Dear Sir / MadamQUARTERLY REPORT FOR THE PERIOD ENDING 31 MARCH...

Dear Sir / Madam
QUARTERLY REPORT FOR THE PERIOD ENDING 31 MARCH 2006
HIGHLIGHTS
Major events and achievements during the quarter ended 31 March 2006 were as follows:
􀂾 Commencement and progression of due diligence work program for the Cane River Iron Ore Project:
- Drilling commenced;
- Engineering firm appointed; and
- Experienced due diligence advisory team appointed.
􀂾 Announcement of Mineralogy’s separate transaction with Citic Pacific on the Central Block tenements at Balmoral, adjacent to the Southern Block tenements of which Sherlock is completing due diligence. This transaction is important as it may provide the port for which Sherlock will have access rights on a sharing capital and operating cost basis, assuming the Company successfully finalises its negotiations with Mineralogy.
􀂾 Appointment of Mr Paul Piercy to the Board.
􀂾 Metallurgical recoveries exceed expectations for Sherlock Bay Nickel Project.
SIGNIFICANT UPCOMING ACTIVITIES
􀂾 Finalisation of due diligence on the Cane River iron ore project.
􀂾 Announcement of resource on the Balmoral Southern Block.
􀂾 Completion of preliminary engineering study.
CANE RIVER IRON ORE PROJECT
As previously announced in the December quarterly report the Company has entered into an exclusive right to negotiate the purchase of the Cane River Project from Mineralogy Pty Ltd via its 100% ownership of Cane River Mining Pty Ltd.
Cane River Mining holds the rights to 400Mt of magnetite iron ore from granted mining leases on the Balmoral Southern Block and 100% of the iron ore on the Cane River tenement.
Sherlock Bay Nickel Corporation Limited March 2006 Quarterly Report
Page 2
Drilling Update for Balmoral Southern Block and Cane River Tenement
The cyclone season presented some challenges during the quarter due to multiple and extensive cyclonic rain events in the region. The Cane River area was most affected as access was difficult, resulting in a temporary suspension to the works until access conditions improved.
Fortunately the southern tenements at Balmoral provide for quicker and easier access following major rain events and hence the ability to switch focus allowed the work program to continue.
Subsequently the drilling at Balmoral is well advanced. The Company is still assessing the ultimate impact of these rain delays. It is expected an update of the due diligence work will be released shortly.
Engineering Team Appointed
The Company appointed Promet Engineers and Maunsell Australia Pty Ltd to complete a preliminary engineering study on the Balmoral South magnetite component of the Cane River project. This multi disciplinary team has extensive history with Mineralogy’s projects, completing the bulk of their feasibility work to date including:
- Capital and operating cost estimates;
- Public environmental reviews;
- Flow sheet designs;
- Site layouts; and
- Pilot scale testwork programs and analysis.
This history and knowledge provides the ability to fast track work associated with the Cane River Project and offers significant time and cost saving benefits.
Mineralogy and Citic Pacific Separate Agreement
On 31 March 2006, Mineralogy and Citic Pacific (“Citic”) announced a large transaction over the adjoining central block at Balmoral to that covered under Sherlock’s proposed rights on the Southern Block.
Under its agreement with Mineralogy the Cane River Project will have access to the port facilities on a shared operating and capital cost basis.
The Company believes this is a significant milestone for the development of the Cane River Project in that it provides the necessary infrastructure. This key milestone was expected to occur during the due diligence period.
Appointment of Director
In February, the Company was pleased to announce the appointment of Mr Paul Piercy to the Board. Mr Piercy is a metallurgist who has held senior management and technical positions within the Rio Tinto group during the 1980’s and 1990’s, including General Manager of Hamersley Iron’s Dampier port and rail operations, General Manager of Hamersley Iron’s Paraburdoo & Channar operations and Managing Director of Nova Coal and Kembla Coal & Coke. More recently Paul was Managing Director of Westrac Equipment from 1997 to 2000 before playing an integral role in the successful establishment of Westrac China, as its Chairman/CEO based in China.
Sherlock Bay Nickel Corporation Limited March 2006 Quarterly Report
Page 3
The appointment of Mr Piercy brings to the board considerable senior management expertise in iron ore mining, processing, logistics and marketing along with first hand experience of establishing a business based in China. This marks a significant step for SBNC in achieving its objective of becoming an iron ore producer and targeting the China market and other growth areas in energy and iron ore.
Appointment of Experienced Due Diligence Team
In February the Company appointed Mr Paul Piercy, Mr Jim Hammond, Mr Ross Engleman and RFC Corporate Finance Ltd as part of an advisory team to assist with the due diligence of the Cane River Project.
􀂃 Jim Hammond is a metallurgist with extensive experience in the processing of both iron ore concentrates (and pellets) and iron ore sintering. Jim held a variety of senior technical roles during a distinguished 32 year career with Hamersley Iron, including Manager – Technical Marketing from 1987 to 1998 in which he was responsible for all technical presentations and relationships with steelmaking customers in Asia and Europe. Prior to this Jim was heavily involved in Hamersley’s studies into various downstream processing options and the operation of its Dampier pellet plant. Jim also spent several years in pellet plant process design with Dravo Corporation in the US and nine years as a metallurgist at BHP’s Newcastle steelworks.
􀂃 Ross Engleman is an engineer with considerable expertise in process engineering, technical sales, feasibility study management and the commissioning of iron ore processing plants around the world. Ross’s career includes experience in steel mill operations with US Steel Corporation, a Director of Longworth & McKenzie (a major Australian consulting engineering firm) and Business Development Manager with Baulderstone Hornibrook.
􀂃 RFC, a specialist resources industry investment bank, will be the corporate advisor for the proposed acquisition. RFC will provide general assistance with the due diligence process, the negotiations with Mineralogy and the evaluation of funding alternatives.
Together these advisors bring considerable experience in iron ore mining, processing, marketing, infrastructure development, operational management, financial evaluations and project management.
SHERLOCK BAY PROJECT FEASIBILITY STUDY UPDATE
Metallurgical Recoveries Exceed Expectations
The Company is pleased to announce that final residue assays have been received from the column testwork on the Sherlock Bay ore. These recoveries, as detailed in Table 1, have exceeded expectations and support the Company’s confidence to continue with the feasibility testwork for the Project.
Table 1: FINAL MASS BALANCE
Column
Acid Consumption (kg/tonne)
% oxidation (recovery)
Ni
Co
Co
Fe
Symonds 6.3mm
147.7
91.43
70.85
62.68
24.91
Symonds 5mm
139.8
92.83
83.13
66.36
29.26
Discovery 6.3mm
190.0
88.75
65.04
58.34
24.60
Sherlock Bay Nickel Corporation Limited March 2006 Quarterly Report
All columns have shown excellent recoveries for all metals and validates the subsequent test program investigating the acid demands and supply for the project.
It is important to note that similar testing programs have shown significant reductions in acid consumption with increasing scale of operation. In one similar example a reduction ratio of 4:1 was realised when comparing the acid used in the column tests to that ultimately experienced in pilot scale heap leach trials.
In Situ Acid Generation Test Program
In January, the Company announced the commencement of testwork to explore options for cost effective methods of acid supply.
The first program was designed to generate acid from spent column residues and was intended to be an acid generating column or heap. The second program comprised five new columns and was designed to investigate minimising the upfront acid demand of the ore and the potential for in situ acid generation.
The preliminary results of both these programs are showing promise with some results showing success in generating free acid. Unfortunately, it is too early to draw any solid conclusions, however, the Company and BioHeap are pleased with the progress. Figure 1, 2 and 3 display the results of the acid test programs to date.
Figure 1: Curves generated from measuring the free acid in solution
from operation of the two spent ore columns.
Free Acid Titrations on Acid Generation Investigation Columns010002000300040005000600070008000020406080100Time (days)Free Acid (mg/L)
120
Sulphur Addition (1)PLS Irrigation (2)
Page 4
Sherlock Bay Nickel Corporation Limited March 2006 Quarterly Report
Figure 2: Comparison of Nickel reporting to solution for the five columns Comparison of Nickel Leaching-5.000.005.0010.0015.0020.0025.0030.0035.0040.0045.00010203040506070Time Days% Nickel reporting to solutionPyrite SulphurPLS solutionStandardOn/off irrigation
Figure 3: Comparison of Acid Consumption for the five columns. Comparison of Acid Consumption -2.000.002.004.006.008.0010.0012.0014.00010203040506070Time (days)Acid Consumption (kg/t ore)
80
Pyrite SulphurPLS solutionStandardOn/off irrigation
All other feasibility work is on hold until the acid generation testwork is completed.
MT SALT AND COPPER BORE WELL URANIUM PROJECTS
The Company continued to progress both exploration licence applications during the quarter. It is envisaged the granting will occur in the latter half of 2006 at which time appropriate exploration strategies will be enacted.
Mt Salt
The Mt Salt uranium prospect is located near the West Pilbara coast around 100km southwest of Dampier, immediately to the west of the large Balmoral magnetite deposit. An ELA covering around 15,971 hectares has been lodged over the area.
Page 5
Sherlock Bay Nickel Corporation Limited March 2006 Quarterly Report
Based on open file reports of the Western Australian Mines Department, the Mt Salt prospect consists of a radiometric anomaly system with dimensions of some 20km in strike and 4-5km in width. It strikes parallel to the coast and is developed on the flanks of the Mt Salt mound spring.
The Western Australian Mines Department’s open file report further states: “Given the size of the Mt Salt radiometric anomaly there is an excellent possibility that the postulated buried uranium mineralisation is a very large resource and of significant grade.”
Copper Bore Well
The Copper Bore Well uranium prospect is located some 100km to the southeast of Onslow, and 150km south of the Mt Salt prospect. An ELA covering some 10,130 hectares has been lodged over the area.
The prospect hosts previously identified copper-uranium mineralisation in shear zones in the Boolaloo batholith and adjacent to a contact with overlying Ashburton Formation sediments. During the late 1970’s Esso completed some air track drilling of the shear zone down to 26m deep with best results being 2m @ 1.43% Cu, 4.5g/t Ag, 62ppm U; and 3m @ 2.50% Cu, 9.3g/t Ag and 120ppm U.
For and on behalf of Sherlock Bay Nickel Corporation Limited
Darren Hedley
Managing Director
Page 6