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REACTION NOTE Metals & Mining

13 July 2006

European Nickel Buy 35.75p mkt cap £132.7m

Target Price: 57p
Last Different Recommendation: None

Progress update on Caldag nickel mine

Reserves off Estimated Project Evaluation Results (60%debt) Costs
@ 0.6% Ni Cut off IRR 31.6% Capex $m Financing $m
Ore Mt NPV US$175m Heap Leach & Processing Plant 94 Total Capex 254
Proved 31.6 Payback 5 uears Acid Plant 69 Escalation 14
Probable 1.9 Ni Production 20,400tpa Infrastructure 10 Working Capital 19
Total 33.5 Co Production 1,200tpa EPCM 24 Interest and Financing costs 23
Nickel % Long Term Nickel Price US$4.25/lb Pre-Operating expenditure 17 Total Development cost 310
Proved 1.14% Long Term Cobalt Price US$10/lb Owners Cost 14
Probable 1.08% Operating Cost US$1.18/lb Contingency 26
Total 1.14% Capital Intensity US$5.63/lb Total Capex 254
Source: European Nickel

Following a recent site visit to European Nickel's Caldag ponds collect the run off from the pads and hold the
deposit, work appears to be progressing well in the liquour at various stages of concentration and either re-
development of a 20,400tpa nickel plant. The company circulates it over a pad or enters the nickel removal
has developed a heap leach process, similar to that used process.
for copper heap leaching. It is extracting nickel from
Once at a sufficient nickel concentration, the liquour is
nickel laterite deposits at significantly lower capital cost
treated to remove the nickel. The first stage of separation
than other technologies being developed and used on
precipitates out iron by adding limestone, the second
these types of deposit e.g. high pressure acid leaching.
stage has soda ash added to produce a first nickel
Nickel laterites are the most common form of deposit and product and a third stage precipitates out a second stage
could dominate new scheduled nickel supply. However, nickel product. The remaining liquid is re-circulated back
the low grades, high costs and frequent technical to the ponds and where sulphuric acid will be added to re-
problems have inhibited their development in the past. acidify and continue the leaching.

The Caldag deposit contains proved and probable The two nickel separation stages produce two different
reserves of 33.5mt of ore at 1.14% Nickel and is expected products, which have been proved to be treatable at
to produce 258kt of nickel over a 15 year mine life. Mining smelters: The first product is 36% nickel, 1-1.4% cobalt
at Caldag will be achieved via three open pits: and less than 2% manganese. The second product is 22%
nickel, 0.6-1% cobalt and less than 10% manganese. Both
! Doktor Pit = 4.5mt @ 1.22% and strip ratio of 2.8 products are a green cake that then gets bagged for
! Pig Valley Pit = 19.0mt @ 1.21% and strip ratio of 4.5 shipment in containers. The pilot plant’s product has high
moisture content of around 65%, although more effective
! South Pit = 9.8mt @ 0.94% and strip ratio of 6.6 drying/pressing equipment will be installed to reduce this
Operations will start at Doktor Pit due to its higher nickel significantly on the final plant. Methods to do this are
content and lower strip ratio. Whilst in production, mining being investigated.
at Pig Valley will commence. Lastly mining will take place
There is the possibility of altering the output of the ratio by
at South Pit in years 10-15, which are likely to be the least
30-70% between the two products. The advantage of this
profitable pit due to the higher strip ratio and that this part
is that the two products can be blended and that there is a
of the deposit contains more calcium carbonate, which
degree of control to produce a final single product that is
raises the acid demand for ore treatment. Acid production
optimised for the relevant smelter/refiner that will take the
will be raised to treat this ore, but ore treatment is due to
drop from 2.5mtpa to 2.0mtpa of ore.

European Nickel’s specially developed heap leach

technology is expected to extract 80% of the nickel and
John Meyer 020 7776 1578
84% of the cobalt contained. The ore is leached on pads
with sulphuric acid for around 18 months. A series of
Marc Elliott 020 7776 1464
Simon Toyne 020 7776 1579
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REACTION NOTE Metals & Mining

The technology to develop the heap leach treatment and any shortfall to come from nearby boreholes. Water
process has been developed with BHP Billiton, which has will be lost from the process through evaporation, hence
opted to take 100% of the nickel output of the project. the net demand for water despite zero discharge. The
European Nickel views this as positive news and the company will be taking precautions to ensure the land is
conditions of the agreement are under discussion. It could regenerated when mining is completed.
be advantageous to European Nickel, for BHP to take
The pilot scale plant has shown the process to be robust,
ownership of the product at port and ship it to the desired
comparatively simple versus what is taking place for other
smelting destination. Once possible reason is that BHP
nickel laterite deposits, e.g. Inco’s Goro project using high
can no doubt get cheaper shipping terms than European
pressure acid leach due to cost US$2.2bln for 60,000tpa,
Nickel due to its size and the volumes it already ships.
versus European Nickel’s process which is expected to
Mining is scheduled to start late this year and the first heap cost $310m (including financing costs, US$254m
stacked by April 2007. First nickel production is due in excluding financing costs).
October 2007 in conjunction with the plant start up, with full
The company expects that payback will take 5 years, but
production reached by early 2009. US$4.2m worth of
this is based on a long-term nickel price of US$4.25/lb and
orders have been placed for long lead items and a further
cobalt price of $10/lb, both of which may be conservative.
US$11.5m approved for further orders.
Current nickel prices are well over US$10/lb and cobalt is
A key step in development will be the acid plant due to around $14/lb. Using cobalt and power as credits, the
start up in June 2008 which will also generate 30MW of company expects operating costs of $1.18/lb of Nickel.
power, of which 15MW will be consumed on site and the The project is highly cost competitive and even in a poor
remainder sold to the national grid. Prior to the startup, pricing environment then the project would add value.
sulphuric acid will need to be imported for the leaching
The company currently has 371m shares in issue and at 30
process by road. A road is being constructed to the site
June had US$156m in cash following an £85m raised
due to be complete in February next year in time for acid
through a placing in May. Further funding requirements
deliveries. The acid purchases will be short of full
should be raised through debt.
production requirements hence the importance of the acid
plant. The acid plant will allow full production and improve
the project economics significantly. Doubtless the
company will try to bring the start up date forward if

The whole operation is zero discharge and will consume 3

million cubic metres per year largely from the local river

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