GORDONIA MINERALS MATAYO TRADING Business Plan relating to the start up and development of a gold and iron mining business at the Matayo Mine in North West Province, South Africa Important Notice from Gordonia Minerals Ltd (Gordonia or the Company) to all recipients All information in this document is subject to a duty of confidentiality unless such information is in the public domain, is required to be disclosed as a matter of law, or prior to receipt of this document is already in the possession of the recipient. The Company keeps a careful record of the parties to whom this document is disseminated. As a recipient of this document, you undertake to uphold the copyright of this document and agree that this document will not be published, disseminated, reproduced in any form or disclosed in part or in full to any third party without the prior explicit written consent of the Company. Regardless of the form in which you acquire this document, you may not decompile or disassemble the document except to extent and for the express purpose authorised by applicable law. This document is not, and should not be construed as, including an actual or implied offer of, or invitation to make to subscribe for, shares. It is an internal document that has been prepared to describe the activities and proposed activities of the Company for its internal purposes including the provision of information to its professional and other advisers. All information is provided in good faith and is believed by the Company to be true and accurate in all material respects, but no representation is given thereof. Any third party to whom this document may be provided may only rely on information that is expressly warranted in any agreement that may be entered into by the parties thereto. Table of Contents I. EXECUTIVE SUMMARY II. GENERAL COMPANY DESCRIPTION 3 3 The Industry: 11 Company Strengths and Core Competencies 12 Business Structure 12 III. PRODUCTS – IRON AND GOLD 14 Iron 14 Gold 16 Conclusions 17 IV. DRYLANDS LAND OWNERSHIP 18 Overview 18 Drylands Land 18 Langverwacht 18 V. MARKETING PLAN 19 Customer / The Iron Market 19 Pricing 20 Initial Sales / Off-take 24 Competition 24 Niche 25 Strategy 25 Promotion / Distribution Channels 25 Promotional Budget Error! Bookmark not defined. Sales Forecast 25 Gold 26 VI. OPERATIONAL PLAN 27 Location 27 Overview of Mining and Processing Operation 27 Mine Management 29 Mining 29 Production 30 Pelletising 33 Product Delivery 33 Rehabilitation 33 Cost Summary 35 Legal Environment 36 Page 2 of 46 VII. MANAGEMENT AND ORGANIZATION 38 Executive Management 38 Professional and Advisory Support 38 VIII. MANAGEMENT CONTRIBUTIONS 39 IX. FINANCIAL PROJECTIONS 40 12-Month Profit and Loss Projection 41 Four-Year Profit Projection (Optional) 41 Projected Cash Flow 42 Opening Day Balance Sheet Error! Bookmark not defined. Break-Even Analysis 42 X. APPENDICES ERROR! BOOKMARK NOT DEFINED. Page 3 of 46 I. Executive Summary Commercial Proposition Matayo Mine is an iron and gold deposit in South Africa, close to Johannesburg. It is a start up business, offering outstanding returns to shareholders and investors, consisting of: The mining of iron ore and its processing into a premium iron pellet for sale to steelmakers with the possibility of developing a specialty iron product for sale to the iron catalyst market; and The mining and processing of gold. The parent company of the Group is Gordonia Minerals Ltd, a BVI company managed from the UK, which owns 74% of Matayo Trading 2 (Pty) Ltd, a South African company that is the mineral rights holder. The iron operation is expected to be a “niche” business which will not compete directly with mass producers of haematite ore and which will fetch a premium price for its product. A key aspect of the proposed production of iron is the fact that Management have sourced a unique pelletising technology which will both enable the production of a top quality pellet and also do so at a significantly lower cost than is the norm for pelletising. The gold operation is expected to both underpin the value of overall business and to provide an inherent hedge against fluctuations in the profitability of the iron operation. Mining can commence, subject to financing, within 6 months. In Phase 1 it will consist of relatively small scale mining (60,000 tons per month) to produce 15,000 tons per month high grade iron pellets and 800 ozs per month of gold, with an anticipated free cash flow before financing costs, rising to over $1 million per month. Production will be doubled after approximately 12 months. It is hoped that the final iron production target will be to produce 80,000 tons per month. The capital cost is estimated at $15.4 million inclusive of a preliminary work program to fine tune the iron recovery process and define a core mining resource, and working capital. It is proposed that this is financed in part by asset finance ($3.4 million), with the balance from a third party investors ($12 million). Expansions in production can then be financed out of internal cash flow and asset finance. The market for the iron output is both domestic (Arcelor-Mittal) and export (steelmakers). Page 4 of 46 Production costs for the iron inclusive of pelletising are projected at $35 per ton inclusive of finance costs. The domestic sale price is expected to be $57 (R500). Initially sales will be sought in the domestic market. However, the export price is likely to be substantially better with a net profit margin of at least $40 per ton based on a 62% Fe Fines China price of $100 (presently $150) and assuming bulk shipping. The life of mine: for the iron operation will depend on the total iron resource which remains to be determined. Management consider it to be not less than 8 years at 20,000 tpm, with the potential to be up to 30 years at 80,000 tpm. for the gold operation could be limited to 4 years, based on a total in situ resource of 74,000 ozs. However, this small gold resource is expected to contribute some $40 million (post tax) during the important early stage of the mining operation. The projected annualised profit after tax and royalties from the iron operation, when in full production based on an output of 30,000 tons per month, sold to customers in South Africa, is $5.55m. At the final target of 80,0000 tpm, the annual profit should be not less than $15 million, with the potential for it to be as high as $45 million with export sales at current market prices. The projected annualised profit after tax and royalties from the gold operation is approx $10m for a period of circa 4 years. The total inherent post tax profit is projected at not less than $40 million. Mineral Rights The deposit has a prospecting right for iron, gold and manganese that is in the course of being renewed for a further 3 years, with bulk sampling permissions for iron and gold applied for. The right holder is Matayo. The prospecting right is over an area of 15,666 ha (150 square kilometres). Management believes that most of this very large area has the potential to host iron. Within this area, there is gold mineralisation that was first identified by Anglo American and mined by them between 1987 and 1991. The gold mineralisation runs through the iron mineralised zone so that there are potential synergies between the two mining operations. Mining Mining is a very simple and cheap open cast operation. The deposit is literally from surface with no or little overburden, and the orebody consists principally of soft friable earth to a depth typically of 3m to 20m. Page 5 of 46 Processing Processing of both the iron and gold is also simple, especially for the iron, and has an comparatively low capex requirement. As a result, the Matayo Mine can be operational producing iron pellets within 6 months using the bulk sampling permissions, and in full scale commercial production within 12 – 18 months when a Mining Right has been issued. Iron Operation The iron operation is expected to produce an iron pellet with an Fe content of up to 67%, with very low impurities, in particular almost zero silica: This is a premium product for the steelmaking sector and will fetch a substantial premium over the spot iron fines price. The market for this product will include the Mittal-Arcelor plant at Vanderbijl (80 km from Matayo) and the export market. A pure iron product is used as a catalyst in various industrial processes including the coal to fuel process (Sasol etc) and the production of Ammonia. Matayo has the potential to produce such a product which fetches a substantial premium. Management are also investigating the potential to produce a product for sale to Direct Reduced Iron pellet makers who sell a specialty high value product as the iron feedstock used in DRI based steel furnaces. Sampling has shown that the in situ iron grade varies between 20% and 48% Fe. Management are confident, based on the sampling to date, that there is a core resource sufficient to justify the commissioning of an iron process plant, and that the Mineral Rights Area has the potential to host a substantial iron resource. Management’s internal estimate is an in situ iron resource of (circa) 100 million tons, capable of resulting in the production of approximately 50 million tons of final iron product. This would be enough to service a mine life of 50 years at 1 millions of output per annum. The ability of Matayo to produce a high quality product has been proven by testwork carried out by SGS Lakefield. Matayo has recently sourced a pelletising contractor which can produce a high quality pellet at a reasonable price. It is hard to overestimate the importance of this, a factor which Management considers to be the final piece the jigsaw. Page 6 of 46 Gold Business The gold deposit was identified by Anglo American: AA mined 380,000 tons between 1987 and 1991, producing 32,000 ozs Au at an average grade of just under 3 g/t. AA used cyanide heap leaching as their recovery process, and not the more typical CIP/CIL. Management agree with this approach due to the much lower Capex allied to the relatively small size of the deposit. Based on available historic information, Management regard the resource at circa 74,000 ozs at a little over 1 g/t Au average. Management envisage a cyanide heap leach based process which has a substantially lower cost per ton than a CIP/CIL plant. The recovery rate will be lower, but the return on capital will be higher, as well as the speed at which capex is recovered. The projected opex per oz of gold is $400, giving a profit per oz of $1,200, based on synergies with the iron operation. Without those synergies the profit per oz will be circa $1,000. Financial Projections The financial projections demonstrate what a quality business Matayo promises to be. Management regard the value of Matayo to lie in its profit earning potential more than as a mining resource: The 5 year Profit and Loss Projections are: YEAR 1* YEAR 2 YEAR 3 YEAR 4 YEAR 5 $6,688,133 $6,002,880 $12,691,013 $(5,765,481) $(2,912,508) $4,013,023 $(694,757) $(1,163,777) $13,853,990 $21,392,677 $35,246,667 $(10,586,236) $(3,709,725) $20,950,706 $(2,039,413) $(6,075,705) $15,287,162 $30,779,594 $46,066,755 $(11,096,833) $(3,709,725) $31,260,198 $(2,609,081) $(9,065,457) $15,287,162 $30,779,594 $46,066,755 $(11,096,833) $(3,709,725) $31,260,198 $(2,609,081) $(9,065,457) $15,287,162 $$15,287,162 $(5,862,017) $(3,709,725) $5,715,419 $(590,824) $(1,657,472) NET PROFIT AFTER TAX $2,355,969 $13,427,018 $20,342,293 $20,342,293 $3,638,463 Minority Interest $(612,552) $(3,491,025) $(5,288,996) $(5,288,996) $(946,000) ATTR TO GORDONIA $1,743,417 $9,935,993 $15,053,297 $15,053,297 $2,692,463 Iron Revenues Gold Revenues TOTAL REVENUES Operating Expenditure Depreciation ANNUAL PROFIT Royalties Corporation Tax Management Management is strong consisting of: Page 7 of 46 Terry Negus – a Chartered Accountant by profession, Terry is the Group CEO and Finance Director. Richard Stanton-Reid – Richard, formerly a corporate lawyer as a partner in Kerman & Co in London, provides Matayo with expert administrative and legal input, and spends a substantial amount of his time in South Africa. Frederick Scheepers – Operations Director of Matayo he has 19 years experience in Mining; he worked for Solmin Mining, Shaft Sinkers and Welco Mining Consultants as a HR Manager after acquiring his HR Diploma in 2001 he started his own contracting company mining working on various mines. He is also the CEO of Kalpagen (Pty) Ltd David MacCullum – a highly qualified UK mining engineer who will act as a consultant to the business acting as Management’s expert on mining and processing matters. Kalpagen – mining consultants and contractors, the principals of which together have over 30 years’ experience in the mining sector including management of human resources and health and safety, and specifically in the gold region where Matayo is located. Management has personally invested over R10 million in the project consisting of: Initial acquisition cost of R4.1 million; Subsequent exploration and development of over R6 million, ignoring certain head office costs which were not charged to the project and Management’s own time contribution. Infrastructure Infrastructure is excellent. The deposit is immediately off the N14 road, has a railway line immediately to the south of the Mineral Rights Area, has Eskom power and the Klerkskraal water reservoir is within 100 metres of the western border of the Mineral Rights Area. Investment Opportunity Matayo represents a comparatively low cost, low risk opportunity within the mining sector. Its financial requirement is projected to be circa $15.3 million which will be used: To finalise the design of the mine and process plant. Page 8 of 46 To purchase mining vehicles and to build iron and gold process plant capable of handling 60,000 tons per month run of mine, producing 15,000 tons per month of final pelletised iron product, and 800 ozs of gold per month. Further development and expansion can be financed out of cash flow and asset finance, although Management may seek to raise further external financing in order to expedite development. Management is seeking an investor with a view to securing the required development capital. It is proposed to offer the investor an agreed equity interest which gives the investor a minimum target return in return for an aggregate investment of $12 million structured as loan finance. Page 9 of 46 II. Business Overview Overview Matayo Mine is a gold and iron deposit, which incorporates the old Drylands gold mine of Anglo American, situated close to Johannesburg (80 km) with good infrastructure. It is in North West Province immediately off the N14 approximately 30 km east of Ventersdorp. The nearest town is Carletonville (circa 20 km by road). Management started work on the project 6 years ago, with the focus solely on the iron potential, by acquiring Drylands Goldmine (Pty) Ltd (Drylands Pty). At that time, the gold price was less than $400/oz and the gold deposit was not considered to be economically viable. However, Management recognized the iron potential and immediately set up a sampling program including a bulk sampling operation. Drylands Pty held an old order mining right for gold only over a limited area (99 ha in total), and it was allowed to lapse. Management set up a new group, forming Gordonia Minerals Limited (BVI) (Gordonia) in 2008 owning 74% of Matayo Trading (Pty) Ltd (Matayo) (SA). In 2009 Matayo secured a prospecting right (Matayo PR) over 15,666 ha (150 sq km), effectively blanketing the local area. See Figure 1 below. Mineralisation and Mineral Rights The Matayo PR is for a very large area, 15,666 ha, because of the iron mineralisation and was selected after reconnaissance of the area by a The potential of the Mine is mining engineer who was employed by Management at substantial, based principally on the time. The gold mineralisation is contained in pockets the iron. The large mineral rights within an area of up to 1,000 ha, located in the northern area means that the available iron section of the mineral rights area. This can be seen in Figure 1 by the concentration of place markers. resource Management view the project as generating value for owners via production and the resultant cash flow, rather than as an exploration or resource value based project. at circa 74,000 ozs, but can be expected to generate a very could be over 100 million tons of in situ iron. The gold resource is likely to be small substantial early cash flow. The Matayo PR, which is for gold, iron and manganese, is in the course of renewal (for a further 3 years) and bulk sampling permissions for gold and iron will shortly be granted. This will enable the mine to start production prior to the grant of a mining right. Prospecting right fees have been paid for the period to May 2013. The area covered by the Matayo PR (Mineral Rights Area) is shown in Figure 1 below. Page 10 of 46 Gold Mineralisation Figure 1. The Matayo Mineral Rights Area of 15,666 ha Land Ownership Drylands Pty owns in freehold 160 hectares of land (Drylands Land) which lie at the core of the project. This is where the initial mining will take place, and where the process plant will be located. The Drylands Land has tailings on it from the former Anglo American mining operations. The quantity is estimated by Management at 150,000 tons, with an estimated in situ iron and gold resource value of $9 million. The relevance of the Group’s ownership of the Drylands Land, apart from its inherent value, is that it provides a starting point for the proposed mining operation that does not require any cooperation from any third party. Third party owners of land are required by law to permit exploration and mining by the holders of mineral rights. However, it is useful to have this opportunity to commence the business without any potential of third The Drylands Land, if valued for party interference. Moreover, the land provides the site agricultural use, which would for the process plant, which again is very useful. otherwise be its normal usage, would have a value of circa $145,000. However, with the above referred to tailings, its value should be substantially larger. Additionally, Drylands Pty owns a 35 ha farm in Limpopo Province, which is the site of a gold deposit known as Mazuma. Drylands Pty used to own a mining right over that land, but it lapsed in 2006 and the mineral rights over the land were secured by a third party. The agricultural use value of this is likely to be no more than $10,000. Page 11 of 46 Production Management want to enter into production as soon as may be practicable. Before doing so, there will be a short period of evaluation to design the exact recovery process and plant required and the final costing of it. The intention is to commence with small scale mining at 60,000 tons per month run of mine pursuant to a bulk sampling permission and to establish the credentials of the Company as a reliable producer of high quality iron. The initial customers are likely to be domestic - Mittal and/or SCAW. After approximately 12 months, mining will then be increased to at least 120,000 tons per month run of mine. Profitability is easily demonstrated. Iron product will earn a net margin of not less than $20 / t, and on mining of 120,000 tpm, annual net profit before tax and should be not less than $7.2 million. The estimated gold resource of 74,000 ozs should generate net pre tax earnings of $60 million over the first 4 years of operations. Financing Requirement The financing requirement can be tailored to meet the available finance, but this Business Plan and the associated Projections have been prepared on the assumption that total finance of $12 million will be available from an investor, with a further $3.4 million being available as asset finance (vendor or bank). The Industry: Iron is a bulk product that generally is sold to steelmakers in one of two forms: Haematite lumpy Magnetite Fines or Pellets The iron at Matayo is magnetic and will be produced as fines, which then will be pelletised into a first class product. Generally, end users will purchase iron of varying iron content, but the benchmark for Iron Fines is 62% Fe, although benchmark prices are quoted for Fe Fines of lesser and greater qualtiy. Iron is actually iron oxide (Fe2O3 or Fe3O4), and 62% Fe equates to about 88% actual iron, the balance being various minerals which generally are not desirable, such as silica and alumina. Platts provides daily prices for 58% and 62% Fe Fines CFR Tianjin China (and for 62% Fe low alumina, and 63/63.5% Fe Qingdao China), being the average for trades reported to them. At present the 62% Fe Fines price is circa $150 / t. The relevance of this to the Company will be explained in the marketing section of this Business Plan (Section Error! Reference source not found.). Page 12 of 46 For iron producers in South Africa the potential customer base consists of: Domestic buyers – Mittal or SCAW, and possibly Sasol and Petro SA. Export sales – steelmakers in the Far East generally in China, Japan or India The Company proposes that its initial sales will be domestically. The reason for targeting domestic sales for the Company’s initial production is reduce risk as well as the Company’s working capital requirement. Having said this, the export opportunities should be extensive and the effective ex works pricing should be better than for domestic sales. Group Strengths and Core Competencies The strength of the Group lies in the fact that it has secured mineral rights over a very sizeable area most of which appears to be mineralized, allied to the professionalism and extensive experience of its executive and operational Management team: Richard Stanton-Reid – a UK qualified lawyer who has been part of the Management team since the beginning of the project, has extensive experience in project management and business systems, as well as substantial corporate and commercial legal experience. Terence Negus – a UK chartered accountant, also part of the Management team since the inception of the project. Terry is the FD of the Group. Kalpagen Mining – the principals of which have over 20 years of experience in the mining sector. David MacCullum – a highly qualified and experienced UK mining engineer with experience of working in Africa. Group and Business Structure Gordonia is the holding company of the Group which includes: Matayo (74%) – a South African company that is the mineral rights holder. The remaining 26% is held by a local partner, as required by the local black economic entitlement (BEE) requirement. Drylands Pty (100%) – a South African company that owns the Drylands Land including tailings from the historic gold mining operation, and the land at Mazuma (referred to above). It is likely that Drylands, which presently is a shell, will become a mining services contractor which will be engaged by Matayo on the basis that: Page 13 of 46 Drylands sells all product as agent for Matayo Drylands is paid a fee equal to the sale proceeds less a sum of ton of product (effectively a royalty) This is a simple structure that ensures that Gordonia’s financing of the mining and processing operation is properly rewarded bearing in mind that the minority shareholder in Matayo . The iron resource is addressed in Section Error! Reference source not found., the operational plan (how the Company will mine and produce iron) is described in Section VI, and the marketing plan is set out in Section V. The financial potential of this business is explained in Section VIII (Financial Projections). Page 14 of 46 III. Resource and Products – Iron and Gold Drylands will produce a pelletised iron with a specification of not less than 63% Fe. The target product will be of a very high specification potentially suitable for more specialist customers, fetching a substantial premium to the bulk iron price. The market for iron is explained in Section IV. Gold will be processed as a concentrate via a cyanide heap leach based process, with the concentrate refined into bullion at Rand Refinery which will then sell the bullion as agent. Iron Resource Sampling carried out by Drylands in 2006 (and paid for by Management) has shown that the Drylands Land contains an iron deposit with in situ iron with a grade of between 20% and 48%, where the iron is literally on surface with no overburden. Sampling in 2011 (carried out by Matayo) has shown that the iron continues at depth to bedrock. The depth of the bedrock varies being as shallow as 2m in places, but generally is at least 5 metres. A photograph of this surface iron is set out as Figure 2 below. The tailings, estimated at 150,000 tons, on the Drylands Land together with a further 230,000 tons of tailings on adjoining farms which fall within the Mineral Rights Area and therefore can be reprocessed by Matayo, are sufficient to sustain 8 months of mining at the initial proposed mining rate. The most prospective part of the Drylands Land, as sampled in 2006, encompasses an area of circa 50 hectares, and assuming an average depth of 5 metres, contains an estimated ore deposit of 3.45 million tons containing an in situ iron resource of 1.4 million tons. This is sufficient to sustain a further 33 months of mining at the proposed mining rates. The remainder of the Drylands Land, some 110 hectares should contain iron mineralisation at a similar rate (75,000 tons per hectare), but this remains to be ascertained by a sampling program. Assuming 75% mineralisation on the remainder, the total resource on the Drylands Land estimated by Management is: Page 15 of 46 DRYLANDS LAND (160 HA) Depth Ore Body (t) Surface to 0.5 metres In Situ Fe2O3 (t) Recoverable Fe2O3 (t) 993,750 493,894 325,970 0.5 metres to 5 metres (average) 8,943,750 3,175,031 1,587,516 TOTALS 9,937,500 3,668,925 1,913,486 This resource alone has the potential to sustain mining operations for up to 90 months. In practice, there will be mining operations on adjacent land because (i) circa 230,000 tons of the tailings is on adjacent land and (ii) there could be better iron grades on areas outside of the Drylands Lands. For example, on the Rooipan farm, in a location immediately adjacent to the core iron mining area on the Drylands Land, 4 trenches each 25 metres apart, sampled in the 2011 exploration program, had an average Fe grade of 30% from surface to bedrock (4m to 5m) (and also had an average gold grade of 0.74 g/t). Figure 2. Iron on surface at Drylands Land Page 16 of 46 The Mineral Rights Area includes a further 15,506 hectares, in addition to the Drylands Land. There is the potential for most of this area to be mineralized with iron. This is based on the geology being homogeneous, and that observations have shown that iron is visually present in much the same form as at the Drylands Land. The project does not have an independent resource calculation. Management have estimated the iron resource for the entire Mineral Rights Area, applying conservative factors of mineralisation, including “discounting” the mineralisation on the Drylands Land from the numbers referred to above, as follows: ENTIRE MINERAL RIGHTS AREA (15,666 HA) Depth Surface to 0.5 metres Ore Body (t) In Situ Fe2O3 (t) Recoverable Fe2O3 (t) 32,602,500 16,203,443 10,694,272 0.5 metres to 5 metres (average) 293,422,500 104,164,988 52,082,494 TOTALS 326,025,000 120,368,430 62,776,766 Products Drylands will produce a pelletised iron with a target grade of up to 68.5%., and a minimum spec of 63% Fe. Testwork has shown that a simple mechanical beneficiation process, described in Section 0 (Operational Plan), can upgrade the iron content to 66% - 3 High spec iron product will tests carried out by an independent lab (SGS Lakefield) on differentiate Matayo iron different samples produced Fe grades of 65.7, 66.5 and 66.9%. product from bulk iron The pelletising process itself will further upgrade the Fe, by products and will attract a reducing the oxygen content. premium price. If achievable, the iron produced by Drylands will be a very high specification product that will fetch a premium price. However, in the initial months, when product will be sold domestically, the target spec will be to exceed 63% Fe on a consistent basis, and thereby to demonstrate the ability of the Company to produce a consistent product. Gold Resource The 380,000 tons of tailings have a gold grade of not less than 0.6 g/t and contain an estimated 8,000 ozs of gold with an in situ value of $12 million and an aggregate inherent net profit of not less than $6.4 million. As noted previously, approx one third of this is on the Page 17 of 46 Drylands Land, but the remainder is on adjoining farms within the Mineral Rights Area and is easily mineable by the Group. The in situ gold resource on the Drylands Land and adjoining areas remains to be ascertained, but based on information previously in the possession of Management, and on the Anglo American mine closure report, is at least a further 1.2 million tons containing an estimated 66,000 ozs of gold. To summarise, the estimated gold resource is as follows: Area Ore Body (t) Grade (g/t) In Situ Quantity (oz) Tailings 380,000 0.65 7,916 Old Anglo Areas Proven 234,615 1.03 7,730 Old Anglo Area Potential 157,720 1.43 7,217 Areas between Old Anglo Areas 914,643 1.74 51,280 TOTALS 1,686,978 74,143 The iron resource runs through the gold resource so that the gold mineralisation (this is obvious in the case of the Tailings) will be mined and subjected to ore preparation (screening, crushing and milling) as part of the iron operation. As such, there will be substantial synergies between the iron and gold operations. Product The gold product produced on site would be a gold concentrate, which would be sent to Rand Refinery for refining into bullion and for sale by Rand Refinery as agent. Conclusions In conclusion, the Drylands Land alone contains a sufficient iron resource to justify the proposed gold and iron mining operation. The very large remainder of the Mineral Rights Area, provides immense upside potential and is regarded by Management as likely to be achieved. Page 18 of 46 IV. Drylands Land Ownership Overview Drylands is the registered owner, free from claims, of: The Drylands Land – 160 ha of land consisting of Portion 3 of Drylands 64 IQ located in North West Province. Land in Limpopo – 35 ha land consisting of the farm known as Langverwacht. Drylands Land This is located in an agricultural area and, but for its mining potential, would be used for grazing. As such, it is believed to have a value per hectare of circa R8,000 – Management have been told by the former owner of the adjacent farm that he sold his farm at that value to a buyer who uses the land as grazing for his cattle. As agricultural land it therefore has an estimated value of R1.28 million / US$145,000. However, the land has additional value due to: The Tailings – this ore resource is owned by Drylands and contains an estimated 3,125 ozs of gold as well as 75,000 tons of iron, with an aggregate in situ value of circa US$9 million. the mineral rights that have been secured over the Drylands Land and which will be licensed to Drylands by Matayo As such, Management expect that the appraised value of the Drylands Land will be sufficient to secure the finance required (R7 million) to commission the proposed iron process plant, related expenditure and initial working capital requirements. Langverwacht This land, in Limpopo, is the site of a gold deposit over which Drylands used to have a mining right. However, the mining right expired in 2006 and the mineral rights over the land are now held by a third party. The land is not in use, and is heavily wooded with Acacia. The value of the land is not known to Management, but is estimated at around US$10,000. Page 19 of 46 V. Marketing Plan Customers / The Iron Market The potential market for iron product produced by the Group is as follows: Domestic customers There are limited potential customers for iron in South Africa: Mittal and/or SCAW, and possibly Sasol and Petro SA. Mittal use iron to produce steel at their Vanderbijl plant which is only 100km from Drylands. Their main iron supplier is Kumba mainly from Sishen. Until 2 years ago, Mittal had a “sweetheart” deal with Iscor which they inherited as part of their purchase of the steel production business from Iscor. They were entitled to purchase 6 million tons a year at cost plus $3. Their typical purchase cost was $30 per ton (ex mine). It is worth noting that this implies that Kumba’s production cost was $27 /t. However, as has been well publicized Kumba cancelled that agreement 2 years ago, since when the matter has been in arbitration. Pending settlement, Mittal have been paying a negotiated price which is presently $50 / t ex mine. Management have been reliably informed that Kumba are certain that the old agreement will not be revived. The effect is that the door is open for domestic producers to sell to Mittal, and Management expect Mittal to be interested in securing a supplier of higher grade iron on their very doorstep to reduce their reliance on Sishen. In 2008, before the world recession, Mittal could not source all their iron requirements from Kumba and at that time indicated in face to face meetings with Management that they were willing to buy iron from Matayo at circa R500-600 / t. SCAW normally buy scrap iron as feedstock for their steel production. However, Management believe that they will purchase iron pellets if the price is competitive. Apart from Mittal and SCAW potential customers for a very high specification “chemical grade” iron product are Sasol and Petro SA. High grade iron is used as a catalyst in the coal to oil production process. Indeed, in 2007/8 Sasol showed firm interest in the iron at Matayo following an internal analysis by them of the nature of the iron. It was Sasol who commissioned the SGS testwork that has been referred to in Section III. However, they are not an easy customer to secure because it would be necessary for them to alter their production process to fine tune it to utilize the Matayo iron. The Group will need first to produce a high quality pelletised product for Sasol to analyse, and then to convince them that it is capable of providing Sasol with a secure and reliable source of supply. Management believe that Petro SA have a similar requirement. In the case of Sasol, when Page 20 of 46 discussions first started with them in 2007/8, the price that was discussed was of the order of $200 / t, at a time when the normal iron price was less than $50 /t. The potential demand from Mittal cannot be estimated with any certainty. However, it is clear that they will have capacity to take at least 60,000 tons per month. The potential demand from SCAW is unknown. Sasol are believed to have a requirement of 7,000 tons of iron per month. Petro SA are believed to have a smaller requirement. Export Customers Export customers are steelmakers in the Far East and India. There are 2 kinds of steel plants. In the main, steel is produced using a traditional furnace and normal bulk iron, either haematite lumpy or magnetite fines/pellets, as the feedstock. However, newer plants have furnaces that use DRI (Direct Reduced Iron) as their feedstock. DRI plants need a higher grade iron as their feedstock and this iron can fetch a substantial premium. It is the Group’s intention to produce iron of such a specification. A consultant to the steel industry (Mr. Susanta Ghosh) has advised the Company that the iron at Matayo has the characteristics needed for the production of this kind of DRI furnace quality iron product. Pricing Domestic Market The domestic market has an indirect link to pricing in the export market in that it needs to compete with the effective ex works price that can be attained on export sales. Having said this, domestic customers expect a lower price because of the logistical difficulty in, and increased risks of, exporting iron. Mittal are believed to pay Sishen $50 / t ex mine, and Management believe that this is a reliable long term price bearing in mind that production costs at Sishen appear to be circa $27 / t. As such, a lower price than this is not likely to be sustainable. Matayo is closer to Mittal than Sishen and it is reasonable to assume that it will be able to command a price of not less than $50 / t The domestic market should provide price or R400 to R500 / t. The Group’s insulation from the volatile iron market in the Far projections use an effective R500 / t. Export Market There is no single price for iron. Contracts are negotiated. However, East. Recently there have been widely differing forecast prices, short term and long term. Management believe that the natural floor set by production and transport costs means that the Group should be able to maintain profitability in the export market. However, the South Africa market is not linked directly to the price of iron in China or India. This is another reason for the Group to seek a cornerstone customer in South Africa. Page 21 of 46 benchmark prices are quoted based on reported trades for spot purchases. The benchmark iron price in the industry is the 62% Fe Fines price that is quoted daily in Platts. At present this is circa $150 / t. The low in the last 12 months is circa $80 / t last September, and the high is $180 /t. However, other prices are reported in order to provide market information. For example on 11/12 March 2013, FerroAlloyNet.com gave the following prices for iron: Date 12-Mar-13 12-Mar-13 12-Mar-13 12-Mar-13 12-Mar-13 12-Mar-13 12-Mar-13 12-Mar-13 12-Mar-13 12-Mar-13 12-Mar-13 12-Mar-13 12-Mar-13 12-Mar-13 12-Mar-13 12-Mar-13 12-Mar-13 12-Mar-13 12-Mar-13 12-Mar-13 12-Mar-13 12-Mar-13 11-Mar-13 11-Mar-13 Product SA Iron Ore Lumpy 66% India Fines 63% India Fines 62% India Fines 58% India Fines 63/63.5% India Fines 63/63.5% India Fines 58% India Fines 58% India Fines 54% India Fines 54% India Fines 52% India Fines 52% Australia PB Fines 61.5% Australia PB Fines 61.5% Australia Newman Lumpy 63% Australia Newman Lumpy 63% Brazil Lumpy 65% Brazil Lumpy 65% Brazil Pellets 66% Brazil Pellets 66% Turkey 65% Iran Magnetite 62% SA Iron Ore Lumpy 64.24% SA Iron Ore Fines 64.4% Terms Warehouse China Warehouse China Warehouse China Warehouse China FOB Chennai CFR China FOB Goa/Mangalore CFR China FOB Goa CFR China FOB Goa CFR China FOB Hedland CFR China RMB 1060 980 970 840 FOB Hedland CFR China FOB Tubarao CFR China FOB Tubarao CFR China CFR China CFR China Warehouse China Warehouse China $ 169.6 156.8 155.2 134.4 126 143 111 123 98 110 85 99 132 142 148 1110 1070 155 135 152 163 179 144 136 177.6 171.2 From this it can be seen, for example: The premium per each additional 1% of Fe is circa $3 to $4 The Brazil pellets attracted a premium over lumpy of circa $28 (allowing $4 for the extra 1% Fe) Page 22 of 46 The SA lumpy (presumably from Sishen) price ($169.60) implies an FOB price of circa $140. This in turn equates to an ex mine price of circa $90. SA 64% lumpy attracted a higher price than SA 66% lumpy. This demonstrates the fact that prices are negotiated on a contract by contract basis and that factors other than Fe% are relevant such as the impurity percentages. The iron price is very attractive at present, and the obvious question is what will be the long term average iron price. At any point in time, there are forecast prices on an almost daily basis and one will find different views from different analysts. One has to be careful to differentiate between forecasts of short term volatility and long term forecasts. In the short term, prices can fall to any level. However, there will always be a market correction with a natural floor for iron prices in China and India set by production and transport costs. Fortescue Metals (Australia) believe that the sustainable long term price is $120 / t. Vale have said that they believe the floor could be as low as $70 / t. Figure 3 is a chart of 62% Fe Fines prices for the last 12 months. Figure 3. Last 12 months 62% Fe Fines Price (Index Mundi) In order to understand how the benchmark market price, which as noted above is based on delivery to China for a 62% Fe Fines product, correlates to pricing for the Group, we need to look at the cost of transport from Matayo to China, and at the premium that the Matayo product might fetch for being of higher specification. The cost of transport iron from Matayo to the Far East on a CFR basis is circa: $85 / t by Container Page 23 of 46 $50 / t by rail and bulk shipping. There is a rail head very close to Drylands (20 km) – a discussed maize supply siding – on an active rail line. It should be possible to reach an agreement with Transnet for the transport of iron to Richards Bay. However, in order then to ship by bulk one has to transport minimum quantities of circa 50,000 tons. As long as the Group is exporting less than this quantity it is likely to have to be transport by Container. Containerized shipping can accommodate any size of cargo. The effective ex mine sales price would be the CFR China price from time to time less the transport costs. A premium is added to the price for: Each % of Fe above 62%. From the above analysis it can be seen that this ought to be about $3 per %. Lower than normal contaminant minerals – alumina, titanium, silica and manganese (or a penalty if one of them is outside spec) Pellets – the Brazil pellets price referred to above suggests this should be not less than $20 / t. Management expect the Matayo iron product to fetch a premium of not less than $20 / t above the 62% Fe Fines price, and based on the above analysis, it ought to be in the order of $32 / t for a 66% Fe product. Accordingly, the Group needs to work on the assumption that: export sales will have a transport component of $85/t. production cost will be of the order of $30 / t, making the breakeven price $115 / t.. assuming a premium of $20 /t, at current market prices, the price would be $170 / t, and the profit margin at $55 / t would be substantially greater than on domestic sales ($26 / t). at the forecast long term sustainable average 62% Fe Fines price of $120 / t, the Matayo profit margin, based on transport by Container, would fall to $25 / t. the ability to transport by rail and bulk is needed to sustain export sales if the 62% Fe Fines price falls below $120 /t for any appreciable length of time. As such it can be seen that the attractiveness of export sales will depend very much on: the premium that can be negotiated for the Matayo product – this might be higher than the $20/t assumed above, whether transport by rail and bulk shipping is available – this will increase the profit margin by $35 / t, and Page 24 of 46 the quality of long term off-take agreement with the buyer. The Group will investigate the export market once it is in production and therefore can market a specific product. Initial Sales / Off-take In the early stages it is the intention to seek domestic sales probably to Mittal.: Domestic sales will result in a far earlier cash flow to the Group which will limit the initial finance requirement. It may be that with export sales it will be possible to secure a financial facility from an offtaker as a term of supply. This is not unusual, with the loan being repaid via a discount on Domestic sales will also have a lower sales. This is certainly an option that will be risk of product rejection, or at least it considered will be possible to address such issues speedily and face to face with the customer. Production at 10,000 tons per month may be too small to interest an export customer. Accordingly, on balance, the main focus of the Group, in the initial phase of production, will be to secure an off-take agreement from either Mittal or SCAW. In an ideal world, it would have such an agreement in place prior to seeking finance, but in practice it is not possible to secure any meaningful arrangement until the Group can demonstrate that it has the financial capability to enter into production. Competition The Group will not compete with any particular suppliers of iron, other than, as regards sale to Mittal, product from Sishen. In general, iron is a bulk commodity and as long as the price of iron from Matayo is competitive, it will be able to secure customers. The higher the specification of product that the Group is able to produce, the less it will be compete with standard bulk iron suppliers. Indeed, if it is possible to produce a very high spec product, such as a 68.5% Fe pellet that is suitable for use in DRI furnaces, it will cease to be directly susceptible to the vagaries of the bulk iron price. Such a product may also be saleable to customers such as Sasol who use iron as a catalyst in a chemical process – there will be an export market for such a product, but this will require more specialist distribution channels. Page 25 of 46 Niche Following on from the analysis above, it can be seen that while the Group is ready to supply a bulk iron product, its target is to produce a product that can be considered to be a niche product that is attractive to DRI furnace steelmakers, and to the iron catalyst market. Strategy The Group strategy can be summarized as follows: To fine tune its production process, and demonstrate its ability to produce and supply on a consistent basis by commencing with a small scale operation. This will produce circa 15,000 tons per month, and sales are likely to be domestic, generating a net profit per ton of the order of $23 which should be sustainable in the long term. While implementing its initial production, it will ascertain the feasibility of export sales, and ultimately determine whether it wants to replace its domestic sales with export sales, or to supplement them. The intention of securing export sales will be to obtain a substantially higher profit margin, possibly increasing it to as much as $90 / t (based on the current market price and transport by rail/bulk shipping). It will also clarify during the initial “pilot” phase, its ability to produce an ultra high spec product that be sold into the niche markets that have been referred to above. These products can be expected to fetch a substantial premium possibly increasing the net profit to as much as $150 / t. Promotion / Distribution Channels The securing of customers on either short or long term contracts will be carried out: By Management directly contacting identified potential customers such as Mittal and SCAW, By appointing overseas agents/consultants who have a knowledge of local end users. For example, the steel consultant referred to earlier in this Business Plan, Susanta Ghosh, has offered his services to find customers within the DRI steel furnace market – as has been noted above this market is expected to fetch a substantial premium if the Matayo product can meet its specification, and Possibly by appointing a well known trading company, such as Glencore or Duferco. Sales Forecast The Financial Projections of the Company, set out in Section VIII, envisage the following iron sales: Page 26 of 46 15,000 tons per month (after an initial lead in period) for the first 12 months of operations 30,000 tons once a full Mining Right is secured. This will require additional capex in order to double the processing capacity, but this should be financed out of cash flow. Profitability is addressed in Section VIII, but to summarise, broadly speaking the net profit per ton is projected as $20 at R8.80 per ton in Phase 1 and as $26 per ton in Phase 2, so that the associated monthly profit (pre tax and depreciation) from iron production during the above phases is: $300,000 for the 1st twelve months $780,000 when in full production. This is based on attributing all costs to the iron product other than costs that are only relevant to the processing of gold. If export sales are feasible and generate a higher net profit, they will be introduced and the above numbers will be improved upon. Gold The market for gold is generic and gold can always be sold the prevailing LMBA price or very close to it. The LMBA price has been relatively firm for some time at above $1,600 / oz, although in the past 2 weeks it has fallen below $1,600 / oz. Forecast gold prices vary considerably and change on an almost daily basis. The Group’s Financial Projections are based on $1,500 / oz. In South Africa, the major mines refine their gold output at Rand Refinery the facilities of which are available to all producers. If the Company decides to process ore for gold, its gold concentrate would be taken to Rand Refinery for refining, and RR would also sell the gold bullion as agent. RR’s fees for this service are very reasonable. At present gold prices, they amount to about $35 / oz of refined gold. At an LMBA price of $1,500 / oz, and assuming that the Group is mining and processing iron from the gold mineralized ore, which is the basis on which the Financial Projections have been prepared, the net profit per oz of gold is over $1,100 when in full production. Separate projections of the Group based on the gold operation being an entirely separate mining and processing operation gave a net profit per oz of $1,000. Accordingly, it can be seen that there is scope for the gold operation to withstand a substantial fall in the gold price. Page 27 of 46 VI. Operational Plan Location The iron processing plant will be located on existing concrete flooring/foundations left over from the historic gold process plant. Figure 4. A section of proposed site of Iron Process Plant – on the Drylands Land The entrance to the mine is only 200m from the N14 road, and this site is within 200m of the mine entrance. Infrastructure Matayo is situated in an area with excellent infrastructure. The northern border of the Mineral Rights Area is National Road N14. The closest town is Carletonville. To the immediate south of the Mineral Rights Area is a disused railway siding on a railway line from which goods can be taken to either Richards Bay or Durban. Management have ascertained that there is spare capacity on this line. Page 28 of 46 Within 100 metres of the western border of the Mineral Rights Area is the Klerkskraal Reservoir. The old Drylands mine of Anglo American (part of the Matayo deposit) had a water permit to use water from this reservoir and Management do not anticipate any problem in renewing this permit or obtaining a new one. There is an Eskom power line to the property. Its current capacity is 400 kVa. It needs to be reconnected, with a larger capacity. Overview of Mining and Processing Operation Mining will be by open cast methods, with iron being present literally from surface, and the gold being from surface in places (eg in the case of the tailings) or normally within 2 metres of surface. The ore will be subjected to an ore preparation circuit in which oversize and fines are screened off, and the selected size range is crushed and milled (a process known as comminution). This process liberates the iron and gold from the minerals in which they are respectively encased or surrounded. The iron is then recovered by magnetic separation. Only iron that is sufficiently magnetic will be recovered by this process, so that recovery will not be 100%. The SGS testwork shows that a recovery rate of circa 66% should be attainable. In other words, if one ton of run of mine ore contains 500 kg of iron (iron oxide i.e Fe203 or Fe3O4), we can expect to produce 300 kg of final product. The magnetically separated iron will be in the form of a powder in which 75% will be sub 100 micron in size. This product may be saleable as is as “Fines”, but it is advisable to pelletise the fines so as to: Reduce loss of iron during transport Ensure that there is not a problem over meeting particle size specifications (Fines have to meet a certain sizing specification) Improve the quality of the product to attract a higher price (the increase being greater than the cost of pelletising). Pelletising will be carried out by a third party, Drum Energy Solutions (Pty) Ltd, on a toll treatment basis. D.E.S. will put a pelletising plant on site at Drylands, but will be responsible for its operation. The pelletised product will be transported on a daily basis by truck to the domestic customer, or, as the case may be, to a Container depot for export sales. Page 29 of 46 Where the ore also contains gold, the fines from the initial screening circuit, and the waste from the iron separation circuit, will be sent to the gold process plant. This will consist of a gold heap leach pad, where the gold will be separated from the ore by a cyanide reagent, and subsequently recovered via carbon tanks and an elution circuit. The final process will be to product dore bar in a smelter, which will be sent to Rand Refinery for final refining and sale. The Company will design on the ground procedures for keeping a track of mining, processing, finished product and deliveries, and will record all relevant information in a software application that it will either buy off the shelf or will be written for the Company to match the Company’s precise operation. There will be appropriate 24 hr on site security to protect the on site plant and vehicles and office contents. Suitable high tech video via internet system will be installed in due course in order to enable off site management to keep a track of activity. The Company will have an on site office to manage mine administration, but accounting, invoicing, debt collection and customer relations will be managed by an office in Johannesburg and directly overseen by executive management. Mine Management Executive management will consist of 2 directors, Richard Stanton-Reid and one other. Initially the Company will not have a formal head office, but will operate from a home office. At the mine, management will consist of a Mine Manager. Apart from management considerations, this is a legal requirement. The mine manager will hold all required certifications. There will be an office at the mine, located in existing buildings which will be refurbished. In particular, the roof needs to be repaired, and the electrical wiring reinstalled. The office will be staffed by one person who will handle all functions – phone, data entry and record keeping. Within the buildings will be toilet and washroom facilities – again these need to be refurbished. These facilities will be maintained by a single washroom attendant. Mining Mining is extremely simple consisting of open cast mining from surface. The pit is not expected to be deeper than 20 metres, and in general is not expected to be deeper than 5 metres. As such side wall maintenance and safety is not a material issue. Page 30 of 46 Process Flow The mining flow is set out below: Process Unit/Stage Ore Extraction - Excavator (35 ton) Ore transport to process plant – Dump Trucks Load ore into process – Front End Loaders Dust control – Water Bowser Road and Pit Maintenance - Grader No at 60,000 ROM per month 1 2 No at 120,000 ROM per month 1 4 2 1 1 4 1 1 Capacity and Rate of Mining The mining vehicles that Management propose should be acquired will have a capacity of over 200,000 tons per month on a single shift (240 hours per month) when operating at full capacity. This is the capacity of a 35 ton excavator. In Phase 1, when it is planned to mine 60,000 tons per month, the mine will use 2 x 30 ton dump trucks and 2 x 5 ton front end loaders. In Phase 2, when the rate of mining will be doubled, the number of dump trucks and FELs will be doubled. In the early stages, a stockpile of ore will be created, taking advantage of the spare mining capacity, to ensure that the process plant has feed stock should there be any breakdowns or other delays in the mining process. Personnel In addition to the operator drivers of each mining vehicle (referred to above), each mining shift will consist of approximately 8 staff. Opex The operating costs consist of: Staff salaries Diesel Maintenance Production Process Flow Iron – Ore Preparation and Iron Recovery Sections The initial ore preparation phase is based on the need to liberate the iron. Overall the process of beneficiating the iron from its in situ grade of between 20% and 48% Fe (average Page 31 of 46 of circa 30% Fe) to a saleable grade of 63% Fe plus, is very simple. The process has been verified by testwork carried out by SGS Lakefield. In the phase 1 production of 60,000 tons per month ROM, the capacity of the ore preparation and iron processing plant will be designed to accommodate that ROM. Expansion in Phase 2 to 120,000 tons per month ROM will be by adding a second circuit. This will reduce the initial capex requirement and provide a measure of redundancy when in Phase 2. The process and estimated mass balance for the ore preparation and iron recovery circuits is as follows: Phase 1 – 60,000 tons per month ROM Process Unit/Stage Oversize screen – remove plus 100 mm as waste Screen out fines (less than 1.7 mm) as waste Vibrating Feeder Jaw Crusher – coarse crushing Jaw Crusher – fine crushing Electromagnetic Feeder Ball Mill Spiral Classifier Magnetic Separator (x 2) – strong magnetic Magnetic Separator – weak magnetic Pelletising Plant Figure 5 sets out the basic process flow. In Out 60,000 54,000 54,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 15,000 15,000 15,000 To Iron Pelletising Plant To Gold Plant 24,000 15,000 15,000 Page 32 of 46 Figure 5. Iron Process Flow Chart Although fines and oversize will be screened, those size fractions contain economic iron grades. Accordingly, the fines will be rerouted to the mill, and the oversize will be crushed and sent back to the crushing circuit. The plant design will therefore have a capacity of not less than 60,000 tons throughout the process. Unlike the mining section, the ore preparation and iron recovery processing circuits will operate continuously 24 days per 4 week period for 22 hrs per day (allowance of 2 hrs per day on average for down time). Sunday’s will be a day off, but will be used for regular maintenance and repair. On this basis the design will be based on operating 528 hours per 4 week period. Management have obtained a quote from ARD Crushers in England for a screening and crushing circuit that has a capacity of 73,000 tpm. The mill will likely be sourced from China. Management have a quote for a ball mill with a nominal capacity of 40,000 tpm. The present intention is buy two mills, one to handle crushed material which will have a maximum size of 12 mm. The other to handle the fines from the screening circuit. In practice, we are likely to buy larger capacity mills than those presently quoted, and the Financial Projections make allowance for this. Personnel Each process shift will consist of approximately 19 staff. Page 33 of 46 Opex The operating costs consist of: Staff salaries Electricity Replacement of balls in ball mill Maintenance Output At a run of mine rate of 60,000 tons per 4 week cycle, the anticipated iron fines output is 15,000 tons per month. Pelletising The final step in the production process will be to pelletise the iron fines output from the magnetic separation circuit. Drum Energy Solutions have been providing demonstrations of their product to third parties seeking to briquette coal and manganese with spectacular results. However, prior to engaging them, appropriate testwork It is proposed to engage Drum Energy Solutions (Pty) will be carried out on their pelletising of Ltd, an independent contractor which has developed a Matayo iron. proprietary binder for the pelletising (or briquetting) of certain minerals including iron. D.E.S. has agreed (subject to contract) to install a plant and operate it at its cost, charging Drylands a toll treatment fee. This fee has still to be agreed because D.E.S. first needs to analyse the Drylands iron fines before it can finally determine its cost. However, the cost is likely to be R120 per ton of pelletised product. Product Delivery Initial iron product will be loaded on to the customer’s truck for sales domestically. This will be done using a front end loader which may be bought second hand rather than bought because its daily usage may be limited. The 4 week cycle output of 15,000 tons amounts to an average of 625 tons or 24 trucks per day. In due course, a circuit will be built where pellets can be loaded directly by conveyor on a semi continuous basis. Gold The gold processing section will consist of the following basic sections: Heap Leach Pad Page 34 of 46 Carbon Tanks Elution Circuit Smelter. Additional elements are the pregnant pond and slimes dam. Ore will be received from the iron recovery section consisting of the original run of mine ore from which the iron has been extracted less ore that is lost in that process such as ore that has been reduced to dust. The Financial Projections assume a loss of 10%. Because the ore will have been milled to less than 100 micron it will be agglomerated before being placed on the heap leach pad. This is a simple process is which the ore is passed through a revolving drum and mixed with cement and lime. The circular motion plus the additives causes the ore to pelletise. This is necessary to ensure the proper circulation of the cyanide solution through the heap leach. Without this step, the ore is otherwise likely to become compacted and impervious to the cyanide solution. The cement is porous so that the cyanide will seep through the pellets. The addition of lime during the agglomeration phase is needed in order to ensure that the ore is at the optimal ph for the operation of the cyanide. In the case of the ore at Matayo, testwork has indicated that a greater than normal amount of lime may be required. The amount of lime will be determined by further testwork during the proposed design phase. Management anticipate that the prior removal of the iron will reduce the lime requirement. From the agglomeration circuit the ore is loaded by a stack conveyor system onto the heap leach pad. The pad itself consists of the following basic elements: A prepared floor in which collection pipes are covered with stones and sand which in turn are covered by a porous plastic layer. The ore is placed progressively on top of this layer and be stacked as high as 50 metres depending on the dimensions of the pad. In the case of Matayo the height is likely to be no more than 10 or 20 metres. A sprinkler system which delivers a cyanide solution at a steady rate. The cyanide reacts with the gold and dissolves it into solution, with the cyanide remaining in the pad as a salt. The pipe system in the heap leach pad collects the solution that is pregnant with gold and delivers it to a pregnant pond from where it is delivered at a constant rate to the carbon recovery tank circuit. Activated carbon in the carbon tank circuit extracts the gold from the pregnant solution. Page 35 of 46 The carbon, to which the gold has attached, is routed to the elution circuit where via an electrowinning process the gold is extracted from the carbon forming a gold concentrate. The gold concentrate is then smelted to form high purity gold dore bars. Personnel Each process shift will consist of approximately 21 staff. Opex The operating costs consist of: Staff salaries Electricity Cyanide, Carbon, Lime Maintenance Output At a run of mine rate of 60,000 tons per 4 week cycle, the anticipated gold output is 884 ounces per month. Rehabilitation Waste, consisting of waste from the iron process plant that is not sent to the gold plant, and the spent gold heap leach pad ore, is estimated at 45,000 tons per 4 week cycle based on the initial run of mine quantity. This will be backfilled on a regular basis. In practice there should be synergies with the mining operation making use of the empty return runs of dump trucks. Cost Summary The total operating cost of mining and processing 60,000 tons of run of mine to produce 15,000 tons of final product is accordingly projected to be as follows: Mining Ore Preparation Iron Recovery Gold Plant General TOTALS Iron Product Total Gold Total Total $37,977 $67,791 $2,989 $217,770 $89,981 $416,509 $198,739 $217,770 Per TOM t $0.63 $1.13 $0.05 $3.63 $1.50 $6.94 $3.31 $3.63 Per Iron t $2.57 $4.60 $0.20 $$6.10 $13.47 $13.47 $- Per Oz Au $$$$223.68 $$223.68 $$223.68 Page 36 of 46 The Capex cost (not including working capital) is projected to be as follows: Mining Ore Preparation Iron Recovery Gold Plant Infrastructure General Contingency TOTALS Iron Product Total Gold Total Total $1,773,523 $4,500,000 $500,000 $2,100,000 $865,000 $200,000 $893,852 $10,832,375 $8,732,375 $2,100,000 Per ROM t $0.49 $1.25 $0.14 $0.58 $0.24 $0.06 $0.25 $3.01 $2.43 $0.58 Per Iron t $2.00 $5.08 $0.56 $$0.98 $0.23 $1.01 $9.87 $9.87 $- Per Oz Au $$$$35.95 $$$$35.95 $$35.95 The finance cost is projected to be as follows: Principal Monthly Repayment Term (Years) Total $15,386,000 $326,000 5 Investor $12,000,000 $255,000 Asset Finance $3,386,000 $71,000 Legal Environment The legal requirements for Matayo to operate are as follows: Mining permit as required by the MPRDA 2002 Compliance with relevant mining legislation including requirement to rehabilitate Compliance with health and safety operating requirements Water permits for any borehole water used in the operation. Mining Permit There are 3 possible mineral rights that will permit the mining and sale of recovered product: Bulk sampling permission – this is issued when a prospecting right is still in existence. Its purpose is to permit small scale mining in order to prove in practice the proposed mining and processing procedures. Its main effect is to permit the sale of recovered minerals. It is commonly used as the legal basis for small scale mining and many prospecting right holders, especially alluvial diamond “diggers” never apply for a full mining right. Matayo has applied for a bulk sampling permission and the process has been completed. It expects the permission to be issued any day now. In practice, because of the back log at DMR, it is necessary to pressurize the local DMR office and Matayo will do this once it knows that it has financing available. This will entitle Matayo to mine at the low rate of 60,000 tons per month. Page 37 of 46 Small mining permit – this is a mining permit that allows mining on an area of 1.5 ha. It is easily and quickly obtained. Up to 4 small mining permits can be obtained on any one deposit. If desirable, or necessary, Matayo will apply for SMPs to supplement the bulk sampling permission. Mining Right – this is required for full scale and long term commercial mining. Matayo will apply for a mining right immediately small scale mining commences. A mining right typically takes 18 months to be issued, but Management are confident this period can be shortened by putting continuous pressure on DMR. Health and Safety One of the principals of Kalpagen, Frederick Scheepers, who is a member of the Management team, is an expert in personnel issues including health and safety. At this stage all the Company can do is express the intention to ensure that it operates to the highest standards. The operating budget includes provision for appropriate training. Water Permits There are boreholes on the Drylands Land and there will be existing permits. Enquiries will be made once financing is in place. Securing a water permit is a formality. Water usage will not be high because the iron recovery process is dry. Any additional water supply that is needed will be obtained from the nearby Klerkskraal Dam. Page 38 of 46 VII. Management and Group Structure Executive Management Terence Negus (60), CEO and Group Finance Director: Experienced UK Accountant who was the senior partner of a successful accountancy practice until 2000. AIM public company experience as finance director of a property development company. Acts as FD for Group Companies managing its financial and tax affairs. Richard Stanton-Reid (55), Director – Corporate and Legal: Experienced UK public company lawyer with particular expertise in corporate finance transactions. Listed 10 natural resource companies on London's AIM market between 2002 and 2005. Lives in Connecticut in the USA, and travels extensively between there, London and South Africa in the management of the Group's business. Richard's key attributes are: Experienced project and transaction management through his work as a corporate lawyer Knowledge of stock exchange listings with a particular focus on AIM, of private and public M&A and of capital raising transactions. Knowledge of the workings of mining transactions, including an ability to assess and minimize risk Frederick Scheepers (Kalpagen Mining), Operations Director – Human Resources, Health & Safety: Has over 19 years experience in the mining sector with a particular expertise in Human Resources and Mining Health and Safety. He is also the CEO of Kalpagen (Pty) Ltd with responsibility of the management of Coal, Gold and Diamond mining projects. Professional and Advisory Support Attorney: Kevin Pietersen of Pietersens Inc, Illovo, Johannesburg. Kevin is the senior partner of the firm that bears his name. He acts for a number of major mining groups, including Kumba and Anglo American, and his practice specializes in minerals rights law. Accountant: Moore Stephens, Houghton, Johannesburg. Insurance agent: to be appointed. Banker: to be appointed. Consultants: to be appointed. Page 39 of 46 Group Structure Gordonia, a British Virgin Islands incorporated company., is the parent company of the Group. Gordonia owns 74% of Matayo Trading 2 (Pty) Ltd, a local SA company which is the holder of the prospecting right. The balance of Matayo is held by the local South African Black Empowerment partner. Gordonia also owns 100% of Drylands Goldmine (Pty) Ltd which owns the Drylands Land. Gordonia is owned by Management with 2% owned by a third party investor. Black Empowerment Matayo is in full compliance with the equity requirements of the Mining Charter with a black owned company holding 26% of its issued equity. Management Contributions Management have personally invested over R10 million ($1.25 million) in the project consisting of: Initial acquisition cost of the Drylands gold project in 2006 of R4.1 million; Subsequent exploration and development of Drylands of over R6 million, Formation of Matayo and the acquisition of its mineral rights, and subsequent development, at an estimated cost of over R1 million. ignoring Management’s own very considerable time contribution. Page 40 of 46 VIII. Financial Projections Assumptions The financial plan of the Group is based on the following assumptions: Mining: o 2 phases: Phase 1 – 60,000 tons per month run of mine. Phase 2 – 120,000 tons per month run of mine. o Mining control ensures that there is perfect differentiation between ores that contain gold and iron, and those that only contain iron. o The initial mining is of ore that contains both gold and iron until the gold ore is wholly mined out. Process: o Iron: o Gold: Deposit average depth of 5 metres. Average recovery of 24.6% on run of mine, based on average grade of 35% and a recovery rate of 65% in first 0.5 metres, and 30% and 55% in next 4.5 metres. Average grade of 0.75 g/t. Recovery rate of 75%. Gold leached at 45% per month over 4 months. Total available gold resource in situ of 72,000 ozs. Loss of 10% ore during prior ore preparation and iron recovery circuit. Sales: o Iron price of R380 ($43) based on sale of iron to the pelletising plant. In practice, the pelletising will toll treat at an estimated R120. The reason for this assumption is to simply the projections because Management expect the toll treatment cash flow to be borne by the pelletising plant subject possibly to a 25% on account payment. The effective ex mine price is therefore R500 ($57). This assumption ignores the export sale and higher than normal specification potential of the Matayo product. o Gold price of $1,450 / oz. Capex: Phase 1 – Total of $15.4 million: o Investor Finance: $12 million. Page 41 of 46 o Asset Finance: $3.4 million. Amortisation is treated as equivalent to loan repayments over 5 years. Year 1 (20-Month including development period) Profit and Loss Projection It is projected that there will be an 8 month lead in period during which the final plant design will be developed, and the required vehicles and plant ordered, delivered and commissioned. This will be followed by the Phase 1, 12 month, bulk sampling period. The summary projections for this period as as follows: $ ,000 Iron Sales 155,000 tons 6,668 Gold Sales 4,140 ozs 6,003 TOTAL REVENUE 12,691 Operating Expenses and Interest (5,765) Depreciation (2,912) NET PROFIT BEFORE TAX 4,013 Royalties (695) Corporate Tax (963) NET PROFIT 2,255 Minority Interest (586) ATTRIBUTABLE TO GORDONIA 1,668 Five Year Profit Projection The Projections for the first 5 years are as follows. Year 1 is the 20 month Phase 1. The following 5 years are Phase 2 in which the rate of mining has been doubled to 120,000 tpm YEAR 1* YEAR 2 YEAR 3 YEAR 4 YEAR 5 $6,688,133 $6,002,880 $12,691,013 $(5,765,481) $(2,912,508) $4,013,023 $(694,757) $(1,163,777) $13,853,990 $21,392,677 $35,246,667 $(10,586,236) $(3,709,725) $20,950,706 $(2,039,413) $(6,075,705) $15,287,162 $30,779,594 $46,066,755 $(11,096,833) $(3,709,725) $31,260,198 $(2,609,081) $(9,065,457) $15,287,162 $30,779,594 $46,066,755 $(11,096,833) $(3,709,725) $31,260,198 $(2,609,081) $(9,065,457) $15,287,162 $$15,287,162 $(5,862,017) $(3,709,725) $5,715,419 $(590,824) $(1,657,472) NET PROFIT AFTER TAX $2,355,969 $13,427,018 $20,342,293 $20,342,293 $3,638,463 Minority Interest $(612,552) $(3,491,025) $(5,288,996) $(5,288,996) $(946,000) ATTR TO GORDONIA $1,743,417 $9,935,993 $15,053,297 $15,053,297 $2,692,463 Iron Revenues Gold Revenues TOTAL REVENUES Operating Expenditure Depreciation ANNUAL PROFIT Royalties Corporation Tax Page 42 of 46 Projected Cash Flow The cash flow projections are based on the following timing assumptions: Loan drawdowns are made in the month in which the vehicles and plant are ordered. In practice, deposits will be paid, with the balance payable on delivery: o Initial drawdown from investor of $500,000 to finance the proposed preliminary mine and plant design phase as well as minimal immediate working capital requirements o Main investor loan and asset finance drawndown when vehicles and plant are ordered at the end of the above program. o Loan Repayments including on the initial drawdown commence in the month after the main drawdown. Iron customers pay within 60 days of delivery. payment should be within 30 days. Gold revenues are received 30 days after the month in which the gold is produced. In practice gold refining and sale should occur on a fortnightly basis in respect of gold produced in the preceding fortnight. The Group adjusts its accounting period such that Corporation Tax is first paid in In practice on domestics sales, respect of the first 12 months of operations, and is paid 6 months after the end of the Group’s financial year. Capital In Capital Out Capital Repayment + Interest Revenues Operating Expenses Corporation Tax Royalties Net Cash Flow Cash Balance At Period End Min Cash Balance During Period PERIOD 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 $18,860,807 $(18,256,591) $(4,996,653) $10,134,600 $(4,039,070) $$(672,257) $1,030,836 $1,030,836 $279,265 $$$(5,036,737) $32,690,254 $(8,810,770) $(896,322) $(2,039,413) $15,907,011 $16,937,847 $2,009,074 $$$(5,036,737) $46,066,755 $(9,321,367) $(5,426,275) $(2,609,081) $23,673,295 $40,611,142 $19,580,234 $$$(5,036,737) $46,066,755 $(9,321,367) $(8,250,824) $(2,609,081) $20,848,746 $61,459,888 $43,253,529 $$$(5,015,490) $17,852,128 $(4,094,885) $(8,250,824) $(572,824) $(81,895) $61,377,993 $58,565,388 Analysis and Comment Management’s analysis of, and views, on their Financial Projections are as follows: We have sought to be conservative, but realistic, in both pricing and sales of iron product. We know we can produce an excellent iron product and that we ought to be able to sell domestically in quantities of 20,000 to 30,000 tpm (probably more). When in full production, our sales are 30,000 tpm, and the price used of an effective $57 per ton ex mine is sustainable. However, as noted below our expectation is that Page 43 of 46 we will sell internationally at substantially higher prices, and in greater quantities. These assumptions have been made because: o We have still to define the full iron resource for the Project and until we do so we cannot assume that it is large enough to sustain larger sales volumes o Use of the domestic sales price should be sustainable in that it is set, in effect, by Sishen’s costs of production which should prevent them selling to Mittal at less than our assumed price, plus the fact that any import of iron by Mittal will be a substantially higher price. The transport costs alone have to be more than the price they pay Kumba for Sishen iron. In 2008, at a time when Mittal’s requirement was for more than the 6 million tons they were entitled to buy from Sishen, they were importing iron from mines they own in Poland and Management were told by Mittal that the transport costs alone were circa $100 / t. In Years 1 to 4, the gold resource is wholly depleted. This is because we have based our projections on a gold resource of 72,000 ozs. This is a conservative figure based on an analysis of historic information. We regard it as a minimum, with the potential for a larger resource to be defined. This is because historically, due to the lower gold price, the economic cut off grade was lower than it is today. At present prices, the breakeven grade, based on a gold only operation (i.e all costs put on the gold operation), is only 0.2 g/t. As a result of the above, in Year 5 there is a dramatic drop in profit because it is based only on iron sales of 360,000 tons. In practice, as noted above, our objective will be to increase iron sales and/or the sale price through making export sales. The target will be 1 million tons per month at a net profit of $50 per ton (thus requiring a CFR price of $130 / t). Provided the iron resource is large enough, this objective ought to be achievable. The assumption that mining control ensures that initially the run of mine ore is only of the gold deposit, containing iron of the assumed grade, is not likely to be sustainable. Initially, we can mine the tailings which we know contain gold. After that, when we start mining in situ ore, if we are to keep to this assumption, there will be areas where there is an overburden to the gold deposit (which will contain iron) and we will have a choice of putting the overburden aside for later iron only processing and continuing to concentrate only on ore that contains both gold and iron, or of processing this ore immediately in a controlled manner. The latter is the more likely option, and we are confident that proper mining controls can be put in place and maintained to ensure that we differentiate between the two types of ore and process them accordingly. The Projections do not include any structuring to maximize the profit attributable to Gordonia, and minimize the tax burden. In practice, as has been noted, Dryland Pty (or a Newco) may be the entity financed by Gordonia (using the investor’s investment) and it will act as a mining contractor with Matayo effectively been paid a Page 44 of 46 royalty. This is a fair arrangement and will provide the BEE partner in Matayo with a fair return on the investment it has made. Additionally, if export sales are made, Gordonia may form a marketing company in a tax efficient jurisdiction which is the purchaser from Matayo and which on-sells to the end customer. On the conservative assumptions used over the first 5 years of operation: o Based on an capital investment: initially of $15.4 million ($12 million from an investor and balance as 50% asset finance, and in relation to Phase 2, a further $8 million ($4.4 million as 75% asset finance and balance from accumulated cash reserves) o Total Net Post Tax Profit attributable to Gordonia is $43 million. o The NPV of the cash flows to Gordonia based on the investor’s investment of $12 million is $25 million at a 10% discount. o The IRR on the $12 million investment is 57%. Page 45 of 46 IX. FINANCING In order to develop the proposed mining operations in the manner proposed in this Business Plan, total financing of $15.4 million is required, of which it is anticipated $3.4 million will be obtained as asset finance either from the vendor or as bank asset finance. It is therefore proposed that $12 million be raised from an investor. The proposed terms of this are discussed below. The asset finance is considered feasible because the investment by the investor will give the Group the required credibility and enable the payment of the deposits. Deposits of 50% have been assumed, but in practice, smaller deposits are likely. The $12 million sought from an investor will be drawndown and used as follows: Pre Production - $500,000: This will be used to finalise the mine plan and the design of the process plan. The Financial Projections include a worksheet setting out the proposed expenditure on this program. It also includes an allowance for working capital. Phase 1 - $11,500,000: This will be used to purchase the required mining vehicles and process plant as described in Section VIII (Financial Projections). The precise investment terms will require discussion, but in general terms Gordonia proposes the following basic structure: Monies to be provided to Gordonia as a 5 year term loan, with the first repayment to be made following the commencement of mining operations. Loan to be secured on Management’s shareholding in Gordonia. Investor to be issued an agreed equity interest in Gordonia. A ratchet may be considered in order to underpin a target minimum return on investment.
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