Comments of Nilefos Minerals Ltd on SRK SA's scoping report of October 2010

These comments are published in January 2011, following detailed deliberations with the Industrial Development Corporation of South Africa (IDC) in early December 2010. SRK-SA's scoping study's report is a key component of the Term Sheet executed by NML and IDC in December 1998. Under this Term Sheet, IDC expressed an interest to invest in equity of and provide long term credit to, the Project. Letter of confirmation of Government of Uganda (GOU) was issued to IDC (link).

It is proposed that IDC's initial funding will be utilized to progress the implementation of the Project, here onwards to financial closure. It is planned that IDC's disbursements could commence as early as June 2011.

NML is pleased that the SRK-SA report essentially reaffirms the viability of the Sukulu phosphate project:

There are, at this stage, no evident ‘Fatal Flaws’ in the conceptualised project. The project appears to have the potential to be viable, within the constraints and assumptions made for the conceptual scoping study. The project should be limited to the production of SSP, but the annual production volume needs to be reassessed.

Areas where improvement to the project returns may be possible, relate principally to areas where significant capital and operating cost savings might be achieved. At this stage these ‘areas of opportunity’ are seen to be...

NML confines its comments on SRK SA’s scoping report to those aspects for which it has some objection namely:

1.  Tenure: NML does not share SRK's conclusion that the Project faces risk on this account. Government of Uganda (GOU) has provided written assurances - a letter of intention of GOU to IDC (link)- that GOU will pay for and actively participate in, "in accordance with the laws” of the country land compensation and resettlement of the local residents on the mine site. NML is working as agreed with GOU on a resettlement plan to relocate the residents over three years (2011-2014, which is anticipated to cost approximately USD 20 million.

In this regard, GOU has given firm assurances that licenses will be granted subject to certain conditions (principally pilot plant operation and completion of the RAP) and further GoU has offered NML options of whether to extend the retention license or receive a conditional mining lease.

2.  Land availability for tailings and infrastructure: SRK's observation is well noted and due attention is taken of the comments. Practically NML wishes to point out that the current area covered by the license is considered by some politicians in Uganda as too large; therefore NML has to optimise the use of the existing licensed area prior to acquiring additional land. Fortunately and if absolutely necessary land is available adjacent to the licensed area.

NML is currently preparing a preliminary FEED document which will confirm the position and determine if any further land is required – e.g. for tailings dam if the licensed area is found to be insufficient. The FEED document would also estimate the costs in this regard as it is agreed that NML’s estimate for the tailings dam may require a revised costing.

3.  Geology: NML has received an offer from SRK-USA to issue a JORC Standard evaluation of reserves at a total cost of approximately kUSD 150-200. This involves additional pitting and some nominal drill work.

The detailed plan is complete for the work to be implemented and will take 3 to 4 months after commencement.

4.  Metallurgy and mineral processing: Significant paras of SRK's report (chapter 5) are:

"On average more than 50% of the ore in the size range 0 to 44µm and about 40% of the available apatite reports to this size fraction while about 25% of the iron is contained in this particle size range. Furthermore the apatite and magnetite are evenly distributed throughout the particle size ranges." And

“Two ways of beneficiating this ore are therefore apparent. Firstly one could remove the fine fraction (-44µm ahead of magnetite removal and apatite recovery from the coarse fraction. Secondly one could reduce the size of the total feed to below 44µm ahead of magnetite removal and apatite recovery. The latter option was the one favoured by IMMT" (see flowsheet).

Much has been said and studied in the field of ore beneficiation of the Sukulu carbonatites over the past 50 years. The IMMT, FMPET and MISA research has brought a breakthrough with innovative findings in developing these two beneficiation routes that enable to improve P205 recovery twofold by recovering values from the fine fractions of the ore. NML cannot ignore this innovation and indeed SRK has confirmed that the Project should proceed from this basis and that a pilot plant tailored to this process should be set up and a programme of continuous tests must be undertaken.

The test programme shall envisage working on samples taken from different parts of the orebody to reflect its variability, and thereby generate data to adjust the process, rather than working on a composite sample (see SRK's statement chapter 5 page 21 on this issue.

The pilot plant already delivered by SRK USA (100kg/hour throughput) will remain in situ and will be made operational; the proposed second pilot tailored for IMMT's process will have a capacity of not more than 1000kg/hour and is estimated to cost up to MUSD 1.5.

The results of the test programme are planned for end of 2011.

Last comment: with regard to SRK’s observation regarding the absence of P2O5 values at the different sections of IMMT's process flowsheet, such values do exist with IMMT but are not relevant at this stage as they are necessary to understand the losses and to adjust equipment dimensioning.

5.  Capex and project feasibility: There is a significant difference between NML's capex estimate and SRK's which affects the rate of return of the project. This is a substantial disagreement. NML is convinced that its estimates for CAPEX and hence project viability are more accurate than those of SRK (even taking into account possible variations as some offers are over a year old and would be revised). Indeed, NML has definitive offers for the beneficiation plant and infrastructure corresponding to IMMT's process; moreover NML has invited competitive quotations from vendors for supply of the sulphuric and phosphoric acid and the SSP and TSP fertiliser plants. Current preliminary indications by these prospective vendors, together with definitive offers from Delkor and civil contractors for the beneficiation plant, will consolidate NML's Capex estimate. The full quotations are expected by end of February 2011. In the meantime, NML's assessment of CAPEX differences are shown in this comparison (link).

NML disagrees with SRK’s conclusion that production of phosphoric acid is not viable at Tororo. Nilefos’ investment plan is guided by GOU policy to manufacture value added products as per the Government's directives for extractive industries. MISA has requisite experience for the production of phosphoric acid. Accordingly the production of phosphoric acid and TSP are a priority of NML and in the feasibility estimates shown in this presentation, the projected IRR is approx 20%. (link)

Therefore NML will demonstrate that within the overall CAPEX range of MUSD USD 140-190, the production of phosphoric acid and TSP are a viable and profitable business that Uganda should not ignore. An optimisation of capex and opex will determine the final outcome of the production planning and phasing of investments.

6.  Costs of feasibility study: MUSD 6.79 proposed by SRK. NML considers this cost as excessive and will be putting forward its own estimate.

With regard to all other issues raised by SRK, these will be addressed within the scope of the next steps for implementation. NML has full confidence that these issues shall not put the project in jeopardy.