PROYECTO FENIX

Project Background

Nickel deposits were identified in the Lake Izabal region of eastern Guatemala in the 1950’s and 60’s. In 1974, Inco commenced construction on the Exmibal nickel laterite mine and smelter. The plant, completed in 1977, was designed to process the saprolite portion of the ore body to produce a nickel sulphide matte in a single rotary kiln-electric furnace (RKEF) production line. In 1980, the Exmibal plant was shutdown and placed on care and maintenance due to a combination of high oil prices and low nickel prices. Mobile equipment was sold and major equipment was carefully mothballed with a potential future re-start in mind. Staff were retained on site to maintain facilities and rotate major equipment.

In 1992 Inco initiated a feasibility study to look at returning the Exmibal facility to its 1980 condition such that operations could be resumed as per the original design but a decision was made not to restart. On-site maintenance effort was continued.

Upon acquiring the project (renamed Fenix) in 2004, Skye initiated a preliminary assessment of alternatives for restarting production, and, based upon this assessment, initiated a feasibility study for a ferronickel project in 2005 which was completed in September 2006. Skye has also completed a preliminary assessment of a subsequent expansion using hydromettalurgy to process limonite. An update to the ferronickel project was released in a September 2007 technical report.

The financing plan for the development of the ferro-nickel project is now being finalized.

Development Plan

Skye believes by utilizing the existing plant and infrastructure which has been surprisingly well maintained since 1980, and implementing significant operating improvements resulting from technical advances since the original plant was designed in the 1970’s, the Fenix project would be a very competitive nickel project. The operating improvements would be achieved by using proven technologies to double the plant throughput; converting power generation from oil to petcoke in the second phase of the project, and using coal in place of oil in the process plant. These changes, once implemented, would essentially eliminate any dependence on oil, and would take advantage of economies of scale which together should overcome the issues which caused the plant to be closed in 1980, at a time of low nickel prices and high oil prices. Furthermore the smelting of nickel laterites is a mature technology, proven on a commercial scale that has been demonstrated to successfully treat the Fenix ore body.

In September 2006 Skye released the results of the feasibility study for the ferro-nickel smelting project. An update to the ferro-nickel project was released in a September 2007 technical report, the results of which are summarized below. (All $ are 2007 US$)

Ferro-nickel Project (Feasibility Study):
Skye’s ferro-nickel project, which uses conventional smelting technology, involves refurbishing and expanding the existing mine and plant which produced nickel matte from the project’s saprolite resource from 1977 to 1980. Modifications to the plant include replacing the existing oil-fired dryer with a larger coal-fired unit, converting the existing oil-fired kiln to coal-firing, installing a second kiln and adding a ladle refinery to produce ferro-nickel. The existing electric furnace will be upgraded to 90 megawatts (MW). Power supply for the first five years of operation will be provided under a power purchase agreement through a connection to the Guatemalan power transmission grid, and a new 150 MW pet-coke fired power plant will be installed in Phase 2 of the project, during years 2 through 5 of operations.

The Phase 1 capital cost is estimated to be $640 million, with an intended level of accuracy of +12/-5%. This total includes direct costs of $355 million, indirect costs of $157 million, a contingency of $65 million and owner’s costs of $63 million. The cost of the power plant in Phase 2 including direct, indirect and contingency is $344 million, with an intended accuracy of +20/-10%. The capital cost estimate has a base date of July 2007,

Based on a nickel price of $6.50 per lb, an iron credit of $0.20 per lb. and royalties and other costs of $0.49 per lb, the ferro-nickel project’s IRR is estimated at 14.3% and its NPV at $275 million with a 10% discount rate. The IRR is estimated at 19.8% and its NPV at $667 million at a long term nickel price of $8.00 per lb.

Cash operating costs are estimated to average US$2.66 per lb over the 30-year project life. During the first five years of production (while power is being purchased) they are estimated to be US$3.47 per lb. Thereafter, assuming the construction of a solid-fuel power plant, cash operating costs are estimated to be US$2.34 per lb for years 6 through 20.

The feasibility study shows, that of all the key parameters, the project’s economics are most sensitive to nickel prices. At an average nickel price of $8.00 per lb., the ferro-nickel project’s IRR climbs to 19.8% and its NPV rises to $667 million at 10%. A US$1.00 per lb. increase in the nickel price during the first five years of operation will be expected to increase the NPV by US$94 million.

The Fenix project now has all major permits, and basic engineering for phase 1 of the project is complete. Based on the current project schedule, ferro-nickel production is scheduled to begin by late 2009 with full production expected to be achieved by 2012.

As the ferro-nickel project only uses part of the nickel laterite found at Fenix, Skye also undertook a preliminary assessment of a subsequent expansion using hydrometallurgy to process the limonite. The results of this study were also published in September 2006, and are summarized below. (All $ are 2006 US$)

Hydromet Project (Preliminary Assessment):
Skye’s hydromet project would expand annual output by an average of 49 million pounds beyond the ferro-nickel project’s production. The new plant would employ high-pressure acid leach technology to process Fenix limonite resources producing a nickel/cobalt hydroxide intermediate for further refining. A sulphur-burning acid plant would produce sulphuric acid, to leach the plant feed, as well as by-product steam for use in the autoclaves and to supply approximately one-third of the power required for the hydromet project.

The Preliminary Assessment estimates the capital cost of the hydromet project to be $858 million, with an intended level of accuracy of +/- 25%. This total includes direct costs of $504 million; indirect costs of $179 million, owner’s costs of $30 million and a contingency of approximately $145 million.

The IRR for the Hydromet project is estimated at 14.2%, at a nickel price of $5.00 per lb and a cobalt price of $15 per lb. The project has an estimated NPV of $424 million using an 8% discount rate, and $242 million using a 10% discount rate. As with the ferro-nickel project, the hydromet project is most sensitive to nickel prices. At an average nickel price of $6.25 per lb. (being the average price of the past five years in 2006 dollars), the hydromet project’s IRR rises to 18.6% and its NPV rises to $781 million at 8% and, $533 million at 10%. (All values calculated to the start of construction.)

Cash operating costs (before royalties of $0.12 per lb.) are estimated to be $1.38 per lb of nickel, including refining charges of $0.75 per lb of nickel and net of cobalt by-product credits of $1.10 per lb. of nickel.

The next steps in the advancement of the hydromet project include further engineering studies leading to a feasibility study, running a pilot plant, a continuation of the drilling program and conducting an environmental and social impact assessment. The Preliminary Assessment assumes that these will be completed to permit initial engineering and procurement to begin in mid 2009 with production beginning in 2012.

For purposes of the Preliminary Assessment, Skye optimized the hydromet ore feed by using a portion of the higher iron content resource (the transition zone, being the upper portion of the saprolite ore) currently assigned to be used in the ferro-nickel case, on the assumption that this material would be replaced from within the known saprolitic resources from other nearby areas. These other resources would be upgraded to measured or indicated for inclusion in the mine plan before the hydromet project proceeded.

The Hydromet preliminary assessment was issued in October 2006 and the capital cost estimate, operating cost estimate and economic analysis set out in the study have a base date of third quarter 2006, with no allowance for escalation in prices beyond this base date. In addition, since October 2006 the ferro-nickel project’s scope and cost estimates have been updated, as described in the September 2007 technical report. Some of these scope and cost estimate changes would impact the hydro-metallurgical expansion. For example:

• project operating supplies (e.g., elemental sulphur) would no longer be shipped to site by a combination of trucking and barging. They would be shipped by an all-truck method, as described in the September 2007 technical report.
• updates to unit prices of fuel oil, unit labour costs, nickel prices and currency exchange rates would also apply to the hydro-metallurgical expansion project.

Geological Setting

The Fenix nickel-cobalt deposits are in lateritic weathering profiles that have formed on ophiolitic peridotites thrust into place during the early Tertiary. The laterites developed during the late Tertiary era through prolonged tropical weathering of the ultramafic bedrock.

The ultramafic rocks of the Lake Izabal region lie in the vicinity of a major transform fault zone stretching from here through Jamaica to the southern peninsula of Hispaniola. The transform fault, which is thought to have a left lateral displacement of about 1,300 km, comprises two branches, the Polochic-Chixoy fault system through Lake Izabal and the parallel Motagua fault in the large valley south the Sierra de Las Minas. These faults curve from their trans-Caribbean ENE trend into a WNW trend across the highlands of Guatemala to parallel the Americas trench off the Pacific coast. The ophiolitic rocks are in fault contact with limestones and other sedimentary rocks of the North American tectonic plate.

Lake Izabal occupies a graben in a pull-apart basin along the Polochic-Chixoy fault system, and the terraces hosting the deposits appear to represent small down-dropped blocks flanking the main structure. Some of the terraces in the La Gloria area are clearly separated from the higher terrain to the north by marked topographic lineaments that probably represent such faults. The ultramafic rocks are predominantly harzburgite (ca. 80% olivine + 20% orthopyroxene). In the mine area there are minor (<5%) small (several meter scale) bodies of dunite and pyroxenite. The ultramafic rocks are strongly jointed and are cut by zones of serpentinite matrix breccia. Most show moderate to intense serpentinization which is related to the fundamental control of the level of nickel enrichment.