shuttles created by NASA are made of 90% aluminum. Aluminum is also widely used for construction purposes due to the fact that the surface of aluminum quickly develops a thin, microscopic layer of oxide over its top, which renders the metal almost completely resistant to corrosion.
Exhibit 6: Worldwide Availability of Aluminum
Source: www.aluminiumleader.com
Aluminum is primarily extracted from its ores called bauxites. Bauxites are not widespread throughout the world with only seven bauxite-rich areas found throughout the world, namely in Western and Central Africa (mostly Guinea), South America (Brazil, Venezuela, Suriname), the Caribbean (Jamaica), Oceania & Southern Asia (Australia, India), China, the Mediterranean (Greece, Turkey) and the Urals (Russia).
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Macquarie Harbour Mining Limited
Exhibit 7: Aluminum Demand-Supply Scenario (Metric tons)
3,701,000 3,401,000 3,101,000 2,801,000 2,501,000 2,201,000
Production
Consumption
Source: Bloomberg
The Australian aluminum industry has been operating for over 50 years and has been a significant contributor to the Australian economy. Australia has more than 30% of the world?s bauxite reserves, is the world?s largest producer of Alumina, the world's fifth largest aluminum producer, and the world?s third largest aluminum exporter behind Canada and the United States.
Exhibit 8: Australian Aluminum Industry Locations
Source: Australian Aluminium Council Ltd.
The most influential factor in the price of Aluminum is power, contributing one of the largest cost components to the manufacturing of aluminum given that production involves electrolysis. Consequently, manufacturers are located near cheap and abundant sources of electricity such as hydroelectric power plants. Indian manufacturers are the lowest cost producers of the base metal due to its access to captive power, cheap labor and proximity to abundant supply of raw material, i.e., bauxite. However, recycled metal requires significantly less amounts of energy for manufacturing primary aluminum. The recycling of
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Macquarie Harbour Mining Limited
aluminum scrap requires only 5% of the energy required for primary smelting, which is astoundingly lower considering that power is such a high cost component.
Exhibit 9: The Australian Minerals Industry 2009?10
Exports $A billion
0.162 4.624 4 15 29,036 1 1 3 0 2 1.128 11.138 23 1
Exports $A billion
4.624 3.732 2.148 0.545 0.561 1.071
Export receipts in nickel mining revenue 0.294 0.267
Bauxite 66,200 Alumina 20,204 Copper 890 Gold 0 Iron ore 423,900 Lead 648 Manganese 5,865 Nickel 177 Silver 2 Mineral sands 3,276 Zinc 1,336 Coal thermal 213,000 Coal metallurgical 158,000 Uranium 9
Source: Minerals Council of Australia
Exhibit 10: The Australian Minerals-Minerals Processing
Smelting and Refining Production ?000t
Alumina 20,204 Aluminum 1920
Refined Copper
Lead Bullion
Refined Lead
Refined Zinc
Refined Nickel
427 148 208 523 128
Refined Silver 0.774
Synthetic Rutile 551
Source: Minerals Council of Australia
Production 000t
Exhibit 11: Aluminum Price Variation (LME Aluminum Cash in $/ton)
3500 3000 2500 2000 1500 1000
Source: Bloomberg
The demand for Aluminum has experienced a decline in early 2009 compared to initial period of 2008, due to global slowdown. The slowing economy severely affected demand in the markets. But, it has been coming back on track. In the past year, prices have shown an increasing trend. Since April 2009, the prices of base metals have shown a substantial improvement after the approval of stimulus plans by various governments across the globe.
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Exhibit 12: World Smelter Production and Capacity (Million Tons)
16000 12000 8000 4000 0
Production 2008
Year end capacity 2008
Source: U.S. Geological Survey, Mineral Commodity Summaries, January 2010
The outlook for the demand of the metal is very strong, driven by increasing demand from the automobile and constructions industries. Increasing industrialization has, in emerging economies, promised a bright future for the metal demand. Consumption in countries such as China and India is projected to grow significantly. China has continued to increase its share of global aluminum demand to around 35% and it is expected that its share will continue to increase out to 2013.
Exhibit 13: 5 Year Forward Curve Price Change (Indexed to 100 - June 2010 to June 2015)
Source: UC RUSAL 2010
Silica Industry
Silica, chemically known as silicon dioxide, is ubiquitous in the earth's crust. It occurs in trace to large quantities in rocks and soil. As it is so common it is used by many industries, mostly in the form of quartz. Mineral commodities that contain silica include diatomite, bentonite, kaolinite, talc, pyrophyllite, sand and gravel, perlite, pumice, dimension stone and barite.
Products that contain minerals, many of which are associated with silica, include paint, paper, rubber, plastic, pharmaceuticals, food, cement, plaster, cat litter, potting soil, plaster board and miscellaneous construction materials. The majority of optical fibers, used for telecommunications, are made from silica. It is a primary raw material for ceramics such as earthenware, stoneware, porcelain.
According to research by The Freedonia Group, world demand for specialty silicas, such as precipitated silica, fumed silica, silica gel and silica sol, will rise 6.3% per year to 2.7 million metric tons in 2014. Gains will be driven by a rise in world manufacturing activity, particularly in key silica markets, such as tires, rubber, chemicals and agricultural products.
15% 10% 5% 0% -5% -10% -15%
Aluminum
Zinc Lead Copper Nickel
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United States
Australia Brazil Canada China India Norway Russia South Africa UAE,Dubai
Other countries
Macquarie Harbour Mining Limited
Precipitated silica, the major specialty silica form most used around the world, accounted for 70% of world specialty silica demand in 2009 and is expected to be the fastest-growing silica product. Growth is driven by a strong rebound in the rubber market and its increasing utilization in tires as a partial replacement for carbon black. Rubber is the largest market for specialty silicas and it is expected to account for 45% of total demand in 2014.
The Asia Pacific region is expected to experience the fastest growth in demand through to 2014 with an estimated rise of 9% a year that will then add up to about half of total world demand. China, which is already the world?s single largest market for silica, will continue to be the leader in silica production with double digits growth.
Another form of silica, micro silica, is widely used in the refractory industry and special cement industry. With the increasing construction and infrastructure projects in the emerging economic countries, the demand for Silica will grow significantly.
Mineral Industry in Tasmania
Tasmania is known for many of its mines, including long-term production mines such as Mount Lyell, Rosebery and Savage River, which are rich in minerals, such as zinc, lead, gold, copper and silver, bauxite, magnetite, high-grade silica, and tungsten.
Exhibit 14: Major Mining and Mineral Processing Operations and Proposed Projects in Tasmania
Source: Mineral Resources Tasmania
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Tasmania?s mineral extraction and processing sector is worth $1.56 billion and it is Tasmania?s largest export industry, accounting for 44.8% of its mercantile exports in 2008- 2009. The total value of mining and metallurgical production in Tasmania was estimated at $2,451 million in 2008/2009. Some of the small mines at Kara (magnetite, scheelite) and Que River/Hellyer (zinc, lead, gold, copper and silver) are in the expansion phase. A mine at Corinna is the source of Ultra-high purity silica flour which is used mostly in the manufacture of LCD panels.
In 2006-2007, the Tasmanian Government initiated the TasExplore Project, a four-year, $5.06 million program of geoscientific data acquisition and promotion. This includes a new 200 meter line spaced aeromagnetic and radiometric survey over the prospective parts of northeast Tasmania, and an updating of the geology of central northern Tasmania, northeast Tasmania and King Island.
The global crisis in 2008-09 slowed the pace of mineral exploration in Tasmania, however it has started to recover over the last few months due to stronger commodity prices, availability of 3D geological model and prospective analysis of Tasmania, and a clear and consistent regulatory regime for both exploration and mining.
Mining Developments ? Key Peer Analysis Despite its small area of 68,000 square kilometers, Tasmania has a remarkable geological
diversity and abundance of rich and high-grade mineral deposits.
There are a number of opportunities for acquiring ground for mineral exploration in Tasmania. The Tasmanian Government has taken steps over the recent years to remove the perception that access is difficult and to eliminate the threat of sovereign risk.
The key mining developments can be highlighted as below:
Bendigo Mining Limited has announced completion of the purchase of the Henty mine from Barrick Gold Corporation. Bendigo is accelerating exploration and has announced increases to gold resources and reserves that will ensure the extension of the life of the mine beyond the closure at the end of 2009 planned by Barrick, including an expected production of 50,000 ounces of gold in 2009/2010.
The Chinese-owned Minerals and Metals Group (MMG) has announced that development of the $25 million raise bore at the Rosebery mine will proceed and a $1.6 million in-mine exploration project will resume. The company is buoyed by recent successes, including a recently announced increase in resources indicating the potential to extend mine life beyond fifteen years. MMG has also recently acquired the Avebury nickel mine, west of Zeehan, which is presently on care and maintenance but which is capable of producing 7500 to 8500 tons of nickel in concentrate from 900,000 tons of ore per annum. The company has an off- take agreement with the Jinchuan Nickel Group.
A merger of Grange Resources Limited and Australian Bulk Minerals was completed in January 2009. The ?new? company is now Australia?s largest producer and exporter of high value iron ore pellets. Shagang Mining Australia, which is owned by the Chinese Shagang Group Co. Limited along with the other shareholders in ABM, hold 73.9% of the shares in the merged company. The merger has paved the way for a $150 million project to extend the open-cut mine and to upgrade production equipment as well as the concentrate plant. Options are being investigated for increasing the production rate of iron ore from 2.5 million tons to 3.0 million tons per annum and eventually to 3.5 million tons per annum.
Bass Metals Limited is in its third year of open-cut mining of high grade zinc-lead-silver-gold ore at Que River, with the ore being trucked to MMG Rosebery for treatment. This is the planned initial phase, to be concluded in June 2010, of a potential five-year project. Bass has acquired the Hellyer flotation plant and has recently announced that it is conducting a pre-feasibility study into resuming mining and treatment of the Hellyer tailings. The company is also assessing mining and treatment of the remaining Que River ore at Hellyer. Bass has announced that it is commencing development of a new mine at the Fossey Zone, near the
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Hellyer mine, to produce 400,000 tons per year over two to three years, with first ore production expected in September 2010.
Metals X Limited (MLX) has signed a Heads of Agreement with the Yunnan Tin Group (Holding) Company Ltd. (YTG) to sell up to 60% of its Tasmanian tin operations. The company has reopened the Mount Bischoff and Renison Bell tin mines and has established the first significant copper resources at Renison Bell. Metals X has completed a successful engineering and feasibility study into constructing a plant to treat the Renison Bell tailings to recover tin and copper. The project would enable treatment of the complex stannite-bearing cassiterite-sulfide ores that are known in western Tasmania and would also open up further exploration opportunities. The joint venture with YTG provides access to technical and marketing expertise and potentially enhances the future development of the Rentails project.
King Island Scheelite Limited (KIS) has announced a financing and partial off-take agreement with the Hunan Nonferrous Metals Corporation. KIS has a resource of 13.4 million tons of 0.64% WO3 in the Dolphin ore body at Grassy and has completed a feasibility study for an initial ten-year project in which 6.8 million tons of ore would be mined to produce an average of 3,000 tons of WO3 per annum. KIS has all approvals in place for the commencement of mining. Scheelite recovery will be by whole-ore flotation. The company is also investigating potential recovery of tungsten from old tailings.
Proto Resources and Investments Limited has signed a joint venture with Metals Finance Corporation with the aim of producing 4,000 tons of contained nickel a year from the Beaconsfield laterite and is finalizing a feasibility study.
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Macquarie Harbour Mining Limited
Recent Results
Exhibit 15: Yearly Results
(in A$ )
Revenue from Continuing Operations
Other Income
Administrative Expenses
Cost of Sales
Exploration Expenses
Pre-operational Expenses
Annual Leave Expense
Consultancy Fees
Depreciation Expense
Employee Benefit Expense
Insurance Expense
Office Accommodation Expense
Option Expense
Professional Fees
Shareholder Expenses
Other Expenses
Results from Operating Activities
Loss before Income Tax Expense
Income Tax Expense
Loss after Income Tax Expense
Loss and Comprehensive Income attributable to members of Macquarie Harbour Mining Ltd
Basic Earnings per Share
Source: Company, RB Milestone Research
Full Year 2007A 2008A
2,965 118,483
0 6 -244 -24,753 0 0 0 0 0 0 0 -29,577 -121,635 -136,384 -521 -18,861 0 -56,085 0 -20,985 0 -28,325 0 -176,660 -10,970 -47,612 0 -38,625 -15,087 -86,498 -145,492 -545,876 -145,492 -545,876 0 0 -145,492 -545,876
-145,492 -545,876 -0.017 -0.017
2009A
254,101
1,053 -38,555 0 0 0 -9,108 -103,580 -39,709 -199,174 -20,616 -31,164 56,178 -96,971 -57,321 -137,164 -422,030 -422,030 0 -422,030
-422,030 -0.008
2010A
2,855,239
0 -43,191 -839,246 -727,069 -977,051 -78,771 -90,343 -150,202 -762,316 -56,818 -77,915 -335,571 -106,663 -106,568 -525,760 -2,022,245 -2,022,245 0 -2,022,245
-2,022,245 -0.027
% Chg (FY?10 vs FY?09)
1,023.7%
N.M. 12.0% N.M.
N.M.
N.M. 764.9% -12.8% 278.3% 282.7% 175.6% 150.0% N.M. 10.0% 85.9% 283.3% 379.2% 379.2%
379.2% 379.2% 255.0%
For the twelve months ended June 2010, the Company generated revenue of A$2,855,239, up 1,023.7%, after the Company transitioned from mineral exploration into an income producing, diversified resources company. In January 2010, the Company, through its wholly-owned subsidiary Alreco Pty Ltd, acquired the Salt Slag business of Sims Aluminum Pty Ltd in Moolap, Victoria resulting in immediate income generation for the Company for the period ended June 30, 2010. A tolling income of A$2,556,869 during the period contributed to the surge in Net Revenue of the Company.
During FY2010, Operating Expense rose 620% to A$4,877,484, from A$677,184 recorded in FY2009. The components to the Operating Expense were Cost of Sales, Exploration Expenses and Pre-operation Expenses stood at A$839,246, A$727,069 and A$977,051, respectively, as the Company continued ground-based exploration and helicopter geophysical survey of the West Coast Tasmanian gold and base metal projects. Other Expenses soared 283.3% to A$525,760 from A$137,164 during the last year.
Loss from Operating Activities rose 379.2% to A$2,022,245 for the twelve months ended June 2010, as compared to loss of A$422,030 reported during FY2009.
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Macquarie Harbour Mining Limited
Basis for Revenue Projections
The key assumptions made in forecasting revenues are as follows:
    

 
We have done the revenue projection (2010 onwards) for the Company based on its Aluminum project
For the aluminum project, the Company expects to earn $230,000 per month from January 2010 to October 2010, then increasing to A$8.6 million per annum thereafter
Alreco Pty Ltd contributed revenues of $2,735,528 and a net profit of $1,008,021 to the group for the period January 15, 2010 to June 30, 2010
Going forward, once the interests of the Three Party JV are acquired, this would increase again to ~A$11.0 million per annum
Lately, the Company entered into an agreement with Smelter Service Corporation (SSC) to conduct a joint feasibility study to conduct salt slag processing in the US. SSC produces around 90,000 tonnes of slat slag per annum. The Company has also been approached by several aluminum companies from Canada to conduct a joint feasibility study to conduct salt slag processing
We estimate that the Company may able to generate revenue in between US$120 million and US$140 million, and EBITDA (Earnings before Interest, Tax, Depreciation and Amortization) in the range of US$90 to 100 million starting FY2013
We expect the Company to incur capital expenditure budgeting US$50.0 million over the next 2 years on the Aluminum project
Apart from the above, the Company would incur US$12.0 million for the feasibility study agreed to conduct along with SSC scheduled to conclude it by June 30 2011, to progress opportunities with Alcoa and for the purposes of working capital
Valuation & Investment View
Our valuation is based on the fundamental valuation of the Company?s aluminum project. For the Aluminum project, the Company plans to build three plants in the U.S. of 525,000 tpa combined capacity, and has earmarked a budget of US$70.0 million for this.
We have valued the Company using the future free cash flow projection of this project and have applied a discount using the weighted average cost of capital to arrive at a present value and evaluate the potential for investment.
Planned Capital Expenditure
We have estimated a planned capital expenditure of US$70.0 million for the three plants in the United States. For the aluminum project in Australia, MHM expects to earn $230,000 per month from January to October 2010, increasing to A$8.6 million per annum thereafter. Once the interests of the Three Party JV are acquired, this would increase again to ~A$11.0 million per annum.