Gold Stars And Black Holes - Edison Group

iStockphoto.com/jandrielombardGold stars and black holesAnalysing the discount: From resource to sanctionMining sector report, January 2019Published by Edison Investment Research

PrefaceIn keeping with recent tradition, Edison has conducted, augmented and added to three major analyses in thisreport. The first is to derive in-situ vales for 19 metals and minerals, listed across three markets, differentiated byresource category. The second is a study of EV/NPV ratios for junior explorers at PEA, PFS and BFS stages ofdevelopment. The third is a series of multiple regression analyses used to both corroborate our in-situ valuationsand to derive specific empirical equations to predict the valuations of junior mining exploration companies withrespect to five factors, namely project location, IRR, NPV, discount rate and stage of development.

Gold stars and black holesAnalysing the discount: From resource to sanctionMetals & mining22 January 2019‘If a man empties his purse into his head, no man can take it away fromhim. An investment in knowledge always pays the best interest.’Benjamin Franklin, statesmanEdison has once again taken the opportunity to analyse the global equity markets’appetite for pre-production mining companies. This report highlights our findings:Explorers benefit from forward-looking investorsOverall, the market appears to be ascribing less in-situ value for pre-developmentresources than it did in 2017. This is largely following commodity price movementsbut with a few notable exceptions such as vanadium.On a more positive note for junior mining companies, many of the commodities areshowing in-situ value accretion when moving projects from inferred through tomeasured resources. This includes gold, a number of the in vogue battery metals(vanadium, lithium) and also – slightly unusually – some of the bulk commoditiessuch as coal (thermal and met). However, commodities where we see there isuncertainty around demand (eg uranium, copper, zinc) may experience valuationpressures as projects reach the measured resource stage but then potentiallystruggle to attract funding. Companies need to bear these trends in mind whenconsidering deploying additional expenditure to upgrade resources.On the other hand, equity markets’ tendency to ascribe value to companies theyexpect to increase resources appears to be increasing – another positive for earlystage exploration companies seeking capital. The markets also appear to be lessconcerned by political risk than they have previously, although there is strongevidence this becomes more important ahead of project sanction.Finally, breaking the markets down (in this case for gold), it appears that Australiacontinues to offer the greatest recognition for pre-development resources ahead ofLondon (especially at the inferred and indicated stages). In the meantime, theCanadian market continues to be a sensible home for early stage companies,although valuations struggle versus other markets as resources are matured.While developers need to target BFS as a priorityEquity markets remain tough for companies looking to develop projects through tosanction. The markets continue to discount PEA-stage projects significantly (evenmore so than in 2017) and as in 2017 we see value destruction at the PFS stage.While there are always exceptions, it appears prudent for companies to focus ongetting to BFS stage as expeditiously as possible, as that is where equity marketsoffer valuations that reflect anything like the NPV of the underlying projects.Development companies should also consider the factors that will influence equityvaluations. Increasingly, markets reward projects of scale and low sovereign risk asthey approach sanction, while overall project economics (IRR) becomes lessimportant. Perhaps surprisingly, grade appears to be less important than we hadpreviously thought. Ultimately, the right projects should be sanctioned, although it isimportant for companies not to get bogged down in equity market ‘black holes’ andfocus on moving resources through to BFS as expediently as possible.AnalystCharles Gibsonmining@edisongroup.com 44(0)20 3077 5724

ContentsExecutive summary . 4Gold . 4In-situ valuation summary . 5Financial returns from gold exploration . 6Equity markets are discounting future movements in commodity markets . 6Valuation pitfall of ‘over-exploring’ . 9Equity markets provide a fertile environment for prospective ground . 9Sovereign risk abating . 9Multiple regression analysis corroborates majority of in-situ findings . 9EV/NPV analysis confirms PFS valuation discount . 10Grade, jurisdiction, IRR and project size. 11Marked market preference for gold, silver and copper. 12Management. 12Rationalising EV/NPV with discount rates . 13Honing the EV/NPV analysis . 14Parthian shot . 14Differentiated in-situ value analysis . 17Gold . 18Gold multiple regression analysis . 22Uranium . 23Uranium multiple regression analysis . 25Silver . 27Silver multiple regression analysis . 28Iron ore . 30Iron ore multiple regression analysis . 32Platinum group metals (PGMs). 33PGM multiple regression analysis. 35Nickel . 36Nickel multiple regression analysis . 38Potash . 39Potash multiple regression analysis. 42Copper . 43Copper multiple regression analysis . 44Zinc (lead). 46Zinc multiple regression analysis . 47Lithium . 49Lithium multiple regression analysis . 51Graphite . 52Graphite multiple regression analysis . 53Tungsten . 54Mining overview: Gold stars and black holes 22 January 20192

Tungsten multiple regression analysis . 57Vanadium. 59Vanadium multiple regression analysis . 60Metallurgical coal . 61Metallurgical coal multiple regression analysis . 62Thermal coal . 63Thermal coal multiple regression analysis . 64Bauxite. 65Bauxite multiple regression analysis . 66Undifferentiated analysis . 67NonSuch Gold . 72The physical limitations created by financial boundaries . 72Creating, valuing and manipulating NonSuch Gold . 72EV/NPV: A key transition . 75Sample notes. 76Sample NPVs . 76Sample IRRs . 77Relating company valuations to project economics . 78EV/NPV vs discount rates – comparing two Edison analyses . 85Conferring exceptionality – four parameters considered . 88Internal rates of return (IRR) . 88The Fraser Institute Investment Attractiveness Index . 89Project size . 91Project grade . 92Product/product price . 93Conclusions . 94Parthian shot? . 95Discount rate analysis . 97Relating company valuations to project economics . 98EV/NPV vs discount rates – comparing two Edison analyses . 102Conferring exceptionality – four parameters considered . 105Internal rates of return (IRR) . 105The Fraser Institute Investment Attractiveness Index . 106Conclusions . 109The 8% sample’s Parthian shot? . 110Mining overview: Gold stars and black holes 22 January 20193

Executive summaryIn past publications, we have derived differentiated values for measured, indicated and inferredgold resource ounces listed in London, Canada and Australia. This report updates these numbersand extends the methodology to other metals and minerals (provided overleaf). In addition to ourtraditional in-situ analysis, in 2018, Edison conducted multiple regression analyses over 12 of the19 metals/minerals across three markets that were the subject of the in-situ analysis in order tocorroborate (or not) the findings of the in-situ study.For only the second time, we have also performed an EV to project NPV analysis. In this casehowever, rather than being conducted over a limited sample of 63 companies and five metals andminerals, the study has been conducted over a sample of 102 companies, 13 metals and mineralsand three distinct stages of development, namely preliminary economic assessments (PEAs), prefeasibility studies (PFSs) and bankable feasibility studies (BFSs). The intention of the analysis wasto investigate the relationship between seven project variables (NPV, grade, IRR, size, jurisdiction,discount rate and product) and the valuations of their host operating companies.GoldResults for gold explorers, including the variance in calculated values from our previous report onthe subject (Mining overview: Unlocking the price to NPV discount, published in November 2017),are provided in the table below. Results for the whole suite of metals and minerals analysed aregiven in Exhibit 2 on page 5.Exhibit 1: Global average value of in-situ explorers’ gold resources, by listing, US /ozJuly 2018London marketCanadian marketAustralian marketArithmetic meanGeometric meanMeasured .7812.33Inferred7.877.877.877.8711.07July 2017Total Measured .338.7711.00Variance (%)Total Measured -10.30.6Total-4.4-11.8-32.1-16.6-14.8Source: Edison Investment ResearchA number of features of the results are immediately apparent with respect to gold explorers: Globally, the average value of an average ounce has declined by 14.8% compared to that inJuly 2017, at a time when the gold price has declined by 1.6% (US 1,208/oz vs US 1,228/oz). The ‘logical’ pattern, whereby the value of measured ounces is greater than the value ofindicated ounces, which is greater than the value of inferred ounces, has reasserted itselfacross all three markets, as well as the arithmetic and geometric means. Among other things,this means that investment returns from delineating an average resource are positive in all three markets for the first time in five years (see Exhibit 26).The average value of ounces quoted in the London market is lower than that observed in theother two markets for the second year in succession.The average value of ounces quoted in the Australian market is above that observed in Londonand Canada for the third year in succession.Against an otherwise prevailing negative trend, the (implied) values for measured ounces inLondon and indicated ounces in Canada have increased.Valuations overall remain consistent with bear market conditions, generally (see Exhibit 141 onpage 69).Mining overview: Gold stars and black holes 22 January 20194

Mining overview: Gold stars and black holes 22 January 2019In-situ valuation summaryExhibit 2: Selected metals’ and minerals’ in-situ values, costs of discovery, etc, 2018Resource multipleAIM erage9.88Spot price1,208Unit /ozPercentages of Average0.82%Costs of al/Average8.81Percentages0.73%Return on er of companiesCanada 24.081,2081,208 /oz /ozGlobal gold(geo)32.7812.3311.0714.951,208 /ozGlobal gold(arith)51.0615.787.8715.931,208 /ozSilver-0.650.251.290.4415.84 /ozUranium-3.671.520.220.4625.73 ore Copper0.044 -269.560.06099.100.02111.870.04322.5069.095,882 /t /tPotash(MOP)-0.400.200.0030.020216 70.570.78600 /tPtE-25.817.773.612.00791 sh(SOP)-6.581.700.410.76600 /tNickel144.1816.684.5119.7512,982 et.)0.1650.0650.0190.055170 /tCoal(thermal)0.0380.0300.0150.030118 /t10Zinc Vanadium 4.276.7952.31272.292,65045,20333,500 /t /t /tLithiumLithium (spodumene) Graphite 01,75041.00 /t /t /t /t-0.62% 15.78%0.61% 4.38%0.16% -0.63%0.19% -0.06%142Source: Edison Investment Research. Note: Platinum equivalent (PtE) costs of discovery derived from Witwatersrand gold cost of discovery. August 2018.Exhibit 3: Selected metals’ and minerals’ in-situ values, costs of discovery, etc, 2017Resource multipleAIM verage10.34Spot price1228.7Unit /ozPercentages of Average0.84%Costs of al/Average8.81Percentages0.72%Return on er of companiesCanada AustraliaGlobalGlobalgold gold (geo) gold 11.647.3311.008.7715.6831

Mining overview: Gold stars and black holes 22 January 2019 4 Executive summary In past publications, we have derived differentiated values for measured, indicated and inferred gold resource ounces listed in London, Canada and Australia. This report updates these numbers and extends the methodology to other metals and minerals (provided overleaf). In addition to our traditional in-situ .