What’s Down the Track?October 2013

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All share price information is as at 18 October 2013.

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Argonaut’s Perspective

3

Where are we at and where might we go?

Resource sector performance

Commodities and the sharemarket

Resource service sector – value and performance

Funding companies, funding projects

Importance of exploration

Alternative funding

Corporate Activity and Asset transactions

Summary and Implications

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7

3

4

8

6

5

Relative Index Performance in CY2013

4

Although Resources as a whole have underperformed the broader market in CY2013, the Small Resources have dramatically underperformed

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20% S&P/ASX 200 +14%

S&P/ASX 200 Resources -5%

S&P/ASX Small Resources -40%

As bad as it gets for Small Resources

5

The S&P/ASX Small Resources Index is trading at levels comparable to the depths of the GFC in 2008-09 and as far back as 2005

Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-130

1000

2000

3000

4000

5000

6000

7000

8000

S&P/ASX Small Resources 2277 points

S&P/ASX Small Resources Index 10-Year Historical Performance

Gold

6

Gold equities have underperformed the physical, with US tapering concerns and the real cost of gold mining weighing on the sector

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-1390

95

100

105

110

115

Spot Gold (AUD) Gold Stock Composite HUI Index

ASX 200

Relative Performance of Gold Price in CY2013 Physical gold price remains volatile, largely driven by central bank policies

Fundamentals for gold are intact while uncertainty surrounding US tapering continues to lean on expectations

Previous buoyant gold price environment resulted in gold companies pursuing increasingly marginal projects

Investment paradigm has shifted to cash flow margins, earnings and capital discipline

Producers are transitioning to an ‘all in’ cost reporting standard

High margin producers offer investors relative safety from a declining gold price

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4

3

6

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Base Metals

7

Outlook for copper OK but nickel looks challenging

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-1340

50

60

70

80

90

100

110

120

Copper Price (USD /lb) Copper Stock Composite ASX200

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-1340

50

60

70

80

90

100

110

120

Nickel Price (AUD /lb) Nickel Stock Composite ASX200

Relative Performance of Nickel Price in CY2013

Relative Performance of Copper Price in CY2013 Base metals prices persist at low levels

Cu and Ni remain in surplus and high LME stockpiles are likely to sustain downward pressure

Testing times for marginal producers

Ni sector focused on cutting costs; unfortunately prices are falling faster making free cash flow generation difficult

For many commodity sectors we need to see capitulation of marginal projects before markets can rebalance

Improving demand, particularly from China, is important for price turnaround

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5

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Iron Ore

8

Current production benefiting from resilient Fe price helped by a weaker AUD, generating significant cash for miners

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-1340

50

60

70

80

90

100

110

120

Iron Ore Price (AUD CFR 62% Fe) Iron Ore Stock Composite

ASX200

Relative Performance of Iron Ore Price in CY2013 Iron ore market has been resilient, but market volatility may increase in the short-term

Iron ore market has maintained relative strength as a key constituent of the Chinese growth engine

Seasonal demand weakness is yet to materialise in 2013

Australian producers have increased supply by ~10% in FY13, however the capital intensity of new supply remains a key hurdle to growth moving forward

Listed Iron Ore producers have been a good place to hide whilst the rest of the resources sector struggled

Over supply was prematurely factored into equities; strong earnings helped by weaker AUD

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5

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Uranium

9

Not a matter of if, but when

Price (US$ per pound)

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

$55

$60

$65

$70

$75

$80

Long-term Uranium Price

Uranium Spot Price

Monthly Uranium Prices: Long-term vs. Spot

Source: Cameco

Demand increasing, supply faltering, held back by Japanese overhang

Uranium remains a strategic energy commodity which is facing a medium term supply deficit, driven by 65 reactors under construction and a further 167 planned

Uranium equities are trading at an average 70% of pre-Fukushima values

Uranium is the only non-carbon based energy that can provide long-term clean base load power

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Commodity View

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Ironically, the decline of resources investment caused by retreating commodity prices will result in future supply deficits…and so the cycle will repeat itself

PRECIOUS Gold

Expected tapering of monetary easing and lack of inflation places downward pressure on the gold price

Continued financial uncertainty in key markets (USA, Japan, Eurozone, China) may provide support

Strong physical demand in Asia Central Banks (India & China account for ~50% physical demand)

However equities have underperformed bullion by >30% in 2013

BULKS Iron Ore The market has maintained relative strength in 2013

The threat of looming seaborne oversupply has been prematurely factored into equities. Mid-cap producers with competitive cost structures remain positioned for earnings growth. The impact of lower AUD FX will increasingly favour Australian producers

ENERGY Uranium

Prolonged low prices have not incentivised the supply required to meet the growing global reactor fleet (from 345 currently to ~660 in 2030)

With new mine lead times of 4-8 years, and numerous project cancellations/deferrals this decade, supply is unlikely to meet increasing demand

The supply-side is temporary in surplus (Argonaut estimate 30Mlb) related to idled Japanese reactors, however the overhang will not prevail under a market that is propped up by secondary sources which will soon cease, namely the 24Mtpa Russian megatonnes for megawatts program

BASE METALS

Copper

LME inventories have plateaued, however they remain high (620kt). With the development capital committed on large projects, the medium term market is tipped marginally into to surplus, however project delays and cancellations are expected under current price conditions

Declining grades, deeper resources and higher sovereign risk will ultimately lead to high production costs. New projects will not be incentivised at current prices

Nickel The market is currently in oversupply and will remain so until there is capitulation on the supply side – most likely from low grade and laterite sourced ores

Resource Services vs S&P/ASX 200

11

Resources services stocks have experienced a volatile year, beginning 2013 strongly before plummeting mid-year and more recently showing healthy signs of recovery but have still underperformed the broader market

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13-30%

-20%

-10%

0%

10%

20%

30%

S&P/ASX 200 +14%

Argonaut Resource Services Peer Index*-4%

*Argonaut Resource Services Peer Index is a market-weighted index consisting of: Austin Engineering, Ausdrill, Decmil, Fleetwood, Forge, GCS, GR Engineering, Imdex, Logicamms, Macmahon, Matrix Composites, Maca, NRW Holdings, Pacific Energy, RCR, SCEE and Tox Free

Resource Services – Value Proposition?

12

Although current resource services forward multiples are higher than the 5-year average, the gap between the broader market and resource services forward multiples remains wide

Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-130.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

ALQ MCEW

ORTO

XCLO SK

EIM

DMRM

MND LYL

WDS

UGLBKN

SDM AAX

ANGRQL LE

ITS

EDOW RCR

GNGW

TP LCM

FWD

PEA SXE

SWK

MIODCG

COFMLD

NWH

FGE

MAHGCS

ASL BYLCGH

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0 18.7

x

16.0

x

15.6

x

15.4

x

14.4

x

14.1

x

12.9

x

12.8

x

12.7

x

12.2

x

11.7

x

11.2

x

11.2

x

11.1

x

11.1

x

11.0

x

10.8

x

10.7

x

10.7

x

10.4

x

10.4

x

10.3

x

10.3

x

10.2

x

10.1

x

9.5x

9.1x

9.0x

8.6x

8.5x

8.0x

7.8x

7.0x

6.5x

5.7x

5.5x

5.5x

4.9x

4.8x

Average FY14 forward multiple10.4x

5-year average forward multiple9.4x

Resource Services Forward Multiples

S&P/ASX 200Forward Multiples

Resource Services FY14 Forward Multiples

S&P/ASX 200 vs. Resource Services Forward Multiples

Raising capital in a challenging equity environment

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With clouds of uncertainty still lingering over the resources sector, equity capital markets have run dry as investors keep their hands out of their pockets

Equity Capital Markets Activity for WA-listed Resources Companies

Source: Business News WA

FY2011 FY2012 FY2013 FY2014 to date0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

14000.0

0

5

10

15

20

25

30

35

40

45

50$13,131.5b

$6,198.7b

$3,619.7b

$875.7b

34

39

22

Value of ECM deals

Number of IPOs

The importance of exploration in the creation of wealth

Exploration trends Australian exploration expenditure has continued to lose ground relative to other destinations In spite of higher expenditures Australia’s discovery rate has declined in recent years Since 2003, grassroots exploration has dropped from 50% to 34% of total spend Over the last decade (to 2012) the juniors share of spend has risen from 36% to 53% (non-bulks)

Downturn in exploration activity Availability of equity funding for exploration is tight, particularly for juniors High correlation between commodity prices and exploration activity Trend away from Australia

– Perception as a mature exploration destination– Impediments of sovereign risk, red tape, green tape, land access and the time required to achieve approvals and cost of inputs

Importance of new discoveries to resource industry sustainability About half of current non-ferrous mines will be exhausted within 7 – 18 years On average it takes 7 years to convert a new discovery into an operating mine In the absence of commodity price driven interest, exploration success can stimulate investor demand and provide capital raising

opportunity e.g. Sirius at Nova/Bollinger

Exploration incentives WA Government Exploration Incentive Scheme – Co-funding exploration drilling Mineral exploration tax credit

– Explorers can pass through the tax deduction to all shareholders from genuine exploration expenditure– KPMG report suggests a multiplier factor of 2 in additional exploration activity would result in positive ~$280m annual tax

revenue, up to ~ 4300 additional jobs and an additional $2.2b across the mining sector

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No substitute for discovery

Alternative funding solutions

Funding projects with equity at current valuations is difficult and highly dilutive, other solutions are available

Exchangeable Bond

Pre-Payment

Loan plus Warrants

Royalty /Stream Finance

Structured Convertible

Contractor Finance

Partial Asset Sales

Bridge Finance

Vanilla Project Finance

Infrastructure Sharing

Structured Bond

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Finance Solutions Key Provider

Service Provider

Private Equity

Fixed Interest Hedge Funds

Industry Participant

Commercial &Investment Banks

Commodity Trader

Royalty Fund

Investment Bank

Special Situations Investor

Infrastructure Owner

End-User

Selected Argonaut Transactions

$40,000,000Otto Energy

Structured Project Finance FacilityAdvisor

2013

$320,000,000Territory

Bridge Facility with Lehman for supporting CSM Bid

Advisor & Arranger

2007

$20,000,000Mediterranean Oil & Gas

Structured Bond secured with Stark & HarmonyAdvisor & Arranger

2005

$7,000,000Transerv

Short term facility secured with Apollo

Advisor & Arranger

2012

$100,000,000Sino Gas & Energy

Funding secured with HK listed oil & gas group MIE

Advisor & Broker

2012

$50,000,000Pacific Energy

Zero Coupon Exchangeable Bond with Pacific Road

Advisor & Arranger

2009

$5,000,000Indo Mines

Convertible Royalty Debenture with Anglo Pacific

Advisor & Arranger

2010

$50,000,000BC Iron

Pre-payment with Henghou for Partial Off-take

Advisor

2010

$100,000,000Latent Petroleum

Asset Farm-in with Alcoa

Advisor & Broker

2008

$116,000,000BC Iron

Infrastructure Access Agreement with FMG

Advisor

2010

ConfidentialGR Engineering (as Provider)

Advisor & Arranger

2013

MultipleAusdrill (as Provider)

Advisor & Arranger

Since 2005

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5 6 7 8

9 10 11 11

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Investor universe

Australian and Global Banks Lowest cost form of financing which comes with large levels of due diligence and conditions Hedging may be required Specialised teams focused on resource project financing

Specialty Royalty Providers and Streaming Companies To minimise dilution at current equity prices consideration to be made to speciality metal stream or royalty providers Appreciate the longer term aspect of funding

Specialist Funds Private equity firms are increasingly focused on resource investments of scale ($50m+) Will take an active , medium term view to realise a meaningful production profile Strong appetite for quality projects Have been very active in the resource services sector

Special Situation Flexible mandates with the ability to move quickly Familiar with project finance must be able to see sufficient value to meet financial hurdles

Institutions Domestic and Overseas Large cap through to micro-cap institutions Can be fickle depending on fund availability and redemptions Can be early stage

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There is now a diverse universe of capital providers and financing may be a combination of the alternatives

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Corporate Activity

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The focus for M+A in recent times has largely been around domestic consolidation of small to medium resources projects

FY2013 Resources M+A deals by location of target

Source: Herbert Smith Freehills Public M&A Report 2013

125

4

1

1

Gold Iron Ore Other Coal Uranium Total

$1.74b

$1.35b

$0.88b

$0.41b

$0.01b

FY2013 Resources M+A deals market value by Commodity

FY2009 FY2010 FY2011 FY2012 FY2013

72

95104

83

59

Number of Public M+A Deals FY2009-13

Overall Australian public M+A deal numbers fell in FY2013, continuing the fall from the previous year

Western Australia leads the way in the quantity of M+A deals in the resources space

Gold leads all commodities both in terms of quantity and value of deals, as consolidation continues to be a prominent theme in the sector

A significant number of resource projects were put up for sale as stand alone assets by private auction process

Opportunities to merge cash rich/project poor with project rich/cash poor

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FY2011 FY2012 FY2013 FY2014 to date

$1,263m

$1,913m

$1,584m

$520m

Asset Transactions

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Individual asset transactions have become more attractive as companies are showing a preference to pick and choose specific assets to acquire

Asset Transaction Activity for WA-listed resources companies

Source: Business News WA

The current metals and mining market has forced companies to rationalise asset portfolios Driven by the majors divesting non-core and more expensive

operations and distressed juniors

Companies looking to bolster balance sheets via sale of unprofitable and or non-core assets

Opportunistic acquisitions exist for companies with cash or strong script driven by solid management and track records Private equity firms are increasingly focused on resource

investments of scale ($50m+) Will take an active , medium term view to realise a meaningful

production profile Strong appetite for quality projects Have been very active in the resource services sector

Recent examples include: Barrick’s sale of WA assets (Granny Smith, Darlot, Lawlers ) to Gold

Fields for US$300m Alacer’s sale of its ABU (Kalgoorlie South and Higginsville) to Metals

X for $40m Gold Fields sale of the Vivien project to Ramelius for $10m (staged) Mega Uranium’s sale of Lake Maitland uranium deposit to Toro

Energy for 415m TOE shares Rio’s sale of it 80% stake in the Northparkes copper mine to China

Molybdenum for $820m

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Other potential sales: Reed Resources Meekatharra operations (in Administration) BHP Billiton’s Nickel West business

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Summary/Implications

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Reasons to be optimistic, important to be realistic

Resources Global economic growth is improving, albeit modestly, some improvement in the US, Europe coming off a low base, Japan providing

strong stimulus and China continues to grow Stimulus by central authorities and accommodative policy settings will remain in place for some time to come Commodity prices are generally regarded are at low levels and the expectation is for improvement over time Equity market conditions to fund exploration and development will remain challenging Project development may require alternative funding models and groups to bridge some of the financing gap A slow down has its benefits, recalibration of labour and input costs and broader expectations Producers will be prudent with capital expenditure and concentrate on cost cutting Incentives, improved technology and lower input costs to improve exploration outcomes and activity levels Investors, financiers and bankers are looking for resource companies with high quality projects run by high quality management Cashflow margins, earnings, capital discipline and share holder returns (dividends) are key metrics M + A activity, asset divestment and project consolidation at moderated valuations provide opportunity

Resource Services Increased competition for fewer projects Margin pressure and low utilisation of gear Preferred exposure to production and higher quality projects Short-term lack of positive catalysts Stocks performed well, sector fully valued

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