Iofina_080411

Iofina

MIRABAUD Securities Limited 21, St James’s Square UK – London SW1Y 4JP T +44 (0)20 7321 2508 F +44 (0)20 7930 4066 www.mirabaudsecurities.co.uk

Energy Research 11th April 2008

Energy Analysts Richard Savage +44 (0) 20 7866 0098 [email protected] Tim Hurst-Brown +44 (0) 20 7866 0092 [email protected] Energy Sales Pav Sanghera +44 (0) 20 7878 3380 [email protected] Harry Baker +44 (0) 20 7878 3401 [email protected] Nick Orgill +44 (0) 20 7878 4172 [email protected] Resources Sales Trading Lucas McHugh +44 (0) 20 7866 0085 [email protected]

A Rare Necessity


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Contents

Executive Summary.................................................................... 3

Iodine: a rare necessity .............................................................. 5

The Atlantis Prospect: twin revenue streams ............................. 7

Gas and Iodine Production....................................................... 10

Valuation ................................................................................. 14

Risk Factors……………......................................................... 16

Financial Summary................................................................... 17

Appendix 1: Valuation Assumptions ........................................ 18

Appendix 2: Iodine – Global Production and Competition ....... 19

Appendix 3: Iodine – Global Consumption and Demand ......... 23

Appendix 4: Iodine – Extraction Technologies ......................... 25

Appendix 5: Management........................................................ 27


3

Executive Summary

Iofina’s key asset is a c.40,000 acre land bank covering part of the Atlantis Prospect in the plains of northern Montana. It is sandwiched between two major natural gas accumulations: the Southeast Alberta Milk River gas pool to the north has produced over 5 trillion cubic feet (tcf) of gas; Bear Paw Uplift to the south has produced more than 1.5 tcf. However, while the area where Iofina is focused has provided just enough encouragement to keep the industry interested, it has so far failed to deliver any meaningful success. More than 200 wells have been drilled in the area and all have found gas, but the gas has been associated with large volumes of water.

The gas in the Atlantis Prospect is held in solution by artesian pressure, not trapped in a conventional way by a structural or stratigraphic closure. To get at the gas you have to produce the water, and it is the cost of handling this water that has so far prevented the commercial development of the area. While other industry players have hunted unsuccessfully for structural or stratigraphic closures which contain only gas, Iofina has taken a totally different approach. Through the application of its proprietary Wellhead Extraction Technology™, the company has managed to turn the waste water into a valuable revenue stream in its own right.

Figure 1: Atlantis Prospect Location Map

Source: Iofina.

The key to this success lies in the specific chemistry of the formation water: it has a high concentration of iodine but a low overall salinity. These unique properties enable the iodine to be extracted using a relatively cheap, electrolysis based process. The net result is that Iofina is sitting on what is considered to be the largest single source of iodine in the United States, and on our projections, could be producing around 4% of current global supply within five years.

MEDICINE HAT

TIGER RIDGE

Iofina has found the key – iodine – to unlock a promising asset and create a highly profitable business.

At the Atlantis Prospect gas is trapped and dissolved in the unconventional reservoir by artesian pressure, but the the high water cut has historically prevented commercial production.


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The chemical element iodine, the rarest of the halogens, is essential to the health of humans and many other life forms, and has a wide variety of commercial uses. These include X-ray contrast media, LCD screens, and the chemical, pharmaceutical and nutritional industries, and a potential major new application as an agricultural fumigant. Demand for iodine is growing strongly at around 4% to 5% a year and this trend is set to continue, driven by increased healthcare expenditure in countries such as China and India, and explosive growth from LCD manufacturers. In most cases, there is no viable substitute for iodine.

With only a few known locations worldwide where it can be economically produced, iodine is a rare commodity. Global production is dominated by Chile and Japan which together provide 90% of global supply, but even the modest amount of production outside these countries tends to be controlled by Japanese or Chilean companies. In a market which is effectively controlled by a cartel, Iofina is unlikely to remain independent for long. The challenge for the company is to demonstrate the true scale and potential value of the Atlantis opportunity before it loses its independence.

To date four wells have been drilled by the company and test gas production has been sold into the market via Iofina’s 100% owned, export pipeline. An extended field test of the iodine extraction technology has also been carried out, and the results incorporated into the development plan for the field. The field will be developed using production clusters of between eight to ten wells, with each cluster supporting an iodine extraction facility. The wells are shallow – between 1,000 ft and 1,500 ft deep – and so will be quick and cheap to drill. MHA, the Denver based independent reserves auditor and leading unconventional gas expert, estimates recoverable resources of 98 billion cubic feet (bcf) of natural gas and 37,200 tonnes of iodine, assuming a land bank of c.28,000 acres out of a potential 300,000 acres in the overall Atlantis Prospect. In fact there is scope for Iofina to expand its acreage position at relatively low cost, and the company continues to acquire additional acreage on a daily basis – it currently stands at around c.40,000 acres.

Valuation – core value US$91 million

We have calculated a core valuation for Iofina of US$91.1 million based on a discounted cash flow analysis and a long run natural gas price of US$7/mcf (forward strip to 2010), an iodine price of US$28/kg and a 10% discount rate. In reaching this figure we have applied a 90% risk factor to allow for potential overruns in both timing and cost. Our valuation is considerably lower than the US$171 million mid-case NPV10 calculated by independent consultants MHA. The main reason is that our model runs for only 20 years and does not capture the full benefit of the production tail. It also uses flat, rather than inflation adjusted, cost and commodity price inputs.

Key operational risks

Scalability: Iofina has proven its iodine extraction technology works in the field, but for commercial production the equipment requires a degree of scaling up.

Pace of roll-out: Our model assumes Iofina drills 900 wells in five years. Though the wells can be drilled fast (under three days each) this is still a major logistical task.

Water injection: Once the iodine has been extracted Iofina will need to dispose of large volumes of water – on our numbers more than 0.5 million barrels per day by 2012. We have assumed that the waste water will be injected into deeper reservoirs but this has yet to be field-tested. As an alternative, Iofina is looking at ways to lower the salinity of the water to enable it to be used for agriculture.

Iodine is experiencing growing demand from a wide range of commercial applications; global production is dominated by a handful of producers in two countries.

A conservative, independent assessment estimates recoverable resources of 98 bcf of gas and 37,200 tonnes of iodine.

Our risked core valuation of US$91 million is based on a long run gas price of US$7/mcf and an iodine price of US$28/kg.


5

Iodine: a rare necessity

Iodine, a bluish-black, non-metallic crystalline solid, is the rarest and most expensive chemical of the halogen group, which includes fluorine, chlorine and bromine. Essential to the health of humans and many other life forms, though only in small quantities, it has a wide variety of commercial applications. With demand rising from multiple applications, prices have risen significantly in recent years.

Global Production

Although iodine is produced in nine countries worldwide, the iodine market is dominated by Chile and Japan which together control about nine-tenths of global output. Production is restricted because while iodine is present in many forms, there are few areas in the world where it can be found in high enough concentrations to be economically extracted.

The world’s largest producers are found in Chile, where iodine is extracted from unique caliche deposits, located just a few metres below the desert surface. In Japan, iodine is produced from underground brines associated with natural gas, in a similar setting to Iofina’s Atlantis Prospect in Montana. Production in the US is concentrated in Oklahoma where three Japanese owned companies produce around 1,500 tonnes/year – less than 6% of global production. The potential for increasing capacity in both Japan and the US is limited and production from these regions is in decline. (Detailed information on the global production of iodine can be found in Appendix 2).

Manifold Uses

Iodine enjoys a wide variety of commercial uses and this breadth of utility gives it multiple sources of demand growth. One of the main uses is in contrast media for CT Scans, MRI and X-ray, which represents some 22% of global iodine consumption. Other important uses include LCD display screens and a host of different chemical, pharmaceutical, biocide and animal nutrition (particularly in emerging markets) applications. A potential major new use as an agricultural fumigant (methyl iodide) has been approved for a one year trial period in the US.

Figure 2: Estimated Worldwide Commercial Uses, 2006

Source: Armour Associates; Atacama Minerals; Kanto Natural Gas; SQM; Mirabaud Securities.

Iodine is a rare and expensive chemical, with a wide range of commercial uses.

Human & Animal Nutri tion

13%

Catalysts13%

Pharmaceuti cals12%

LCD Screens8%

O thers14%

Biocides & Herbicides

18%

X-ray Contrast M edia22%

Iodine enjoys a wide variety of commercial uses and this breadth of utility gives it multiple sources of demand growth.


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Demand for iodine is growing strongly at around 4% to 5% a year and this trend is set to continue, driven by increased healthcare expenditure in countries such as China and India, and explosive growth from LCD manufactures. Major consumers, including North America and Europe, are largely reliant on imports to meet demand, and in most cases, there is no viable substitute. (More information on iodine consumption can be found in Appendix 3).

Positive Price Outlook

Surging demand has driven the price of iodine to record levels. By the end of 2007, producers were reporting prices in the range of US$25-29/kg. However, the actual spot price is somewhat difficult to monitor as the majority of iodine production is sold under long term contract.

Figure 3: Crude Iodine Prices

Source: US Geological Survey, 2008; Mirabaud Securities estimates.

While recent years have seen soaring demand and prices, the 1980s and 1990s did see considerable price volatility. The global economic downturn in 1989-1992 contributed to softer prices, while oversupply (due to a sell-off in now depleted US Government stockpiles) suppressed prices in 1998-2003. Although cyclical price shifts remain possible in the future, we believe that several key factors serve to limit the downside risk.

Firstly, the fact that iodine demand is evenly spread across a wide range of highly differentiated sectors provides a degree of protection against downswings. Secondly, because demand is so fragmented, this enhances the ability of the small number of large producers to control pricing, with iodine prices typically negotiated on a contractual basis adding to the inflexibility of the global market. Thirdly, with iodine generally only used in tiny quantities, it typically represents just a small portion of the total cost of applications, and therefore higher prices are unlikely to dampen demand significantly. Finally, increasing demand from new sectors, in particular from LCD flat-screen televisions and possibly methyl iodide usage, suggests a sharp fall in prices is unlikely.

Producers express confidence that strong demand and high capacity utilisation will maintain the upwards pricing trend towards and above US$30/kg in coming years. Independent experts Armour Associates concur with this view, estimating prices at US$29/kg in 2008 and US$30/kg in 2009, rising to US$33/kg in 2010. Furthermore, none of these estimates reflect the potential impact of methyl iodide as a fumigant.

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Iodine prices have risen in recent years on the back of strong demand growth.

The structure of the iodine market should provide price support in the event of an economic slowdown.


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The Atlantis Prospect: twin revenue streams

Iofina plc (“Iofina”) is an exploration and production company focused on the development of unconventional natural gas resources, and the parallel production of iodine. To date, the company has leased c.40,000 acres of land in northern Montana, just south of the Canadian border, which forms part of a “structure” which Iofina has called the Atlantis Prospect.

Figure 4: Location of Atlantis Prospect

Source: Iofina.

The Atlantis Prospect gas accumulation is controlled by artesian pressure rather than any structural or stratigraphic closure. It lies between two large, conventional gas fields: Milk River 150 km to the north has already produced more than 5 tcf of gas; Bear Paw 35 km to the southeast has produced in excess of 1.5 tcf. Given the proximity to existing gas fields and infrastructure, it is not surprising that the Atlantis area has been extensively explored, with over 200 wells drilled to date by a variety of industry players. However, a commercial discovery has remained elusive. While all the wells in the prospect area have produced gas, it has been associated with large volumes of water, which is costly to handle, and has prevented the commercial development of these resources.

Iofina proposes a solution to this problem which involves converting the cost of handling the water into a revenue stream in its own right. The unique chemistry of the formation water is the key to cracking this conundrum. The water contains a relatively high concentration of iodine (around 50 to 60 parts per million – roughly 1,000 times the concentration found in seawater) and unusually low salinity (only one sixth of that found in seawater), making it ideal for Iofina’s proprietary iodine extraction technology. This is essentially a low tech, electrolysis based process which offers significant cost savings over competing technologies. Although this dual approach to natural gas and iodine extraction has been successfully employed in Japan for more than 50 years, it has not been used directly in the US before.

Atlantis Prospect Reservoir Geology

The primary reservoir targets of the Atlantis Prospect are the Cretaceous Eagle and Virgelle sandstones. These sands are interbedded with layers of marine shale over a gross interval of around 300 ft, lying at a depths of between 950 ft and 1,400 ft. The reservoir section has variable porosity (up to 36%) and permeability (up to 4,000 milidarcies) and contains both dissolved and adsorbed natural gas.

Iofina intends to produce both natural gas and iodine from the unconventional Atlantis Prospect in northern Montana.

The Atlantis Prospect lies between the highly productive Milk River and Bear Paw gas fields, but due to the high water cut, the Atlantis Prospect has not been commercially developed.

The shallow-lying Eagle and Virgelle sandstones make up the Atlantis Prospect.

The unconventional reservoir at the Atlantis Prospect contains iodine-rich water and both dissolved and adsorbed gas.


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In a conventional field the gas migrates up-dip and collects above the water in the reservoir, but in the Atlantis Prospect the opposite is happening. The gas is held, locked in place and prevented from migrating upward due to water pressure and capillary resistance between the sand grains. This is demonstrated in the schematic diagram below of the Milk River gas accumulation which has a similar trapping mechanism. Here the gas reservoir is formed in fine-grained sediments where the structure flattens out, creating capillary forces which exceed the buoyancy of the gas (the red zone in the diagram below). The relatively poor reservoir quality means that the water cut tends to be low – which is generally a good thing – but Iofina is targeting the areas where the reservoir quality is better because it wants high water flow rates in order to maximise the rate of iodine extraction. This would be represented by the green zone on the schematic chart below.

Figure 5: Atlantis Prospect Regional Geology: Milk River Gas Pool

Source: Iofina.

Within this zone, the contrasting coarser and finer-grained rock types are inter-mixed and the gas content is much lower; the capillary forces being not quite strong enough to trap free gas. The result is a thick package of sands containing iodine-rich brine with dissolved gas as well as low permeability shales and siltstones containing some adsorbed gas. Through high volume water production, the reservoir pressure can be lowered, releasing the adsorbed gas – a process described later in the note.

Analogies in Japan

Although differences exist, the gas fields in Japan’s Chiba basin, such as the 13 tcf Mobara field, offer the best analogies to Iofina’s Atlantis Prospect. Clastic sediments and mudstones in the Chiba Basin east of Tokyo have produced significant quantities of gas and iodine from shallow brine-filled sediments. Natural gas production curves from these fields often demonstrate the same “negative decline” curve exhibited by shale gas and coal bed methane reservoirs. In 1990, Japan’s production from such unconventional reservoirs was 18.7 bcf per year – 28% of the total gas production in Japan. Analysis by Ryder Scott in 2005 suggested similarities between the Eagle and Virgelle formations and the Mobara field in Japan. Both fields are dipping monoclines with varying degrees of dip, and the depth of the Atlantis Prospect is also comparable.

The Atlantis Prospect shares many features with the prolific Mobara gas and iodine field in Japan.


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Resource Estimates

Estimates of total in-place resource size and potential cumulative production at the Atlantis Prospect have been calculated by independent auditor MHA Petroleum Consultants. These figures are based on a land bank of only c.28,000 acres, compared with Iofina’s current acreage position of c.40,000 acres and potential acreage in excess of 300,000 acres in the overall Atlantis Prospect.

Iodine: Chemicals industry consultants Armour Associates estimate that the iodine concentration of brine in the Eagle and Virgelle formations averages 47 ppm and 53 ppm respectively. These figures were used by MHA to calculate the iodine resource potential of Iofina’s acreage. MHA assumed that the iodine-rich brine is present in the higher-porosity sandstone layers and that these layers make up 50% of the gross interval. MHA also assumed that due to the presence of a very active regional aquifer, four times the volume of water directly under the Iofina licence area can be recovered, since extracted volumes will be continually replenished. Based on this volumetric analysis, MHA estimates an indicative iodine-in-place figure of 100,600 tonnes. However, although this is described as an in-place number, this figure factors in the 70% extraction rate assumed by both Iofina and Armour Associates.

To calculate a recoverable resource figure, MHA has used a production-based approach rather than a volumetric approach. MHA has calculated the amount of iodine that would be recovered from the 1,164-well drilling programme, assuming each well produces at an initial rate of 600 barrels of water per day, and then applying various decline rates. The mid-case assumes a decline rate of 2.3% per annum after five years which suggest that a total of 37,200 tonnes of iodine will be produced over the 40 years for which the model has been run. It should be stressed that the field is still economic after this period and the cut-off is purely arbitrary. In the US licences are held by production; as long as you are producing, you get to keep the acreage.

Natural Gas: MHA has taken a different approach to calculating natural gas resource figures. MHA determined that about 14% of the estimated in-place gas resource is dissolved in the water, assuming a dissolved gas yield of 5 standard cubic feet per barrel (scf/stb). This equates to an estimated 21.9 bcf of dissolved gas. The remaining estimated total gas is adsorbed in less permeable siltstone layers. Using data from the analogous Chiba basin fields in Japan, MHA has assumed that maximum gas adsorption in the rock is 24 scf/tonne. This gives an estimate for the adsorbed gas-in-place at 133.7 bcf.

Together, these volumetric estimates of dissolved and adsorbed gas-in-place amount to a total in-place resource of 155.6 bcf, which MHA says represents a contingent resource under SPE classifications. It should be noted that under the SPE classification system, it is not possible to include gas or water volumes that are not located directly under Iofina leases, even though it is possible that a greater volume will ultimately be recoverable, due to reservoir recharge. We therefore believe that these gas resource estimates can be seen as conservative.

MHA’s mid-case production forecast for natural gas indicates cumulative production of 98.0 bcf, implying a recovery rate of 63%. (This production-based estimate is calculated exactly as for iodine, but with an additional 4.5% per annum decline rate for gas production applied after five years).

Figure 6: Resource Estimates Gas Iodine

In place 156 bcf 100,600 t

Rec. factor 37% 63%

Recoverable 98 bcf 37,200 t

Source: MHA; Armour Associates.


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Gas and Iodine Production

With well drilling costs of around US$50,000, and quick drilling times of only three days per well, Iofina should have no difficulty in bringing production of gas and iodine from the Atlantis Prospect on-stream in 2008. If key challenges, such as water handling, are overcome, peak output of nearly 1,100 tonnes of iodine and over 13 million standard cubic feet per day (mmscf/d) of gas is expected in 2013 (based on the current acreage alone) and is likely to be followed by relatively slow rates of decline.

Production Mechanics

In line with test-well data and extensive technical analysis of comparable reservoirs, we understand that production from the Atlantis Prospect occurs as a two-stage process (illustrated in figure 7). In the first stage, large volumes of brine, containing dissolved gas, are produced, principally from the more porous sandstone layers of the reservoir. This causes a pressure decline in the reservoir, triggering the second stage of production, when the majority of the gas resource, held through adsorption in the less permeable siltstone layers, is released. This gas is believed to flow into the more permeable sandstone layers, which act as conduits to the production wells, in a process similar to that seen in methane-producing coal seams.

Figure 7: Diagram of Production Mechanism

Source: MHA Petroleum; Mirabaud Securities.

Extraction Processes

At the surface, the extraction of the natural gas requires just a simple separator. As the formation water reaches the surface, the drop in pressure allows the natural gas to escape – similar to the “fizz” when a carbonated drink is opened (see figure 8 on the next page). All that needs to be done to collect the gas is to flow the water into a separator where the released gas can be collected and transported to the export pipeline.

The gas content of the water is relatively high – totalling around 25 standard cubic feet (scf) per barrel – and it is actually possible to ignite the water and gas mixture as it flows out of the well bore. (The photo in figure 8 fails to do the spectacle justice).

Gas and iodine production from the Atlantis Prospect should be relatively inexpensive and technically undemanding.

As water is produced to the surface, the natural gas can be extracted with a simple separator.

SILTSTONE

SANDSTONE

SILTSTONE

SANDSTONE 2. As reservoir pressure falls, gas released from adsorption in siltstone layers flows into adjacent sandstones and then into the wellbore.

RESERVOIR INTERVAL

1. Iodine-rich brine with dissolved gas flows from sandstone layers.

WELLBORE


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Figure 8: “Fizzy water” and “Burning water”, Atlantis Prospect, Northern Montana

Source: Mirabaud Securities.

Once the natural gas has been separated, the iodine-rich brine is then treated, before the iodine is extracted, and the remaining water is injected into a deeper formation.

Figure 9: Gas and Iodine Extraction: Schematic Diagram

Source: Iofina; Armour Associates; Mirabaud Securities.

Brine

Gas

Separator

Iodine Extraction

Facility

Injection Well

Adsorption column charge with Iodine

Extracted Brine

Natural Gas Compressor

Gas Lift

Brine Lines

Stripping Facility

Production wells c. 10 per cluster,

depending on water injection rate

to market via pipeline


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Iodine extraction from the produced brine will be carried out in the field using Iofina’s proprietary Wellhead Extraction Technology™. This process is a modification of the Ion-Exchange Resin method (see Appendix 4). The procedure, which is unique to Iofina, brings several clear safety, environmental and cost-efficiency benefits over existing extraction techniques, and has been proven in field trials in 2007.

Iofina plans to develop the field with clusters of production wells. Each cluster of around eight to ten producers will include an in-field iodine extraction plant and water injection well. The size of the clusters may vary, depending mainly on injection well capacity. Due to their simple design and shallow depth, the wells will be quicker (one every three days) and cheaper (only US$50,000 per well) than most traditional oil and gas wells.

Iofina will need to dispose of the large volumes of processed water, without returning it into the producing Eagle and Virgelle formations, which might prevent the necessary decline in reservoir pressure required to optimise gas production. The company is planning instead to inject the brine into the deeper-lying Bow Island, Sawtooth and Madison Formations. Although this approach has not yet been field tested, water injection is standard practice throughout the oil and gas industry. Other options are also under consideration, including purifying the water for agricultural use, which could prove relatively cheap due to its low salinity and could introduce a new revenue stream which would help offset any additional cost.

Figure 10: Atlantis Prospect, Production and Water Injection Formations

Source: Iofina; Strand Partners; Mirabaud Securities.

Production Estimates

The production rates of gas and iodine are linked to the volume of brine produced. We have conservatively assumed that brine production will average 600 bpd (Iofina’s Mendell Jorgenson #1 test-well achieved production of 1,000-2,000 bpd). Analysis carried out by MHA suggests that brine production depends on the rate of reservoir recharge from the regional aquifer and is likely to decline modestly at between zero and 4.6% per year. It is likely that gas lift will be introduced in the latter years to minimise further the decline rate.

Iofina has said it plans to drill a total of 1,164 production wells, but we have opted to use a wider well spacing, although to be conservative, we have maintained the same

Iofina’s proprietary iodine extraction process offers clear benefits over rival technologies.

Iofina intends to inject waste water into deeper formations.

The rate of decline in water production is expected to be between zero and 4.6% per year.

Eagle

Bow Island

Virgelle

Madison

Sawtooth

CRETACEOUS

MISSISSIPPIAN

JURASSIC

1,000 ft

2,000 ft

3,000 ft

4,000 ft

Gas & Iodine Production

Water Injection

approx. depth


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level of production per well. Based on the current land bank of around c.40,000 acres, we have assumed that a total of 900 production wells will be drilled over the period, at a spacing of 40 acres per well. We have also assumed that water production will decline at 2.5% per year, while natural gas output will fall by an additional 4.5% annually. This may prove conservative as the gas volumes could actually increase through the life of the well as the formation pressure is progressively lowered. In our base case, we see peak gas production of around 13 mmscf/d in 2013.

Figure 11: Gas Production Profile

Source: Mirabaud Securities estimates.

For gas transportation, Iofina currently owns a four mile pipeline that has existing capacity of 3 mmscf/d without compression or line looping. The pipeline is already connected to a major transportation line (the Trans-Canadian pipeline) offering Iofina access to liquid markets, with gas sold into the Chicago market.

Figure 12: Iodine Production Profile


We foresee iodine production rising to a peak of nearly 1,100 tonnes annually in 2013, based on the current land bank. The company has already negotiated a contract to sell up to 250 tonnes of iodine a year with H&S Chemical. Looking ahead, Iofina may also consider a move into the US$2.5-3.0bn iodine derivatives market, where significantly enhanced margins are possible.

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Valuation

Core Valuation: US$91 million (£46 million)

We have modelled Iofina’s gas and iodine producing assets using a standard discounted cash flow methodology. Our US$98.8 million valuation of the Atlantis Prospect is calculated using a 10% discount rate, a long-run natural gas price of US$7/mcf (forward strip to 2010), and a flat Iodine price of US$28/kg. We have then applied a 90% completion risk factor, and made a small adjustment for cash and warrants to derive our final risked core valuation of US$91.1 million (£46.1 million).

Figure 13: Core NAV 10% discount rate Unrisked Risked

Asset Interest Bcf (1) Tonnes (2) US$m £m CoS(3) US$m £m

Atlantis prospect 100% 61 16,495 98.8 50.1 90% 88.9 45.0

Add: Net cash 2.0 1.0 2.0 1.0

Add: Warrants 0.1 0.1 0.1 0.1

Core value 101.0 51.1 91.1 46.1 Source: Mirabaud Securities estimates. (1) Bcf of gas, net to Iofina; (2) tonnes of iodine, net to Iofina; (3) chance of success.

Our valuation is considerably lower than MHA, which has calculated a mid-case NPV10 of US$171 million. The main reason for the difference is that our model runs for only 20 years and does not capture the full benefit of the production tail. This effectively acts like a risking mechanism and reduces the cumulative recovered gas and iodine to 61 bcf and 16,495 tonnes respectively (compared with MHA’s mid-case assumptions of 98 bcf and 37,200 tonnes). The other key difference is the use of inflation adjusted cost and commodity price inputs in MHA’s model. There are also small differences in the pace of the roll-out, the number of wells and the overall acreage exploited.

Sensitivity Analysis

The tables in figure 14 show the sensitivity of our valuation to fluctuations in the price of US gas and iodine.

Figure 14: Gas and Iodine Sensitivity Analysis Gas price

US$6.00/mcf US$6.50/mcf US$7.00/mcf US$7.50/mcf US$8.00/mcf US$8.50/mcf

8% 103 108 113 118 123 128

10% 83 87 91 95 100 104

12% 67 70 74 78 81 85 Iodine price

US$24/kg US$26/kg US$28/kg US$30/kg US$32/kg US$34/kg

8% 96 105 113 121 129 137

10% 77 84 91 98 105 112

12% 62 68 74 80 86 92 Source: Mirabaud Securities estimates. NB: values in US$m.

Atlantis Cash Generation

Due to the early stage of Iofina’s business, the company will be valued primarily on a DCF calculation. However, the business becomes cash generative within 12 months and future cash flows benefit from only a moderate decline in production once the peak has been reached in 2013. Using our core valuation to derive an EV, we estimate that the business is trading on the following cash flow multiples.

Our DCF valuation of Iofina’s gas and iodine output is US$91 milion.


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Figure 15: Cash Flow Multiples 2008 2009 2010 2011 2012

EV/CF from operations 147.0x 17.6x 7.0x 4.3x 3.2x

EV/FCF NA NA NA NA 5.4x Source: Mirabaud Securities estimates.

Strategic Value

As discussed earlier in the note, we believe that Iofina is unlikely to remain an independent entity in the medium term as it emerges as a global iodine producer. Based on the current acreage position, we estimate that Iofina could be producing around 4% of current worldwide iodine output within the next five years. The Japanese are perhaps the most likely buyers as they already produce iodine from brines in Oklahoma and are suffering from declining domestic production. However, if Iofina starts to threaten the pricing control of incumbent producers, a buyer could come from any corner of the market.

We believe that Iofina’s business will attract a strategic premium over and above any cash flow derived valuation of the Atlantis Prospect. The first thing to consider is the company’s proprietary technology, which is lower cost than the Japanese method of extraction, but similar in its approach. Although it is not patented and could be copied, this would require in-depth knowledge of the extraction technique, which remains a trade secret.

Secondly, Iofina is in the process of significantly expanding its land bank in the US and therefore its long-term production potential.

Thirdly, Iofina has ambitions to expand into the highly profitable and much coveted iodine derivatives market. The company’s CEO, David Schneider, was the founder and former president of H&S Chemical, a manufacturer of speciality chemicals – including iodine derivatives – which was acquired by Syrgis Companies in 2005. At present, this US$2.5-3.0bn marketplace is controlled by the major vertically-integrated iodine producers.

Figure 16: Iodine Transactions Buyer Seller Year Transaction details US$m Capacity* Deposit

Kanto Natural Gas Toyota Tsusho 2007 Acquired 2% stake in Nihon Tennen Gas 1 24 t/yr Brine

SQM DSM Fine Chemicals 2006 Acquired iodine unit, DSM Minera 72 2200 t/yr Caliche

Atacama Minerals AFC Minera 2005 Acquired residual 50% interest in Atacama 16 360 t/yr Caliche

SQM PotashCorp 2003 Acquired iodine unit, PCS Yumbes 35 170 t/yr Caliche

SQM Cosayach 2001 Failed transaction to purchase Cosayach 140 2300 t/yr Caliche Source: Armour Associates; Companies; Mirabaud Securities estimates. *Capacity acquired, not necessarily indicative of actual production levels.

There have been a number of M&A transactions in the iodine market over the past decade. However, most of the deals involve related parties and cannot be relied on as valuation markers. There is also the added complication surrounding different types of iodine deposits, the value of any other commodities co-produced with the iodine, and the method and cost of extraction. These aspects vary considerably from company to company and it is therefore difficult to derive a read-through valuation for Iofina. For what it is worth, the table above shows a summary of recent deals in the sector and figure 21 in Appendix 2 shows the major producers and their market values. In both tables, the production capacity numbers are not necessarily indicative of the actual level of production, but we have included these in the absence of any reliable data on reserves and production.


16

Risk Factors

Overall we regard Iofina’s business as relatively low-risk, having access to a substantial resource base in a known geological setting with favourable fiscal terms. We also remain comfortable with the extraction technique and believe it has been effectively demonstrated to work in the field. Perhaps the biggest challenge facing the company is ensuring the smooth logistical roll-out of the development plan.

Technical and Operational Risks

The unconventional nature of Iofina’s approach to gas and iodine extraction inevitably involves some technical and operational risk, though we believe Iofina should have the necessary expertise and resources to overcome these challenges.

Scalability: Iofina has proven that its iodine extraction technology works in the field; however, for commercial production to be established the equipment does require a further degree of scaling up.

Pace of roll-out: Our modelling assumes that Iofina will drill 900 wells in the next five years. While the wells are quick to drill – typically taking less than three days – this still represents a major logistical challenge.

Water injection: As part of the production process Iofina will need to dispose of large volumes of water – on our numbers more than 0.5 million barrels per day by 2012. We have assumed that this will be injected into deeper reservoirs; this is yet to be field-tested. As an alternative, Iofina is looking at ways to lower the salinity of the water to a level that would enable it to be used for agriculture.

Money and Market Risks

Commodity Markets: Iofina could be affected by fluctuations in the price of natural gas or iodine. However, several factors should mitigate these market risks: firstly, the many varied uses of iodine should provide price support in the event of an economic downturn; secondly, the dual revenue streams should provide a cushion against an unexpected drop in the price of one of the commodities; and thirdly, Iofina’s low production costs make it better positioned in a downturn.

Currency: Iofina plans to report its financial results in pounds sterling, while many gas and iodine industry contracts are denominated in US dollars. Fluctuations in exchange rates between these currencies may impact financial results and could also have an adverse effect on income or asset values.

Fiscal and Regulatory Risks

Regulatory: While political and legal conditions in the US and Canada are clearly stable and reliable, new, amended or reinterpreted legislation could adversely impact Iofina’s operations and financial performance. The regulatory risks associated with iodine itself are minimal and Iofina CEO David Schneider has extensive experience in the manufacture of iodine derivatives involving the handling of domestic and foreign iodine shipments. Regulatory change could conceivably curtail the use of iodine in certain applications (though, equally, it could create new uses for iodine, as has recently been the case with the approval of methyl iodide for use as an agricultural fumigant).

Tax: There is currently no state levy on iodine revenues, besides corporation tax; were this situation to change, it could reduce the overall profitability of the project.


17

Financial Summary

Iofina’s financials are driven primarily by revenues and costs incurred from the development of the Atlantis Prospect. Our P&L does not include any upside in relation to further acreage acquisitions over and above the c.40,000 acres assumed in our model.

We expect revenues and profits to peak in 2013. However, one of the unique attributes of this project is the relatively modest production decline rate, which significantly enhances the long term profitability of the business.

Figure 17: Profit & Loss Statement FYE 31st Dec (IFRS) 2007A 2008E 2009E 2010E 2011E 2012E

Iodine production Tonnes NA 30.7 159.4 404.7 748.1 1,024.0

Wellhead price US$/kg NA 28.0 28.0 28.0 28.0 28.0

Gas production Bcf NA 0.1 0.7 1.8 3.3 4.6

Wellhead price US$/mcf NA 8.4 8.2 7.7 6.0 6.0

Total revenue US$m - 2.0 10.3 25.3 40.8 55.9

Cost of sales US$m - (0.2) (1.0) (2.6) (4.9) (6.8)

Royalty US$m - (0.2) (1.1) (2.9) (4.5) (6.6)

Administrative expenses US$m (0.8) (1.0) (1.0) (1.0) (1.0) (1.0)

DD&A US$m - (0.1) (0.5) (1.3) (2.3) (3.2)

Interest US$m 0.0 0.0 - - - 0.3

Profit/(loss) before tax US$m (0.8) 0.6 6.7 17.5 28.1 38.6

Tax US$m - (0.2) (2.7) (7.0) (11.2) (15.4)

Profit/(loss) for the period US$m (0.8) 0.4 4.0 10.5 16.9 23.1


Iofina raised US$2.7m after costs in November 2007. To take into account future capital needs, we have designed our model to inject funding (see Funding requirement in Figure 18) as and when required.

Figure 18: Cash Flow Statement FYE 31st Dec (IFRS) 2007A 2008E 2009E 2010E 2011E 2012E

Profit/(loss) before tax US$m (0.8) 0.6 6.7 17.5 28.1 38.6

DD&A US$m - 0.1 0.5 1.3 2.3 3.2

Operating cash before WC US$m (0.8) 0.7 7.2 18.7 30.4 41.7

Changes in working capital US$m 0.5 - - - - -

Interest adjustment US$m (0.0) - - - - -

Tax paid US$m - (0.0) (2.1) (6.0) (9.6) (13.6)

Net cash flow from operations US$m (0.4) 0.7 5.1 12.7 20.8 28.1

Capex US$m (0.0) (6.8) (15.4) (22.6) (31.8) (11.7)

Cash (outflow) inflow after Iivestments US$m (0.4) (6.1) (10.3) (9.9) (11.0) 16.4

Funding requirement US$m 2.7 3.5 10.3 9.9 11.0 -

Cash (outflow) inflow after financing US$m 2.4 (2.6) - - - 16.4



18

Appendix 1: Valuation Assumptions

Roll-out: we are modelling a total land bank of 40,286 acres, of which 90% will be drilled using a well spacing of 40 acres. We estimate that five clusters (50 wells) will be drilled in 2008 with each rig taking around one month to drill a cluster. In 2008 one rig will be operational, in the second year two rigs, in the third three, with a final rig added in year four. Peak drilling activity occurs in 2011 when we assume 32 clusters will be completed.

Gas and iodine yield: We assume that each cluster produces 6,000 bpd of water which remains flat for the first five years, then declines at 2.5% per annum thereafter. For the first five years the gas content of the water is assumed to be stable at 25 cubic feet per barrel, but thereafter it declines at 4.5% per annum. For iodine, we assume a yield of 5.6 grams per barrel which is maintained at the same level for the life of the well.

Operating costs: The principal operating costs relate to the cost of water injection and replacement of the resin column. We assume that the cost of water handling is US$25 per 1,000 barrels which includes the cost of electricity plus the maintenance of the pump. Meanwhile, we believe the cost of stripping the resin columns will be around US$2 per kg of iodine produced. We have also included a work-over cost of US$10,000 per well, assuming that each year 10% of the wells that have been producing for more than three years will need to be worked over. In total this equates to just over US$8,500 per well in 2012. Finally, we have assumed a G&A cost of US$1 million per annum.

Capex: We are assuming costs of US$50,000 to drill a production well and US$150,000 to drill a larger-bore injection well, including the cost of an injection pump. We are assuming that each cluster of ten production wells requires an iodine plant at a cost of US$200,000 plus US$50,000 to connect the cluster to the pipeline. We assume that four drilling rigs will be purchased in total, at a cost of US$1m per rig. We are assuming that a single iodine stripping plant will need to be built at a cost of US$250,000 and that a new export pipeline will need to be added in 2011 at a cost of US$1m.

Pricing: For the natural gas, we are using the NYMEX strip out to 2010 and then US$7/mcf flat nominal. We assume the realised price at the wellhead is 85% of the NYMEX price. For iodine, we are assuming a flat nominal price of US$28/kg.

Royalty: We assume an industry standard 1/8 royalty on the natural gas revenues and a 3% royalty on the iodine revenues.

Tax: We are assuming a state tax of 0.76% on gross natural gas sales in the first year of production from any given well, increasing to 9.26% thereafter. We understand that there is currently no state levy on iodine revenues.

We assume that all capital costs are depreciated on a straight line basis over 12 years and that a corporate tax rate of 40% will be applied to the business.


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Appendix 2: Iodine – Global Production and Competition

Global Production

Iodine producers have reported iodine demand is growing at around 4% to 5% per year, and the consensus in the industry is that this rate of growth will be maintained over the coming decade. In response to this worldwide demand growth, production levels have risen significantly, doubling over the last 20 years, according to US Geological Survey data. (The USGS is one of the few sources of global industry data).

Figure 19: Global Iodine Production

Source: US Geological Survey, 2008; Mirabaud Securities.

Iodine is present in many forms worldwide, but because it is usually present in very low concentrations, there are few areas in the world where iodine can be economically extracted. For instance, large quantities of iodine are present in seawater, but in concentrations of around 0.05 ppm which makes extraction uneconomic.

Figure 20: Global Iodine Production (tonnes)

Source: US Geological Survey, 2008; Mirabaud Securities. †2005 data.

The two major sources of industrial-scale iodine production today are the unique nitrate deposits (caliche) in the Chilean desert and subsurface brines associated with

Iodine can only be economically extracted in a few areas where it occurs in high concentrations.

0

5

10

15

20

25

30

1970 1975 1980 1985 1990 1995 2000 2005

thou

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tonn

es

2006 & 2007 estimates

Chi le, 5,000

Chi le, 16,500Japan, 5,500

Japan, 8,800

US, 1,320O thers, 1,290

O thers, 1,500US†, 1,570

1997 2007

W or ld , 13,110

W or ld, 28,370

World iodine production is heavily concentrated in Chile and Japan.


20

natural gas deposits, principally in Japan. Global output is dominated by these two countries: in 2007 they constituted around 90% of worldwide production; some sources put their market share even higher.

Powerfully positioned, vertically-integrated, producers dominate the world market. Chile’s Sociedad Química y Minera de Chile (SQM) has emerged as the largest single global player, holding 34% of the global market, according to its own November 2007 figures. Along with a handful of rival Chilean and Japanese producers, NYSE-listed SQM has a dominant position in the marketplace, giving it increasing control over production levels and pricing, and recent takeover activity suggests the company is keen to maintain this position. Figure 21 shows the largest global iodine producers.

Figure 21: Major Iodine Producers Mkt Cap Capacity*

Name Listing US$m Tonne/Yr Iodine Assets / Region Deposit

SQM US/Chile 7,262 10,000 Tarapacá and Antofagasta, Chile Caliche

ISE Chemical Japan 155 3,600 Chiba, Japan & Oklahoma, US Brine

Cosayach Private, Chilean owned NA 3,000 Tarapacá and Antofagasta, Chile Caliche

Godo Shigen Sangyo Private, Japanese owned NA 2,400 Minami Kanto gas field, Chiba, Japan Brine

Iochem Private, Japanese owned NA 1,400 Oklahoma leases, US Brine

ACF Minera Private, Chilean owned NA 1,400 Tarapacá and Antofagasta, Chile Caliche

Kanto Natural Gas Japan 371 1,200 Mobara gas fields, Chiba, Japan Brine

Nihon Tennen Gas Private, Japanese owned NA 1,200 Mobara gas fields, Chiba, Japan Brine

Atacama Minerals Canada 84 1,000 Aguas Blancas mine, Chile Caliche Source: Armour Associates; Companies; Mirabaud Securities estimates. *NB: capacity is not necessarily indicative of actual production levels.

Chile

SQM and other Chilean producers, such as privately-owned Cosayach, have benefited from large, easily accessible reserves and relatively low production costs. In Chile, which produced around 16,500 tonnes in 2007, iodine is usually a co-product in a process that extracts iodine, alongside sodium nitrate (used in fertilisers), from nitrate ores in deposits located in the northern provinces of Tarapacá and Antofagasta. The extensive iodine-bearing nitrate ores occur in a belt several hundred kilometres long and tens of kilometres wide. Caliche ore layers are typically 1-3 metres thick, flat lying or gently dipping, and near the land surface. SQM claims to have exploitation and exploration rights over approximately three-quarters of all existing economically viable deposits of caliche, while Atacama Minerals recently announced a big increase in its ore reserves. The caliche contains iodine as calcium iodate in concentrations averaging 300-600 ppm and crushed caliche is leached to produce an iodine-rich solution. (More information on iodine extraction methods can be found in Appendix 4).

Caliche deposits originate in the unique environment in which they were accumulated and preserved. The conditions for their creation include an extremely arid climate, slow accumulation of materials starting in late Tertiary (Miocene) through Quaternary times, and a paucity of nitrate-utilising plants and soil micro-organisms. As a consequence of the unique nature of these environmental conditions, the discovery of similar deposits elsewhere in the world is considered unlikely.

Chilean producers have in the past enjoyed a cost advantage in iodine extraction, owing to the high iodine grades of caliche ore and the efficiencies in surface mining and heap leaching. However, in 2006-07 rising energy prices and the appreciation of

Following recent industry consolidation, a small number of producers dominate Chilean production.

Chile is the world’s largest iodine producer; the mineral is extracted from caliche ores.


21

the Chilean peso against the dollar saw operating costs rise. For the first quarter of 2007, iodine production costs at Atacama Minerals averaged US$12.24/kg, according to the company, which is investing in more efficient equipment in an attempt to reduce its costs. However, Atacama’s costs are high by Chilean standards; currently the Atacama region caliche ore remains the lowest cost production route in the world although Iofina’s production costs look set to be even lower.

Japan

Japan is home to around 30% of global output, totalling around 8,800 tonnes in 2007, according to USGS data. Unlike in Chile, the iodine is not mined but instead is found in natural brines where the concentration is typically 100-150 ppm – some 2,000-3,000 times greater than that found in seawater. The brines are recovered alongside natural gas, with most of the production concentrated in the Chiba prefecture, near Tokyo. Japanese producers have historically experienced higher operating costs than in Chile, owing to their higher labour and energy costs. Most Japanese production, by producers such as Ise Chemicals, Godo Shigen Sangyo and Kanto Natural Gas, is exported to the United States and Western Europe. While most large Japanese producers appear to be separate, they are in reality tied together by a common and overlapping shareholder base, reinforcing their market position.

Unlike Chilean caliche deposits, Japanese iodine-bearing brines are not unique. In addition to the iodine-rich brines which have been commercially exploited in the United States, a number of other areas have been identified with similar geological characteristics to the gas fields of Japan. These areas, such as the Cagayan Valley in the Philippines, the Cholan Formation in Taiwan, and the southwestern part of New Zealand’s North Island are, theoretically, potential sources for dissolved gas and iodine. However, we are not aware of any attempts to develop iodine-rich brines commercially at these locations in the short or even medium term.

United States

Iodine production in the United States currently accounts for less than 6% of global output. The USGS reported that US production of 1,570 tonnes in 2005 was slightly exceeded in 2006; figures for 2007 are not available. Unlike in Japan, existing US iodine extraction is not directly associated with natural gas production – the iodine-rich brine is acquired from neighbouring gas producers. Three companies produce iodine from iodine-rich natural brines in the deep subsurface of the Anadarko basin of northwestern Oklahoma. These brines have an iodine content of around 300 ppm and occur at depths between 2,000 and 3,000 metres.

All three US producers were either established or acquired by Japanese firms. Woodward Iodine Corporation was initially a joint-venture between two American companies. It was bought in 1984 by Asahi Glass which sold it to Japanese iodine producer Ise Chemicals in 1994. Another Oklahoma producer, Iochem, is part of the Toyota Tsusho Corporation. The third US producer, North American Brine Resources (NABR) was established as a joint-venture by Japanese Iodine producer Godo Shigen Sangyo, Mitsui and Co., and a US firm. NABR, which produces only small quantities of iodine from waste brine associated with oil, was acquired by Japanese private investors in 2002. In addition, Oklahoma-based iodine derivatives producer, Deepwater Chemicals, was bought by Japan’s Tomen Corporation in the 1990s, and is now a subsidiary of the Toyota Tsusho Corporation.

In Japan, iodine is produced from brines associated with natural gas deposits.

The US accounts for only around one twentieth of world production.

Japanese companies have a long history of involvement in US iodine production.


22

Other Countries

Despite growing demand, China has no major domestic iodine production. The mineral is still extracted from seaweed in small volumes by a large number of small-scale producers, many based in Qingdao, which use highly labour-intensive processes (including harvesting the seaweed by hand) to produce small quantities of iodine, as a by-product of the production of food additive sodium alginate. According to USGS data, China represents only 2% of global iodine production; no great increase in production from this source is anticipated.

Iodine is currently produced in Turkmenistan from brine associated with oil and gas fields. The government has announced ambitious plans to raise domestic iodine production levels, currently around 270 tonnes/year, to 1,700 tonnes/year by 2010.


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Appendix 3: Iodine – Global Consumption and Demand

Iodine has a wide range of commercial uses, several of which have seen strong growth in recent years. In many cases, no adequate substitutes for iodine exist; for example, other substances cannot replace its application in many pharmaceutical, catalytic, photographic, and human and animal nutrition uses. Bromine and chlorine could be substituted for most of the biocide uses of iodine, but they are usually considered less environmentally friendly.

Figure 22: Estimated Worldwide Commercial Uses, 2006 Share of Consumption Approx. Consumption

Commercial Application % tonnes/year

Contrast Media (X-ray, CT Scan etc.) 22 6,275

Biocides and Herbicides 18 5,125

Human and Animal Nutrition 13 3,700

Industrial Catalysts 13 3,700

Pharmaceuticals 12 3,425

LCD Screens 8 2,275

Others 14 4,000 Source: Atacama Minerals; Kanto Natural Gas; SQM; Armour Associates; Mirabaud Securities.

Because iodine absorbs X-rays and is harmless in small quantities, it is used extensively in applications requiring contrast media, such as X-rays and CT scans, which are one of iodine’s major and growing uses. More medical tests on an aging population will result in increased demand for iodine-containing X-ray contrast media, which could see growth of 4-5% per year, according to the USGS. SQM reported that the demand in this sector grew by 6% in 2006 and remained robust in 2007.

Iodine is used in biocides and disinfecting chemicals, notably in the water treatment market. Expansion in this sector is expected, with further growth anticipated in Asia, particularly in the treatment of municipal water supplies. For example, in China, the introduction of child healthcare programs has seen the treatment of drinking water with iodine to prevent disease becoming a national concern. Iodine-based biocides are also used for their disinfectant properties in a variety of cleansing applications in hospitals, dairies, laboratories and food-processing plants.

Demand for iodine has also increased in other more traditional applications. For example, iodine is used as a catalyst in the chemicals industry, particularly in acetic acid production. Acetic acid is used to make polyester for plastic bottles and in the production of polyvinyl acetate. Annual growth in this market is approximately 3%.

The rapidly expanding market for liquid crystal displays (LCDs), as a technology preferable to plasma screens, has made electronics the fastest-growing sector for iodine consumption. Current LCD technology demands the incorporation of optical polarised film into the display structure, and the production of this film requires iodine. According to SQM, demand for iodine for the production of LCDs increased by nearly 30% in 2007 as worldwide LCD-TV shipments rose to an estimated 62.5m units (up 57% year on year).

Such dramatic growth rates are unlikely to be sustained, but the increasingly competitive pricing of LCD products – especially larger flat-screen televisions – is expected to keep sales growth in the LCD-TV sector in double-digits over the next five years. In 2007, manufacturers of LCDs said that production was outstripping the supply of key components including polarising films, which were now in high

The global iodine market has grown rapidly in recent years, owing to strong demand from such uses as X-ray contrast media, water purification and LCD manufacturing.

LCD screens for computer monitors and flat screen TVs have been a key driver of iodine demand growth in recent years.


24

demand. Overall, the outlook for iodine demand growth from this sector is expected to remain very positive; possibly averaging 30% annually in the coming years.

Recently, in October 2007, the US Environmental Protection Agency (EPA) approved the use of methyl iodide (iodomethane) as an agricultural fumigant, for a one-year trial. Methyl iodide can be injected into the soil to kill insects and weeds prior to planting such crops as peppers, strawberries and tomatoes. The compound was developed to replace methyl bromide, which is one of the world’s most heavily used pesticides, but contributes to degradation of the ozone layer. The EPA concluded that, within strict guidelines, methyl iodide is safe to use at 50-175 pounds of product per acre. Usage at these rates in the replacement of methyl bromide would create additional US demand for several thousand metric tonnes of iodine in the first year alone. If final approval is granted, methyl iodide would represent a huge new growth area for iodine use, in the US and worldwide.

Longer-term potential growth areas include the use of iodine in promising emerging technologies such as conductive polymers and fuel cells – though these developments remain speculative.

For some other uses of iodine, growth prospects are weaker. Photography, notably, is one of the oldest uses of iodine, but the development of digital imaging technologies has curtailed demand for wet-processing film in photography and video applications.

Regional Consumption Patterns

Because of the uneven distribution of iodine production around the world, a high proportion of output is traded. The main trade flows are, unsurprisingly, from Chile and Japan to Western Europe, North America and mainland Asia. Consumption levels in the United States have long outstripped domestic production, and US iodine imports are the largest of any country in the world. In the past two decades, imports have increased from 3,200 tonnes in 1987 to over 6,500 tonnes of iodine in 2007 – well over a fifth of total global output.

Figure 23: US Iodine Imports

Source: US Geological Survey, 2008.

Although starting from a small base, Chinese imports of iodine increased 200-fold in the seven years from 1997 to 2004, and have continued growing into 2007 due to LCD production demand and a switch of manufacturing products from the US and Western Europe to China. Part of the increase in demand was due to the introduction of a salt iodization program, aimed at eradicating iodine deficiency which can lead to a variety of health problems. Imports into India tripled in the same period – a pattern that looks set to be repeated in many other newly industrialised countries.

Use of methyl iodide as an agricultural fumigant represents a huge new potential growth area for iodine.

0

1

2

3

4

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Appendix 4: Iodine – Extraction Technologies

Existing Extraction Processes

Iodine is found in nature as an inorganic salt, always in combination with other inorganic salts. Commercial recovery processes use techniques that separate these iodine inorganic salts from the non-iodine inorganic salts. The three processes currently used in industrial-scale production in Chile and Japan are the Blowing-Out method, the Ion-Exchange Resin method and the Leached Ore method (which incorporates the Blowing-Out method).

Blowing-Out Method: After removal of sand and other impurities by precipitation and separation of the iodine using an oxidising agent, the brine is exposed to air. This process takes advantage of the fact that elemental iodine has a high vapour pressure and is thus relatively easy to vaporise. Heat and air flow separates the iodine which is condensed and collected. This procedure requires relatively high capex and opex costs, and is suitable only for larger installations.

Ion-Exchange Resin Method: This method takes advantage of the fact that the more valuable ionic iodine can be selectively exchanged for other less expensive ions contained on a preparative ion exchange resin contained in a column. Sand and other impurities are removed by precipitation or filtration, before the iodine is separated from the brine by means of an oxidising agent and collected by adsorption on the ion-exchange resin. The iodine is separated from the resin by elution, crystallised, and refined. The elution of the resin produces a concentrated iodine solution. The advantages of this method include the relatively low cost of the facilities and greater flexibility in terms of scale, making it suitable for both large and small plants.

Iodine Recovered from Leached Nitrate Ores: In Chile, iodine is recovered from ores that contain iodates after the ore is treated with water from the ocean, which is pumped into large leach piles which contain nitrates and iodine in various stages of oxidation. Following this pre-treatment, extraction is carried out using the Blowing-Out method described above.

Iofina’s Wellhead Extraction Technology™

Iofina’s Wellhead Extraction Technology™ (WET™) is a modification of the Ion-Exchange Resin method. In this process, iodine-containing brine is chemically changed and made ready for the Ion-Exchange process by a chemical process that is managed with the application of electrical current. In this process the oxidation chemicals required to prepare the brine for adsorption are continually generated from the brine itself by the application of an electrical current.

This procedure is unique and brings many benefits. Typically, the Ion-Exchange Method is practised at acidic pH values and requires the handling of corrosive chlorine gas. The chlorine gas is used to oxidise iodine-containing brines to make the brine ready for adsorption on the ion exchange column. By contrast, the Iofina WET™ method is practiced at a relatively mild pH level made possible by the on-site generation of oxidant. This approach manufactures NaOCl from NaCl, which is already present in the iodine-containing brine produced in the field. This eliminates all the handling and site-safety complications of using chlorine gas, as well as alleviating the need to purchase expensive chemical oxidant. Finally, because extraction is carried out in the field, there are further savings in infrastructure costs.

Commercial iodine extraction techniques currently include Blowing Out and the Ion-Exchange Resin method.

Iofina’s unique, low-cost, proprietary iodine extraction technology is a modification of the Ion-Exchange Resin method period


26

A Proven Technology

The technology has been successfully tested in the field: a production unit using the Iofina WET™ method has been assembled and operated in the Atlantis area. The average yield of this production unit was higher than 70%; meaning that 70% of the iodine in the brine that passed through the production unit was recovered as elemental iodine.

Beginning in August 2007, field testing was carried out using a mobile iodine brine recovery unit, near the Mendell-American No. 1 D. Jorgensen well – one of four pilot wells already drilled by Iofina. Four eight-day cycles of iodine recovery were carried out and the detachable columns filled were shipped to H&S Chemical – the iodine off -taker – for evaluation and removal of the iodine contained in the recovery column. (The columns can be reused repeatedly without depletion of efficiency).

The WET™ technology was successfully demonstrated in the field during the four cycle run, and the iodine recovered was of good quality and has been used for synthesis by H&S Chemical on several iodide derivatives with results as good as standard retail iodine. Iofina believes that the ease of in-field operation confirmed the design performance of the recovery equipment with current automation levels, while the rapid training of the on-site non-technical personnel confirmed the validity of the simplified operational design.

Iofina should also be able to use the WET™ method on other fields and properties around the world. Independent experts Armour Associates have confirmed the performance of the WET™ approach, which is the most environmentally friendly of all known existing methods. Because of the multiple column design architecture, by which columns can be added or subtracted without affecting recovery rates, production can be efficiently scaled up or down in the field.

Iofina’s iodine extraction technology has been successfully field-tested.


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Appendix 5: Management

Dr David Schneider, Chief Executive Officer and President

Dr Schneider is a founder and former president of H&S Chemical, a manufacturer of speciality chemicals, of which the majority of the issued share capital was sold to Syrgis Companies in 2005. Dr Schneider has established extensive relationships with iodine buyers and sellers over the previous 20 years while President at H&S Chemical in the iodine derivatives markets. Dr Schneider earned a BS in Physics and Mathematics from Northern Kentucky University, an MS in Atomic and Molecular Physics from the University of Connecticut and a PhD in Chemical Physics from the University of Cincinnati. He has extensive experience in scale-up of chemical processes from laboratory to pilot to full scale production, and is the inventor on several chemical patents over the past ten years. Dr Schneider is responsible for company direction, new projects, product development and EPA registrations.

Lance Baller, Finance Director

Mr Baller is the former managing partner of Shortline Equity Partners, Inc., a mid-market merger and acquisitions consulting and investment company in the United States. He has actively served on the investment committees, audit committees, committees on corporate governance, compensation and benefits committees, executive committees, finance committees, committees on public policy and social responsibility, and on the board of directors of companies in Asia and United States. Mr Baller is also the former vice president of mergers and acquisitions, financing and corporate development at Integrated Biopharma, Inc and prior to this a vice president of the investment banking firms UBS AG and Morgan Stanley. He is the former chairman and current director of NetAds International, Inc. Mr Baller is on the board of trustees of Giant 5 Mutual Funds and also serves as the chairman of the audit committee and as the audit committee financial expert under the Sarbanes-Oxley Act of the United States for Giant 5 Funds.

Jeffrey Ploen, Non-executive Chairman

Mr Ploen is currently a director of Momentum Biofuels Inc., a biodiesel producer in Houston Texas. Mr Ploen is also a former director of Petro Uno, a Colombian oil and gas exploration company. He was the director of finance at Navidec, Inc., now BPZ, Inc (AMEX:BZP; market capitalisation of US$1.38 billion), having raised more than US$150 million in debt for the IFC (World Bank) and US$140 million in equity from institutional investors. Mr Ploen is the former CEO of Tamaron Corp., Paradigm Holdings, Inc. and Tonga Capital Corp., all of which were sold to or merged with substantially larger corporations.

Dr Christopher Fay CBE, Non-executive Deputy Chairman

PhD, BSc, C.Eng, FREng, FRSE, FICE, FEI

Dr Fay is currently the non-executive chairman of Expro International Group plc (LSE:EXR, market capitalisation of £1.34 billion), non-executive of Stena International Sarl, Conister Financial Group plc and of Anglo American plc (LSE:AAL, market capitalisation of £44.7 billion). Dr Fay is chairman of the S&SD Committee and a member of the remuneration and audit committees for Anglo American plc. From 1993-1998, Dr Fay was chairman and chief executive of Shell UK Limited, a leading integrated oil, gas and chemical company in the UK with a typical net income of £500 million on turnover of £9 billion per annum, annual capex of £900 million and 7,000


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direct staff. Dr Fay retired from the Shell Group in February 1999 after 30 years’ service. Dr Fay was non-executive director of The Weir Group plc 2001-03, senior non-executive director of BAA plc 1998-2006, during which BAA was sold for £10.3 billion to the Ferrovial Consortium, chairman of ACBE (Government Advisory Committee on Business and the Environment) 1999-2003 where Dr Fay championed the launch of the UK’s Emission Trading Scheme in 2002-03. Educated at Leeds University where he received a BSc and a PhD in civil engineering, Dr Fay was awarded a CBE in 1999 for services to the gas and oil industry.

Paul Mendell, Geologist & Co-founder

Mr Mendell is a self-educated petroleum engineer and geologist. He has been responsible for drilling and completing over 60 exploration and 50 development oil and gas wells in Oklahoma, Colorado, Montana, North Dakota, Kansas and Arkansas, and in Saskatchewan, Canada. Mr Mendell has formed and exited many businesses including: Mendell-Denver which was acquired by Prima Energy (the net return on capital was 6:1), Mendell Petroleum which was acquired by Gerrity (now Patina) (net return of 40:1 on capital in less than one year); Maxedon, a shallow gas discovery, which was acquired by Enron (net return of 16:1 in less than one year); and Cushing, a gas discovery which was acquired by Great Northern Natural Gas (net return on capital of 10:1 in less than one year).

RECOMMENDATIONS HISTORY

RATINGS, CERTIFICATION AND DISCLOSURE

RATINGS SYSTEM

BUY: The stock is expected to generate absolute positive price performance of over 20% during the next 12 months.

ACCUMULATE: The stock is expected to generate absolute positive price performance of 10-20% during the next 12 months

NEUTRAL: The stock is expected to generate absolute price performance of between 10% positive and 10% negative during the next 12 months.

REDUCE: The stock is expected to generate absolute negative price performance of 10-20% during the next 12 months

SELL: The stock is expected to generate absolute negative price performance of over 20% during the next 12 months.

RISK Qualifier: Speculative

Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in the stock may result in material loss.

INVESTMENT ANALYST CERTIFICATION

All research is issued under the regulatory oversight of Mirabaud Securities Limited

Each Investment Analyst of Mirabaud Securities Limited whose name appears as the Author of this Investment Research hereby certifies that the recommendations and opinions expressed in the Investment Research accurately reflect the Investment Analyst's personal, independent and objective views about any and all of the Designated Investments or Relevant Issuers discussed herein that are within such Investment Analyst's coverage universe.

INVESTMENT RESEARCH DISCLOSURES

The following disclosures relate to this document: 3, 8

1. This is a commissioned or a non-independent research note/comment.

2. In the past 12 months Mirabaud Securities or its affiliates have had Corporate Finance mandates or managed or co-managed a public offering of the relevant Issuer's securities or received compensation for Corporate Finance services from the Relevant Issuer, excluding acting as a corporate broker, on a retained basis, for the Relevant Issuer.

3. Mirabaud Securities expect to receive or intend to seek compensation for Corporate Finance services from this company in the next 6 months, excluding acting as a corporate broker, on a retained basis, for the Relevant Issuer.

4. The Investment Analyst or a member of the Investment Analyst's household has a long position in the shares or derivatives of the Relevant Issuer.

5. The Investment Analyst or a member of the Investment Analyst's household has a short position in the shares or derivatives of the Relevant Issuer.

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The Investment Analysts who are responsible for the preparation of this Investment Research are employed by Mirabaud Securities Limited a securities broker-dealer. The Investment Analysts who are responsible for the preparation of this Investment Research have received (or will receive) compensation linked to the general profits of Mirabaud Securities Limited.

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DISCLAIMER ISSUED BY MIRABAUD SECURITIES LIMITED, A COMPANY AUTHORISED AND REGULATED BY THE FINANCIAL SERVICES AUTHORITY. A MEMBER OF THE LONDON STOCK EXCHANGE

© Mirabaud Securities Limited. All rights reserved. Any unauthorised use or distribution is strictly prohibited. This document has been prepared and issued by Mirabaud Securities Limited or its associated companies and has been approved for publication in the United Kingdom by Mirabaud Securities Limited, a private limited liability company authorised and regulated by the Financial Services Authority. This document is distributed in Hong Kong by Mirabaud Securities (Asia) Limited, which is authorised as a licensed dealer in securities and regulated by the Hong Kong Securities and Futures Commission. Neither the information nor the opinions expressed in this document constitute or intend to be an offer, or a solicitation of an offer, to buy or sell relevant securities (i.e. securities mentioned herein and options, warrants, or rights to or interests in any such securities). The information and opinions contained in this document have been compiled from and based upon generally available information which Mirabaud Securities Limited believes to be reliable but the accuracy or completeness of which cannot be guaranteed. All comments and estimates given are statements of Mirabaud Securities Limited’s or an associated company’s opinion only and no express or implied representation or warranty is given or to be implied there from. All opinions expressed herein are subject to change without notice. This document does not take into account the specific investment objectives, financial status, attitude to risk or any other specific matters relevant to any person who receives this document and should therefore not be used in substitution for the exercise of judgment by such person. Neither Mirabaud Securities Limited nor any associated company accepts any liability whatsoever for any direct or consequential loss arising from the use of its advice or research publications save where such loss arises as a direct result of Mirabaud Securities Limited’s or an associated company’s negligence. Research publications are issued by Mirabaud Securities Limited or an associated company for private circulation to eligible counterparties, professional clients and professional advisers (“its clients”), and specifically not to private or retail clients. They may not be reproduced, distributed or published by you for any purpose except with Mirabaud Securities Limited’s express written permission. Mirabaud Securities Limited, an associated company, or their employees and officers may have a holding (long or short) in an investment which it knows will be the subject of a published research recommendation to clients. It may also have a consulting relationship with a company being reported on. Mirabaud Securities Limited or an associated company may also act as agent of its clients and may have or have undertaken transactions in investments covered by this document prior to your receipt of it. Additional information on the contents of this report is available on request.

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