Siddharth Rajeev, B.Tech, MBA, CFA Analyst Nicole Engbert- BSc. Research Associate - Mining Alexandros Tzilios Research Associate September 18, 2012 Gowest Gold Ltd. (TSXV: GWA, OTC: GWSAF, Frankfurt: 1GW) Expansion of the North Timmins Gold Property and Ore Processing Test Results Sector/Industry: Junior Mining/Exploration Market Data (as of September 13, 2012) Current Price C$0.09 Fair Value C$0.45 ( ) Rating* BUY Risk* 5 (Highly Spec) 52 Week Range C$0.08 - C$0.27 Shares O/S 131.90 mm Market Cap C$11.87 mm Current Yield N/A P/E (forward) N/A P/B 1.1x YoY Return -62.5% YoY TSXV -27.2% *see back of report for rating and risk definitions Investment Highlights www.gowestgold.com The North Timmins Gold property has been expanded to a total of 61 unpatented claims and eight mining leases along the Pipestone Fault. The total area covered is now 9,255 hectares. Ore sorting and metallurgical testing have returned positive results. An updated preliminary economic assessment is expected in Q1 2013. Drilling continues to extend the strike length of the Frankfield East deposit. The company currently has approximately $1.10 million in cash. According to management, the company is not drilling at this time, but will pursue a drilling program later in the year with its flow through dollars (approximately $0.50 million). Our fair value estimate dropped from $0.60 to $0.45 per share due to share dilution. Key Financial Data (FYE - Oct 31st) (C$) 2011 2012-(6M) Cash and Equivalents 1,838,799 1,210,205 Working Capital 1,076,994 833,623 Mineral Properties 10,611,714 12,873,140 Total Assets 12,825,850 14,414,253 Net Income (1,639,088) (336,254) EPS (0.02) (0.00) Gowest Gold Ltd. is focused on the 100% owned Frankfield East deposit, part of the North Timmins Gold project. The deposit has an indicated NI 43-101 resource estimate of 1.6 million tonnes containing 348,000 oz of gold with a grade of 6.68 g/t Au, and an inferred resource of 4.3 million tonnes containing 838,900 ounces of gold at a grade of 6.01 g/t Au. A 2011 preliminary economic assessment gave a pre-tax NPV (5%) of $159 million with an internal rate of return of 23%.
Page 2 Property Expansion GWA completed two expansions on the North Timmins Gold project in 2012. The first was in June when the company announced the staking of 12 unpatented claims. These cover an area of 2,432 hectares adjacent to the Pipeline East property. The second, announced in July, was an arm s length transaction for the surface and mineral rights to the Tully Guidoccio property. The property is located to the east of GWA s Tully East property, see Figure 1. The company acquired all rights, title and interest in the property in exchange for 200,000 common shares of GWA. The new acquisitions expanded the company s properties to include eastern portions of the Pipestone Fault structure, which hosts the Frankfield East gold deposit. The Pipestone Fault also hosts several other gold showings in the area. The new properties cover a section of the North Pipestone Break structure as well. This is a recently defined area that coincides with gold-bearing structures on the Tully North property. The North Timmins Gold property now includes 61 unpatented claims and eight mining leases along the Pipestone Fault and associated structures. The total land covered is 9,255 hectares in the Evelyn, Little, Tully and Wark Townships in the Timmins gold camp in Ontario. Figure 1: Map of the North Timmins Gold property Ore Sorting Study Source: Company The company recently completed a commercial scale ore sorting test using a 1,000kg sample taken from the Frankfield East mineralized zone. The test used Dual Energy X-ray Transmission (DEXRT) sorting equipment and was performed in Germany by Tomra Sorting Solutions. This utilizes a method of detecting the arsenopyrite (strongly associated
Page 3 with the gold) in the crushed material and separating it from the barren waste rock with jets of air. This has been shown to successfully separate greater than 50% of the waste rock, effectively reducing the volume of material that would need to be transported and processed during milling. The final result was an increase in gold grade to 12-15g/t Au (from an average of 6g/t Au unsorted) in the material that would be sent for processing, with only a 2-3% gold loss. Management has indicated that they plan to apply the ore sorting method to crushed rock prior to milling and concentration, and will release an updated PEA in Q1 2013, taking this method into account. It should be noted that this technology is still relatively new, and to the best of our knowledge, is not currently applied at any operating gold mines. Therefore, the overall effectiveness during commercial production remains unknown. However, we believe that this technology has the potential to reduce processing costs. Metallurgical Study Gold mineralization at the Frankfield East property is strongly associated with arsenopyrite, and to a lesser degree, with pyrite. The gold is also refractory, meaning it is attached to ore trapped within the sulphide mineral structure, requiring pressure oxidation treatment during milling. In early February 2012, GWA announced the results of a metallurgical and engineering study performed by SGS Canada. The study found that course grinding and flotation successfully produced a gold-sulphide concentrate. This serves to reduce the volume of material that will be run through the mill vs. whole rock milling, creating the potential to reduce overall operating costs. Four flow sheets were examined to determine the most efficient gold recovery process with the highest gold recoveries coming from the locked cycle test. Figure 2: Flow sheet for the locked cycle test Source: Jackman (2012) Development of Processing Alternatives for Frankfield East Deposit Using Selective Arsenopyrite-Pyrite Flotation
Page 4 This process had a final gold recovery of 92-93% in an arsenopyrite cleaner concentrate that was approximately 7% of the original ore mass. The concentrate grade was 94 g/t gold (see Table 1 for a summary of the results). This also produced a pyrite concentrate with only 1.6% arsenic, and therefore, has the potential to be sold as a source of sulphur. Table 1: Summary of sample description, head grade (or calculated head), concentrate grade and percent recoveries Test Number Product Wt % Assays, g/t, % Recoveries, % LCT3 Au S As Py Aspy Au S As Py Aspy Final Arsenopyrite Concentrate 6.4 93.70 16.20 24.30 10.8 52.9 92.7 40.3 90.2 20.2 90.2 Pyrite Concentrate 4.8 4.64 28.60 1.54 52.3 3.4 3.5 54.1 4.3 74.3 4.3 Flotation Tailings 88.8 0.27 0.16 0.11 0.2 0.2 3.8 5.5 5.5 5.5 5.5 Head (calc) 100.0 6.44 2.56 1.72 3.4 3.7 100.0 100.0 100.0 100.0 100.0 Source: Company Overall, this method produced a combined arsenopyrite/pyrite concentrate with the same gold recovery as whole rock flotation. Producing the arsenopyrite/pyrite concentrate reduces the amount of material to be processed by greater than 90%. Utilizing this technique would reduce reagent costs and presents the possibility of selling the concentrate without performing further processing. We find that this has provided the company with a means to potentially reduce future operating costs while producing a high quality product. This testing was performed on whole rock material. The combined effect of the above mentioned ore sorting method, and arsenopyrite/pyrite concentration, has yet to be determined. Future Development The company is in the process of updating the Frankfield mineral resource estimate as well as initiating mine development studies. The results of these studies will be included in an updated preliminary economic study (PEA), which is slated for release in Q1 2013. See Figure 3 for the current development timeline of the Frankfield East deposit. Figure 3: Planned development timeline for the Frankfield East deposit. Exploration Update Source: Company The company is also preparing for an environmental baseline review. This is the starting point for a permit application for the construction of the ore processing facility. Drilling on the Frankfield East deposit has extended the east-west strike length by 400m for a total length of approximately 1,350m. The resource is still open in both directions and at depth.
Page 5 Figure 4: Long section of Frankfield East deposit Table 2: Assay results from fall 2011 to winter 2012 drilling on Frankfield East Hole ID From (m) To (m) Interval (m) Au Grade (g/t) GW11-180 66.2 66.9 1.5 1.5 129.0 141.5 12.5 1.6 165.5 167.0 1.5 3.9 181.8 182.3 1.5 4.1 GW11-182 36.5 40.5 4.0 1.6 62.0 63.0 1.5 2.0 79.1 79.9 1.5 2.1 103.0 104.0 1.5 2.0 117.7 118.7 1.5 4.4 GW11-183 35.9 36.9 1.5 1.9 61.5 62.5 1.5 8.2 76.0 81.0 5.0 2.0 GW11-185B 281.8 283.8 2.0 3.4 317.5 318.0 1.5 3.2 421.0 421.5 1.5 2.4 GW11-186 82.9 83.5 1.5 1.5 373.0 374.0 1.5 4.5 GW11-187 400.0 401.0 1.5 2.0 404.0 406.0 2.0 5.4 423.0 428.0 5.0 5.0 436.0 437.0 1.5 6.2 467.0 469.0 2.0 3.5 GW11-188 95.0 111.0 16.0 3.6 172.0 173.0 2.8 1.9 GW11-193 24.0 25.1 1.5 1.6 GW11-197 35.0 36.5 1.5 2.3 GW12-202 142.1 143.0 1.4 2.6 Source: Company We find these results show moderate to good grades over the east and west extensions
Page 6 of the mineralization. Pipestone Main Property The company drilled on the Pipestone Main property in spring 2012. The holes exhibit carbonate alteration, which could be an indicator that the fluids responsible for forming the Frankfield East gold deposit flowed along other sections of the Pipestone Fault. Similar fluid composition increases the possibility of finding other gold showings along the structure. Although the drill holes did not return significant values for gold, management has stated that they provided valuable structural information regarding the area. This could prove useful in planning further exploration. Changes to Management Since our last report, GWA has appointed Mr. Peter Quintiliani to the Board of Directors and as the Chairman of the Audit Committee in May 2012. The company accepted the resignation Mr. Ewan Mason from the Board of Directors in April 2012. See below for Mr. Quintiliani s biography as provided by the company. Peter Quintiliani, Director and Chairman of the Audit Committee Mr. Quintiliani is currently the Chief Financial Officer and Executive Vice President Corporate Development of a large private company and has over 35 years experience in corporate finance. Mr. Quintiliani is a Chartered Accountant. Financials At the end of Q2-2012 (April 30th, 2012), the company had cash and working capital of $1.21 million and $0.83 million, respectively. The company reported a net loss of $0.34 million (EPS: -$0.00) during the first six months of FY2012. We estimate the company had a burn rate (cash spent on operating and investing activities) of $0.50 million per month in the first six months of FY2012. The following table summarizes the company s liquidity position as of April 30th, 2012. Liquidity Position (C$) 2011 2012-(6M) Cash and Equivalents 1,838,799 1,210,205 Working Capital 1,076,994 833,623 Current Ratio 2.10 2.99 LT Debt - - LT Debt/Asset - - Burn Rate (564,172) (503,347) Subsequent financings: In May 2012, the company announced its plans to pursue a private placement of up to $2.50 million by issuing: - units of the company at a unit price of $0.10: each unit consists of a common share and one-half of a flow-through warrant - units of the company at a unit price of $0.10: each unit consists of a common share and a warrant
Page 7 Since then, the company has raised $0.81 million. The company currently has approximately $1.10 million in cash. According to management, the company is not drilling at this time, but will pursue a drilling program later in the year with its flow through dollars (approximately $0.50 million). We estimate the company currently has 8.79 million stock options (weighted average exercise price of $0.26) and 12.30 million warrants (weighted average exercise price of $0.26) outstanding. At this time, none of the stock options or warrants are currently inthe-money. Valuation and Rating Although the company is currently evaluating the ore sorting method, and ways to fast track production, we have not made any changes to our DCF and real options valuation models as the company has yet to make a decision on the process/method they will eventually apply. Also, the economics of the various options the company is currently evaluating are currently unclear. We have maintained our DCF and real options valuation on the Frankfield East deposit at $49.87 million, and $66.74 million, respectively. However, the value per share estimates dropped from $0.45 to $0.38 share, and $0.60 to $0.51 per share, respectively, due to share dilution. The number of shares (calculated based on the treasury stock method) increased from 110 to 132 million shares since our previous report in November 2011. We have maintained our long-term (2015+) gold price forecast at US$1,200 per oz. Our comparables valuation dropped from $0.66 to $0.44 per share due to share dilution and as we currently use $60 per gold equivalent oz to value junior exploration companies, versus $75 per oz at the time of our previous report. Valuation Summary Value Value per Share DCF $49,871,275 $0.38 Real Options $66,741,560 $0.51 Comparables $58,630,500 $0.44 Average $58,414,445 $0.44 Working Capital (net of debt) + LT Inv. $1,124,623 $0.01 Average $59,539,068 $0.45 Therefore, based on our revised valuation models, we reiterate our BUY rating and adjust our fair value estimate from $0.60 to $0.45 per share.
Page 8 Risks The following risks, though not exhaustive, may cause our estimates to differ from actual results: The value of the company depends on commodity prices. The success of drilling, resource expansion, and development are important longterm success factors for the company. Access to capital and share dilution. The company currently has no operating mines. The company is subject to delays that are affecting the entire mining industry. The outcome of environmental studies at the Frankfield Gold property. We rate the company s shares a RISK of 5 (Highly Speculative).
Page 9 Fundamental Research Corp. Equity Rating Scale: Buy Annual expected rate of return exceeds 12% or the expected return is commensurate with risk Hold Annual expected rate of return is between 5% and 12% Sell Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A Coverage and ratings suspended until more information can be obtained from the company regarding recent events. Fundamental Research Corp. Risk Rating Scale: 1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is conservative with little or no debt. 2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company s capital structure is conservative with little to modest use of debt. 3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverage ratios are sufficient. 4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a turnaround situation. These companies should be considered speculative. 5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding. These stocks are considered highly speculative. Disclaimers and Disclosure The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any forward looking statements are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. 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