Hexagon Resources Limited (ASX: HXG) April 2018 Update

Transcription

1 Hexagon Resources Limited (ASX: HXG) April 2018 Update

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3 Contents Major De-Risking of McIntosh... 1 Key Points... 1 Valuation Summary... 1 Activities Update... 2 Background... 2 Mineral Resources HoA to Fully Fund Development... 3 Metallurgical Test Work... 4 Chief Development Officer Appointment... 5 Offtake and Financing Agreement - CNBM-GT... 5 Ongoing and Upcoming Work... 5 Valuation... 5 Comparative Valuations... 8 Risks... 9

4 Update - April 2018 Note: This report is based on information provided by the company as at April 15, 2018 Investment Profile Share Price as at April Base Case Valuation Per Share Issued Capital: A$0.23 A$0.93 Ordinary Shares 251.2m Unlisted Options 29.3m In The Money Unlisted Options 29.3m Fully Diluted 280.5m Diluted for In The Money Options 280.5m Market Capitalisation UD A$57.8m 12 month L/H A$0.08/$0.26 Cash (December 31, 2017) A$1.10m 2018 Option Conversion Cash A$0.49m Potential Option Conversion Cash Board and Management Mr Charles Whitfield: Chairman Mr Mike Rosenstreich: Managing Director Mr Garry Plowright: Non-Executive Director Major Shareholders A$4.90m Tribeca Investment Group 6.56% HSBC Custody Nominees 5.53% Board and Management 2.02% Top % Share Price Performance Senior Analyst Mark Gordon The investment opinion in this report is current as at the date of publication. Investors and advisers should be aware that over time the circumstances of the issuer and/or product may change which may affect our investment opinion. MAJOR DE-RISKING OF MCINTOSH Subsequent to our January 2018 initiation research report, Hexagon Resources ( Hexagon or the Company ) has significantly de-risked the McIntosh Graphite Project ( McIntosh or the Project ) located in the Kimberley region of Western Australia. The major advance involves the signing of a binding Heads of Agreement ( HoA ) to form a JV covering the development of Stage 1 of McIntosh with Mineral Resources Limited (ASX: MIN, MinRes ), whereby MinRes can earn 51% of the Project through sole funding from a feasibility study ( FS ) through to commercial production of the Phase 1, 100,000tpa concentrate production scenario as presented in the May 2017 Pre-Feasibility Study ( PFS ) - the time frame for commercial production is three years from shareholder approval of the agreement (expected in early May) with an 18 month time frame for completion of development studies and all permitting; MinRes has the right to withdraw pending the outcome of the FS. MinRes is a major Western Australian focussed miner and mining services company, and with a market capitalisation of A$3.2 billion, strong balance sheet and H1 FY2018 revenues of A$962 million should be well placed to develop McIntosh (thus mitigating a major project risk, with a large number of graphite projects looking at development), with upfront capex being estimated at ~A$148 million in the PFS. Given the in house capabilities MinRes is well placed to carry out all operations at any future mine and play a major part in project development - under the terms of a proposed Mining Services Agreement ( MSA ) MinRes plans to build, own and operate the required infrastructure. As discussed in the initiation report, one of the features of McIntosh is the quality of the flake graphite, with metallurgical characteristics indicating that potential products will be suitable for use in most applications, including high revenue niche markets. This has been reinforced by recent work highlighting the highly ordered crystallinity of purified flake, which also raises the potential for McIntosh flake to be used as a substitute for high value synthetic graphite in some applications. One of the outcomes of the MinRes agreement is that the Company will now have the resources to carry out effective exploration over the nearby Halls Creek Project, which is prospective for precious and base metals; in addition there will be the opportunity to explore other technology material type opportunities. Hexagon will also continue to investigate value add down stream processing opportunities for McIntosh. KEY POINTS Experienced partner with a strong balance sheet: The agreement with MinRes brings in a partner with extensive experience in mineral project development, execution and operations, as well as the balance sheet to fulfil its obligations to achieve commercial production, subject to a positive feasibility study. Significant, low risk cash flow: Dependent upon a future decision to mine, the entry of MinRes significantly de-risks the Project for Hexagon, with no need for the Company to source project financing, and also raises the possibility of significant cash flows - using the Company s current basket price of US$2,200/tonne for graphite concentrate annual pre-tax free cash flows could be as much as A$90 million; even using prices of US$1,500/tonne our modelled pre-tax cash flows are still A$46 million per annum based on operating costs of ~A$1,050/tonne including royalties. Potential for high end products: Metallurgical test work to date, including recent crystallinity analysis highlights the potential for McIntosh concentrate to be suitable for high end applications and attract premium pricing; this is a key facet for the success of the Project, and with a low strip ratio and ready access to infrastructure overcomes what is a relatively low grade mineralisation amongst peers. Growing graphite markets: The outlook for graphite, and in particular high value premium products, remains strong largely driven by the forecast growth in the battery markets. Steady News Flow: Ongoing work, although now to be managed by MinRes at McIntosh should provide steady news flow through 2018; we would also now expect increased news flow from Halls Creek. VALUATION SUMMARY We have updated our valuation for Hexagon, taking into account the MinRes earn-in deal. This results in a base case risked after tax Company valuation of A$271 million or A$0.93/share for a 20 year, 100,000tpa concentrate operation. The per share valuation is based on the current share structure diluted for in-money options. We would expect this to increase with further derisking through positive results from ongoing activities (including metallurgy and resource/reserve upgrades amongst others) leading to the delivery of a positive FS - our unrisked valuation is A$1.90/share. 1

5 ACTIVITIES UPDATE BACKGROUND This report presents an update to our initiation report on Hexagon that was published on January 30, Hexagon s activities are largely concentrated on the McIntosh Graphite Project, located in the Kimberley region of north-east Western Australia (Figure 1) - the Project has current Resources of 4.5% TGC, with significant upside, as evidenced by an Exploration Target (exclusive of Resources) of 110Mt to 2.5% to 5.0% TGC. Figure 1: McIntosh project location map Source: Hexagon A positive PFS was completed over McIntosh in May 2017, which provided the impetus to progress to a FS, which at the time of the initiation note the Company expected to complete in Q3, 2018; subsequent events, including the signing of the HoA with MinRes (discussed below) may change this time line. A key focus of the FS as originally planned was on metallurgy, product development and marketing, with this concentrated on two main areas - upstream and downstream ; MinRes will take over responsibility for the upstream activities with Hexagon retaining operational and funding responsibility for the downstream. This may result in some changes to the upstream studies, however given that Hexagon is anticipated to continue to provide key technical inputs into the Project these may only be minor. The upstream concerns the mine face, and includes a comprehensive metallurgical test work programme to identify areas within the deposit that have the potential to provide the best value in terms of graphite quality and purity and ensure stable processing performance. The downstream refers to additional value-add processing to target specialty applications, including spheroidisation for battery anodes, the production of expandable graphite and purification for other higher end applications, including the potential to replace synthetic graphite in some applications. The upshot is that the Project JV will probably be aiming at selling a range of high value, specialist products; this is a change in strategy enacted earlier by Hexagon from that in the PFS which was predicated on selling a range of concentrate (that were neither refined nor spheroidised) into the battery anode market; another facet of this, which is critical to customers, is that McIntosh should be able to provide a long term and consistent supply of such high value products. 2

6 Hexagon also has a portfolio of precious and base metal tenements some 80km to the south-west (Halls Creek Project, Figure 1); although the Company was originally considering options with regards to Halls Creek, the deal with MinRes at McIntosh means that Hexagon should now be able to carry out effective exploration at Halls Creek. MINERAL RESOURCES HOA TO FULLY FUND DEVELOPMENT As announced to the market on March 27, 2018, Hexagon has entered into a binding HoA with MinRes, whereby, subject to shareholder approval (with a meeting of shareholders to be held within 60 days of March 27, 2018) MinRes may earn up to 51% of McIntosh. Key milestones of the agreement include: MinRes is to undertake all development studies and obtain all mining and construction approvals within 18 months of shareholder approval; Make a decision to mine within 24 months; and, Target completion of project development activities and commercial production of graphite concentrate within 36 months. MinRes will have the right to withdraw from the JV pending the outcome of the FS in which case the Project reverts 100% to Hexagon; the Project will also revert back to Hexagon should the key milestones not be met. These time frames may however be extended through mutual agreement should events deem it necessary (although MinRes is targeting meeting milestones well within these time frames). Following shareholder approval, Hexagon will transfer a 51% legal interest in the McIntosh Project assets after MinRes has spent A$300,000 on the exploration and/or development of the project. Hexagon and MinRes will form an unincorporated joint venture ( JV ) with MInRes being operators and managers; in addition the two parties will form a 50:50 jointly owned marketing company for the marketing of products from the planned operation, however revenue from sales will be split 51:49 MinRes:Hexagon. As part of the JV representatives from both MinRes and Hexagon will form a management committee to plan and oversee operations which will enable the utilisation of the respective skills of both companies. MinRes will fully fund all development studies, and should a decision to mine be made, develop Phase 1 (100,000tpa graphite concentrate as envisaged in the PFS) of the Project. Hexagon will be free carried until commercial production is reached - this is considered to be the production and sale of 16,667t of flake graphite concentrate (2 months production at an annualised rate of 100,000tpa). A wholly owned subsidiary of MinRes will be engaged by the unincorporated JV through a life of mine ( LOM ) Mining Services Agreement to carry out all mining, processing and ancillary activities, including providing and operating all infrastructure under a buldown-operate ( BOO ) basis - Hexagon will have the ability to employ a price umpiring mechanism to ensure that rates are at or below market. About Mineral Resources Limited MinRes is an ASX-listed, Western Australian based miner and mining services company, with a market capitalisation of ~A$3.2 billion, strong balance sheet and H1, FY2018 revenues of A$962 million; in the same half reported NPAT was A$163 million, with an underlying EBITDA of A$250 million. MinRes has an active organic and acquisitive growth and diversification strategy, with this highlighted by the mid-2017 acquisition of the Wodgina Lithium Project from Global Advanced Metals, and the November 2017 acquisition of the assets of Empire Oil and Gas (Administrators Appointed). In late 2017 MinRes also entered into a Scheme of Arrangement to acquire all of the shares in energy company AWE Exploration (ASX: AWE), however this was subsequently defeated by a counter offer from Mitsui. MinRes main mining activities include: Iron ore mining at the 7mtpa (with the potential to increase this to 16mtpa) Iron Valley operation in the Pilbara and the 4.0mtpa Carina Iron Ore Project in the Yilgarn; 3

7 A 43.1% interest in the Mt Marion Lithium Project, located 40km SW of Kalgoorlie in the Yilgarn; this is currently ramping up to a planned annual production of 450,000t of spodumene concentrate, with ramp up expected to be completed this financial year; A 100% interest in the Wodgina Lithium Mine - MinRes is currently shipping DSO ore, with a planned ramp up to sales of 4.75mt for FY2018; MinRes is also in the process of installing a spodumene concentration plant with procurement of three 250,000tpa modules commenced in the December, 2017 quarter; and, 100% of the Ant Hill and Sunday Hill manganese deposits through Mesa Minerals Limited ( Mesa ); Mesa is also a hydrometallurgical technology developer, with proprietary technologies including ones to produce a variety of high value manganese products. MinRes also has a significant mining services and construction division, with key subsidiary brands including Crushing Services International ( CSI ), Process Minerals International ( PMI ) and PIHA Pty Ltd, which is involved in pipeline engineering and construction. These subsidiaries are variously involved in development, construction and operations in their various fields; in addition CSI is involved in the delivery of full mining projects in addition to specialised beneficiation systems. On the development side, MinRes is also developing a low cost, mine to port rail based bulk commodity transport system. The above demonstrates the significant in-house capabilities that will be able to be applied to both the development and operation of McIntosh (and which are currently being applied at MinRes current mining and development projects), and which may result in lower costs than those envisaged in the PFS. METALLURGICAL TEST WORK As discussed in our initiation report, metallurgical test work to date has highlighted the potential for McIntosh flake graphite to be used in a number of high value niche applications, which will allow sales across a diversified customer base with the inherent in-built hedging which that provides. To reiterate, key attributes of McIntosh flake graphite include: High purity with low deleterious elements, with the potential to purify to a five nines % TGC purity product through thermal processing; Excellent flake size distribution, with 85% of the flake from concentrate produced from Emperor being 180μm (large) or larger; Good expansion properties as demonstrated in preliminary testwork; and, Test work has demonstrated excellent battery properties. As announced to the market on March 6, 2018, more recent work has demonstrated the excellent crystallinity of the samples tested. This work, carried out by Argonne National Laboratory ( ANL, operated by the US Department of Energy), highlighted the near all-hexagonal crystal orientation of purified natural flake from McIntosh with this containing only minor amounts of amorphous material; this also highlighted the large crystall size making the material suitable for lithium ion intercalation. This hexagonal orientation, as opposed to a rhombohedrally arranged lattice allows for, amongst other factors, a higher electrical conductivity, greater reversible capacity towards lithium ion intercalation and excellent thermal management properties. Another outcome was the description of the samples as HOPG-like - HOPG is an acronym for highly oriented pyrolitic graphite, which is characterised by the highest degree of 3D atomic ordering. HOPG is generally a synthetic product, which has a market of some 30,000t to 40,000t per annum, and sells for ~US$30,000/tonne - it is used for a number of high end specialist applications including nuclear, thermal and high end battery uses amongst others. The Company reports that one of the key outcomes of this work is that it highlights the potential for McIntosh product to be substituted for high cost synthetic graphite, however further work, including variability test work will be required to confirm this potential, and the capability of McIntosh to become a long term supplier of such material. 4

8 CHIEF DEVELOPMENT OFFICER APPOINTMENT On April 12, 2018, the Company announced that it had appointed Mr Michael Chan to the Executive position of Chief Development Officer ( CDO ). Mr Chan, who brings 30 years experience in product market development and innovative processing for a number of specialty materials was most recently General Manager - Project Development for Syrah Resources Limited (ASX: SYR), where he was responsible for all of the major test work programmes. At Hexagon he will be responsible for driving the Company s strategy to diversify into downstream graphite processing, which will include major secondary processing test work amongst other responsibilities. OFFTAKE AND FINANCING AGREEMENT - CNBM-GT On February 2, 2018, the Company announced that it had signed an MoU with China National Building Materials - General Technology Co ( CNBM-GT ) regarding project financing and the offtake for up to 30% of the Project s product. It will now be up to the JV marketing company to decide on how to proceed with this. ONGOING AND UPCOMING WORK Although ongoing activities at McIntosh will largely now be dependent upon decisions of the JV partners rather than Hexagon alone, we would expect that, given the nature of the Project and Hexagon s anticipated continuing technical input, that the activities as listed below (and as included in our initiation report) may remain largely unchanged, but now carried out by MinRes except as noted: Progress the marketing and development strategy, with this including continuing the current comprehensive metallurgical test work, including both upstream (funded and operated by MinRes, through the JV) and downstream (funded and operated by Hexagon) activities, with the results to be used in the FS and continuing negotiations with potential off take partners; Resource update and metallurgical drilling planning based on the geomet model, with this drilling expected to commence within the next few months; again the results of this and the updated MRE will be used in the FS; and, Prior to the MinRes agreement the Company was of the view (with which we concur) that there is no benefit to be gained by drilling to increase resources until the metallurgy, in particular the variability, is fully understood - whether this carries through to the JV is yet to be seen. We would now also expect an increase in activities at Halls Creek; however the Company will need to raise funds to pursue this. Hexagon will also continue to evaluate Phase 2 downstream value add processing opportunities, as well as looking at other specialty material type projects. VALUATION We have updated our valuation of Hexagon to take account of the MinRes agreement - this sum of the parts valuation is shown in Table 1, with a risked, post tax valuation of A$0.93/share calculated on the current capital structure diluted for in-money options. This includes two phases; an initial base case six year operation as modelled in the PFS, and upside which considers a further 14 years of production at the same throughput and which is of higher risk given that this draws upon material within the Exploration Targets. We have increased the risk multiple for both phases to reflect the de-risking with the entry of MinRes, with this de-risking largely due to ease of project execution should a decision to mine eventuate - we have used a risk multiple premium of 20%, taking the original six year project risk from 50% (which was based on the resource confidence) to 70% and the longer term project risk from 10% to 30%. As mentioned earlier there are a large number (+140) of graphite projects globally looking for funding - having a potential development solution in place is therefore a significant de-risking event. The valuation assumes that all Project expenditure through to commercial production is funded by MinRes (as per the agreement), with revenue and costs thereafter split 49:51 between Hexagon and MinRes. 5

9 Capital and operating costs are those as per the 2017 PFS, however after discussions with the Company and considering the potential for the production of high value niche products, we have increased our graphite price forecast to US$2,200/tonne; this however is the most uncertain of the inputs and as such we have included sensitivity analyses in Tables 4 to 6. We note that the Company was investigating options with regards to reducing both capital and operating costs, and hence those used may actually be conservative; the same may apply with MinRes now looking to develop and operate the project. Other pertinent points include: Given MinRes plans to develop any project on a BOO basis, we have not attributed any depreciation (that could be used to offset some of the tax liabilities) to Hexagon. Should the Company however have access to depreciation, our modelling indicates that this could add up to A$0.04/share to the valuation for the case where the Company can use 49% of the A$150 million capex as estimated in the PFS. Also with regards to tax, we have used A$13 million of carried forward losses, and, Tax is calculated on a consolidated basis, including McIntosh operations, head office costs and development and exploration expenditure - for the purposes of this exercise we have fully expensed the exploration/development costs. We have assumed head office expenses of A$1.2 million per annum, and exploration/ development expenditure of A$3 million per annum. Given uncertainties in some of these items (particularly forecasting head office and exploration expenses on a longer term basis and treatment of depreciation and hence tax payable), we have separated items out in Table 1 - this also allows for an appraisal of the underlying McIntosh valuation on a pre-tax basis. The per share valuations are based on the current share structure diluted for in-money options, which is, at a share price of A$0.24 is million shares. We have not taken into account any future capital raisings - given the current cash position and the long dates (2020) of the majority of the options we would expect that the Company would be looking at a raise within the next few months, with resultant dilution of the per share valuation. Table 1: Hexagon valuation Hexagon valuation - 49% Equity in McIntosh Item Total Base Case - Six Year 100,000tpa Production McIntosh 6 Year Production Pre-Tax Total/ Share Risk Factor Risked Risked/ Share Notes A$364 m A$ % A$255 m A$0.908 NPV8 Other Properties A$5.00 m A$ % A$5.00 m A$0.018 Nominal Head Office - A$1.2m pa -A$8.41 m -A$ % -A$8.41 m -A$0.030 NPV8 Exploration and Development - A$3m pa -A$21 m -A$ % -A$15 m -A$0.052 NPV8 Tax -A$93 m -A$ % -A$65 m -A$0.231 NPV8 Cash 31/12/17 A$1.00 m A$ % A$1.00 m A$0.004 Actual 2018 Option Conversions A$0.49 m A$ % A$0.49 m A$0.002 Actual Potential Option Cash A$4.91 m A$ % A$4.91 m A$0.017 Total Base Case A$253 m A$0.902 A$178 m A$ % conversion Upside - Additional Thirteen Years Production McIntosh Production Pre Tax A$409 m A$ % A$123 m A$0.437 NPV8 Head Office A$1.2m pa -A$5.55 m -A$ % -A$1.67 m -A$0.006 NPV8 Exploration and Development A$3m pa -A$14 m -A$ % -A$4.17 m -A$0.015 NPV8 Tax -A$111 m -A$ % -A$33 m -A$0.118 NPV8 Total Upside A$279 m A$ % A$84 m A$0.298 Total Valuation A$531 m A$ % A$262 m A$0.932 Source: IIR analysis 6

10 Table 2 presents key inputs and outputs on an unfunded/pre-tax project basis and key financials attributable to Hexagon on a pre-tax basis for the modelled 20 year LoM. Table 2: McIntosh DCF key inputs and outcomes - 20 year LoM McIntosh DCF key inputs and outcomes - 20 year LoM Description Unit Project Parameters Due HXG Mine Life Years 20 N/A Total Ore Mined Tonnes 48,000,000 N/A Concentrate Produced Tonnes 2,000,000 N/A Concentrate Sales Price US$/tonne $2,200 N/A NPV, mid-year A$m $1,445 m $772 m IRR, Pre-Tax % 122% N/A LoM Revenue A$m $5,746 m $2,815 m LoM Opex A$m -$2,058 m -$1,008 m LoM EBITDA A$m $3,688 m $1,807 m LoM Capex A$m -$231 m -$41 m Working Capital A$m $20 m $0 m LoM FCF A$m $3,456 m $1,766 m Peak annual FCF A$m $180 m $88 m Peak Annual EBITDA A$m $184 m $90 m Discount Rate % 8.00% N/A Exchange Rate AUD:USD 0.75 N/A Source: IRR analysis Table 3 presents key project outcomes, updated to reflect the higher concentrate price used - this highlights, should a basket price of US$2,200/tonne (A$2,933/tonne) be achievable, the very high operating margins that could be returned. Table 3: McIntosh DCF detailed outcomes McIntosh DCF detailed outcomes Description Unit Six Year Life Additional to 20 Years Mining Rate tpa 2,400,000 2,400,000 Strip Ratio Waste: Ore 4.50:1 4.50:1 Waste Moved tpa 10,800,000 10,800,000 Con Produced tpa 97,935 97,935 Con Grade % 98.00% 98.00% Mine Life Years 6 14 Mining Cost A$/tonne moved $3.51 $3.51 Processing Cost A$/tonne RoM $13.40 $13.40 G & A A$/tonne RoM $2.10 $2.10 Transport A$/tonne Con $51.00 $51.00 Mining Cost A$/tonne Con $ $ Processing Cost A$/tonne Con $ $ G & A A$/tonne Con $51.46 $51.46 Total Site Costs A$/tonne Con $ $ Royalty A$/tonne Con $ $ Con Sales Price A$/tonne Con $2, $2, Operating Margin A$/tonne Con $1, $1, Revenue/Costs A$/tonne Con Initial/Expansion Capex A$ million $ $0.00 Capex Intensity A$/annual tonne Con $1,509 N/A Sus Capex Intensity A$/tonne ROM $1.74 $1.74 Source: IRR analysis As part of our modelling we have completed a sensitivity analysis for McIntosh. 7

11 Table 4 presents the sensitivity of the risked per share Company valuation to changes in a number of key parameters, with Table 5 presenting the unrisked, pre-tax valuation for Hexagon s 49% stake in McIntosh - these are based on the 20 year production scenario. The sensitivity analysis highlights the generally robust nature of McIntosh, which in our modelling will comfortably absorb 20% adverse movements in key inputs from the base case. Table 4: Hexagon risked per share sensitivity Hexagon risked per share sensitivity Change Product Price Site Costs Grade -20% $0.73 $0.99 $ % $0.83 $0.96 $0.83 0% $0.93 $0.93 $ % $1.03 $0.90 $ % $1.13 $0.87 $1.13 Source: IIR analysis Table 5: McIntosh pre-tax project unrisked sensitivity attributable to Hexagon McIntosh base case project unrisked sensitivity attributable to Hexagon Con Price US$/Tonne Source: IIR analysis Change in Site Operating Costs -20% -10% 0% 10% 20% US$1,250 A$568 m A$551 m A$535 m A$518 m A$501 m US$1,500 A$631 m A$614 m A$597 m A$580 m A$563 m US$1,750 A$693 m A$677 m A$660 m A$643 m A$626 m US$2,000 A$756 m A$739 m A$722 m A$706 m A$689 m US$2,250 A$819 m A$802 m A$785 m A$768 m A$751 m US$2,500 A$881 m A$864 m A$848 m A$831 m A$814 m One of the key aspects of the revised structure is the potential for Hexagon to receive significant free cash flows from McIntosh - Table 6 presents the sensitivity of this to operating costs and graphite prices. Table 6: McIntosh peak annual free cash flow attributable to Hexagon McIntosh peak annual free cash flow attributable to Hexagon Con Price US$/Tonne Source: IIR analysis Change in Site Operating Costs $ % -10% 0% 10% 20% US$1,250 A$39 m A$35 m A$31 m A$26 m A$22 m US$1,500 A$54 m A$50 m A$46 m A$42 m A$38 m US$1,750 A$69 m A$65 m A$61 m A$57 m A$53 m US$2,000 A$84 m A$80 m A$76 m A$72 m A$68 m US$2,250 A$100 m A$95 m A$91 m A$87 m A$83 m US$2,500 A$115 m A$111 m A$107 m A$102 m A$98 m This again highlights the robustness of the Project to adverse changes in these factors, and the quantum of pre-tax cash flows that Hexagon may receive upon successful execution of the Project. COMPARATIVE VALUATIONS Another valuation method for resources projects and companies that are going concerns with long term production profiles include multiples of financial parameters, including EBITDA - common multiples in the resources sector include 5x to 7.5x EBITDA. In the modelled case, the peak Project annual EBITDA is $184 million, thus valuing the Project as a going concern at A$920 to A$1380 million using this method and Hexagon s 49% stake at A$450 to A$676 million; we consider this an un-risked method, given that it is applied to a going concern. In addition, a possible transaction valuation could be determined which would depend upon expected costs to commercial production to value 51% of the Project; however given that the current agreement is an HoA (albeit binding) and that potential costs are conditional, any such valuation would be ballpark at best. 8

12 RISKS Offtake and funding With the MinRes agreement, the funding risk has all but been removed (unless there is a significant bust in resources markets); however for the project to get the green light offtake agreements will still need to be entered into - the JV will look at the potential to provide a stable supply of high end products to obtain such offtake agreements. Mineral Resources: The six year LoM as presented in the PFS is largely de-risked with respect to Resources (this is based predominantly on Indicated Resources, with some Inferred). The risk here lies in the potential of further exploration, including drilling, over the Exploration Targets (which are conceptual in nature, and over which insufficient work has been carried out to estimate Mineral Resources) to upgrade parts of these to Mineral Resources that will support a longer term project. That being said however, the nature and style of the mineralisation and the exploration results to date provides confidence that further work may result in the definition of additional Resources. The Exploration Targets are based upon results from geological mapping and sampling, electromagnetic ( EM ) surveying and some drilling amongst others that display similar characteristics to those for the estimated Mineral Resources. Metallurgy: Given the positive results of work to date and the potential to provide high end products, metallurgical risk will now largely apply to the results of the variability work being able to demonstrate that the project will be able to reliably supply such products over the long term. Permitting: This is a risk for any near development project, and for Hexagon is applicable at McIntosh; our view however is that the risk here should not be failure to permit, but time frames being longer than expected. This has the potential to affect the 18-month time frame to permitting in the MinRes agreement. Commissioning: Should the Project proceed challenges commonly occur in the commissioning of plants, with these not behaving as expected on an overall project basis this is reduced with the proposed operation using industry standard techniques and the involvement of MinRes, with their development and operational experience; with regards to Hexagon alone the commercial production milestone means that MinRes bears all of the commissioning risk. Costs and Prices These are always price and cost risks in mining, and given the grade and operating costs the Project will be sensitive to changes in graphite prices - there could be headwinds in pricing, especially in the base load products with a lot of forecast supply coming onto the market. However as discussed the Company is targeting the production of high value products so as project economics do not reply solely on base load production. Equity markets: Although relatively buoyant at the moment, markets can turn on a dime and funding for juniors can dry up very quickly; given the entry of MinRes this risk is largely mitigated in respect of McIntosh, however still remains for Halls Creek. Sovereign: Western Australia is a well developed and regarded mining jurisdiction - the State ranked 5th globally in the 2017 Fraser Institute survey, and ranked 1st amongst Australian jurisdictions. 9

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