Kingston Resources Ltd (KSN AU, $0.022. Market cap A$26m) · ratio was low, rock was soft and the metallurgy simple (the Merrill Crowe process was employed due to its high silver

Dr Chris Baker

11 April 2018

KINGSTON RESOURCES (ASX: KSN) | Research report

Kingston Resources Ltd (KSN AU, $0.022. Market cap A$26m)

UPDATE: Revisiting the Umuna deposit with an initial 2.8Moz JORC resource ‘Shadow of the headframe’ exploration to commence at Misima

Investment overview

• KSN has acquired 49% of the Misima gold project and will move to 70% within months. The

Misima deposit was one of the core assets of former gold major, Placer Pacific in the 1990’s.

It consistently delivered around 300,000 low cost ounces in its early years from a large scale,

low grade open cut, until mine closure in 1999 with the gold price under US$300/oz. There

has been little significant exploration undertaken for gold on Misima for over 15 years.

• In a review of existing drill data, KSN have established a JORC standard resource of 2.8 million

ounces (82.3Mt at 1.1gpt). This we judge is an excellent base from which to build a stronger

resource to allow the start of a scoping study for mine development.

• Exploration targets include extensions of the main Umuna lode, northern extensions of the

lode, and splay structures in the SE. We are also attracted to the depth potential of the main

Umuna lode where a small number of deeper drill holes suggest that gold grade might increase

with depth.

• Mapping and trenching of key targets has begun and a new target has been discovered

(Ginamwamwa, assays from 53 samples reported, median of 1.4gpt). Drill testing will

commence in April 2018.

• As well, KSN is about to start a follow-up RAB programme at its Livingstone project (Bryah

Basin), WA.

• KSN currently holds around A$6m in cash.

• We can see a short to medium term price target of 4 to 7cps as reasonable, based on a

comparison with KSN’s peers.

KINGSTON RESOURCES (ASX: KSN) | Research report Page | 2

Background

In December 2017 KSN merged with Canadian WCB Resources. WCB had been principally exploring a copper porphyry on Misima Island in PNG located to the north of the old Placer Pacific open cut gold mine. Results were disappointing. Investors were reluctant to continue funding WCB.

KSN saw the gold potential of the old Misima gold mine as an opportunity, and proposed a nil-premium merger with WCB Resources. This was completed in late November 2017.

The merged company holds 49% of the Misima project, and is earning its way to 70% with the expenditure of a total of A$9m. (Around $1.7m remains to be spent). The 30% JV partner, Pan Pacific Copper, is owned by Japanese majors, JX Nippon Metals and Mitsui Mining and Smelting.

Since completion of the merger, KSN has upgraded the resource by some 22% to 2.8Moz (at a 1.1gpt grade) with the incorporation of deeper drill holes and with the application of JORC reporting standards, and has commenced exploration of the main Umuna lode and other targets on the island.

The company

Post-merger and a recent capital raise (A$4.5m at 2.2c) the company has 1,214m shares on issue, and a market capitalisation of around $24m. The current cash position is around A$6m.

Kingston’s executive management is led by ex-fund manager, and engineer Andrew Corbett. He is supported by geologist Andrew Paterson who is coordinating exploration, and commercial manager Chris Drew. Recently appointed exploration manager, Michael Woodbury, was involved in exploration at Misima with Placer in the early 2000’s, and will no doubt contribute strongly to the understanding of the deposit. The exploration effort is supported by a number of ex-Placer geologists.

The assets

The Misima project

• Misima was one of Placer Pacific’s best mines in the 1990’s. It was an open cut gold-silver mine

on an island in PNG that produced ca. 250-300kozpa for +10 years at low cash costs. It

produced some 3.7Moz gold and 22Moz silver over its 15 year life. The mill shut down in 2004.

Discussions with previous management confirmed that the low prevailing gold price at the


time (ca. US$300/oz) would not have allowed another cutback of the main pit. It ceased mining

in 2001 and treated low grade for 3 years. The plant was sold and the mine site rehabilitated.

• Misima was only ever a low grade mine, starting production with a reserve of 56Mt at 1.38gpt

(at a 0.7gpt cutoff grade). However, the mine consistently delivered profits and cash. The strip

ratio was low, rock was soft and the metallurgy simple (the Merrill Crowe process was

employed due to its high silver content). The mine is reported to have generated a +20% call

factor on tonnes and grade.

• The mine was a jewel in the crown of the Placer global operations in the 1990’s, consistently

being one of the company’s lowest cost producers with a life-of-mine average of US$218/oz.

Typical of Placer operations at that time, the miners selectively delivered higher grades to the

mill, stockpiling low grade ore for processing at the end of the mine life.

• One of the key cost advantages of the mine was its ability to undertake marine discharge of

tailings, eliminating the need a tailings dam tailing dams. Environmental consultants

monitored the behaviour of the largely benign waste products, and consistently gave it the

‘thumbs up’. Some of the waste was discharged into the sea as well, while much found its way

back into old pits and nearby waste dumps.

• The decision to close the mine was late 90’s when gold hit $250/oz.

Geology of the Misima orebody

The main Umuna orebody appears to be fault-hosted within Cretaceous/Paleogene metamorphic

rocks. It is believed by some geologists to be a dilatational jog within a 3km long fault/breccia zone.

Source: The Geology and Mineral Potential of PNG, Corbett (ed). 2003

Epithermal mineralisation in the Umuna lode is characterised as two styles. A low sulphidation

carbonate-base metal phase is commonest and is hosted within a multiphase extensional breccia.


Minor base metals are common. The high silver is thought to have been derived from the near-surface

oxidation of silver-bearing sulphides.

Recent mapping by a consultant structural geologist has confirmed this theory, with strike slip

movement on the Umuna fault having developed an extensional component, providing an ideal host

for mineralisation.

The remnant Misima resource

• WCB undertook several NI43-101 compliant resource estimates on the remaining gold

mineralisation and at 0.5gpt COG the last reported was 73Mt at 1gpt for 2.3Moz .

• Since its acquisition, KSN has revisited the resource estimate, and incorporated a number of

drillholes which had not been used in the earlier estimate. The new resource estimate is as

follows, with the headline 2.8Moz reported for a 0.5gpt cut-off grade:

Source: KSN announcement, 27 November 2017. See Appendix 1 for more detail.

• Note that 54% of the resource is currently in an inferred category.

• What is interesting in these results is the relative steepness of the grade curve. As in its past

life, there appears to be the potential to selectively mill higher grade ore, and stockpile the

lower grade material for later processing. (This is referred to as grade streaming).

Source: KSN announcement, 27 November 2017


• It is interesting to note that at a 0.4gpt cut-off, while the grade drops to 0.9gpt, tonnes expand

to around 110mt, for some 3.2Moz. We are not suggesting that a 0.4gpt is ‘the right number’

but it does show how sensitive reserves might be to project economics.

Where did the additional resource ounces come from?

The recently added 800koz in resources emerged from:

• The incorporation of drill results previously not used in the estimate, and

• The difference in resource classification methods between Canadian NI41-101 and JORC. JORC

has a ‘reasonable expectation of being economic’ test around mineral in the ground. The 43-

101 report requires a conceptual mining method (in this case a conceptual open cut). The

shape of this open pit will have been based on reasonably conservative pit dimensions, given

this project is nowhere near at a scoping or PFS stage.

The plan below shows that most of the incremental ounce emerged from beneath the existing resource

(“Umuna US$1200 pit shell” is the 43-101 resource), with a little more to the north and some in the

east Umuna lodes/

Note that around 220koz of 2.8Moz resource is associated with a nearby satellite deposit,

Ewatinona/Quartz Mountain, which was mined by Placer in the late 1990’s.

It is worth noting that the resource consultant identified a further 10-20Mt at 0.8 to 1.2gpt as an

exploration target. This 257 to 772koz target is very much that, and there has been insufficient drilling

to define a resource.


Exploration opportunities

• KSN has presented the opportunities for further resource ounces into 4 groups: the two

deposits with existing resources, the old Umuna and Quartz Mountain pits, Umuna East and

Misima North.

• In total there are over 7 kilometres of strike potential to be evaluated.

• Not to say that previous owners (Placer in particular) did not undertake regional exploration.

They did. But a sub US$300/oz gold price and political uncertainties in PNG might well have

seen the precious exploration dollar directed elsewhere. WCB’s main exploration target was

for copper.

Misima – Umuna and Quartz Mountain lodes

• The down dip extension of the Umuna lode likely represents the ‘easiest’ additional ounces.

Moreover, there seems to be a suggestion that grades might improve at depth.

• Looking back at the long section above, we can see a smattering of deeper drill holes (400-

500m), testing down-plunge extensions of the richer section of the orebody. Grades reported

are over twice the resource grade. The section below is though this zone.


Source: KSN corporate presentation, September 2017

• We understand that under 9% of the numerous drill holes were over 200 metres in depth. Its

fair to say that the depth potential of the Umuna deposit is open.

• Other comments in the technical literature refers to marked primary zonation at depth.

(References available on request). One particular paper refers to a move from low iron

sphalerite (zinc sulphide) nearer to surface, to higher iron sphalerite at depth. The epithermal

experts will say that this is low temperature moving to higher temperatures of deposition. And

with that might come differing grades and differing ratios of gold to silver.

• So is it possible that grades will consistently improve with depth. This is a completely

reasonable exploration model which is yet to be tested.

• Note as well that the old Umuna pit was part-filled with waste. So, there will be additional

cost required to access the deeper ore.

• At Quartz Mountain, KSN report that mineralisation remains open at depth. The average drill

hole depth here was only 90m.

Umuna East and Misima North targets

• The historic soil geochem plan, above, shows the exploration opportunity here.


• Umuna East seems to consist of splay structures of the main Umuna lode. Here the exploration

opportunities are over a 2 to 3km strike, with historic trenching, and limited drilling suggesting

the potential for moderate grade mineralisation near to the surface. KSN reports two zones

of mineralisation in the splays, one 40m at 1.19gpt the other 90m at 1.65gpt. These are

believed to be undrilled. Exploration success here could be very important, as it could deliver

near surface, low strip ounces, which could assist the average stripping ratio of the main pit

itself.

• The Misima North targets represent a 3km plus potential extension of the Umuna lode. This

target is supported by underground historic mining and surface geochem. Recent mapping by

a consultant has reaffirmed Misima North as a key target.

To stress, its not to say that these targets were not drilled during the Placer era. As the following plan

shows, exploration was very much focussed on the Umuna deposit itself. Much of the step-out

exploration was undertaken using RC drilling, not an issue in itself, but clearly the drill spacing is

considerably wider, and quite possibly shallower.

Source: AMC Technical Report, September 2013

The recent Ginamwamwa (“Gina”) discovery


Channel sampling by KSN geologists have identified satellite mineralisation to the south of the Umuna

mine. Mineralisation was highlighted by artisanal miners working to recover alluvial gold in an area

immediately NE of the old Placer mill site.

Some 53 surface samples have delivered assays of 0.5gpt (minimum reported) to 39.5gpt with a

median of 1.4gpt, coincidently close to the original resource grade of the deposit. We would be

cautious reading too much into these chip samples, but the discovery is certainly encouraging.

2018 drill programme

Drilling is scheduled to commence April 2018. Key targets are:

• The main Umuna shear, under existing workings (see “Figure 3” above).

• Quartz Mountain.

• The recent Ginamwamwa discovery.

KSN have proposed a 2800m diamond drilling program, some 12-14 holes which should be completed

within 3 months. The cost for drilling alone is likely to be around A$800,000, we estimate. The

company has sufficient cash to allow drilling to continue, if warranted.

Misima…what could it be?

The old Misima Mine, its satellites and surface gold anomalies deserve further exploration. From what

we have seen of historic reporting there has been little attention paid to the gold potential of the

island. Previous explorers, WCB Resources, were focussed on the area’s porphyry copper potential.

(This was a valid target, but results were disappointing). So often have we seen gold mines of the 70’s,

80’s and 90’s revisited with a drill rig to see substantial additional reserves identified.

The 2.8moz of measured, indicated and inferred is a great place to start. An aggressive drill programme

should rapidly upgrade the inferred resource to M&I, thereby allowing some preliminary economic

scoping studies. Remember, Misima was an exceptional mine for Placer in the 90’s: simple geology,

simple bulk scale mining and no-nonsense metallurgy. This is a good place to start.

Simultaneously, the geologists will be looking hard for higher grade satellite deposits to provide

additional mill feed.

It is far too early to speculate as to what “New Misima” might be. But unless the project passes an

initial sniff test, it would not be worth our while spending time.

Resource potential: let’s assume that exploration in 2018 and possibly 2019 delivers a M&I resource

of 2.8Moz plus 25% = 3.5Moz.

Reserve potential: let’s assume a 60% resource to reserve conversion, so reserves on this basis would

be 2.1Moz. At a reserve grade of 1.1gpt, this would represent a tonneage of 60Mt.

The following table summarises a ‘what if’ scenario:


It should be stressed that this is educated guesswork and should not be used in formulating a valuation

for KSN, but it does suggest that with a 2Moz reserve, and modest grade streaming early in the mine’s

life, a 170-180kozpa project at around US$800/oz could be targeted for a +10 year life. So, this is a

target worth testing.

Note in the above example, we have assumed that in the early years that higher grade ore would be

streamed to the mill.

It is far too early to speculate the capex required for a project of this scale.

Other assets held by Kingston

Livingstone Gold project, Bryah Basin WA.

The Livingstone Gold Project (KSN 75%) is an advanced exploration project with an existing JORC2004

Inferred mineral resource of 49,900 ounces and a number of high-grade drilling intersections that

indicate excellent potential for additional discoveries.

Located 140km northwest of Meekatharra in the Peak Hill mineral field of Western Australia,

Livingstone covers 204km2 of the western Bryah Basin.

Recent drilling has generated encouraging results including 7m at 12.6gpt and 18m at 3gpt. Recent

auger sampling has identified a large (4x5km) area of gold anomalism worthy of further drill testing.

The project is within trucking distance of other deposits within the Bryah Basin. Westgold

recommissioned the old Fortnum plant in 2017 and is undoubtedly looking for satellite feed.


A follow-up drilling programme is planned for April 2018, with 8000m of RAB drilling designed to follow

up last years auger programme.

Source: KSN release, 4/4/18

Lithium projects

KSN was recapitalised in 2016 as a lithium play. The company’s lithium assets include:

• Bynoe/Wingate Projects: Both projects are within the 180km long Litchfield Pegmatite Belt,

which lies close to Darwin. This is probably the most interesting of KSN’s lithium plays as it

adjoins the Bynoe and Finnis lithium projects of Core Exploration (CXO AU, not covered). The

Core tenements were bought in November 2017 from Liontown Resources for $1.5m and

approx. $2.7m in CXO shares. KSN’s Lei deposit, located adjacent to Core’s tenements, has

already yielded encouraging drill results, including one intercept of 12m at 1.43% Li2O.

• North Arunta Projects: Kingston holds a number of tenements within the Alcoota Pegmatite

Region and the Barrow Creek Pegmatite Field within the Arunta Region.

• Mt Cattlin Project: Within the project area, the Deep Purple South Prospect lies 14km south-

west of the established Mt Cattlin lithium mine (GXY) and 15km from the town of

Ravensthorpe, providing an ideal infrastructure setting.

• Greenbushes Project: The Greenbushes tenement adjoins the southern border of Talison’s

Greenbushes mine, the largest hard rock lithium mine in the world. The site contains a series

of mineralised pegmatites which have intruded along the Donnybrook-Bridgetown shear zone.

Should KSN deliver a successful project out of Misima, it would be realistic to imagine that the lithium

assets would be sold, or spun out into a separate vehicle.

What could Misima be worth to KSN?


Valuation of ounces gold in the ground is always one of the great imponderables as the implicit value

of ounces (ie NPV per ounce) will vary so much depending on the quality of those ounces. Nonetheless

it is appropriate to try and make an estimate as to what a company could be worth when judges against

its peers. For consistency, we have used much the same peer group reported by KSN in recent

presentation. Updating for current share prices (and resource additions) the median EV per resource

ounce for 22 small to mid cap pre development gold companies is A$44/resource ounce. Excluding

the pre-development companies (such as Dacian and Gascoyne) the median score drops to A$38/oz.

Needless to say, the spread is wide. At the low end, we see Azumah, Nusantara and Geopacific in the

$10-20/resource ounce range. These hold projects which carry some baggage with the market. At the

high end, again excluding financed projects, in construction, we see the market favourites like West

African Resources (at $96/oz), Echo (at $79/oz). Even OreCorp, despite its Tanzanian exposure, is

trading at $44/oz.

The following analysis is very much a ‘what if’ for Kingston. What if the market was to pay roughly half

the peer group average for KSN’s current resource, the stock could trade at 4cps. What if the

forthcoming drilling programme added 10% to resources and then valued these ounces in line with its

peers, we could expect a per share value of 7-9cps.

We see a realistic share price target range of 4 to 7cps over the medium term.


Appendix 1

Misima resources statement, November 2017


By downloading this report you acknowledge receipt of our Financial Services Guide, available on our web page

www.bridgestreetcapital.com.au.

Bridge Street Capital Partners Pty Ltd is licensed to provide financial services in Australia; CAR AFSL 456663;

Level 14, 234 George Street, Sydney NSW 2000

Bridge Street Capital Partners Pty Ltd is providing the financial service to you.

General Advice Warning

Please note that any advice given by Bridge Street Capital Partners Pty Ltd or its authorised representatives (BCP)

is GENERAL advice, as the information or advice given does not take into account your particular objectives,

financial situation or needs. You should, before acting on the advice, consider the appropriateness of the advice,

having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible

acquisition, of a particular financial product you should read any relevant Prospectus, PDS or like instrument.

Disclaimers

BCP does not warrant the accuracy of any information it sources from others. BCP provides this report as an

opinion held at a point in time about an investment or sector. BCP has no obligation to update the opinion unless

you are a client of BCP. Assessment of risk can be subjective. Historical information may not translate into future

performance. Portfolios of investments need to be well diversified and the risk appropriate for the investor. BCP

does not stand behind the capital value or performance of any investment. To the fullest extent permitted by

the law, BCP disclaim any liability for any loss or damage arising from the use of, or the reliance on, any

information within the report whether or not caused by any negligent act or omission of BCP. Overseas investors

acknowledge that BCP has not solicited their business and that they have accessed this report while searching

for information on Australian companies.

Disclosures

Dr Chris Baker, an authorised representative of BCP, certifies that the advice in this report reflects his honest

view of the company. He has 29 years investment experience in wholesale capital markets. He worked as a

mining analyst for brokers BZW and UBS for 11 years and has a further 16 years’ experience as a mining analyst

and portfolio manager with Colonial First State and Caledonia Investments. He now provides independent

financial advice on a part time basis. He may own securities in companies he recommends, but will declare this

when providing advice. He currently owns shares in KSN. He is remunerated from corporate finance fees.

http://www.bridgestreetcapital.com.au/

Documents

Kingston Resources Ltd (KSN AU, $0.022. Market cap A$26m) · ratio was low, rock was soft and the metallurgy simple (the Merrill Crowe process was employed due to its high silver