President's review

With respect to Financial Year 2004

Dear fellow shareholders:

In 2004, your company became Adastra Minerals Inc. and its ticker symbols on both the TSX and AIM became AAA. These changes to your company’s external face were timed to coincide with equally radical changes to both its asset base and ownership.  In May, we received clear and unequivocal title to the enormous Kolwezi tailings deposit whilst, over the course of the year, Adastra became predominantly owned by European financial institutions. We chose the name Adastra, derived from the Latin "to the stars",  because it aptly reflects the Company's principal corporate objective of commercializing one of the World's most significant cobalt and copper resources. It furthermore effectively represents Adastra's current portfolio of assets and geographic focus. Our two principal assets are both located in the Democratic Republic of Congo (DRC) and the field of that country's national flag comprises seven stars. Adastra has yet to reach the stars but we are determinedly on our way.

In 2004, we achieved the most important corporate objectives set at the beginning of the fiscal year. In particular, our 82.5% owned subsidiary Kingamyambo Musonoi Tailings SARL, (“KMT”) secured unequivocal title to Kolwezi. On November 17 2003, we announced that the Kolwezi Contract of Association (the shareholders’ operating agreement) had been agreed and initialled by Adastra (then America Mineral Fields or AMF), the Government of the DRC and La Générale des Carrières et des Mines (Gécamines), the state-owned mining company. Shortly thereafter, in January 2004, the Economic and Finance Committee of the Government approved the project. In March of 2004, His Excellency President Joseph Kabila of the Democratic Republic of Congo (“DRC”) signed Presidential Decree No. 04/020, approving the incorporation of KMT , the Congolese operating company that now holds the Kolwezi Tailings Exploitation Permit. Adastra immediately thereafter signed the Contract of Association, with the Government and Gécamines. This agreement, inter alia, set Adastra’s shareholding of KMT at 82.5%, Gécamines at 12.5% and the DRC Government at 5.0%. 

The Tailings Exploitation Permit, giving formal title to the project was received by KMT on May 27th 2004. This allowed your company to take several immediate and important actions, including:

  • 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.

As our Chairman, Bernard Vavala, stated when the Contract of Association was signed the”.. acquisition of the Kolwezi project … fully vindicates the long term strategy that management has pursued in the DRC, demonstrating that the adherence to ethical and transparent business practices is not an inhibitor to getting deals done in Central Africa.”

In order to develop Kolwezi in the most time and cost efficient manner, management decided to carry out the DFS, ESIA, metal marketing and project financing in parallel.

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.

Kipushi Zinc/Copper Project

In August 2004, we recommenced negotiations  with Gécamines aimed at finalizing a framework agreement on Kipushi.    These negotiations are ongoing with Gecamines and Kumba and we are hopeful of reaching a conclusion in early 2005. The strengthening zinc price over the past 15 months has improved the potential economics of the proposed project and, accordingly, Kumba and Adastra are keen to commence the feasibility study.

Cuango Diamond Project

Unfortunately, Adastra has not enjoyed the same quality of relationship with its local partners in Angola as it has with its strategic partners in the DRC. In September we announced that our wholly owned subsidiary IDAS Resources N.V. was commencing legal proceedings in the United States against Empresa Nacional de Diamantes de Angola (“Endiama”), the state owned diamond company in Angola.  IDAS and Endiama signed agreements in 2002  for diamond exploration and exploitation in the Luremo area of Angola. These agreements followed the official publication in October 2001 of the Council of Ministers’ confirmation of two licences awarded to Endiama with licence rights to be exercised through a joint venture of Endiama and IDAS.  Despite agreed detailed commercial terms and fully drafted documentation, we have been frustrated in our attempts to progress matters further and Endiama has made it clear that it has repudiated its contractual obligations. Since our announcement in September, we have “stayed” filing suit, seeking to obtain through senior diplomatic representations a resolution of this dispute without having to resort to litigation. This has yet to produce any tangible results, which leaves IDAS with no choice but to seek legal redress. 


In the past eighteen months there has been a fundamental change in the structure of ownership of your company. Prior to the equity offering in September 2003, Adastra was largely owned by individual investors. Now, the majority of the shares are held by investment institutions, predominantly European based institutions. In January 2004, a private placement was made with Prudential M & G of 3.5 million shares. As a result of this placement and subsequent  share acquisitions, Prudential M & G currently owns some 14.9% of the company.  At much the same time, it was disclosed that Mr. Jean Raymond Boulle, through his investment offiliates Gondwana (Investments) S.A. and America Diamond Corp. has reduced his shareholding to 7.7%.

Outlook for 2005 and Beyond

Adastra intends to sustain the tremendous momentum created during 2004. The ESIA will be completed by the end of May 2005 and the DFS in mid 2005. Throughout the year we shall be advancing our commercial negotiations with off-takers for KMT’s metal production, with the engineering contractors for a lump sum turnkey price for construction of the production facilities, and with the financial institutions for limited recourse project finance. The confluence of all these events should hopefully permit financial close by the end of calendar 2005 and the start of project construction in the early part of 2006. On this basis, initial production from Kolwezi is expected in late 2007.

On behalf of the Board of Directors I would thank and congratulate the Adastra employees for all their hard work in this year of achievement. This current year will be one of considerable challenge but ultimately it holds the prospect for a successful culmination for all the patience and commitment demonstrated by shareholders, directors and employees alike in previous years.

Yours truly,

Tim Read
Director, President and Chief Executive Officer

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