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INDONESIA – Realm reduces cash cost forecasts

Realm Resources has announced the results of a review of the operating cost assumptions used in the feasibility study and the valuation for its 51%-owned Katingan Ria Thermal Coal Project in Central Kalimantan. The FOB cash cost forecasts have been reduced by $8 per tonne, of 20%, to US$31 per tonne before royalties.

Industry operating costs have declined by up to 30% over the last two years in parallel with falling commodity prices and profitability, and the strengthening US dollar. Katingan Ria’s unit operating cost forecasts have subsequently been reduced by approximately 20% following a review by management and their consultants.

Importantly the forecast life of mine (LOM) unit cost for the operation before royalties has reduced to about US$31/tonne which is below the current spot coal price expected for Katingan Ria coal (ie 4200 Kcal/Kg GAR at US$36/tonne).

Management has also reduced its long term price forecast for Katingan Ria’s coal quality to US$42.50/tonne (vs US$52.00/tonne) in line with industry consensus forecasts.

Based on the long term price and revised cost assumptions, the NPV (10%) valuation for Katingan Ria (100%) declines marginally to $100 million (vs $111 million) for the 3 million tonnes/annum dozer push mining method case as defined in the feasibility study. The NPV at spot prices is US$29 million.

In the light of recent trends in operating unit costs, Realm together with PT Britmindo and Xenith Consulting undertook a high level review of the operating cost assumptions used in the feasibility study. Rio Tinto and BHP Billiton have both recently announced significant unit cost reduction of 32% and 21% for their thermal coal divisions respectively over the last 2 years. Both companies are targeting further costs reduction with BHP Billiton targeting a further 15% by FY2016.

Realm secured the services of Britmindo to review the FOB cash cost assumptions. Britmindo is a leading mining and technical services company that has operated in Indonesia for more than 10 years. They have up to date knowledge of mine operating costs in Indonesia due to recent contract negotiations for several clients. In addition, Britmindo is managing coal mines that are producing similar quality at an annual rate of 4 million tonnes and also has extensive knowledge and experience in the Katingan Province. Xenith Consulting, who independently reviewed the feasibility study, provided oversight of the review.

Britmindo assumed a 3 million tonnes/annum case and greater use of dozer push mining methods. Realm therefore used its feasibility study upside case with dozer push model as a basis for comparison. Britmindo concluded that further cost savings could be achieved by doing a more definitive study, and particularly looking at expanding the use of dozer push mining methods and switching to owner operator status. It should be noted that their study excluded a review of the capital forecasts and government royalties and VAT.

For the purpose of this study, Realm has assumed that capital costs remain steady and the current 5% royalty rate and VAT rebate regulations remain, however, notes that these could be changed in the future.

Meanwhile, the company says that the thermal coal market is showing signs of stabilizing. It also says that management is continuing to engage with prospective buyers and/or strategic off take partners interested in the project.

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