CAPRICORN METALS LTD — M&A Activity 2010

May 25, 2010

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26 May 2010

ASX Ltd 10[th] Floor, 20 Bond Street Sydney NSW 2000

Dear Sir,

MALAGASY ANNOUNCES MERGER TO CREATE DIVERSIFIED MADAGASCAR-FOCUSED RESOURCE GROUP

KEY ASSETS OF MERGED GROUP TO INCLUDE ADVANCED TOLIARA MINERAL SANDS PROJECT

Key Points:

• Malagasy Minerals agrees to merge with unlisted public company, Madagascar Resources

• Merger terms based on the offer of three (3) Malagasy shares for every one (1) Madagascar Resources share, plus half an option exercisable at 20 cents for every three (3) Malagasy shares issued

• Madagascar Resources’ key asset is the advanced Toliara Sands Project – JORC compliant resource of 710Mt @ 6.3% THM (Total Heavy Minerals) containing approximately 30Mt of ilmenite (see table below)

• An independent review of the Toliara Sands Project by TZ Minerals International Pty Ltd (TZMI) has indicated the potential for a viable Phase 1 project producing 200,000tpa of ilmenite and 23,000tpa of rutile/zircon concentrate – discussions are underway with potential off-take partners[1]

• The merged group will also have an extensive, nickel, copper, PGE and vanadium exploration portfolio as well as existing rental income from commercial property assets and labradorite royalties from quarrying operations in Madagascar

International minerals company Malagasy Minerals Ltd (ASX Code: “MGY”) is pleased to announce that it has reached agreement with the unlisted Madagascar-based Australian public company, Madagascar Resources NL, (“MRNL”) to merge the two companies to create a diversified Madagascar-focused resource group (“Merger”).

The Companies have executed a Merger Implementation Agreement (“MIA”) to effect the merger by way of a Scheme of Arrangement (“Scheme”) under which MGY will make offers to acquire all of the issued shares in MRNL.

The proposed Merger will combine MGY’s prospective portfolio of VMS copper, nickel-copper-PGE and vanadium exploration assets, as well as its strong logistics and operational base in Madagascar, with MRNL’s advanced Toliara Sands Project, located in the country’s south-west.

1 This is not a production forecast by the Company but an assumption used in the independent review by TZ Minerals International Pty Ltd.

Malagasy Minerals Ltd. (ACN 121 700 105), Suite 7, 11 Colin Grove, WEST PERTH WA 6005 Tel: +61 8 9463 6656, Fax: +61 8 9463 6657

This will give the merged group a mix of existing cash flow, near-term development potential in the mineral sands business, excellent exploration upside and a strong strategic position in Madagascar, which is attracting significant international investment in its emerging resource industry.

Merger Summary

The Merger terms are based on the offer of three (3) MGY shares for every one (1) MRNL share , plus half an option exercisable at 20 cents per share within a four year term for every three (3) MGY shares issued.

MRNL has a total issued capital of 51,364,870 shares and 8,750,000 options which are to be exercised or cancelled prior to completion. Assuming that all the options are exercised and the Merger is completed, MGY will issue up to an additional 180,344,610 shares and 30,057,435 options.

The merger is to be effected by a Scheme of Arrangement and is subject to various conditions including:

• satisfactory completion of due diligence by the Boards of both companies;

• approvals being received from the security holders of MRNL, MGY and the Court;

• all relevant regulatory approvals; and

• conditions customary for a transaction of this nature.

A summary of the conditions to the Merger and certain other key provisions of the MIA are contained in Annexure A to this announcement.

MRNL is an unlisted public company with 69 shareholders and which has been involved in Madagascar for over 16 years. Dr Peter Woods and Mr Guy LeClezio are directors of both MGY and MRNL and are therefore considered to be non-independent directors of MGY and have not been involved in the decision to merge.

On completion of the Merger, MGY will have a market capitalization of approximately A$13.75 million based on an MGY price of 5 cents per share, with MRNL shareholders holding approximately 65% of the merged capital as detailed below:

	Pre Merger	Pre Merger	Post Merger
	MGY	MRNL	MGY-Merged Coy
Ordinary Shares (millions)	95.0	60.1	275.4

Key Assets of the Merged Group

The key assets of the merged group will comprise:

• the advanced Toliara Sands Project, which has a JORC compliant resource of 710 million tonnes grading 6.3% THM (Total Heavy Minerals) containing approximately 30 million tonnes of ilmenite;

• three base metal exploration projects at Vohibory, Ampanihy and Fotadrevo targeting copper, nickel, PGEs and vanadium;

• significant commercial property assets and rental income derived from 19,000 square metres of land in the Madagascan capital of Antananarivo, where the Company’s administrative operations are based; and

• royalty revenues from Labradorite quarrying operations in the south-east of Madagascar.

Strategic Benefits

The independent directors of MGY believe that the combination of MGY and MRNL, should the Merger be approved, represents a strategic benefit to both companies.

MGY will benefit from the acquisition of an advanced project. MRNL will benefit from its project being combined within a listed company, while both companies will benefit from the combination of their complementary technical, operational and commercial skills with resultant economies of scale.

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Toliara Sands Project

MRNL has a significant mineral sand project located in the southwest of Madagascar known as the Toliara Sands Project (“TSP”) which includes the advanced Ranobe deposit and two other mineralized zones to the north (M-M area). Ranobe has a mineralized zone around 16km long, 1 to 2km wide and comprising three mineralized sand units. ( refer Figures 1 and 2 and Annexure B ).

Within this larger zone, detailed exploration was focused on the Upper Sand Unit at Ranobe resulting in a JORC compliant resource being identified as follows:

Upper Sand Unit	Tonnage THM (*) Slime Mt % %	Mineral assemblage % Ilmenite Zircon Rutile Leucoxene
Measured Indicated Inferred	209 7.44 4.08 320 6.09 4.02 181 5.32 4.76	64.65 5.65 1.88 4.97 65.68 5.58 1.97 6.08 65.79 5.64 1.88 5.08
Total	710 6.29 4.23	64.71 5.56 1.91 5.09

(*) Total Heavy Minerals

A review of the Ranobe project undertaken by MRNL and its consultants TZMI has indicated that a Stage 1, Phase 1 project would be potentially viable based on the development of 75 million tonnes at an average grade of 9.5% THM containing 4.6 million tonnes of ilmenite, with a 20 year mine life, yielding 200,000 tonnes pa of ilmenite and 23,000 tonnes pa of rutile/zircon concentrate.[2]

Discussions are currently underway with several potential off-take partners.

MGY believes that the combination of the MRNL assets and MGY’s existing projects at Vohibory, Fotadrevo and Ampanihy targeting copper, nickel, PGEs and vanadium will enhance the Company’s presence in Madagascar and its ability to achieve early development of its mineral assets. The merger of the two groups should result in a significant re-rating of the underlying value of the merged entity.

Funding

The Company is presently reviewing funding requirements and anticipates raising funds with the assistance of Australian broking firm Patersons Securities Limited. Further details will be provided in due course.

For and behalf of the Board

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Max Cozijn Director/Company Secretary

cc: Directors

Competent Persons Statement

The information in this report that relates to the Toliara Sands Project or Mineral Resources is based on information compiled or reviewed by Mr. Andrew Milne of GEOCraft Pty Ltd who is a Member of the Australasian Institute of Mining and Metallurgy and of the Geological Society of Australia. Mr. Milne has sufficient experience, which is relevant to the style of mineralisation and type of deposit under consideration and to the activities undertaken to qualify as a Competent Person as defined in the 2004 Edition of the “Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves”. Mr. Milne consents to the inclusion in the report of the matters based on this information in the form and context in which it appears.

2 This is not a production forecast by the Company but an assumption used in the independent review by TZ Minerals International Pty Ltd.

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Figure 1: Summary of combined MML and MRNL project holdings in Madagascar

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Figure 2: Detail view of Ranobe (Toliara Sands) Project as shown on Figure 1 above

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Figure 3: Detail view of Malagasy Minerals project holdings as shown in Figure 1 above

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Annexure A

Summary of Key Terms of Merger Implementation Agreement

MGY and MRNL have signed a Merger Implementation Agreement ("MIA") dated 25 May 2010 that sets out the obligations of both companies in relation to the proposed Merger.

A summary of the terms and conditions of the MIA are set out below. The full terms and conditions of the MIA will be provided in the Scheme Booklet to be available to MGY Shareholders. MGY Shareholders do not need to take any action at this time

Pursuant to the MIA, MGY will make offers to acquire all of the issued shares in MRNL in exchange for the issue of shares and options in MGY.

The Merger terms are based on the offer of three (3) MGY shares for every one (1) MRNL share , plus half an option exercisable at 20 cents per share within a four year term for every three (3) MGY shares issued.

Implementation of the Scheme is subject to a number of conditions including:

• an independent expert concluding that the Scheme is in the best interests of the MRNL Shareholders;

• satisfactory completion of due diligence by the Boards of both companies;

• MGY shareholder approval;

• MRNL shareholder approval;

• court approval in respect of the Scheme;

• all relevant regulatory approvals; and

• other conditions customary for a public transaction of this nature.

The parties have agreed to do everything reasonably necessary to implement the Scheme.

Key steps to be undertaken include:

• lodgment of Scheme documents with ASIC;

• MGY making the share offers under the proposed Scheme;

• obtaining Court approval to hold the Scheme meeting for MRNL Shareholders to vote on the Scheme respectively;

• obtaining MGY shareholder approval for the Scheme;

• obtaining MRNL shareholder approval for the Scheme; and

• if the MGY and the MRNL shareholders approve the Scheme, Court ratification of the Scheme.

The MIA provides that each party shall notify the other of any negotiations or discussions or any attempt or approach to initiate any negotiations or discussions in respect to any competing proposals for either company.

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Subject to the fiduciary or statutory obligations of the board of each party and the requirements of the Listing Rules, the parties agree that they will not, without the consent of the other party, solicit, encourage, invite or facilitate any negotiations or discussions with third parties in respect to any competing proposal or for the sale of assets.

A termination fee of $100,000 will be payable if a party terminates the agreement (other than for material breach of the other party) and also when:

• a material adverse change occurs in relation to a party;

• a material prescribed occurrence occurs in relation to a party; or

• a superior proposal occurs in relation to a party,

whereby non-terminating party or the party to whom the above events do not occur shall receive the termination fee provided that they have not failed to perform any material covenant under the MIA, no material representation or warranty made by them is untrue in any material respect and no material adverse matter (as defined in the MIA) has arisen in respect to them.

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Annexure B

Toliara Sands Project

Madagascar Resources NL (MRNL), through its Malagasy subsidiary Toliara Sands SARL (TSSARL), currently holds permits for the Toliara Sands Project (TSP) in south-west Madagascar, where a significant zone of heavy mineral sand mineralisation has been identified at Ranobe, around 40km north of the port of Toliara

To date a considerable amount of work has been completed at Ranobe including resource definition (JORC compliant resource estimates) and feasibility level study reports into processing, infrastructure, environmental and social matters. MRNL and TSSARL have subsequently undertaken a comprehensive review of the TSP, resulting in a smaller scale project concept that is considered to be a viable initial development with considerable scope for future expansion.

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Diagram 1: Landsat view showing the Ranobe deposit

The mineralised zone at Ranobe is of an appreciable size around 16km long, 1 to 2km wide and comprising 3 mineralized sand units. Within this zone, a JORC compliant resource of 710 million tonnes at 6.3% THM has been defined within the Upper Sand Unit.

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Diagram 2: Idealised cross section through the Ranobe Deposit showing the three mineralised units

A review of the initial mine plan and schedule has focused on a high value area capable of sustaining a rescaled mining operation for 20 years, with a view to reducing operating and capital costs by relaxing the restrictions that had been put in place during the initial study.

The re-scaled Ranobe project will satisfy the local and national interest, generate returns for investors and produce a long term reliable ilmenite supply to growing markets, especially China.

The first stage of the project focuses on 15km[2] area with Measured and Indicated Resources of 145 million tonnes at an average heavy mineral content 8.1% (see Figure 2 to ASX Release). Within this resource a Phase 1 project has been identified, with 75 million tonnes of 9.5% THM, capable of sustaining a mining operation of 3.5 million tonnes per year (450tph) for approximately 20 years.[3]

The heavy mineral consists predominantly of ilmenite making up about 65% of the concentrate. The project also benefits significantly from the presence of much higher value zircon and rutile which together contribute about 8% of the heavy mineral, but around 33% of the value.

Important features of the deposit that deliver significant advantages compared to many existing operations are the low slimes content in the ore (less than 5%) and the absence of barren overburden.

The global mineral sands industry mines an average ore grade of 5.6% heavy mineral with an overburden strip ratio of 0.4 and a contained value of US$6.60 per tonne of ore. By contrast, contained value of the first phase of the Ranobé deposit has the potential to exceed this value due to its grade, and there is no overburden to remove. This is the key to unlocking the project value.

3 This is not a production forecast by the Company but an assumption used in the independent review by TZ Minerals International Pty Ltd.

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US$/tonne
45
40
35
30
Industry curve
25
Industry average
20
Ranobe - Stage 1
15
Ranobe - Overall
10
5
0
0 10 20 30 40 50 60 70 80
Ore mined (million tonnes pa)
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Diagram 3: Ore contained value Ranobe compared with mineral sands industry average

The ore volume requirements for the project mean that the deposit can be economically mined using a simple front end loader direct feeding a slurry transport unit. This mining methodology is employed in many operations world-wide, and represents a very low risk option.

The primary concentrator plant will be based on easily relocatable plants widely employed in many Australian ilmenite mines.

Testwork conducted to date shows that the ilmenite consists predominantly of a product suitable for use in the TiO2 sulfate pigment process or in ilmenite smelters for the production of chloride grade slag. A smaller volume of higher value ilmenite suitable for direct chlorination or as a blend feed to synthetic rutile processors is also recovered. These products can be separated with conventional mineral sands processing technology at a low unit cost.

A simplified flowsheet will be employed to recover a mixed rutile/zircon concentrate suitable for shipment to Chinese processors, which have shown an increasing appetite for semi-finished concentrates.

Capital and operating cost estimates have been prepared by TZMI and are considered to be in line with similar minerals sands processing operations.

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Concentrator Mine
Truck New 40km road
HMC Toliara
Ilmenite 1
Ilmenite 2
rutile/zircon
concentrate Containers
Tailings
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Diagram 4: Simplified process flow diagram

MRNL has initated the search for an offtake partner interested in a long term supply of high quality ilmenite, initially at 200,000 tonnes per year, but with potential to increase this to more than double with incremental investment. Several Chinese groups have expressed interest in further review of the project.

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