MAGONTEC LIMITED — AGM Information 2012

Nov 28, 2012

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Executive Chairman’s Address to Annual General Meeting 10:00 am Thursday 29 November 2012

Ladies and Gentlemen ,

We move now to a presentation on the activities of the company over the last 16 months and some more detail on our activities and projects in the coming period.

This time last year your company had just acquired the Magontec assets from Straits Resources. As we described at the time, the acquisition and the subsequent change of name from Advanced Magnesium Limited to Magontec Limited, underlined the ambition of the company to provide a more robust footing for our technology portfolio and our broader activities in the magnesium alloy industry.

Over the last 12 months we have realised much of that ambition. The newly named Magontec Limited is a leader among magnesium alloy manufacturers. We number among our customers the largest automotive manufacturers in the World. We have advanced our technology portfolio in a number of applications and we have concluded an exclusive Cooperation Agreement with the Qinghai Salt Lake Magnesium Company Limited, who will build the largest and greenest pure magnesium manufacturing facility ever constructed.

Without the acquisition of the Magontec assets we would never have been a contender for the role we now expect to play in this industry. Furthermore our ability to commercialise the old Advanced Magnesium technology assets would have been at best constrained, if not impossible, without the Magontec operating base.

So I want to make the point at the beginning of this address that the course we chose in acquiring the Magontec assets last year means that our many long-standing shareholders can look forward to a far brighter future for their company than might otherwise have been the case. Combined with the successful conclusion of the agreement with Qinghai, we now have a very exciting business opportunity ahead of us.

This is not to say that the last 15 months has been without its challenges. Magontec has not performed in the manner that we anticipated. This is reflected not only in the result for the year to 30 June 2012, but also in the actions we have taken through the period to reduce debt and restructure the business.

On an annualised basis interest costs will decline by more than 50% and loss-making activities will cease altogether by 31 March 2013. Your management team in Australia, China, Germany and Romania have put a lot of effort into reorganising Magontec so that it can be profitable.

Over the last few months as our Romanian business came on-stream and management changes in Germany began to take effect, our overall profitability has begun to improve. In Romania we have yet to fully commence anode manufacturing activities, which will

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provide significant additional profitability from this facility, and we are yet to conclude the re-organisation of our Chinese alloy manufacturing activities.

Magontec Limited FY 2012

MGL business objectives over the last 2 years

• Create a productive business on a profitable footing

− Exploit technology portfolio

− Grow margins and returns

• Create an environmental point of distinction

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2

16 months after acquiring Magontec we are on track to place the whole business on a sustainable and profitable footing in 2013. We have made significant strides in exploiting our technology portfolio and examining new technologies. We are now seeing margins expand and have a definitive plan to see them expand further over the next 24 months. And we are a company that has a very distinctive environmental edge in an industry that in general has been less green than many.

I want to show you a couple of charts that put your company into a better perspective.

First of all, the big picture - revenue and gross profit.

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A large and sustainable business
A platform for growth
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Gross Profit Revenue
$140 $10
$9
$120
$8
$100 $7
$6
$80 $5
$60 $4
$3
$40 $2
$1
$20
$0
$0 $1
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
REVENUE (A$ millions)
GROSS PROFIT (A$ millions)
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Your company was re-launched in 2005 as a company seeking to exploit a magnesium technology portfolio. It had no revenue and no profit at any level. This state of affairs continued until 2010/2011 when a 53% share in HNKWE, a magnesium alloy manufacturer in Henan Province, was acquired. While the company made some progress in this new structure it remained a small player, failing to achieve sustainable profitability and struggled to grow to an economic size. Over the last 12 months the cost structure of the industry moved against HNKWE and the emerging profitability of July 2011 quickly evaporated.

In July last year, with the acquisition of Magontec, we instantly became one of the largest magnesium alloy and magnesium anode manufacturers in the World. Our turnover today of over $100 million per annum is set to more than double in the next 24 months as we construct and then move to our new facility at Golmud in Qinghai Province.

Profitability as well as volumes will be impacted by the move to Golmud. We expect volumes to be nearly twice those of today and margins to benefit both from economies of scale and a highly advantageous operating environment.

Before we move on to take a closer look at the Golmud project I want to spend a few moments reviewing the current operating divisions and the short-term profit outlook.

Regional profitability 1 July to 31 October 2012 Vs Previous Corresponding Period

• ─ Improving trend in Germany

• ─ Romania building revenue and profit in alloys and anodes

• ─ China restructuring and other ‘one-off’ costs

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Regional EBITDA
$600
$400
$200
$0
$200
$400
Germany Romania China Total
1 July - 31 Oct 2011 1 July - 31 Oct 2012
4
A$ Thousands
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This chart shows Magontec Earnings Before Depreciation, Amortisation and Interest (EBITDA), an analysis that displays the underlying performance of each regional division. It includes all the ‘one-off’ costs that have been absorbed in these periods.

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This is a graphical illustration of the drag on our business from the start-up phase in Romania, the cost pressures that our Chinese business is suffering as it closes its old foundry at Xi’an and opens a new business in Shanxi Province and the steady but significant improvement in Germany.

Over the next two months to the end of 2012 and through 2013 Romania will become a more significant contributor (July was a start-up month that included significant final project payments) and our Chinese business is expected to recover to margins approaching those of 2011 and early 2012 as closure cost pressures abate.

Looking now at the group’s debt you will see that we are in a much improved position and likely to experience further improvement in the months ahead.

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Debt position following
Rights Issue and Debt Restructure Agreement
$45 500%
$40 450%
$35 400%
350%
$30
300%
$25
250%
$20
200%
$15
150%
$10 82% 100%
60%
$5 Before acquisition 50%
39% 22%
$0 0%
30-Jun-11 30-Jun-12 30-Sep-12 Pro-forma Pro-forma Full
Underwritten Subscription
Interest Bearing Debt Non-Interest Bearing Debt Convertible Loan Note 1
Convertible Loan Note 2 Net Debt/Equity Net Interest Bearing Debt/Equity
5
A$ Millions
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As we move into 2013 interest costs will decline markedly as a result of the debt restructure announced in October and secured by the capital raising that is currently underway.

Under the debt agreement with Straits, $4.6 million of the original debt of $13 million is forgiven, just under $3 million is, or has been, paid back to Straits and an additional $3.5 million is exchanged for a zero coupon convertible note. The remaining debt of $2.1 million will attract no interest.

The debt to equity ratio will likely fall below 80% and the interest bearing debt to equity ratio to below 40%.

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I wanted to make a couple of comments about the rights issue and of course, I am happy to take questions on this and other issues after the presentation.

Rights Issue

• A Renounceable Rights Issue in the ratio of

• ─ 5 new shares for every 9 existing shares at 5 cents per new share with

• ─ two free attaching options exercisable at 2c

• ─ to raise a minimum of $8.8 million

Proceeds of the Issue	Offer Fully Subscribed	Offer Subscribed to extent of Underwriting Only
Golmud Cast House	$9.4 million	$6.4 million
Repayment to Straits	$2.0 million	$2.0 million
Expenses of the offer	$0.4 million	$0.4 million
	______________	___________
Estimated Total	$11.8 million	$8.8 million

• ─ Allows Qinghai to make a major investment in Magontec without excessive dilution for existing shareholders

• ─ Options provide Rights participants opportunity to invest at an average price of 3 cents per share – a discount to the last traded price of 27%

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6
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The rights issue offers an opportunity for shareholders to fully participate at a time when the company is seeking to introduce a major new shareholder.

The issue is renounceable so that shareholders who choose not to participate do not forego the value of the rights entitlement.

The minimum raising will allow Magontec to repay debt to Straits, so that the debt restructuring agreement can be concluded, and build the Cast House at Golmud.

If Magontec does not raise the full amount sought, $11.8 million, it will need to find other sources of finance to complete the cast house.

These sources may include capital raised from exercise of options, debt raised against the Golmud Cast House or other assets and cash flow from the businesses other activities.

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Now I would like to move on to an overview of the group’s assets and a discussion of the Golmud project, which is so pivotal to your company’s future.

Magontec operational structure

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Magontec Limited (ASX Code: MGL)
Germany Romania China
Xian, Shanxi,
New Mg alloy
(Golmud from 2014)
Mg alloy recycling Bottrop Santana Suzhou
CCP (anodes) Bottrop Santana Xian
7
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As we have already discussed today, Magontec operates in Germany, Romania and China.

We manufacture new magnesium alloys in China and we recycle the scrap returns from our customers in China and Europe. We also manufacture magnesium and titanium anodes in Europe and China.

Magontec has about a 20% share of the global market in both businesses.

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We currently have productive capacity of 30,000 tonnes pa of new alloy in China and a total recycling capacity of over 25,000 tonnes pa in Germany, Romania and China.

Magontec locations and capacities

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112
Toronto
2 Bottrop Golmud
# Employees Santana Shanxi
HQ 30 Xian 93
Production 161
Suzhou
Sales Office
67
Technology Centre
Cast House Project
Alloy/Recycling Capacity
Anode Capacity
planned
Bottrop Santana Xi‘an Suzhou Shanxi Sydney
1 CAST is a Technology Association 2 kt = thousands of tonnes 15 kt 1 kt [2 ] 3 kt 1 kt 18 kt 1 kt 7,5 kt 30 kt CAST [1 ] 3
Business overview 8
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Our recycling operations are located close to our customers, who return scrap to Magontec for recycling, and our new alloy operations are close to pure magnesium production facilities to optimise transportation costs.

In 2014 we will move our new alloy production to Golmud where production economics will be superior to our existing locations and those of our competitors.

We currently employ 463 people at 8 locations around the world and take our responsibilities as an employer very seriously. We have an active health and safety program and make every attempt to ensure that employees in our metal handling areas wear appropriate clothing and are properly trained and supervised.

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Now a few comments on Golmud

Qinghai Salt Lake development – a A$9.1 billion project

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─ The Chaerhan Salt Lake - a major magnesium chloride resource
Golmud
Qinghai Project 9
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As you can see, Golmud is in a remote region. It is located on the Tibetan plateau about 3,000 kms from Shanghai and at an altitude of 3,000 metres. It is a very beautiful region with a growing tourist industry. It is also a rapidly expanding manufacturing location. It benefits from low taxes, cheap energy and an abundance of raw materials.

The Qinghai Salt Lake Industries Company Limited is spending A$9.1 billion to construct a multi-industry complex based on the Chaerhan salt lake. This magnesium chloride resource will provide the feedstock for both chloride based and magnesium industries.

Qinghai Salt Lake - project statistics

Total Qinghai project A$9.1 bn - Major MgCl2resource - Development by Qinghai Salt Lake Industry Co Ltd (QSLI) - Shenzen SX listed (000792.SZ) - 9 other major industrial facilities also under construction - including polypropylene, PVC, Calcium Chloride, Calcium Carbide, Sodium Hydroxide - Infrastructure – major rail, road and utilities networks already installed The Magnesium Project A$3.05 bn - Electrolytic production technology (ex - Norsk Hydro Bécancour) - Energy source: 75% hydroelectric - Lowest *GHG/CO2footprint Mg in China (less than aluminium) - First stage commencement 2014 - 150,000 metric tonnes pa - Final capacity 450,000 mtpa - equal to 64% of current World consumption - - - -

Magontec Cast House Project A$10.5 mn Magnesium alloy cast house for generic and specialist alloys 75% hydroelectric energy 56,000 mt pa Mg alloy capacity Building and land leased from QSLM

*GHG is Green House Gas

10

Qinghai Project

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The magnesium project alone will cost over A$3 billion. The construction of the first stage electrolytic smelter, by the Canadian engineering company Hatch, is expected to be completed in the second half of 2013 and the final project size of 450,000 metric tonnes per annum will make Golmud the largest magnesium project ever constructed producing the equivalent of 64% of current world consumption of pure magnesium.

The two most frequent questions I am asked are

• Who will buy all this material? and

• Why did they choose Magontec to be their partner?

• Both of which are excellent questions!

Since we announced our Cooperation Agreement with Qinghai we have been to visit all of our major customers in Europe and N America. The response to our announcement and the project has been overwhelmingly positive. Our customers are largely automotive and powertool manufacturers. Both industries are under extreme pressure to reduce CO2 emissions and to use greener and more recyclable products.

Another source of new demand will come from the Chinese domestic automotive industry. Today China produces 17 million cars a year, more than any other country. Few of these cars have any magnesium. State and national level government support for the Qinghai project is driven by a desire to see the Chinese automotive industry become greener and more efficient, addressing domestic pollution issues and vehicle quality issues as China looks to grow its automotive exports.

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Golmud will be the ‘greenest’ magnesium project in the
World
45
40 Tonnes of CO2 per tonne of magnesium
35 produced
30
25
20
15
10
5
0
Source: F.Cerubini et al/ Resources Conservation & Recycling 52 (2008) 1093 - 1100
Source: Simone Ehrenberger. German Aerospace Centre, Institute of Vehicle Concepts.
Qinghai Project 11
China Serbia Israel USA Kazakhstan Canada Russia Brazil Golmud (75% hydro) Ukraine
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The carbon footprint of magnesium manufacturing has long been inferior to aluminium, the principal competitor metal. Alone among Chinese producers Magontec alloys, produced from the Qinghai facility, will have a smaller carbon footprint than aluminium

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alloys and be available in such volume that we can expect to see a reduction in price volatility.

The carbon footprint is also attractive by comparison with magnesium produced by the Pidgeon Process. This chart shows the new Qinghai smelter in comparison with the average Chinese magnesium production facility and in comparison with smelters from every other region of the World. Because Qinghai uses a modern technology and renewable energy it will be the Worlds ‘greenest’ producer. Overall carbon emissions generated by applications made from Qinghai magnesium will be superior to all Pidgeon Process magnesium, to all magnesium produced elsewhere in the World and to all aluminium alloy production. Aluminium generates an average of 12 kgs of CO2 per kg produced.

And why did Qinghai choose Magontec? – Because we are the only magnesium alloy manufacturer with a truly global manufacturing, recycling and distribution footprint. Magontec provides Qinghai with a multi-lane highway to the global magnesium alloy customers and a suite of contemporary technologies to go with it. Qinghai immediately saw the value of Magontec’s offering and the utility of Magontec for their commercialisation phase. We expect these attributes to become increasingly evident to investors over the coming months.

Cooperation Agreement between MGL and Qinghai Salt Lake Magnesium Company (QSLM)

In June 2012 Magontec signed a Cooperation Agreement with Qinghai Salt Lake Magnesium Limited (89% owned by QSLI). Under this agreement

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QSLM will MGL will
- Supply pure magnesium - Finance and construct alloy casting
facility
- 30% shareholder in MGL
-
Have exclusive manufacturing and
- Director on MGL board commercialisation rights at Golmud
- Long-term fixed contract pricing - Market pure magnesium
- Incentives for volume sales. -
Rent land, building and office space
Off-take Price Agreement
Pricing formula references
- Asianmetal published market price for pure - discounts reflecting project economics
magnesium ! processing, energy, labour, transport
Qinghai Project 12
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The Cooperation Agreement provides Magontec with a strong basis for growth and profit improvement. To ensure that this Agreement is enduring we welcome today Mr Xie - the President of Qinghai Salt Lake Magnesium Company - to our board and we expect to see his company become an even larger presence on our share register as a result of their sub-underwriting of the rights issue.

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Under the Agreement Qinghai will supply Magontec with hot metal directly from their furnaces to our alloying production unit. We will enjoy energy inputs at the same marginal cost as our partner and a production process that removes significant costs by comparison with the older Pidgeon Process production method.

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Golmud Cast House – margin and revenue opportunities
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-
Magontec average magnesium alloy gross profit margin per tonne in 2012 was A$190
Gross profit margin (gross profit/tonnes sold) influenced by cost savings from
- Direct hot metal supply
-
Cheaper power (hydro electric)
- Reduced materials handling
- Location and scale effects
Absolute gross profit (total revenue less cost of goods sold) influenced by
added revenue from
-
Increased sales of high margin specialist products
-
Greater production flexibility
-
Greater capacity utilisation and capacity concentration
-
Net profit after tax at Golmud is expected to be influenced by the impact of
- Reduced labour rates
- Lower income tax rates
- Shared administration infrastructure
Qinghai Project 13
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Overall Magontec expects to derive considerable margin and revenue enhancement opportunities from its involvement at Qinghai in addition to those I have already mentioned. Other benefits include an enhanced ability to develop higher margin specialist products, improved production flexibility from a larger plant and other economies derived from partnering with a large and well-respected entity such as Qinghai.

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Lastly I would like to discuss the critical issue that underpins our corporate and industry growth expectations.

Automotive die cast alloys – Magnesium's growth sector

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600"
Die Cast alloy
500"
Forecast
400"
Aluminium Alloy
300"
Iron & Steel
200"
Die Cast Other
100"
Other
0"
Source: Clark & Marron
Industry drivers 14
2003"2004"2005"2006"2007"2008"2009"2010"2011"2012"2013"2014"2015"2016"2017"2018"2019"2020"2021"2022"2023"2024"2025"
Magnesium"('000's"tonnes)"
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Magontec is a manufacturer of magnesium alloys for the die-cast industry. As this chart displays, according to industry experts Clark and Marron, die-cast magnesium is expected to enjoy far stronger growth than any other magnesium sector, indeed higher than most other metals.

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The reason that Clark and Marron forecast this growth is because cars must become lighter and more efficient if they are to meet very stringent emission guidelines.

Vehicle emission legislation – global comparisons

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100 kg of weight reduction reduces ~10g of CO2 emission per kilometre
NEDC gCO2/km
Year US California Canada EU Australia Japan China S. Korea
2002 261 261 244 166 252 157 213
2003 259 239 164 156 232
2004 262 239 162 247 154 218
2005 253 237 161 245 153 214
2006 249 227 160 230 149 188 213
2007 243 158 226 147 207
2008 240 239 154 222 141 185 198
2009 213 146
2010 212 222
2011 228 221
2012 205 205
2013 198 198
2014 191 191
2015 181 181 130
2016 172 172 154 125 167 150
2017 162
2018 152
2019 143
2020 134 95 117
2021 126
2022 119 Actual
2023 112 Enacted Source: International Council on Clean Transportation
2024 105 Proposed
2025 99 Under study (All numbers rebased to New European Driving Cycle)
Under the EU ‘Cars Regulation’, fleet average for all new cars is 130g of CO2/km by 2015 - phased in from 2012 - and 95g/km
by 2020. The regulation is currently undergoing amendment in order to implement the 2020 target. Updated 30 July 2012
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By 2015 European cars must have CO2 emissions of less than 135 g/km and by 2020 less than 95g/km. These are ambitious targets, require significant improvements from current levels and failure to meet these targets will incur financial penalties that will run into millions of Euros.

‘Lightweighting’ cars is one way to do this and at 2/3 the weight per part of aluminium, magnesium is an obvious candidate. A US survey identified over 136 kilograms of weight savings through the replacement of aluminium, steel and zinc with magnesium. This level of weight reduction would remove 13.6g/km of CO2 emissions from the average European new car.

Not included in the Clark and Marron estimates is the impact of the Qinghai project. Qinghai will change the landscape of the magnesium industry forever. The product is greener, will come in larger volumes and will be available under longer-term contracts.

Contracts in our industry today are three to six months. Our customers would like to see 2 to 3 years. Under our agreement with Qinghai, and because of the nature of the Qinghai resource, we will be able to offer long-term contracts.

Our customers are excited that at last a supplier of magnesium alloy will offer supply certainty, volume and terms of trade that will enable them to specify magnesium for a much larger range of parts.

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So in summary

• ─ Magontec is to become the largest and ‘greenest’ magnesium alloy manufacturer in the World

• ─ Qinghai delivers a unique and exclusive platform for volume growth and margin enhancement

• ─ In Qinghai Salt Lake Magnesium, Magontec has a strong partner providing financial support and sponsorship in China

• ─ Over the last 12 months Magontecs underperforming businesses have been restructured and short-term profitability is set to improve