MARK HANSEN, MANAGING DIRECTOR, PRAIRIE DOWNS METALS LIMITED (PDZ)

“Presentation at Mining Aust-Asia 2008”

http://www.brr.com.au/event/47618

TUESDAY, JUY 22, 2008, 10:15 AM

PDZ Well, don't we live in interesting times. Once upon a time, the investments in Freddiemac or Fanniemae was as safe as houses. It was like money in the bank...no longer. It's not stronger for longer. Some people are predicting that

10 this is 1929, things are tough. When you have good news and you’re junior company less than a billion market cap, that news will create liquidity and that allows people to sell because they don't want to hold your shares because they're as nervous as I am about the market place. That's the environment we're in. The price of diesel is much more important than the price of heavy

15 fuel oil to a company such as Prairie Downs looking to develop a resource project. There's not a lot of additional capacity in the world to expand days of production that comes from sweet light crudes. Diesel cars are popular. Funny that the diesel price goes up because they sell more diesel cars you don't get something for nothing. Now my presentation today is not about our

20 company. It's about how we develop a mining project in difficult economic times. Howe we plan to do that is by forming relationships with end-users, people who want metal. Much easier to talk to such people than to people who don't want shares at the moment and banks who are nervous as can be. There's a thing called some of you night have experienced it, a deal creep.

25 You talk to them, there's all sorts of promises made and when you get to the stage we're at, life changes, prices go up, costs go up.

With our project, this presentation is readily able to be followed by reading it

30 so I'm not going to do that. I'm going to dwell upon some salient points as I go through it. We're located in Newman in Western Australia. The reason that the primary focus is the Asian region and it's not just China, Korea. There’s an interesting opportunity in Japan still and that's recently been pointed out to me, there's an awful lot of money in Indonesia. I'm going to go through how we are dealing with that but first a little background.

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The setting of mineralisation at Prairie Downs is on a reef or a continental margin, an excellent place for mineralisation and the structure as we see it at the moment is within and about that reef we've got and we've released that's why I'm not saying anything, that's not in the public domain. We've got what

40 appears to be a large copper fall free system, copper and gold and silver. We've drilled a hole, the first hole in the current drill program and then dissected over 200 meters of visible copper. We know from previous sampling, this also carries gold and silver. We have identified at 5 kilometres strike length and who knows how deep it goes. What happens in these

45 systems is you get vein and replacements to mineralisation is the waning phase of that process and that's what we believe has happened with the lead and zinc veins that you see there and with some additional discoveries we are in the process of drilling now in lead and silver. Our target is 10 million tonnes zinc lead silver resource and our plan is to drill from there and that's where our negotiations are pretty catered on today.

Feasibility studies, they go on forever. We started a scoping study in 06 and a

5 pre-feasibility last year and we're just coming to the end of a plus or minus 10% feasibility study as I speak. That will be translated into Chinese in the first instance and any other language deemed appropriate and that will be the start of the first quarter for us. We have aligned though potentially interested parties but first they need to see some real data and we're at that stage now.

10 As you can see, there are two strings to our bow, you've caught he expression, that's correct, we'll finance that and we've got project development.

Something interesting for you, it's in base metals at today's prices. We

15 produce a very good quality zinc concentrate that net of all smelter charges, price participation, also net of shipping to Shanghai or an equivalent port and there's storage and handling at Port Hedland, fetches about $500 a tonne. That's not very much money when the zinc price is $2,000. So my point there is it is not what the prices are, whether it be a base metal or a bulk, it's

20 what’s the margin of the cost of production. That's what you need to be below. I don't care what price of copper is trading at today or iron ore. It’s what I can produce with that, that's what counts. We've had sparks regularly and we're seeing them right in front of our eyes today in various commodities. Iron ore is not going to be worth $1,000 a tonne. You know that sector in the

25 United States that was one of the worst performing in the last financial year, you're right, it was the steel sector. Life is cyclical, you do know that. So we've go to presume that things are going to get worse before they get better.

What we do have though is we have a very, very attractive lead and silver

30 concentrate worth $1,500 a tonne net of all those charges. So other than copper, we're focusing on lead and silver and we made an announcement late last year about a new lead discovery and we're drilling that now.

Energy, indirectly our biggest single cost is transporting concentrate. You

35 don't hear that very often, it's only 500 kilometres. You'll hear people talking about trucking things thousand kilometres through mountains in the (inaudible) (7:05). What we do about that? Well, there's a couple of things that we can do. The first one is that concentrated rather compressed natural gas has a technology, it's very advanced. In fact, Beijing is converting its

40 entire bus fleet to compressed natual gas. That's something we are looking into now. The other theoretical thing we can do is that Newman's nearby and we could potentially use the (inaudible) (7:31) forest. It's done a big favor to all of us in the Pilabara. Courts have agreed with them but I don’t think we'll be doing anything anytime soon. It's the sort of thing we could do and you

45 can imagine we need a large-scale operation if we did. We could put semi-trailers on flat tops, on a long train following (inaudible) (7:57) to coast. It's fantasy to think that you're going to build roads (inaudible) (8:02) unless you've got a very large scale operation which this is not.

So half a million tonnes is pretty small. We're designing it to expand to a million tonnes a year which is still small but then it's bigger than most zinc operations in Australia. Operating cost works not CAPEX. Now I have at least two shareholders in this room and I'd like to (inaudible) (8:27) the

5 shareholders what's the most important to me is the share price and when I finance that project to produce lead and zinc concentrates, it remains the most important factor. Equity is really expensive and so is debt. The real issues is it's just the cost of copper, of course, whichever way it is. It's expensive now, we're looking at achieving that risk and development risk is

10 where most people fall over. Whatever we do, we must ensure that we minimize risks. One of the things there is too much debt, as you know, and the nervous credit market can see the pending (inaudible) (9:02) for worse, you happen to raise a lot of equity.

15 I am going to talk about hedging here because it's little understood and it's a necessary part of any financing. What most people mean when they say hedging though is speculation. On this page you know all the different sources, I'm not going to discuss those oh ho hum. Look for partners to share risk, that's what we're doing, to share risk and reward, of course, not

20 financiers, financiers who have feet of clay, I might add, as we've seen over the last few years. You imagine in our jobs if we get paid what they got paid and we left the mess behind. You think about that one. That's all of us, we're allowing that to happen. Anyway, that's being a little bit cynical, isn't it. Getting back to the subject, hedging.

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The LME is there to provide price discovery, a futures market which we call hedging but it's really trading futures and as a last resort, accept our product at whatever the price is at anytime, not the LME itself but those who trade. Futures markets, I'm just talking about the LME here. Futures markets have

30 two typical periods, one is contango and one is backwardization or backwardation, back we're going to call it here today. Now, contango is a curve that rises going for the price rise going forward with time. That is a function of the cost of capital interest and the cost of storage. It is not a prediction of a future price. Whenever you hear someone say that, you know

35 they don't know what they're saying and what they're talking about. It varies from day to day. The reason that is that if it were not such then, of course, it'll be an arbitrage opportunity and you could make money and speculators do this, trillions and trillions of dollars traded on the LME every year. Most trading occurs in copper and in aluminum and then in zinc and it occurs cash

40 or current and three months out. There is very, very little volume beyond that. You might see a few studies and this is readily available. Someone such as Prairie Downs may hedge three, four years out and you'll see a little of it; we're doing some business done. Backwardation, back is when...and copper is coming out of backwardation now where the current price is higher that

45 than the future price, nothing to do with what people are thinking…..up, backend of the curve, it's just that they're excited over copper today and there's huge demand, cash in three months and it pushes the price up.

The LME has, and I speak hypothetically here, there's possibility for market manipulation in the LME just like any other market. If you recall, we have...what do we have..$50, 000 a tonne for nickel and it was strongly in backwardation. The fact that you control the market can go infinitely high.

5 That was because of several parties together and they were discovered. The nickel prices went up there, therefore, it was completely unrelated to the price of nickel as it relates to the economies within which we live. So you must be mindful about other markets.

10 Oiler tankers...there are tankers of light crude floating at sea at the moment. Why wouldn't they be? If you earn one you think the price is going to be high later and you're going to deliver into a future contract. Anyway, another story. Ah, look, what we see is, of course, too much comment on too little information, generally speaking. This is the cold phase that we're at today

15 and that's what you're hearing. Hedging the speculation, watch what the dirty word is. It is speculation you're seeing not hedging, Hedging, and I'm going to explain, is really quite simple. If you go to a bank, they'll give you a complex instructional chart you look forward to. I'm quite capable to hedging my own product direct with an LME member and I might say, I'll seek a larger

20 shareholder. It's simply metals and concentrates and they are an LME member. Those are things that are really important for finance and difficult market conditions.

So a sure hedge, that's really standard. If we're going to be in production,

25 never on sales, we're going to be in production in 2010 so I guess I am too. So in 2010, we're going to start producing some metal. So I can sell some paper today or tomorrow, but whatever day it is , let's say today, when I sell a physical, day xx when obviously I deliver against that, I didn't buy back the paper. I get paid for the physical. There’s a cost to do that but you can see,

30 there's no risk in terms of the price. Whatever the price is, I'm buying and selling it at profit at price except, remember, buying and selling in Asia is not necessarily buying and selling at LME prices. In the case of zinc, it can be $100 or more different, it's a mine field. Where people usually have problems is, of course, they have production delays. They're not producing 2010,

35 they're producing 2012. The problem with hedging is it's very expensive and you can see it. Every tonne of copper I hedge today will cost me $550. That’s the amount of money that has to be held by my member and I have to finance that. Obviously, I'll get it back but I have to finance it maybe for two years. I'll have to find it in the first instance. As the copper price moves, I get further

40 margin calls because this is a futures market and then the broker takes a commission on the spread. However, it is necessary and when you understand it, it adds and makes your project much more robust than otherwise would be but I would say, the time to invest is here. If you don't understand it, you won't say most of the people involved don't either.

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Some issues, third point down, what's happening at the moment when some financiers, banks talk an interesting story but they want some horrendous things, some of them up to 30%. A potential over run on your CAPEX rationally might want to raise $30 million in equity and have it in the bank or have it held by themselves, security cost against overruns. Those are the things that blow the cost up to produce project finance beyond belief but they always buy some metal.

5 So what we're looking at doing is effectively, joint venturing, or, in other words, or in some way dealing upon (inaudible) (16:32) resource. Money that we've saved for that, using those funds to develop that resource and to develop the mine and, therefore, develop cash flow to us and for our partner. Those are some of the ways that we can do it. I'm looking at all the bets

10 specific to each one of those points though is a specific area of negotiation for us, there are others. I just want to know what I have chosen for ourselves. As you can see, it's a lot of time. I mean, I've been doing this for 18 months and the game has not really started, this is just the pre-season.

15 I think the biggest issue is cultural differences, language and communication. Been in and out of China for well over 10 years and we're the best one in the world when you're talking taking issues, it’s very difficult. So what we're doing is we have and we will continue to translate as much as possible. We also have formed very good relationships with some Chinese advisers in Shanghai

20 and in Hong Kong.

The last point you see and you've already seen that in our environment but if the price is right, be happy with that. Second point (inaudible) (17:44) it’s happening already as we speak and if it's going to consume too much

25 energy...you know, some projects they do. Now these things are known, we have a huge, apparently a huge rise in the price that Rio and BHP got for their iron ore. You know how important it is for them and look what's happened to the share price. Reflect upon this. It's not rosy out there but if you've got a good project with good grades, low costs, you'll get it up

30 whatever the price is. It's the marginal cost of production that counts. Thank you for listening.

INTERVIEW CONCLUDED

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