HOLD - COL Financial

Regulatory environmentbrightens, but risks remainLifting of the ban on open-pit mining. On October 24, the multi-agency Mining IndustryCoordinating Council (MICC) recommended to lift the ban on prospective open pit mining.Lifting the ban would result in the continuation of the development of prospective large miningprojects previously banned by the regulator. DENR Secretary Roy Cimatu noted that he wouldstill need to consult his cabinet members before reversing the order. Notable projects thatwould benefit from the lifting of the ban include US 5.8Bil Tampakan copper-gold project ofSagittarius Mines Inc., the US 1.2Bil Silangan mine project of Silangan Mindanao Mining Co. andthe US 2.0Bil King-king copper-gold project of St. Augustine Gold & Copper Ltd. The possiblelifting of the ban also boosted sentiment for the mining sector as it reduced potential risks facingmining companies.THU 26 OCT 2017HOLDNICKEL ASIA CORPORATIONPHP7.60HOLDPHILEX MINING CORPORATIONPHP10.10PX to significantly benefit. One of the key risks that PX faced with the ban on open pit miningwas the suspension of its US 1.2Bil Silangan mine project. Note that the Silangan mine projectaccounts for approximately 80% of PX’s current value, as the miner’s only operational mine(Padcal mine) is nearing the end of its mine life. With the possible lifting of the ban, the saidproject can once again be developed.Increase in excise tax remains key risk. Recall that during President Duterte’s second State ofthe Nations Address (SONA), he firmly stated the he wants miners to stop exporting unprocessedmineral resources and that he would impose more taxes on the industry if miners don’t followthe rulings of the DENR.In 2014, a bill was drafted to increase taxes on mining companies. In the draft bill, companies willeither have to pay 10% tax on gross revenues, from the current rate of only 2%. Assuming thatthe government pushes through with plans to impose taxes on mining companies, profitabilitywould suffer.KYLE JEMMRIC VELASCORESEARCH ANALYSTkyle.velasco@colfinancial.comDisclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside ofthe COL Financial website as these may be subject to tampering or unauthorized alterations.

MINING SECTORIREGULATORY ENVIRONMENT BRIGHTENS, BUT RISKS REMAINTHU 26 OCT 2017Nickel Asia Corporation(NIKL)COMPANY BACKGROUNDNickel Asia Corporation (NIKL) primarilyengages in the business of mining of all kindsof ore, metals and minerals and in the businessof generation, transmission, distributionand supply of electricity to cities and otherlocalities. The Company exports saprolite andlimonite ore to customers in Japan, China andAustralia. The Company owns four operatingmines, namely: Rio Tuba, Taganito, Cagdianaoand Taganaan sites, all of which are located inthe southern half of the country. Apart fromwhich, the Company has five properties invarious stages of exploration for nickel.REVENUE BREAKDOWNINCOME STATEMENT (IN PHPMIL)Revenues% GrowthEBITDA% GrowthEBIT% GrowthEPS% ANCE SHEET (IN PHPMIL)Cash & EquivalentsTrade ReceivablesInventoriesOther Current AssetsPPEOther Non-Current AssetsTotal AssetsAccounts PayableST DebtsOther Current LiabilitiesLT DebtsOther Non-Current Liabilities3.9%Total LiabilitiesTotal EquityTotal Liabilities & 1.13318.5%CASHFLOW STATEMENT (IN PHPMIL)Net IncomeDepreciation & Amortization96.1%Other Non-Cash Exp (Gains)96.1%Sale of nickelSale of nickelCOL Financial Group, Inc.Decrease (Increase) in Working CapOthersOthersOperating Cash FlowCapexOther InvestmentsInvesting Cash FlowProceeds (Payment) DebtsPayment of Cash DividendsOthersFinancing Cash FlowChange in 336)(116)(5,503)30(5,588)3,2312

MINING SECTORIREGULATORY ENVIRONMENT BRIGHTENS, BUT RISKS REMAINTHU 26 OCT 2017INVESTMENT THESIS:Nickel prices rally to help boost earningsNickel price is currently on an uptrend mainlydue to increased demand from China and EVproduction boom. Demand for nickel fromChina has significantly increased due to anuptick in the country’s economic growth. Themanufacturing and the industrial sector’sdemand for stainless steel increased. Sincenickel is a primary raw material to producestainless steel, we can expect demand forthe metal to likewise increase. Additionally,the anticipation of an EV production boomalso pushed up nickel prices. Investors areanticipating a boom in EVs as developedcountries are starting to create regulationsthat would push automakers to build moreEVs. The resulting boom in the demand for EVbatteries as a result of increased production ofEVs is expected to act as a tailwind for nickelprices in the next few years. With the increasednickel price, the company’s revenues will alsobe able to pick up and help earnings to growmoving forward.KEY RATIOSEBITDA Margin (%)NPM (%)Current Ratio (X)Days ReceivableDays InventoryDays PayableAsset T/O atory issues continues to make theindustry bleakDENR secretary, Gina Lopez announced theclosure of 21 mining operations in several areasin the country, noting that the mines wereruining nearby watersheds. Afterwhich, thesecretary issued an order to cancel 75 mineralproduction sharing agreements (MPSA)for mining sites that are near watersheds.Although the commission on appointmentsrejected the appointment of Gina Lopez asthe DENR secretary, the suspension on severalmines and the cancellation of MPSA remainsin effect. In addition, President Dutertementioned in his SONA last July that he wouldimpose more taxes on the mining industry.With the said developments, the outlook ofthe local mining industry remains cautious inthe foreseeable future.COL Financial Group, Inc.3

MINING SECTORIREGULATORY ENVIRONMENT BRIGHTENS, BUT RISKS REMAINTHU 26 OCT 2017ValuationMethodologyRELATIVE VALUATIONP/EPhilex Mining Corp.Oceanagold Corp.Atlas Consolidated MiningHudBay Minerals Inc.Zijin Mining Group Co LtdMinera Frisco SAB de CVNickel Asia Corp.Median ex-NIKL17E21.012.522.718.514.36.815.116.4EPS 7.0%n/a0.6%3.6%VALUATION ASSUMPTIONSCOL Financial Group, Inc.Risk premiumRisk free rateBetaCost of equityCost of debtTax rateWACC5.0%5.0%1.1010.5%2.1%30.0%8.8%Enterprise valueLess: (Net debt) / net cashEquity valueNumber of outstanding shares (Mil)Equity value per share45,86912,22958,0987,6037.604

MINING SECTORIREGULATORY ENVIRONMENT BRIGHTENS, BUT RISKS REMAINTHU 26 OCT 2017Philex MiningCorporation (PX)INCOME STATEMENT (IN PHPMIL)COMPANY BACKGROUNDPhilex Mining Corp. (PX) is a mining companyengaged in the exploration, development,and production of metallic minerals andpetroleum. Most of the company’s revenuescome from the sale of copper and goldconcentrates. It currently operates the Padcalmine in Benguet, whose mine life is expectedto last until the year 2022. PX is currentlyengaged in exploration efforts in Padcal inorder to extend its mine life. The companyis also gearing up to develop the Silanganmine, which is expected to be the company’snext operating mine. The Silangan project iscurrently on hold due to regulatory issuesREVENUE BREAKDOWNRevenues% GrowthEBITDA% GrowthEBIT% GrowthCore EPS% GrowthCash & EquivalentsTrade ReceivablesInventoriesOther Current AssetsPPEOther Non-Current AssetsTotal AssetsAccounts PayableST DebtsOther Current LiabilitiesLT DebtsTotal LiabilitiesTotal EquityTotal Liabilities & (1,500)1,000(3,025)0(2,025)170BALANCE SHEET (IN PHPMIL)Other Non-Current .23-25.7%CASHFLOW STATEMENT (IN PHPMIL)41.2%41.2%58.0%58.0%Net IncomeDepreciation & AmortizationOther Non-Cash Exp (Gains)Interest Expense (Income)Decrease (Increase) in Working CapGoldGoldCopperCopperCOL Financial Group, Inc.SilverSilverOperating Cash FlowCapexOther InvestmentsInvesting Cash FlowProceeds (Payment) DebtsPayment of Cash DividendsOthersFinancing Cash FlowChange in (5,462)(4,935)(367)10,1274,8251,1515

MINING SECTORIREGULATORY ENVIRONMENT BRIGHTENS, BUT RISKS REMAINTHU 26 OCT 2017INVESTMENT THESIS:Coppery prices on acontinuous uptrenddue to Chinese economic recoveryCopper prices have been on a continuousuptrend since last year, reaching a high ofUS 3.16/lb this month, up 44% y/y. The stronguptrend of copper price was mainly driven bythe acceleration in Chinese manufacturingand the tight supply situation brought aboutby strikes in Chilean mines. China remainsone of the top importers of copper and itsdemand heavily affects prices in the worldmarket. This year, China factories grew at thefastest pace in over five years as output pricesand demand improve to the highest level.For example, China’s Purchasing Managers’Index or PMI (an indicator of economic healthof the manufacturing sector) reached 52.4in September, up from 51.7 in August andwell above the 50-point mark that separatesgrowth from contraction on a monthly basis.This marked the 14th straight month ofexpansion for China’s manufacturing industryand the highest reading since April 2012.KEY RATIOSEBITDA Margin (%)NPM (%)Current Ratio (X)Days ReceivableDays InventoryDays PayableAsset T/O (%)ROAE 5.0020.8%6.1%Regulatory issues continues to make theindustry bleakDENR secretary, Gina Lopez announced theclosure of 21 mining operations in severalareas in the country, noting that the mineswere ruining nearby watersheds. Afterwhich,the secretary issued an order to cancel 75mineral production sharing agreements(MPSA) for mining sites that are nearwatersheds, including PX’s Silangan mine.Although the commission on appointmentsrejected the appointment of Gina Lopez asthe DENR secretary, the suspension on severalmines and the cancellation of MPSA remainsin effect. In addition, President Dutertementioned in his SONA last July that he wouldimpose more taxes on the mining industry.With the said developments, the outlook ofthe local mining industry remains cautious inthe foreseeable future.COL Financial Group, Inc.6

MINING SECTORIREGULATORY ENVIRONMENT BRIGHTENS, BUT RISKS REMAINTHU 26 OCT 2017ValuationMethodologyRELATIVE VALUATIONP/ENickel Asia Corp.Oceanagold Corp.Atlas Consolidated MiningHudBay Minerals Inc.Zijin Mining Group Co LtdMinera Frisco SAB de CVPhilex Mining Corp.Median 29.411.212.215.620.312.3EPS %17.0%n/an/a25.7%3.6%78.4%3.2%VALUATION ASSUMPTIONSCOL Financial Group, Inc.Risk premiumRisk free rateBetaCost of equityCost of debtTax rateWACC5.0%5.0%1.3011.5%5.3%30.0%8.4%Enterprise valueLess: (Net debt) / net cashEquity valueNumber of outstanding shares (Mil)Equity value per share58,690-8,59150,0984,94010.107