Skye Resources Inc.

Skye Resources Inc.

September 26, 2006 07:30 ET

Skye Receives Feasibility Study Results

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - Sept. 26, 2006) - Skye Resources Inc. (TSX:SKR) ("Skye") today announced that it has received the results of the Feasibility Study for the ferro-nickel smelting project at its Fenix nickel property in Guatemala and the Preliminary Assessment for an expansion project using hydrometallurgical processing ("hydromet"). The Feasibility Study and the Preliminary Assessment ("the studies") were led by Hatch Ltd., an independent international engineering consultancy. The key consultants involved in the studies and their respective areas of responsibility are described below under "Qualified Persons and Data Verification".

"These studies support management's view that Fenix is one of the world's best high grade nickel deposits capable of being brought into production in the near term. With a base case nickel price of $5.00 per lb., a level well below today's prices, they confirm robust economics," said Ian Austin President and CEO of Skye Resources. "Completion of the feasibility study was the last condition for finalizing our acquisition of Fenix, and we are now poised to make the decision to initiate construction. The two projects would produce about 100 million pounds of nickel annually over at least 20 years, but they would consume less than half of the total resources identified so far at the project. This provides the potential to further expand the production rate, or to extend the mine life."

Highlights of the Studies
(All $ are US)
Ferro-nickel Project (Feasibility Study):

- An internal rate of return ("IRR") of 13.4% at a nickel price of
$5.00 per lb.;

- Net present value ("NPV") of $374 million calculated using an 8%
discount rate;

- Construction cost of $754 million, including $265 million for a new
power plant;

- Cash operating costs (after iron credits and before royalties) of
approximately $1.87 per lb. of nickel produced for the first 20
years after ramp up is complete (years 3 to 22). Cash operating
costs over the 30-year mine life are $2.01 per lb;

- A 30-year mine life, commencing in 2009, producing a total of
1.3 billion pounds of nickel, from an annual average of 1.37
million tonnes of ore grading 1.63% nickel. Average annual
production during the first 20 years after ramp up is 48.5 million

Hydromet Project (Preliminary Assessment):

- An IRR of 14.2% at a nickel price of $5.00 per lb. and a cobalt
price of $15.00 per lb;

- NPV (to start of construction) of $424 million calculated using an
8% discount rate;

- Construction cost of $858 million;

- Cash operating costs (before royalties) of approximately $1.38 per
lb of nickel produced, including refining costs and cobalt by-
product credits;

- A 20-year mine life commencing in 2012, producing a total of
1 billion pounds of nickel and 84 million pounds of cobalt from an
annual average of 1.76 million tonnes of limonite grading 1.33%
nickel and 0.12% cobalt.

Summary of Economics

Ferro-Nickel Project Hydromet
NPV @ 8% discount (Feasbility Study) (Preliminary Assessment)
@$5.00 per lb Nickel $374 million $424 million
@$6.25 per lb Nickel $789 million $781 million

Reserves and Resources

Based upon the Feasibility Study, a portion of the Fenix mineral resources has been reclassified as proven or probable reserves as follows:

Fenix Saprolite Reserves

Contained Ni
Reserves Tonnes (million) %Ni Tonnes
Proven 8.7 1.81 157,000
Probable 32.7 1.58 516,000
Proven and Probable 41.4 1.63 673,000

Fenix Resources (excluding proven and probable reserves)

Resources Tonnes (million) %Ni %Co
(1.5% Ni COG)(1)
Measured 8.7 1.79 (i)
Indicated 27.1 1.82 (i)
Measured & Indicated 35.8 1.81 (i)
Inferred 55.2 1.64 (i)
(1.25% NiEq(2) COG)
Measured 32.3 1.18 0.119
Indicated 0.8 1.12 0.112
Measured & Indicated 33.1 1.18 0.119
(1.6% NiEq COG) 17.3 1.30 0.099
(1.25% NiEq COG) 7.4 1.10 0.095
(i) not reported
(1) Cut-off grade
(2) Nickel Equivalent equals Nickel % plus 3 X cobalt %

The effective date of the mineral reserves is September 25, 2006. To Skye's knowledge, none of the resource and reserve estimates are materially affected by any known environmental, permitting, legal, title, taxation, socio-political, marketing, or other relevant issues. Mineral resources that are not mineral reserves do not have demonstrated economic viability.

Ferro-nickel Project (Feasibility Study):

Skye's ferro-nickel project, which uses conventional smelting technology, involves refurbishing and expanding the existing mine and plant which produced nickel matte from the project's saprolite resource from 1977 to 1980. Modifications to the plant include replacing the existing oil-fired dryer with a larger coal-fired unit, converting the existing oil-fired kiln to coal-firing, installing a second kiln and adding a ladle refinery to produce ferro-nickel. The existing electric furnace will be upgraded to 90 megawatts (MW), and a new 150 MW pet-coke fired power plant will be installed. Nearly all fuel requirements will be supplied by coal and pet-coke, thereby essentially eliminating the prior sensitivity of operating costs to the oil price.

The capital cost is estimated to be $754 million, with an intended level of accuracy of +/- 15%. This total includes direct costs of $455 million, indirect costs of $157 million, a contingency of $80 million and owner's costs of $62 million. The cost of the power plant including direct, indirect and contingency (which is included in these amounts) is $265 million (The capital cost estimate has a base date of January 2006, and no allowance has been included for price escalation or currency fluctuations).

Based on a nickel price of $5.00 per lb, an iron credit of $0.20 per lb. and royalties and other costs of $0.35 per lb, the ferro-nickel project's IRR is estimated at 13.4% and its NPV at $374 million with an 8% discount rate, and $195 million with a 10% discount rate.

Cash operating costs during the first 20 years after ramp-up have been estimated to be $1.87 per lb, (with an intended level of accuracy of +/-10%). In the base case, Skye has assumed a combination of trucks and barges for the transportation of bulk materials to and from the project. An all-marine transportation alternative would reduce operating costs by about $0.18 per lb. Operating costs have been calculated using estimates of long term pet-coke, coal and oil prices, but the study also estimates that costs in the first 20 years after ramp-up would be increased by approximately $0.36 per lb. if today's higher prices for those consumables were used.

The feasibility study shows, that of all the key parameters, the project's economics are most sensitive to nickel prices. At an average nickel price of $6.25 per lb. (being the average price of the past five years in 2006 dollars), the ferro-nickel project's IRR climbs to 18.3% and its NPV rises to $789 million at 8% or $528 million at 10%.

Basic engineering will begin shortly and, dependant upon a decision to proceed, procurement of major equipment would begin in early 2007. Based on the current project schedule, ferro-nickel production is scheduled to begin in early 2009 with full production expected to be achieved by 2012.

Hydromet Project (Preliminary Assessment):

Skye's hydromet project would expand annual output by an average of 49 million pounds beyond the ferro-nickel project's production. The new plant would employ high-pressure acid leach technology to process Fenix limonite resources producing a nickel/cobalt hydroxide intermediate for further refining. A sulphur-burning acid plant would produce sulphuric acid, to leach the plant feed, as well as by-product steam for use in the autoclaves and to supply approximately one-third of the power required for the hydromet project.

The Preliminary Assessment estimates the capital cost of the hydromet project to be $858 million, with an intended level of accuracy of +/- 25%. This total includes direct costs of $504 million; indirect costs of $179 million, owner's costs of $30 million and a contingency of approximately $145 million.

The IRR for the Hydromet project is estimated at 14.2%, at a nickel price of $5.00 per lb and a cobalt price of $15 per lb. The project has an estimated NPV of $424 million using an 8% discount rate, and $242 million using a 10% discount rate. As with the ferro-nickel project, the hydromet project is most sensitive to nickel prices. At an average nickel price of $6.25 per lb. (being the average price of the past five years in 2006 dollars), the hydromet project's IRR rises to 18.6% and its NPV rises to $781 million at 8% and, $533 million at 10% (All values calculated to the start of construction).

Cash operating costs (before royalties of $0.12 per lb.) are estimated to be $1.38 per lb of nickel, including refining charges of $0.75 per lb of nickel and net of cobalt by-product credits of $1.10 per lb of nickel.

The next steps in the advancement of the hydromet project include further engineering studies leading to a feasibility study, running a pilot plant, a continuation of the drilling program and conducting an environmental and social impact assessment. The Preliminary Assessment assumes that these will be completed to permit initial engineering and procurement to begin in mid 2009 with production beginning in 2012.

For purposes of the Preliminary Assessment, Skye optimized the hydromet ore feed by using a portion of the higher iron content resource (the transition zone, being the upper portion of the saprolite ore) currently assigned to be used in the ferro-nickel case, on the assumption that this material would be replaced from within the known saprolitic resources from other nearby areas. These other resources would be upgraded to measured or indicated for inclusion in the mine plan before the hydromet project proceeded.

Social and Environmental Issues

Fenix is being constructed to meet all key international benchmarks in particular the Equator Principles. With the implementation of appropriate impact mitigation strategies, the project will comply with all relevant Guatemalan laws and the International Finance Corporation (IFC) Performance Standards.

The Feasibility Study contains a social and environmental assessment summary, prepared by Klohn Crippen Berger Limited the lead consultant for the preparation of the project's Social and Environmental Assessment (SEA), which is scheduled for completion later this year. The summary notes that the major social and environmental issues have been addressed by the SEA.

Qualified Persons and Data Verification

The independent Qualified Persons (QP) for the purpose of National Instrument 43-101, Standards of Disclosure for Mineral Project) are:

(a) for the ferro-nickel project (Feasibility Study): (i) Andrew F.
Ross FAusIMM (CP) and P.Geo. (mineral resource estimates),and Phil
Morriss MAusIMM. (mining reserve estimates, mine plan, mine capital
and operating costs), both of Snowden Mining Industry Consultants
Inc. of Vancouver, BC; and (ii) Mark Sucharda, P.Eng., of Hatch
Ltd. of Mississauga, ON (process and infrastructure engineering and
cost estimation);

(b) for the hydromet project (Preliminary Assessment): (i) Andrew F.
Ross FAusIMM (CP) and P.Geo., of Snowden Mining Industry
Consultants Inc. of Vancouver, BC (mineral resource estimates);
(ii) Brian Krysa, P.Eng., of Hatch Ltd. of Mississauga, ON (process
and infrastructure engineering and cost estimation); and (iii) Jan
Sajer, P.Eng. of J. Sajer Engineering Services Inc of Burlington,
ON., (mining study);

(c) for the portion of the mineral resource estimates that is based on
the technical report dated July 4, 2006 filed at
August 17, 2006 entitled "Mineral Resource Estimate, Fenix Project,
Izabal, Guatemala, July 4, 2006", Andrew F. Ross FAusIMM (CP) and
P.Geo. and Dr. J. Paul Golightly, P.Geo., of Golightly Geosciences
Ltd. of Sudbury, ON; and

(d) for the portion of the mineral resource estimates (re-
classification of historic mineral resource estimates) that is
based on the technical report dated August 5, 2005 filed at on August 9, 2005 entitled "Fenix Nickel Project:
Nickel Laterite Deposits of the Lake Izabal Region, Guatemala", Dr.
J. Paul Golightly, P.Geo., of Golightly Geosciences Ltd. of
Sudbury, ON.

Dr. Paul Golightly, P.Geo., of Golightly Geosciences Ltd. of Sudbury, ON is the independent QP, as defined under NI 43-101, responsible for the quality control and verification of the drill hole data used by Snowden Mining Industry Consultants Inc. in the resource estimates. Details of the procedures for logging, sampling, density determinations, assaying and quality control measures are given on Skye's website:

About Skye

Skye is an international mining company focused on becoming a new mid-tier nickel producer. The Company conditionally acquired the rights to 70% of its Guatemalan lateritic nickel project (the Fenix project) in December 2004 and now owns 92.4%. It has just completed a feasibility study for a ferro-nickel operation using proven conventional smelting technology.

The estimates, projections and conclusions set out in the studies, which are summarized in this press release, are subject to important qualifications, assumptions and exclusions, all of which are set out in the studies. To fully understand the summary information contained in this press release, the Feasibility Study and the Preliminary Assessment, which will be filed on Sedar, should be read in their entirety.

All $ amounts are in 2006 US Dollars. IRR & NPV calculations are calculated on a real after tax basis assuming all-equity financing.

Cautionary Notices:

This news release may contain forward-looking statements including but not limited to comments regarding the timing and content of upcoming work programs, geological interpretations, capital and other costs and credits, timing for and results of feasibility study and other programs, receipt of property titles, potential mineral recovery processes, and other related matters. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in this news release. No representation or prediction is intended as to the results of future work, nor can there be any promise that the estimates and projections herein will be sustained in future work or that the projects will otherwise prove to be economic. The forward-looking statements included in this news release represent Skye's views as of the date of this news release. While Skye anticipates that subsequent events and developments may cause its views to change, it specifically disclaims any obligation to update these forward-looking statements. These forward-looking statements should not be relied upon as representing its views as of any date subsequent to the date of this news release.

Inco Limited, the former 70% owner of the facilities and mineral rights that comprise the Fenix project, takes no responsibility for nor makes any representation or warranty of any kind relating to any information contained in this news release.

The hydromet preliminary assessment is preliminary in nature, it includes inferred mineral resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves, and there is not certainty that the preliminary assessment will be realized.

All subsequent written and oral forward looking statements attributable to Skye or persons acting on its behalf are expressly qualified in their entirety by this notice.

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