DOWNSTREAM DEVELOPMENT UPDATE AND CHALLENGE AGUS SUHARTONO Vice Chairman of APEMINDO Chief Operating Officer of Ibris Nickel Ltd. February 2013 Key To Indonesia’s Downstream Development Strong Government and Sponsor Support Clearly Defined Laws and Regulations Access To International Financial Markets Financial Incentives For Investments Sponsors With A Proven Track Record Mineral Resource Infrastructure Technology Proven Resource Base With Mineable Reserves Transport and Distribution Infrastructure Proven Processing Technology And Know-How Quality Management and International Standards Access to Power, Energy and Other Raw Materials Sustainable International and Domestic Demand 2 Key Success Factors and Development Challenges Government and Sponsor Challenge Lack of clarity in laws and regulations Sudden significant changes to mining laws deters foreign investment due to uncertainty Regulations Success of capital intensive downstream processing projects requires reliable local sponsors with a proven track record of delivery Must seek reputable and reliable JV partner for technology Sponsor No clear tax incentives for investor Indonesia has a history of introducing new mining taxes, adding uncertainty to long term returns Government Support Capital Cost High investment cost due to: – Requirement to build infrastructure and power as part of downstream project – Inability to source locally – Limited access to financing due to risks 3 Key Success Factors and Development Challenges Mineral Resource Factor Challenge Most downstream projects require 20+ year mine life to justify downstream investment However: – Indonesian assets have generally undergone limited exploration which was not conducted according to international standards – The IUP system adds restriction and limitation to resource size – Too many overlap and non CNC assets adds to resource uncertainty Resource Base Nickel ore mining is relatively new in Indonesia and lacks experienced management teams and quality standards Traditional nickel downstream processes are too expensive to build while new technology/NPI process does not have internationally recognized standards Quality Management International Standards 4 Key Success Factors and Development Challenges Infrastructure Factor Challenge Lack of power infrastructure and access to grid Power plant must be constructed as part of the project since there is no access to the power grid Addition of power plant increases cost and risk of the development Power plant operators and mineral processing usually requires different JV partners Access to Power No existing location with suitable infrastructure – shipping, jetties, power and roads must be constructed as part of the project, adding to the investment cost Distribution infrastructure – lack of pipelines, energy storage terminals and deep water access imposes limitations on processing plant design and production capacity Infrastructure Based on different processing technologies, various raw materials are required, such as coal for power, coking coal and limestone for blast furnace operations and natural gas for advanced processing technologies Indonesia lacks reliable suppliers of raw materials as well as the necessary infrastructure to access them Certain developments are not possible due to the inability to secure a stable long-term supply Access to Raw Materials 5 Key Success Factors and Development Challenges Technology Factor Challenge Blast Furnace – relatively lower development cost; high operating cost (currently negative margins); low grade product with questionable long term demand Electric Furnace – high development cost; lower operating costs (currently break-even); medium grade product with China as the only consumer market Other Technologies – high development costs with technology risk; not sustainable with current commodity prices Proven Processing Technology Domestic Market Demand Currently no domestic demand for NPI, making it difficult to have a contingency plan if international demand softens Demand for NPI product currently from China only China has over capacity for NPI production and will only import from Indonesia if there is a shortage More and more Chinese plants are becoming integrated and may not need to buy intermediary nickel products such as NPI International Market Demand 6 Case Study – Project Overviews and Updates 7 Roadmap for Downstream Project Phase I (Industrial Park I) Resources Processing Power Nickel Asset Nickel Ore Nickel Ore Phase II (Industrial Park II) Product Electric Arc 12% Ni NPI Furnace [x[mtpa Rotary Kiln NPI/Ferronickel Electric Furnace [x]mtpa Power Coal Asset Coal Power Plant (Stage I – 4x65MW) (Stage II – TBD) Power Power Coal Coal Drying/ Upgrading 8 Coal Upgraded / Dry Coal Coal Gas Proposed Materials Flow Asset Location Processed Nickel Phase II Area Nickel Ore Phase I Area Nickel Assets 9 1. Industrial Park Development 10 Industrial Park I – Development Overview Location of Site Industrial Park I will include infrastructure and energy storage to accommodate downstream processing plants and auxiliary facilities The location was strategically chosen for its access to deep water, allowing the construction of a jetty capable of servicing sea borne vessels The development will include a deep water jetty, a terminal for energy storage as well as infrastructure for an integrated industrial estate Company will lease a portion of the land at the industrial park for Phase I of its downstream project and will have access to the existing infrastructure and transport facilities Industrial Park I Location Progress of Work Survey Work Industrial Park I currently includes 64 hectares of land for the industrial estate and survey work on the area is in progress Work completed thus far includes: – Bathometry – Topography Soil investigation – Preliminary site planning A suitable area has been identified for a deep water jetty/port and various design parameters are currently being considered – The AMDAL for the terminal storage is currently in progress and is expected to be completed in Q2 2013 An independent consultant has been engaged to perform additional planning and analysis for a pre-feasibility study 11 Overview of Phase II Industrial Complex Overview Industrial Complex Layout The ultimate purpose of the Minerals Processing Complex is to provide an attractive location for mining industry players to construct downstream processing facilities. The target location for the industrial estate is in East Kalimantan, near the Coal asset Planning for the industrial estate began in 2010, when Consultant was engaged to produce a pre-feasibility for the project Company continues to move forward in its plan to develop the site and is currently engaged another consultant to study the feasibility of the project Company intends to leverage its nearby coal resource to produce low-cost power that will serve the entire estate, thereby providing a competitive advantage compared to other projects in Indonesia Phase I of the project will consist of a Nickel Pig Iron (“NPI”) plant, 4x65MW power stations and port facilities – Nickel ore will be transported from Sulawesi to the site by barge or small vessel – The low cost coal will fuel the power stations, which will in turn provide electricity to the NPI facility – The NPI facility will then process the nickel ore into NPI product, which will be exported to the international market 12 2. Phase I Downstream Development 13 Phase I – Electric Arc Furnace Overview EAF Design Company is in discussions with a major Chinese entity to jointly construct an Electric Arc Furnace (“EAF”) in Phase I of its nickel downstream processing strategy Power cables Hatch for nickel ore, lime and other material The Chinese partner will contribute capital, technology and nickel refining experience to the partnership The technology decision for Phase I was made after careful consideration of the availability of power, coking coal and other raw materials in the planned industrial estate area The processing facility will produce a ~10% Ni NPI product which will be sold to the Chinese partner through an long-term offtake agreement Oxygen inlet Tapping spout for molten NPI Door for removing slag Molten NPI Technology Background Electrodes Furnace Details Arc furnaces have been in use in the metallurgical industry since the late 1800s but have only recently started gaining acceptance in the area of smelting ores such as nickel laterite Advantages of the arc furnace: – Ability to treat directly ore particles less than 1mm in size, improving overall efficiency – Gas produced by furnace can be used as a reducing agent as well as a supplement for energy requirements – Ability to fun at an optimum slag temperature due to the open-bath mode of operation The electric arc furnace is capable of processing nickel laterite into NPI product in the range of 10% - 20% Major cost components include nickel ore and electricity, although transport, coal and calcium lime can also be major factors depending on availability at the plant location Location Annual Processing Capacity Product Advantages Disadvantages 14 East Kalimantan (Industrial Estate 1) 950k WMt nickel ore 10k Mt nickel metal ~10% NPI Coking coal not required, reducing processing costs compared to blast furnace Higher value product compared to blast furnace Not as capital intensive as Rotary Kiln Electric Furnace (RKEF) technology, reducing risk High electricity consumption Shorter life of refractory lining 3. Phase II Downstream Development 15 Phase II – Rotary Kiln Electric Furnace Overview RKEF Design Company has engaged a consultant to perform a pre-feasibility study for a large scale nickel processing plant for Phase II of its downstream strategy Company is in discussions with potential Chinese partners to contribute capital, technology and nickel refining experience to the project The facility will be built on a second industrial estate near coal asset in East Kalimantan (Industrial Park II). Coal fired power plants will be part of the Phase II development to supply electricity to the RKEF plant Company hopes to construct a world class project to bring Indonesia to the forefront of the global nickel processing industry Technology Background Furnace Details RKEF technology was developed in the 1950s and is currently the basis of new, world class nickel refining facilities producing ferro-nickel via pyrometallurgy Process flow: – Ore treatment – crushed, mixed and proportioned with reductive and sent to the rotary kiln – Rotary Kiln Calcination – drying, heating and calcining. The roasting of ore eliminates moisture, reducing weight by approximately 30% – Ore Furnace Smelting – material discharged from the rotary kiln is smelted in the electric furnace. Lime and limestone is added to ensure suitable smelting temperatures – Purification – additives to eliminate phosphorus, silicon, coal and sulphur in the converter. Further purification to reduce iron from the nickel-iron liquid produced in furnace Location Annual Processing Capacity Product Advantages Disadvantages 16 East Kalimantan (Industrial Estate 2) 4.7mm WMt nickel ore 31.9k Mt nickel metal 12-15% NPI Modular design allows staged development for production ramp-up Capable of producing ferro-nickel up to 25% Ni Ability to modify the RKEF furnace to directly produce 300 series stainless steel Very capital intensive Lack of skilled workers and local materials will increase costs Phase II – Downstream Development on a National Scale EXPLORATION RESERVE & RESOURCE MINE CONSTRUCTION PRODUCTION FUEL SOURCE POWER GENERATION MINERAL PROCESSING REFINED PRODUCT COAL GASIFICATION COAL UPGRADING OTHER MINERALS DEEP SEA PORT Minerals Resource Downstream Processing Expansion Potential National Project 17 Phase II – National Project Minerals Resource Energy Resource Downstream Processing Future Development NICKEL ASSET Nickel mine is located in Southeast Sulawesi and its operations employ over 1,000 staff and contractors JORC compliant resources of 105mm Mt of nickel ore and ongoing exploration work is in progress to significantly increase the resource base Current monthly production rate of ~350k Mtpm with plans to ramp up to ~500k Mtpm Nickel mining company has entered into a long-term offtake contract with an Australian entity COAL ASSET Company holds a coal concession in East Kalimantan Current SNI complaint resources of 550mm Mt of low rank, high moisture coal Company is undergoing an intensive drilling program to significantly increase its resource base and to convert its current resource estimates to JORC compliant standards INDUSTRIAL PARK II Company intends to develop an industrial complex near the coal asset concession Stage I of the project will consist of a Nickel Pig Iron (“NPI”) plant, 4x65MW power stations and port facilities and Stage II will include a ferro-nickel smelter Low cost coal will fuel the power stations, which will in turn provide electricity to the NPI facility to process nickel ore into NPI product In addition to constructing infrastructure capable of supporting coal mining and the industrial estate activities, the project will also include a jetty to be utilized for the transport of ore and processed minerals FUTURE DEVELOPMENT POTENTIAL With a low cost power source, the complex will provide an attractive location for mining industry players to construct downstream processing facilities Future expansion plans include: – Coal gasification – Coal upgrading – Ferronickel plant and other mineral processing facilities – Deep sea port facilities 18