A Message from the CEO - year 2009 in brief

During 2009, Endomines achieved several milestones on its path from an exploration company to the gold mining and production company, with a scheduled start-up of production estimated to begin by the end of 2010.

Key Events

A key accomplishment last year was securing the financing for the Pampalo Gold project. Endomines was granted a Finnish government grant of SEK 28 million in February 2009 for infrastructure construction at the Pampalo site, which was followed in October by the signing of a project financing facility of SEK 82 million from Nordea Bank, guaranteed by Finnvera plc, a specialized financing company owned by the State of Finland. A rights issue which raised SEK 179 million was subsequently successfully completed in accordance with the terms of the project financing. With these financing arrangements in place, the Board of Directors authorized the commencement of construction work at the Pampalo site.

A significant step leading to the prospect of profitable gold mine production at Pampalo was the completion of a new ore reserve estimate last April by external consultants. The Pampalo Gold project ore reserves were increased by 90%, thus enabling planning for a 6-7 years mining and processing operation. Planned production capacity is 230,000 tonnes of ore per annum and planned annual gold production 900-1000 kg. These new estimates strengthen the outlook for sustainable and profitable long-term gold production at the Pampalo project.

Other significant measures have been the signing of a purchase agreement for processing equipment from Metso Minerals as well as the ordering of a new power line to the mine, securing the necessary power supply.

Project status

With the progress that has been made during 2009, I am pleased to report that construction of Pampalo Gold mine is on schedule and in accordance with the budget that was indicated in the Prospectus for our rights issue at the end of the year. We are aiming to begin test production at the end of this year and then to increase production to full capacity from the beginning of 2011.

I am particularly pleased that Endomines has successfully concluded these critical steps towards start up of operations in the face of the particular challenges posed by the global financial crisis. This success is also in no small way due to the continuing trust and support of our major shareholders.

The Pampalo Gold project opportunity

A decade long gradual decline in mine produced gold was reversed in 2009, a consequence of development efforts materializing in the form of new mines, extraction of lower grade reserves at existing ones and reactivation of stalled operations. However, the relative share of mine supply declined from 69 % to 66 % of total supply of 3890 t (World Gold Council) as the strengthening appreciating price of gold increased the supply of recycled metal to 40 % of total supply, an abnormally high level on a historical basis.

The decline in mine supply since the year 2000 reflects the combination of ore grade deterioration at established operations as well as the escalation of costs. Even though gold has traditionally been the number one commodity in the exploration business, the level of exploration funding in the past, in the 1990´s in particular, has been far too low to support the required level of primary metals supply. From 2004 onwards, exploration and development funding has grown substantially, but the level is still deemed insufficient considering the escalation of costs.

The prerequisite for global supply growth is a steady flow of large new mines which are very capital intensive and often located in high risk regimes. Small and mid size projects in low risk regions became attractive propositions a few years ago, and the turmoil in the financial markets has further enhanced the value of projects and companies with low debt gearing. Endomines is in a perfect position to benefit from these trends in the gold markets in the coming decade, both timing- wise and from the standpoint of its capital structure, with its Pampalo mine due to come on-stream and with its additional resources along the Karelian Gold Line.

In addition, the impact of de-hedging by producers over the past decade has been pointed as a key factor that has supported the recent rise in gold price. This de-hedging process is now coming to an end. The global hedge book is now less than 10 % of what it was in the year 2000, and represents a mere 10 % of annual mine production of gold. Gold price development is now driven by physical supply / demand issues and economic and monetary considerations, rather than by volatile speculative changes triggered by hedge book movements. This is beneficial for producers like Endomines who can resort to various price hedging structures in the normal course of business and when it suits them best.

Endomines hedged 50% of its gold production at the end of last year, which was welcomed by our financiers and investors, as it significantly protects the company against any possible weakening of the gold price during our first years of production.

This year the company will be focusing on the construction and start-up of the Pampalo mine. Over the next few years, other deposits along the Karelian Gold Line will also be targeted for development as well as further exploration carried out with a view to increasing Endomines’ resources and reserves.

Personnel

The number of personnel at the end of 2009 was ten and at the end of this year there will be 70 persons working for the Pampalo project. As we approach start-up, we have started training process operators, laboratory workers and shall soon start the training of underground miners. As at the beginning of 2010, all necessary personnel has been recruited for the construction phase and running the Pampalo Gold Mine.

I am very pleased to report that we have had an excellent safety record so far with no accidents or Lost Time Injuries. Endomines promotes safe working practices, and the safety of our personnel is of paramount importance to us.

Outlook

Although gold production will be the main focus of the company in the near future, Endomines also owns mineral rights for significant ilmenite assets due for development in the future. Endomines’ fully held subsidiary, Kalvinit Oy, is unique in that it possesses the most advanced known ilmenite project within the European Union. Used in the production of titanium alloys, painting pigments and other industrial purposes, the European Union currently consumes c. 1-1.5 million tonnes of ilmenite concentrate per annum, all of which is imported. Endomines therefore has a significant logistical advantage to the main producers of ilmenite, mainly Australia, South Africa and Ukraine. During this year, the Endomines team and Board of Directors will be investigating various options on developing Endomines’ ilmenite assets company with a view to generating maximum value for our shareholders.

Looking back on an eventful and exciting year, I would like to take the opportunity of expressing my sincere thanks to my colleagues at Endomines for their excellent work, and our Board, our partners and in particular, our shareholders, for their continued support and commitment.

Pampalo, March 2010

 

Markus Ekberg
CEO