Clean TeQ Holdings. Cobalt and premium nickel A$1.06 AUSTRALIA. Initiating coverage with an Outperform. Delivering what the customer wants

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1 AUSTRALIA CLQ AU Price (at 05:48, 07 Mar 2017 GMT) Outperform A$1.06 Valuation A$ - DCF (WACC 10.0%, beta 2.0, ERP 5.0%, RFR 3.8%) month target A$ month TSR % Volatility Index Very High GICS sector Commercial & Professional Services Market cap A$m day avg turnover A$m 1.7 Number shares on issue m Investment fundamentals Year end 30 Jun 2016A 2017E 2018E 2019E Revenue m EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % EPS adj EPS adj growth % Total DPS ROA % ROE % EV/EBITDA x Net debt/equity % Source: FactSet, Macquarie Research, March 2017 (all figures in AUD unless noted) Analyst(s) Hayden Bairstow hayden.bairstow@macquarie.com Ben Crowley ben.crowley@macquarie.com Hai Le hai.le@macquarie.com 7 March 2017 Macquarie Securities (Australia) Limited Cobalt and premium nickel Initiating coverage with an Outperform We are initiating coverage on CLQ with an Outperform rating and set a $1.50 price target. CLQ offers a unique exposure to cobalt, with its Syerston project in NSW targeting first production in Syerston is forecast to produce 19ktpa of nickel and 3ktpa of cobalt in sulphate as opposed to concentrate, enabling CLQ to directly target Lithium-ion battery manufacturers. There are a number of key hurdles that CLQ will need to clear during 2017, each one presenting a potential positive de-risking catalyst for the stock. We believe the most significant of these will be off-take agreements for nickel sulphate assuming CLQ is able to negotiate a premium to LME prices for its product. Cobalt has grabbed most of the headlines and has been a key driver of CLQ s share price in recent months. Securing cobalt sulphate offtake agreements is also likely to be a material catalyst for the stock. We expect some of the offtake agreements will come with some level of funding and note that our $1.50 price target assumes a 60/40 debt/equity funding split for the ~US$700m capex. Delivering what the customer wants On the face of it Syerston is similar to many other laterite nickel/cobalt deposits, with high pressure acid leach (HPAL) the key process route required to extract metal. However, unlike most traditional laterite projects, CLQ plans to produce nickel and cobalt sulphates using its proprietary Clean-iX technology. Nickel and cobalt sulphates are a key part of raw materials mix for Lithium-ion batteries. Battery manufacturers require metal to be supplied as salts, usually in the form of sulphates. CLQ s plan to produce nickel and cobalt sulphates is delivering the product battery manufacturers want, reducing the need for additional processing from metal back to sulphate, the cost of which we believe CLQ can secure as a premium over LME pricing for nickel. Syerston top of the pack for cobalt The Syerston project boasts higher than average cobalt grades and importantly a much lower nickel/cobalt ratio than many other laterite deposits in Australia. Syerston s nickel/cobalt ratio is ~6:1 based on production, compared to ~15:1 for Murrin. At current spot prices the ratio on a revenue split basis is <2:1. The Syerston definitive feasibility study is due to be completed toward the end of 2017, and we are not expecting to see major changes from the pre-feasibility study completed in Our development scenario for the project is broadly in line with the PFS and delivers an IRR of 23% on Macquarie price forecasts. Scandium growth optionality In addition to the nickel/cobalt mineralisation, Syerston also contains an area of highly concentrated Scandium. The main use for scandium is as an aluminium alloy, strengthening the aluminium and improving welding characteristics, making it ideal for the aerospace industry. CLQ completed a feasibility study assessing the potential of developing a scandium circuit in parallel for a modest additional capital cost. The expected production rate is 5x current global output, hence there is significant risk in securing offtake volumes and prices. We value the scandium option at $0.04/sh. Please refer to page 33 for important disclosures and analyst certification, or on our website

2 Inside Cobalt and premium nickel 3 Valuation, recommendation, risks 8 Delivering what the customer wants 12 Syerston top of the pack for cobalt 15 Scandium growth optionality 21 Company overview 24 Board and Management 25 Nickel outlook 27 Cobalt outlook 29 Company profile (CLQ AU) owns the Syerston nickel/cobalt/scandium deposit near Condobolin in NSW. The project consists of a large laterite resource containing 710kt of nickel and 114kt of cobalt. In addition Syerston also has a separate high grade resource containing 1.0kt of scandium. CLQ was listed on the ASX in 2007 focused on commercialising its proprietary ion exchange and water purification technologies. The company acquired Syerston from Ivanhoe Mines in November 2014 for $1m in equity, $100k in cash and a 2.5% gross royalty. The initial plan focused on developing the small but high grade scandium deposit. However in 2015, CLQ launched a feasibility study looking at the potential to develop the larger nickel/cobalt resource, potentially in parallel with the scandium project. Feasibility studies have been completed on both the nickel/cobalt and scandium projects at Syerston. Our development scenarios for both projects are broadly in line with feasibility study estimates. Fig 1 Syerston nickel and cobalt production outlook Nickel (kt) Cobalt (kt) AISC (US$/lb) AISC + sulphate premium (US$/lb) FY17e FY18e FY19e FY20e FY21e FY22e FY23e FY24e FY25e FY26e FY27e FY28e FY29e FY30e (0.50) (1.00) Source: Macquarie Research, March 2017 Fig 2 CLQ AU vs Small Ordinaries, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, March 2017 (all figures in AUD unless noted) 7 March

3 Cobalt and premium nickel Initiating coverage with an Outperform Outperform and $1.50 price target We are initiating coverage on CLQ with an Outperform rating and set a $1.50 price target. CLQ offers unique exposure to cobalt, with its Syerston project in NSW targeting first production in Syerston is forecast to produce 19ktpa of nickel and 3ktpa of cobalt in sulphate as opposed to concentrate, enabling CLQ to directly target Lithium-ion battery manufacturers. There are a number of key hurdles that CLQ will need to clear during 2017, each one presenting a potential positive de-risking catalyst for the stock. We believe the most significant of these will be off-take agreements for nickel sulphate assuming CLQ is able to negotiate a premium to LME prices for its product. Securing offtake agreements a key catalyst Securing cobalt sulphate offtake agreements are also likely to be material catalysts for the stock. We expect some of the offtake agreements will come with some level of funding and note that our $1.50 price target assumes a 60/40 debt/equity funding split for the ~US$700m capex. Fig 3 CLQ share price vs LME cobalt price Fig 4 CLQ share price vs LME nickel price 1.20 CLQ (A$) Cobalt (US$/lb) - Spot CLQ (A$) LME Nickel (US$/lb) - Spot Jan 16 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Jan 16 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Source: IRESS, Bloomberg Macquarie Research, March 2017 Source: IRESS, Bloomberg Macquarie Research, March 2017 CLQ share price correlated with cobalt NPV at spot prices is $1.76 Cobalt has grabbed most of the headlines and has been a key driver of CLQ s share price in recent months. While the Syerston project produces more nickel than it does cobalt, the project s greater exposure to cobalt than any other comparable laterite deposit has resulted in CLQ s share price showing a greater correlation with spot cobalt prices. Cobalt prices are now trading at more than a 100% premium to our long-term forecast of US$12.00/lb, which is a key driver of our valuation for CLQ. Running a sensitivity analysis on our NPV for CLQ shows there is significant upside to our $1.50 base case price NPV using various combinations of nickel and cobalt as outlined below. We note that at current spot prices our NPV is A$1.76. Fig 5 NPV sensitivity to nickel and cobalt price assumptions Nickel Cobalt US$10.00/lb US$15.00/lb US$20.00/lb US$25.00/lb US$30.00/lb US$4.00/lb US$5.00/lb US$6.00/lb US$7.00/lb US$8.00/lb Source: Macquarie Research, March March

4 Delivering what the customer wants Syerston to produce nickel and cobalt sulphates Nickel sulphates command an LME premium On the face of it Syerston is similar to many other laterite nickel/cobalt deposits, with high pressure acid leach (HPAL) the key process route required to extract metal. However unlike most traditional laterite projects, CLQ plans to produce nickel and cobalt sulphates. Nickel and cobalt are expected to form a key part of raw materials demand for Lithium-ion batteries. Battery manufacturers require metal to be supplied as salts, usually in the form of sulphates. CLQ s plan to produce nickel and cobalt sulphates is delivering the product battery manufacturers want, reducing the need for additional processing from metal back to sulphate, the cost of which we believe CLQ can secure as a premium over LME pricing for nickel. Importantly, in terms of a percentage of nickel prices, the premium has averaged 20-30% between 2010 and 2014 but rose to nearly 40% during 2016 as nickel prices fell below US$4.00/lb. This inverse relationship is important as we believe this will reduce the volatility of CLQ s nickel price exposure, with the effective fixed premium increasing as a percentage of total revenue when nickel prices are low and falling back at higher prices. Fig 6 Nickel sulphate premiums generally prices on a US$/lb basis Nickel Sulphate Premium (US$/lb) % Premium/LME Nickel Jul 10 Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16 Source: Bloomberg, Macquarie Research, March % 35% 30% 25% 20% 15% Syerston top of the pack for cobalt Syerston high cobalt concentration The Syerston project boasts higher than average cobalt grades and importantly a much lower nickel/cobalt ratio than many other laterite deposits in Australia. Syerston s nickel/cobalt ratio is ~6:1 based on production, compared to ~15:1 for Murrin Murrin. At current spot prices the ratio on a revenue split basis is <2:1. Fig 7 NiEq grade at various pricing assumptions Fig 8 Syerston revenue split at spot prices 1.60% Ni Eq (Macq) Ni Eq (spot) Ni Eq (US$30/lb) 1.40% 1.20% 1.00% 0.80% Cobalt (US$m) 38% Nickel (US$m) 44% 0.60% 0.40% 0.20% 0.00% Syerston Wingellina Murrin Murrin Ravensthorpe CLQ AU MLX AU GLEN LN FN TSX Nickel premium (US$m) 18% Source: IRESS, CLQ, Macquarie Research, March 2017 Source: IRESS, CLQ, Macquarie Research, March March

5 DFS due to be released at the end of the year The Syerston definitive feasibility study is due to be completed toward the end of 2017, although we are not expecting to see major variations from the pre-feasibility study completed in Our development scenario for the project is broadly in line with the PFS and delivers an IRR of 23% on Macquarie price forecasts. Cobalt is a unique metal in the lithium battery market, as it is a critical raw material component for cathodes for both Lithium Cobalt (LCO) batteries, demand for which is dominated by portable electronics, primarily mobile phones, but also for Nickel/Manganese/Cobalt (NMC) and Nickel/Cobalt/Aluminium (NCA) batteries, the primary chemical compounds for electric vehicles (EVs) and power storage markets. Fig 9 LCO batteries are most important for cobalt demand, and dominate portable electronics Fig 10 Our forecasts call for an emerging deficit for the cobalt market in % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Composition of major battery cathodes 33% 35% 7% 4% 96% 20% 60% 61% 19% 4% 33% 36% 7% 20% 7% 9% 48% LCO LMO LFP NMC NCA Source: Avicenne, Macquarie Research, March 2017 Source: CDI, CRU, Macquarie Research, March Ni Co Mn Li Other 60.0 (8.0) F 2018F 2019F 2020F 2021F Scandium growth optionality Cobalt demand (kt) Cobalt suppy (kt) Surplus/(deficit) In addition to the nickel/cobalt mineralisation, Syerston also contains an area of highly concentrated Scandium. The main use for scandium is as an aluminium alloy, strengthening the aluminium and improving welding characteristics, making it ideal for the aerospace industry (2.0) (4.0) (6.0) We value the scandium option at $0.04 CLQ completed a feasibility study assessing the potential of developing a scandium circuit in parallel for a modest additional capital cost. The expected production rate is 5x current global output; hence, there is significant risk in securing offtake volumes and prices. We value the scandium option at $0.04/sh. Fig 11 Syerston scandium project needs at least US$1,000/kg Sc 2O 3 Scandium price (US$/kg) 500 1,000 1,500 2,000 2,500 3,000 IRR (%) 0% 15% 29% 41% 50% 58% NPV (A$m) Source: Macquarie Research, March March

6 Mar 17 Nov 17 Jul 18 Mar 19 Nov 19 Jul 20 Mar 21 Nov 21 Jul 22 Mar 23 Nov 23 Jul 24 Mar 25 Nov 25 Jul 26 Mar 27 Nov 27 Jul 28 Mar 29 Nov 29 Jul 30 Macquarie Research Fig 12 Ni/Co production and cost forecasts Fig 13 Scandium production and cost forecasts Nickel (kt) Cobalt (kt) AISC (US$/lb) Scandium oxide (t) AISC (US$/kg) Source: CLQ, Macquarie Research, March 2017 Source: CLQ, Macquarie Research, March 2017 Fig 14 NiEq grade comparison at various cobalt Fig 15 NPV sensitivity to 10% move in price 1.60% 1.40% Ni Eq (Macq) Ni Eq (spot) Ni Eq (US$30/lb) 12% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 10% 8% 6% 4% 2% 0.00% Syerston Wingellina Murrin Murrin Ravensthorpe CLQ AU MLX AU GLEN LN FN TSX Source: CLQ, Macquarie Research, March 2017 Source: CLQ, Macquarie Research, March % Nickel Nickel Sulphate premium Cobalt Scandium Fig 16 CLQ Net cash build Fig 17 CLQ NPV by project 3,000 2,500 Net cash / (debt) (A$m) Market cap (A$m) 2,000 1,500 1,000 Cash / corporate / other 26% (500) (1,000) Syerston Scandium 3% Syerston Nickel & Cobalt 71% (1,500) Source: CLQ, Macquarie Research, March 2017 Source: CLQ, Macquarie Research, March March

7 Fig 18 Clean TeQ summary financials Clean TeQ ASX: CLQ Price: (A$ps) 1.06 Year end: Jun Rating: Outperform Up/dn TSR Mkt cap: (A$m) 508 Diluted shares (m) Target: % 42% ASSUMPTIONS FY17e FY18e FY19e FY20e FY21e FY22e FY23e ATTRIBUTABLE MINE OUTPUT FY17e FY18e FY19e FY20e FY21e FY22e FY23e Exchange Rate A$/US$ Syerston Nickel & Cobalt Nickel Price (US$/lb) Nickel (t) ,016 15,529 18,800 Cobalt Price (US$/lb) Cobalt (t) ,042 2,689 3,255 RATIO ANALYSIS FY17e FY18e FY19e FY20e FY21e FY22e FY23e Scandium Oxide (t) Diluted share capital m C1 Cash costs EPS (diluted and pre sig. items) A Syerston Nickel & Cobalt (US$/lb) nm nm nm nm P/E x -34.3x -62.7x -55.3x -26.2x 43.4x 5.0x 3.6x Syerston Scandium (US$/kg) nm nm nm nm CFPS A (1.6) (1.4) (1.9) (4.0) AISC P/CF x -65.6x -76x -57.0x -26.5x 37.0x 4.0x 3.0x Syerston Nickel & Cobalt (US$/lb) nm nm nm nm DPS A Syerston Scandium (US$/kg) nm nm nm nm Dividend yield % 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Franking Level % 0% 0% 0% 0% 0% 0% 0% SYERSTON NICKEL & COBALT Book value per share x Nickel (kt) Cobalt (kt) AISC (US$/lb) AISC + sulphate premium (US$/lb) 3.50 P/Book value x 6.1x 2.4x 2.5x 2.7x 2.5x 1.7x 1.1x R.O.E. (pre sig items) % -15% -3% -4% -10% 6% 34% 32% R.O.A. (pre sig items) % -14% -3% -2% -1% 6% 20% 26% Interest Cover x 80.2x 7.6x -8.7x -0.8x 2.0x 9.0x 17.4x 12.0 EBITDA per share A$ps EV/EBITDA x -27.2x -19.2x -44.9x -71.5x 12.9x 2.6x 1.3x Free cash flow yield % (3%) (21%) (42%) (45%) (1%) 23% 32% EARNINGS FY17e FY18e FY19e FY20e FY21e FY22e FY23e Sales Revenue A$m (0.50) Other Revenue A$m (1.00) FY17e FY18e FY19e FY20e FY21e FY22e FY23e FY24e FY25e FY26e FY27e FY28e FY29e FY30e Total Revenue A$m SYERSTON SCANDIUM Operating Costs A$m (123) (227) (267) Operational EBITDA A$m Scandium oxide (t) AISC (US$/kg) 900 Exploration Expense/Write-offs A$m Corporate & Other Costs A$m (16) (16) (16) (17) (17) (18) (18) 700 EBITDA A$m (16) (16) (16) (17) D&A A$m (1) (1) (1) (1) (18) (43) (51) 500 EBIT A$m (16) (17) (17) (17) Net Interest A$m 0 2 (2) (23) (38) (37) (26) Profit Before Tax A$m (16) (14) (19) (40) Tax Expense A$m (15) (89) (126) Minorities A$m Adjusted NPAT A$m (16) (14) (19) (40) Significant Items (post tax) A$m FY17e FY18e FY19e FY20e FY21e FY22e FY23e FY24e FY25e FY26e FY27e FY28e FY29e FY30e Reported NPAT A$m (16) (14) (19) (40) NICKEL/COBALT RESERVES AND RESOURCES Reserves Syerston Mt Ni (%) Ni (kt) Co (%) Co (kt) CASHFLOW FY17e FY18e FY19e FY20e FY21e FY22e FY23e Proved % % 55.0 Net Profit A$m (16) (14) (19) (40) Probable % % 41.0 Interest/Tax/D&A A$m Total Reserves % % 96.0 Working Capital/other A$m (28) (29) (2) Resources Net Operating Cashflow A$m (10) (14) (18) (39) Syerston Mt Ni (%) Ni (kt) Co (%) Co (kt) Capex A$m (10) (212) (419) (429) (43) (23) (18) Measured % % 57.0 Investments A$m (1) Indicated % % 49.0 Sale of PPE and Other A$m Inferred % % 8.0 Free cash flow A$m (21) (226) (438) (469) (15) Total Resources % % Dividends Paid A$m Debt A$m (0) (133) (267) SCANDIUM RESERVES AND RESOURCES Equity Issuance A$m Syerston Mt Sc (ppm) Sc (%) (Sc t) (Sc2O3) Other A$m Reserves % 699 1,069 Net Financing Cashflow A$m (133) (267) Resources - High Grade % 996 1,524 Net change in cash A$m (160) Resources - Low Grade % 11,819 18,083 BALANCE SHEET FY17e FY18e FY19e FY20e FY21e FY22e FY23e EQUITY DCF VALUATION Spot prices Macquarie forecasts Cash A$m Projects A$m A$ps A$m A$ps PP&E & Mine Development A$m ,066 1,092 1,072 1,039 Syerston Nickel & Cobalt 1, , Exploration A$m Syerston Scandium Total Assets A$m ,226 1,378 1,679 1,747 Unpaid capital & Equity Raising Debt A$m Resources Total Liabilities A$m , Corporate (114) (0.11) (114) (0.12) Total Net Assets / Equity A$m Cash Net Debt / (Cash) A$m (81) (199) Debt (3) (0.00) (3) (0.00) Gearing (net debt/(nd + equity)) % (294%) (83%) 35% 64% 63% 43% 13% Net Equity Value (@ 10% real WACC, 12.6% Nominal)) 1, , Gearing (net debt/equity) % (75%) (45%) 54% 180% 173% 76% 15% Price Target 1.50 Source: CLQ, Macquarie Research, March March

8 Unique exposure to cobalt We assume US$600m of debt and $350m of equity to fund Syerston CLQ share price tracking cobalt Valuation, recommendation, risks Initiating coverage with an Outperform We are initiating coverage on CLQ with an Outperform rating and set a $1.50 price target. CLQ offers a unique exposure to cobalt, with its Syerston project in NSW targeting first production in Syerston is forecast to produce 19ktpa of nickel and 3ktpa of cobalt in sulphate as opposed to concentrate, enabling CLQ to directly target Lithium-ion battery manufacturers. There are a number of key hurdles that CLQ will need to clear during 2017, each one presenting a potential positive de-risking catalyst for the stock. We believe the most significant of these will be off-take agreements for nickel sulphate assuming CLQ is able to negotiate a premium to LME prices for its product. Cobalt has grabbed most of the headlines and has been a key driver of CLQ s share price in recent months. Securing cobalt sulphate offtake agreements is also likely to be a material catalyst for the stock. We expect some, if not all, of the offtake agreements will come with some level of funding and note that our $1.50 price target includes US$600m of debt financing and A$350m of new equity. Becoming a cobalt proxy CLQ s share price has risen strongly over the past few weeks, broadly in line with the cobalt price. While the Syerston project produces more nickel than it does cobalt, the project s greater exposure to cobalt than any other comparable laterite deposit has resulted in CLQ acting more as a proxy for cobalt than we had anticipated. Interestingly the recent share price move has tracked the cobalt price entirely, ignoring the downward move in nickel prices that occurred following the partial removal of the Indonesian nickel ore export ban. We would expect over time CLQ s share price to reflect a broad blend of both nickel and cobalt prices. Fig 19 CLQ share price vs LME cobalt price Fig 20 CLQ share price vs LME nickel price 1.20 CLQ (A$) Cobalt (US$/lb) - Spot CLQ (A$) LME Nickel (US$/lb) - Spot Jan 16 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Jan 16 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Source: IRESS, Bloomberg Macquarie Research, March 2017 Source: IRESS, Bloomberg Macquarie Research, March 2017 Project funding presents the key risk to our base case valuation Total capex over A$1bn CLQ s ability to fund the development of Syerston is the most material risk to our base case valuation and price target. Our development scenario for the project assumes total expenditure of over A$1.1bn, which includes project construction, ramp up, funding and corporate costs and other working capital items. We note CLQ s capex budgets for Syerston of US$680m for the nickel/cobalt project and US$75m for the scandium project are in line with our assumptions and we assume similar project construction timeframes as proposed in the respective feasibility studies for the nickel/cobalt and scandium developments. 7 March

9 At the end of December CLQ s net cash balance was A$15m and in late February the company announced it had formed a strategic partnership with Pengxin Mining. This included an A$81m private equity placement, which should lift group cash to A$97m on completion of the placement, which is expected to occur at the end of March. We include A$350m of equity and US$600m of debt To fund the development we have assumed an A$350m equity raising at a 10% discount to the current share price and US$600m (A$800m) in debt is needed to fund the development of Syerston. We view the level of equity dilution as a key risk given the company s share price has doubled in the past two months. Fig 21 We assume A$350m of equity and US$600m of debt Inflows A$m Outflows A$m Cash 97 Feasibility spend 12 Option conversion 14 Syerston capex - Ni/Co 936 Debt 800 Syerston capex - Scandium 125 Equity 350 Corporate/interest/other 188 Total 1,261 Total 1,261 Source: CLQ, Macquarie Research, March 2017 Offtake agreements a key catalyst and de-risking event Pengxin placement boosts cash to $97m CLQ announced it had formed a strategic partnership with Pengxin Mining, a Chinese conglomerate. Under the terms of the agreement Pengxin Mining will make an A$81m equity investment at A$0.88/share translating to a 16% equity interest in CLQ. Pengxin Mining s Chairman, Jiang Zhaobai, will become Co-Chairman, and along with current Co-Chairman Robert Friedland, will become CLQ s equal largest shareholder. Fig 22 Co-Chairman are equal holders Substantial Shareholders Shares (m) % Robert Friedland Pengxin Mining Australian Super Source: CLQ, Macquarie Research, March 2017 Interestingly, the strategic partnership and equity investment with Pengxin Mining did not include any offtake commitments for nickel or cobalt sulphate forecast to be produced from Syerston. We note that Pengxin Mining owns the Shituru Copper project in the Democratic Republic of Congo. As part of the agreement Pengxin Mining has agreed to assist in procuring Chinese financing for the project on a best endeavours basis. We note CLQ is also negotiating with a number of Australian and international financial institutions on debt funding. Valuation uses sum-of-the parts Price target equivalent to sumof-the-parts NPV Our $1.50 price target for CLQ is derived from our sum-of-the-parts NPV. Our NPV includes discounted cash flow valuation of our development scenarios for both the Syerston nickel/cobalt and scandium projects. We also dilute for an A$350m equity raising at A$0.90 and incorporate corporate overhead costs and current net cash balances. Our WACC of 10% (real) assumes an ERP of 5%, RFR of 3.75% and beta of 2.0x. We assume a financing cost of 10% and medium-term gearing of 45% Fig 23 We use sum-of-the parts NPV to value CLQ Projects A$m A$ps Syerston Nickel & Cobalt 1, Syerston Scandium Unpaid capital & Equity Raising Resources Corporate (114) (0.11) Cash Debt (3) (0.00) Net Equity Value (@ 10% real WACC, 12.6% Nominal)) 1, Source: CLQ, Macquarie Research, March March

10 Strong cash generator once in production First production in 2020 Our development scenario for CLQ assumes project funding is secured in late 2017 with construction commencing in early First production is forecast to occur in late 2020 with its first full year of production expected in FY22. We note that CLQ s earnings multiples in the years post production look attractive, even after accounting for a significant equity raising. Fig 24 CLQ earnings multiples once in production Multiples FY21e FY22e FY23e FY24e EV/EBITDA 13.8x 2.8x 1.5x 0.8x P/E 42.8x 5.0x 3.5x 3.3x Free cash flow yield (1%) 23% 32% 34% Source: CLQ, Macquarie Research, March 2017 We have included Independence Group NL (IGO AU, A$3.73, Neutral, TP: A$4.00, Hayden Bairstow) and Oz Minerals (OZL AU, A$8.95, Neutral, TP: A$10.40, Hayden Bairstow) as CLQ s core peer group as only these base metal producers have comparable mine lives to CLQ. CLQ trading on cheaper long-term multiples than peers Comparing the respective P/E and free cash flow multiples for CLQ vs its peers demonstrates the strong earnings potential of the Syerston project once in full production. We note that IGO s earnings are generated from Nova and its stake in Tropicana while OZL is generating earnings from both Prominent Hill and Carrapateena in the comparative years below. Fig 25 Peer group P/E multiples FY22/FY23 Fig 26 Peer group free cash flow yield FY22/FY x FY22e FY23e 35% FY22e FY23e 12.0x 30% 10.0x 25% 8.0x 20% 6.0x 15% 4.0x 10% 2.0x 5% 0.0x CLQ IGO OZL 0% CLQ IGO OZL Source: IRESS, Macquarie Research, March 2017 Source: IRESS, Macquarie Research, March 2017 Nickel and cobalt sensitivity analysis NPV at spot prices is A$1.76 Given the significant move in cobalt prices we have assessed the sensitivity to our sum-ofthe-parts NPV for CLQ using various nickel and cobalt prices. Our NPV ranges from A$1.00 to A$2.70 based on the various combinations of nickel and cobalt as outlined below. We note that at current spot prices our NPV is A$1.76. Fig 27 NPV sensitivity to nickel and cobalt price assumptions Nickel Cobalt US$10.00/lb US$15.00/lb US$20.00/lb US$25.00/lb US$30.00/lb US$4.00/lb US$5.00/lb US$6.00/lb US$7.00/lb US$8.00/lb Source: Macquarie Research, March March

11 CLQ has higher leverage to nickel than cobalt Our forecasts for CLQ have a 1:1 relationship with nickel prices in terms of sensitivity to commodity price movements. The higher ratio to nickel vs cobalt reflects our lower cobalt vs nickel price assumptions compared to current spot prices. We note that our scandium forecast of US$1,000/kg has only a modest impact on our base valuation for CLQ. Fig 28 Earnings leverage to nickel is close to 1:1 Year end June FY21e FY22e FY23e FY24e FY25e NPV 10% change in nickel 31% 10% 10% 10% 9% 11% 10% change in nickel sulphate premium 11% 3% 3% 3% 3% 3% 10% change in cobalt 15% 4% 3% 3% 3% 3% 10% change in scandium 9% 2% 2% 2% 2% 2% 10% change in A$/US$ (50%) (17%) (15%) (15%) (15%) (13%) Source: Macquarie Research, March 2017 Cobalt revenue mix 38% at spot prices On our forecasts the Syerston project is more exposed to nickel than cobalt. Nickel revenue accounts for 62% of our life of mine development scenario using Macquarie forecasts, with an additional 18% attributable to our US$2.00/lb sulphate premium with cobalt accounting for the remaining 20%. Fig 29 Revenue split using Macquarie forecasts Fig 30 Revenue split at spot prices Nickel premium (US$m) 18% Cobalt (US$m) 20% Nickel (US$m) 62% Cobalt (US$m) 38% Nickel (US$m) 44% Nickel premium (US$m) 18% Source: IRESS, CLQ, Macquarie Research, March 2017 Source: IRESS, CLQ, Macquarie Research, March 2017 Cobalt revenue mix rises to 50% at US$40/lb At spot prices, cobalt s share of total revenue from Syerston rises to 38%. Given the strong correlation between CLQ s share price and cobalt we assess the change in the contribution to Syerston project revenue at various cobalt prices, keeping nickel at the current spot price of US$5.00/lb. Cobalt revenue is 20% of the total at US$10/lb and 50% at US$40/lb. Fig 31 Cobalt revenue share at various cobalt prices 60% 50% 40% 30% 20% 10% 0% US$10/lb US$15/lb US$20/lb US$25/lb US$30/lb US$35/lb US$40/lb Source: Macquarie Research, March March

12 CLQ plans to produce nickel and cobalt sulphates We assume a US$2/lb nickel sulphate premium Proprietary CleaniX technology enables Delivering what the customer wants Focus on sulphate products On the face of it Syerston is similar to many other laterite nickel/cobalt deposits, with high pressure acid leach (HPAL) the key process route required to extract metal. However unlike most traditional laterite projects, CLQ plans to produce nickel and cobalt sulphates. Nickel and cobalt are expected to form a key part of raw materials demand for Lithium-ion batteries. Battery manufacturers require metal to be supplied as salts, usually in the form of sulphates. CLQ s plan to produce nickel and cobalt sulphates is delivering the product battery manufacturers want, reducing the need for additional processing from metal back to sulphate, the cost of which we believe CLQ can secure as a premium over LME pricing for nickel. Using its proprietary Clean-iX technology, CLQ can produce nickel and cobalt sulphates from the primary leach solution significantly improving overall metal recovery. Reprocessing charges have averaged US$1.00/lb US$3.00/lb in recent years for nickel sulphate, while there is little data available for cobalt sulphate costs. As a result we have assumed 100% payability for both the nickel sulphate and cobalt sulphate products, with an additional US$2.00/lb premium above LME nickel prices to cover the conversion costs. Simplifying the process route CLQ s proprietary Clean-iX technology enables the production of nickel and cobalt sulphates direct from laterite ore, bypassing the reprocessing of mixed sulphide product to produce sulphate products in a HPAL circuit or processing nickel matte back into solution when using pyro-metallurgical processes. Aside from the removal of the re-processing cost the key advantage of the Clean-iX process is that metal can be extracted from a solution. Under both pyro-metallurgical and HPAL processing methods ore is converted to solution, dried into product and then converted back into solution to produce the sulphate product. Each step incurs some recovery loss and as a result the Clean-iX process delivers better metal recoveries than traditional processing. Fig 32 Using Clean-iX technology removes two process steps Source: CLQ, March March

13 Cost of conversion to sulphate drives a premium Nickel sulphate premium reduces volatility Pricing for nickel sulphate products is fairly opaque, although we understand that most contracts are based off LME nickel prices with a premium applied to cover the conversion cost from nickel matte/mixed sulphide to nickel sulphate crystals. Since 2010 the Chinese nickel sulphate premium has ranged from US$1.50/lb US$3.00/lb. Interestingly in terms of a percentage of nickel prices, the premium has averaged 20-30% between 2010 and 2014 but rose to nearly 40% during 2016 as nickel prices fell below US$4.00/lb. This inverse relationship is important as we believe this will reduce the volatility of CLQ s nickel price exposure, with the effective fixed premium increasing as a percentage of total revenue when nickel prices are low and falling back during more bullish pricing environments. Fig 33 Nickel and nickel sulphate prices Fig 34 Premium is usually set on a US$/lb basis LME Nickel (US$/lb) Nickel Sulphate (US$/lb) Nickel Sulphate Premium (US$/lb) % Premium/LME Nickel 40% 35% % % 20% Jul 10 Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16 Jul 10 Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16 Source: Bloomberg, Macquarie Research, March 2017 Source: Bloomberg, Macquarie Research, March % No premium for cobalt sulphate The market for cobalt sulphate is more opaque than nickel with very little data on pricing premiums. CLQ has noted in previous presentations that it does not believe a premium for cobalt sulphate is realisable in the current market. We have assumed 100% payability of the LME cobalt price in our development scenario for Syerston. Fig 35 Nickel sulphate produced from pilot plant Fig 36 Cobalt sulphate produced from pilot plant Source: CLQ, Macquarie Research, March 2017 Source: CLQ, Macquarie Research, March March

14 We expect nickel prices to rise steadily Nickel prices in decline since 2011 Nickel prices have been in decline since early 2011 when the LME price peaked at just over US$13.00/lb. The Indonesian ore export ban provided a temporary halt to the price decline in early However, the emergence of Philippines nickel ore as a replacement for the banned Indonesian ore saw prices recommence the downward trend a few months later. Recent news on supply for nickel has been mixed with the Indonesian Government announcing a partial lift in the ore export ban while the mine audit in the Philippines has the potential to close more nickel ore production than the Indonesians have allowed back into the market. Fig 37 We forecast only modest price rises for nickel LME Nickel (US$/lb) - Spot LME Nickel (US$/lb) - Macq Nickel Sulphate (US$/lb) - Spot Nickel Sulphate (US$/lb) - Macq 0.00 Jul 10 Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16 Jul 17 Jul 18 Jul 19 Jul 20 Source: Bloomberg, Macquarie Research, March 2017 Material upside to our cobalt price forecasts Cobalt prices up ~70% YTD Cobalt has been the standout base metal in 2017, rising from ~US$15/lb to US$25/lb in the first two months of the year. Our forecasts assume an average price of US$14/lb for CY17 and CY18 and while near-term cobalt prices do not impact our valuation for Syerston, it certainly helps sentiment for the project, and improves CLQ s ability to fund the development. Fig 38 Cobalt prices have rallied significantly YTD Cobalt (US$/lb) - Spot Cobalt (US$/lb) - Macquarie 9.00 Jul 10 Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16 Jul 17 Jul 18 Jul 19 Jul 20 Source: Bloomberg, Macquarie Research, March March

15 Syerston top of the pack for cobalt Low nickel/cobalt ratio key positive for Syerston Nickel/cobalt ratio is 6:1 Using current spot prices the revenue mix is closer to 2:1 The Syerston project boasts higher than average cobalt grades and importantly a much lower nickel/cobalt ratio than many other laterite deposits in Australia. Syerston s nickel/cobalt ratio is 6:1 based on production and 6.6:1 on reserves, compared to 14x for Murrin Murrin and 20x for Ravensthorpe. The recent rise in cobalt prices has increased the importance of the mix of nickel and cobalt. We note that while the physical contained metal ratio for Syerston is around 6:1 nickel to cobalt, using current spot prices the revenue mix at Syerston is closer to 2:1, compared to 4:1 on our forecasts. We note that a cobalt price of US$40/lb and US$5/lb for nickel would shift the revenue split to 1:1. Fig 39 Revenue split using Macquarie forecasts Fig 40 Revenue split at spot prices Nickel premium (US$m) 18% Cobalt (US$m) 20% Nickel (US$m) 62% Cobalt (US$m) 36% Nickel (US$m) 46% Nickel premium (US$m) 18% Source: IRESS, CLQ, Macquarie Research, March 2017 Source: IRESS, CLQ, Macquarie Research, March 2017 DFS due to be completed by end of 2017 Superior nickel/cobalt ratio The Syerston definitive feasibility study (DFS) is due to be completed toward the end of 2017, although we are not expecting to see major variations from the pre-feasibility study completed in Our development scenario for the project is broadly in line with the PFS and delivers an IRR of 23% on Macquarie price forecasts. Cobalt more important for Syerston There are only two significant operating nickel laterite mines in Australia, Murrin Murrin and Ravensthorpe. Queensland Nickel used to process imported ore from New Caledonia, Indonesia and the Philippines. An examination of the mineable reserves at these two operating mines suggests both are more leveraged to nickel than Syerston. Fig 41 Nickel/Cobalt ratio of Australian laterite resources Syerston Wingellina Murrin Murrin Ravensthorpe CLQ AU MLX AU GLEN LN FN TSX Source: CLQ, MLX, GLEN, FN, Macquarie Research, March March

16 Syerston Sconi Wingellina Young Murrin Murrin KNP Total NiWest Ravensthorpe Macquarie Research Nickel/cobalt ratio lower than producing peers We have compared the reserves for the operating HPAL projects in Australia, Murrin Murrin and Ravensthorpe and we also include MLX s Wingellina project, the only other major laterite deposit with a reserve. We note that Syerston s nickel/cobalt ratio of <7x is significantly lower than the ~13x for Wingellina, ~15x for Murrin Murrin and over 20x for Ravensthorpe. There are a number of smaller exploration companies that boast nickel/cobalt laterite resources in Australia. We have compared the latest resource estimates with Syerston and the other operating HPAL mines with some of the smaller earlier stage projects. This comparison also demonstrates Syerston s superior weighting to cobalt. Fig 42 Nickel/Cobalt ratio of Australian laterite resources CLQ AU AUZ AU MLX AU JRV AU GLEN LN ARL AU GME AU FN TSX Source: Macquarie Research, March 2017 Syerston grades comparable to operating mines Higher cobalt prices lift NiEq grades closer to peers Assessing the various nickel equivalent (NiEq) grades (nickel plus cobalt) of the operating laterite mines and Syerston/Wingellina highlights that Syerston is actually a lower grade deposit on our forecasts, which assume long-term prices of US$6.80/lb for nickel and US$12.50/lb for cobalt. At spot prices Syerston s average grade is much closer to the other operating mines. To demonstrate Syerston s superior leverage to cobalt we have run scenarios showing the impact in the NiEq grade using various commodity prices. We note that moving from Macquarie long-term forecasts to spot prices increases the NiEq grade at Syerston by 30% while using spot nickel and US$30/lb for cobalt lifts the NiEq grade at Syerston by 50%. Fig 43 NiEq grade at various pricing assumptions Fig 44 NiEq upgrade at spot and US$30/lb Co 1.60% Ni Eq (Macq) Ni Eq (spot) Ni Eq (US$30/lb) 60% Macq vs Spot Macq vs US$30//lb 1.40% 1.20% 50% 1.00% 40% 0.80% 30% 0.60% 20% 0.40% 0.20% 10% 0.00% 0% Syerston Wingellina Murrin Murrin Ravensthorpe Syerston Wingellina Murrin Murrin Ravensthorpe CLQ AU MLX AU GLEN LN FN TSX CLQ AU MLX AU GLEN LN FN TSX Source: IRESS, CLQ, Macquarie Research, March 2017 Source: IRESS, CLQ, Macquarie Research, March March

17 Targeting higher grade cobalt in earlier years Reserves underpin a ~40 year life Ore reserves at Syerston underpin a ~40 year life based on a 2.5mtpa throughput rate, which is the initial design capacity for the autoclaves. We note that the reserve has some variability in terms of grade. CLQ s feasibility study has targeted average autoclave feed grades of 0.80% Ni and 0.14% Co in years Fig 45 Syerston reserve underpins a ~40 year mine life Syerston Mt Ni (%) Ni (kt) Co (%) Co (kt) Proved % % 55.0 Probable % % 41.0 Total Reserves % % 96.0 Source: CLQ, Macquarie Research, March 2017 Our development scenario close to feasibility study estimates Our development scenario for Syerston is based on feasibility study estimates. We have assumed the reserve as our mining inventory, but run higher grades in the first twenty years as higher grade cobalt mineralisation is targeted. This results in a material drop in average grades over the remaining life of the project. We suspect that in the early phases of the project the scandium circuit will be constructed and will just process what is contained in the nickel/cobalt reserve. We note that only 10% of the total scandium resource is contained within the nickel/cobalt resource. Fig 46 Syerston nickel/cobalt resource Fig 47 Syerston high-grade scandium resource Source: CLQ, Macquarie Research, March 2017 Source: CLQ, Macquarie Research, March 2017 More cobalt in earlier years Targeting higher grade cobalt mineralisation lowers the nickel/cobalt ratio to 5.7:1 on a contained ore basis for the first twenty years, compared to 6.6 for the reserve. In the final 20 years the nickel/cobalt ratio rises to 8.5:1. Fig 48 Targeting higher grade cobalt in first 20 years. Mine life Mt Ni (%) Co (%) Ni (kt) Co (kt) Ni/Co Years % 0.14% Years % 0.06% Mining inventory % 0.10% Source: Macquarie Research, March March

18 Resources support high grade strategy CLQ s reserve that was released as part of the feasibility study was based off the economic assumptions outlined in the study. However the resource statement did include an analysis of the mineralisation at various cut off grades. We note that the high grade reserve in the first twenty years is broadly in line with the resource using a 1.0% NiEq cut-off. Fig 49 Syerston resource demonstrates grade variability Resource cut-off grade Mt Ni (%) Co (%) Ni (kt) Co (kt) Ni/Co 0.6% NiEq cut-off % 0.10% % NiEq cut-off % 0.13% % NiEq cut-off % 0.15% Source: Macquarie Research, March 2017 Simple mining process Life of mine strip ratio was just 0.8:1 Ore at Syerston is located close to surface (less than 25m) and the mining study completed as part of the PFS indicated the life of mine strip ratio was just 0.8:1. Given CLQ is targeting higher grade mineralisation in the earlier years we suspect that the strip ratio will be higher while this is occurring. We assume a strip ratio of 1.2:1 for the first twenty years and 0.7:1 for the remainder of the mine life. Our development scenario for Syerston assumes A$6/t of material moving mining cost. With the project operating in shallow soft laterite ore we suspect this cost is on the high side. It remains uncertain whether CLQ will target high grade scandium mineralisation separately or just process the modest grade contained in the nickel/cobalt resource. Processing technology a key risk Conventional high pressure acid leach (HPAL) circuit at front end CLQ is proposing to utilise a conventional high pressure acid leach (HPAL) circuit to process the nickel/cobalt laterite ore. The front end of the process plant uses conventional crushing and grinding technology to produce feed for the autoclave. The HPAL circuit is also conventional injecting sulphuric acid at high temperature and pressure to leach the nickel, cobalt and scandium from the ore. The production of the acid will require an onsite acid plant, resulting in the purchase of around ktpa of sulphur to produce the acid. We note that the Syerston mineralisation is relatively low in magnesium, resulting in lower than average acid consumption of kg/t, compared to most laterite projects around kg/t. The other key raw material cost of note is the resin for the Resin-In-Pulp circuit. Fig 50 Nickel cobalt process flow sheet including scandium Source: CLQ, Macquarie Research, March March

19 Downsizing process plant by focusing on sulphate production Proprietary CleaniX technology The key difference between most HPAL circuits and CLQ s plan for Syerston is the use of a resin-in-pulp circuit as opposed to a counter current decantation (CCD) circuit to process the leached ore into final product. Traditional processing of HPAL slurry through a CCD circuit is then mixed with hydrogen sulphide to produce a mixed sulphide product which is then oxidised to produce a nickel hydroxide or refined into metal briquettes. CLQ is planning to utilise is proprietary Clean-iX technology to produce sulphates from leach solution. The Clean-iX process covers the complete spectrum of leach systems as outlined below. Continuous Resin-In-Column Continuous Resin-In-Pulp Continuous Elution The most important benefit of the Clean-iX process is that metal can be extracted from leach solutions, removing the need to dry the solution and then remix it. This has a double impact of reducing the size and complexity of the HPAL circuit and also achieving higher metal recoveries. After the Resin-In-Pulp circuit solution will be processed through standard solvent extraction in two trains to produce separate nickel sulphate and cobalt sulphate products. We recently visited the pilot plant CLQ constructed a pilot plant in Western Australia to test its Clean-iX technology on a larger scale. We recently visited the pilot plant and returned comfortable that the process technology can process Syerston ore into nickel sulphate and cobalt sulphate, although scalability remains a key risk for the project. Fig 51 CLQ s Continuous Resin-In-Pulp pilot plant Source: CLQ, March 2017 Gas fired power likely Pre-production capital cost of US$680m Power generation for the project could be sourced from the grid, but we note that CLQ is also assessing the option of building its own standalone gas fired power station. Syerston is located close to the Moomba to Sydney gas pipeline hence there is excellent gas availability. Whether the power station would be built adjacent to the pipeline and transmission lines constructed to site or a gas pipeline brings gas direct to site is the only variable. Capital cost estimate broadly in line with feasibility study We have assumed a pre-production capital cost of US$680m which is in line with the feasibility study estimate. We note that the feasibility study assumes a 2.5 year construction period and an 18 month ramp up to full production. Fig 52 Capital cost of US$680m Nickel-cobalt PFS Macq Variance Capex (A$m) % Capex (US$m) % Source: CLQ, Macquarie Research, March March

20 Processing cost accounts for 75% of total cash costs Our operating costs are also broadly in line with feasibility study estimates. The key risk remains the processing cost, which accounts for 75% of total cash costs. We note that both the capital and operating cost assumptions assume a gas fired power station is built on site. We note that key variables that could translate to variations in feasibility study estimates are the performance of the Clean-iX technology and the cost of resin and sulphur. Fig 53 Capex breakdown Fig 54 Processing costs key risk Contingency 8% Mining/site prep 4% Other costs 5% Mining costs 20% Owners costs 13% Indirect 14% Process plant/utilities 38% Services/infrastructure 23% Processing costs 75% Source: IRESS, CLQ, Macquarie Research, March 2017 Source: IRESS, CLQ, Macquarie Research, March 2017 The base cash operating costs outlined below translate to A$6/t for mining costs on a total material moved basis, A$47/t for processing and $3.50/t for other costs which include administration costs. Fig 55 Operating cost assumptions in line with feasibility study estimates Costs PFS Macq Variance Mining costs (US$/lb) % Processing costs (US$/lb) % Other costs (US$/lb) (1%) C1 costs (US$/lb) % Source: CLQ, Macquarie Research, March 2017 Sulphate premium drives AISC below zero Our development scenario for Syerston is broadly in line with the feasibility study. We note that including by-product credits the project should have an AISC around US$2.00/lb. However with nickel sulphate expected to yield a US$2.00/lb premium (real terms), if we assumed this was an additional by-product credit the ASIC would be less than zero. Fig 56 Macquarie production forecasts for Syerston nickel/cobalt project 20.0 Nickel (kt) Cobalt (kt) AISC (US$/lb) AISC + sulphate premium (US$/lb) FY17e FY18e FY19e FY20e FY21e FY22e FY23e FY24e FY25e FY26e FY27e FY28e FY29e FY30e Source: CLQ, Macquarie Research, March (0.50) (1.00) 7 March

21 Scandium growth optionality Scandium stream a free option but needs a market Scandium is used as an aluminium alloy In addition to the nickel/cobalt mineralisation, Syerston also contains an area of highly concentrated Scandium. The main use for scandium is as an aluminium alloy, strengthening aluminium and improving welding characteristics, making it ideal for the aeronautical industry. The Scandium feasibility study has focused on a small scale standalone development targeting the small but higher grade scandium resource located on the edge of the larger nickel/cobalt resource. We believe CLQ will target this scandium mineralisation, but will form part of the larger nickel/cobalt project as opposed to a smaller scale standalone development. We value the scandium option at $0.04/sh Scandium resource is located in the periphery CLQ completed a feasibility study assessing the potential of developing a scandium circuit in parallel for a modest additional capital cost. The expected production rate is 5x current global output, hence there is significant risk in securing offtake volumes and prices. We value the scandium option at $0.04/sh. Small high grade resource within a larger deposit Scandium mineralisation is found throughout the larger nickel/cobalt deposit but CLQ completed a drilling program that focused on upgrading the small high grade portion of the deposit. The high-grade scandium resource is located in the periphery of the Syerston nickel/cobalt laterite deposit on a large dunite complex. The mineralisation is close to surface in laterite soils. Fig 57 Syerston scandium resources Resources Ore (kt) Sc (ppm) Sc (%) Sc (t) Sc Ox grade Sc Ox Eqv >600ppm cut off Measured % % 603 Indicated % % 834 Inferred % 57 66% 87 Total 1, % % 1,524 >300ppm cut off Measured 5, % 2,635 65% 4,032 Indicated 15, % 6,697 65% 10,247 Inferred 6, % 2,487 65% 3,805 Total 28, % 11,819 65% 18,084 Source: CLQ, Macquarie Research, March 2017 Reserve underpins small scale 15 year mine life A mining reserve was defined as part of the feasibility study. A total of 1,334 RAB and RC holes have been drilled into the deposit as part of the reserve, although we note that the bulk of the holes were drilled by previous owners. We note that our development scenario for the Scandium project incorporates only the reserve as outlined below. In reality scandium is more likely to be a by-product stream from the larger nickel/cobalt project Fig 58 Syerston scandium reserves Reserves Ore (kt) Sc (ppm) Sc (%) Sc (t) Sc Ox grade Sc Ox Eqv Proved % % 359 Probable % % 710 Total 1, % % 1,069 Source: CLQ, Macquarie Research, March 2017 Reserve equates to a 15 year life The Scandium feasibility study outlined a small scale mining operating extracting just 80ktpa of ore, implying the current reserve equates to a 15 year life. The mineralisation is close to surface and as a result the strip ratio for the project is 2.3:1 over the life of the reserve. Optimisation studies on the reserve and mine plan have been completed by third party consultants, and we note that given the small scale of the mining rate, we do not believe this is a major area of risk in delivering the project. 7 March

22 Processing technology key to unlocking value Scandium circuit as part of larger project Scandium mineralisation at Syerston is hosted within laterite and as such will be processed initially using conventional methods. The process flow sheet envisages standard crushing and grinding of ore before being processed through a high pressure acid leach circuit (HPAL) via a small autoclave. This front end is a similar process to the larger nickel/cobalt project and we would expect the final scandium circuit to focus on beyond the HPAL circuit. Scandium should be able to be separated in the resin-in-pulp (RIP) from the nickel/cobalt mineralisation before being sent to the refinery for processing and then calcination to produce scandium oxide. Fig 59 Scandium process flow sheet Source: CLQ, Macquarie Research, March 2017 Development scenario broadly in line with feasibility study Our estimates in line with feasibility study Our development scenario for the Scandium project delivers a similar outcome on production and costs as outlined in the feasibility study. As noted earlier, we suspect in reality the scandium circuit will be just a small add on to the larger nickel/cobalt project and is likely to be consolidated into the larger project. Our pre-production capital cost assumption of $100m is broadly in line feasibility study estimates, although we also include a further $25m once production commences for working capital build and other potential cost overruns. Assuming the scandium project is consolidated within the nickel/cobalt development then we suspect the cost of the scandium circuit will be lower than our initial estimate. HPAL alone makes up $20m of the total capital cost of the project. Fig 60 Scandium oxide production expected to be 50-60tpa 60.0 Scandium oxide (t) AISC (US$/kg) FY17e FY18e FY19e FY20e FY21e FY22e FY23e FY24e FY25e FY26e FY27e FY28e FY29e FY30e Source: CLQ, Macquarie Research, March March

23 Only 10% of the scandium resource is located within the larger Ni/Co deposit Our operating cost assumptions are broadly in line with guidance in the feasibility study. The mining cost assumption is equivalent to A$10/t of material moved, which reflects the small scale nature of the operation. We note that only 10% of the high grade scandium resource is located within the larger nickel/cobalt deposit, hence we would expect it to be selectively mined as part of the larger project. The key variable is the processing cost, which accounts for more than 80% of total costs. CLQ plans to use its proprietary ion exchange technology to extract the scandium, however the cost to operate on a larger scale is still to be tested. Reagents, including sulphur to produce H2S, are also a key contributor to the processing cost and present a major non-controllable variable cost for the operation. We note that the C1 costs do not include royalties (4% for NSW Government and 2.5% payable to Ivanhoe Mines) and sustaining capital. Our AISC for the scandium project is around US$530/kg. Fig 61 Our cost forecasts are broadly in line with feasibility study Scandium Feasibility study Macquarie Variance Capex (A$m) % Operating Costs Mining (US$/kg) % Processing (US$/kg) % Other (US$/kg) % C1 costs (US$/kg) % Source: CLQ, Macquarie Research, March 2017 Too much scandium for the world for now Global market for scandium oxide is around 10-15tpa Aside from the risks around scaling up CLQ s proprietary processing technology and the implied operating cost to do so, the much more significant risk is that the global market for scandium oxide is currently around 10-15tpa with prices around US$2,000-US$3,000/kg Sc2O3. The main use for scandium is in the solid oxide fuel cell industry. With Syerston having the potential to produce ~50kpa of scandium oxide securing offtakes for the production presents the most material risk for the project in our view. CLQ announced in December 2016 it had entered into a collaboration agreement with Airbus Group to investigate using scandium oxide on a more commercial scale. Increasing the use of aluminium-scandium alloys appears to be the most likely path to full commercialisation in our view. Adding scandium increases the strength of aluminium and perhaps more significantly enables stronger welding. This has an obvious usage in the global transport sector, potentially removing rivets from aircraft, which account for 10-15% of the weight of an aircraft. Scandium price a key risk Current prices range between US$2,000- US$3,000/kg Sc2O3 We use US$1,000/kg in our assumptions Prices for Scandium oxide are not publicly available, which is unsurprising given the size of the market. CLQ has indicated in the scandium feasibility study that current prices range between US$2,000-US$3,000/kg Sc2O3 and CLQ uses US$1,500/kg in its feasibility study, which delivered a IRR of 33% and NPV of A$273m. We note that our development scenario assumes additional capital for working capital and slightly higher operating costs, which translates to an IRR of 29% and NPV of A$175m under CLQ s pricing assumptions. However given the significant uncertainty as to whether CLQ s volumes can be sold and the impact on market pricing, we have taken a more conservative view and use US$1,000/kg in our assumptions. Fig 62 Syerston scandium project needs at least US$1,000/kg Sc 2O 3 Scandium price (US$/kg) 500 1,000 1,500 2,000 2,500 3,000 IRR (%) 0% 15% 29% 41% 50% 58% NPV (A$m) Source: Macquarie Research, March March

24 Company overview CLQ was listed on the ASX in 2007 Syerston project is located near Condobolin in NSW (CLQ AU) owns the Syerston nickel/cobalt/scandium deposit near Condobolin in NSW. CLQ was listed on the ASX in 2007 focused on commercialising its proprietary ion exchange and water purification technologies. The company acquired Syerston from Ivanhoe Mines in November 2014 for $1m in equity, $100k in cash and a 2.5% gross royalty. The company owns water purification technology that we have carried at zero value. Syerston project is CLQ s core asset The Syerston project is located near Condobolin in NSW. Mining in the region dates back to the late 1800s when modest amounts of platinum were extracted. In 2000 SNC-Lavalin completed a feasibility study for Black Range Minerals (BLR AU), the owner of the project at the time, assessing the potential to construct a conventional HPAL nickel laterite project. The Independence Group NL (IGO AU, A$3.73, Neutral, TP: A$4.00, Hayden Bairstow) acquired the project in 2005 and completed a revised feasibility study in Project development consent was triggered in 2006 but did not proceed as the existing processing route technology not yielding an economic return. CLQ has focused on dual development scenario Since acquiring the project from IVN in 2014, CLQ has focused on a dual development scenario, investigating the potential for a small scale development of the high grade scandium resource as well as a large scale development of the nickel/cobalt resource. The key change in our view is a move to using ion exchange technology to produce nickel and cobalt sulphate as opposed to traditional laterite projects that produce nickel and cobalt briquettes. Fig 63 Syerston project location Source: CLQ, March 2017 Capital structure and major shareholders Private placement to Pengxin Mining CLQ s capital structure is clean with 479m ordinary shares, 4.9m performance rights and 51m unlisted options on issue. The company has just announced a private placement to Pengxin Mining that will lift total shares on issue to 571m. Fig 64 Co-Chairmen are the largest shareholders Substantial Shareholders Shares (m) % Robert Friedland Pengxin Mining Australian Super Source: CLQ, Macquarie Research, March March

25 Board and Management Board of Directors Robert Friedland Non-Executive Co-Chairman Robert joined the Board of Clean TeQ as Co-Chairman and Non-Executive Director in September He is also the founder, Executive Chairman, and a director of Ivanhoe Mines Ltd and is the Chairman and President of Ivanhoe Capital Corporation. He directed the assembly by Ivanhoe Mines Ltd. of a portfolio of interests in several countries over 15 years and led the company s discoveries and initial development of the Oyu Tolgoi copper-goldsilver deposits in southern Mongolia. Jiang Zhaobai Non-Executive Co-Chairman Jian Zhaobai was invited to join CLQ as Co-Chairman on completion of the private placement to Pengxin Mining, which is expected to occur in late March. He is the Co-Chairman of Pengxin Group. We note that Pengxin Mining can also appoint another Non-Executive Director to the Board. Sam Riggall Managing Director and Chief Executive Officer Sam joined Clean TeQ as Non-Executive Chairman in June 2013 and was appointed Interim CEO in November Prior to joining CLQ Sam was Executive Vice President of Business Development and Strategic Planning at Ivanhoe Mines Ltd. In that role he was responsible for securing the agreement to develop the Oyu Tolgoi copper / gold mine in Mongolia, as well as managing Ivanhoe s other global business development opportunities. He has previously been a director of Ivanhoe Australia Limited and Oyu Tolgoi LLC. Prior to Ivanhoe, Sam worked for over a decade in a variety of roles in the Rio Tinto Group, covering project generation and evaluation, business development and capital market transactions. Peter Voigt Founder and Executive Director Peter Voigt established Clean TeQ in 1990 and up to his appointment as CEO was the company s Chief Technology Officer, responsible for all research and development activities and the negotiation and management of overseas licences. Peter is a biochemist, with extensive experience in product development, technology commercialisation, and developing complete engineering solutions. Prior to founding Clean TeQ, Peter held product and technology development roles with Arnotts and Uncle Bens. Peter has a Bachelor and Masters of Applied Science (Chemistry) from Royal Melbourne Institute of Technology. Eric Finlayson Non Executive Director Eric worked as an exploration geologist in Ireland and Turkey with NL Petroleum Services and as a field geochemist in Malawi with the British Civil Uranium Procurement Organisation prior to joining the Geological Survey of Papua New Guinea in 1984 as a regional geological mapper. In 1989 he joined Rio Tinto as project geologist responsible for copper and gold exploration in the Papua New Guinea highlands based out of Sydney and in 1993 was transferred to Vancouver as regional exploration manager for Canada. This was followed by a transfer to London in 2000 as the personal assistant to the Head of Exploration. In January 2002, he moved to Perth to assume the role of Rio Tinto s Director of Exploration for Australasia and in January of 2007 was appointed Global Head of Exploration for Rio Tinto based in London. In July 2011, he was appointed CEO of Rio Tinto Coal Mozambique following Rio Tinto s takeover of Riversdale Mining. After two years in Mozambique, Eric departed Rio Tinto in July 2013 and joined High Power Exploration Australia Ian Knight Non Executive Director Ian is a graduate in Business Studies and is also a fellow of the Institute of Chartered Accountants, a member of the Australian Society of Certified Practicing Accountants, an Associate Fellow of the Australian Institute of Management and a member of the Institute of Company Directors. His experience includes presenting and working with boards of public, private and private equity ownership, State and Federal Governments and has extensive experience in strategising and implementing mergers, acquisitions, divestments and capital raising initiatives. Ian was also formerly a Partner of KPMG where he held the position of Head of Mergers and Acquisitions and Head of Private Equity for KPMG Corporate Finance. 7 March

26 Roger Harley Non Executive Director Roger is a founder and principal of independent corporate advisory firm, Fawkner Capital. Previously he worked for 11 years for Deutsche Bank, and held positions including Director of Corporate and Finance and Director of Equity Capital Markets. His current roles also include Director of People and Parks Foundation and Trustee of the Alfred Deakin Lecture Trust. Roger has had various appointments by the Commonwealth Government that related to the oversight of innovation and venture capital programs and policies. These include membership of the Pooled Development Funds Registration Board, the Industry Research and Development Board and Innovation Australia. His previous board positions include Director of Medibank Private. Mike Spreadborough Non Executive Director Mike is a mining engineer with extensive experience in the development and operation of mineral resources projects spanning a range of commodities including copper, gold, uranium, lead, zinc and iron ore. Over the past 20 years Mr Spreadborough has held senior executive roles with a number of mining companies including Chief Operating Officer of Sandfire Resources and Inova Resources Ltd (formerly Ivanhoe Australia), General Manager Coastal Operations for Rio Tinto and General Manager Mining for WMC and later Vice President Mining for BHP Billiton at the world-class Olympic Dam mine in South Australia. Mr Spreadborough holds a Bachelor of Mining Engineering from the University of Queensland and an MBA from Deakin University, as well as a WA First Class Mine Manager s Certificate of Competency. Ben Stockdale Chief Financial Officer Ben is a financial and commercial executive with extensive mining industry experience including project and corporate debt and equity financing, mergers and acquisitions and metals marketing and logistics. Over the past 18 years Ben has held a number of executive roles at public and private mining companies including Oxiana Limited, Citadel Resource Group and Unity Mining. Ben is a graduate in Commerce from Melbourne University and completed a post graduate diploma in applied finance and investment. John Carr General Manager of Metals John is a Chemical Engineer with 10 years experience in technical, development and commercialisation roles in the mining and oil & gas industries. Graduating from Melbourne University with honours in Chemical Engineering, John has also completed post graduate studies including a Masters in Business Administration, Diploma of Project Management and is currently undertaking a Masters in Mineral Economics. John s experience includes technology development and commercialisation, corporate development, project management, research and development, process engineering, and strategic planning. Nikolai Zontov General Manager of Metals Nikolai has extensive international experience in the mineral processing industry including over ten years as the Director General of the Sorption Technology Division of the All-Russian Research Institute of Chemical Technology (ARRICT) in Moscow. He has managed the design and practical commissioning of several ion exchange plants, in particular for recovery and purification of nickel, scandium, gold, uranium and tungsten. Since joining Clean TeQ, Nikolai has been instrumental in extending the use of ion exchange technology to a range of solutions for numerous applications in mineral processing and water purification. Scott Magee Syerston Project Director In earlier roles with BHP Billiton, Scott was Project Director for the Worsley Alumina business and Project Development Manager for the Stainless Steel Materials business where he played a key role in the recovery of the Ravensthorpe Nickel Project, ahead of the successful sale to a new operator. Prior to BHP Billiton Scott held engineering and project management roles with Hatch and operational roles with Alcoa Melanie Leydin Company Secretary Melanie is an experienced Company Secretary and Chief Financial Officer having held these positions at a number of small public companies. Ms. Leydin is the Principal of Leydin Freyer Corporate Pty Ltd, a company that specialises in outsourced company secretarial and accounting services to public listed companies in the biotechnology and resources industry. 7 March

27 E '000t Ni weeks' use Macquarie Research 2016 was a turning point in the nickel market Nickel outlook Indonesian ore export relaxation dashes strong price recovery 2016 was a turning point in the nickel market as supply cuts and a better-than-anticipated demand recovery pushed the market from structural surplus (of over 500kt Ni combined over the past five years) to what looks like to be a structural deficit. The Q average of $10,810/t was 27% higher than the first quarter average. However, prices sold off sharply in December amid fund end-year profit-taking and, as it turns out, well-placed fears of an Indonesian ban reversal. Following the surprise Indonesian announcement to pave the way for nickel ore and bauxite exports to recommence, further details of the impact are coming to light. The government stated that 5.2mt of nickel ore per annum would be allowed to be exported roughly a tenth of the levels seen in After adjusting for moisture, grade and yield loss this would equate to just over 50kt of nickel contained. However, in our view, this is still enough to cause downward pressure on ore prices, NPI production costs and LME prices. For further details of the regulation changes and Indonesia s importance to the global nickel market please refer to our 12 th January Commodities Comment. Fig 65 Nickel market moves into deficit in 2016 for first time since 2010 following stock build of 500kt+ Fig 66 Rollercoaster price recovery in 2016 as doubts remained about Indonesian supply potential Nickel supply/demand balance and stocks 5.50 LME Nickel (US$/lb) - Spot Balance (LHS) Stocks in weeks of use (RHS) Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 Source: INSG, Macquarie Research, March 2017 Source: LME, Macquarie Research, March 2017 Government policy in 2017 in the Philippines is still unclear The stronger 2016 performance reflected booming demand with estimated 2016 annual global demand growth of 7.8% YoY for refined nickel, driven by strong Chinese stainless steel production and strong demand growth for nickel in batteries for electric vehicles. Low nickel prices in late-2015 and early 2016 led to over 70% of the industry moving into loss-making territory and prompted large price-related production cuts, which more than offset increases in production in Indonesia and a number of other new suppliers. Overall, global refined nickel production fell by an estimated 1% in 2016 following a similar 1% fall in Global supply should return to growth from 2017 onwards, due mainly to new NPI capacity in Indonesia and the small resumption of ore exports, but the lack of new supply growth elsewhere should lead to supply growth of only 2.3% this year. Government policy in 2017 in the Philippines (an environmental audit of nickel mines) is still unclear but ore supply last year was more a function of ore price (low in H1 and higher in H2) than policy. The partial relaxation of the Indonesian nickel ore ban will lower ore prices and lead to lower exports from the Philippines and New Caledonia of mid-grade ore. In 2016, Indonesian nickel pig iron production grew to an estimated 93kt from only 28kt in It is expected to grow strongly again in 2017 (to 180kt) as new supply is commissioned from Tsingshan, PT Virtue Dragon (Delong) and the PT Harita/Xingxing joint venture. The pace of building should accelerate in the coming years due to the low cost of making nickel pig iron in Indonesia when compared with China (a cost advantage of $2,500-3,000/t of nickel) we expect Indonesian NPI production to exceed 300ktpa by March

28 '000t recoverable Ni in ore '000t Ni Macquarie Research Chinese NPI producers are heavily reliant on ore from the Philippines We now expect a year-on-year fall in Pilipino exports in 2017 to 290kt The one advantage Chinese NPI producers do have is integration into stainless steel production by hot metal transfer. The Chinese NPI producers are heavily reliant on ore from the Philippines. They are, however, increasing their diversification to other feed sources including nickel concentrates and other intermediate products from the sulphide ore industry. Tsingshan is now getting feed from Zimbabwe, Russia, Finland and Australia (potentially 35-40kt Ni in 2017) to offset losses of feed sources from the Philippines. Exports of recoverable nickel in ore from the Philippines fell by an estimated 67kt Ni in 2016 to 327kt. The year-on-year fall was entirely in the first half of the year and reflected the depletion of high-grade reserves at the Tawi Tawi mine and deliberate production cuts due to low nickel ore prices. Surprisingly, however, exports rose strongly in the second half of 2016 despite a central governmental environmental audit of the industry and the suspension of production at several small mines. We now expect a year-on-year fall in Pilipino exports in 2017 to 290kt due mainly to lower nickel ore prices. Chinese NPI production should fall slightly this year to 370kt due to the expected depletion of ore stocks in the Chinese ports and at plants. We estimate that around 40kt of nickel in 2016 NPI production came from destocking and this cannot continue in The more immediate challenge for Chinese NPI producers, however, is rising costs. Due to rises in coal/coke costs, freight costs and ore costs, we estimate that the breakeven for efficient Chinese NPI producers (using RKEF technology) rose from $8,500-9,000/t in February 2016 to $11,000-11,500/t (LME equivalent basis) by December, forcing most Chinese producers into loss-making territory. With ore and coal prices now expected to fall in 2017, the upward pressure on nickel prices will now dissipate, pushing prices back to the $9,500-10,000/t range. Fig 67 Nickel ore exports from Philippines price elastic: up YoY in 2H 2016 as nickel ore prices recover Fig 68 The key assumption in nickel: NPI production growth in China and Indonesia E 2017F 2018F 2019F 2020F 2021F 0 Q1 Q2 Q3 Q4 China Indonesia Source: Antaike, Macquarie Research, March 2017 Source: INSG, Macquarie Research, March 2017 Fig 69 Global nickel supply/demand balance `000t f 2018f 2019f 2020f 2021f Total SS production % Change 8.7% -1.7% 8.3% 2.8% 2.8% 2.4% 2.8% 2.4% 300-series SS prod % Change 7.2% 1.4% 6.3% 3.5% 3.4% 2.5% 3.7% 2.9% Primary nickel consumption % Change 4.7% -0.6% 7.8% 2.0% 4.2% 2.5% 3.7% 2.3% Nickel Supply % Change 1.5% -0.8% -0.5% 2.3% 4.9% 3.4% 2.0% 2.7% (of which NPI) (483) (428) (474) (550) (590) (630) (660) (690) World Market Balance Estimated total stocks Weeks' world demand LME Cash Price ($/tonne) Source: INSG, Macquarie Research, March March

29 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan Feb Feb Feb Mar Mar Mar Apr Apr Apr May May May Jun Jun Jun Jul Jul Jul Aug Aug Aug Sep Sep Sep Oct Oct Nov Nov Nov Dec Dec Dec Jan Jan Jan Feb 2017 $/lb RMB/tonne Macquarie Research Demand from the core portable electronics sector recovering Latest spot metal prices are above $25/lb Cobalt outlook The 2017 battery metal story might well be cobalt If last year was lithium s time, for 2017 its battery peer cobalt may be the one receiving more attention. Prices have accelerated to levels last seen in 2011, and with demand from the core portable electronics sector recovering and supply growth relatively stagnant, this can be fundamentally justified. China has next to no domestic mine supply, and is highly reliant on the Democratic Republic of Congo (DRC) for its cobalt units. Moreover, the prioritisation of higher quality battery development by the Chinese government may even open up the coveted new energy vehicle market to greater cobalt penetration. Risks remain technological on the demand side and geopolitical on the supply side but for now the perennial underperformer in metals markets looks well placed to shine. There has been a long wait for cobalt prices to start moving upwards in a conspicuous fashion. From a peak at ~$50/lb in 2007, to ~$25/lb coming out the GFC, prices steadily ground lower through 2010 (even as peers were rising), 2011 and 2012 before finding some stability. After dropping to ~$10/lb in late 2015, from July 2016 onwards we have seen recovery, and one accelerating into Latest spot metal prices are above $25/lb, a level beyond what we expected over the medium term. This move has been matched and even slightly exceeded by moves in cobalt chemical prices, the raw material crucial for the global rechargeable battery industry. Cobalt tetroxide prices in China have roughly doubled in RMB terms since mid-2016, suggesting battery demand has been improving over this period. Fig 70 Cobalt prices are gaining momentum Fig 71 while cobalt chemical prices also rising % cobalt prices % cobalt tetroxide price Source: Metal Bulletin, Macquarie Research, March 2017 Source: Metal Bulletin, Macquarie Research, March 2017 Much of this improvement has to do with the wider industrial recovery. Cobalt has always tended to benefit from the maturing period of such recoveries, where the industrial consumer is feeling more confident. And, as we noted recently, into year-end 2016 the pace of IP growth is clearly accelerating, reaching 2.8% YoY in November, its fastest since December The main improvement has been in the developed markets, which are seeing synchronised growth for the first time in years. PMI data, which we think gives a heads up to the output data over the next few months, suggests that recovery continued into January. Cobalt is distinct among peer metals through roughly half of consumption being in battery manufacture Cobalt is distinct among peer metals through roughly half of current consumption being in battery manufacture. While lithium is often thought of as the battery metal, this sector currently only accounts for around a third of total demand, and may only reach cobalt s current levels on a 5-10 year view. The past decade has seen almost a 10% CAGR for cobalt in this area. However, the pace of growth both in absolute and percentage terms has been weakening in recent years, even with lower cobalt pricing. 7 March

30 f 2018f 2019f 2020f 2021f Macquarie Research Fig 72 As the global industrial recovery matures Fig 73 we see an acceleration in battery demand 5% 4% Other developing China World Developed Oil exporters 60,000 50,000 Cobalt demand for batteries, tonnes 3% 40,000 2% 30,000 1% 20,000 10,000 0% 0 (1%) Source: National Statistics, Macquarie Research, March 2017 Source: CDI, CRU, Macquarie Research, March 2017 Smartphones did pick-up strongly in H after a stagnant Q1 Much of this growth slowdown is related to the portable electronics sector. Lithium-cobalt (LCO) batteries are the staple of consumer electronics, and have suffered as core areas have declined both laptop and tablet shipments dropped over 10% YoY in However, smartphones (whose batteries are smaller but sales significantly higher) did pick up strongly in H after a stagnant Q1. Indeed, Q4 shipments were up 7.3% YoY according to industry statistics. This is highly beneficial for cobalt, while LCO batteries also continue to gain penetration in other areas, notably power tools. Thus for 2017 we see an acceleration in cobalt demand for batteries to 10% YoY. Fig 74 LCO batteries are most important for cobalt demand, and dominate portable electronics Fig 75 where smartphone shipment growth is accelerating once more, after a poor H Composition of major battery cathodes YoY Smartphone shipment growth 18% 100% 90% 16% 80% 33% 35% 33% 36% 14% 70% 60% 7% 4% 7% 7% 12% 50% 96% 20% 9% 10% 40% 8% 30% 60% 61% 19% 48% 20% 6% 10% 20% 4% 0% 4% LCO LMO LFP NMC NCA 2% Ni Co Mn Li Other 0% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Source: Avicenne, Macquarie Research, March 2017 Source: IDC, Macquarie Research, March 2017 This improving demand perspective is clearly pressurising Chinese battery manufacturers to seek more cobalt. After strong imports in 2015, 2016 was a year where cobalt ore and intermediate stocks were run down the raw material overhang which depressed prices in early 2016 is gone. Most Chinese cobalt comes from DRC Of the ~54kt of recoverable cobalt units imported into China last year, 48kt came from the DRC, making this China s most concentrated supply risk in an individual commodity. This is helped by the distinct lack of Chinese domestic resource, which supplies less than 3% of Chinese cobalt units. We reiterate our view that the ongoing Chinese purchases of DRC assets (most notably Tenke Fungurume) are with one eye on securing supply of cobalt. 7 March

31 Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec tonnes, 6MMA t Co Macquarie Research Fig 76 China s cobalt unit imports have swung aggressively in recent times Fig 77 but remain highly reliant on DRC supply, increasingly in intermediate form China's cobalt unit imports Imports Consumption 60,000 50,000 40,000 30,000 Source of China's imported cobalt ,000 10, e DRC ore DRC intermediate Other ore Other intermediate Source: China Customs, Macquarie Research, March 2017 Source: China Customs, Macquarie Research, March 2017 The global cobalt market is becoming ever more dependent on supply from the DRC Much of DRC cobalt supply comes as a co-product with copper China is prioritising the higher battery quality technologies Just as with many other markets, cobalt has limited new supply projects coming through. Meanwhile, refined output in key supply countries such as Australia, Russia and Zambia are well down on levels seen a decade ago. As a result, the global cobalt market is becoming ever more dependent on supply from the DRC, a country where geopolitical risk is once again rising after a period of relative stability, with a transfer of presidential power due next year, a process which has not gone smoothly over history. Moreover, it is also a country under increasing pressure domestically to add more value to mined products in the country, and under increasing pressure internationally to clamp down on artisanal mining with cobalt extraction the poster child for this. Much of DRC cobalt supply comes as a co-product with copper, hence the copper price (and therefore copper projects) are crucial. Given the steady downtrend in copper pricing until October last year, investment in the DRC has been limited while certain existing assets (most notably Glencore s operations) have seen a supply decline. Indeed, DRC copper output has been stagnant for the past three years, with 2017 expected to continue this trend. We do however expect some growth in We see cobalt supply growing 2.9% this year, the lowest rate since 2012, with the swing up and down from this number highly dependent on the performance of small-scale DRC supply. The fundamental outlook does look to be improving for 2017, and on our modelling we see a sustained deficit and stock draw through the end of the decade. So where are the risks to this view? First, let s consider the upside risk. Currently we are assuming little cobalt penetration into the rapidly growing electric vehicle and new energy vehicle market. China, most notably BYD, has been progressing down the LFP (zero cobalt content) battery route for the bus sector while LCO batteries are not deemed practical for the larger scale needed for NEVs. However, here technology could be shifting in cobalt s favour. On December 30 th 2016, China announced a revised E-bus subsidy policy please see this note by our China autos analyst Allen Yuan for further details. While overall subsidies were lowered, the policy introduced more technology metrics, such as energy density and battery weight/total vehicle weight ratio. It also lifted the minimum travel range to 200km, and lowered the maximum E-kg requirement to 0.24Wh/km.kg. Essentially, this is prioritising the higher battery quality technologies, which should see a decline in use of LFP batteries and potential replacement with NMC (19% cobalt by weight in cathode) and NMA (9% cobalt), which means our demand forecast risk is skewed to the upside. While our team expects a 24% YoY decline in China E-bus sales over 2017 given the subsidy removal, this is still seen as a sector targeted for growth by the government to alleviate environmental concerns. We forecast an 8.2% CAGR over the coming years. 7 March

32 f 2017f 2018f 2019f 2020f Macquarie Research Fig 78 DRC copper output has been stagnant since 2014 Fig 79 If cobalt can gain more share of the rising NEV market, demand growth may be quicker than forecast Copper mine output, DRC (kt) 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% Forecast penetration rates for EVs and total NEVs Global NEV China NEV Global EV China EV F 2017F 2018F 2019F 2020F 2021F Source: ICSG, Macquarie Research, March 2017 Source: National Data, Macquarie Research, March 2017 LCO batteries, cobalt is significantly more important than lithium in terms of pricing However, a rising cobalt price may also slow the relatively rapid decline we have seen in battery manufacturing costs over recent years. For LCO batteries, cobalt is significantly more important than lithium in terms of pricing, and with both now well up YoY there is a risk that companies look at alternative technologies to the detriment of cobalt. Moreover, while the DRC-China link clearly brings supply side risk, it also creates potential problems on the demand side. Material buyers rarely feel comfortable being beholden to such concentrated supply, and when coupled with concerns over the social and environmental impact of DRC mining, there is certainly potential that cobalt is thrifted or engineered out of battery technology over the longer term horizon. Fig 80 Cobalt supply-demand balance Cobalt Demand (t) F 2018F 2019F 2020F 2021F Superalloys 13,115 14,595 15,750 16,264 16,755 17,261 17,508 17,737 17,981 18,202 Batteries 30,600 32,900 39,100 41,055 43,108 47,419 49,552 52,030 54,111 56,005 Dyes & Paints 6,178 6,363 6,554 6,620 6,818 7,023 7,233 7,450 7,674 7,904 Catalysts 2,233 2,345 2,521 2,647 2,779 2,918 3,064 3,217 3,378 3,547 Other Chemicals 7,977 8,417 8,864 8,991 9,318 9,662 10,097 10,445 10,807 11,125 Magnets 3,623 3,405 3,473 3,543 3,649 3,686 3,722 3,760 3,797 3,835 Diamonds & Hard Facing 8,964 9,144 9,144 9,235 9,327 9,421 9,515 9,610 9,706 9,803 High Strength Steel 1,660 1,710 1,744 1,709 1,709 1,726 1,744 1,761 1,779 1,779 Total Demand 74,350 78,879 87,151 90,064 93,464 99, , , , ,201 % change YoY 10.4% 6.1% 10.5% 3.3% 3.8% 6.0% 3.4% 3.5% 3.0% 2.7% Primary/Secondary Cobalt Supply (t) F 2018F 2019F 2020F 2021F Zambia 5,735 5,000 4,317 2,997 3,500 3,500 3,500 3,500 3,500 3,500 DRC 2,999 3,000 3,300 3,300 1,900 3,500 3,500 3,500 3,500 3,500 Russia 2,186 2,368 2,302 2,040 3,200 3,200 3,200 3,200 3,200 3,200 India China 29,725 33,200 35,400 44,100 47,000 51,500 53,500 54,588 55,702 56,845 Finland 10,547 10,010 11,452 8,582 11,000 11,000 11,000 11,000 11,000 11,000 Australia 4,869 4,981 5,419 5,150 3,000 2,100 2,100 2,100 2,100 2,100 Canada 5,682 5,559 5,261 5,591 5,900 6,150 6,150 6,150 6,150 6,150 Secondary sources 2,800 3,050 3,050 3,050 3,000 3,000 3,000 3,000 3,000 3,000 Other 10,942 14,331 15,845 17,389 18,155 15,551 15,501 15,669 15,641 15,613 Total Supply 76,065 81,794 86,446 92,349 96,755 99, , , , ,007 % change YoY 0.7% 7.5% 5.7% 6.8% 4.8% 2.9% 2.0% 1.2% 1.1% 1.1% Balance 1,715 2, ,285 3, ,205-5,340-7,194 Stocks 26,627 29,542 28,837 31,123 34,414 34,900 34,015 30,810 25,470 18,277 Weeks of Consumption Source: CDI, CRU, Macquarie Research, March March

33 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 2016 AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients) Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients) Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients) CLQ AU vs Small Ordinaries, & rec history IGO AU vs Small Ordinaries, & rec history OZL AU vs Small Ordinaries, & rec history (all figures in AUD currency unless noted) (all figures in AUD currency unless noted) (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, March month target price methodology CLQ AU: A$1.50 based on a Sum-of-the-parts NPV methodology IGO AU: A$4.00 based on a 50/50 NPV/6.0x EV/Ebitda methodology OZL AU: A$10.40 based on a 50/50 Blend of NPV and 6.0x EV/Ebitda methodology Company-specific disclosures: IGO AU: The Macquarie Group together with its affiliates, beneficially owns 1% or more of a class of common equity securities of Independence Group (IGO.AX) MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of Independence Group NL in the past 12 months, for which it received compensation. The analyst principally responsible for the preparation of this report or a member of the analyst's immediate household holds exercises investment discretion over a long position in Windward Resources Ltd, which has received a takeover offer from Independence Group NL. OZL AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Oz Minerals Limited's equity securities. MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of OZ Minerals Ltd in the past 24 months, for which it received compensation. Important disclosure information regarding the subject companies covered in this report is available at Target price risk disclosures: CLQ AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. IGO AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. OZL AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: 7 March