Anaconda Mining Inc. (TSX: ANX) Reports Best Ever Q1; Exploration on Newly Acquired Lands

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1 Siddharth Rajeev, B.Tech, MBA, CFA Analyst Nicole Engbert, BSc Research Associate-Mining October 29, 2012 Anaconda Mining Inc. (TSX: ANX) Reports Best Ever Q1; Exploration on Newly Acquired Lands Sector/Industry: Junior Exploration/Mining Market Data (as of October 29, 2012) Current Price C$0.14 Fair Value C$0.26 ( ) Rating* BUY Risk* XXX 52 Week Range C$ C$0.16 Shares O/S mm Market Cap C$24.76 mm Current Yield N/A P/E (forward) 4.0x P/B 1.6x YoY Return 40.0% YoY TSX -1.7% *see back of report for rating and risk definitions Investment Highlights Anaconda sold 4,217 oz of gold and reported $6.86 million in revenues in Q making Q1 the best quarter ever in terms of gold sales and revenues. We have maintained our production forecast for FY2013 at 15,500 oz. We, however, raised our revenue forecast for FY2013 from $24.41 million to $25.58 million due to higher gold sales price estimates. The total cash costs per oz dropped from $956/oz in FY2012, to $948/oz in Q The company was able to cut G&A expenses from $0.56 million (12% of sales) in Q1-2012, to $0.46 million (7% of sales) in Q G&A expenses in Q were significantly lower than our estimates. Our revised net profit forecast for FY2013 is $6.24 million (EPS: $0.04), up from our previous estimate of $5.18 million (EPS: $0.03). At the end of Q1-2013, ANX had $1.62 million in cash and cash equivalents, with working capital of $0.52 million. Debt to capital dropped further from 21% at the end of FY2012, to 17% at the end of Q Soil sampling on 4,335 hectares surrounding the Pine Cove mine has identified numerous gold-in-soil anomalies. The company plans to drill a northern extension of the Pine Cove mineralization early next year. We have raised our fair value from $0.20 to $0.26 per share. Key Financials (FYE - May 31) FY2011 FY2012 FY2013E FY2014E CAD thousands, expect per share data Revenue 7,325 19,906 25,575 27,914 Net Income (9,233) 3,298 6,244 8,150 EPS $ (0.08) $ 0.02 $ 0.04 $ 0.05 Cash and Equivalents ,308 14,128 Working Capital (5,329) (348) 3,913 14,990 LTD 6,130 3, An FRC analyst visited Anaconda s Pine Cove Mine in November Anaconda Mining Inc. is a mining and exploration company based in Toronto, Canada focused on the currently producing Pine Cove gold mine, located on the Baie Verte peninsula, Newfoundland. The Pine Cove mill currently operates at a throughput rate of 900-1,000 tonnes per day.

2 Page 2 Sells 4,217 oz in Q1 We maintain our production forecast of 15,500 oz for FY2013 Anaconda had announced its Q revenue and gold sales figures last month. On October 12, 2012, the company released its Q1 financial statements which showed exactly the same gold sales and revenue figures as last month s press release. The following table shows a summary of the performance Q Revenue ($, 000s) $7,325 $19,906 $6,860 Au Sales (oz) 5,344 11,978 4,217 Grade (gpt) 1.99 * Recovery Rate (%) 64% * 80% 84% * January - May 2011 The company sold 4,217 oz of gold and reported $6.86 million in revenues making Q1 the best quarter ever in terms of gold sales and revenues. Gold sales in Q were 3,677 oz and $6.04 million, respectively. Although gold sales increased QOQ, production dropped from 3,746 oz to 3,141 oz due to a scheduled maintenance period in August for 16 days. Note that the production figures are our estimates calculated from the table below; management did not disclose production data. As a result of the maintenance, tonnes processed dropped from 25kt per month in June and July, to 13kt per month in August, as shown in the table below. Q1 s recovery rate of 84%, and grade of 1.85 gpt, were significantly higher than the 80%, and 1.81 gpt, in FY2012 (12 month period). Source: Company ANX does not have any more scheduled maintenance periods for the rest of the year. The company expects gold sales of 16,000 oz in FY2013. We have maintained our production forecast for FY2013, and FY2014, at 15,500 oz, and 16,420 oz, respectively. We, however, raised our gold sales price forecasts from $1,575 per oz and $1,525 per oz, to $1,650 per oz and $1,700 per oz, for FY2013, and FY2014, respectively. Our revised revenue forecasts for FY2013, and FY2014, are $25.58 million, and $27.91 million, up from our previous forecasts of $24.41 million, and $25.04 million, respectively. Production costs continue to drop Total cash costs per oz dropped from $956/oz in FY2012, to $948/oz in Q Costs were extremely high at $1,684/oz in FY2011. Improvements in grade and recovery rates were the primary reasons for the drop in costs. Our forecast for FY2013 (12 month period)

3 Page 3 was $883/oz we have raised our estimate to $905/oz. As for FY2014, we raised our estimate from $843/oz to $862/oz. Cuts G&A Expenses EBITDA improved YOY, and QOQ, from $0.89 million in Q1-2012, and $2.08 million in Q4-2012, to $2.35 million in Q The company was able to cut G&A expenses from $0.56 million (12% of sales) in Q1-2012, and $0.52 million (9% of sales) in Q4-2012, to $0.46 million (7% of sales) in Q Management attributed the drop to general cost management, a reduction of professional fees, and a reduction in consulting fees related to commissioning the mill. Lower cash costs and G&A resulted in a significant improvement in margins as shown in the table below. Margins FY2011 FY2012 Q Q Ind. Avg. Gross (22.9%) 42.5% 37.4% 41.7% 45.0% EBITDA (77.9%) 29.1% 19.6% 34.2% 25.0% EBIT (83.6%) 20.4% 10.3% 25.6% 15.0% Net (111.8%) 15.7% -18.0% 22.1% N/A G&A expenses were significantly lower than our estimate and therefore, we have adjusted our forecasts for FY2013, and FY2014, accordingly. Raising EPS estimates The company reported net profit of $1.51 million (EPS: $0.01) in Q1-2013, versus a net loss of $0.81 million (EPS: -$0.01) in Q We are raising our EPS estimates as we lower our G&A expense forecasts, partially offset by a higher production cost estimates. Our revised net profit forecast for FY2013 is $6.24 million (EPS: $0.04), up from our previous estimate of $5.18 million (EPS: $0.03). Our revised forecast for FY2014 is $8.15 million (EPS: $0.05) versus our previous estimate of $5.49 million (EPS: $0.03). Free cash flows were $1.86 million in Q Our models predict positive free cash flows of $7.68 million (previous estimate - $6.56 million) and $10.51 million (previous estimate - $7.77 million) in FY2013, and FY2014, respectively. The table below shows the historical cash flows and our forecast for the next two years. Cash Flows (000's) FY2011 FY2012 Q FY2013E FY2014E Cash Flow from Operations (2,470) 2,428 2,387 8,180 11,005 Cash Flow from Financing 4,358 (3,843) (787) (3,051) (1,685) Cash Flow from Investing (2,105) 1,803 (663) (500) (500) Net Change in Cash (243) ,629 8,820 Free Cash Flow (4,359) (411) 1,858 7,680 10,505

4 Page 4 Debt to Capital drops to 17% At the end of Q1-2013, ANX had $1.62 million in cash and equivalents with working capital of $0.52 million. Debt to capital dropped further from 21% at the end of FY2012, to 17% at the end of Q We expect ANX s debt to capital to drop to approximately 8% by the end of FY2013 assuming the company continues to pay down principal at the same rate as it did in FY2012 and Q Liquidity Analysis (000's) FY2011 FY2012 Q FY2013E Ind. Avg. Cash and Equivalents ,615 5,308 Working Capital (5,329) (348) 519 3,913 Current Ratio 0.4x 0.9x 1.2x 1.9x 1.8x Debt / Capital 55.58% 21.49% 16.67% 8.00% 23.50% LT Debt / Capital 36.35% 19.40% 14.87% - Stock Options and Warrants Exploration Update We estimate ANX has 8.18 million warrants (weighted average exercise price - $0.08) and million options (weighted average exercise price - $0.21) outstanding. All the warrants and 3.10 million options are currently in the money. Anaconda recently provided an update on their 2012 exploration program. The program is focusing on the 4,335 hectares surrounding the company s Pine Cove mine. Out of this, 3,379 hectares were acquired in 2012 through option agreements with Tenacity Gold Mining Company Ltd. and Fair Haven Resources Inc., discussed in detail in our July 26, 2012 note. A project area map showing samples collected and trench targets associated with the current surface exploration program follows (location of Pine Cove mine marked with purple star);

5 Page 5 Source: Company The company has outlined three objectives for the 2012 program; 1. re-evaluate the exploration potential immediately north of the Pine Cove deposit 2. identify drill targets regionally across the Pine Cove mining lease, the mining licenses acquired through recently announced option agreements and staked property 3. obtain a bulk sample from the Romeo and Juliet prospect for metallurgical testing A summary of the work completed towards each objective is provided below; 1. ANX uncovered highly prospective geology during overburden stripping in the area to the north of the active open pit. This is similar to the geology hosting the main zones of the deposit. Two holes were drilled in this area during March one of which, PC , intersected gold mineralization grading 0.85 g/t Au over 32m. The company plans on re-evaluating the near surface and down-dip exploration potential and has applied for a drilling permit. We believe this could represent a possible expansion target for the mine. Management expects to drill approximately 12 holes; 2,000 3,000 meters. 2. The company completed compilation and digitization of more than 30,000 historical geochemistry results for the Baie Verte Peninsula. Field work to follow up on historical

6 Page 6 anomalies began in June To date, 430 soil samples have been sent for analyses. Based on these results, a number of trenching targets have been identified; see the map above for locations of the seven trench targets. ANX is currently waiting on permitting for each target area. To date, the permit for the number 1 trench target has been received. This initial trench is located approximately 1km northeast of the Pine Cove mine. Drilling will begin once surface testing of historical anomalies is complete and priority drill targets have been identified. 3. During August 2012, ANX collected 24 grab samples from the Juliet zone. This is located approximately 1.5km northwest of the Pine Cove mine. Assays returned highly variable results within a range of 10 parts per billion (0.010 g/t) to 130.7g/t. The variation is a result of the nature of the very fine grained, free gold contained in the quartz veins. This type of mineralization causes a non-uniform distribution of gold within the veins, thus, sample results can be highly inconsistent (termed the nugget effect ). The following map shows the Romeo and Juliet zones. Source: Company

7 Page 7 ANX plans to extract a 1,000 tonne bulk sample from the Romeo and Juliet quartz vein system. The permit for the bulk sample has been received and the company plans to begin extraction by November December of this year. This sample, we believe, will allow for better definition of gold grade over the zone and provide material for metallurgical test work. We believe that the current exploration program will provide a solid base from which ANX will be able to further define the mineralization potential of the Baie Verte Peninsula. Valuation and Rating Our DCF valuation increased from $0.18 to $0.20 per share as we raised our EPS estimates. ANX continues to trade well below the average valuation multiples of its comparables. The average comparable P/E, EV/EBITDA and EV/Revenues are 19.9x, 5.3x and 1.3x, versus ANX s forward multiples of 4.0x, 3.0x, and 1.0x, respectively. Ticker Company Name P/E EV/EBITDA EV / Revenues TSX:PTQ Petaquilla Minerals Ltd. 7.4x 6.4x 1.7x TSX:WDO Wesdome Gold Mines Ltd x 1.2x TSX:CRJ Claude Resources, Inc. 56.8x 7.9x 1.9x TSXV:MMY Monument Mining Limited. 1.6x 2.5x 1.8x TSX:DNG Dynacor Gold Mines Inc. 8.7x 4.9x 0.5x TSX:OYM Olympus Pacific Minerals Inc x 1.3x TSX:ND New Dawn Mining Corp. 8.3x 4.1x 0.7x TSX:MDN MDN Inc. 5.2x 2.0x TSX:CAL Caledonia Mining Corporation 2.4x 0.7x 0.5x TSXV:GAL Galantas Gold Corp. 13.5x 6.1x 1.4x Average 14.1x 5.3x 1.3x TSX: ANX Anaconda Mining Inc. (forward) 4.0x 3.0x 1.0x Average Comparables Valuation $0.49 $0.26 $0.18 $0.31 * we decided to use 14.1x for valuation purposes, even though it is skewed by an outlier, as we feel it is more inline with the global gold industry average P/E of 17.3x. We have raised our BUY rating and fair value from $0.20 per share to $0.26 per share.

8 Page 8 Risks The following risks, though not exhaustive, may cause our estimates to differ from actual results: The success of drilling, resource expansion, and development are important long-term success factors for the company. The value of the company depends on gold prices. The ability of the company to achieve and maintain consistent grade/recovery rates at Pine Cove mill. Pine Cove has only been in commercial production since September The proximity of some prospective mineralization to the edge of the Baie Verte Peninsula may complicate future extraction. We rate the company s shares a RISK of 4 (Speculative).

9 Page 9 Income Statement (All figures in 000's except for per share data) FY2011 FY2012 FY2013E FY2014E Revenue Sales 7,325 19,906 25,575 27,914 Other Income Total Revenue 7,325 19,906 25,575 27,914 Cost of Goods Sold 9,000 11,449 14,034 14,209 Gross Profit (1,675) 8,457 11,541 13,705 Stock-based compensation G&A 3,385 2,252 1,914 2,089 Consulting and professional fees - - All other SG&A Total operating cost 4,033 2,671 2,554 2,927 EBITDA (5,708) 5,786 8,988 10,779 Depreciation and Amortization 417 1,732 2,252 2,589 EBIT (6,125) 4,052 6,736 8,189 Interest expense (1,696) (1,178) (492) (39) Interest income Net interest cost (1,696) (1,178) (492) (39) EBT before other operating items (7,821) 2,874 6,244 8, Write-down of deferred exploration exp. (2,063) - - Write-down of PP&E Gain on sale of Chilean Mine Other 491 (554) - - EBT (9,393) 3,298 6,244 8,150 Tax Net Smelter Royalties Net Income (Loss) (9,233) 3,298 6,244 8,150 Basic EPS $ (0.077) $ $ $ 0.046

10 Page 10 Balance Sheet (All figures in 000's except for per share data) FY2011 FY2012 FY2013E FY2014E ASSETS Current Assets Cash and cash equivalents ,308 14,128 Restricted cash Total Cash and restricted cash ,308 14,128 Account receivable, prepaids and deposits ,389 Inventory 794 1,594 2,090 2,893 Other current assets 1, Total Cureent Assets 3,274 2,680 8,289 18,494 Net PP&E 17,574 17,328 15,576 13,487 Investments Restriced cash Mineral properties 1, Other long-term assets - - Total Long-term Assets 20,046 18,365 16,613 14,524 Total Assets 23,320 21,044 24,899 33,015 LIABILITIES Current Liabilities Account payable and accrued liabilities 5,360 2,668 2,691 3,504 Current portion of LT debt 1, ,685 - Other current liabilities 1,711 Total Current Liability 8,603 3,028 4,376 3,504 Total LT Debt 6,130 3,342 - Asset retirement obligations 1,096 1,146 1,146 1,146 Total Long-term Liabilities 7,226 4,488 1,146 1,146 Total Liabilities 15,829 7,516 5,522 4,650 Total Shareholder's Equity 7,491 13,527 19,377 28,365 Total Liability & Shareholder's Equity 23,320 21,044 24,899 33,015

11 Page 11 Statement of Cash Flows (All figures in 000's except for per share data) FY2011 FY2012 FY2013E FY2014E Operating Net Income (Loss) (9,234) 3,298 6,244 8,150 Depreciation & Amortization 417 1,732 2,252 2,589 Write-down of PP&E Write-down of exploration expenditures Total D&A and Non-cash 417 1,732 2,252 2,589 Stock-based compensation Future income taxes (160) Gain on Sales of Chilean Mine - (978) - - Other non-cash items 2,356 1, Change in account receivable (482) (582) Change in Inventory 49 (800) (496) (802) Change in account payable and accrued 3,092 (2,692) Change in other (3) (7) - - Cash flow from Operations (2,470) 2,428 8,180 11,005 Financing Equity Debt 3,802 (4,070) (3,051) (1,685) Cash Flow from Financing 4,358 (3,843) (3,051) (1,685) Investing Sale of assets 153 4, Exploration on mineral properties (223) (1,373) - - PP&E capex (1,666) (1,466) (500) (500) Restricted cash (369) Other - - Total Investing (2,105) 1,803 (500) (500) FX effect (27) Net increase (decrease) in cash (243) 388 4,629 8,820 Cash at beginning of the period ,308 Cash at the ending of the period ,308 14,128

12 Page 12 Fundamental Research Corp. Equity Rating Scale: Buy Annual expected rate of return exceeds 12% or the expected return is commensurate with risk Hold Annual expected rate of return is between 5% and 12% Sell Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A Coverage and ratings suspended until more information can be obtained from the company regarding recent events. Fundamental Research Corp. Risk Rating Scale: 1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is conservative with little or no debt. 2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company s capital structure is conservative with little to modest use of debt. 3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverage ratios are sufficient. 4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a turnaround situation. 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