President's review

With respect to Financial Year 2004

• commissioning the final phase of the Environmental and Social Impact Assessment (ESIA) from SRK Consulting of South Africa, who  earlier performed the Environmental Audit and Scoping Study on the project;

• issuing a formal tender request for the Definitive Feasibility Study (DFS), and

• making an initial payment of US$5.0 million to Gécamines. Under the terms of the Contract of Association, a further payment of US$10 million will be made to Gécamines once the project is fully funded and a go-ahead decision is made.

In August 2004, Adastra awarded the contract for the DFS to a joint venture of Murray & Roberts and GRD Minproc. The Choice was based on the joint venture's engineering and contruction expertise and the extensive experience of its two constituent organisations in working on major mining projects in Southern and Central Africa. It is Adastra's intention to secure a lump sum turnkey contract from the joint venture for the development of the Kolwezi project with a fixed price and approriate contractor warranties.

The DFS will pull together all the technical aspects of the project, incorporating the extensive work that has already been completed, including the detailed resource definition and metallurgical test work conducted during a 12 month pilot plant programme.

As a first stage in the development of the DFS, the joint venture examined capital and operating costs for several different levels of production. This information, in conjunction with analyses of both the cobalt market and the availability of project finance, has enabled the KMT Board of Directors to determine the appropriate annual production parameters for the project's first phase of development. These have now been set at 30,000 tonnes of copper and 5,500 tonnes of cobalt annually. We fully recognize, however, that at this level of output, the Kolwezi resource will have an operating life in excess of 50 years. Consequently, it is KMT's corporate objective to bring forward value to its shraeholders by increasing production once the first phase has been successfully commissioned and once financial and commercial conditions permit.

Securing title to Kolwezi has also allowed your company to begin the important work of negotiating off take agreements for the cobalt and copper we plan to produce at Kolwezi and securing project financing. To assist with this, Adastra has retained Rothschild as financial advisor. Rothschild is one of the world's leading financial advisors to the mining industry and has extensive relevant experience in Central Africa, which should prove invaluable in structuring limited recourse finance for the project and all the other complex contractual negotiations. A key objective will be to put in place a financing structure that mitigates the equity dilution of existing shareholders.

In doing this we will be able to build on a financing base that we have already established with two leading international organizations, the Industrial Development Corporation of South Africa (IDC) and the International Finance Corporation (IFC), a member of the World Bank Group. The IDC recently announced its decision to exercise in full its option to earn a 10% equity interest in KMT, subject to the receipt of Exchange Control permission  from the South African Reserve Bank. The IDC will pay for its shareholding in KMT by meeting all allowable expenditures on the project after the date of exercise until it has earned its 10% interest. This expenditure is currently estimated at approximately $5 million. Thereafter, the IDC will meet its share of equity expenditures on the Project in proportion to its percentage ownership. The IDC will also pay Adastra $0.6 million as its pro rata share of the $5 million initial payment to Gécamines. A further identical option continues to be held by the IFC and it is our hope that this institution will also elect to exercise its option in the near future and in full. In such an event, Adastra’s ownership of KMT would be reduced to 62.5%, the IDC and the IFC would each hold 10%, whilst Gécamines and the Government would continue to own 12.5% and 5% respectively.  Both the IDC and the IFC are also important potential sources of project debt. In September 2004, Adastra signed a Memorandum of Understanding (“MoU”) with Umicore s.a., which provides, inter alia, for the negotiation of a long-term supply contract whereby Umicore will purchase cobalt produced at Kolwezi.  Umicore is an important producer of high value metal products and enjoys global leadership in the production of cobalt chemicals. Under the MoU, Umicore is also assisting KMT in the placement of Kolwezi’s cobalt output amongst Umicore’s own chemical customers, as well as providing important technical assistance to the establishment of a robust cobalt processing facility at Kolwezi.  Umicore continues to hold a 5% interest in Adastra.