BUY SHARE PRICE CHART FORECAST OPERATING CASHFLOW COMPANY DATA & RATIOS $2.00. A$m 300 FY19 FY20 FY21 FY22 FY23

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1 KIDMAN RESOURCES (KDR) INITIATION: Could KDR be the best of both worlds? Our Top Pick in the ASX lithium space Analyst Phone Date Steuart McIntyre November 2017 We say Price Target Strategic Target BUY We believe Kidman has the potential to become a $2-3bn company over the next few years through its JV with SQM at the Mt Holland integrated lithium project in WA. The CEO of SQM has also indicated he expects Mt Holland to be at the lowend of the cost curve a potentially industry changing development and one which we believe puts Kidman on track to become the preferred institutional ASX lithium play over the next few years. KDR is our Top Pick in the ASX lithium space. SHARE PRICE CHART FORECAST OPERATING CASHFLOW COMPANY DATA & RATIOS $2.00 $1.50 $1.00 $0.50 $0.00 Nov16 May17 Nov17 KDR ASX 200 (relative) - S ou rc e: IRESS, Blue Oce an E qu it ies A$m FY19 FY20 FY21 FY22 FY23 S ou rc e: Co mp an y, Blue Ocea n Eq uities Enterprise value $520m Diluted market cap* $519m Diluted shares* 400m Free float 100% 12 month price range $ GICS sector Materials Board & Management hold ~1.4% (FD) *Diluted for 50m options IMPLIED RETURN Implied all-in return 92% THE BEST OF BOTH WORLDS? Many institutional investors prefer to be at the low end of the cost curve, and in lithium, until now, that meant investing in a brine project, probably in South America. KDR s Mt Holland JV with SQM has plans to become the first hard rock lithium play at the low end of the cost curve and in Western Australia. Unlike most hard rock plays, KDR will also produce a final product and won t carry Chinese counter-party risk (see p4). TIER 1 GRADE, SCALE, COSTS & JV PARTNER The JV is targeting 40ktpa LCE at Mt Holland initially and we estimate the operation should generate EBITDA of ~US$300m (100%) at a lithium carbonate price of US$12,000/t. We estimate the NPV of KDR s 50% at A$1.2bn. The JV also has plans to grow production to kt LCE which we believe could make KDR an A$2-3bn company over the next few years. COMPELLING NO MATTER HOW YOU CUT IT For those who believe in the mainstream adoption of electric vehicles over the next few years, in our view leverage to lithium doesn t get much better than KDR. SQM s endorsement of Mt Holland carries significant weight, with >20 years experience in lithium, SQM also brings considerable technical expertise to the table and an impressive track record of delivering projects on time and on budget. BLUE OCEAN EQUITIES PTY. LTD. L29, 88 PHILLIP ST S YDNEY NSW 2000 AFSL ABN

2 CONTENTS INVESTMENT SNAPSHOT 3 Macro: Why Lithium? 3 Stock Specific: Why Kidman Resources? 3 Could Kidman be the best of both worlds? 4 COMPANY OVERVIEW 5 Understanding the JV with SQM 6 Development Timetable 7 Near-term Catalysts 7 A BRIEF INTRODUCTION TO SQM 8 SQM s Lithium Business 8 SQM The Partner of Choice 9 LITHIUM A STRONG OUTLOOK 10 Lithium Demand 10 Lithium Supply 11 Lithium Prices 12 Global Lithium Peers 12 EARL GREY MINE & CONCENTRATOR, WA 13 Scoping Study 13 Mineralisation 14 Resource 15 Mining & Processing 15 Infrastructure 16 Deals on adjacent ground with Western Areas 17 Site Visit Highlights 18 Gold mineralisation in Earl Grey overburden 19 LITHIUM CARBONATE / HYDROXIDE REFINERY, WA 20 INVESTMENT PROPOSITION 22 Valuation Assumptions 22 Funding Assumptions 23 Price Target & Rating 24 Strategic Target 24 Key Risks 24 Model Summary: Financials & Valuation 25 Model Summary: Operational Inputs & Free Cash Flow 26 BOARD & MANAGEMENT 27 2

3 INVESTMENT SNAPSHOT MACRO: WHY LITHIUM? In our view, the macro outlook for lithium remains strong, primarily driven by the growing use of lithium batteries through the mainstream adoption of electric vehicles and growing use of static storage in domestic, industrial and grid applications. We provide more detail on page 10. STOCK SPECIFIC: WHY KIDMAN RESOURCES? In our view, Kidman is on track to become the preferred institutional ASX lithium play and the only fully-integrated, 100%-Australian-based lithium exposure with costs at the low end of the cost curve. KDR is our Top Pick in the ASX lithium space and we expect it to be one of the best performing ASX lithium stocks over the next 12-months as studies land and investors get better visibility on the company s ambitious plans. Key highlights of the investment case for KDR include: District scale potential: In our view, the known lithium mineralisation on Kidman s ground has district scale potential, At present it comprises 4 key components: o The Earl Grey resource: 1.44% Li 2O the highest grade undeveloped lithium resource in WA over 100mt o The Earl Grey Exploration Target: % 1.5% Li 2O (Dec 2016) o Preliminary drilling also shows the Earl Grey deposit extends onto the exploration o tenements acquired from Western Areas (WSA) in Feb 2017 KDR also signed a farm-in agreement with WSA in March 2017 to acquire lithium rights for 19 tenements, consolidating ownership of the highly prospective Forrestania Greenstone belt around the world-class Earl Grey lithium deposit, including the Bounty pegmatite 1.53% Li 2O & 1.39% Li 2O (see p17)) Very high grade: The Earl Grade resource grade of 1.44% is second only to Greenbushes. Very l ow strip: The first 25 years of mining are expected to have a very low average strip ratio of 1.9:1 post pre-stripping (or 2.3:1 including the pre-strip). JV Partner of Choice in SQM: SQM is a US$15bn NYSE-listed chemicals company which controls 27% of the global lithium market, has lithium customers and has been producing lithium products for over 20 years. SQM s considerable processing expertise, breadth of customer base and considerable balance sheet make it the Partner of Choice in lithium. Low-end of the cost curve : While Kidman & SQM have not yet completed the studies for the planned refinery, on 24 Aug 2017, on SQM s quarterly call, SQM s CEO said its JV with Kidman will be at the low-end of the cost curve. If studies confirm this objective, Kidman would be the only hard rock player in the bottom end of the global cost curve. Safe jurisdiction: Western Australia is widely regarded as one of the best jurisdictions in the world to develop mining projects. Many of Kidman s peers are in much higher risk jurisdictions in South America and Africa. Excellent management team with the right set of skills: On our site visit to Mt Holland last month, we were impressed by the technical skills of the Kidman operational team. In addition, the MD, Mr Martin Donahue has executed several transformative deals while at the helm of KDR which have positioned the company to become the leader in the ASX lithium space over the next few years. In our view, in time, the market may also begin to recognise Kidman s JV with SQM as the best deal to date in the ASX lithium space. We elaborate more on this view on page 6. 3

4 COULD KIDMAN BE THE BEST OF BOTH WORLDS? We have been covering the ASX lithium space for several years now and believe most ASX lithium juniors have assets which typically fall into one of two broad categories: Brines Hard rock Pros Cons - Bottom half of cost curve - Produces a final product - No Chinese counter-party risk - Complex processing - Higher capex - Longer to develop - South-American sovereign risk Pros Cons - Simple mining / processing - Lower Capex - Faster to Develop - Australian sovereign risk - Top half of cost curve - Produces an intermediate product - Carry Chinese counter-party risk But what if you could cherry pick the best of both worlds? We believe Kidman has potential to be the best of both worlds. In our view, Kidman is on track become the preferred institutional ASX lithium exposure over the next 12-months, if studies can confirm the integrated Mt Holland lithium operations in Western Australia stack up like this: Mt Holland JV Pros - Bottom half of cost curve* - Produces a final product - No Chinese counter-party risk - Australian sovereign risk - Faster to develop (than a brine) - Simple mining / processing (again compared to brines) Cons - Higher capex (than hard rock, but ~3x EBITDA per tonne ore) Source: Blue Ocean Equities *On 24 Aug 2017, on SQM s quarterly call, the CEO said its JV with Kidman will be at the low-end of the cost curve In short, we believe Kidman is on track become the only major integrated 100%-Australian-based lithium exposure on the ASX and with costs in the bottom half of the cost curve. If the JV can deliver studies (on both the mine and refinery) which confirm the thesis above, we believe Kidman s shares are likely to see major inflows from global institutional investors over the next few years. 4

5 COMPANY OVERVIEW Kidman Resources is an ~A$450m market cap lithium developer through its 50:50 JV with Sociedad Quimica y Minera de Chile (SQM), in the world-class Mt Holland integrated lithium project in Western Australia. Location of Kidman s Mt Holland lithium project in WA Mt Holland is located ~105km south-southeast of Southern Cross in WA. Mt Holland has been recognised as a project of State Significance by the government of Western Australia, which should help expedite project approvals. Source: Company The development plan for the Mt Holland integrated lithium project comprises: - The Earl Grey lithium mine and concentrator (Mine Mine): Producing ~300ktpa of 6% conc - A WA-based conversion plant (Refinery Refinery): Producing ~40ktpa of lithium carbonate/hydroxide Mt Holland integrated lithium project, WA Source: SQM Investor Day, September 2017 A Scoping Study for the development of the Earl Grey lithium deposit was completed in October 2017 and further studies are now underway. At end Sept Kidman had ~A$6m in cash and ~A$6m in debt. KDR also has undrawn convertible debt of US$15.5m. On satisfaction of the remaining conditions precedent to the JV with SQM (expected by end Dec), SQM will pay US$5m to Kidman and pay a further US$20m into the JV. 5

6 UNDERSTANDING THE JV WITH SQM Based on our discussions with investors the JV with SQM is generally not well understood and somewhat perversely, Kidman s share price actually fell in the weeks following the announcement of the deal! We believe some investors assessed the deal with SQM (incorrectly in our view) like this: KDR sold 50% of a tier 1 lithium deposit in WA for US$70m, when comparable peers were being valued at A$ m+ But in our view, investors should be looking at the deal like this: KDR essentially traded half the deposit for the right to own half an SQM-run refinery Given half the refinery is worth much more than half the deposit, in our view this would have probably been a great deal on its own (especially when the partner is SQM!) But SQM also essentially agreed to fund KDR s share of the mine into production and to provide a short term debt facility until the JV conditions are met In short, in our view, this JV is a transformative deal for Kidman shareholders, which positions the company to become the only major integrated 100%-Australian-based lithium exposure on the ASX targeting costs at the low-end of the cost curve. If studies confirm this cost position, we believe Kidman will be on track to become the leader in the ASX lithium space within a few years. In our view, in time, the market may also begin to recognise Kidman s JV with SQM as the best deal to date in the ASX lithium space. Terms of the JV with SQM While the chart below provides more detail on the timing of JV cash flows, the simplest explanation is SQM is providing US$110m, comprising: - US$30m to KDR - US$80m into the JV to fund the mine The US$80m in JV funds will be spent first, after which both parties will contribute 50:50 to costs. Indicative timetable for JV payments Source: Company 6

7 KDR should now be fully-funded funded to build the mine The Scoping Study estimated the mine would cost US$111m to build. The US$80m in JV funds will be spent first, followed by a 50:50 split of the remaining US$31m (i.e. US$15.5m each). Given SQM will be paying US$30m to KDR, assuming there is no material increase in capex in the Feasibility Study for the mine, KDR should be fully funded for its share of mine capex. SQM Convertible Debt To provide KDR with working capital while the JV conditions precedent are being satisfied (FIRB approval is the last key condition as we understand it), SQM also agreed to provide a US$21.5m convertible debt facility at 7% interest. Any debt drawn is repayable either in cash or at KDR s election in KDR scrip at 67.8c per share. The company expects the remaining conditions precedent to be met by end Dec 2017 and any debt drawn will be repaid by being offset against capital contributions. KDR retains all gold rights at Mt Holland Under the JV with SQM, Kidman retains all the rights to the Mt Holland gold resource. We discuss this gold potential in more detail on page 19. DEVELOPMENT TIMETABLE As a brownfield operation, the permitting process for Earl Grey should be less onerous because the project sits on an approved mining lease and has no native title issues. The key required permit is environmental approval, and following extensive baseline flora and fauna studies, groundwater studies, waste characterisation, site planning and 6 months of consultation, the Referral Document was prepared and submitted to permitting authorities in May Mt Holland has also been recognised as a project of State Significance by the government of Western Australia, which should help to streamline the permitting process. Our forecasts assume the following development timetable for Mt Holland: Potential for a Resource Upgrade for Earl Grey based on recent drilling, due near-term Feasibility Study results for the mine and concentrator completed in Q2 CY18 Mine & Concentrator built during FY19, first lithium conc production in 2H CY19 Refinery studies and permitting in parallel during FY19 Refinery built during FY20, first production in 2H CY20 NEAR-TERM CATALYSTS In our view the key near term de-risking milestones for Kidman are: Confirmation that all conditions precedent to the JV have been met. As we understand it the final key condition is FIRB approval which is expected by end Q4 CY17. Completion of mine and concentrator optimisation studies in Q2 CY18. Completion of the refinery study in 2H CY18. SQM has flagged it believes the integrated Mt Holland operation will be in the bottom half of the cost curve completion of the refinery study will probably be the first time the likely cost profile of the refinery is reported, which we believe will make it a very important milestone for investors. 7

8 A BRIEF INTRODUCTION TO SQM SQM is a ~US$15bn Chilean-based chemicals company listed on the NYSE (SQM). At 30 June 2017, SQM had cash of US$518m and debt of ~US$1.2bn most of which is at a very low effective interest rates of ~ %. i.e. SQM has a strong balance sheet and access to cheap debt. The slide below from SQM s latest quarterly presentation provides a useful overview of the company s key businesses, the substantial EBITDA of ~US$850m at impressive margins of over 40%. It also highlights lithium as the biggest contributor to gross profit over the past 12-months, representing over 60%. Over the 12-months to June 2017 SQM generated: - US$2.1bn in Revenue - US$853m in EBITDA - EBITDA margin of 41% Lithium Contribution: - 29% of Revenue - 61% of Gross Profit Source: SQM quarterly earnings presentation, 23 August 2017 SQM S LITHIUM BUSINESS SQM speaks for ~27% of global lithium production with sales volumes over the last 12-months of ~51kt and lithium revenue of US$592m. SQM is also the world s lowest-cost lithium producer through the Salar de Atacama operation in Chile. SQM s lithium s production capacity is: - Lithium Carbonate: 48ktpa in 2017 expanding to 63ktpa in 2018 (capex ~US$50m) - Lithium Hydroxide: 6ktpa in 2017 expanding to 13.5ktpa in 2018 (capex ~US$30m) SQM s key lithium development assets are: - Minera Exar JV in Argentina: 25ktpa production to begin in Q (capex ~US$430m). Total capacity 50ktpa (Total capex ~US$675m) - Mt Holland JV in Australia: 40ktpa of LCE (lithium conc production in 2019, production of lithium carbonate and lithium hydroxide in 2H 2020). 8

9 SQM THE PARTNER OF CHOICE Kidman describes SQM as the Partner of Choice and we would strongly agree with that assessment. SQM has been producing lithium carbonate for ~24 years and one of the SQM executives told us the company essentially invented battery grade lithium carbonate and created the market. On our site visit to Mt Holland in October, one of the attending SQM executives told us that SQM: - Sells 26 different lithium products; - Has lithium customers around the world With SQM as its JV partner, KDR: - Should be able to access much cheaper debt (at the JV level) - Has no need to sign offtake agreements, as it can simply use SQM as its marketing agent for its 50% share, to sell lithium products directly into SQM s established customer network - These advantages materially reduce the financing risk for KDR (and should also be faster) While SQM does not have any existing spodumene conversion facilities in operation, SQM believes there are 9 primary skill sets required to successfully develop the integrated lithium operation at Mt Holland and as per the slide below, SQM believes it has the required expertise in 8 out of 9 of these skill sets (outlined in green). The only area where SQM does not regard itself as an expert is in Calcination and Leaching (outlined in blue) where has only ~2 years of experience, but it is developing further experience. We believe SQM may decide to hire additional specialised personnel to bolster its expertise in this area. Source: SQM Investor Day, September 2017 SQM s expertise in lithium processing is well-established over more than 20 years. It has 50 process engineers in its Process Team, who focus on continuous improvement and ensure each project is tailor made. SQM s project team has 50 engineers and more than US$1.4bn of successfully delivered projects with an on-time and on-budget track record. 9

10 LITHIUM A STRONG OUTLOOK In our view, the macro outlook for lithium remains strong, primarily driven by the growing use of lithium batteries through the mainstream adoption of electric vehicles and growing use of static storage in domestic, industrial and grid applications. Given SQM has been producing lithium products for over 20 years, has lithium customers and controls 27% of the lithium market, we take the view that it is in a much stronger position than us to assess the current supply/demand picture. As such, in the section below we present the highlights on SQM s outlook for lithium from its Investor Day in New York in September On 12 September 2017, when Kidman executed its JV with SQM for Mt Holland, the CEO of SQM, Patricio de Solminihac said The outlook for lithium has never been stronger. LITHIUM DEMAND According to SQM s estimates, lithium demand in 2017 is expected to be ~208kt of Lithium Carbonate Equivalent (LCE), with energy storage expected to account for 58% of demand. Source: SQM Investor Day, September 2017 Looking ahead, in the slide below SQM outlines a number of potential demand scenarios, based on electric vehicle penetration rates by 2025 ranging from 8-12%. Bottom line: At the top end, SQM sees potential for lithium demand to quadruple by 2025! Source: SQM Investor Day, September

11 LITHIUM SUPPLY According to SQM s estimates, the primary sources of lithium supply in 2017 are ~50% from brines in South America (Chile and Argentina), ~40% from hard rock sources in Australia and a relatively modest 8% of supply coming from China. Source: SQM Investor Day, September 2017 According to SQM, most of the new lithium projects are based in Australia (11) and Argentina (7): Source: SQM Investor Day, September 2017 Interestingly, in the unlikely event all of these projects get built and achieve full production by 2025 (including the 325kt in the possible category), supply will only just meet the 12% EV penetration scenario outlined by SQM (see bottom of previous page), which SQM predicts would require a supply of ~800ktpa LCE of by 2025 (current supply 208kt LCE + all these projects 607kt LCE). 1 1

12 LITHIUM PRICES The chart below shows lithium prices over the past two years. The two most important lines on this chart for Kidman are: - The spot price for battery grade lithium carbonate (99.5%): ~US$19,000/t - SQM s average contract price (for a range of products): ~US$13,500/t Battery-grade lithium hydroxide is not shown on this chart, but typically sells at a premium to battery grade lithium carbonate and we are told the spot price is ~US$20,000/t at present. Lithium Prices over the last ~2 years Source: Pilbara Minerals, Asian Metals, Company reports GLOBAL LITHIUM PEERS All of the serious players in lithium are integrated and as the chart below highlights, for investors looking for lithium exposure, the three key options are typically: A major chemicals conglomerate not a pure lithium exposure A brine play comes with complex processing + South American sovereign risk A hard rock play not integrated, Chinese counter-party risk, top half of the cost curve We believe Kidman is on track to become the best of both worlds (see p4) Global Lithium P rojects Source: Company, Data compiled from Roskill (2016) and Signumbox (2016) Reports 1 2

13 EARL GREY MINE & CONCENTRATOR, WA SCOPING STUDY In October 2017, Kidman released a Scoping Study for the development of the Earl Grey mine and concentrator. It is important to note that the Scoping Study figures below do not contain the future benefits SQM is expected to bring to the project. A Feasibility Study including these benefits is underway and some of the potential project improvements have already been provided in the company s presentations. The table below summarise the Scoping Study results as well as some of the pre-released figures being targeted in the advanced Feasibility Study: Scoping Study Feasibility Study Earl Grey mine & concentrator Oct 2017 Underway Capex US$111m Lower? Strip ratio 2.3:1 1.9:1 post pre-strip Plant throughput 2mtpa 1.5mtpa? Head grade (Li 2O) 1.4% Recovery 60% 80-86% Lithium production (6% conc) 288ktpa C1 Cash Cost US$205/t Lower? Source: Company The Scoping Study also included financial outcomes for an operation exporting concentrate. As this is now longer the plan, we have omitted those outcomes from this report. After the release of the Scoping Study, both SQM and Kidman s investor presentations have hinted at much higher potential recoveries from the concentrator which could mean: - Lower cash costs? - A smaller plant? Say 1.5mtpa to produce the same volume of concentrate? - Lower capex? Time will tell, but needless to say, if higher recoveries are confirmed in the Feasibility Study due by end Q2 CY18, we see scope for material improvement in a number of areas. The Scoping Study was based on a production target of 47mt a very modest 37% of the 128mt resource. Of the initial 25 year mine life outlined in the Scoping Study, the first 20 years will come exclusively from Indicated resources. Source: Company 1 3

14 MINERALISATION The Earl Grey mineralisation is hosted by three pegmatite sills which are typically 900m wide, and dip north at around 15 degrees over 1,400m in strike length. The hangingwall and main pegmatites outcrop at surface and all three pegmatites display geological continuity to 300 m depth from surface at the northern end of the deposit. The main pegmatite varies in thickness from 15-50m over the length of the deposit. Source: Company Source: Company The primary lithium-bearing minerals in the pegmatites are predominately spodumene and petalite with trace amounts of eucryptite (see table below for more detail). The Scoping Study production target produces 76% spodumene, 13% mixed (spodumene plus petalite) and 11% petalite. The Mt Holland JV will be preferentially targeting the spodumene ore for the refinery, simply because it has much higher Li 2O grades (~8% vs. 4.9% in petalite) in essence its higher grade ore. The petalite may be stockpiled for refining later in the same way low grade ore is stockpiled in other mining operations. Source: Australian Institute of Geoscientists Journal, aigjournal.aig.org.au 1 4

15 RESOURCE Kidman released its maiden resource at Earl Grey on 5 December 2016, as set out below: Earl Grey Resource December 2016 Source: Company In the same release, Kidman also released an Exploration Target of % where the Earl Grey deposit is known to extend below the historic waste dump from the Earl Grey gold deposit as well as down-dip dip. One of the drill holes within the exploration target includes 1.56% Li 2O from 264m. The Exploration Target at Earl Grey is provided below: Source: Company MINING & PROCESSING Mining at the Earl Grey pit will be undertaken by low technical risk conventional open pit mining using a drilling and blasting and a truck and shovel operation. While the Scoping Study only examined a Stage 1 pit comprising 1.4% with a 25 year mine life an optimisation was also undertaken on the entire published resource, leading to a potential mining inventory 1.4% at a very competitive life of mine strip ratio of :1 3.2:1 and an implied mine life of ~55 years! (at a processing rate of 2mtpa) The concentrator at Earl Grey will set next to the pit and will employ low risk conventional processing techniques. The Scoping Study examined a 2mtpa concentrator containing a threestage crushing circuit, primary dense media separation (DMS) plant, a secondary DMS circuit (for fines) and a flotation plant to treat the high grade middlings from the second stage DMS. The JV is working on a Feasibility Study on the mine and concentrator and has flagged potential for significant improvement in recoveries from 60% to 80%+. This would mean a smaller 1.5mtpa plant (vs. 2mtpa) could potentially produce the same volume of concentrate (~288ktpa). Using the potential mining inventory of 109mt flagged above, an improvement in concentrator recoveries from 60% to 80%+ could increase the mine life to almost 73 years! (at a processing rate of 1.5mtpa) without including the Exploration Target or any further exploration success! 1 5

16 INFRASTRUCTURE Earl Grey is a lithium deposit located within Kidman s Mt Holland gold and lithium tenements. The project is located ~105km south-southwest of Southern Cross in the Yilgarn Mineral Field in Western Australia. As a brownfield operation it very fortunate to have good access to substantial existing infrastructure. Road Access: The Earl Grey project is accessible via the sealed National Highway 1 (Great Eastern Highway) from Perth to Southern Cross. The balance of the trip is along a well maintained gravel road. Airstrip: In addition to utilising labour from the local area, the Earl Grey project will operate a flyin/fly-out workforce. Kidman will re-furbish and utilise the existing Mt Holland airstrip, located within the Mt Holland site. The Mt Holland airstrip is in very good condition and will be upgraded at minimal cost to initially allow regular servicing by 19 seat charter flights from Perth. Water: The Earl Grey project is likely to require approximately GL of water p.a. There is an existing borefield located approximately 8 km southeast of the accommodation village which has 7 production bores. In addition there is a large stored volume of water within the nearby Bounty Underground mine workings (now abandoned). When Bounty was fully developed recorded water inflows were approximately 28l/sec. Kidman proposes to refurbish the existing borefield and will apply for a new groundwater licence. Power: The site is currently connected to the Western Power grid via a 132KV line coming in from Moorine Rock. Kidman plans to generate power for the new processing plant on site using diesel generators. The 2mtpa processing plant load is estimated to be 7MW. Accommodation Camp: During the construction phase of the Earl Grey project, the exploration camp which already has a capacity of 24 rooms with ablutions will be upgraded and expanded then utilised for a period of one year as a construction camp. A permanent accommodation village has been included in the Earl Grey project planning with a maximum capacity for a planned 200-person workforce. 1 6

17 DEALS ON ADJACENT GROUND WITH WESTERN AREAS In early 2017, Kidman struck two deals with Western Areas (an ASX listed nickel producer, ASX:WSA) to grow its lithium exploration footprint around the Earl Grey deposit: 1) On 28 February 2017, Kidman acquired two exploration licences adjacent to Earl Grey from WSA. Preliminary drilling shows the Earl Grey lithium deposit extends onto this ground. The additional tenements also provide Kidman with more space to optimise the planned layout of the Mt Holland lithium mine and concentrator. WSA retains all nickel rights. The purchase price comprised: - A$6m in KDR scrip (11.1m shares with a 12-month escrow); plus - A gross 1.5% revenue royalty on any lithium production; plus - KDR will pay WSA A$150 per contained Li 2O tonne reserve defined on this ground 2) On 20 March 2017, Kidman signed a farm-in deal with WSA to acquire lithium rights on 19 tenements, consolidating ownership of the highly prospective Forrestania Greenstone belt around the world-class Earl Grey lithium deposit (farm-in tenements in yellow below). These tenements include the Bounty pegmatite p which straddles the Kidman-Western Areas boundary; Assays from drilling on Kidman s side include several impressive hits: % Li 2O % Li 2O Under this farm in agreement, KDR issued WSA 6.3m shares escrowed for 6-months. At the conclusion of both of these deals, WSA held a 5.2% stake in KDR. WSA was also given the right to appoint a non-executive director to the KDR board, and on 24 July 2017, David Southam was appointed. Farm-in Terms - Stage 1: 1 KDR to earn 50% by spending A$5m over 3 years, and a minimum of A$1.5m in year 1 - On completion of Stage 1, WSA has right to cocontribute 50:50 on further exploration. - Stage 2: 2 If WSA elects not to co-contribute at the end of Stage 1, KDR may elect to spend a further A$4m over 2 years to earn 70%. WSA is then free carried to a decision to mine. The Mt Holland JV also has the right to explore for and mine lithium on other tenements held by Kidman in the Mt Holland area. 1 7

18 SITE VISIT HIGHLIGHTS The pictures below were taken during our site visit to Mt Holland in October The site visit was well attended, with 8 institutional investors in attendance as well as key Kidman personal and two SQM executives. The time we spent on site with the SQM executives left little doubt in our minds about SQM s views on the compelling potential of Mt Holland, and their commitment to pursuing development as quickly as possible. Above: A typical road and terrain at Mt Holland. Being a brownfields operation means much of the required be infrastructure is already in place. Above: The old gold plant at Mt Holland. Most of this will plant will be removed to make way for the new lithium concentrator. Above: The historic Earl Grey gold pit. Cleary very competent rock. Tiny by comparison to the planned lithium pit. Above: A diamond drill rig we drove past at Earl Grey Above: Some wide diameter core with white spodumene crystals clearly visible. Above: The Chilean flag flying on the waste dump at Earl Grey. Apparently the Kidman team visited SQM s operations in Chile and were welcomed by an Australian flag. So the Kidman team decided to return the favour. We were also told the JV with Kidman represents the first investment in Australia by a Chilean mining company. 1 8

19 GOLD MINERALISATION IN EARL GREY OVERBURDEN The Mt Holland project was previously known as the Bounty Gold mine which operated between 1988 and One of the interesting features of the Earl Grey lithium deposit is the fact there is gold mineralisation in the overburden, as illustrated in the picture below. Given this material will be mined anyway, Kidman may decide to identify zones of gold mineralisation as mining progresses with a view to toll-treating gold-bearing ore through a third party mill or stockpiling it for monetisation at a later date. While we believe this option has the potential to be meaningful, Kidman s primary focus at present is firmly on developing its lithium assets. In the JV signed with SQM, Kidman retained the rights to any gold found at Mt Holland. Source: Company 1 9

20 LITHIUM CARBONATE / HYDROXIDE REFINERY, WA Lithium concentrate from the Earl Grey mine will be trucked to the refinery to be converted into either lithium carbonate or lithium hydroxide. The refinery is being designed with the flexibility to produce either product depending on the needs of customers. Flexibility to produce with Lithium Carbonate or Lithium Hydroxide The potential production capacity for stage one is: Source: Company - 44ktpa of lithium hydroxide; or ktpa of lithium carbonate SQM has technical knowledge and proprietary designs for a refinery that can produce a mix of both hydroxide and carbonate. Feasibility studies for the refinery are underway with Hatch retained and managed by SQM. These refinery studies are well advanced. The flow chart below provides the refinery concept at Mt Holland: Source: Company 2 0

21 SEVERAL POTENTIAL LOCATIONS Based on proximity to infrastructure, there are three potential locations being assessed for the location of the refinery Kemerton, Mungari and Kwinana, as shown below: Source: Company Studies examining the optimal location for the refinery are well advanced and the outcomes will be confirmed in due course. 2 1

22 INVESTMENT PROPOSITION This section provides an overview of our valuation assumptions for Kidman Resources. VALUATION ASSUMPTIONS Our valuation of Kidman is based on the Mt Holland JV building a mine and concentrator producing ~288ktpa of 6% lithium concentrate and a refinery producing ~40ktpa of lithium carbonate. Valuation of the mine & concentrator Our valuation assumes: - a 2mtpa operation is built for initial capex of US$111m (KDR only has to fund US$15.5m 1 ) - producing 288ktpa of 6% Li conc p.a. - at an all-in cost of ~US$260/t - which is sold for export for US$650/t (while the refinery is being built) - generating post tax proceeds in year 1 of US$82m (KDR s share US$41m) - After year 1, we assume the mine sells to the refinery at cost (i.e. mine cash flow is zero) - This means the KDR s share of the NPV of the mine is ~US$21m in essence the wholesale cost of lithium concentrate flows through to the low opex in the refinery. Valuation of the refinery No studies have been released for the refinery at this stage, so our refinery valuation assumptions are based on Blue Ocean estimates. Our valuation of the refinery assumes: - Initial capex of US$400m - producing 40ktpa of lithium carbonate for 30+ years - With opex of ~US$4,000-5,000/t LCE 2 - Which at ~US$12,000/t generates: o an operating margin of ~US$300m p.a. (KDR s share US$150m p.a.) o a post-tax IRR of 51% o and an NPV 10 of US$1.6bn of A$2.2bn (KDR s share A$1.1bn) We apply a 30% discount to our NPV for KDR s share until studies confirm the refinery s capex and opex. Valuati on of the expansion of Mt Holland (both the mine and the refinery) While the figures above are eye-watering, Mt Holland is a Tier 1 asset and based on the existing resource is scaleable to much higher production rates. The Mt Holland JV has plans to expand production to ktpa of LCE longer term. On our estimates the expansion case can add another A$900-1,000m to our valuation of KDR s share! We apply a heavy 80% discount to our NPV for the expanded case until studies provide more confidence in the refinery capex and opex. 1 Since SQM funds the first US$80m and funding is shared 50:50 thereafter. 2 On 24 Aug 2017, on SQM s quarterly call, SQM s CEO said its JV with Kidman will be at the low-end of the cost curve 2 2

23 FUNDING ASSUMPTIONS On our estimates, assuming there is no material increase in the capex of the mine and concentrator, SQM s JV payments should cover KDR s share of capex. i.e. We believe KDR should be fully funded to build the mine and concentrator, as set out in the table below: Funding the Mt Holland Mine & Concentrator Funding Uses US $m Funding Sources US $m Initial capex 111 SQM initial payment into JV 80 Working capital + other costs 19 SQM s 50% share of equity 25 KDR s 50% share of equity 25 Debt - Total 130 Total 130 Source: Company, Blue Ocean estimates We expect the mine and concentrator to be built during FY19 and the refinery to be built during FY20. We are very confident the refinery will support at least US$250m of debt, which would leave each JV partner to fund their 50% share of equity on our forecasts ~US$100m each: Funding the Refinery Funding Uses US $m Funding Sources US $m Initial capex 400 Debt 250 Working capital + other costs 50 SQM s 50% share of equity 100 KDR s 50% share of equity 100 Total 450 Total 450 Source: Company, Blue Ocean estimates Given the mine and concentrator should be up and running by the end of FY19, we believe Kidman may be able to sell the first 12-months of lithium concentrate production (being produced while the refinery is being built) to fund a meaningful portion of the required US$100m to build the refinery. Alternatively, KDR may also be able to forward sell its share of refinery production. But bottom line, on the basis of this analysis, KDR appears to be well funded for at least the next 18 months, with a US$5m payment from SQM due by end December 2017 and a further US$25m cash payment due by the end of Q2 CY18 on the decision to mine. 2 3

24 PRICE TARGET & RATING Our $2.50 Price Target is for Kidman is based on: An NPV for the integrated Mt Holland operation producing 40ktpa of LCE using a long term lithium carbonate price of US$12,000/t and a 10% nominal discount rate We risk-adjust our NPV for Mt Holland by applying a 30% discount for development risks ahead and until studies confirm the capex and opex the mine and refinery. We have also calculated an expanded case for Mt Holland, which we believe is highly likely longer term, but for now we have applied a material 80% discount to our NPV of the expansion. We rate Kidman a high conviction Buy and our $2.50 Price Target represents an implied return of over 92%. STRATEGIC TARGET We derive our $4.00 Strategic Target for Kidman based on the same scenario set out above but we have reduced the discounts applied to our NPV. Our $4.00 Strategic Target represents an implied return of over 200%. It is important to note that our Strategic Target does not reduce our discounts to NPV to zero (which would increase our price target to over $5.00!). It also does not account for higher lithium price scenarios or for further exploration success (which we believe is highly likely!). We also believe KDR holds considerable corporate appeal and once Mt Holland is permitted and in construction, we believe there is a chance SQM may consolidate its ownership of Mt Holland and bid for Kidman. We also wouldn t rule out another lithium player bidding for Kidman at some point given the scale and quality of its Mt Holland project and the high calibre of its joint venture partner. KEY RISKS Kidman is exposed to all the normal risks associated with developing and operating mining projects, including permitting, funding and construction risks. Assuming Kidman makes the transition into production, its revenues will be predominately derived from the sale of lithium carbonate and lithium hydroxide. Fluctuations in the prices of these products as well as the Australian dollar could impact the company s reported cash flow, profitability and share price. As Kidman s Mt Holland project is based in Western Australia, an investment in Kidman also carries Australian sovereign risk. However, it is worth noting that Australia is considered materially lower sovereign risk than some of the other jurisdictions which host lithium projects, South America (Chile and Argentina) and Africa. 2 4

25 MODEL SUMMARY: FINANCIALS & VALUATION Stock Details Enterprise Value $520m Recommendation: BUY Diluted MCap $519m Target $2.50 Share Price $1.30 Strategic Target $4.00 Diluted Shares 400m NAV $ Week High $1.68 Implied Return to ST 208% Free Float 100% Implied Return 92% 52 Week Low $0.34 Avg Daily Value $2.2m Macro Assumptions FY17E FY18E FY19E FY20E FY21E Ratio Analysis FY17E FY18E FY19E FY20E FY21E Exchange Rate (A$/US$) Diluted Shares m Lithium Carbonate Price 12,125 12,750 12,000 12,000 12,000 EPS - Diluted Ac (1.4) (1.8) (1.4) P/E x n.m. n.m. n.m. 14.6x 5.2x CFPS - Diluted Ac (2.6) (1.7) (1.3) Profit & Loss (A$m) FY17E FY18E FY19E FY20E FY21E P/CF x n.m. n.m. n.m. 11.5x 4.2x Revenue FCF - Diluted Ac (3.2) (1.5) (5.3) (42.4) 31.8 Operating Costs (50) (171) P/FCF x n.m. n.m. n.m. n.m. 4.1x Operating Profit Corporate & Other (4) (6) (6) (8) (8) Dividends Ac Exploration Expense - (0) (0) (0) (0) Dividend yield % EBITDA (4) (6) (6) Payout Ratio % D&A (0) (0) (0) (2) (11) Franking % EBIT (4) (7) (7) Net Interest Expense (1) (1) 1 (2) (10) Enterprise Value A$m Pre-Tax Profit (5) (7) (6) EV/EBITDA x (127.2x) (78.4x) (70.6x) 9.8x 2.6x Tax Expense (19) (54) ROE % (29%) (14%) (5%) 27% 43% Underlying Profit (5) (7) (6) ROA % (17%) (12%) (5%) 13% 36% Signficant Items (post tax) (13) Reported Profit (18) (7) (6) Net Debt / (Cash) 6 (26) (75) 141 (6) Gearing (ND/(ND+E)) % n.m. (108%) (163%) 46% (2%) Cash Flow (A$m) FY17E FY18E FY19E FY20E FY21E Gearing (ND/E) % n.m. (52%) (62%) 85% (2%) Operating Cashflow (9) (6) (6) Tax (10) (36) Reserves & Resources As at December 2016 Net Interest 0 (1) 1 (2) (10) Earl Grey mt % Li 2 O Li 2 O (mt) Net Operating Cash Flow (9) (7) (5) Measured Exploration (8) (2) (2) (2) (2) Indicated % 1.1 Capex (3) - (21) (270) (6) Inferred % 0.7 Additional Exploration Target Acquisitions / Disposals (2) Resource % % Li 2 O Other Net Investing Cash Flow (14) 38 (23) (272) (8) Proved Equity Issue Probable Borrowing / Repayments (150) Reserve Dividends Other Earnings Sensitivity FY21E FY22E FY21E FY22E Net Financing Cash Flow (150) A$m A$m % % Change in Cash Position (2) (49) (3) Lithium Carbonate Price US$/t +10% % 18% FX Adjustments Exchange Rate A$/US$ -10% % 20% Cash Balance Valuation Discount Stake A$m A$/sh Mt 40ktpa LCE (unrisked) 50% 1, Balance Sheet (A$m) FY17E FY18E FY19E FY20E FY21E Mt Holland expansion (unrisked) 50% Cash Other Current Assets Mt 40ktpa LCE 30% 50% PP&E Mt Holland expansion 80% 50% Exploration & Development Exploration & Other Projects Other Non Current Assets Corporate & Other (91) (0.23) Total Assets Debt (6) (0.02) Debt Cash Other Liabilities Option Strikes P/NAV Net Assets Risk adjusted NAV 1, Source: Company data, Blue Ocean Equities 2 5

26 MODEL SUMMARY: OPERATIONAL INPUTS & FREE CASH FLOW Macro Assumptions FY18E FY19E FY20E FY21E FY22E A$/US$ FX x Lithium Carbonate Price US$k/t Operational Summary FY18E FY19E FY20E FY21E FY22E FCF Contribution A$m FY18E FY19E FY20E FY21E FY22E Mt Holland intergrated lithium project, WA (100% Basis) Mine & Concentrator Plant throughput Head grade 1.4% 1.4% 1.4% Recovery 60% 60% 60% Mt Holland intergrated lithium project, WA (KDR's 50% share) Production lithium conc (6%) Net proceeds from conc sales A$m 76 (First year only) Refinery Lithium Carbonate Production kt Refinery Revenue A$m Refinery Costs Operating cost US$k/t LCE Operating cost Sustaining capex US$k/t LCE Sustaining capex 6 6 Opex+Sustaining capex US$k/t LCE Opex+Sustaining Capex A$m Cash Margins US$k/t LCE Cash Margins A$m Cash Margins % % 62% Cash Margins 62% 62% Growth Capex Exploration Corporate Overheads All-in Cash Margin A$m (8) (29) (204) All-in Cash Margins - - n.m. 59% 59% Corporate A$m FY18E FY19E FY20E FY21E FY22E Cash Tax Other Items (40) FCF pre Debt Service 32 (29) (214) Net Interest 1 (1) Debt Drawdown / (Repayment) (150) (17) FCF post Debt Service 31 (28) (49) (3) 120 New Equity/Dividends A$m FY18E FY19E FY20E FY21E FY22E Proceeds from Shares/Options Dividends Paid Change in Cash (49) (3) 120 Cash Balance Source: Company data, Blue Ocean Equities 2 6

27 BOARD & MANAGEMENT Brad Evans, Interim Non-Exec Chairman: Mr Evans is a Mining Engineer with nearly 20 years experience in the mining industry and is currently the General Manager of Mining Plus Pty Ltd. Since completion of a Bachelor of Engineering (Mining) at the University of Ballarat, Mr Evans has gained a broad range of practical mining experience through seeking out a diverse range of roles. Mr Evans has an intimate knowledge of the mining industry, business strategy, operations, mine planning and software which is applied in combination to extract the greatest value from projects and people. Mr Evans became interim Chairman on 2 Nov 2017 when the former Chairman retired. The search for a new Chairman has begun and discussions with several candidates are underway. Martin Donohue, Managing Director: Mr Donohue is the founder of Kidman Resources and has had over 15 years experience in equity capital markets and the natural resources sector where he has been directly involved in evaluating mineral projects at various stages of development. Mr Donohue is a director of several private and public companies focused on base and precious metals with projects in Australia and Sub Saharan Africa. He is also the principal of Penstock Advisory, a private consulting and investment company based in Melbourne that specialises in identifying, managing and developing mineral projects in Australia and overseas. Mr Donohue has been instrumental in putting together Kidman s portfolio of mineral projects in Australia. David Southam, Non-Exec Director: Mr Southam brings extensive industry experience including significant capital markets expertise, familiarity with the set-up and operation of joint ventures, negotiation of substantial international commodity offtake agreements and has a background covering base and precious metals, bulk materials, contracting and industrial logistics. Mr Southam is a Certified Practicing Accountant with more than 20 years experience in accounting, banking and finance across the resources and industrial sectors. Mr Southam has been an Executive Director at Western Areas for nearly seven years and has previously acted as a Non-Executive Director of a number of ASX listed companies. He is currently a member of the Audit and Compliance Committee of Curtin University Council, and a member of the WA Advisory Board of Starlight Children s Foundation. Chris Williams, General Manager Operations: Mr Williams is a mining engineer who has over 30 years experience in underground and open pit mining operations and management roles throughout Australia. Before joining Kidman, Mr Williams worked for 12 years at Panoramic Resources in a number of senior roles including General Manager Operations for the Savannah and Lanfranchi nickel mines and General Manager Projects and Technical Services. Prior to Panoramic Resources Mr Williams was Mine Superintendent for New Hampton Goldfields and Harmony Gold Mines at their Jubilee Operation near Kalgoorlie. Michael Green, Exploration Manager: Mr Green previously worked with Newmont Mining and gained broad experience with varied mineralised systems working in both the Regional Exploration Team in QLD, NSW and the NT before moving to the Tanami Operations in the Northern Territory where he was responsible for both near mine and District exploration. During his time at Newmont Mr Green was a part of the team that made the Oberon Regional discovery, and the near mine Auron Ore body discovery which has significantly increased the Life of Mine at Newmont Tanami Operations. Mr Green is responsible for all Exploration projects and near mine resource development and delineation. Jason Eveleigh, Chief Financial Officer: Since qualifying as a Chartered Accountant with Ernst & Young in London, Mr Eveleigh has been active in private mergers and acquisitions and has been engaged in the Australian financial services industry for the last decade providing compliance and financial support to corporate advisors. He has extensive capital markets experience and has developed a close working relationship with both the mining and exploration arms of the business. 2 7

28 CONTACTS ANALYST AUTHORITY Steuart McIntyre David O Halloran Senior Resource Analyst Executive Director P P E steuartmcintyre@boeq.com.au E doh@boeq.com.au Philip Pepe Senior Industrials Analyst P E philpepe@boeq.com.au Michael Gerges Investment Analyst P E michaelgerges@boeq.com.au Adam Stratton Institutional Dealing P E adamstratton@boeq.com.au Scott Hildebrand Institutional Dealing P E shildebrand@boeq.com.au HEAD OFFICE Blue Ocean Equities Pty. Ltd. AFSL No ABN Stuart Turner Senior Industrials Analyst P E stuartturner@boeq.com.au Mathan Somasundaram Market Portfolio Strategy P E mathan@boeq.com.au Scott Calcraft Institutional Dealing P E scottcalcraft@boeq.com.au Tim Potts Institutional / HNW Dealing P E tim@boeq.com.au P E info@boeq.com.au W blueoceanequities.com.au Justin Pezzano Research Associate P E justinpezzano@boeq.com.au Josie Nicol Dealing Associate P E josienicol@boeq.com.au Doc Cromme Institutional Dealing P E doccromme@boeq.com.au Level 29, 88 Phillip Street Sydney NSW 2000 Australia DISCLAIMER This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Blue Ocean Equities Pty Limited. This is general investment advice for Institutional and Sophisticated Investors only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific client s financial situation, particular needs and investment objectives you should consult your own investment adviser before any investment decision is made on the basis of this document. While this document is based on information from sources which are considered reliable, Blue Ocean Equities Pty Limited has not verified independently the information contained in the document and Blue Ocean Equities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or by implication, that the information contained in this document is complete or accurate. Nor does Blue Ocean Equities Limited accept any responsibility for updating any advice, views opinions, or recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued. Except insofar as liability under any statute cannot be excluded. Blue Ocean Equities Pty Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. DISCLOSURE Blue Ocean Equities Pty Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from transactions involving securities referred to in this document, and may from time to time hold interests in the securities referred to in this document. Blue Ocean Equities Pty Limited and associates may hold shares in Kidman Resources at the date of this report and this position may change at any time without notice. Steuart McIntyre does not own shares in Kidman Resources. 2 8