RCKS TALK. Lupaka Site Visit: Ready, Set, Grow. Lupaka Gold Corp. (TSXV:LPK)

Transcription

1 RCKS TALK Paolo Lostritto President Derek Macpherson VP Mining Analysis Alex Pitcher Associate Lupaka Gold Corp. (TSXV:LPK) Our recent site visit to Lupaka Gold Corp s (TSXV:LPK) polymetallic Invicta project suggests that the market has mispriced, both the near-term production potential and the likely stepwise growth. Based on this growth potential, we believe a fair 10% NAVPS estimate for Lupaka is C$0.79 (5% NAVPS of C$0.97) and that the company, should be able to demonstrate this potential to the market over the next 18 months. We note that this estimate is underpinned by a 10% NAVPS, base case estimate of C$0.34. The difference between the likely case and base case is an expansion from 350 tpd to 500 tpd in 2020, and 25% mineable resource growth. We believe the stock does not fully reflect our base case view given that a technical report outlining economics for the project won t be released until later this year. The company is a mere few months away from production and is currently rehabbing and installing the necessary infrastructure, upgrading the mine access road, creating an operations team, evaluating toll milling alternatives and negotiating an offtake agreement. Two 4.2-yard PLH Scoops have arrived on site along with a single boom drill jumbo in preparation of accelerated development and stope preparation. Upgrading the site access road is approximately three months away from being completed to accommodate the larger production profile considered in our likely case. We believe the company is taking the appropriate steps to demonstrate the potential that we see, through expanded production and drilling. Part of this process is evaluating slashing the existing access adit to 4.5x4.0 metre which would help improve operating efficiency; lower operating costs and improve the ability to ramp up production to a higher rate. We expect a number of catalysts over the next two years, which should demonstrate the potential we see, in the nearterm, we believe additional funding from Pandion and marketable security sales (~US$7 million), an updated technical report highlighting project economics, an offtake agreement and initial production. Our base case 10% NAVPS estimate is C$0.34, likely case C$0.79. Based on our base-case estimate of 350 tpd of production, we believe Lupaka Gold s 10% NAVPS is approximately C$0.34 using current commodity prices (fully diluted and fully financed see Figure 1). However, we believe everything that the company is doing is to target a much higher production rate. If we conservatively model an increase in production to 500 tpd in 2020, our estimated 10% NAVPS would increase to C$0.65 (see Figure 2). In addition, the exploration potential in the hanging wall, down dip and along strike opens up the potential for a further expanded NAVPS. We believe a conservative increase in the resource of another 25% should be achievable. As a result, our 10% NAVPS would expand further to $0.79 (Figure 3). Once in steady-state production, we believe the stock will trade at a premium to its 5% NAVPS, which is estimated at $0.97 (see Figure 4). Priced as of prior trading day's market close, EST (unless otherwise noted). All values in USD unless otherwise noted. For Disclaimer and Applicable Disclosures, see the end of this report

2 Gold Price (US $/oz) Gold Price (US $/oz) Gold Price (US $/oz) Figure 1: Estimated NAVPS (10%) sensitivity with base-case 350 tpd through-put Copper Price (US $/lb) $2.50 $2.75 $3.00 $3.25 $3.50 $1,225 $0.277 $0.291 $0.305 $0.319 $0.333 $1,250 $0.289 $0.303 $0.317 $0.331 $0.345 $1,275 $0.301 $0.315 $0.329 $0.343 $0.357 $1,300 $0.313 $0.327 $0.341 $0.355 $0.369 $1,325 $0.325 $0.340 $0.354 $0.368 $0.382 $1,350 $0.338 $0.352 $0.366 $0.380 $0.394 $1,375 $0.350 $0.364 $0.378 $0.392 $0.406 Figure 2: Estimated NAVPS (10%) sensitivity with 500 tpd throughput in 2020 Copper Price (US $/lb) $2.50 $2.75 $3.00 $3.25 $3.50 $1,225 $0.576 $0.592 $0.607 $0.622 $0.637 $1,250 $0.590 $0.605 $0.620 $0.635 $0.651 $1,275 $0.603 $0.618 $0.633 $0.649 $0.664 $1,300 $0.616 $0.632 $0.647 $0.662 $0.677 $1,325 $0.630 $0.645 $0.660 $0.675 $0.691 $1,350 $0.643 $0.658 $0.673 $0.689 $0.704 $1,375 $0.656 $0.671 $0.687 $0.702 $0.717 Figure 3: Estimated NAVPS (10%) 500 tpd through-put in 2020 with 25% expansion in resource Copper Price (US $/lb) $2.50 $2.75 $3.00 $3.25 $3.50 $1,225 $0.704 $0.722 $0.740 $0.759 $0.777 $1,250 $0.720 $0.738 $0.756 $0.775 $0.793 $1,275 $0.736 $0.754 $0.772 $0.791 $0.809 $1,300 $0.752 $0.770 $0.788 $0.807 $0.825 $1,325 $0.768 $0.786 $0.804 $0.822 $0.841 $1,350 $0.784 $0.802 $0.820 $0.838 $0.857 $1,375 $0.800 $0.818 $0.836 $0.854 $

3 Gold Price (US $/oz) Figure 4: Estimated NAVPS (5%) sensitivity with 500 tpd through-put in 2020 and 25% expansion in resource Copper Price (US $/lb) $2.50 $2.75 $3.00 $3.25 $3.50 $1,225 $0.870 $0.893 $0.915 $0.937 $0.959 $1,250 $0.890 $0.912 $0.935 $0.957 $0.979 $1,275 $0.910 $0.932 $0.955 $0.977 $0.999 $1,300 $0.930 $0.952 $0.974 $0.997 $1.019 $1,325 $0.950 $0.972 $0.994 $1.016 $1.039 $1,350 $0.969 $0.992 $1.014 $1.036 $1.059 $1,375 $0.989 $1.012 $1.034 $1.056 $1.078 Catalysts to expect over the next two years: Monetization of marketable securities and third and final Pandion financing tranche brings cash position > $7M Bolstering on site management Compliant base-case technical study Assays from underground channel samples Completion upgrading site access road Rehabilitation and stope development Toll milling agreement Off-take agreement Mining commissioning Exploration results 350 tpd steady state commercial production Expand resource Expand base-case production rate to reflect expanded resource Engineering and initiate permitting for an onsite plant (lower operating costs) Historic polymetallic project finally in a position to be unlocked. Invicta is a property that has been explored and developed by a number of organizations (including Barrick Gold) since the mid-1990s. To date, more than $15 million has been spent on mine development and site infrastructure. Previous owners put the project on care and maintenance mainly due to a lack of community support that has since has been secured, along with the necessary operating permits. Invicta was previously permitted for a 5,200 tpd operation but was never developed as a result of poor market conditions, and a lack of a community agreement. Andean American Gold optioned a portion of the Invicta property from Barrick Gold in By 2012 Andean gained complete control of this major 4,700-hectare land package. That same year Andean was acquired by Lupaka Gold. Since the project was acquired, Lupaka Gold has processed two bulk samples at two different mills provided great insight into metallurgy and recoveries. It has also arranged project financing and reached an agreement with the Lacsanga community allowing the company to operate and produce. Lastly, it has recently monetized non-strategic Crucero property adding $4.7 million cash and marketable securities to the balance sheet. We believe the third and final tranche from the Pandion financing is imminent. 3

4 Advancing quickly toward cash-flow; production by late 2018 expected to generate the activation energy to grow. With community agreements and mining permits in place, Lupaka is taking important steps toward reaching production in H2/18. PLH S.A.C., a Peruvian contractor that specializes in underground mining, has been hired to carry out initial works at the Invicta Gold Development Project. Following completion of mining for process testing, PLH will begin underground development of the safety and ventilation infrastructure. The mine has a head start with 1,200 m existing workings and a camp capable of housing 65 workers. It is worth noting that PLH were involved in completing the two bulk sample programs at Invicta, during 2015 and Under the base-case scenario, we believe Lupaka Gold would generate average free cash flow of approximately US$7.5 million per year. This is expected to give Lupaka Gold the activation energy needed to grow. At the 500 tpd rate, the average annual free cash flow is expected to increase to approximately US$19 million. It is worth noting that our estimated 10% NAVPS is most sensitive to changes in gold and copper (see Figure 8). Existing infrastructure to help unlock potential. There is an existing 66 kv transmission line within 29 km of the Invicta property. Additionally, S.N. Power Peru S.A. has a 220 kv electrical transmission line under construction that could provide a backup power source to the 66 kv line. As part of road expansion project, the company is also currently upgrading the power supply to camp. The mine contractor may even choose to supply their own power. Lupaka has been granted a water use permit from the Peruvian Ministry of Agriculture. Surface rights have been attained, a well has been constructed, and testing studies have concluded it can supply water up to 60 liters per second during the dry season, which should be sufficient supply for an onsite mill in the future. Road widening exercise is progressing well; stepwise growth in production becomes obvious when looking at the design. While 50% of the road was widened during our site visit, work continued to ensure that 24- tonne trucks could operate safely and efficiently using North American standards. This involves proper safety berms, passing stations, water drainage, widening hard rock areas using explosives and community by-passes routes. Figure 5 illustrates the standard being applied to the operation by new management. While most Peruvian operations would view this expansion as not necessary for 350 tpd operation, we believe new management are already thinking about increasing shareholder value by increasing throughput at a later date. 4

5 Figure 5: Road Expansion Showing Improved Width - Signifying Potential for Expanded Production Rate Source: RCKS Photos Exploration opportunities seemed obvious during our underground site visit. There was plenty of evidence of additional mineralization. The company is conducting a channel sample program with five metre spacing within the resource to confirm the block model prior to going into production. Whilst conducting the program the geologists have also sampled the extensions of the mineralization along strike in both directions as structure, geology and obvious signs of copper mineralization were evident. When looking at the copper grade contours on the long-section is seemed to suggest that the heart of the system is plunging towards the lower left (see Figure 6 below). 5

6 Figure 6: Geology Points to Further Exploration Potential Source: RCKS Photos and Company reports Toll milling and offtake agreement are expected shortly. Discussions are ongoing with several toll milling facilities in the general region. In addition, discussions are underway with offtake traders regarding the sale of concentrates from Invicta. Bulk samples produced clean concentrate and solid metallurgical recoveries. Invicta ore will be processed at a toll milling facility and is expected to generate three separate concentrates; Cu, Zn and Pb. Engineering studies indicated that approximately 87% of the gold and 92% of the copper was expected to report into the lead and copper concentrates. Gold values reporting to a zinc concentrate were not considered to be payable. In addition, concentrates from Invicta are not expected to incur charges for penalty elements, because values reported for As, Sb, and Bi, were below 0.03%. As mentioned earlier, two bulk sample programs (see October 27, 2015 and February 22, 2016) totaling nearly 1,000 tonnes helped refine the metallurgical flow sheet. The first run-of-mine bulk test of 342 tonnes achieved total recoveries of 83.6% for gold and 95.5% for copper. Under the supervision of CERTIMIN, a local Peruvian toll mill did the processing. Under the supervision of another independent metallurgist, the second bulk test, 520 tonnes worth of material (roughly 80% run-of-mine and 20% from a lower grade stockpile), was processed at a local toll mill in Nazca (located south of Lima). Those recovery rates helped confirm earlier results with 87.5% Gold, 91.5% Copper, and 91.2% Silver. 6

7 Figure 7: Miners, Geologists and New Equipment Onsite to Accelerate Site Development Source: RCKS Photos 7

8 Chnage to NAVPS (%) Figure 8: Estimated 10% NAVPS Sensitivity to Commodity Prices Changes 15.0% 10.0% 5.0% 0.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% -5.0% -10.0% -15.0% Change to Base Case (%) Gold Copper Silver Lead Zinc Base case commodity prices: US$1,300/oz Au, US$16/oz Ag, US$3/lb Cu, US$1.15/lb Pb, US$1.50/lb Zn 8

9 Share Price (C$) Volume - Shares Traded Company Information: Lupaka Gold Corp. (TSXV:LPK) Lupaka is a gold developer focused in Peru on its polymetallic Invicta Gold project. The project is fully permitted and funded with the goal of production in Q The company has undertaken internal mining studies which it hopes will be validated and enhanced with the PEA. The study will use an initial mining rate of 350 tpd and update the existing resource. $0.25 $0.20 TSXV.LPK - Stock Chart 1,400,000 1,200,000 Project Invicta (Peru) Key Projects Current Resources (M&I+I) 1.2M oz AuEq 3.34 g/t AuEq) 1,000,000 Financials Peer Comparison $ ,000 Price (C$/sh): $0.18 Company Mkt Cap (C$) EV/oz (C$) $ ,000 Basic S/O (M): TSXV:LPK $21 $14 Fully Diluted S/O (M): 400, TSXV:FPC $174 $16 $0.05 Market Cap (C$ M): $21.4 TSX:ER $54 $36 200,000 Cash (C$ M): $5.0 TSXV:AOT $205 $39 $ Debt (C$ M): $0.7 TSXV:NEE $96 $171 Volume - Shares Traded Price per Share (C$) EV (C$ M): $17.0 TSX:SBB $423 $42 TSX:LUG $600 $76 Sources: RCKS, Capital IQ, Thomson Reuters, Company Reports Peer Average $56 Stage Pre-Production Notes PEA planned for Q1 2018, with operations to follow at 350 tpd Paolo Lostritto President Derek Macpherson VP Mining Analysis Alex Pitcher Associate Red Cloud Klondike Strike Inc. 105 King Street East, 2nd Floor Toronto ON, M5G 1G6 RCKSTalk@RedCloudKS.com /rcks-talk Disclaimer Red Cloud Klondike Strike Inc. is registered as an Exempt Market Dealer in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland & Labrador, and the Yukon. Part of Red Cloud Klondike Strike Inc.'s business is to connect mining companies with suitable investors that qualify under available regulatory exemptions (the "Red Cloud KS Business"). Red Cloud Klondike Strike Inc., its affiliates and associates, and their respective officers, directors, representatives, researchers and members of their families (collectively, "Red Cloud KS") may hold positions in the companies mentioned in this publication and may buy or sell, or buy and sell their securities or securities of the same class on the market or otherwise. Additionally, Red Cloud KS may have provided in the past, and may provide in the future, certain advisory or corporate finance services and receive financial and other incentives from issuers as consideration for the provision of such services. Red Cloud KS has prepared this publication for general information purposes only, NOT as part of the Red Cloud KS Business. This publication should not be considered a solicitation to purchase or sell securities or a recommendation to buy or sell securities. The information provided by Red Cloud KS for the purposes of this publication has been derived from sources believed to be accurate, but cannot be guaranteed. Opinions or analysis contained in this publication may be subject to change and Red Cloud KS does not undertake to advise the reader of such changes. This publication does NOT take into account the particular investment objectives, financial situations, or needs of individual recipients and other issues (e.g. prohibitions to investments due to law, jurisdiction issues, etc.) which may exist for certain persons. Recipients should rely on their own investigations and take their own professional advice before investment. Red Cloud KS will not treat recipients of this publication as customers or clients by virtue of having viewed this report. Company Specific Disclosure Details Company Name Ticker Symbol Disclosures Lupaka Gold Corp. TSXV:LPK 1,3,4 1) A member of Red Cloud KS team has visited/viewed material operations of the issuer. 2) In the last 12 months, Red Cloud KS has been retained under a service or advisory agreement by the subject issuer. 3) In the last 12 months, Red Cloud KS has received compensation for investment banking services. 4) Red Cloud KS or a member of the Red Cloud KS team or household, has a long position in the shares and/or the options of the subject issuer. 5) Red Cloud KS or a member of the Red Cloud KS team or household, has a short position in the shares and/or the options of the subject issuer. 6) Red Cloud KS or a member of the Red Cloud KS team own more than 1% of any class of common equity of the subject issuer. 7) A member of Red Cloud KS team or a member s household serves as a Director or Officer or Advisory Board Member of the subject issuer. 9