Market Update

Evolution - Panoramic - Genex - Finders - West African - Graphex

Good afternoon

back from Australia, and as you can imagine, my desk is full of paper...So I will only gradually work through the numerous meetings/updates/ideas and news from my trip...

Overall, and as you can imagine, the mood has been substantially better than 12 month ago...Companies are able to raise cash again, and the commodity price deck is much improved. And what is certainly new, is the batterie-metals story. Many Australian fundmanagers, analysts and also mining-people are still trying to come to grips with the story. Applications for the various commodites, product specifications, demand expectations, ways to produce the stuff - all is relatively new , and a lot of uncertainty remains to be adressed!!

Also, there was a relative sanguine view on Australian gold producers. Most of us have been able to read the recent presentation by John Paulson, accusing the gold industry of value destruction. While this might apply to few of the North American names, I think generally, the Australian gold sector has been different to this over the last 2-3 years. Companies like Evolution, Northern Star, Oceana Gold, Regis Resources or Saracen have certainly created value, and are well-mamaged companies these days, generating significant free cash flow, and value via increasing share prices.

West African Resources - this is one of my largest holdings, and one which I continue to buy. Management has always made a strong impression on me, and continues to strongly drive the development of it´s major asset, Sambrado. Having done a typical, Australian mistake, to do a feasibility study too early, they are now sorrowly exploring the M1 and M5 orebodies. Results of a new feasibility study will be announced mid next year, following from a new resource/reserve statement in March/April 2018. Today, the company announced the first resource for their M;1South underground ore body, from which we had seen numerous, ultra high grade drilling results. The Indicated Resource for this part of the project has been estimated at 400.000 oz, at 26.4 g gold/t - this is clearly outstanding! The resource has been calculated down to a depth of 500m, and it´s still wide open at this stage!

The total M1 resource now stands at 566.000oz indicated, at average grade of 14.4g - split up into 161.000 oz at 6.8g open pit, 395.000oz at 26.4g underground, + another 180.000oz at 16.1g in the inferred resource class. M5 now comprises 1.460.000 oz open pittable at 1.3g in the Indicated categorie, and 410.000 oz at 1.1 g in the Inferred. The overall project now stands at 2.7 mill oz resources, of which 2.07 mill are Indicated.

I am expecting another resource increase in March 2018 - but smaller than this one. Reserves could be approaching 2 mill oz - but we will have to wait another 5 month for that. Indications are, that West African will produce above 200.000 ( probably rather 220.000 oz! ) p.a. for three years, before coming down. Given the fantastic grade, costs should be somewhere between 600- and 700 US$/oz! With capex of roughly 200 mill A$, I think WAF have a share price of 60ct written all over them. This is by far the best gold story I have seen - and this project is far from fully explored! 25 Mill A$ cash in the bank assure, that drilling will continue full steam ahead.

There are a few companies, which could be interested to buy out this company - and given the fact, that the MD is a geologist, and not a mining engineer, I think somebody with development expertise could buy themat a substantial premium top today, and still have all exploration upside for free. For now, and at current prices, WAF are my clear favourite in the gold sector!

Finders Resources - feedback I have heard in Australia re the current takeover bid at 23ct was, that nobody expects this bid to be successfull. The asset is based in Indonesia, which is  a clear negative, preventing the company to get a full valuation of around 40ct. It seems to be the case, that the bidding parties´claim, that they have made this bid to get bigger, or get out, has some genuine the wording of recent announcements I am now taking as genuine, and not a threat....It´s now up to FND to demonstrate static production numbers, and some more upside from exploration. To that point, the Meron orebody should be drilled as soon as possible! I think a all approvals to do so should be in place relatively soon. In any case, I think any serious bid needs to be above 30ct, if it wants to have some chance of success. There are not many, pure copper producers listed in Australia anymore, and if FND can demonstrate, that exploration is adding to mine life, we will have further fun with this stock. And who knows - there might even be another Indonesian company interested in the large cash-generation abilities of this stock.

Graphex Resources - I have been very impressed by Phil Hoskins, the MD, meeting him for the second time. The project has matured quite a bit since last year, having found majore, Chinese backing and take-off for their graphite product, which is unique in it´s type , and expected to deliver the coarsest flake graphite in the world, used as a flame retardent in the building material industry. Legislative changes have recently made it compulsory to use this type of products in the Chinese building industry, and mine closures for enviromental reasons, plus increased use of graphite for batteries, have been responsible for large price increases for graphite in recent times. While GPX have in the past used a price of 1200 US$, more recent price indications are for 1800 US$ - and GPX have would have been highly profitable at 1200, with a target valuation of just over 1 A$/share. At 1800, this valuation should more than double. In my opinion, this huge discount to the current share price ( 29ct ), even in Tanzania, is not justified. The Chinese partner has recently confiirmed it´s commitment. Tanzania has a new Mininister of mines, who ahs made some positive noise, to gain back investor interest in the country. Also, Barrick has made good progress to settle the infamous situation of it´s subsidiary, Acacia ( by the way - I dare speculating, that in fact Barrick/Acacia have done something wrong in the past - how could they otherwise agree on a 300 mill US$ payment to Tanzania???? ).

China clearly wants the matrial Graphex can supply, and I would not be surprised, if Chinese banks would fully finance this project, despite of the asset being in Tanzania ). The new mining minister clearly would love to announce a new mining venture in her country - not to talk about the tax revenue, and the expectation, that 16<% of the venture will probably be owned by Tanzania, according to the new legislation.

Panoramic - the long-awaited, optimised feasibility study is out ! Many parameters are obviously unchanged, like production of 10.800 Ni / 6.100t Cu / 800t of cobalt p.a. over a mine life ( so far ) of 8.3 years. As base case assumptions, the company used 5.50 US$ lb for nickel, 3.10 US$ for copper, and 28 US$ for cobalt, and an exchange rate of 78ct to the US$. In aggregate, these assumptions are more or less excatly today´s parameters. The study expects up-front and ramp-up capital of 36 Mill A$ - as you know, the plant is already there, and it´s being kept in good condition. The all-important cost basis for a new project are All-In-Sustaining costs - tehy would be 4.50 A$ / lb, uisng the above parameters. 

While the project would be feasible today, and finance could be raised via a combination of debt/off-take and probably a little bit equity, I think the company is in no hurry to press the button. The largest shareholder controls 27% of the company, and I believe, that he is expectingw ay higher prices for nickel some time into the future. I can only agree to this - but givenm the fact, that the project would be very profitable as at today, and that care & maintenance of the Svannah mill/plant costs about 3 mill$ p.a., I would like to see a start of operations some time late next year. This time table would require a decision to go ahead by about the 1st of April 2018. 

My back-on-the-envelope calcucations, using a 7 US$lb nickel price, tell me, that free cash flow would be approx 50 mill A$ p.a., and EBITDA about 90 mill A$ p.a.. The company has got 65 mill A$ in taxable losses to carry forward, and spending for a start up would increase this amount. Therefore, I do not expect PAN to pay any taxes for at least the first two years of operation. Valuing the company at 8x free cash flow, and 4x EBITDA, gives me a valuation of roughly 400 mill A$ - that´s about 93ct/share. Including some limited equity of additional 10 mill A$, or 25 mill shares at 40ct, this still gives me a valuation of 88ct/share. This would be appropriate, in my view, given the beautiful upside the nickel price should have from the use of nickel in batteries for electrical cars. In my opinion, this long term price might well be proved conservative - but that´s a few years out. 

Nickel is increasingly becoming a strategic metal, and I am expecting a diverse market for it over time - nickel for use in "basic" stainless steel vs nickel for use in batteries and high-quality stainless steel. PAN´s nickel concentrate would be a very high quality concentrate, much sought-after by various players. While the short term, upside for PAN might be limited, I have no problem to see dramatically increased valuations going forward by 3-4 years. I think to see substantially higehr prices within the enxt 12 month, I think we will have to see continued strong dynamics in the take-up of EV´s. I will be keeping my substantial position in Panoramic.

Genex Power - during my absence, Genex updated the feasibility study for the pumped hydro project, announced a preferred contractor to build it, and updated progress on the solar project ( which is all going according to plan ).The layout of the hydro project has somewaht changed, resulting in a reduction of construction time by 6 month, and longer time of continous generation and increased energy storage. Over the next few eeks, I do expect the company to come through with more detail on capex - this will give analysts some more clarity on numbers. The new energy legislation in Australia has delayed offtake negotiations with large electricity-distributors, as they had to digest the new framework first. I therefore only expect an agreement with one of them within say the next 3 month. This is the precursor to any potential financing. Overall, the new legislation is rather good news for GNX, as can be seen in the slowly-but-surely increasing share price. But while I hoped for a financing announcement this year, this is now probably too bullish, and is expected for the first Quarter 2018. I still see GNX as one of the best stories in the market...They have enough cash in the kitty right now, but I am still expecting some more government support for GNX over the next few month. If not - well, cash flow from Solar Stage 1 is only a few month away! 

The share price still does not show much value for Solar Stage 2 and the Hydro Project, the main value drivers longer term. For analysts, this is a very difficult animal....capex is not clear as yet to them,. operating costs are very much depending on electricity prices going forward, and revenue is a lot of guesswork as well. Overall, too many moving parts to do a model. Once capex has been announced ( definitely beofr Christmas ) , and offtake ( = pricing guarantee ) in the first Quarter, they will have a much easier and more reliable job to come to a valuation ( which I would be very surprised to be any lower than 50-60ct/share! ).

Evolution - Australia´s premier gold miner delivered yet another fantastic Quarter, with record production and fantastic costs of 762 A$ AISC/oz. Responsible for this have been Cowal, Ernest Henry, and Mt.Carlton, all of whom had great Quarters. In general, and from what I have heard on my trip, the times of reducing salaries and contractor-rates are definetly over - some cost pressures are emerging, from electricity to slaries to drilling rates for exploration. On the contrary, digitalisation is making progress in the mining industry, and some more cost reductions are possible here - but that will be a gradual process and will not come quickly, nor easily! Evolution have been doing an outstanding job so far on the cost side - but is that it? I have no doubt, that they will not loose focus - that´s for sure. 

Management have accelerated exploration - this is the only area, where EVN could not excel so far. There is some indication, that exploration around Cowal especially is starting to deliver, but I am also hoping for progress around their Mungari asset. From now on, and in my very subjective opinion, this is the area, where we will see value-add from Evolution. If the company can succeed here, I see no reason, why the stock should not be re-rated to trade at similar ratings to Newcrest, or ultimately, even Randgold.

More over the next few days!

have a nice evening




Wilhelm Schröder


Schröder Equities GmbH


80538 München


Tel. +49-89-4613440-0

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