West African Resources (WAF)

Transcription

1 Analyst Duncan Hughes Authorisation David Coates Recommendation Buy (Initiation) Price $0.39 Valuation $0.62 (Initiation) Risk Speculative GICS Sector Materials Expected Return Capital growth 59.0% Dividend yield 0.0% Total expected return 59.0% Company Data & Ratios Enterprise value Market cap $201.3m $225.7m Issued capital 578.7m Free float 95.9% Avg. daily val. (52wk) $289, month price range $0.18-$0.45 Price Performance (1m) (3m) (12m) Price (A$) Absolute (%) Rel market (%) Absolute Price $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 Nov 15 May 16 Nov 16 May 17 Nov 17 SOURCE: IRESS WAF S&P 300 Rebased BELL POTTER SECURITIES LIMITED ABN AFSL Speculative See key risks on Page 22. Speculative securities may not be suitable for retail clients West African Resources (WAF) 27 November g/t gold resource driving Sanbrado Sanbrado project transformed through high-grade additions We feel the DFS completed in February demonstrates the quality of understanding on the open pit operations but also demonstrated the need for additional exploration success. We believe the exploration success achieved since February and the recent resource upgrade to 2.7Moz has transformed the project with high grade underground ore 22g/t Au) likely to complement bulk tonnage open pit operations. The blending of high-grade open pit and underground ore creates significant flexibility and diversification. But, more significantly the M1 South Underground Resource will add overall grade and production ounces to the first years of mining (and LOM), lower strip ratios and potentially improve recoveries. An updated DFS is expected in mid 2018 and we expect this to be vastly improved. Exploration upside expected to add further value We believe the favourable geology at Sanbrado positions for project for additional exploration success. The high grade M1 South Resource remains open at depth and is currently being drill tested. If mineralisation continues to be defined at 1500ozpvm then each additional 100m of resource will add 150koz of gold. We expect near term newsflow from drilling this position and anticipate M1 South additions to a likely resource upgrade next quarter. In addition, drilling at depth in the southern portion of the M5 Resource indicates potential for an underground resource here also. Investment thesis BUY (Speculative), Valuation $0.62/sh Our SOTP valuation consists of a discounted (40%) NPV valuation on the Sanbrado project, cash at face value and a peer reviewed exploration valuation. At Sanbrado we assume a 10 year 2.5Mtpa CIL project utilising underground and open pit ore to produce an average of 160kozpa LOM at AISC of circa A$900/oz. We discount this valuation to reflect technical, exploration, permitting and funding risk. We assume additional equity funding of A$95m and dilute our valuation accordingly. We believe WAF is an excellent and undervalued exploration story and initiate with a Spec. Buy. Earnings Forecast Year ending 30 June 2018e 2019e 2020e 2021e Sales (A$m) EBITDA (A$m) (14) (11) (9) 361 NPAT (reported) (A$m) (14) (11) (10) 257 NPAT (adjusted) (A$m) (14) (11) (10) 257 EPS (adjusted) ( ps) (2) (1) (1) 31 EPS growth (%) n.a n.a n.a n.a PER (x) (16.1) (31.1) (31.2) 1.3 FCF Yield (%) nm nm nm 81% EV/EBITDA (x) (14.2) (19.2) (23.7) 0.6 Dividend ( ps) Dividend Yield (%) 0% 0% 0% 0% Franking (%) 0% 0% 0% 0% ROE (%) -81% -17% -11% 116% SOURCE: BELL POTTER SECURITIES ESTIMATES DISCLAIMER: THIS REPORT MUST BE READ WITH THE DISCLAIMER ON PAGE 24 THAT FORMS PART OF IT. Page 1

2 Contents Investment case... 3 Valuation... 6 Peer Analysis... 8 Company overview... 9 Sanbrado Project, Burkina Faso (90%) Regional Exploration, Burkina Faso (90%) Burkina Faso Board and management West African Resources (WAF) Resource sector risks Page 2

3 Investment case High grade M1 South resource transforms the project High-grade has transformed the project We feel the DFS completed in February demonstrates the quality of understanding on the open pit operations but also demonstrated the need for additional exploration success. We believe the exploration success achieved since February and the recent resource upgrade (and likely future upgrades) has transformed the project with high-grade underground ore 22g/t Au) expected to complement bulk tonnage open pit operations. The blending of high grade open pit and underground ore creates significant flexibility and diversification. But, more significantly the M1 South Underground Resource will add overall grade and production ounces to the first years of mining (and LOM), lower strip ratios and improve recoveries. An updated DFS is expected in mid 2018 and we expect this to be vastly improved. Strong resource base expected to grow and convert Resources and reserves to grow The resource upgrade in October provides a strong resource base of 2.7Moz for the project. Importantly M1 South (575koz) is at exceptional grades (26g/t Au in Indicated and 16g/t in inferred). Current reserves of 0.9moz are expected to grow from this resource upgrade where indicated resources currently sit at 2.1moz. We assume reserve life will grow to support a solid 10 year mine life at ~160kozpa on average over LOM. In addition, exploration upside is considered excellent with an aggressive 60km drilling program expected to grow resources further. The favourable geological position of Sanbrado leads us to believe there is more gold to be found. We see exellent potential to grow high grade resources down dip of the M1 South and M5 resources. Depth extensions at M1 South offer near-term upside 100m = 150koz The high grade M1 South Resource remains open at depth and is currently being drill tested. If mineralisation continues to be defined at 1500ozpvm then each additional 100m of resource will add 150koz of gold (~1 year of underground mine life). The resource is still relatively shallow and indications are that ground conditions should support mining to significantly greater depths than the known resource. We expect near term newsflow from drilling this position and anticipate M1 South additions to a likely resource upgrade next quarter. In addition, drilling at depth in the southern portion of M5 indicates potential for an underground resource here also. However, strike limits on M1 South need careful definition Strike lengths on plunging shoot are short at M1 South One consideration at M1 South is the short strike length of mineralisation at <100m. Given the high-grade of the mineralisation any change from the estimated strike of the ore body will have a greater than usual impact on the ounces per vertical metre (ozpvm) and the relative cost of development infrastructure. Based on current strike length estimates the underground is set to average 1500ozpvm which looks able to support a profitable underground mine. Resource modelling also looks favourably conservative, however the risk of unexpectedly shorter strike lengths to this mineralisation and the consequent dramatic drop-off in ounces should be considered. This should be a major focus in the updated DFS and ongoing drilling program. Page 3

4 Processing re-design and blending expected to add value Processing recoveries expected to improve Metallurgical recoveries in the DFS were 90.7%, however blending more of the higher grade (higher recovery) M1 South ore as well as an improved SAG and ball mill comminution circuit is expected to lift recoveries to >93%. Overall gold recovery and costs will also likely be assisted by the improved gravity recovery (~40% LOM) from coarser M1 South ore and the addition of a Wilfley (shaker) table to the Knelson gravity concentrator circuit. Permitted for heap leach operation Permitting commenced The project is currently permitted for a heap leach open pit operation. We believe that, whilst permitting for a CIL processing plant and underground mine is still required, this initial permit will assist and uncomplicate the pathway to final permitting. Management experienced and qualified Management has had success in West Africa Management is experienced in the discovery and development of gold assets in West Africa. Management has experience from a number of successful ventures in West Africa including the successful takeover of ASX listed Papillon Resources, the merger of ASX listed Adamus Resources and the operation of Equigold s Bonikro Gold project. However, WAF will need to add to its current team should it wish to develop and mine Sanbrado. Strong balance sheet will take WAF to a production decision Funded to a development decision WAF has circa $25m in cash and no debt. WAF is well placed to fund aggressive exploration and a DFS in The current shareholder base that includes Sprott, Dynamic and Macquarie likely leaves WAF better placed than most should it require future project funding support. Expect M&A interest WAF a potential M&A target With a strong project and exploration upside we believe WAF will be attracting the interest of existing producers in West Africa and is potentially at risk of takeover as Sanbrado progresses towards a funding decision. At current market valuations we see an opportunity for a larger incumbent producer to acquire Sanbrado and fund from their own balance sheet. This has the potential for a near term realisation of value for shareholders. Undervalued on NAV and peer analysis Our SOTP valuation of $522m indicates considerable upside on the current market valuation for WAF. Our peer analysis supports our view that the company has a sizeable resource base to underpin an operation and does not carry the premium valuation we feel it should when measured against other ASX listed gold explorers. Table 1 - WAF sum of the parts valuation (A$m) Fair Value Calculation Discount rate NAV (AUD $M) NAV "X" Factor NAV Target (AUD $M) SOURCE: BELL POTTER SECURITIES ESTIMATES. * FOR FURTHER DETAIL ON THE VALUATION METHODOLOGY PLEASE SEE THE VALUATION SECTION ON PAGE 6 Target SP (AUD $) Sanbrado (90%) 10% $582.5 M 0.60 X $349.5 M $0.41 Exploration Upside $50.0 M 1.00 X $50.0 M $0.06 Unpaid capital $95.0 M 1.00 X $95.0 M $0.11 Cash from options $3.2 M 1.00 X $3.2 M $0.00 Cash (est. end qtr) $24.4 M 1.00 X $24.4 M $0.03 Investments $0.0 M 1.00 X $0.0 M $0.00 Total NAV $755.1 M $522.1 M $0.62 Page 4

5 Figure 1 - SWOT Analysis Strengths Fully focussed on gold Exceptionally high grade M1 South Sizeable resource/ reserve with blending of high grade underground and bulk open pit Good metallurgy with upside DFS completed on open pits Healthy balance sheet. $25m cash, no debt Permitted but not for CIL Capable management with track record Undervalued Threats Gold price volatility Regional security, political risk Relatively short strike of plunging shoot Potential takeover target FX changes Weaknesses Need to re-house some locals Study yet to be completed on underground potential Permitting still to be completed Government free- carried 10% Opportunities Exploration upside and large budget Potential Takeover target Improve metallurgy Grid power? SOURCE: BELL POTTER SECURITIES Upcoming Catalysts High grade drilling intersections ongoing; Metallurgical test work on M1 South and new processing on M5 1QCY18; Resource update 1QCY18; and DFS on underground and open pit mine 1HCY18. Page 5

6 Valuation Sanbrado (90%, Burkina Faso 10% free-carry) We have modelled Sanbrado to commence production in FY21 with a 10 year mine life supported by production from high grade underground mining for 4 years from FY21 and lower grade open pit operations over LOM. We assume open pit and underground ore is blended over the life of the underground operation. Our mine plan assumes 2.41g/t Au for 1.9Moz is mined over LOM, compared to current reserves of 0.9Moz. We assume additional conversion of resources to reserves on the back of the recent high grade resource upgrade (150% increase) and future upgrades from underground ounces. We assume production in excess of 200kozpa over the life of the underground (first four years) and production of circa 120kozpa thereafter. Table 2 - Sanbrado assumed mine plan (100% of project) Mine Plan FY21 FY22 FY23 FY24 FY25 Total Plant Feed (Mt) Average Head Grade (g/t Au) Average Plant Recovery (%) Gold produced (koz) SOURCE: BELL POTTER SECURITIES ESTIMATES. We have assumed production efficiency and costs based on company announcements and our own assumptions. Our FX and gold price assumptions are based on Bell Potter forecasts. Table 3 - Sanbrado modelling assumptions Assumption Life of Mine Open Pit Mining Cost (A$/t rock) 3.20 Underground Mining Cost (A$/t ore) CIL Processing Cost (A$/t ore) M1 South Processing Cost (A$/t ore) G&A Cost (A$/t ore) 4.67 Initial Capex (A$m) Sustaining Capex (A$m pa) Exploration (A$m pa) 5.00 Government Royalty (%) 5.0% Community Royalty (%) 1.0% Corporate Tax (% p.a) 27.5% LOM C1 cost (A$/oz) 558 LOM All in sustaining cost (A$/oz) 847 LOM Average Gold Price (A$/oz) 1933 A$/US$ (Long term) SOURCE: BELL POTTER SECURITIES ESTIMATES We value Sanbrado at $350m or 41c/sh We value WAF s 90% interest in the Sanbrado project on a post-tax basis, calculating an NPV10% of A$583m. However, given the underground resources are yet to be converted to reserves or undergo a feasibility study (the open pit reserves were subject to a study prior to the recent underground resource upgrade) we have decided to risk our valuation by 40% to reflect technical and funding risk. Our risked 0.6X NPV for WAF s 90% share in the project is A$350m or 41c/share (fully diluted) and 60c/share undiluted. Page 6

7 Exploration tenure Exploration tenure, a ~1,000km 2 package hosting circa 100km of strike of greenstone, includes the large but relatively low grade Sartenga gold and copper discovery and the Moktedu exploration trend which was formerly the main focus of the business before Sanbrado. Exploration tenure also includes additional resources of 800koz at Sanbrado. We value exploration tenure at A$50m based on peer comparisons. Cash, corporate costs, unpaid capital and investments We assume cash at 31 December 2017 of A$24m and value it at face value. Corporate costs (A$4mpa) and debt funding are factored into our Sanbrado model. WAF has no significant additional investments. We assume the A$3.2m in share options are exercised and dilute our valuation by 20m shares accordingly. We also assume A$95m (45%) of the assumed capital and working capital expenditure for Sanbrado is funded through the issue of 244m shares at the current share price. We dilute our valuation to reflect the unpaid capital of 244m shares. Discounted valuation of $522m ($0.62/sh) Total valuation Our total discounted sum-of-the-parts (SOTP) NAV valuation for WAF is A$522m or A$0.62/share. Table 4 - WAF: sum-of-the parts valuation Shares on issue (m) ITM options (m) 20.0 Performance rights (m) - Unpaid capital (m) Diluted (m) SOTP* A$m A$/sh 90% Sanbrado (risk discount 40%, NPV10%) Exploration Upside Cash (est. end qtr) Investments - - Total (undiluted) Cash from options Unpaid capital Total (fully diluted) SOURCE: BELL POTTER SECURITIES ESTIMATES. Page 7

8 Moz EV/oz (A$) West African Resources (WAF) 27 November 2017 Peer Analysis Figure 2 below summarises the attributable resource ounces across the ASX listed gold sector. WAF has a sizeable resource base, the fourth largest for an explorer on the ASX and the second largest in Africa. As a result we would expect the company to attract investor attention and a premium valuation. Figure 3 below summarises the market valuation of each company s resource ounces. The chart displays enterprise value per resource ounce and arguably affords a rough approximation of what the market appears to be valuing each company s resources at. There are several notable limitations with an EV per ounce valuation as not all resources are the same in terms of depth, grade, commerciality and upside potential. In addition, an EV per ounce valuation does not account for other valuation metrics such as management quality, country risk, infrastructure or technical evaluation stage. WAF s resources are valued only moderately against peers Across the sector, WAF appears only moderately valued (a slight premium to median valuations) for its resources against peers. This surprises us given the large resource base (~2.5moz), strong exploration upside, level of technical studies (DFS on part of project) and the very attractive combination of 575koz at exceptional grade (22g/t Au) that can be blended with open pit tonnes. We believe WAF s resources should be valued at a substantial premium to peers. Figure 2 - ASX listed gold explorers - resources 7.00 Figure 3 ASX listed gold explorers EV per resource ounce SOURCE: COMPANY DATA & BELL POTTER SECURITIES WAF s resources should be valued at a greater premium SOURCE: BELL POTTER SECURITIES ESTIMATES As a consequence, we feel our peer analysis indicates that there is upside in WAF s relative valuation against peers owing to the high quality of the Sanbrado resource ounces. Page 8

9 Company overview Background West African Resources (WAF) is a Perth based gold explorer focussed on Burkina Faso and listed on the ASX and TSXV. WAF listed on the ASX in 2010 with a focus on its Boulsa project the northern portion of its current tenement package. Initial results were encouraging but largely confined to shallow oxide mineralisation at the Moktedu prospect. In 2012 the company s focus switched to a large but relatively low grade gold and copper porphyry style deposit called Sartenga. In 2014 WAF acquired TSXV listed Channel Resources for 30m shares and subsequently listed on the TSXV in Channel Resources contiguous tenements host the Sanbrado project (called Tanlouka at the time). Initially WAF looked to develop a low grade heap leach operation. However, additional high grade intersections and investor appetite led the company to define a more conventional CIL gold project at Sanbrado and complete a Definitive Feasibility Study (DFS) on open pit resources in February The release of a significant high grade underground resource update in October 2017 looks to have transformed the economics of the project. Corporate summary WAF has 579m shares on issue and 20m options at an average strike price of 16c for a total potential cash value of $3.24m. The options need to be exercised at various dates between February 2018 and December 2020 as outlined in the table below. At the current share price all options are in the money. Table 5 - WAF options on Issue Expiring Shares (m) ex. Price Value (A$m) ITM (A$m) ITM shares (m) 20/02/ $0.15 $0.73 $ /08/ $0.10 $0.05 $ /12/ $0.15 $0.29 $ /06/ $0.08 $0.42 $ /06/ $0.10 $0.10 $ /06/ $0.15 $0.15 $ /07/ $0.32 $0.35 $ /03/ $0.24 $0.10 $ /05/ $0.24 $0.12 $ /10/ $0.38 $0.28 $ /11/ $0.24 $0.66 $ Total 20.0 $0.16 $3.24 $ SOURCE: WAF, BELL POTTER There are no performance rights on issue. WAF has net cash estimated at A$24m. M&A With a strong project and exploration upside we believe WAF will be attracting the interest of existing producers in West Africa and is potentially at risk of takeover as Sanbrado progresses towards a funding decision. At current market valuations we see an opportunity for a larger incumbent producer to acquire Sanbrado and fund from their own balance sheet. This has the potential for a near term realisation of value for shareholders. The Sanbrado Project is located adjacent to TSXV listed Orezone Gold Corporation s (ORE) large but very low grade Bombore gold development project 0.64g/t Au). ORE has a market capitalisation in the order of C$110m. Despite the overall low grade of Bombore, we see potential synergies with both projects adjacent to each other and looking to potentially develop their resources. Page 9

10 Sanbrado Project, Burkina Faso (90%) Background The Sanbrado gold project was originally discovered in 2010 by TSXV listed Channel Resources (CHU). Channel defined the Mankarga 5 (M5) resource of 1Moz. Since acquiring Channel Resources, WAF has advanced Sanbrado to an open pit DFS and a combined high grade (M1 south) and low grade (M5) resource of 2.7Moz. WAF owns 90% of the project with the Burkina Faso government free carried after payback on capital. Location, Infrastructure and access The Sanbrado Gold Project is located 90km south east of Ouagadougou, the capital of Burkina Faso. Sanbrado can be accessed by sealed road, with the last 14km an allweather gravel road. The project is situated adjacent to Orezone Gold s (TSXV:ORE) Bombore project in the southern part of Burkina Faso. Figure 4 Sanbrado project Location SOURCE: WAF The project has a mining permit and an approved ESIA permit for an open pit heap leach operation. An update of these permits will be required for a CIL and underground operation. Initial studies indicate that some 220 households will need to be relocated should mining commence, the relocation plan was approved as part of the ESIA permit. The area is flat savannah, water can be sourced from the River Nakambe. Power is likely to be in the form of diesel or HFO (Heavy Fuel Oil) generation, although grid power is potentially available in the region (reliability could be an issue). The access and infrastructure are considered favourable for a gold project in West Africa. Page 10

11 Geology, resources and reserves The right structural setting Sanbrado is hosted within a sequence of structurally deformed Birimian Greenstone rocks, the Proterozoic aged rocks that host other gold deposits in the region. The sequence of metamorphosed volcanics and sediments is structurally deformed as part of a regional deformation event where roughly north-south compression has formed a sequence of regional transcurrent shear zones that tend northeast as shown in Figure 4. The sequence of shears and greenstones is intruded by granites and porphyry bodies that often assist in locating gold mineralisation. At Sanbrado the M5 structure appears to be a second or third order splay off the regional Markoye fault zone where it jogs (or deviates) slightly to the north making the area more favourable for the precipitation of mineralisation fluids in a more extensional/dilational environment. In addition, the mineralisation appears to be located in the pressure shadow to the south of a competent granodiorite intrusive body. This is a common structural setting and trap for gold as the large granodiorite affords a de-stress zone and dilation which provides space to trap gold. M1 is likely another structure forced around the granodiorite to the north. The high grade M1 South shoot likely reflects localized fold hinges or later faulting that intersects the north trending M1 shear, the likely result from N-S compression. The Sanbrado gold project is in a geologically favourable location for gold mineralisation and we see potential for additional gold discoveries here. Interestingly the higher grade and deeper portions of the M5 trend is located in the south where the M1 trend potentially intersects, making this a good target for additional high grade gold at depth. Figure 5 Sanbrado geology plan SOURCE: WAF Gold is found within sheared and boudinaged quartz veining associated with silica, sulphide (pyrite, arsenopyrite and pyrrhotite), carbonate and calc-silicate alteration. The high grade plunging shoot at M1 South is associated with particularly intense silicification, Page 11

12 this alteration suggests a large amount of fluid flow and potential for a relatively sizeable gold deposit rather than just a smaller tension gash style of mineralisation. In long section (Figure 6 below), the high grade plunging shoot at M1 South appears to be offset slightly to the northwest below 400m vertical depth. We believe this may be a late structure that could also offset the smaller plunging shoots located at shallow depths to the northwest in the long section below. In our view, this could open up potential for the offset continuation of these shallow shoots at depth also. This hypothesised late structure could also potentially explain why the mineralisation also appears to split at depth on cross section to the south (Figure 7). Figure 6 - M1 South long section Figure 7 - M1 South Cross section: ore body splitting at depth SOURCE: WAF SOURCE: WAF Resources Sanbrado hosts four resources, the larger M5 resource, the high-grade M1 South resource and the smaller M3 and M1 North resources. On 30 th October, WAF announced a substantial (150%) increase in resource ounces at Sanbrado, largely due to the 22g/t Au resource from M1 South. M1 South and M5 form the backbone of our assumed mine plan. M3 will likely provide shallow oxide satellite pits as outlined in the open pit DFS. Sanbrado hosts a 2.7Moz resource that is JORC 2012 compliant as shown below. The resource was defined independently with open pit resources defined at a 0.5g/t lower cut and underground resources at a 3g/t Au lower cut and 250g/t upper cut. Additional resource upgrades are expected in The M5 open pit resource and M1 South underground resource remain open at depth. Page 12

13 Table 6 Sanbrado mineral resources (30 October 2017) Category Tonnes (Mt) Grade (g/t Au) Contained Gold (Koz) Measured Indicated ,080 Inferred Total ,735 SOURCE: WAF, 100% OF PROJECT Within the global resource above is an exceptionally high-grade resource at M1 South. This underground resource is confined to a plunging shoot of mineralisation that has a relatively short strike length. Given the exceptional grade it is important that mineralisation is not projected aggressively along strike. Consequently the resource was calculated using Ordinary Kriging on small parent cell (2.5m x 5m x 5m) block sizes. Modelling allowed extrapolation no more than 10m along strike at the edge of the resource. Grade distribution in M1 South shows acceptable variance and a favourably low nugget effect for such a highgrade ore body with only 4 samples reporting above the 250g/t Au upper cut. Table 7 Sanbrado High Grade M1 South mineral resource (30 October 2017) Category Tonnes (Mt) Grade (g/t Au) Contained Gold (Koz) Indicated Inferred Total SOURCE: WAF, 100% OF PROJECT The high grade resource remains open below 450m. Open pit reserves were estimated in February 2017 utilizing a 5:1 average strip ratio and US$1,200/oz gold price. These reserves are expected to grow and the strip ratio fall in an updated DFS due 1HCY18. Table 8 - Sanbrado mineral reserves (20 February 2017) Category Tonnes (Mt) Grade (g/t Au) Contained Gold (Koz) Probable Total SOURCE: WAF, 100% OF PROJECT Mining and mine plan In a potential mining scenario the operation would likely be a combination of open pit mining and an underground mining operation on M1 South (and possibly at depth on M5 South). The February 2017 DFS assumed an open pit mining operation that would produce 150kozpa over the first 3 years and 93kozpa over the remaining 6 years, at estimated life of mine (LOM) all in sustaining costs (AISC) of US$759/oz. But with initial capital expenditure of US$131m the post-tax NPV5 was estimated at ~$100m. This initial DFS was only based on open pit mining and assumed an extreme 36:1 strip ratio on M1 South. We believe the recent resource upgrade (and future upgrades) has transformed the operation with high grade underground ore to complement bulk tonnage open pit operations. The blending of high grade open pit and underground ore creates significant flexibility and diversification. But, more significantly the M1 South resource will add overall grade and production ounces to the first years of mining (and LOM), lower strip ratios and improve recoveries. We assume contract mining (lower capex slightly higher opex) in our modelling. Page 13

14 In the recent resource upgrade the company s Whittle Pit Optimisation assumed relatively shallow slope angles of 50⁰ for fresh ore, we believe steeper slope angles are possible and this would likely lower strip ratios and improve the economics of these pits. The Whittle Pit design assumes an open pit to 120m at M1 South. An underground operation is currently expected to commence beneath this pit, accessed by a separate box-cut to enable underground mining at the same time as open pit mining. M1 South underground mining is likely to be conventional long-hole open stoping. The dip and widths of mineralisation look to be supportive of this technique with average widths of 45m and a steep dip and plunge. More geotechnical work will be done as part of the updated DFS in order to more confidently determine ground support conditions. One consideration at M1 South is the short strike length of mineralisation at <100m. Given the high-grade of the mineralisation any change from the estimated strike of the ore body will have a greater than usual impact on the ounces per vertical metre (ozpvm) and the relative cost of development infrastructure. Based on current strike length estimates the underground is set to average 1500ozpvm which looks set to support a profitable underground mine. Resource modelling also looks favourably conservative, however the risk of unexpectedly shorter strike lengths to this mineralisation and the consequent dramatic drop-off in ounces should be considered and be a major focus in the updated DFS and ongoing drilling program. Drilling to date shows a consistent ore body that is relatively predictable at M1 South. Figure 8 - Planned site layout showing open pit, underground access and plant locations SOURCE: WAF Processing Processing is expected to utilize a conventional 2.5mtpa gravity-cil processing plant. Metallurgical recoveries in the DFS were 90.7%, however blending more of the higher grade (higher recovery) M1 South ore as well as an improved SAG and ball mill comminution circuit is expected to lift recoveries to >93%. Overall gold recovery and costs Page 14

15 will also likely be assisted by the improved gravity recovery (~40% LOM) from coarser M1 South ore and the addition of a Wilfley (shaker) table to the Knelson gravity concentrator circuit. The company will need to consider the risk of gold theft associated with an open Wilfley table. Ore is hard and the M1 South ore recovery benefits from finer grind to 75 microns compared to M5 at 90 microns hence the introduction of a SAG- Ball mill combination. This will add to capex and opex but should be offset by the greater recoveries (assumed in our modelling). Cyanide consumption is low at 300mg/l to achieve relatively rapid leach times of circa 24 hours which is favourable. Given the hardness of the ore and the requirement for a relatively fine grind, power costs will be relatively high. The company is exploring options on possible grid power, Heavy Fuel Oil or diesel. Exploration Exploration upside potential is considerable at Sanbrado. WAF will have 6 drilling rigs on site and will complete a geophysical (IP) program to aid exploration targeting at Sanbrado shortly. M1 South The highest priority target is clearly down dip of the M1 South resource. The company is currently drill testing this area. If mineralisation continues to be defined at 1500ozpvm then each additional 100m of resource will add 150koz of gold (~1 year of underground mine life). The resource is still relatively shallow and indications are that ground conditions should support mining to significantly greater depths than the known resource. We expect near term newsflow from drilling this position and anticipate M1 South additions to a likely resource upgrade next quarter. At M1 South we believe a potential faulted offset of shallow shoots to the south could open up potential for a continuation of these shallow shoots at depth (as outlined in the geology section on pages 11 & 12). M1 South remains open to the south. Reconnaissance drilling of this trend is likely oriented incorrectly given the shear appears to trend more east-west and drilling traverses are oriented east west and could potentially miss the ore zone. M5 Another compelling target is at depth beneath the southern part of the M5 pit design. As outlined in the geology section on page 11, this higher grade portion of M5 is coincident with a possible intersection with the M1 trend and makes a compelling geological target that is complemented by favourable drilling results to date. Gold is often focussed and at higher grades where two gold bearing structures insect. Drilling at depth at M5 south has returned some very encouraging widths and grades that could potentially support an underground operation. Better intersections include 12.3g/t Au and 17.5g/t Au. The M5 trend extends 1.5km along strike to the northeast of the M5 resource. We expect drilling to test this trend The size of the Sanbrado tenement limits the strike extent of these mineralised trends on company ground, although (in our opinion) WAF s tenement covers the geologically most prospective ground within the pressure shadow of the Sanbrado Granodiorite. Page 15

16 Figure 9 M5 Drilling and pit outline and intersections to south Figure 10 X-section showing depth potential at M5 South SOURCE: WAF SOURCE: WAF The bulk of the FY18 field season s planned 60,000m of RC and Diamond drilling will likely focus on Sanbrado. Page 16

17 Regional Exploration, Burkina Faso (90%) Sartenga The Sartenga copper-gold-molybdenum project is a large tonnage porphyry system which is unique in the Biriman rocks of West Africa. The Inferred Mineral Resources contain 174,000t copper, 651,000oz gold (70 million tonnes at 0.2% copper, 0.3g/t gold, 166g/t molybdenum and 1.1g/t silver using a 0.45% copper equivalent cut-off). The dominant sulphide is bornite and therefore mineralisation has the potential to create a high-grade copper-gold concentrate. The project is located close to potential infrastructure including rail to port less than 40 km from the project. Preliminary metallurgical test work has been carried out on a composite sample of Sartenga primary ore with a head grade of 0.23% Cu and 0.43g/t Au, at a relatively coarse primary grind size of 106 microns. Flotation rougher recovery of 97.9% was returned for gold, while a recovery of 96.1% was recorded for copper. These very high rougher recoveries indicate that final copper and gold recovery levels into a commercial grade concentrate will also be quite high, potentially in excess of 90%. Sartenga was the company s flagship asset prior to accessing the Sanbrado Project. Moktedu The Moktedu prospect is located in the southwestern part of the Boulsa Project. The prospect covers some 10km of strike and is confined within a northeast trending regional shear. The prospect is also located some 2km northeast of Orezone Gold Corporation s (TSXV: ORE) Bomboré gold deposit. Favourable shallow oxide mineralisation was intersected including 8.4g/t Au and 10g/t Au. Mineralisation does not appear to continue at depth into fresh rock. Other The Meguet and Fatmatenga prospects are located near the town of Meguet, some 24km northwest of Zorgho, and are centrally situated within the Boulsa Project. Best drilling results include 10m at 7.67g/t Au and 10m at 2.77 g/t Au. Page 17

18 Burkina Faso Burkina Faso is a West African nation located between Ghana and Mali. Burkina Faso has a strong track record of gold mining and exploration success. Burkina hosts nine gold mines owned and operated by largely North American and European mining companies including Roxgold (Yaramoko mine), Avocet (Inata mine), Semafo (Mana mine and Natougou development), IamGold (Essakane Mine), Nordgold (Bissa Hill and Taparko mines), MNG Gold (Youga mine) and Endeavour Mining (Karma and Hounde mines). RoxGold s Yaramoko gold mine is a high grade and profitable underground gold mine and likely the best analogy for a potential operation at M1 South. Burkina Faso is currently ranked 8 th in Africa and 48 th globally in the Fraser Institute attractiveness for mining investment survey. The country has a transparent mining code, the corporate tax rate is 27.5% and government gold royalty is 5%. The government acquires a 10% free carry in mining projects (after capital payback). In recent years Burkina Faso s capital has been on the receiving end of a number of terrorist attacks. The northern part of the country near the border with Mali is deemed challenging from a security perspective. WAF s project is located in the southern portion of the country that is considered relatively safe to operate in by comparison. Page 18

19 Board and management Management has strong and relevant experience in West Africa. However, the executive team is small and geared towards exploration and would need complementing should the company look to develop the project to a producing asset (assuming the asset is not bought by an incumbent producer). Non-Executive Chairman Mark Connelly has more than 27 years of experience in the mining industry, and has held senior executive positions with Newmont Mining Corporation and Inmet Mining Corporation. He is the former Managing Director and Chief Executive Officer of Papillon Resources Limited, a Mali-based gold developer which merged with B2Gold Corp in a US$570 million deal. He was Chief Operating Officer of Endeavour Mining Corporation following its merger with Adamus Resources, where he was Managing Director and CEO. Mark has extensive experience in financing, development, construction and operation of mining projects in a variety of commodities including gold, base metals and other resources in West Africa, Australia, North America and Europe. Managing Director Richard Hyde is a geologist with 20 years experience in the minerals industry and more than 15 years of experience in West Africa. Richard has managed large exploration and development projects in a range of different geological environments in Australia, Africa and Eastern Europe. He has consulted extensively to the mining industry as a senior consultant with RSG Global and Coffey Mining based in West Africa and Australia. Richard is a founding director and shareholder of West African Resources. He is Member of the Australian Institute of Mining and Metallurgy. Non-Executive Director Simon Storm is a chartered accountant with more than 25 years of Australian and international experience in the accounting profession and commerce. He commenced his career with Deloitte Haskins & Sells in Africa and then transferred to London before joining Price Waterhouse in Perth. He has held various senior finance and company secretarial roles with listed and unlisted entities in the banking, resources, construction, telecommunications, property development and funds management industries. In the past 10 years, he has provided consulting services involving accounting, financial and company secretarial matters to various companies in these sectors. Chief Operating Officer Lyndon Hopkins has more than 20 years of experience in gold exploration, development and production. He is the former COO of Equigold NL s Ivory Coast operations and Mine Manager for the construction of Regis Resources Ltd s Rosemont Gold Mine. Page 19

20 West African Resources (WAF) Company description WAF is a Perth-based company focused on gold exploration at its 90% owned Sanbrado project in Burkina Faso. WAF is listed on the ASX and TSX-V. Sanbrado hosts >2.5moz of gold resources and is undergoing an aggressive 60,000m per annum exploration program and Definitive Feasibility Study on a potential gold mining operation. The project hosts the extremely high grade underground resource at M1 South 22g/t Au) that will likely supplement bulk open pit mining from M5. The Feasibility Study is due for completion in mid Investment thesis BUY (speculative), Valuation $0.62/sh Our SOTP valuation consists of a discounted (40%) NPV valuation on the Sanbrado project, cash at face value and a peer reviewed exploration valuation. At Sanbrado we assume a 10 year 2.5mtpa CIL project utilizing underground and open pit ore to produce an average of 160kozpa LOM at AISC of circa A$900/oz. We discount this valuation to reflect technical, exploration, permitting and funding risk. We assume additional equity funding of A$95m and dilute our valuation accordingly. We believe WAF is an excellent and undervalued exploration story and initiate with a Spec. Buy. Discounted valuation of $522m ($0.62/sh) Valuation risk discounted SOTP with DCF on Sanbrado We have modelled Sanbrado to commence production in FY21 with a 10 year mine life supported by production from high grade underground mining for 4 years from FY21 and lower grade open pit operations over LOM. We assume open pit and underground ore is blended over the life of the underground operation. Our mine plan assumes 2.41g/t Au for 1.9Moz compared to reserves of 0.9Moz. We assume additional conversion of resources to reserves on the back of the recent high grade resource upgrade (150% increase) and future upgrades from underground ounces. We value WAF s 90% interest in the Sanbrado project on a post-tax basis, calculating an NPV10% of A$583m. However, given the underground resources are yet to be converted to reserves or undergo a feasibility study (the open pit reserves were subject to a study prior to the recent underground resource upgrade) we have decided to risk our valuation by 40% to reflect technical and funding risk. Our risked 0.6X NPV for WAF s 90% share in the project is A$350m or 40c/share (fully diluted). Exploration tenure includes the large but relatively low grade Sartenga gold and copper discovery and the Moktedu exploration trend which was formerly the main focus of the business before Sanbrado. Exploration tenure also includes additional resources of 800koz at Sanbrado. We value exploration tenure at A$50m based on peer comparisons. We assume cash at 31 December 2017 of A$24m and value it at face value. Corporate costs and debt funding are factored into our Sanbrado model. WAF has no significant additional investments. We assume the A$3.2m in share options are exercised and dilute our valuation by 20m shares accordingly. We also assume the A$95m (45%) of the assumed capital and working capital expenditure for Sanbrado is funded through the issue of 275m shares at the current share price. We dilute our valuation to reflect the unpaid capital of 275m shares. Our total discounted sum-of-the-parts (SOTP) NAV valuation for WAF is A$522m or A$0.62/share. Page 20

21 Figure 11 - WAF: sum-of-the-parts valuation Shares on issue (m) ITM options (m) 20.0 Performance rights (m) - Unpaid capital (m) Diluted (m) SOTP* A$m A$/sh 90% Sanbrado (risk discount 40%, NPV10%) Exploration Upside Cash (est. end qtr) Investments - - Total (undiluted) Cash from options Unpaid capital Total (fully diluted) SOURCE: BELL POTTER SECURITIES ESTIMATES Page 21

22 Resource sector risks Risks to WAF include, but are not limited to: Operating and capital cost fluctuations. Markets for exploration, development and mining inputs can fluctuate widely and cause significant differences between planned and actual operating and capital costs. Key operating costs are linked to energy and labour costs as well as access to, and availability of, technical skills, operating equipment and consumables. West Africa is a relatively expensive place to operate. Lack of exploration success: Our modelling assumes additional exploration success and the company s ability to convert resources to reserves. Exploration is by its very nature risky and there is no certainty, despite our view on its prospectivity. The M1 South ore body is particularly exposed to risk in fluctuations in its geometry where an unexpected shrink in strike length could significantly impact economics of mining. Lack of funding: Exploration/development companies generally do not have a source of revenue and so they require access to funding to enable them to carry out adequate exploration and related development activities in order to continue to develop their operations. WAF will need to acquire funding for the project which we assume to be in the order of $200m. WAF is well funded for near term requirements with net cash of ~$25m. Metallurgical issues: Detailed metallurgical test work has been completed on the open pit options but is yet to be completed on the underground resource in detail. Initial indications suggest that improvements can be expected, but this is pending additional test work. Regulatory and social licence approvals: WAF has a mining permit and ESIA approved for a Heap Leach operation. It is yet to update this process for a CIL processing plant and underground operation. The granting of a heap leach permit suggests, but does not guarantee these additional permits will be granted. Technical risks: a Definitive Feasibility study has been completed on an open pit mining scenario at Sanbrado. A study is yet to be completed on a combined underground and open pit mining scenario. Greater de-risking of the project is expected as the company completes a combined Feasibility Study in Corporate/M&A risks. Risks associated with M&A activity include differences between the entities and the market s perception of value associated with completed transactions, the actual performance of an acquired asset vs its expected performance as assessed by the acquirer. We view WAF as a potential takeover target. Commodity price and exchange rate volatility: Gold price and exchange rates are exposed to a number of unpredictable economic factors that are hard to predict and could alter WAFs revenue potential. Revenue and costs are paid in a different currency (USD and CAF) to WAF s domestic currency. Africa: Africa offers considerable upside opportunities due to its relative lack of development and exploration of its mining potential. However, with this opportunity comes risk of social unrest, lack of infrastructure and unexpected government changes to mining codes and nationalisation. Each country will vary in risk profile and Burkina Faso is considered considerably more favourable than many African countries due to a stable mining code that supports mining investment. However, Burkina Faso has experienced a forced change in government in recent years and some social unrest, though this has not overly impacted mining in the country to date. Page 22

23 West African Resources as at 27 November 2017 Recommendation Buy, Speculative Price $0.39 $0.62 West African Resources (WAF) 27 November 2017 Table 9 - Financial summary PROFIT AND LOSS FINANCIAL RATIOS Year ending 30 June Unit 2018e 2019e 2020e 2021e 2022e Year ending 30 June Unit 2018e 2019e 2020e 2021e 2022e Revenue $m VALUATION Expense $m (14.2) (10.5) (8.5) (159.4) (175.6) NPAT $m (14) (11) (10) EBITDA $m (14.2) (10.5) (8.5) Reported EPS c/sh (2) (1) (1) Depreciation $m (35.3) (40.5) EPS growth % n.a n.a n.a n.a -6% EBIT $m (14.2) (10.5) (8.5) PER x -16.1x -31.1x -31.2x 1.3x 1.4x Net interest expense $m (2.3) (7.7) (2.4) DPS c/sh PBT $m (14.1) (10.5) (10.5) Franking % 0% 0% 0% 0% 0% Tax expense $m (61.3) (89.0) Yield % 0% 0% 0% 0% 0% NPAT $m (14.1) (10.5) (10.5) FCF/share c/sh nm nm nm P/FCFPS x nm nm nm 1.2x 1.2x CASH FLOW EV/EBITDA x -14.2x -19.2x -23.7x 0.6x 0.5x Year ending 30 June Unit 2018e 2019e 2020e 2021e 2022e EBITDA margin % nm nm nm 69% 68% OPERATING CASHFLOW EBIT margin % nm nm nm 63% 61% Receipts $m Return on assets % -72% -14% -6% 80% 46% Payments $m (2.3) (2.0) (2.0) (154.4) (170.6) Return on equity % -81% -17% -11% 116% 51% Tax $m (61.3) (89.0) LIQUIDITY & LEVERAGE Net interest $m (2.3) (7.7) (2.4) Net debt (cash) $m (19) (45) 105 (163) (430) Other $m ND / E % na na 113% na na Operating cash flow $m (2.2) (2.0) (4.0) ND / (ND + E) % na na 53% na na INVESTING CASHFLOW Current ratio x 9.8x 2.3x 0.1x 3.1x 13.3x Capex & Mine Development $m (0.1) (60.0) (140.0) (25.1) (15.9) EBITDA / Interest x nm nm -3.7x 47.0x 154.5x Sale of PP&E $m Exploration $m (11.9) (8.5) (6.5) (5.0) (5.0) MINERAL RESOURCES, RESERVES & MINE PLAN ASSUMPTIONS (Attributable) Investing cash flow $m (12.0) (68.5) (146.5) (30.1) (20.9) Total Mt Au (g/t) Moz Au EV/oz FINANCING CASHFLOW Reserve $244 Share issues/(buy-backs) $m Resource $82 Debt proceeds/(repayments) $m (43.6) (43.6) LOM Production $120 Dividends $m *assumed production includes low grade stockpiles but excludes 0.5moz of TB underground reserves Other $m 0.2 (0.3) PROJECT ASSUMPTIONS - production profile, costs, capex & pricing Financing cash flow $m (42.7) (43.6) Year ending 30 June Unit 2018e 2019e 2020e 2021e 2022e Cash generated/(lost) $m (59.9) Currency US$/A$ Gold price US$/oz 1,313 1,360 1,420 1,450 1,450 BALANCE SHEET Gold price A$/oz 1,706 1,813 1,893 1,933 1,933 Year ending 30 June Unit 2018e 2019e 2020e 2021e 2022e Cash costs (C1) A$/oz ASSETS AISC A$/oz Cash & short term investments $m CAPEX - growth A$m - (60) (140) (10) - Other current assets $m CAPEX - sustaining A$m (15) (16) PPE & Exp. & Dev. $m Ore milled Mt Other non-current assets $m (0.0) (0.0) (0.0) Head grade g/t Au Total assets $m Attributable Gold Production oz Au , ,410 LIABILITIES Gold sold oz Au , ,410 Accounts payable $m Borrowings $m VALUATION End Qtr. Provisions $m Shares on issue (m) Other $m ITM options (m) 20.0 Total liabilities $m Performance rights (m) - SHAREHOLDER'S EQUITY Unpaid capital (m) Share capital $m Diluted (m) Reserves $m SOTP* A$m A$/sh Retained earnings $m (77.0) (87.5) (98.0) % Sanbrado (risk discount 40%, NPV10%) Non-controlling interest $m Exploration Upside Total equity $m Cash (est. end qtr) Shares on issue at year end m Investments - - Total (undiluted) CAPITAL STRUCTURE Cash from options Unpaid capital Shares on issue m Total (fully diluted) Performance shares / other m 0.0 * corporate costs and debt incorporated in project NPV Total shares on issue m Share price $/sh LT* GOLD PRICE (US$/oz) & DISCOUNT RATE VALUATION SENSITIVITY TABLE Market capitalisation $m Discount/Price $1,150 $1,250 $1,300 $1,400 $1,450 $1,500 Net cash (est.end qtr) $m % $0.39 $0.43 $0.46 $0.50 $0.52 $0.54 Enterprise value (undiluted) $m % $0.43 $0.48 $0.50 $0.55 $0.58 $0.60 Options outstanding m % $0.46 $0.51 $0.54 $0.59 $0.62 $0.65 Options (in the money) m % $0.49 $0.55 $0.58 $0.64 $0.67 $0.70 Performance rights m 0.0 5% $0.55 $0.62 $0.66 $0.73 $0.77 $0.80 Issued shares (diluted for options/rights) m % $0.69 $0.79 $0.84 $0.93 $0.98 $1.03 Market capitalisation (diluted) m * long term = FY21 onwards Net cash + options $m 27.6 PRODUCTION PROFILE FY17-FY23 Enterprise value (diluted) $m ,000 2,200 2,000 MAJOR SHAREHOLDERS DIRECTORS & MANAGEMENT 250,000 1,800 % m Non Exec. Chair Mark Conelly 1,600 Dynamic Fund (1832) 7.9% 45.7 Managing Director Richard Hyde 200,000 1,400 Macquarie 7.0% 40.5 Non Exec. Director Simon Storm 1,200 Sprott 5.7% 33.0 Chief Ops Officer Lyndon Hopkins 150,000 1,000 Dir. & Mngmt. 4.1% , Top % , Mine Life Assumption - - Operation Sanbrado FY2021 FY2022 FY2023 FY2024 FY2025 FY2026 FY2027 FY2028 FY2029 Years 10 Gold Produced Gold Price (A$/oz) AISC (A$/oz) VALUATION METRICS Implied capital return (%) P/NAV (x) SOURCE: BELL POTTER SECURITIES ESTIMATES Current 59% 0.63 Page 23