Graphex Mining Ltd - RM Research Pty LtdMar 08, 2017  · Graphex Mining Ltd MOU with Chinese...

15
8 March 2017 ASX CODE: GPX Speculative Buy Graphex Mining Ltd MOU with Chinese counterparties taking shape...RC drilling returns high grade intercepts...80% high-grade JORC Resource increase Offtake/Funding Taking Shape The Company announced (25/1/2017) that negotiations with CN Docking (a subsidiary of China National Building Material Group Corporation-CNBM’) and China Gold Group Investment Co. Ltd (‘China Gold’) were progressing in respect to providing part or all of the A$100m CAPEX, agreement on GPXs role as project manager, the terms of an offtake agreement for graphite concentrates and the joint arrangement of debt finance from Chinese banks. Technical due diligence (including a feasibility study) was completed late last year by the Chinese parties and we anticipate a definitive agreement in the near term. Outstanding matters include the completion of commercial documentation, relevant board approvals and Chinese regulatory approvals for offshore investment. 80% JORC Resource upgrade, high-grade drill results & production upside The high grade JORC Resource increased 80% to 16.9Mt @ 10.2% TGC including an Indicated Resource of 5.2Mt @ 11.9% TGC and Inferred Resource of 11.7Mt @ 9.4% TGC). Total JORC Resources have increased from 25-53.5Mt over the last two years. The RC program completed in late 2016 returned numerous high-grade intersections including NRC16-186 with 68 metres @ 6.6% TGC from 50 metres downhole, including 18m @ 13.8% TGC from 80m downhole. Enhanced financial metrics Our mid-case valuation of A$1.33 scenario is based on a 30% discount to our attributable after tax NPV10 of A$133 million (50% project interest) over an expanded 18 year mine life at an attributable production rate of 34,500 tpa @ 10.85% TGC and a basket graphite price of A$1,620/tonne. There is potential upside to this basket price particularly in the expandable graphite market where its application as a flame retardant material is critical in meeting the new Chinese legislative guidelines. The emergence of Contemporary Amperex Technology Ltd (“CATL”) with its proposed 50GW factory producing lithium-ion car batteries are likely to further impact battery grade graphite demand. Price Catalyst Finalisation of project finance and offtake agreements with Chinese counterparties. Action and Recommendation GPX is trading at a 68% discount to our 12 month A$1.33 mid case target based primarily on our risked NPV 10 of Chilalo. RMR is maintaining a speculative buy on the back of the finalisation of key commercial and permitting agreements, compelling financial metrics and further JORC Reserve upside/mine life/production increases. 1 Capital Structure Sector Materials Share Price A$0.425 Fully Paid Ordinary Shares 56.9m Options (ex 25c, exp 6/19) 13.3m Options (ex 20c, exp 6/19) 3.0m Options (ex Nil, exp 17/19/21) 3.4m Market Capitalisation (Diluted) A$32.4m Share Price Year High-Low A$0.595-0.315 Approx Cash A$2.4m Valuation (Mid Case) Chilalo A$93.03m A$1.22 Exploration A$20.7m A$0.27 Cash A$2.4m A$0.03 Corporate (A$15m) (A$0.19) TOTAL $101.1m A$1.33 Directors Stephen Dennis Non-Executive Chairman Phil Hoskins Managing Director Grant Davey Non-Executive Director Stuart McKenzie Company Secretary Major Shareholders JP Morgan Nominees 6.7% MMG Exploration Holdings 6.2% One Managed Inv Funds 5.0% Analyst GT Le Page +61 8 6380 9200 Share Price Performance EARNINGS PROJECTIONS 2017 2018 2019 2020 Production (Mt) - - 34 34 Cash Cost (A$/t) - - 645 645 Net Profit (A$m) (1.5) (1.5) 17.1 11.9 Cash Flow (A$m) (2.5) (3.0) 28.0 22.8 CFPS (c) (0.04) (0.04) 0.37 0.30 CFM (x) (9.6) (10.6) 1.2 1.4 EPS (c) 0.03) (0.02) 0.22 0.16 PER (x) (16.0) (21.0) 1.9 2.7 DPS (c) - - - - Div Yield (%) - - - -

Transcript of Graphex Mining Ltd - RM Research Pty LtdMar 08, 2017  · Graphex Mining Ltd MOU with Chinese...

Page 1: Graphex Mining Ltd - RM Research Pty LtdMar 08, 2017  · Graphex Mining Ltd MOU with Chinese counterparties taking shape...RC drilling returns high ... rate Presentation, July 2016)

8 March 2017

ASX CODE: GPX

Speculative Buy

Graphex Mining Ltd MOU with Chinese counterparties taking shape...RC drilling returns high

grade intercepts...80% high-grade JORC Resource increase

Offtake/Funding Taking Shape

• The Company announced (25/1/2017) that negotiations with CN Docking (a

subsidiary of China National Building Material Group Corporation-‘CNBM’) and China

Gold Group Investment Co. Ltd (‘China Gold’) were progressing in respect to

providing part or all of the A$100m CAPEX, agreement on GPX’s role as project

manager, the terms of an offtake agreement for graphite concentrates and the joint

arrangement of debt finance from Chinese banks.

• Technical due diligence (including a feasibility study) was completed late last year by

the Chinese parties and we anticipate a definitive agreement in the near term.

Outstanding matters include the completion of commercial documentation, relevant

board approvals and Chinese regulatory approvals for offshore investment.

80% JORC Resource upgrade, high-grade drill results & production upside

• The high grade JORC Resource increased 80% to 16.9Mt @ 10.2% TGC including an

Indicated Resource of 5.2Mt @ 11.9% TGC and Inferred Resource of 11.7Mt @ 9.4%

TGC). Total JORC Resources have increased from 25-53.5Mt over the last two years.

• The RC program completed in late 2016 returned numerous high-grade intersections

including NRC16-186 with 68 metres @ 6.6% TGC from 50 metres downhole,

including 18m @ 13.8% TGC from 80m downhole.

Enhanced financial metrics

• Our mid-case valuation of A$1.33 scenario is based on a 30% discount to our

attributable after tax NPV10 of A$133 million (50% project interest) over an expanded

18 year mine life at an attributable production rate of 34,500 tpa @ 10.85% TGC and

a basket graphite price of A$1,620/tonne. There is potential upside to this basket price

particularly in the expandable graphite market where its application as a flame

retardant material is critical in meeting the new Chinese legislative guidelines. The

emergence of Contemporary Amperex Technology Ltd (“CATL”) with its proposed

50GW factory producing lithium-ion car batteries are likely to further impact battery

grade graphite demand.

Price Catalyst

• Finalisation of project finance and offtake agreements with Chinese counterparties.

Action and Recommendation

• GPX is trading at a 68% discount to our 12 month A$1.33 mid case target based

primarily on our risked NPV10 of Chilalo. RMR is maintaining a speculative buy on the

back of the finalisation of key commercial and permitting agreements, compelling

financial metrics and further JORC Reserve upside/mine life/production increases.

1

Capital Structure

Sector Materials

Share Price A$0.425

Fully Paid Ordinary Shares 56.9m

Options (ex 25c, exp 6/19) 13.3m

Options (ex 20c, exp 6/19) 3.0m

Options (ex Nil, exp 17/19/21) 3.4m

Market Capitalisation (Diluted) A$32.4m

Share Price Year High-Low A$0.595-0.315

Approx Cash A$2.4m

Valuation (Mid Case)

Chilalo A$93.03m A$1.22

Exploration A$20.7m A$0.27

Cash A$2.4m A$0.03

Corporate (A$15m) (A$0.19)

TOTAL $101.1m A$1.33

Directors

Stephen Dennis Non-Executive Chairman

Phil Hoskins Managing Director

Grant Davey Non-Executive Director

Stuart McKenzie Company Secretary

Major Shareholders

JP Morgan Nominees 6.7%

MMG Exploration Holdings 6.2%

One Managed Inv Funds 5.0%

Analyst

GT Le Page +61 8 6380 9200

Share Price Performance EARNINGS PROJECTIONS 2017 2018 2019 2020

Production (Mt) - - 34 34

Cash Cost (A$/t) - - 645 645

Net Profit (A$m) (1.5) (1.5) 17.1 11.9

Cash Flow (A$m) (2.5) (3.0) 28.0 22.8

CFPS (c) (0.04) (0.04) 0.37 0.30

CFM (x) (9.6) (10.6) 1.2 1.4

EPS (c) 0.03) (0.02) 0.22 0.16

PER (x) (16.0) (21.0) 1.9 2.7

DPS (c) - - - -

Div Yield (%) - - - -

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INVESTMENT CASE

POSITIVE PFS- ROBUST

ECONOMICS: RMR modelling

indicates a risked post-tax

attributable NPV10 (assuming

50% project interest) of A$133

million (risked NPV10 of A$93

million) based on annual

attributable production of 34,500

tonnes of graphite, an 18 year

mine life and a modest CAPEX

of A$100 million (likely to be

100% funded by Chinese

counterparties/debt). Annual

attributable EBITDA is around

A$30.9 million with metallurgical

testwork supporting a high quality product mix averaging A$1,620 per tonne. GPX is

currently trading at a 68% discount to our 12 month mid-case target of A$1.33 per

Share with potential to significantly increase mine life/annual production rates based on

further JORC Reserve upgrades and increasing graphite demand.

RESOURCE UPGRADE-MINE LIFE

EXTENSION or PRODUCTION INCREASE: RM

Research believes that an increase in JORC

Reserves by a further +15Mt @ 11% TGC could

add over A$30 million or A$0.40 per Share to the

GPX valuation based on a modest EV/JORC

Reserve Tonne of A$18. This is conservative

compared to the weighted average comparable

company of A$35/tonne (refer “Peer

Comparison”). Numerous exploration targets

over 53km remain to be followed up.

DEMAND GROWS FOR EXPANDABLE AND SPHERICAL GRAPHITE: RM

Research believes the PFS assumptions for graphite pricing (driven in part by the

increasing demand for expandable and spherical graphite) at A$1,620 per tonne are

conservative. Furthermore, the demand for graphite is likely to see the projected annual

throughput of 69,000 tonnes increase within the first few years of production. Recent

announcements new China based lithium-ion battery demand player CATL are likely to

lead to heightened demand for battery grade graphite.

METALLURGICAL TESTWORK SUPPORTS HIGH QUALITY PRODUCT MIX:

Chilalo graphite expandability is 1,500 ml/g compared to an average of 250 ml/g for

Chinese deposits. The real value in RM Research’s view is the potential size and

strategic value of JORC Resources at Chilalo that have the potential to match or

surpass Magnis in both quality and size. Metallurgical testwork also indicates Chilalo

graphite is suitable for battery grade graphite.

OFFTAKE AND FUNDING-CNBM AND CHINA GOLD: It appears that there is broad

agreement between the parties on the key commercial terms of the offtake and funding

arrangements whereby the Chinese counterparties will end up with a 50% direct project

interest and an offtake for 100% of Chilalo graphite production. It appears that GPX will

be appointed Project Manager and utilise their operational/technical expertise. RM

Research anticipates term sheets (ahead of formal documentation) will be finalised in

the coming weeks.

TIGHT CAPITAL STRUCTURE WITH SIGNIFICANT SHARE PRICE UPSIDE: RM

Research considers there are a number of key milestones that are likely to see a re-

rating of GPX in the near term, in particular the conclusion of offtake/funding

agreements. With only 76.2m Shares (fully diluted), these outcomes should have a

positive effect on the GPX Share price.

2

Compelling project economics

based on modest production pro-

file and graphite price outlook…

...GPX is trading at a 68% dis-

count to our 12 month A$1.33mid

-case target

We anticipate further JORC Re-

source + Reserve upgrades will

have a significant impact on mine

life and/or annual production

rates...

Metallurgical characteristics are

superior to existing Chinese

graphite deposits

Commercial negotiations appear

to be nearing a conclusion

The emergence of CATL is likely

to increase demand pressures for

battery grade graphite

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COMPANY OVERVIEW

Graphex Mining Limited (ASX:

GPX) is in advanced discussions

with CN Docking (a subsidiary of

CNBM) and China Gold in respect

to the provision of project finance

and offtake agreements. Executives

of GPX have spent over 140 days in

China over the past 2 years and

commercial negotiations appear to

be coming to a conclusion. The

negotiations have been fast tracked

with the utilization of experienced

market consultants such as Juyan

Feng.

RM Research believes that the

Company remains on track to be in

production some time in CY 2019

with a high probability of an

expanded production profile well

above the modest 69ktpa (or

34Ktpa attributable to GPX)

contemplated in the 2015 Pre

Feasibility Study.

The Company’s current corporate

structure is set out in Figure 2

3

Figure 1: Location of Chilalo

Graphite Project and other ASX

listed explorers/developers.

(source: Graphex Mining, Corpo-

rate Presentation, July 2016) .

Figure 2: Graphex Mining corpo-

rate structure. (source: Graphex

Mining, Prospectus, 4 April

2016) .

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CHILALO GRAPHITE PROJECT Location and Access

The Chilalo Graphite Project is situated in south-east Tanzania (Figure 1) within the

Mozambique belt, host of a number of significant graphite deposits including Syrah

Resources Ltd (ASX: SYR) Balama deposit and Magnis Resources Ltd (ASX: MNS)

Nachu Project.

Infrastructure

The Project is strategically located approximately 220 km from the deep water port of

Mtwara. 160km of this road is sealed and the Tanzanian government is conducting a

feasibility study on sealing the remaining 70 km (Figure 1). The port is suitably

equipped for loading and handling of concentrate and is able to accommodate

Panamax vessels.

Resources & Reserves

The Project comprises a high grade Indicated and Inferred JORC resource of 16.9Mt

@ 10.2% TGC for a total of 1.71Mt tonnes of graphite and total JORC Resources of

53.5 Mt @ 5.6% TGC (Table 1). The current 10 year mine life (2015 PFS) is based

primarily on JORC Reserves of 5.1Mt @ 11.9% TGC. Significantly the Company has

also published an exploration target of 100-350Mt @ 3-11% TGC. On the back of the

recent 80% increase in JORC Resources we are confident of further significant

resource upgrades over the 53km of strike at Chilalo (Figure 3) which should already

support an increase in mine life well beyond the current 10 year mine life to

somewhere in the order of 18 years in our estimate.

4

Domain Classification Tonnes (Mt) TGC (%) Contained Graphite (Kt)

High-grade zone Probable Reserve 4.7 11% 517

Total Ore Reserves Probable Reserve 4.7 11% 517

High-grade zone Indicated 5.2 11.9% 619

High-grade zone Inferred 11.7 9.4% 1,100

Total High-Grade Resources Indicated + Inferred 16.9 10.2% 1,719

Low-grade zone Inferred 36.6 3.4% 1,244

Total Resource Indicated + Inferred 53.5 5.6% 2,996

Table 2: Chilalo Graphite Project

Resources + Reserves. (source:

Graphex Mining, ASX Announce-

ment, 2 February 2017) .

Figure 3: Chilalo Mineral Re-

source Plan Projection. (source:

Graphex Mining, ASX Announce-

ment, 2 February 2017).

The recent increase in JORC

Resources was attributable to

new discoveries to the north and

south west of the existing Chilalo

JORC Resource

The recent increase in the high-

grade JORC Resources should

support an extension of mine life

to somewhere in the order of 18

years…

...from 10 years based on the

2015 PFS

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Metallurgy

Metallurgical testwork undertaken in 2015 demonstrated that Chilalo is able to produce a high

quality concentrate with a very high proportion of large—Super Jumbo flakes (Table 3) with a

conservative basket price of US$1,216 (A$1,620) per tonne of graphite. Petrographic

examinations of RC chips from the recently outlined north-east JORC Resource zone (Figure

3) have also confirmed similar flake graphite dimensions to the previous 2015 JORC

Resource estimates.

As outlined in Graphite Markets (see below), there is reasonable scope for this basket price to

increase based on pricing data provided by Benchmark Mineral Intelligence. A higher basket

price could be justified by the strong demand for both spherical and expandable graphite

(note Chilalo can sell 100% of its product into various expandable graphite markets and up to

47% of its product into spherical graphite markets).

GRAPHITE MARKETS

Graphite has no terminal market and is therefore reliant on offtake agreements between

buyers and sellers. Given the size distribution and the superior expansion rates of Chilalo

graphite (Figure 4), the Company is likely to be able to supply the high value expandable

graphite markets. GPX has also indicated (ASX Announcement, 28/6/2016) its ability to

supply the battery-grade graphite market. Table 4 sets out the various categories of graphite

and importantly, GPX is able to supply all of these product types (refer Table 4).

Expandable Graphite is a compound of graphite that is able to expand to several hundred

times its original size when heated and immersed in acid. This is measured in millilitres per

gram with coarser flakes having better expansion characteristics.

5

Flake Size Microns Mesh Mass Dist Grade Price Basket Sales

(%) TGC (%) (US$/t) Price (US$/t)

Super Jumbo >500 +35 1.9 94 - 97 2,500 47.5

Jumbo 300 - 500 +50 24 94 - 97 2,200 528

Large 180 - 300 +80 22.5 94 - 97 1,400 315

Medium 150 - 180 +100 6 94 - 97 950 57

Small 75 - 150 +200 20.6 94 - 97 700 144.2

Fines <75 -200 25 90 500 155

Weighted Avg Basket Price 1216.7 (Mass dist x price)

Table 3: Chilalo Graphite Project

product specifications and

weighted average basket price.

(source: Graphex Mining, Corpo-

rate, website, August 2016) .

GRAPHITE BATTERIES TRADITIONAL MARKETS EXPANDABLE GRAPHITE MARKETS

SPECS (refractories/foundaries) (eg. foil, sheet, gasket, seals, flame retardants)

Flake Size Fine (< 150 μ) Medium-large (150-300 μ) Mainly coarse (>180 μ)

Purity Higher purity marginally reduces Minimum 94% TGC purity Higher purity (95% TGC)

cost for spherical graphite pro-ducer opens up a number of applications

Other Favourable battery performance N/A Expansion rate, method + temperature

Table 4: Primary graphite markets

and products specifications

(source: Graphex Mining, Corpo-

rate Presentation, February

2017) .

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This type of graphite has a number of important uses:

• Flame Retardant: The real market opportunity here is the recommendation by the

Chinese and South Korean governments for the use of flame retardant materials in

future construction. CNBM have indicated that the market for flame retardant building

materials in China is currently around 5Mtpa with expandable graphite representing 5-

50% of these materials depending on the building specifications. Dwindling reserves,

environmental issues and cold weather interruptions are also placing pressure on

Chinese supply. The superior expansion rates of Chilalo have the potential to supply

this growing market. Expandable graphite is added to foam to improve thermal

efficiency and provides the material with natural flame retardant properties. This

premium product currently sells for over US$2,600 per tonne.

• Graphite Foil: This type of graphite is used as a heat shield in electronic devices such

as LED, smart phones and laptops and is produced from high purity and coarse flake

graphite. Foil sells for up to US$50,000 per tonne.

• Graphite Paper/Sheet: Used in sealing gaskets, graphite tapes, packing and

reinforced tapes. This requires high purity and coarse flakes with good expansion

rates.

From a pricing perspective (Benchmark Mineral Intelligence), the demand for expandable

graphite would appear to support high prices in the near term for 32 mesh, 48 mesh and 80

mesh graphite (Figure 5).

6

Figure 4: Expansion rates for

Chilalo graphite (source:

Graphex Mining, Expandable

Graphite Presentation, July

2016).

The Chinese government has

legislated for the use of flame

retardant materials…

...expandable graphite is a key

component

Pressure is mounting on Chinese

supply

Figure 5: Price points for graphite

being sold into expandable graph-

ite markets (source: Benchmark

Mineral Intelligence, July 2016) .

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We note that the Company appears to have taken a conservative view on its as-

sumed pricing going forward. Price forecasts in this space are typically across a

wide range.

While prices for small, medium and large flake graphite typically have declined by

over 30% in the preceding two years, prices for expandable graphite have in-

creased 10% over the same period. There is potential for further near term price

upside based on the market dynamics outlined above.

Spherical Graphite: This is produced through fine grinding, purification and pro-

cessing the flat flake into a sphere of concentrate. Spherical graphite is used as an

anode for lithium ion batteries with battery grade spherical graphite having a mini-

mum of 99.95% TGC. Pricing is determined by particle size and shape.

The demand for lithium-ion batteries has been well documented with the Tesla

US$5 billion battery factory in Nevada nearly complete. This plant has the capacity

to double the world’s output of electrical vehicles at 500,000 batteries per annum.

Tesla is likely to require 80-126K of battery grade spherical graphite per annum.

The Tesla Model S has an 85kw battery that consumes170kg of spherical graphite

(425kg of flake graphite). More recently China based CATL has announced plans

to expand their lithium-ion production six-fold to 50 gigawatt hours by 2020 to keep

up with surging Chinese demand. Their output has overtaken LG Chem and is fast

approaching Panasonic and the Warren Buffet backed BYD (Fortune.com, 2016).

Another potential growth market is the introduction of the Powerwall home battery

market with projected annual production of 15GWh per annum.

Offtake Negotiations with CN Docking and China Gold Given China produces

80% of the world’s expandable graphite with a well publicized shortage of coarse

flake graphite, the Chinese are key players in this sector. RM Research noted the

ASX announcement by GPX (ASX Announcement, 25/1/2017) updating the market

on the status of advanced negotiations that appear to have reached broad agree-

ment on:

• Taking a 50% joint venture interest in the Tanzanian subsidiary

Ngwena Tanzania Limited via a cash injection into Ngwena.

• Finalising an offtake agreement for 100% of Chilalo graphite.

• The parties jointly working on a debt funding package.

• GPX acting as project manager, and

• GPX providing technical expertise for the Project.

It appears CNBM (the owner of the worlds largest amorphous graphite supplier

South Graphite Co Ltd) will be taking the lead in this funding/offtake process

which could also see some downstream processing of concentrates from Chilalo

within Tanzania. CNBM control the building material industry in China producing

50% of all building materials. The use of the Chilalo material to produce expanda-

ble graphite for flame retardant building materials explains the reason for their in-

terest in the product.

Through experienced marketing consultant Mrs Juyan Feng, who was responsible

for the CNBM/China Gold introduction, GPX appear well placed to conclude what

would amount to China’s first commercial agreement with an offshore graphite de-

veloper.

7

Electric Vehicles likely to drive

spherical graphite demand

Chilalo graphite is superior to

Chinese graphite…

...this is likely to motivate China

Gold and CN Docking

GPX is very close to finalising

offtake and funding agreements

for Chilalo

Page 8: Graphex Mining Ltd - RM Research Pty LtdMar 08, 2017  · Graphex Mining Ltd MOU with Chinese counterparties taking shape...RC drilling returns high ... rate Presentation, July 2016)

FINANCIAL OVERVIEW

Revised 2015 Pre Feasibility study

A pre-feasibility study was completed in

November 2015 which we have since revised

and further expanded to an 18 year mine life

(from the 2015 PFS mine life of 10 years) as

summarised in Table 4. The financial metrics

in this table are based on a conservative

production profile of only 69Ktpa. The project

shows a relatively fast payback of under two

years, a healthy internal rate of return of 50%

and a positive NPV10 of US$204 million

(US$102 million attributable to GPX based on

a 50% project interest).

RM Research believes (Sensitivity Analysis

based on the 2015 PFS) that there is near

term upside particularly with the possibility of

increased production rates and graphite

basket price upside given the positive outlook

for expandable graphite and the recent 80%

high- grade JORC Resource upgrades.

For the purpose of our valuation (Estimate of Value) RM Research has assumed a 50%

project ownership based on the recent ASX Announcement (25/1/2017). We anticipate further

updates on commercial negotiations in the near term.

Sensitivity Analysis 2015 Pre Feasibility Study

Table 5 and Figure 6 (based on

the 2015 PFS study over a 10

year mine life) shows the project

is relatively insensitive to CAPEX

however a 20% lift in graphite

basket prices has a significant

impact on the pre-tax NPV which

increases by almost US$100

million. The project is very

sensitive to grade variability

which we consider as less of a

risk given the Reserve status.

8

Table 4: Financial summary for

the Chilalo Graphite Project re-

vised Pre Feasibility Study

(source: Graphex Mining, web-

site, March 2017 and RM Re-

search modelling).

FINANCIAL SUMMARY MID CASE

Mine Life yrs 18

Avg Annual Production tpa 69,123

Plant Feed tpa 630,000

Avg Head Grade (LOM) % TGC 10.85

Avg Recovery % 94.00

LOM Revenue US$m 1,222.10

Avg Annual EBITDA US$m 39.70

Graphite Basket Price US$/t 1,217.00

OPEX/tonne conc US$/t 490.00

Op Margin US$/t 727.00

CAPEX US$m 74.00

Payback (Pre Tax) yrs 2 yr

NPV10 (after Tax) US$m 204.00

IRR (after Tax) % 50.00

OPEX CAPEX Mill feed grade Basket price

Factor NPV Factor NPV Factor NPV Factor NPV

80% $104.48 80% $235.89 80% $214.71 80% $112.51

85% $128.28 85% $226.84 85% $210.96 85% $134.31

90% $152.09 90% $217.80 90% $207.21 90% $156.11

95% $175.90 95% $208.75 95% $203.46 95% $177.91

100% $199.71 100% $199.71 100% $199.71 100% $199.71

105% $223.51 105% $190.66 105% $195.96 105% $221.51

110% $247.32 110% $181.62 110% $192.20 110% $243.30

115% $271.13 115% $172.57 115% $188.45 115% $265.10

120% $294.94 120% $163.53 120% $184.70 120% $286.90

Table 5: Chilalo Graphite Project

2015 Pre-Feasibility Sensitivity

Analysis.

80%

80%

120%

120%

120%

120%

80%

80%

80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250 260 270 280 290 300

Basket price

Mill feed grade

Operating costs

Capital costs

Pre-Tax NPV (US$M)

Sensitivity TornadoFigure 6: Chilalo 2015 Pre Feasi-

bility sensitivity tornado .

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ESTIMATE OF VALUE

Our valuation scenario (Table 6, Figure 7) assumes a fully funded Chilalo Project leaving

GPX with a 50% equity interest and no further dilution of the Company. In the alternative, a

A$30 million equity raise around current prices together with say A$70 million of project

funding (refer 25/1/2017 ASX Announcement) would have a similar effect on an earnings per

share basis given the current market capitalisation of GPX. We consider the upside is the

exposure to the high value expandable graphite together with the likely increase in plant

throughput/mine life to meet graphite demand.

Finally, a look at our peer analysis leaves RM Research in no doubt that the recent JORC

Resource increase should have a very significant impact on the valuation, and in turn the

share price of GPX in the short to medium term given the A$311 million enterprise value for

Magnis Resources (based on the Nachu Graphite Project JORC Reserves of 76Mt @ 4.8%

TGC for 3.6Mt of contained graphite). This equates to an EV of around A$90 per tonne of

contained JORC Reserves. The weighted average EV/tonne JORC Reserve of contained

graphite for the sample of companies is A$32/tonne.

Our scenarios for exploration factor in attributable JORC Reserve increases of 10Mt, 20Mt

and 30Mt (attributable of 5Mt, 10Mt and 15Mt) @ 10.87% TGC for our lower case, mid case

and upper case scenarios based on an EV/tonne of JORC Reserve of a median of A$18/

tonne for our comparable companies (Table 6). Our valuation of the operating mine assumes

the base case scenario as set out in the Pre-Feasibility Study.

Our Upper Case scenario of $1.98 per Share (Table 6, Figure 7) represents our un-risked

attributable NPV10 based on a A$133m attributable NPV10 over an 18 year mine life

(assuming a constant annual OPEX for the life of mine). This is not unreasonable given the

similar grade and configuration of the high grade JORC Resource. Our mid-case scenario

discounts this by 30% for completion risk and our lower case variable is the risked NPV10 on

the most recent 10 year mine life scenario (2015 PFS). We believe annual production

increases are highly likely given the current tightness in graphite markets.

9

VALUATION Mid Case Lower Case Upper Case

$ $/Sh $ $/Sh $ $/Sh

Chilalo (NPV10) $93.03 $1.22 $65.12 $0.85 $132.89 $1.74

Exploration $20.65 $0.27 $10.33 $0.14 $30.98 $0.41

Cash + Liquid Sec $2.40 $0.03 $2.40 $0.03 $2.40 $0.03

Corporate -$15.00 -$0.20 -$15.00 -$0.20 -$15.00 -$0.20

TOTALS $101.08 $1.33 $62.84 $0.82 $151.27 $1.98

Table 6: Graphex Mining Valua-

tion mid case, lower case and

upper case scenarios.

Figure 7: Graphex Mining Valua-

tion Summary.

An increase of 30Mt in JORC

Reserves (15Mt attributable to

GPX) could add in excess of 40

cents per Share to the current

GPX share price…

...the Chilalo mine life would likely

be increased well beyond 18

years based on JORC Reserves

of >15Mt @ +10% TGC

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PEER COMPARISON

Table 7 and Figures 8 and 9 provide an overview of the more advanced ASX listed graphite

developers/producers. While earnings valuations are difficult to project, due to the non-

transparent graphite markets and variability among graphite deposits (not to mention the lack

of operating history for graphite producers generally), a comparison of Enterprise Values and

premium/discount to NPV gives us some insight. The market is generally discounting long

10

Table 7: Comparable ASX listed

graphite explorers/developers

based on EV/tonne of JORC Re-

serves of graphite.

Figure 8: ASX listed Graphite

Developers EV/T Reserve of con-

tained graphite.

Figure 9: ASX listed Graphite

Developers Premium/Discount to

NPV.

Company ASX Code

Share Price ($)

EV ($m) Graphite (Mt) Gr Prod Ktpa

NPV Premium/Disc

EV/Mt Re-serve

Project Status

Graphex Mining GPX $0.425 30.1 1.72 69.1 $101.0 -70.2% $17.44 PFS

Syrah Res SYR $2.49 493.6 19.0 380.0 $1,466.7 -66.3% $26.0 Develop

Magnis Res MNS $0.575 330.3 3.7 220.0 $2,248.0 -85.3% $90.5 Feas

Walkabout Res WKT $0.097 6.9 1.4 40.0 $430.7 -98.4% $4.99 Feas

Kibaran Res KNL $0.165 44.0 2.2 36.4 $262.7 -83.2% $19.79 Feas

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

$-

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00

$90.00

$100.00

Graphex Mining Kibaran Resources Syrah Resources Magnis Resources

Co

nta

ined

Gra

ph

ite (M

t)

EV

/T G

rap

hit

e (

A$)

ASX Listed Graphite Developers-EV/Tonne contained Gr Reserves

Contained

Graphite

-

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

-120.0%

-100.0%

-80.0%

-60.0%

-40.0%

-20.0%

0.0%

Graphex Mining Syrah Resources Magnis Resources Walkabout Resources

Gra

ph

ite C

on

c P

rod

ucti

on

(K

tpa)

Dis

co

un

t/P

rem

ium

to

NP

V

ASX Listed Graphite Developers-Prem/Disc to NPV vs Gr Production

Annual Production

Disc/Prem NPV

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mine life/industrial minerals companies due to the lack of a terminal market for the product, in

this case graphite, and the lack of any earnings history. Furthermore the long mine lives do

tend to inflate NPV calculations.

Notwithstanding the above, we note that GPX is trading at a discount of approximately 66% of

NPV compared to KNL at 83% and MNS at 85% however we consider the MNS production

profile, for example, to carry more risk given the projected larger concentrate output and more

risk associated with having to secure offtake agreements. We also note that the NPV

calculations for MNS are derived from significantly higher basket graphite prices and have

therefore inflated valuations compared to our basket of comparable companies. RM

Research notes that MNS are assuming US$3,400 per tonne for >500mm compared to our

figures for GPX of US$2,500 per tonne for >500mm graphite.

We believe the recent JORC Resource increases should lead to an increase in the JORC

Reserve inventory and translate ultimately into further mine life extensions and/or an increase

in annual production. This should in turn lead to higher NPV’s and therefore higher valuations

as indicated in our sensitivity analysis. Furthermore we anticipate that, in a normalised market

for the majority of production situations, and subject to operating performance, market

valuations for these companies should approach NPV.

In the short to medium term however MNS represents the most meaningful comparison to

GPX which would lead us to conclude the strong potential for a re-rating following the

conclusion of commercial arrangements with the Chinese counterparties.

CORPORATE Not much corporate activity since the listing of GPX in June 2016, however the Company did

report a cash balance of A$2.6 million for the 31 December 2016 Quarterly Report.

11

The recent JORC Resource up-

grades at Chilalo is likely to see a

re-rating of GPX in the short to

medium term…

….and should lead to an exten-

sion of mine life and/or annual

throughput

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RISK ANALYSIS

POLITICAL RISK: A press release by the Ministry of Energy & Minerals (Tanzania) on 3

March 2017 stated that the Tanzanian Government intends to ban the export of mineral

concentrates and metallic ores (such as gold, copper, silver and nickel). The objective of the

Tanzanian Government is to undertake more value adding downstream processing in country.

Given that graphite is already processed to a high degree of purity, we believe that the policy

(yet to be legislated) is more likely targeted at metallic ores rather than Industrial minerals.

We believe that in country manager Heavenlight Kavishe (see Board and Management) will

seek further clarification on this press release in the near term. At a more general level,

Tanzania is considered by RM Research to be one of the more stable countries in Africa to

undertake mining and exploration activities with a favourable corporate tax rate (30%),

accelerated depreciation schedule and reasonable royalties (3% on graphite).

PROJECT TENURE: The Company already has a granted Mining License so we consider the

risks, subject to compliance with Tanzanian mining laws, to be minimal.

INFRASTRUCTURE RISK: Chilalo has a number of significant infrastructure advantages

including being connected by road 220km from a deep water port (capable of handling

Panamax sized vessels) at Mtwara. While 160km of the road remains unsealed, we

understand the government is likely to provide some funding for a road upgrade.

GRAPHITE OUTLOOK: GPX is focussed on the supply of graphite into the expandable

graphite market which is a highly specialised and non-transparent market. Graphite relies on

sales by contract/offtake agreements that are difficult to benchmark or project. GPX therefore

could be subject to pressure by end-users or offtake arrangements with larger players in the

market. We note however that the risks, given the supply side pressure and rapidly increasing

demand for both products, remains skewed to the upside.

METALLURGY/PROCESS RISK: RM Research considers the flow sheets (crushing,

grinding, flotation and screening) associated with the Chilalo project are relatively simple

compared to many metalliferous projects/refractory ores that are reliant on more complex

chemical and mechanical processes. Testwork by metallurgical consultants BatteryLimits

Pty Ltd has so far returned very encouraging results in respect to grade, flake size

distribution and purity with coarse flakes (50% flakes > 180 microns) exhibiting very good

expansion characteristics.

RESOURCE RISK: Given the high quality grade nature of the Shimba Deposit with its

favourable metallurgical characteristics, RM Research considers this risk to be low. The risks

here are on the upside with over 53km of prospective strike length remaining to be explored.

The Company is targeting resources in excess of 100Mt @ 3-11% TGC.

FINANCE RISK: At approximately US$74 million (A$100 million), Chilalo is considered by RM

Research to be a low capital cost operation whose project economics are not particularly

sensitive to CAPEX variability. More importantly the operating margins, at a range of

sensitivities, are robust. As with many resource projects, the economics are particularly

sensitive to the graphite price together with exchange rates. There is a risk however, in the

event of a plant expansion, that GPX may be unable to meet its financial commitments in a

timely manner.

MARKET RISK: The market risk, as it relates to GPX, remains skewed on the upside with

limited supply and rapidly expanding demand likely to see companies like GPX trading at a

premium to NPV (at base case production assumptions). Furthermore, the significant

resource upside, combined with the strategic value of the deposit, are likely to diminish the

market risk.

The primary risks for this type of industrial mineral are the ability to market and sell the

graphite in a non-transparent market to end-users and/or traders with significant market

financial and political resources. The key benefit for GPX is the high quality product which

does give the Company some leverage in commercial negotiations and dealings.

12

GPX will seek further clarification

from the Ministry of Energy Min-

erals in respect to press release

outlining the proposed ban on the

export of mineral concentrates

and metallic ores…

...RM Research does not believe

this policy is targeting industrial

minerals

Chilalo is well placed in respect to

existing infrastructure

We believe that project finance is

likely to be provided by China

Gold and/or CN Docking in re-

turn for direct project equity

Chilalo has returned favourable

metallurgical results particularly

with regard to grade and flake

size

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DIRECTORS AND MANAGEMENT

Stephen Dennis, B.Com, LLB, GradDipAppFin (FINSIA) NON EXECUTIVE CHAIRMAN

Stephen has 30 years experience in mining including senior positions with MIM Holdings

Limited, Minara Resources Limited and Brambles Limited. He was also recently

Managing Director of CBH Resources. He is currently a non executive Chairman of Heron

Resources Limited, Rox Resources Limited and Cott Oil & Gas Limited.

Phil Hoskins, B.Com, CA, GradDipAppFin (FINSIA) MANAGING DIRECTOR

He is an experienced chartered accountant and senior executive with 14 years of broad

finance and commercial experience across resources exploration, project development and

production as well as large-scale property developments requiring debt and equity financing.

He was appointed as the IMX's Managing Director in October 2015 after being Chief

Executive Officer since September 2014, before which he spent almost three years as IMX's

Chief Financial Officer. Mr Hoskins commenced as Managing Director in mid CY 2016.

Grant Davey, B.Sc. NON EXECUTIVE DIRECTOR

Mr Davey has in excess of 20 years’ experience covering construction and operation of gold,

platinum and coal mines in Africa, Australia, South America and Russia. More recently he has

been involved in venture capital investments in several Canadian and Australian listed

exploration/mining projects. Grant was instrumental in acquiring the Honeymoon Uranium

project (South Australia). He was the managing director of Cradle Resources Limited and

founder and managing director of the Panda Hill niobium project (Tanzania) which is expected

to go into construction during 2016. Grant is currently an executive director of ASX listed

Boss Resources Limited.

Nicholas Corlis, B.Sc. (Hons), MSc, MAIG GENERAL MANAGER-TECHNICAL

Nick is a geologist with over 20 years of domestic and international experience in the

resources covering gold, iron ore, base metals, graphite and coal. He has significant

experience in mineral exploration and project management; from project generation/M&A,

discovery and resource definition, through to feasibility and development. His previous role

was General Manager Business Development for Flinders Mines where he oversaw the

discovery and delineation of the iron ore project. Prior to that, he held senior roles with

Perilya Limited, Golder Associates and WMC Limited. He is currently also the exploration

manager for Indiana Resources.

Christopher Knee, LLB, B.Ec. (Hons) ACIS CHIEF FINANCIAL OFFICER

Chris has over 10 years' experience working as a Chartered Accountant in senior finance

roles. He commenced his career with a large multi-national accounting firm working both in

Australia and the US, in consulting, audit, corporate finance and technical roles. His most

recent role was as CFO of Manas Resources Limited. He is currently also the CFO of

Indiana.

Stuart McKenzie, BCom, CA CO SECRETARY/COMMERCIAL MANAGER

Stuart has in excess of 25 years commercial experience including 6 years as Company

Secretary for Anvil Mining Limited. Prior to that he held senior positions with Ok Tedi

Mining Limited, Ernst & Young and HSBC.

Heavenlight Kavishe, MSc (Mech Eng), PhD (Eng) COUNTRY MANAGER (TANZ)

Kavishe is Tanzanian and has extensive senior management experienced including the

National Development Corporation (NDC) and the Parastatl Sector Reform Commission

(PSRC). In 2006, Kavisch established Kicheko Ltd and is regularly invited as a guest lecturer

on entrepreneurship at various Tanzanian Universities and centres of higher learning.

13

Phil has over 14 years in financial

and commercial experience in-

cluding resources...

Grant Davey has development

experience with specialty metals

companies in Africa

Nick is a geologist with over 20

years experience

Kavishe is an important conduit to

the Tanzanian Government...

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14

CAPITAL STRUCTURE 2017 2018 2019 2020 SURPLUS FUNDS 2017 2018 2019 2020

# Shares (m) 56.6 76.3 76.3 76.3

Net Profit (1.5) (1.5) 17.1 11.9

Options (m) 19.68 - - -

+ Working Capital Adj - - - -

Proceeds from Options (A$) 0.00 2.43 0.00 -

+Dep/Amort - - 12.5 12.5

Total Shares on issue (m) 56.6 76.3 76.3 76.3

+Asset Sales - - - -

Share Price (A$) 0.425 0.425 0.425 0.425

+Premium Income - - - -

Market Cap (diluted) (A$m) 32.4 32.4 32.4 32.4

-Exploration Expenditure 1.0 1.0 1.1 1.1

-Capex - 0.5 0.5 0.5

PRODUCTION FORECASTS 2017 2018 2019 2020

-Loan Repayment - - - -

Attrib Gr Throughput (Ktpa) - - 315 315

-Dividends - - - -

Grade (%) - - 10.87% 10.87%

-Assets Purchased - - - -

>500um (ktpa) - - 0.7 0.7

CASH FLOW (2.5) (3.0) 8.0 22.8

300-500um (ktpa) - - 8.2 8.2

+Equity (Rts,plc,opts) - - - -

180-300 (ktpa) - - 7.7 7.7

+Loan Drawdown - - - -

150-180um (ktpa) - - 2.1 2.1

TOTAL SURPLUS (A$m) (2.5) (3.0) 28.0 22.8

75-150um (ktpa) - - 7.1 7.1

<75um (ktpa) - - 8.6 8.6

EARNINGS RATIOS 2017 2018 2019 2020

CFPS (c) (0.04) (0.04) 0.37 0.30

PROFIT & LOSS 2017 2018 2019 2020

CFM (x) (9.62) (10.65) 1.16 1.42

A$:USD$ AUD 0.76 AUD 0.76 AUD 0.76 AUD 0.76 EPS (c) (0.03) (0.02) 0.22 0.16

>500m (USD$/t) USD 2,500 USD 2,500 USD 2,500 USD 2,500

PER (x) (16.04) (20.98) 1.90 2.72

>500um (A$/t) AUD 3,289 AUD 3,289 AUD 3,289 AUD 3,289

DPS (c) - - - -

300-500um (USD$/t) USD 2,200 USD 2,200 USD 2,200 USD 2,200

Div Yield (%) - - - -

300-500um (A$/t) AUD 2,895 AUD 2,895 AUD 2,895 AUD 2,895

180-300 (USD$/t) USD 1,400 USD 1,400 USD 1,400 USD 1,400 ASSET VALUATION A$m A$/sh

180-300 (A$/t) AUD 1,842 AUD 1,842 AUD 1,842 AUD 1,842

Chilalo Project (50% Int)

$93.03 $1.14

150-180um (USD$/t) USD 950 USD 950 USD 950 USD 950

Exploration - (50% Int)

$20.65 $0.27

150-180um (A$/t) AUD 1,250 AUD 1,250 AUD 1,250 AUD 1,250

Cash + Liquid Sec

$2.40 $0.03

75-150um (USD$/t) USD 700 USD 700 USD 700 USD 700

Corporate

-$15.00 -$0.20

75-150um (A$/t) AUD 921 AUD 921 AUD 921 AUD 921 TOTAL

$101.08 $1.33

<75um (USD$/t) USD 500 USD 500 USD 500 USD 500

<75um (A$/t) AUD 658 AUD 658 AUD 658 AUD 658

DOMAIN Classif Mt TGC (%) Cont Gp

TOTAL REVENUE - - 54.8 54.8

High-grade zone Prob Res 4.7 11.0% 517.0

Operating Costs (A$m) - - 22.1 22.1

Total Ore Reserves Prob Res 4.7 11.0% 517.0

Dep/Amort (A$m) - - 12.5 12.5

High-grade zone Ind 5.2 11.9% 618.8

Royalties - - 1.6 1.6

High-grade zone Infe 11.7 9.4% 1099.8

Corporate Overheads (A$m) 1.5 1.5 1.5 1.5

Total High-Grade Resources Ind + Infer 16.9 10.2% 1718.6

EBIT (A$m) (1.5) (1.5) 17.1 17.1

Low-grade zone Infer 36.6 3.4% 1244.4

Interest Expense (A$m) - - - -

Total Resource Ind + Infer 53.5 5.5% 2963.0

EBT (A$m) (1.5) (1.5) 17.1 17.1 Resources are inclusive of reserves and are not equity accounted

Abnormal Gain (A$m) - - - - Reserves and resources are depleted by production

Operating Profit (A$m) (1.5) (1.5) 17.1 17.1

Tax (A$m) - - - 5.1

EARNINGS FORECASTS 2017 2018 2019 2020

NPAT (1.5) (1.5) 17.1 11.9 Production (ktpa) - - 34 34

Cash Cost ($/t) - - 645 645

FINANCIAL POSITION 2017 2018 2019 2020

Net Profit (A$m) (1.5) (1.5) 17.1 11.9

ASSETS

Cash Flow (A$m) (2.5) (3.0) 28.0 22.8

-Cash + Debtors (A$m) (0.1) (0.7) 27.3 50.2 CFPS (c) (0.04) (0.04) 0.37 0.30

-Property, Plant & Equip (A$m) - 50.0 38.6 27.2 CFM (x) (9.6) (10.6) 1.2 1.4

TOTAL ASSETS (0.1) 49.3 65.9 77.3 EPS (c) 0.03) (0.02) 0.22 0.16

LIABILITIES PER (x) (16.0) (21.0) 1.9 2.7

Debt (A$m) - - - - DPS (c) - - - -

Trade Creditors (A$m) - - - - Div Yield (%) - - - -

TOTAL LIABILITIES - - - -

NET ASSETS (0.1) 45.0 61.6 73.0

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Disclaimer / Disclosure

This report was produced by RM Research Pty Ltd, which is a Corporate Authorised Representative (343456) of RM Capital Pty Ltd (Licence no. 221938). RM Research received a payment for the compilation and distribution of this research report. RM Research Pty Ltd has made every effort to ensure that the information and material contained in this report is accurate and correct and has been obtained from reliable sources. However, no representation is made about the accuracy or completeness of the information and material and it should not be relied upon as a substitute for the exercise of independent judgment. Except to the extent required by law, RM Research Pty Ltd does not accept any liability, including negligence, for any loss or damage arising from the use of, or reliance on, the material contained in this report. This report is for information purposes only and is not intended as an offer or solicitation with respect to the sale or purchase of any securities. The securities recommended by RM Research carry no guarantee with respect to return of capital or the market value of those securities. There are general risks associated with any investment in securities. Investors should be aware that these risks might result in loss of income and capital invested. Neither RM Research nor any of its associates guarantees the repayment of capital.

WARNING: This report is intended to provide general financial product advice only. It has been prepared without having regarded to or taking into account any particular investor’s objectives, financial situation and/or needs. Accordingly, no recipients should rely on any recommendation (whether express or implied) contained in this document without obtaining specific advice from their advisers. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. Where applicable, investors should obtain a copy of and consider the product disclosure statement for that product (if any) before making any decision.

DISCLOSURE: RM Research Pty Ltd and/or its directors, associates, employees or representatives may not effect a transaction upon its or their own account in the investments referred to in this report or any related investment until the expiry of 24 hours after the report has been published. Additionally, RM Research Pty Ltd may have, within the previous twelve months, provided advice or financial services to the companies mentioned in this report. As at the date of this report, the directors, associates, employees, representatives or Authorised Representatives of RM Research Pty Ltd and RM Capital Pty Ltd may hold shares in this Company.

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Subiaco WA 6008

AUSTRALIA

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RM Research Recommendation Categories

Care has been taken to define the level of risk to return associated with a particular company. Our recommendation ranking system is as follows:

Buy Companies with ‘Buy’ recommendations have been cash flow positive for some time and have a moderate to low risk profile. We expect these to outperform the broader market.

Speculative Buy We forecast strong earnings growth or value creation that may achieve a return well above that of the broader market. These companies also carry a higher than normal level of risk.

Hold A sound well managed company that may achieve market performance or less, perhaps due to an overvalued share price, broader sector issues, or internal challenges.

Sell Risk is high and upside low or very difficult to determine. We expect a strong underperformance relative to the market and see better opportunities elsewhere.

15