Zincox Resources Plc Regulatory News (ZOX)

2 Jun 2006 11:57

ZincOx Resources PLC02 June 2006 General Update on Projects Aliaga Recycling Project Feasibility Study Completed The basic engineering for the Aliaga Recycling Project (ARP) in Turkey has beencompleted by SNC Lavalin Europe, and a Feasibility Study produced. The ARP is onschedule for production of 20,000 tonnes per annum of industrial grade zincoxide (16,000 tonnes of zinc contained) in the third quarter of 2007. Followingthe commissioning of the plant, an expansion to 30,000 tonnes per annum of zincoxide is planned, and this should be operational before the end of 2008. Over the past year costs in the mining and mineral processing industries haverisen substantially throughout the world. Furthermore modifications have beenmade to the design of the production flowsheet for Aliaga that involveadditional process steps. There have also been increases to the sizing ofseveral elements of the plant that will allow a rapid and relatively lessexpensive expansion. As a result capital costs have increased from US$39 millionto US$51 million, but a preliminary estimate of the additional cost required toexpand the plant output by 50% (10,000 tonnes per annum) to 30,000 tonnes perannum of zinc oxide will require only about a further US$12 million. Zinc oxide has several industrial applications for which there are numerousdifferent grades. Almost all applications sell at a premium to the LME value ofthe zinc metal contained. Testwork on samples produced in the Company's pilotplant in Belgium have demonstrated that the zinc oxide product will be suitablefor ceramic and agricultural applications. By the addition of further equipment,to be installed as part of the expansion, material suitable for the largestapplication, vulcanisation of rubber, can also be produced. Almost all zinc oxide is produced from zinc metal or zinc secondary materialsthe price of which is linked to the LME zinc price. At Aliaga the feed is awaste obtained at no cost and so operating margins are substantial at theelevated zinc prices currently prevailing. The Turkish tax regulations have recently been revised, so that the rate ofcorporate tax has been reduced to 20% from 30% but the generous depreciationallowances for environmentally positive projects, such as ARP, have beenabolished. Investec Bank is mandated to arrange the debt finance for the development of theproject. Investec has reviewed the revised costs and indicated they are preparedto increase the amount of debt they can provide to the project. However, someadditional equity will also be required. The study is being evaluated byindependent consulting groups on behalf of Investec Bank as part of the duediligence for the arrangement of project finance. The strength of medium termzinc price forecasts is such that the price may be hedged forward up to sevenyears at levels far in excess of the prices seen over the past seven years.Using a zinc price of US$1,800 per tonne (price currently US$3,450 per tonne)for the first four years of production, falling to US$1,300 thereafter, theproject has a net present value of £22 million and an internal rate of return of21%. If the project expansion is commenced immediately following thecommissioning of the 20,000 tonnes per annum plant, the net present valueincreases to £41 million and the internal rate of return to 26%. Most mineral resource projects are based on a raw material reserve that is afinite size; since the reserve has a limited life, projects are traditionallyvalued on the basis of discounted cashflow over the fixed life of the reserves.In the case of Aliaga, however, the raw material (EAFD) is being constantlyrenewed and so the life is unlimited and an earnings based valuation would beconsidered to be more appropriate by the Company. Based upon the assumptionsabove, the average annual earnings generated by the 30,000 tonnes per annumproject would be about £8 million per annum. (NB if these earnings arerepatriated to the UK, further tax may be payable). Commenting on the study, ZincOx's Chairman, Andrew Woollett said "Whileoperating costs at Aliaga have increased, the rise is more than compensated forby the increase in the zinc price. Furthermore, it is now possible to hedge zincforward at prices and over periods that would have been unthinkable even a yearago, giving us the possibility of ensuring a strong early cashflow from theproject". Jabali, Yemen The Exploitation Agreement for the Jabali deposit has been reviewed by severalgovernment authorities and has recently been passed to the cabinet for finalapproval, prior to ratification by parliament. The Jabali feasibility study wascompleted in March 2005. In order to update the capital and operating costestimates in line with the general increase in costs throughout the industry, areview is being undertaken. The cost review is expected to be completed withinthe next three months. Discussions with a number of banks for the provision ofnon-recourse project finance are progressing well. Shaimerden, Kazakhstan Part of the consideration for the sale of the Shaimerden zinc deposit to Kazzincin 2003, was a deferred payment related to the first 200,000 tonnes of zincmined. Kazzinc started to develop the mine in 2005. The ore lies under about 50meters of overburden and the pit is currently at a depth of 45 meters. Some 6.5million cubic metres of waste has been removed to date. It was planned to startore production in May 2006. However, the high water inflow in the pit has forcedKazzinc to increase the slope of the open pit walls, resulting in a higherproportion of overburden removal and a delay to the mining of ore. Under theagreement with Kazzinc, mining is deemed start in October 2006 at the equivalentof approximately 10,000 tonnes of zinc, on which the 2006 deferred payment is tobe based. This payment will be made at the end of January 2007 and will dependon the average zinc price during the final quarter of 2006. If the zinc pricewas to average US$2,500 per tonne during the final quarter (price currentlyUS$3,450 per tonne), the deferred payment for 2006 would amount to US$4 million.Using Kazzinc's projections we expect the deferred payment for 2007 to be basedon the deemed maximum output of 60,000 tonnes of zinc (deemed minimum 40,000tonnes of zinc) and, assuming an average price of US$2,500 per tonne, this wouldamount to a payment of US$24 million in January 2008. Big River Zinc Negotiations regarding the purchase of the Big River Zinc Smelter are beingconcluded and an announcement is expected imminently. For more information please contact: Andrew Woollett, ZincOx Resources plcTel: +44 (0) 1276 450 100 David Poutney /Chris Wilkinson, Numis Securities LtdTel : +44 (0) 20 7776 1500 Laurence Read/Abigail Singleton, Conduit PRTel : +44 (0) 20 7429 6666 This information is provided by RNS The company news service from the London Stock Exchange