REACTION NOTE

Metals & Mining 13 July 2006

European Nickel
ENK.L Progress update on Caldag nickel mine
Reserves off @ 0.6% Ni Cut off Ore Mt 31.6 Proved Probable 1.9 Total 33.5 Nickel % Proved 1.14% Probable 1.08% Total 1.14%
Source: European Nickel

Buy 35.75p mkt cap £132.7m
Target Price: 57p
Last Different Recommendation: None

Estimated Project Evaluation Results (60%debt) IRR 31.6% NPV US$175m Payback 5 uears Ni Production 20,400tpa Co Production 1,200tpa Long Term Nickel Price US$4.25/lb Long Term Cobalt Price US$10/lb Operating Cost US$1.18/lb Capital Intensity US$5.63/lb

Costs Capex Heap Leach & Processing Plant Acid Plant Infrastructure EPCM Pre-Operating expenditure Owners Cost Contingency Total Capex

$m 94 69 10 24 17 14 26 254

Financing Total Capex Escalation Working Capital Interest and Financing costs Total Development cost

$m 254 14 19 23 310

Following a recent site visit to European Nickel's Caldag deposit, work appears to be progressing well in the development of a 20,400tpa nickel plant. The company has developed a heap leach process, similar to that used for copper heap leaching. It is extracting nickel from nickel laterite deposits at significantly lower capital cost than other technologies being developed and used on these types of deposit e.g. high pressure acid leaching. Nickel laterites are the most common form of deposit and could dominate new scheduled nickel supply. However, the low grades, high costs and frequent technical problems have inhibited their development in the past. The Caldag deposit contains proved and probable reserves of 33.5mt of ore at 1.14% Nickel and is expected to produce 258kt of nickel over a 15 year mine life. Mining at Caldag will be achieved via three open pits:

ponds collect the run off from the pads and hold the liquour at various stages of concentration and either recirculates it over a pad or enters the nickel removal process. Once at a sufficient nickel concentration, the liquour is treated to remove the nickel. The first stage of separation precipitates out iron by adding limestone, the second stage has soda ash added to produce a first nickel product and a third stage precipitates out a second stage nickel product. The remaining liquid is re-circulated back to the ponds and where sulphuric acid will be added to reacidify and continue the leaching. The two nickel separation stages produce two different products, which have been proved to be treatable at smelters: The first product is 36% nickel, 1-1.4% cobalt and less than 2% manganese. The second product is 22% nickel, 0.6-1% cobalt and less than 10% manganese. Both products are a green cake that then gets bagged for shipment in containers. The pilot plant’s product has high moisture content of around 65%, although more effective drying/pressing equipment will be installed to reduce this significantly on the final plant. Methods to do this are being investigated. There is the possibility of altering the output of the ratio by 30-70% between the two products. The advantage of this is that the two products can be blended and that there is a degree of control to produce a final single product that is optimised for the relevant smelter/refiner that will take the material.

! Doktor Pit = 4.5mt @ 1.22% and strip ratio of 2.8 ! Pig Valley Pit = 19.0mt @ 1.21% and strip ratio of 4.5 ! South Pit = 9.8mt @ 0.94% and strip ratio of 6.6
Operations will start at Doktor Pit due to its higher nickel content and lower strip ratio. Whilst in production, mining at Pig Valley will commence. Lastly mining will take place at South Pit in years 10-15, which are likely to be the least profitable pit due to the higher strip ratio and that this part of the deposit contains more calcium carbonate, which raises the acid demand for ore treatment. Acid production 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 84% of the cobalt contained. The ore is leached on pads with sulphuric acid for around 18 months. A series of

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REACTION NOTE The technology to develop the heap leach treatment process has been developed with BHP Billiton, which has opted to take 100% of the nickel output of the project. European Nickel views this as positive news and the conditions of the agreement are under discussion. It could be advantageous to European Nickel, for BHP to take ownership of the product at port and ship it to the desired smelting destination. Once possible reason is that BHP can no doubt get cheaper shipping terms than European Nickel due to its size and the volumes it already ships. Mining is scheduled to start late this year and the first heap stacked by April 2007. First nickel production is due in October 2007 in conjunction with the plant start up, with full production reached by early 2009. US$4.2m worth of orders have been placed for long lead items and a further US$11.5m approved for further orders. A key step in development will be the acid plant due to start up in June 2008 which will also generate 30MW of power, of which 15MW will be consumed on site and the remainder sold to the national grid. Prior to the startup, sulphuric acid will need to be imported for the leaching process by road. A road is being constructed to the site due to be complete in February next year in time for acid deliveries. The acid purchases will be short of full 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 possible. The whole operation is zero discharge and will consume 3 million cubic metres per year largely from the local river

Metals & Mining and any shortfall to come from nearby boreholes. Water will be lost from the process through evaporation, hence the net demand for water despite zero discharge. The company will be taking precautions to ensure the land is regenerated when mining is completed. The pilot scale plant has shown the process to be robust, comparatively simple versus what is taking place for other nickel laterite deposits, e.g. Inco’s Goro project using high pressure acid leach due to cost US$2.2bln for 60,000tpa, versus European Nickel’s process which is expected to cost $310m (including financing costs, US$254m excluding financing costs). The company expects that payback will take 5 years, but this is based on a long-term nickel price of US$4.25/lb and cobalt price of $10/lb, both of which may be conservative. Current nickel prices are well over US$10/lb and cobalt is around $14/lb. Using cobalt and power as credits, the company expects operating costs of $1.18/lb of Nickel. The project is highly cost competitive and even in a poor pricing environment then the project would add value. The company currently has 371m shares in issue and at 30 June had US$156m in cash following an £85m raised through a placing in May. Further funding requirements should be raised through debt.

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