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Magnesium Intl Ltd (MGK)

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Wednesday 29 March, 2006

Magnesium Intl Ltd

Capital Costs & Outlook

Magnesium International Limited
29 March 2006

                  Attention ASX Company Announcements Platform

                         Lodgement of Open Briefing(R)

Magnesium International Ltd
Level 6
210 George Street
Sydney  NSW  2000

Date of lodgement:   29-Mar-2006

Title:   Open Briefing(R).  Magnesium Int.  Capital Costs & Outlook

Record of interview:

Magnesium International Limited (MIL) said in an ASX announcement on 10 March
2006 that Directors are confident that the increase in capital costs reported in
December 2005 from the incomplete MAN Ferrostaal EPC pricing exercise will be
substantially, if not completely, reversed.  Can you outline MIL's revised plans
to progress the project?

MD Pat Elliott

The first step has been to re-arrange the ownership of EMAG. This has been
agreed with our local partners, Amiral, and is subject to shareholders'

The second step is to re-work the capital cost estimate so we are sure that the
project economics are attractive. The MAN Ferrostaal work on capital costs,
which remains incomplete, was primarily based around fabricating the plant in
Germany and constructing it in Egypt.  We are now revising this to achieve the
maximum amount of fabrication work done in Egypt where costs are very low by
world standards.

My view is that we have an economic project, and the objective of the current
engineering work is to improve our confidence levels that this is the case and
be able to prove that to investors.

Unfortunately, the impact of this additional work is to delay likely Financial
Close into 2007.

Can you reiterate how you might reduce the anticipated total construction cost?

MD Pat Elliott

We are reducing the capital cost estimates by:

1.      increasing the amount of the fabrication work undertaken in Egypt and
other lower cost Middle East and Asian sources compared to the EU;

2.      scrutinising the scope and design of the plant very thoroughly in a '
value engineering' exercise. We are not changing any of the critical parts of
the process, but we're making sure we take out all sections that might be
considered optional extras.  That includes any equipment which were designed to
handle the second module of production.  We're now focusing on building a plant
that is purely designed for module one (43,000 tonnes a year) with all
incremental module two requirements coming at the time of module two;

3.      re-tendering and restructuring a number of vendor bid packages so that
competitive bidding is maximised;

4.      shortening the construction schedule; and,

5.      reviewing the construction contract structure and possibly moving to a
fixed price EPCM arrangement.

Over the last few years the number of Lump Sum Turn Key EPC providers in the
engineering construction industry has reduced. However, specialist
subcontractors continue to work under fixed price contracts and the project
financing banks are more prepared to finance projects in that situation.  The
principal contractor is still appointed to manage the subcontractors. Clearly it
is a slightly higher risk approach for the principal  but it means avoiding
paying the EPC contractor a big margin because it is no longer taking all the
risk. This approach may impact on the financing structure and cost but it does
significantly reduce overall costs. The key to achieving this is making sure we
have a very strong owner's team.

You are similarly looking to reduce operating costs.  Can you explain the
program there?

MD Pat Elliott

We've initiated a program to review all operating cost inputs and to pursue cost
reduction and by-product revenue opportunities in parallel with the engineering
and capital costing activities.  We recently agreed contract terms for power and
gas supply and these were in line with expectations.

MIL recently announced that the Egyptian Magnesium Company S.A.E. (EMAG) will
move from being a 50% owned associate of MIL to a 100% fully controlled
subsidiary.  Can you explain the mechanics of the transaction?

MD Pat Elliott

The transaction is effectively a share swap. The Amiral Group will swap its 50%
shareholding in EMAG for 2.5 million shares in MIL. That will take Amiral's and
its associates' interests in MIL to nearly 12%.

We think it's an attractive deal for MIL shareholders because we're getting
ownership of the other 50% of EMAG, but shares on issue will only increase by
6.6%.  EMAG's major asset is of course 100% of the proposed 88,000tpa magnesium
plant at Port Sokhna, Egypt.

How did you determine that the consideration for MIL's additional 50%
shareholding in EMAG would be 2.5 million shares?

MD Pat Elliott

The consideration for buying back the 50% in EMAG related directly to the amount
of capital Amiral had invested and was also tied back to the price for the share
placement to Amiral approved by shareholders in late February 2005.  That
placement was done at $1.20 a share and raised $12 million.  The effective MIL
price Amiral is paying on converting its EMAG shareholding into MIL is around
$1.14 based on their cash investment into EMAG. When compared to the $1.20
placement price in February 2005 which included a 1 for 2 free option and the
current MIL market price the price is attractive to the other MIL shareholders.

In addition, to these ownership changes we have entered into further agreements
with Amiral:

1.      a service agreement with Amiral that safeguards EMAG's rights to
construct the smelter at Port Sokhna, and

2.      a brokerage agreement that provides for Amiral to assist in placing part
of EMAG's equity requirements.

These agreements provide both EMAG and Amiral with strong focus to get the
project to fruition.

Can you outline the management structure of MIL moving forward?

MD Pat Elliott

I have been appointed Managing Director and two of the key people that report to
me are Mike Moran, our Project Director, based in Cairo and Peter Sydney-Smith,
our Finance Director based in London.  Mike has full responsibility for the
engineering team and Peter is responsible for financing the project.  Both Peter
and Mike are recent appointees who have significantly strengthened our
management team.  I will remain as MD until financial close and we'll then
probably appoint a longer term MD.  We think that financial close will be in
around twelve months.

We've recently announced changes to the board and we're also seeking additional
Non-Executive Directors with Egyptian and regional project expertise.

Following this restructure what is MIL's current funding strategy?

MD Pat Elliott

At 31 December 2005, MIL had $7.5 million in cash and that's sufficient to carry
us through until late this year, but as we've already announced, we'll need to
raise additional capital to take us through to the revised financial close.
We've already spoken to a large number of existing and potential new investors
who have indicated their interest in participating in any raisings.  We're
working on securing a pricing structure for that equity which does not merely
reflect the current share price.

MIL recently stated that initial commercial orders have been taken for
MagSheet's magnesium alloy sheet produced in the Melbourne plant, with product
due for supply early in 2006.  Can you explain the potential financial
significance of MagSheet for MIL?  Are you still confident that its technology
offers substantial operating cost savings against competitors' products?

MD Pat Elliott

The CSIRO technology MagSheet is using is leading edge and well ahead of the
pack. The feedback from industry experts and people who have tested and assessed
our product has been very positive.  That view has been confirmed by work
conducted by the leading industry consultants, Clark & Marron.  In the aluminium
industry Twin Roll Cast (TRC) technology is well established, but it has not yet
been successfully applied with magnesium alloys until the CSIRO has been able to
develop it.

This breakthrough is significant because TRC can reduce operating costs by
between 40% and 60%, depending on the application, compared with the current
commercial technologies used in rolling magnesium sheet.

We're well advanced in negotiating commercial contracts with a couple of
Japanese groups and if we finalise those it will be a big step towards
establishing MagSheet as a standalone business.  Financially, this would be very
significant to MIL.

World metal prices were generally strong through 2005 but magnesium has been
weak.  Can you give a general update on magnesium alloy markets?

MD Pat Elliott

Last year magnesium alloy prices moved up to around US$1.60/lb but this year
eased back to US$1.20-1.30/lb.  We view this as a short period of weakness. The
market analysis undertaken by Metal Bulletin Research/Clark & Marron has longer
term pricing at over US$1.45/lb.  Current weakness is due to a short term
slowdown in US demand growth due to reduced SUV sales and supply growth as a
major US recycler came back on stream after a fire.

Our long term pricing view is based on the ability of car manufacturers to
switch between aluminium and magnesium in a number of motor vehicle component
applications.  Magnesium has a specific gravity ratio of around 1.55 times that
of aluminium. i.e a user can pay 1.55 times the price for magnesium and get the
same volume of metal as aluminium. So, once aluminium moves above, say US$1.00/
lb, then it is viable for car manufacturers to switch to magnesium alloys if the
magnesium alloy price is below US$1.55/lb. This ignores the other benefits of
using magnesium alloys: longer tool life, lower machining costs and better
strength and rigidity.

Our feasibility study used the Metal Bulletin Reasearch/Clark & Marron forecast
price of over US$1.45/lb for magnesium alloy, which will prove to be well
achievable for large tonnages if the price of aluminium remains around current
levels of US$1.10/lb.  There is a lead time of at least two to three years for
car manufacturers to switch, but that suits us because that is around the
timeframe for us to get into production. We expect to find good demand at over
US$1.45/lb when EMAG commences production in 2009/10.

Demand for magnesium alloy has been growing by about 9-10% a year for around 10
years and that has been over a period when oil prices have been typically around
US$20-30/barrel.  Despite the intention of various governments to lower vehicle
fuel emissions, there hasn't been a real economic driver for car manufacturers
to improve fuel consumption until now.  With oil prices at US$60/barrel and
petrol pump prices much higher consumers are now reacting and car manufacturers
will have to take notice.  One of the ways they can get better fuel efficiency
is to make the car lighter by using more materials like magnesium alloys, but
that will only happen if companies like EMAG come into being because most of the
existing projects have very limited growth paths. The competitive position of
magnesium alloys has been significantly improved in recent months setting the
scene for an acceleration in demand growth.

The last quarterly report referred to the TKM offtake agreement being extended
to June 2006.  This seems a short period.  Can you explain your intentions in
this area?

MD Pat Elliott

The agreement originates back to the South Australian project and it is our
intention to enter a fresh agreement once we have advanced the construction
contract.  Our first objective with TKM is to use their industrial material
experience to market and distribute our product into the High Quality Magnesium
Alloy sector. Hence the 15 year exclusive agreement.  We are also keen to use
the TKM market knowledge to lead us into higher priced higher specification
alloys rather than be primarily a producer of standard grade alloys. We also
wish to progress the discussions in respect of short and long term contractual
arrangements with end users and the monthly offtake for non contract customers
in the context of TKM's requirements on maximum uncommitted stock levels.

In your December 2005 quarterly report, you stated that Metal Bulletin Research
/ Clark & Marron believe that EMAG is the most likely Greenfield magnesium
smelter project capable of being developed outside China in the next five years.
  How competitive is the Chinese technology?

MD Pat Elliott

The Chinese technology uses a batch process which produces pure magnesium which
has to undergo a number of additional steps before it can become magnesium alloy
with comparable quality and consistency of quality. Many Chinese producers do
not have the necessary expertise to take these steps and a lot of Chinese metal
is therefore reprocessed in Europe and at other locations. Wherever the
upgrading occurs, it all involves significant extra cost and the Chinese
producers still do not provide the technical support required by most high
quality magnesium alloy customers for their particular applications.

Chinese production costs are increasing at a significantly greater rate than
those of Western producers.  For instance, one tonne of magnesium produced in
China typically requires around 22 tonnes of coal.  There is pressure from the
Chinese government for several industries to become more environmentally
responsible and that will add to their production costs.  Our view is that
Chinese costs will rise at a much faster rate than Egyptian or Western World
costs in a lot of areas and that their competitive position will weaken.  When
you factor all these issues, there's no doubt that we'll be very competitive
with the Chinese.

Another aspect of the Chinese process route is that it offers almost no
economies of scale. The electrolytic Dow process that EMAG is using provides
significant scale economies especially once the second module is developed
taking EMAG's planned capacity to 88,000 tonnes per annum. EMAG's operating
costs will be at the bottom end of the world cash operating cost curve placing
EMAG in an excellent position to capture ongoing market growth in the longer

In summary, how confident are you of MIL's project going ahead in the timeframe
currently envisaged?

MD Pat Elliott

The market conditions are right for new magnesium alloy projects and I'm
confident that we can get our capital cost numbers into the range where the
investment returns will attract debt and equity providers to finance the

Thank you Pat.


For previous Open Briefings by Magnesium International visit

For further information on Magnesium International visit or

Pat Elliott through the Sydney office on 02 9252 1505.

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