UK gold sector · Centamin plc (BUY, 80p Target Price). The low operating-cost structure of Centamin’s Sukari mine has enabled the group to maintain margin and internally fund expansion

THIS DOCUMENT INCLUDES RESEARCH WHICH IS A MARKETING COMMUNICATION. It is not investment research and has not been prepared in accordance with legal requirements designed to promote investment research independence and is also not subject to any prohibition on dealing ahead of the dissemination of investment research. Where a stock is indicated with *, Oriel Securities has designated research as “Connected”. Please refer to the back of this document for important disclosures and our research disclaimer.

UK gold sector Sector review and initiations of coverage Mining

6 February 2015

Searching for sustainable value MULTIPLE RECS

Unconnected research

UK gold sector – Multiple recommendations Oriel Sector Report - Mining

The past two years have served as a stark reminder of gold’s unpredictability.

The metal has traded as high as US$1,700/oz (early 2013) and as low as

US$1,150/oz (late 2014), with significant fluctuation in between as markets

struggled to find consensus on the outlook for its key drivers – inflation,

interest rates and the US dollar. Early 2015 has brought a recovery above

US$1,200/oz, offering some relief to beleaguered producers. We are cautiously

optimistic that current price levels are at least sustainable in the near term,

but gold’s rocky ride over recent years highlights the importance of asset

quality and management if value is to be created and protected across the

cycle. We initiate research coverage on one diversified large-cap, one

established mid-tier, and one emerging junior that we believe fulfil this criteria.

Randgold Resources (HOLD, 5,400p Target Price). Randgold’s highly disciplined

approach to project development and capital management has seen it emerge as the

UK market’s pre-eminent gold equity. The group now boasts a diversified suite of high-

quality assets that it has developed largely organically and with limited recourse to

equity markets, factors which distinguish it from most of its established senior peers

and which in our view justify its sector premium rating. Production of ~1.3Moz pa at all-

in costs of <US$800/oz offers good protection against pricing downside and, despite a

relative lack of “alpha” catalysts, Randgold is our top defensive pick.

Centamin plc (BUY, 80p Target Price). The low operating-cost structure of

Centamin’s Sukari mine has enabled the group to maintain margin and internally fund

expansion despite gold’s precipitous fall over the past two years, and with ramp-up to

steady-state production of 400-500koz nearly complete, free cash-flow is set to grow

even at current prices (offering the potential for a rising dividend). Last year’s

acquisition of Ampella brought some welcome project and country diversity, and could

materially add to our valuation if a viable development opportunity is proved up.

Centamin is our preferred established-producer pick on valuation grounds at current

gold prices, and also offers good leverage to higher prices.

Amara Mining (BUY, 30p Target Price). At ~10Moz, Amara has the largest resource

base of any UK-quoted junior. The scale, technical simplicity and array of already

installed-infrastructure at its flagship Yaoure project in Cote d’Ivoire in our view makes

it the highest-quality undeveloped project in West Africa, one that withstands scrutiny

at much lower gold prices and one which we believe could appeal to established mid-

tier producers. With Yaoure financed through to a construction decision by early next

year, near-term funding risk is low. Longer-term, we believe Amara has options to

address the capex hurdle thereafter, should it remain independent.

Stocks reviewed

AMARA MINING PLC

Recommendation BUY

Price 16.50

Target price 30.00

CENTAMIN PLC

Recommendation BUY

Price 67.95

Target price 80.00

RANDGOLD RESOURCES LIMITED

Recommendation HOLD

Price 5,550.00

Target price 5,400.00

All data as of close 05 February 2015

All sources unless otherwise stated: Company data, Factset,Oriel Securities

Contributing analyst Electronic

Sales

Nick Chalmers UK Sales desk

+44 (0)20 7710 7450 +44 (0)20 7710 7600 [email protected]

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Table of contents

Investment summary ............................................................................................................... 3

Gold market overview .............................................................................................................. 4

Gold equities – fortunes changing? .......................................................................................................... 6

Our senior, intermediate and junior picks ........................................................................... 11

Amara Mining plc ................................................................................................................... 13

Valuation ................................................................................................................................. 15

Upcoming catalysts ................................................................................................................................ 16

Risks ....................................................................................................................................................... 16

Company overview ................................................................................................................ 17

Yaoure project – the company maker ..................................................................................................... 18

Baomahun project – development optionality ......................................................................................... 21

Management ........................................................................................................................... 22

Centamin plc ........................................................................................................................... 23

Valuation ................................................................................................................................. 25


Risks ....................................................................................................................................................... 26


Sukari gold mine, Egypt .......................................................................................................................... 27

Building the growth pipeline .................................................................................................................... 30

Management ........................................................................................................................... 33

Randgold Resources Limited ............................................................................................... 35

Premium quality, premium price .......................................................................................... 37

Valuation ................................................................................................................................. 38


Risks ....................................................................................................................................................... 39


Management ........................................................................................................................... 45

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Investment summary

It’s been a testing few years for gold equities, which have by and large underperformed gold for the past

four years, the disparity between equities and bullion emerging even before gold’s precipitous fall in H1

2013. However, there were clear signs towards the end of last year that equities’ beta correlation to gold

was recovering, and with the tentative recovery in gold prices to a >US$1,200/oz level since the turn of

the year, we may have reached an inflection point, with equities set to break a multi-year run of

underperformance.

We are cautiously optimistic that macro-economic conditions are supportive of the current gold price,

and any strengthening from current levels should therefore benefit all gold equities to some degree. But

given gold’s rocky ride over the past two years in particular, which have served as a reminder of its

unpredictability, we believe the sector should continue to be approached selectively – we prefer

companies that have the underlying asset quality and management discipline to withstand another

sustained downturn should it transpire, as well as being able to capitalise on a rising gold price.

In the case of established producers, we look for companies that have below-average cash operating

costs, strong balance sheets and the management discipline to only pursue growth opportunities that

add to the quality of the existing project portfolio. In the case of the developers and emerging producers,

we look for projects that can withstand stress-testing at gold prices significantly below current levels,

and management teams with a proven track-record of financing and developing.

With this criteria in mind, we are initiating research coverage on three UK-quoted gold equities at very

different stages of evolution: Randgold Resources (HOLD, 5,400p TP) and Centamin plc (BUY, 80p

TP) are both established low-cost producers (and amongst the very few that could withstand a

sustained significant further downturn in the gold price without having to cut back production) with debt-

free balance sheets and proven management teams, while Amara Mining (BUY, 30p TP) is an

emerging junior with a stand-out development project that holds potential for low operating-cost

production.

Figure 1: NAV and 2015E EBITDA leverage to gold (flat from today)

At US$1,300/oz gold +10% Leverage -10% Leverage

NAV (p/sh)

Amara Mining (risk-adjusted) 30 41 37% 20 -33%

Centamin 80 98 23% 61 -24%

Randgold Resources 3,104 3,683 19% 2,523 -19%

2015E EBITDA (US$m)

Amara Mining -5 -5 na -5 na

Centamin 223 276 24% 170 -24%

Randgold Resources 581 724 25% 438 -25%

Source: Oriel Securities estimates

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Gold market overview

Gold has been unusually volatile over the past two years, trading as high as US$1,700/oz in early 2013

and as low as US$1,150/oz in late 2014, with significant fluctuation in between as markets struggled to

find consensus on the outlook for gold’s key drivers – inflation, interest rates and the US dollar.

The early weeks of 2015 have seen a bounce off the lows of late 2014, prompted by the Swiss Central

Bank abandoning its currency cap and moving deeper into negative interest rate territory (increasing

gold’s appeal despite its lack of yield) and supported by safe-haven buying on continuing economic and

political uncertainty in the Eurozone and by robust physical demand from Asian markets in particular.

This strength in the face of a collapsing oil price (a potential driver of deflation, which traditionally has

been seen as negative for gold) and a rising US dollar (the dollar and gold are traditionally negatively

correlated) is unusual but not unprecedented – in the immediate aftermath of the 2007/08 global credit

crisis there were a number of occasions when gold and the US dollar rose in tandem, with both viewed

as liquid safe-havens in turbulent global markets and gold carrying the additional attraction of being a

hedge against the possible longer-term implications of monetary stimulus.

Figure 2: Gold and Dollar rising together seems counter-intuitive, but we’ve been here before

Source: Bloomberg

We don’t necessarily feel the dollar will weaken significantly in the immediate term given renewed

pressure on the western world’s other major currency, the euro, following the European Central Bank’s

recent commitment to substantial monetary stimulus in the Eurozone for at least the next 12-18 months.

But this in itself may not necessarily be negative for gold – a weakening euro would clearly make euro-

denominated gold attractive, and ongoing uncertainty over the wider economic and political stability of

the Eurozone may see both the dollar and gold underpinned by safe-haven buying (continuing the

atypical phenomenon of gold and the dollar rising together).

Indeed, gold’s recent resilience in the face of dollar-strength could be viewed positively for its medium-

term prospects, as a strong dollar coupled with current benign inflation and still fragile economic

recovery in the US potentially reduces the likelihood of a material hike in US interest rates in the near

term (a sustained turn in the developed-world interest-rate cycle remains the major long-term threat to

gold). Gold’s upturn in recent weeks is closely correlated with a sharp decline in the yields of

government bonds, an alternative safe-have asset class (Figure 3) – if yields were to continue this

downward trend, there could even be scope for further gold-price strength as the opportunity cost of

holding this non-yielding asset diminishes, increasing its attraction as a safe-haven from current macro-

economic uncertainties and as a hedge against the possible longer-term consequences of an extended

period of loose monetary policy to combat the threat of deflation.

Gold has shown

resilience in the face

of rising dollar

Low bond yields

supportive of gold

5

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Figure 3: In the context of yields the recent uptick in gold makes sense

Source: Bloomberg

Given the prevailing macro-economic backdrop, and the fact that physical buying levels are relatively

robust (at least in Asian markets), we are cautiously optimistic that a >US$1,200/oz gold price is

sustainable in the near term.

It is extremely difficult to confidently make longer-term price predictions given the limited influence of

physical supply-demand dynamics on gold – investor sentiment, which is unpredictable and can change

quickly, plays a far larger role in price setting than is the case with industrial commodities. Moreover,

long-held relationships between gold and other macro-economic indicators can break down completely

from time to time (as at present, with gold rising in tandem with the dollar, to which it is traditionally

negatively correlated). We can envisage a bull-case scenario for gold in which the unprecedented

injection of liquidity into the global money markets over recent years (which is still ongoing in the case of

the Eurozone and Japan) ultimately results in long-term monetary debasement and inflation. But one

could make an equally compelling argument for benign inflation (it has certainly been stubbornly absent

to date, with falling oil prices a key factor in recent times) and gradually rising interest rates in the main

developed world economies, a scenario which would likely prove bearish for gold.

Oriel valuation assumption On balance our long-term view leans more towards the bull-case, but given gold’s wildly fluctuating

fortunes over the past two years in particular, we believe it would be foolhardy to adopt a significantly

higher price assumption in making financial forecasts and company valuations from an equity-analysis

point of view. Put simply, we are wary of gold equities that cannot sustain long-term real margins at

current prices, and ideally look for those that could still deliver positive cash flow at even lower prices.

We thus use a US$1,300/oz long-term (from 2016) price assumption in valuing our stocks under

coverage, recognising that equities typically trade in close relationship to the prevailing spot price. We

believe a US$1,200-1,300/oz range is defendable over the next 12 months, and consider the upper end

of this range to be suitably conservative on a longer-term outlook (US$1,300/oz correlates with the

current global average all-in production cost for the industry as estimated by Thomson Reuters GFMS).

Risks could be to the

upside on a longer-

term view

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Gold equities – fortunes changing? The traditional logic of investing in gold equities rather than gold itself (be it physical bullion or ETF

paper-proxies) is to gain leveraged exposure (and therefore value growth), which itself has traditionally

been viewed as an instrument of wealth-preservation given its historic negative correlation with the

world’s major paper currencies and interest rates, and positive correlation with inflation.

This investment thesis has in the main been borne out over the past 20 years, with equities

outperforming the metal in times of rising gold prices and, on the flip side, moving down at greater rates

when gold falls. But as the charts in Figure 4 below illustrate, in recent years this leveraged “beta” to

gold has broken down somewhat, with gold equities significantly underperforming gold for much of the

past four years, even during periods of gold-price strength.

Figure 4: Gold equities underperformed gold for an unprecedented four years to the end of 2014

Source: Bloomberg

Gold equities merely kept pace with gold in 2010, despite the metal rising 30% for the year as a whole,

and actually lost ground across 2011 and 2012 despite gold still posting gains for both of those years.

Unsurprisingly, equities significantly underperformed over the past two years following gold’s precipitous

fall in H1 2013, making it an unprecedented four straight years of relative underperformance. Indeed, as

Figure 5 illustrates, gold equities ended 2014 at their lowest level in 20 years relative to gold.

Figure 5: Relative to gold, equities are just coming off their lowest level in two decades

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Gold equities have

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General risk-aversion (negative for equities) and/or an anticipation that gold’s multi-year bull run was

running out of steam may partly explain equity underperformance relative to gold in 2011 and 2012 in

particular, when equity valuations actually fell despite gold still holding strong. But given that equities are

in the main reactive to, rather than predictive of, commodity pricing, we believe other factors played a

bigger role, not least of which is that the gold-mining industry, by and large, failed to maximise margin

leverage to gold through the good times, as operating costs rose in tandem with gold.

As production increased into a rising gold price through 2009-2011, costs rose at a similar rate (partly

due to general inflationary pressures, but also because production growth was being delivered at the

expense of grade, with miners looking to maximise their resources in a rising price environment by

reducing reserve cut-off grades), limiting margin expansion as gold rose (Figure 6). Set against a

background of ballooning capex bills for new projects and expansions during this period (often resulting

in dilutive equity fund-raises), it is not difficult to understand why markets lost faith in the ability of gold

equities to deliver real returns, even at robust gold prices.

And as the gold price fell sharply in H1 2013, producers were slow to react to the lower pricing

environment, the resultant margin squeezes and funding holes seeing equities massively underperform

as gold settled down at a sub-US$1,400/oz level.

Figure 6: Senior/intermediate* gold companies combined production and average costs, 2009-2013

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*As selected by Bloomberg Intelligence (>200koz pa producers) Source: Bloomberg, Company data, Oriel Securities estimates

But cost-reduction initiatives are now coming through – Thomson Reuters GFMS calculates that

industry average total cash costs fell by 4% in the first nine months of 2014 compared with the

equivalent period in 2013, to US$736/oz (although estimated all-in costs, which include depreciation,

sustaining capex and corporate overheads, remained stubbornly high at US$1,300/oz). Some of this

has been achieved through cutting excess expenses at the corporate level and increasing productivity

rates (changes which we believe should be sustainable with disciplined management), and some of it no

doubt reflects high-grading of production where possible (which may be more challenging to sustain,

and could have adverse consequences for long-term production grades).

And there are signs that this lowering of the cost base, increase in production cut-off grades and

renewed focus on profitability over outright production growth alone is rebuilding market confidence in

gold equities – Figure 7 indicates that “beta” has returned, with gold equities displaying a stronger

correlation with the gold price over the past six months than over the preceding three-and-a-half years.

And anecdotal evidence also suggests that equities are beginning to behave more normally, with share

prices responding positively to company-specific good news (in contrast to much of the past two years,

when positive news was often taken as a liquid selling opportunity).

Margin expansion

during the good times

was constrained by

soaring costs

Cost-cutting

initiatives now

flowing through

Market beta looks to

have returned

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Figure 7: Gold equities have displayed greater correlation with gold over the past six months than preceding three-and-a-half years

Source: Bloomberg

If the traditional relationship between gold and gold equities has re-established itself, and gold

consolidates at current levels (or indeed builds on the positive momentum of recent weeks), might we

have reached a point of inflection, with equities set to end a four-year run of under-performance? The

early weeks of 2015 are certainly encouraging (see Figure 8), although longer-term we believe much will

depend on whether gold companies have learned the lesson of maintaining cost discipline throughout

the pricing cycle.

Figure 8: Beta has returned in recent months, and equities have outperformed gold so far in 2015

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Source: Bloomberg

But equities still look attractively priced – much depends on the longer-term direction of travel, but it is

worth noting that when gold first broke through US$1,300/oz on the way up (September 2010), the

FTSE Gold Mines index was nearly three times higher than it is today, with gold having recovered to a

similar level. And UK-quoted gold equities continue to sit at undemanding EV/oz resource multiples (an

admittedly crude but still useful comparative valuation metric) – the current UK market average of

US$32/oz (Figure 11) is still below the discovery cost of many. But what is also clear from both EV/oz

(Figure 10) and EV/EBITDA (Figure 9) analysis is that the sector remains polarised, with perceived

funding risks overshadowing underlying asset quality amongst the juniors, and operating-cost structure

and balance-sheet strength having the biggest influence on market rating of the established producers.

Equities still at

undemanding

valuations,

particularly the

juniors

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Figure 9: Top-ten UK-quoted gold producers ranked by EV/forecast 2015 EBITDA (as at close 03/02/15)

Source: Bloomberg estimates, Oriel Securities estimates

Figure 10: EV/oz resource* ranking of top 25 (by market capitalisation) UK-quoted gold equities (as at close 03/02/15)

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*Equity-attributable gold and gold-equivalent resources Source: Bloomberg, Company data, Oriel Securities estimates

10

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Figure 11: UK-quoted primary gold equities ranked by EV/oz attributable gold-equivalent* resources (as at 03/02/15)

Company Status Country Focus Price Mkt Cap Net Cash Attrib Resources EV/oz

(p) (US$m) (US$m) (Moz AuEq) (US$)

Randgold Resources Producer Mali, DRC, Cote d'Ivoire 5,535.0 7,779 61 28.6 270

Fresnillo Producer Mexico 880.0 9,809 328 69.2 137

Polymetal International Producer Russia 600.0 3,819 -1,038 40.4 120

Serabi Gold Producer Brazil 5.1 51 -4 0.7 75

Kirkland Lake Gold Producer Canada 235.0 277 -43 4.6 70

Polyus Gold International Producer Russia 197.0 9,035 -340 140.5 67

Centamin Producer Egypt 65.8 1,146 110 18.6 56

Trans-Siberian Gold Producer Russia 13.5 22 -25 0.9 53

Acacia Mining Producer Tanzania 282.1 1,750 152 32.1 50

Metals Exploration Explorer/Developer Philippines 5.0 104 19 1.9 45

Aureus Mining Explorer/Developer Liberia 20.8 98 -14 2.5 44

SolGold Explorer/Developer Ecuador, Solomon Islands 2.2 22 4 0.4 40

China Nonferrous Gold Explorer/Developer Tajikistan 25.0 144 -36 4.7 38

Petropavlovsk Producer Russia 12.5 37 -922 25.8 37

Hochschild Mining Producer Peru 89.8 498 -251 20.2 37

Shanta Gold Producer Tanzania 11.1 78 -40 3.2 37

Scotgold Resources Explorer/Developer United Kingdom 0.6 9 0 0.3 29

Patagonia Gold Producer Argentina 2.9 46 -3 1.7 28

Anglo Asian Producer Azerbaijan 6.0 10 -52 2.3 28

Nordgold Producer Burkina Faso, Guinea, Russia US$1.72 655 -361 37.6 27

Highland Gold Mining Producer Russia 40.0 197 -239 17.3 25

Dalradian Resources Explorer/Developer United Kingdom 53.5 124 39 3.5 24

GoldBridges Global Resources Producer Kazakhstan 2.7 89 7 5.2 16

Minera IRL Producer Peru, Argentina 3.8 13 -25 2.4 16

Mariana Resources Explorer/Developer Argentina, Chile 1.3 10 3 0.5 15

Greatland Gold Explorer/Developer Australia 0.2 2 1 0.1 15

Caledonia Mining Producer Zimbabwe 43.5 34 24 0.7 14

Condor Gold Explorer/Developer Nicaragua, El Salvador 65.0 45 1 3.4 13

Conroy Gold & Natural Resources Explorer/Developer Ireland 1.0 6 0 0.6 11

Avocet Mining Producer Burkina Faso, Guinea 6.8 21 -70 8.6 11

Pan African Resources Producer South Africa, Mozambique 12.0 332 -12 33.5 10

Amara Mining Explorer/Developer Cote d'Ivoire, Burkina Faso 16.5 105 24 8.9 9

Red Rock Resources Producer Colombia, Kenya 0.1 4 -2 0.6 9

Ariana Resources Explorer/Developer Turkey 0.8 8 0 0.9 8

Orosur Mining Producer Uruguay 11.5 17 4 1.7 8

Goldplat Producer Kenya 3.3 8 2 0.8 8

Hummingbird Resources Explorer/Developer Mali, Liberia 36.5 47 7 5.8 7

KEFI Minerals Explorer/Developer Saudi Arabia 1.0 19 5 2.1 7

Galantas Gold Explorer/Developer United Kingdom 3.1 4 0 0.6 6

Chaarat Gold Explorer/Developer Kyrgyzstan 10.5 43 12 6.1 5

Central Rand Gold Producer South Africa 12.9 17 -13 7.3 4

Goldstone Resources Explorer/Developer Ghana 2.1 2 1 0.4 4

Sovereign Mines of Africa Plc Explorer/Developer Guinea 0.5 2 1 0.5 3

Vast Resources Explorer/Developer Zimbabwe 0.6 12 -1 4.7 3

Ortac Resources Explorer/Developer Slovakia 0.1 6 4 1.3 1

Bezant Resources Explorer/Developer Philippines 4.1 5 4 2.6 0

Stratex International Explorer/Developer Turkey 1.8 13 13 0.7 0

Tengri Resources Explorer/Developer Kyrgyz Republic 2.4 4 0 10.9 0

Average 32

*Gold equivalents calculated at US$1,258/oz Au, US$17.22/oz Ag, US$5,500/t Cu, US$2,128/t Z Source: Bloomberg, Company data, Oriel Securities estimates

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Our senior, intermediate and junior picks

Whatever the long-term future may hold for gold, the metal’s volatility over the past two years has

served as a reminder of its pricing unpredictability in the near term. We therefore believe equities should

continue to be approached selectively, with a focus on underlying asset quality and strength of

management, attributes which are key if periods of gold-price strength are to be fully capitalised on and

further periods of price weakness ridden out.

We have selected three UK-quoted gold stocks that we feel fulfil this criteria: two mid-large cap

companies – Randgold Resources and Centamin plc, both established and relatively low-cost producers

with debt-free balance sheets and proven management teams; and one small-cap, Amara Mining,

owner of a large-scale development project with potential for very low-cost production.

Randgold Resources (HOLD, 5,400p TP). Randgold’s disciplined approach to project development

and capital management has seen it emerge as the UK market’s pre-eminent gold equity – the group

now boasts a diversified suite of high-quality assets that it has developed largely organically and with

limited recourse to equity markets. Production of ~1.3Moz pa at all-in costs of <US$800/oz offers good

protection against pricing downside, and despite a lack of “alpha” catalysts it is our top defensive pick.

Centamin plc (BUY, 80p TP). The low operating-cost structure of Centamin’s Sukari mine has enabled

the group to maintain margin and internally fund expansion despite gold’s precipitous fall over the past

two years, and with ramp-up to steady-state production of 400-500koz nearly complete, free cash-flow is

set to grow even at current prices. Last year’s acquisition of Ampella added some welcome project and

country diversity, and could provide significant valuation upside should a viable mine-development

opportunity be proved up over the next 18-months. Centamin is our top established-producer pick.

Amara Mining (BUY, 30p TP). At ~10Moz, Amara has the largest resource base of any UK-quoted

junior. The scale, technical simplicity and array of installed-infrastructure at its flagship Yaoure resource

in Cote d’Ivoire in our view make it the highest-quality undeveloped project in West Africa (and with

forecast all-in costs of <US$700/oz on production of 279-325koz pa, one that withstands scrutiny at

much lower gold prices). We believe that Yaoure could appeal to established mid-tier producers, but

Amara will be looking to add significant value in the meantime – its recent US$22m equity raise ensures

that Yaoure is adequately funded through to a construction decision by early next year.

Target Prices for all three have been generated using our House gold price assumption of US$1,300/oz.

This does not necessarily reflect our long-term macro view (indeed, we believe a compelling argument

can be made for prices going higher), but we believe it is a realistic target level for spot gold over the

next 12 months (and we recognise that gold equities generally trade in relation to the prevailing spot

price). We include full sensitivity tables to gold price for all our Target Prices in the following company

pages. All have significant valuation upside to prices higher than US$1,300/oz, but just as importantly,

all still generate positive NAVs at US$1,000/oz gold.

Figure 12: NAV and 2015E EBITDA leverage to gold (flat from today)

At US$1,300/oz gold +10% Leverage -10% Leverage

NAV (p/sh)

Amara Mining (risk-adjusted) 30 41 37% 20 -33%

Centamin 80 98 23% 61 -24%

Randgold Resources 3,104 3,683 19% 2,523 -19%

2015E EBITDA (US$m)

Amara Mining -5 -5 na -5 na

Centamin 223 276 24% 170 -24%

Randgold Resources 581 724 25% 438 -25%


Given gold price

volatility, asset and

management quality

are key

12

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13

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Amara Mining plc Initiation of coverage Mining 6 February 2015

Junior company, major asset BUYPrice: 17p Target price: 30p Unconnected research

With resources close to 10Moz – the largest gold resource base of any UK-

quoted junior – Amara is trading at a startlingly low EV/oz of <US$10/oz and at

an 85% discount to our estimate of its core (albeit unfunded) NAV. We believe

Yaoure is the highest-quality undeveloped gold project in West Africa, and

Amara demonstrating capex can be funded (ideally in a manner that minimises

dilution to shareholders) will be key to share-price re-rating.

Robust project in challenging times. Yaoure’s large scale (6.8Moz resource),

metallurgical simplicity (non-refractory ore) and prime location (situated in mining-

friendly Côte d’Ivoire, close to cheap hydroelectric power and with an enviable array of

already-installed infrastructure) more than offset its modest grade to make the project

one of the few undeveloped gold assets we see that warrants developing even if gold

were to fall below current levels. With possible production of 279-325koz (which would

place Yaoure amongst the top 10-15 largest gold mines in Africa) at projected total

cash costs of ~US$600/oz and all-in costs of <US$700/oz (which would make it one of

Africa’s lowest-cost producers), Yaoure’s economics look highly attractive at current

gold price levels (we estimate an IRR of 34% at US$1,300/oz gold) but would still hold

up at significantly lower prices (we estimate an IRR of 18% at US$1,000/oz).

Clear project milestones in 2015. Yaoure will be further de-risked technically over the

next 12 months, with a prefeasibility close to completion and scheduled for delivery in

March, and a full feasibility possible by year-end (and now funded following the

company’s recent US$22m equity raise). We believe the already compelling project

economics demonstrated by last year’s scoping study will at the very least be

confirmed by these upcoming studies, and may even be enhanced.

Baomahun provides optionality. Based on its 2013 feasibility study, the smaller but

higher-grade Baomahun project in Sierra Leone has compelling development potential

if gold returns to the US$1,350/oz level used as the base-case in that study. A smaller-

scale and lower-cost alternative (potentially with a later underground mine to

supplement the initial open pit) based on more selective mining of the deposit’s higher

grade core may make sense at lower gold prices, but further on-the-ground evaluative

work is currently on hold given the Ebola outbreak in Sierra Leone.

Market overly discounting for funding risk. Funding capex of up to US$350-400m is

a big ask for any junior, but notwithstanding the potential of developing Yaoure on a

phased basis (with lower initial capex), we believe Amara has alternatives to issuing

(potentially dilutive) equity alone – Yaoure has significant capacity for debt and is of a

quality and scale that we believe could attract a larger JV partner (or outright acquirer).

Amara has proven adept at finding innovative funding solutions in the recent past, and

demonstrating it has viable options for Yaoure will be key to reducing its shares’ current

heavy discount to core NAV. Initiating with a BUY and a 30p risk-adjusted Target Price.

Share price performance (indexed)

90100110120130140150160170180190

Feb-14 May-14 Aug-14 Nov-14 Feb-15Absolute

Rel. FTSE All-Share / Mining - SEC

Key data

Key financials

Year to Dec 2013A 2014E 2015E

Sales (US$m) 52 0 0

EBITDA (US$m) (8) (7) (5)

EPS adj (US$) (0.27) (0.10) (0.02)

Net cash (US$m) (2) 2 3

PE adj (x) (0.9) (2.5) (14.9)


All sources unless otherwise stated: Company data, Factset, Oriel Securities

Contributing analyst Sales


+44 (0)20 7710 7450 +44 (0)20 7710 7600 [email protected]

Stock code AMA LN

Market cap (£m) 69

FTSE AIM All Share/Basic Resources na

1mth perf (%) 6.3

3mths perf (%) (1.8)

12mths perf (%) 13.0

12mth high-low (p) 28 - 14

Free float (%) 81

14

Mining

Key data1 Key operational data and financial ratios (x)

2013A 2014E 2015E 2016EProduction (koz) 42 40 0 0Gold price (US$/oz) 1,381 1,288 1,281 1,300Total cash costs (US$/oz) 1,384 1,340 0 0All-in sustaining costs (US$/oz) 1,510 1,522 0 0

2013A 2014E 2015E 2016EPE adj (0.9) (2.5) (14.9) (14.9)EPS growth (%) na 63.4 83.0 0

Key profit & loss data (US$m)2013A 2014E 2015E 2016E

Sales 52 0 0 0EBITDA (8) (7) (5) (5)EBITDA margin(%) (14.4) nm nm nmEBIT (14) (7) (5) (5)EBIT margin (%) (27.0) nm nm nmAttributable Net Profit (47) (27) (6) (6)EPS normalised (US$) (0.27) (0.10) (0.02) (0.02)

Key balance sheet data (US$m)2013A 2014E 2015E 2016E

Net debt/(cash) 2 (2) (3) 119

Key cash flow data (US$m)2013A 2014E 2015E 2016E

Cash flow from operating activities 7 (0) (5) (5)Cash flow from investing activities (21) (23) (15) (118)Cash flow from financing activities (7) 13 21 0Net cash flow (20) (9) 1 (122)

Key information Business description

Amara Mining is a gold exploration and development company

quoted on AIM in London. The group's principal asset is the

prefeasibility-stage Yaoure gold project in Cote d'Ivoire, while it also

owns the smaller but more advanced Baomahun project in Sierra

Leone.

Senior management

John McGloin - chairman and chief executive

Pete Gardner - finance director

Peter Brown - group exploration manager

Key dates

March 2015 - Yaoure prefeasibility study

End 2015 - Yaoure feasibility study

Major shareholders

Aurum Holdings (RDV Corporation) - 18.4%

Franklin Templeton - 9.4%

Ingalls & Snyder - 8.4%

Website

www.amaramining.com

1Year end DecemberSource: Company data, FactSet, Oriel Securities estimates

15

Mining

Valuation

We value Amara on a sum-of-the-parts basis, incorporating risk-weighted NPV estimates of the

company’s Yaoure and Baomahun projects using an 8% discount rate and our House long-term gold

price assumption of US$1,300/oz.

In the case of Yaoure, our DCF model uses the published scoping study operating and cost parameters

for the 6.5Mtpa throughput rate scenario (see p18). Although 8Mtpa was the base-case scenario in the

scoping study, the 6.5Mtpa scenario results in a stronger IRR at current gold prices, and has lower

upfront capex requirements (and therefore slightly lower funding risk relative to the 8Mtpa case), and we

believe it will be the preferred case in the upcoming prefeasibility study (which will continue to evaluate

a range of throughput scenarios). We assume construction commences in 2016.

Our DCF model of Baomahun is based on the published (in January 2014) summary operating and cost

parameters resulting from initial optimisation work on the original July 2013 feasibility study (see p21).

The optimisation work demonstrated that a smaller-scale (1Mtpa ore throughput) open-pit development

with a supplementary underground component in later years would enable the higher-grade core of the

deposit to be mined selectively, providing more robust returns at gold prices lower than the US$1,350/oz

assumption used as a base-case in the feasibility study of the larger-scale (2Mtpa) but open-pit only

project. Given uncertainty over the current development plan, we assume it is another two years before

construction commences at Baomahun.

In setting target prices for companies with scoped but still unfunded projects, we treat the project as an

option, with the development capex representing the strike price. We thus heavily risk adjust the

underlying core NPV of such projects to arrive at a fair present equity value. In the case of Yaoure, we

have elected to attribute to our Target Price just 30% of our estimated full (but unfunded) project NPV,

reflecting its still relatively early-stage (operating and cost parameters published to date are at scoping-

study level only, although the resource has been significantly de-risked since, with 65% now classified

as indicated) and the substantial funding hurdle that must be overcome to reach production. Despite the

greater level of technical and economic assessment that has been undertaken at Baomahun (at least for

the open-pit project – the underground concept is still at scoping stage), we apply the same 70% risk

haircut in valuing this project, reflecting the still significant uncertainty surrounding Baomahun’s

development prospects – work is essentially on hold at present owing to a combination of Ebola and the

prevailing gold price.

After also adjusting for our estimate of Amara’s cash position at end 2014, adjusted for the subsequent

US$22m equity issue, and our NPV estimate of future corporate-level cash expenses, our resultant un-

funded but risked Target Price is 30p per share. This represents approximately 80% upside to

Amara’s current share price and we set our recommendation at BUY. There could be considerable

upside to our Target Price as Yaoure is further de-risked and funding options emerge. We would arrive

at a similar valuation level were we to remove the risk adjustment on the project NPV but dilute our

resulting company NAV by assuming Yaoure is 100% equity funded at Amara’s current share price.

Figure 13: Sum-of-parts valuation and Target Price derivation

US$m p/share*

Yaoure (AMA attributable) NPV8% 545 86

Baomahun (AMA attributable) NPV8% 186 29

Net cash (estimate) 24 4

Corporate-level costs NPV8% -52 -8

Core un-risked NAV 703 111

Yaoure risk adjustment 70% -382 -60

Baomahun risk adjustment 70% -130 -21

Target Price 191 30

*Based on 420m shares out post Feb 2015 equity issue, and an exchange rate of £1 = US$1.51 Source: Oriel Securities estimates

16

Mining

Figure 14 below illustrates the sensitivity of our risked Target Price to long-term (from 2016) gold price

assumption and discount rate, while Figure 15 shows the same sensitivity analysis applied to our un-

risked core NAV estimate.

Figure 14: Risked Target Price (p/sh) sensitivity to long-term (from 2016) gold price and discount rate

Gold price (US$/oz)

Discount rate 1,000 1,100 1,200 1,300* 1,400 1,500 1,600

12% 1 7 14 19 26 32 37

10% 3 10 17 24 31 38 44

8%* 6 14 22 30 38 46 53

5% 11 21 32 42 52 62 71

*Valuation base case Source: Oriel Securities estimates

Figure 15: Core (unfunded) NAV (p/sh) sensitivity to long-term (from 2016) gold price and discount rate

Gold price (US$/oz)

Discount rate 1,000 1,100 1,200 1,300* 1,400 1,500 1,600

12% 10 31 51 71 91 112 130

10% 19 43 66 89 112 136 156

8%* 30 58 85 111 138 165 189

5% 53 87 122 154 188 223 253

*Valuation base case Source: Oriel Securities estimates

Upcoming catalysts Yaoure prefeasibility study (March 2015)

Yaoure full feasibility study (by end 2015)

Project funding progress (by end of 2015)

Risks Our cash-flow model of Yaoure and resulting financial forecasts are based on scoping-study level

operating and cost parameters – such estimates carry a higher degree of error than prefeasibility

and full-feasibility study estimates. However, we believe the risks may be to the upside, with a

number of optimisation opportunities identified in the scoping study having the potential to enhance

the project economics.

Our cash-flow model of Baomahun assumes some contribution from underground mining in the

later years – the underground development option has not been evaluated to the same degree of

rigour as the feasibility-stage open-pit project.

Funding – there can be no certainty that funding (debt, equity or third-party project-level

investment) will be available to realise our core underlying project valuations.

Gold price – we believe there is merit in developing Yaoure, and potentially Baomahun, at current

gold-price levels, but this may not be the case were gold to fall significantly lower and remain at

such levels for a sustained period of time.

17

Mining

Company overview Amara Mining was formed in November 2003 (under the then name Cluff Gold plc), listing on London's AIM market in December 2004. Initially focused on operating two small-scale heap-leach projects in Burkina Faso and Côte d’Ivoire, the company underwent a significant transformation in 2012, hiring current chairman and CEO John McGloin and shifting its focus to two substantial development projects, Baomahun in Sierra Leone and Yaoure in Côte d’Ivoire. Resources more than doubled in the intervening period to 9.6Moz (now the largest resource base of all UK-quoted gold juniors), more than justifying management’s change in strategy. And now the plan is even simpler – with the last of the two heap-leach operations closing in 2014, and further work at Baomahun on hold owing to a combination of the current gold price environment and ongoing challenges posed by the Ebola virus in Sierra Leone, Amara is focused fully on advancing what we consider to be the key asset in its portfolio, the large-scale Yaoure project, in our view one of the highest-quality undeveloped gold projects in Africa.

Figure 16: Amara projects location map

Source: Amara Mining

Our medium to long-term operational forecasts, financial estimates and valuation assume both Yaoure and Baomahun are ultimately developed, although clearly this assumption is contingent on both the outcome of further feasibility work and availability of funding. If this scenario is borne out, and assuming the company remains independent, Amara could ultimately emerge as a 300-400koz producer by the end of the decade, which would place it in a very select group of UK-quoted mid-tier gold companies.

Figure 17: Amara – from junior producer to developer to mid-tier producer?


At 9.6Moz, Amara has

the largest resource

base of any UK junior

Long-term production

potential of 300-

400koz pa

18

Mining

Yaoure project – the company maker Previously known as Angovia, Yaoure was first mined by Compagnie Minière d’Afrique (CMA), who

extracted 1.9Mt of ore at 3.9g/t Au over five years before closing the mine in 2003 due to low gold

prices. CMA sold its 90% interest in the project (the 10% balance is held by the Côte d’Ivoire

Government) to Cluff Gold in 2004, and the latter subsequently re-opened the mine in 2008 as a heap-

leach operation exploiting the near-surface oxide resources. But technical issues prevented the

operation from hitting production and cost targets, and it was placed on care and maintenance in 2011.

Following John McGloin’s appointment as executive chairman in 2012, Amara began re-evaluating the

project for the potential of its deeper-lying sulphide mineralisation to sustain a substantial open-pit-

CIL/CIP operation. A series of extensive drilling campaigns over the following two years led to

successive resource upgrades, the most recent of which (January 2015) puts total project resources at

6.8Moz at an average grade of 1.25g/t (4.4Moz indicated and 2.4Moz inferred).

Drilling in 2013 was focused principally on defining the wider footprint of sulphide gold mineralisation,

and led to a substantial increase in reported resources from under 0.5Moz to current levels. The

objective of the largely in-fill drilling campaign in 2014, of which the latest resource update is a result,

was to improve the geological understanding of mineralisation controls and gold distribution within the

conceptual open-pit shells that were used as the basis for the various scenarios run in a preliminary

economic assessment (PEA) of the project’s development potential completed in early 2014 (and in the

process promoting inferred category resources to the indicated category in preparation for the upcoming

prefeasibility study (PFS), which will include a maiden reserve calculation).

Figure 18: Yaoure project resources*

Tonnes (Mt) Au grade (g/t) Gold (Moz)

Indicated 106 1.29 4.4

Sub-total M&I resources 106 1.29 4.4

Inferred 63 1.19 2.4

Total resource 169 1.25 6.8

*As at 5 Jan 2015 (at 0.5g/t cut-off and US$1,500/oz gold) Source: Amara Mining

Up to 325koz pa targeted at <US$700/oz all-in sustaining costs The PEA confirmed the potential for Yaoure’s development as an 8Mtpa open-pit, tank-leach operation,

the large scale offsetting the moderate grade. Gold output was estimated at an average of 325koz pa at

total cash costs of US$655/oz (and all-in sustaining cash costs of US$691/oz) over an initial 12-year

mine life, with upfront capex estimated at US$408m. On these metrics the PEA concluded a project IRR

of 32% assuming a US$1,250/oz gold price, and an NPV of US$688m using an 8% discount rate.

Smaller-scale throughput scenarios were also evaluated using higher cut-off grades for an US$800/oz

conceptual open-pit shell (rather than the US$950/oz pit shell used for the 8Mtpa base case), with

modelled rates of 6.5Mtpa and 5Mtpa yielding still strong IRR’s of 33% and 25% respectively but with

lower upfront capex requirements of US$357m and US$331m. The positive results of these alternative

throughput scenarios indicate the potential to mine higher-grade material more selectively in the event

of sustained lower gold prices (the 6.5Mtpa scenario has estimated total cash costs of just US$594/oz,

and all-in sustaining cash costs of US$624/oz, with average gold output at a still high 279koz pa), while

the 5Mtpa scenario also points to the potential for a staged development strategy (possibly starting at

even lower annual rates than 5Mt). However, given the five-year tax holiday from first production that is

available in Côte d’Ivoire, there is clear benefit in maximising revenues in the early years.

Optimisation work is currently underway as part of the PFS work programme, including comprehensive

metallurgical testing and reviewing capex reduction possibilities. We believe this work could further

improve the project economics as presented in the PEA. The PFS is scheduled for completion in

March of this year, and we expect this to lead directly in to a full feasibility thereafter. The latter

could be completed by the end of this year or early next year, and is fully funded following

Amara’s recent US$22m equity issue.

Amara has grown

Yaoure’s resource

from 0.2Moz to nearly

7Moz in under 3 years

Yaoure could sustain

279koz pa at all-in

cash costs of

<US$700/oz

19

Mining

Figure 19: Yaoure is one of Africa’s largest and lowest cost-structure gold projects


Scale, metallurgy and existing infrastructure the key Yaoure’s compelling economics (which we believe rank the project amongst the strongest in Africa –

see figure 19 above) are driven by the scale of the operation envisaged, the relatively simple mining and

processing methods required, and the excellent array of already-installed infrastructure, all of which

more than compensate for the relatively low average grade of the deposit.

Simple, bulk-scale mining is possible given the extensive footprint of the resource and the continuity of

mineralisation (even the higher-grade zones display good continuity, and occur within a matrix of still

mineralised but lower-grade ore, meaning even more selective mining should be possible at bulk scale),

while metallurgical test work undertaken to date indicates that the ore is free-milling and should be

amenable to conventional, straightforward tank-leaching processing techniques.

The project further benefits from an advantageous location – having been a site of active mining in the

recent past, significant infrastructure is already in place, including an employee camp, a water-storage

facility and tarred roads running within a few kilometres of the site (and a dual carriageway to within

40km). But perhaps most important is Yaoure’s proximity to the Kossou hydroelectric power

station just 5km away, which should see electricity (which makes up around 40% of Yaoure’s

processing costs) supplied at highly-competitive rates – Amara believes power costs of

US$0.09/kWh are realistic (compared with average costs of US$0.15-0.30/kWh for mines elsewhere in

West Africa that rely on conventionally-sourced grid power or diesel gen-sets).

Moreover, we consider Côte d’Ivoire to be a favourable mining jurisdiction relative to many other

countries in the region, with competitive gold royalty and corporate tax rates of 3% and 25% respectively

and a five-year tax holiday available from first production. The State’s 10% free carry in mining ventures

is also lower than in some neighbouring countries.

Upside opportunities Our production and financial forecasts for Yaoure are based on the operating and cost parameters

generated for the 6.5Mtpa throughput scenario. That PEA highlighted a number of opportunities for

optimising the project economics through increasing average head grades, lowering the overall strip

ratio and reducing upfront capex. These opportunities include: the selective mining of defined higher-

grade zones; reducing drill data gaps in the conceptual pit shell (and thereby potentially lowering the

strip ratio through reallocation of material currently deemed waste to mineable resource); a staged

development approach; and optimisation of the process flow-sheet, equipment and project layout.

These opportunities continue to be investigated, and we believe could result in enhanced headline

economic metrics in the upcoming prefeasibility study, which is scheduled for March 2015.

Moreover, Yaoure still holds longer-term exploration potential – mineralisation has not been drill-closed

off along-strike or down-dip of the currently defined resource, while gold anomalies have been detected

in parallel structures to the west of the known deposit. And the resource area forms a very small part of

the wider 367km2 licence area – substantial scope remains for low-cost regional exploration.

Yaoure benefits from

an array of existing

infrastructure and

proximity to cheap

hydro-electric power

Project economics

could be enhanced

with planned

optimisation of

development

parameters

20

Mining

Figure 20: Yaoure still has significant resource upside potential


Funding options Clearly, funding what could be up to a US$400m capex bill is a big ask for a company currently

capitalised at just over US$100m (adjusted for recent equity raise). However, as noted the project

economics are still compelling if Yaoure were to be built on a smaller scale at lower cost, while there is

also potential for constructing on staged basis, which could see the initial capex requirement further

reduced (although we believe much of the infrastructure required for an eventual 8Mtpa operation would

still need to be put in place during the first phase, limiting the initial capex savings from such an

approach). Whatever the eventual starting scale chosen, we believe Amara could look at a number of

potential funding options which do not rely solely on the issue of new equity on a large-scale, which

would not be attractive at Amara’s current share price level given the heavy discount to NPV.

Perhaps the most obvious funding route would be attracting a joint venture partner with greater financial

resources to invest at the project level – Amara is the sole owner of Yaoure (though the Government

has the right to a 10% free-carried interest) and we believe it could thus retain significant valuation

upside were it to sell down its interest (at a fair price) in return for greater funding certainty. A larger

player may of course see merit in acquiring Amara outright, but unlike many of its junior peers we do not

believe Amara is vulnerable to being taken on the cheap, as the recent US$22m equity raise (which was

well supported by existing shareholders) ensures it is adequately funded to complete a definitive

feasibility study on Yaoure, taking the project to the point of investment decision by early 2016.

We also believe Yaoure has capacity for a degree of debt funding, be it conventional project finance or

royalty/gold streaming related. Amara has recent form with the latter, having in 2012 secured an

unhedged US$20m facility from Korean industrial conglomerate Samsung C&T Corp to fund working

capital whilst it progressed the development of the Sega project in Burkina Faso (a satellite operation to

the now closed Kalsaka heap leach), with Samsung in return receiving a portion of Sega’s gold

production at small discount to the prevailing gold price. The agreement provided for a longer-term

strategic partnership between the two groups, and now that the streaming concept has been proven at

Kalsaka/Sega, we believe there could be scope for a similar structure (with Samsung or another group)

to be put in place at Yaoure.

Management has

track-record of

sourcing innovative

funding solutions

21

Mining

Baomahun project – development optionality Located 180km east of Freetown in Sierra Leone, Baomahun was once Amara’s lead development

project, but has taken a back seat to Yaoure over the past 18 months owing to a combination of

significant drilling success at the latter but also to the deteriorating gold price, which has made

Baomahun’s economics less compelling. The outbreak in Sierra Leone of the deadly Ebola virus in 2014

has added a further layer of uncertainty, but we believe Baomahun still represents a solid second

growth opportunity for Amara, with optimisation work last year indicating that the project could still

deliver economic returns at current gold pricing levels were the deposit to be mined more selectively at

a smaller-scale, but at higher grade, than envisaged in the feasibility study.

Figure 21: Baomahun project resources*

Mt g/t Total

Indicated 38.4 1.82 2.25

Sub-total M&I resources 38.4 1.82 2.25

Inferred 6.6 2.50 0.53

Total resources 45.0 1.92 2.78

* As at June 2013 (at 0.5g/t cut-off for open-pit resources, 2.0g/t for underground resources) Source: Amara Mining

The June 2013 feasibility study considered a 2Mtpa open-pit and CIL processing operation to exploit

some 1.2Moz of gold reserves at an average grade of 1.6g/t. This maiden reserve was calculated from a

total project resource base of 2.8Moz at 1.9g/t, with a US$1,100/oz gold assumption used. Gold

production was forecast to average 149koz pa over the first six years of the projected 11.5-year mine

life, with life-of-mine (LoM) total cash costs averaging US$799/oz and an estimated total upfront capex

requirement of US$253m. At the study’s base-case gold price assumption of US$1,350/oz, this scenario

yielded a post-tax IRR of 22% and an NPV8% of US$127m. However, at US$1,200/oz the IRR and NPV

dropped to 13% and US$41m respectively.

But the feasibility study highlighted optimisation opportunities that could improve the capital efficiency,

and a revised set of parameters were presented in January 2014. This optimisation study demonstrated

the potential for more robust economics in a lower gold-price environment (a US$900/oz open-pit shell

was used) if Baomahun were to be developed at a smaller-scale focused on selective mining of its

higher-grade core. Assuming a 1Mtpa open pit and plant, and a higher head-grade of 2.2g/t,

Amara estimated production could average a still reasonable 88koz pa over the first six years,

but at lower LoM average total cash costs of US$711/oz. Crucially, the total upfront capex

requirement of this smaller-scale project was estimated to be 43% lower, at US$143m. On these

parameters Amara calculated a post-tax IRR of 17% at US$1,250/oz gold, and an NPV8% of US$50m.

The optimisation study also highlighted the potential to further enhance the economics with

development of a supplementary underground operation after the first six years of the open pit,

exploiting higher-grade resources at depth (where mineralisation remains open). This could double the

mine life to 20 years and increase production to >90koz pa from year seven, and Amara believes the

additional, but unspecified (we assume US$75m in our model) capex requirement could be internally

funded from the initial open-pit operation. On this basis the company estimates that the supplementary

underground operation could boost Baomahun’s optimised post-tax IRR to 25% and the NPV8%

to US$192m at US$1,250/oz gold. We would however stress that the underground option, though

based on mining defined resources, has not yet been assessed to feasibility-study level, and therefore

we consider there is a higher degree of risk attached to the resulting forecasts.

2013 feasibility study

scenario not

compelling at current

gold price

Economics could be

enhanced with

supplementary

underground mine

22

Mining

Management

John McGloin – chairman and chief executive John McGloin joined Amara in April 2012, prior to which he was a senior mining equities analyst (and

Head of Mining) with Collins Stewart and, before that, with the Arbuthnot and Evolution Securities. A

geology graduate from Camborne School of Mines, Mr McGloin worked for many years in Africa’s

mining industry and then mining consultancy before moving into stockbroking. He has acted for many

mining companies over the years including African Platinum, Randgold Resources, Avocet Mining,

European Goldfields and Titanium Resources Group.

Pete Gardner – finance director Pete Gardner joined Amara in October 2009, prior to which he was CFO of Alexander Mining plc. Mr

Gardner is a qualified Chartered Accountant with a breadth of experience in financial management and

corporate finance in the natural resources sector. Since joining Amara, he has implemented a number of

improvements to the group’s financial reporting systems and procedures. Based in the company’s

London office, he travels to West Africa when required.

Peter Brown – group exploration manager Peter Brown joined Amara in August 2011, bringing more than 25 years’ experience in minerals

exploration and evaluation in Africa, South America, the Middle East and China. He was previously chief

geologist at NunaMinerals, with whom he served as a member of executive board. Mr Brown holds a

BSc in geology from Dundee University and a PhD from Southampton University.

Peter Cowley – non-executive director Peter Cowley joined Amara in January 2008 and is a geologist with 40 years’ international experience in

the minerals industry, particularly in Africa. Mr Cowley is currently CEO of Loncor Resources Inc and a

director of Banro Corp. He was previously managing director of Ashanti Exploration Ltd and group

technical director of Cluff Resources plc.

Geoff Stanley – non-executive director Geoff Stanley joined Amara in October 2008 and brings 26 years’ international experience in the

minerals industry. He has worked in exploration in Australia and as a gold analyst with a number of

securities firms in Australia and the US. Mr Stanley is a director of Crescent Gold Ltd, Riverfield Capital

Ltd, Indo Gold Ltd and Bannerman Resources Ltd.

Hendrik Faul – non-executive director Hendrik Faul joined Amara’s board in May 2012 and is currently CEO of Anglo American's copper

division and was previously the group’s head of mining. Mr Faul brings over 20 years’ experience in

surface and underground mining, processing, logistics and marketing, and has held numerous senior

roles including CEO for Anglo American’s zinc operations and general manager for that group’s Lisheen

Mine in Ireland. He is currently also a non-executive director of Palabora Mining Company.

Peter Hain – non-executive director The Right Honourable Peter Hain MP joined Amara in March 2013 and brings over 22 years’

international experience to the company, including a great depth of understanding of African politics

through his role as Minister of State at the Foreign Office from 1999 to 2002. During his time Mr Hain

worked closely with the Sierra Leone government and was involved in a number of key initiatives and

negotiations to bring stability to the country and facilitate a strong working relationship with the UK.

Alex Davidson – non-executive director Alex Davidson joined Amara in November 2013, and was previously executive vice president,

exploration and corporate development for Barrick Gold, the world’s largest gold producer. Mr Davidson

brings over 25 years' experience in designing, implementing and managing gold and base-metals

exploration programmes throughout the world. He is currently also a director of Yamana Gold, Capital

Drilling, US Silver & Gold, Volta Resources, MBAC Fertilizer Corp and Orca Gold.

23

Mining

Centamin plc Initiation of coverage Mining 6 February 2015

Positioned for growth on all fronts BUYPrice: 68p Target price: 80p Unconnected research

Sukari’s low operating-cost structure has ensured relatively healthy margins

in spite of gold’s precipitous fall over the past two years, and with the ramp-up

to steady-state production of 400-500koz pa nearly complete, free cash flow is

set to grow in 2015 even at current prices. This raises the possibility of higher

dividends, and positions Centamin strongly to execute on organic growth

and/or M&A opportunities if they arise. We initiate with a BUY and 80p TP.

Strong foundations. Centamin's unhedged and debt-free position and long-life, wide-

margin operation in Sukari positions it strongly to grow free cash irrespective of further

recovery in the gold price, giving it flexibility to pursue other development opportunities

and maintain a dividend (we estimate a >40% operating margin in 2015 at current gold

prices, based on forecast production of 420koz at <US$739/oz total cash costs).

Further expansion potential. Sukari's large existing resource base (and additional

resource potential) offers the possibility of extending the projected mine life but also the

potential for some further expansion of production levels – management is confident

that the recently expanded process plant is capable of operating above its 10Mtpa

nameplate capacity (the rate we assume in deriving our estimates).

First mover advantage in Egypt. Sukari is Egypt’s first modern-day commercial gold

mine, and Centamin’s success in originating and developing the asset, and the in-

country relationships that it has built along the way, may give it a strategic advantage to

execute on any other opportunities that may present themselves in what in our view is

a highly-prospective country for new gold discoveries. Centamin has already identified

several targets on its wider exploration landholdings around Sukari.

Becoming more than a one-country, single-asset company. Last year’s acquisition

of Ampella added an advanced exploration asset to the project pipeline – the 3.25Moz

Konkera project in Burkina Faso is now undergoing systematic drilling to define the

optimal route to production, with an initial study of its development potential possible

within the next year. Added to earlier-stage exploration projects in Ethiopia and Côte

d’lvoire, this gives medium-term diversification potential (reducing the obvious risks

attached to being a single-operation and single-country company). And unlike many of

its UK-quoted peers, Centamin has the balance sheet to execute on development

opportunities as they are proved up.

Potential upside to our valuation. Our 80p Target Price is set at our core NAV

estimate (calculated at an 8% discount rate and US$1,300/oz gold), and we initiate

coverage with a BUY recommendation. Demonstrating a viable mine-development

opportunity on the Ampella portfolio (or at its earlier-stage exploration projects in East

Africa) could see significant blue-sky upside to our core NAV estimate, and may also

see Centamin attract a market premium to NAV, in-line with its more diversified peers.


90100110120130140150160170180



Key data

Key financials


Sales (US$m) 504 485 535

EBITDA (US$m) 234 184 213

EPS adj (US$) 0.17 0.10 0.11

DPS (US$) na 0.02 0.03

Net cash (US$m) 106 146 213

PE adj (x) 5.9 10.9 9.1

EV/EBITDA (x) 4.6 5.8 5.0

Div yield (%) na 2.30 2.66





+44 (0)20 7710 7450 +44 (0)20 7710 7600 [email protected]

Stock code CEY LN

Market cap (£m) 783

FTSE All-Share / Mining - SEC 14322

1mth perf (%) 11.8

3mths perf (%) 32.1


12mth high-low (p) 84 - 47

Free float (%) 89

24

Mining


2013A 2014E 2015E 2016EProduction (koz) 357 377 420 470Gold price (US$/oz) 1,384 1,256 1,275 1,300Total cash costs (US$/oz) 706 747 739 739All-in sustaining costs (US$/oz) 957 963 995 968

2013A 2014E 2015E 2016EPE adj 5.9 10.9 9.0 7.3EV/EBITDA 4.6 5.8 5.0 4.3Div yield (%) na 2.3 2.7 3.2EPS growth (%) na (45.6) 20.4 23.1


Sales 504 485 535 611Operating costs (293) (363) (391) (436)Other costs (28) (13) (13) (13)EBITDA 234 184 213 251EBITDA margin(%) 46.5 37.9 39.7 41.1Depreciation (51) (75) (81) (89)EBIT 183 109 132 162EBIT margin (%) 36.4 22.5 24.6 26.6Net interest 1 0 0 0PBT rep 184 110 132 162Tax (0) 0 0 0Net Profit 184 110 132 162Non-controlling interests 0 0 0 0Attributable Net Profit 191 110 132 162EPS normalised (US$) 0.17 0.10 0.11 0.14DPS (US$) na 0.02 0.03 0.03


Non current assets 1,029 1,099 1,126 1,145Current assets 269 305 375 489Non current liabilities 8 8 8 8Current liabilities 78 43 58 66Net debt/(cash) (106) (146) (213) (323)


Cash flow from operating activities 245 154 208 252Cash flow from investing activities (283) (101) (108) (108)Cash flow from financing activities 0 (12) (34) (35)Net cash flow (41) 40 67 110Cash at end of year 106 146 213 323


Centamin plc is a gold exploration, development and production

company dual listed on the London and Toronto Stock Exchanges.

The group's principal asset is the Sukari gold operation, Egypt's first

modern, commercial-scale gold mine.

Senior management

Josef El-Raghy - executive chairman

Andrew Pardey - chief executive

Pierre Louw - chief financial officer

Key dates

23/03/2015 - 2014 full-year results

09/04/2015 - Q1 2015 production results

09/07/2015 - Q2 2015 production results

Major shareholders

BlackRock - 9.6%

Directors & Management - 7.1%

Van Eck - 5.7%

Website

www.centamin.com


25

Mining

Valuation

We value Centamin on a sum-of-the-parts basis, incorporating an NPV estimate of Sukari (at an 8%

discount rate and our long-term House gold price assumption of US$1,300/oz) based on the company’s

current operating and cost guidance for the mine. Our modelled open-pit production profile assumes

only current open-pit reserves are mined, but in the case of the underground mine we assume some

future reserve replenishment (both from conversion of current underground resources and further drilling

of high-grade underground prospects) such that current underground production levels are maintained

for a further eight years. This assumption is somewhat speculative, but we feel fair given the company’s

visibility on current underground resource-to-reserve conversion potential and its confidence that higher-

grade zones extend beyond current drilling limits.

After also including currently defined resources at Konkera in Burkina Faso (the principal asset acquired

through last year’s takeover of Ampella Mining) at a UK peer-group based market multiple of US$32/oz,

and adjusting for corporate items, we arrive at a sum-of-parts NAV for Centamin of 80p per share.

Figure 22: Sum-of-parts valuation and Target Price derivation

US$m p/share*

Sukari - CEY attributable NPV8% 1,234 71

Batie West (Konkera) US$32oz 104 6

Projects value 1,339 77

Net cash (2014 YE estimate) 146 8


Core NAV 1,383 80

Target multiple 1.0x

Target Price 80

*Based on 1,152m shares out and a £1 = US$1.51 exchange rate Source: Oriel Securities estimates

We consider it appropriate to value an established, single-operation producer at 1x core NAV, and

therefore set our Target Price for Centamin at 80p per share. This provides 18% upside to

Centamin’s current share price and we therefore recommend BUY. We note that many established

mid-tier producers have historically traded at premiums to NAV (e.g. Randgold Resources is currently

trading at close to 2x NAV according to our estimates), and believe there may be potential for Centamin

to attract a premium rating over the longer term should the outstanding legal disputes be resolved in its

favour (see p30) and/or should another development opportunity emerge from its exploration portfolio

(adding diversity and thereby lowering the risk exposure associated with being a single operating-asset

company).

Our Target Price equates to 6x our estimate of 2015 EBITDA, just below the average one-year forward

EV/EBITDA multiple of 7.1x for the top ten established UK-quoted gold producers (see p9).

The table below illustrates the sensitivity of our underlying core NAV to long-term (from 2016) gold price

assumption and discount rate.

Figure 23: Core NAV (p/sh) sensitivity to long-term (from 2016) gold price assumption and discount rate

Gold price (US$/oz)

Discount rate 1,000 1,100 1,200 1,300* 1,400 1,500 1,600

12% 34 46 57 68 80 91 103

10% 36 49 61 73 86 98 111

8%* 38 52 66 80 94 107 122

5% 42 59 76 92 109 126 143

*Base-case valuation assumptions Source: Oriel Securities estimates

26

Mining

Upcoming catalysts 2014 full-year results (23 March 2015)

Q1 2015 production results (9 April 2015)

Q2 2015 production results (9 July 2015)

Konkera (Burkina Faso) project updates (2015/2016)

Risks Our cash-flow model of Sukari assumes significant additions to underground reserves to sustain

current underground production levels for a further eight years (current underground reserves are

sufficient for just two more years of mining). The group has a track-record of reserve

replenishment, but there can be no guarantee that this will continue to be the case going forward

(although recent underground drilling results have been highly encouraging).

Centamin currently has just one cash-generating asset, and therefore has a high degree of

operational risk exposure to Sukari and geo-political risk exposure to Egypt.

While we believe the long-running legal dispute regarding the Sukari concession agreement will

ultimately be resolved in Centamin’s favour, there can be no certainty over the outcome nor on the

timescale of the process.

Should the gold price fall below our long-term price assumption of US$1,300/oz for a prolonged

period of time there would be a material negative impact on our financial estimates and valuation.

27

Mining

Company overview

Founded in Australia in the 1970s as a grassroots exploration company, Centamin has been focused on

exploring, developing and ultimately operating the Sukari project in Egypt since first turning its focus to

that country and its highly-prospective share of the Arabian-Nubian geological shield in the mid-1990s.

Following the commencement of production at Sukari in 2009 the company has evolved into one of the

pre-eminent small-mid tier gold producers globally, and its shares are quoted on both the main board of

the London Stock Exchange and on the resource-stock heavy Toronto Stock Exchange.

Sukari gold mine, Egypt The Sukari gold mine is located in Egypt’s Eastern Desert, 700km as the crow flies from Cairo and

25km inland from the Red Sea. Its land mass comprising a significant portion of the western side of the

mineral-rich Arabian-Nubian geological shield, Egypt was a prolific producer of gold in ancient times. Yet

little modern-day exploration was undertaken prior to Centamin entering the country in the 1990s, and

Sukari remains to this day the only commercial-scale gold mine developed in Egypt in modern times.

Centamin's interest in Sukari is held via its wholly-owned Egyptian subsidiary Pharaoh Gold Mines

(PGM), which in turn holds a 50% equity stake in the operating company, Sukari Gold Mines (SGM).

The 50% balance of interest in SGM is held by the Egyptian Mineral Resource Authority (EMRA).

Under the terms of the project’s Concession Agreement, PGM has full operating rights and is

responsible for solely funding SGM, but is entitled to recover all sunk and ongoing capital and

exploration costs (at a rate of 33% of total accumulated costs per annum) as well as all current

operating expenses (other than the State’s 3% royalty on gold revenue), from operational cash flows

prior to surplus cash being distributed to the JV partners. After such deductions, residual net cash flow

is shared equally by PGM and EMRA, except that for the first two years in which there are net proceeds

for the entire year (2017 and 2018 according to our estimates) an additional 10% is paid to PGM as an

incentive (i.e. 60% to PGM and 40% to EMRA), and for each of the next two years an additional 5%

goes to PGM (i.e. 55% to PGM and 45% to EMRA). What’s more, the project has a 15-year income tax

exemption, renewable for a further 15 years thereafter on agreement.

Figure 24: Profits from Sukari will ultimately be shared 50:50 with the Egyptian State

Source: Centamin plc

Sukari is Egypt’s first

modern-day

commercial gold

mine

Centamin benefits

from preferential

share of profits in the

early years and tax

exemption for the life

of mine

28

Mining

The Sukari deposit comprises sheeted veins hosted by an altered granitoid porphyry intruded into a

brittle-ductile shear zone. The majority of gold mineralisation is fine-grained and disseminated and

associated with fresh un-oxidised sulphide minerals (pyrite and arsenopyrite), but some weak oxidation

is present from surface down to a depth of 10-20m. Higher-grade mineralisation tends to be associated

with discrete veins. The deposit has a strike length of at least 2.3km and ranges in thickness from 100-

600m. Mineralisation has been intersected down dip to depths of 1,200m from surface.

Since declaring a maiden resource of 1.3Moz in 2000, Centamin’s exploration efforts have grown total

gold resources to a substantial 15.4Moz (as at 30 September 2013), of which 8.2Moz have been

converted to reserves (7.7Moz open-pit and 0.5Moz underground).

Figure 25: Sukari resources* and reserves

Tonnes (Mt) Au grade (g/t) Gold (Moz)

Measured 184 1.0 6.0

Indicated 205 1.1 7.5

Sub-total M&I resources 390 1.1 13.5

Inferred 42 1.4 1.9

Total resources 432 1.1 15.4

Proven 113 1.1 4.0

Probable 102 1.2 4.1

Stockpiles 16 0.5 0.2

Total P&P reserves 230 1.1 8.2

*As at 30 Sep 2013 (open-pit at 0.3g/t cut-off, underground at 2.0g/t cut-off) Source: Centamin plc

A rapid expansion programme has been underway at Sukari since commissioning in 2009, with the

plant’s capacity having been increased in stages from an initial 4Mtpa to its current 10Mtpa nameplate

capacity, and the main open-pit mining operation being supplemented with a smaller-scale but

significantly higher-grade underground operation. This phased expansion has seen gold production

increase from 150koz in 2010, the first full-year of operations, to 377koz in 2014. Management is

targeting 420koz for 2015, and sustainable output of 450-500koz pa thereafter.

Open-pit mining is undertaken at a higher rate than processing in order to optimise feed grades in the

early years (ore from the higher-grade underground mine is fed directly to the plant). On current

schedules, the resulting low-grade stockpile will be processed after cessation of mining during the last

six years of the >20-year life. Based on past performance of the plant, management believes actual

throughput may exceed nameplate capacity, and could reach at least 11Mtpa. There may thus be

upside to our base-case production estimates, which assume steady 10Mtpa throughput rates.

Figure 26: The open-pit operation remains the foundation of Sukari’s production profile


Greenfield discovery

to >15Moz resource

Production ramping

up to steady-state

450-500koz by end of

this year

29

Mining

Though low-to-moderate grade overall, Sukari has a number of significantly higher-grade (>5g/t) north-

plunging mineralised zones that start towards the base of the planned final open-pit shell and continue

at depth. Centamin took the decision during the latter stages of the open-pit project build to develop

underground access to these zones, with the intention of both bringing forward production from high-

grade resources lying deep within the eventual open-pit shell and to further drill expected depth

extensions of these zones. Development of the Amun decline began in early 2010, with commercial

production from this new underground mine realised by the end of that year. Development of a second

decline (Ptah) is now underway in order to ensure continued underground access to lateral higher-grade

zones (and continued access to drill depth extensions) post intersection of the northern part of the Amun

decline by the deepening open pit (scheduled to occur in 2018 on the current open-pit mining plan).

Figure 27: Underground development has facilitated early access to Sukari’s high-grade zones


The maximum ore capacity of the underground operation is 1.5Mtpa, and, in contrast to the open-pit

mine, all underground mining is undertaken on a contract basis. As at 30 September 2013, underground

reserves stood at just over 0.5Moz at an average grade of 7.2g/t, but we are confident that ongoing

underground drilling will see further resource to reserve conversion (total underground resources are

currently 1.3Moz at 5.7g/t) as well as expansion of the underground resource inventory as high-grade

extensions are followed at depth (Centamin’s recent Q3 2014 report highlighted a number of impressive

underground exploration results). But we would stress that replenishment of underground reserves

will be critical if Sukari is to maintain a 450-500koz pa production rate over the longer term.

Figure 28: Our medium-term production and cost profile estimates for Sukari

0

200

400

600

800

1,000

0

100

200

300

400

500

2013A* 2014E 2015E 2016E 2017E 2018E

Tota

l cas

h co

sts

(US$

/oz)

Gol

d pr

oduc

tion

(koz

)

Gold production Total cash costs


A second decline is

under development to

ensure long-term

access to high-grade

underground ore

Underground drilling

results indicate

potential to materially

increase resources

30

Mining

Court cases still to be resolved Centamin is embroiled in two domestic court cases in Egypt, one relating to a third-party claim brought

against the Concession Agreement for Sukari between Centamin and the Egyptian State, and the other

relating to historic fuel subsidies that Sukari benefitted from early on in its operation. The legal process

in Egypt can be lengthy and complex, and though the ultimate outcome is clearly impossible to predict

with any certainty, on the evidence of Centamin’s public comments on the matters to date we believe

the likelihood is a satisfactory resolution.

Concession Agreement case

In October 2012 Egypt’s Administrative Court handed down a judgment in relation to a claim (brought

against the government by, amongst others, an independent member of the previous parliament) that

argued for the nullification of the Sukari Concession Agreement on the grounds that incorrect

administrative procedures may have been followed in relation to the signing of the original agreement

between Centamin, the Arab Republic of Egypt and the Egyptian Mineral Resources Authority (EMRA).

The Court ruled that the Concession Agreement itself was valid, but judged that insufficient evidence

had been submitted to it to demonstrate that the entire 160km2 "exploitation lease” agreed between

Centamin and EMRA had received approval from the relevant Minister at the time and thus was not

valid (although it did state that it had sufficient evidence to prove the existence of an exploitation lease

for an area of 3km2). Centamin however maintains that it is in possession of the executed original

documentation which clearly shows that the 160km2 exploitation lease was approved by the Minister of

Petroleum and Mineral Resources (whom has publicly expressed his support of Centamin and stated

his view that the lease is valid and its terms fair), but that it appears that this document was not supplied

to the Court (as Centamin was not party to the case at that time). As such, in November 2012 both

Centamin and EMRA formally appealed the judgement to Egypt’s Supreme Administrative Court – this

appeal process is still ongoing but the initial Administrative Court decision has been suspended to

enable normal operations at Sukari to continue during the appeal process.

There is little visibility on when the appeal process will conclude, but Centamin anticipates that there will

be a number of further hearings and adjournments before a final resolution is reached. However, the

company has received independent legal advice that the correct procedure was followed with regards to

the granting of the Concession Agreement, and is therefore confident of an outcome in its favour.

Moreover, we note that a new investment law came into force in April 2014 (although is currently being

challenged itself) that restricts third parties from challenging contractual agreements between the

Egyptian State and investors. This law could be applied retrospectively, potentially leading to the

dismissal of the Concession Agreement case altogether.

Fuel case

Separately, Centamin is in an on-going dispute with the Egyptian Government regarding the price at

which Diesel Fuel Oil (DFO) is supplied to Sukari. The mine previously benefited from subsidised DFO

prices, but has since January 2012 been paying its fuel supplier, Chevron, at the international price for

diesel. Nevertheless, during 2012 Centamin received a demand for US$60m from Chevron for the

repayment of past fuel subsidies (covering the period from late 2009 through to January 2012). Based

on legal advice, Centamin believes it has no case to answer, and has made no provisions in its

accounts in relation to these historic subsidies. Moreover, the company has commenced proceedings in

Egypt’s Administrative Court regarding these matters, arguing that an instant move to international fuel

prices was not a reasonable outcome and that it may therefore be entitled to repayment of any funds

advanced thus far at the higher rate should the court proceedings be successfully concluded.

Building the growth pipeline With Sukari now reaching production levels the scale of the resource warrants after a multi-year phased

expansion programme, Centamin is placing an increased emphasis on organic growth, with exploration

efforts focused both in and around Sukari in Egypt, but also elsewhere in eastern Africa and, following

the acquisition of Ampella Mining early last year, in western Africa. The group anticipates its ongoing

exploration budget to be set at around US$25-30m pa, of which around US$10-15m will be dedicated to

work on the Ampella portfolio in West Africa.

Centamin is confident

the Concession

Agreement will be

upheld

Centamin’s accounts

already reflect fuel

costs at full

international prices

Exploration budget of

US$25-30m to drive

organic growth

31

Mining

Growth in Egypt Sukari already boasts a substantial resource (15Moz) and reserve (8Moz) base by any standards, but

we believe there is still significant upside potential to be realised through the continued exploration of

Sukari Hill itself and other prospects within the wider 160km2 Sukari tenement area.

The immediate focus is on the further drilling of deeper-lying high-grade structures at Sukari Hill to

expand underground resources and reserves and ensure the longevity of the underground operation

(both at Amun, the current operational decline and therefore only area to have declared underground

reserves, and Ptah, where a new decline is being developed outside the boundaries of the final open-pit

shell and which will therefore be the longer-term source of underground production). Recent drill results

have been highly encouraging (Figure 29), and give us confidence that Centamin will continue to

replenish underground reserves depleted through mining and also expand the resource base, work

which will be crucial if it is to maintain a 450-500koz production rate over the longer term given the low

average grade of the core open-pit operation.

Figure 29: Recent drilling supports further expansion of underground resources and reserves


Elsewhere in Egypt, Centamin has defined seven other prospects on the wider 160km2 Sukari licence

area, the most advanced targets being Quartz Ridge and V Shear. Little in the way of recent exploration

work on these regional targets has been undertaken given the understandable focus on expanding

higher-grade underground resources at Sukari, but we believe they hold potential to emerge as satellite

projects to Sukari given all lie within potential truckable distance to the existing process plant.

Growth beyond Egypt The Arabian-Nubian geological shield in which Sukari sits extends further south from Egypt in eastern

Africa and across the Red Sea on the Arabian Peninsula, and several gold and base-metals operations

have been established in similar geology in these neighbouring countries. Centamin holds significant

exploration ground in Ethiopia’s portion of the shield, both directly (its wholly-owned Sheba properties in

the north of the country) and in joint venture arrangement with AIM-quoted Alecto Minerals plc (ALO LN,

which is exploring ground in the east and south of the country). Work on these properties to date has

yielded encouraging results but has yet to progress to resource definition.

Underground reserve

replenishment will be

required to maintain

450-500koz rate over

the longer term

32

Mining

Following the acquisition of ASX-quoted Ampella Mining Ltd early last year, Centamin also has a

substantial exploration footprint on the more established West African gold province. Ampella was

progressing exploration projects in both Burkina Faso and directly across the border in Cote d'Ivoire,

where it held exploration ground of some 2,200km2 and 1,200km2 respectively. The most advanced of

these projects is Batie West in Burkina Faso, where Ampella had drill-defined the 3.25Moz Konkera

resource (1.92Moz at 1.7g/t indicated and 1.33Moz at 1.7g/t inferred).

Since closing the acquisition, Centamin has initiated a systematic exploration programme at Batie West

aimed at better defining the wider resource potential of the project and the scope for developing a

sizeable gold operation. As of the end of Q3 2014, Centamin had drilled 16,247m of reverse-circulation

holes and 1,489m of diamond-core holes, focused mainly on surface regions of known prospect areas in

the vicinity of the existing resource. We expect the project to be advanced to at least scoping study

stage by early 2016, and consider it the company’s principal near-term growth catalyst.

Figure 30: Ampella acquisition has given Centamin a substantial exploration footprint in Burkina Faso


The 3.25Moz Konkera

resource holds

development

potential

33

Mining

Management

Josef El-Raghy – executive chairman Josef El-Raghy holds a Bachelor of Commerce degree from the University of Western Australia and had

a ten-year career in stock broking prior to Centamin. He was formerly a director of both CIBC Wood

Gundy and Paterson Ord Minnett. His expertise in international capital markets has greatly assisted

Centamin in its fundraising and development activities.

Andrew Pardey – chief executive Andrew Pardey was appointed CEO in January 2015, having previously served as group COO since

May 2012 (prior to which he was general manager of operations at Sukari since 2008). He was a driving

force in bringing Sukari into production, having joined during the mine's construction phase. Mr Pardey

holds a BSc in geology and has over 25 years' experience in the mining and exploration industry, having

previously held senior positions in Africa, Australia and other parts of the world with companies including

Guinor Gold Corp, AngloGold Ashanti and Kalgoorlie Consolidated Gold Mines.

Pierre Louw – chief financial officer Pierre Louw is a senior manager with 25 years’ experience in the mining industry with both major and

mid-tier gold and copper producers. Mr Louw is a member of the South African Institute of Professional

Accountants and has extensive international experience having worked in Tanzania, Australia, Zambia

and his native South Africa. Mr Louw was previously finance director for Equinox Ltd’s Lumwana copper

mine in Zambia (2005 to 2010), prior to which he worked as business and financial manager for

AngloGold Ashanti’s Geita gold mine in Tanzania (2000 to 2004). He has held management roles in the

AngloGold corporate office where he worked as Divisional Manager and with Johannesburg

Consolidated Investment Co, with whom he began his career in 1986. He holds a National Diploma in

financial accounting from the University of Johannesburg.

Andy Davidson – head of business development Prior to joining Centamin in August 2012, Andy Davidson worked for nine years as a mining analyst,

including three years as an equity research director with Numis Securities in London. Before this, Mr

Davidson was a senior minerals exploration geologist, including six years with Ashanti Goldfields closely

involved in the discovery and development of the world-class Geita project in Tanzania. Mr Davidson

holds an MSc in Mineral Project Appraisal from the Royal School of Mines and a first class honours

degree in geology.

Ed Haslam – senior independent non-executive director Ed Haslam is currently chairman of LSE-listed Talvivaara plc (since June 2007) and since May 2004

has been a non-executive director of Aquarius Platinum Ltd. In addition, Mr Haslam has been the senior

independent director of Namakwa Diamonds Ltd since December 2007. Previously, Mr Haslam had a

long and distinguished career with Lonmin plc, joining the group in 1981 and becoming chief executive

in 2000 before retiring in April 2004. Mr Haslam has also held various positions with Falconbridge Nickel

Mines and British Steel Corp, and was a director of Cluff Gold until September 2007.

Trevor Schultz – non-executive director Trevor Schultz holds a Masters Degree in economics from Cambridge University, an MSc Degree in

mining from Witwatersrand University and has completed the Advanced Management Programme at

Harvard University. With over 40 years' experience at executive management and board level with

leading international mining companies (including BHP Billiton, RTZ/CRA, Pegasus Gold and Ashanti

Goldfields), Mr Schultz was most recently chief executive of Guinor Gold Corp. His roles have included

the development of several new mining operations in Africa, South America and the USA, negotiations

with various governments and their agencies, and project financing and capital raisings. Mr Schultz is

currently a director of private equity group Pacific Road Capital Management.

34

Mining

35

Mining

Randgold Resources Limited Initiation of coverage Mining 6 February 2015

Premium quality, premium price HOLDPrice: 5550p Target price: 5400p Unconnected research

A stand-out performer in an industry that has struggled to create real value

through a multi-year gold bull cycle, Randgold has deservedly become the go-

to investment in the sector, and continues to deliver solid returns despite a

flattening growth profile and muted gold price. But such quality comes at a

(perhaps justifiable) premium price. We initiate with a HOLD and 5,400p TP.

Priority on profitability over growth alone. Randgold has established an enviable

suite of high-quality operations in Africa, its strict internal investment criteria (new

projects must have at least 3Moz reserve potential and be capable of delivering an IRR

of greater 20% at US$1,000/oz gold) ensuring a near three-fold increase in production

has been achieved over the past seven years (we estimate consolidated gold output of

(1.2Moz for 2014) whilst still maintaining a cash cost position comfortably below the

industry average (we estimate Randgold’s 2014 total cash costs at US$700/oz).

Capital discipline sees value passed to shareholders. But it is perhaps capital

discipline that has most distinguished Randgold from its peers over the past decade,

with exploration and new mine builds funded without regular recourse to equity capital

markets (the group has embarked on just one major equity raise over the past seven

years, and that was undertaken at a significant premium to NAV). Shareholders have

thus retained undiluted exposure to margins (and thus leverage to gold price), a rare

phenomenon in the gold sector over recent years and one which we feel helps explain

the premium at which Randgold’s shares now trade relative to its closest peers.

Well positioned to take advantage of current soft markets. This highly-valued scrip

coupled with an ungeared balance sheet and solid margins going forward mean

Randgold is advantageously positioned to execute on M&A opportunities should they

arise. The group’s success to date has been built on organic growth (of its five

operating mines, only Kibali was not a Randgold discovery), but with it now several

years since its last major discovery, we believe there may be an increased focus on

M&A going forward. The still depressed valuation of much of the gold sector may

provide a unique opportunity in this regard, but we are confident Randgold’s best-in-

class management team will remain characteristically disciplined – the problem may be

finding available assets that match the quality of its existing portfolio.

But looks fully priced. Trading at sector-leading P/E, EV/EBITDA and P/NAV

multiples of 30x, 14x and 1.8x respectively, Randgold is (justifiably) already fully priced

in our view, and in the absence of a meaningful grassroots discovery or value-accretive

M&A, we see no obvious catalyst for outperformance in the near to medium term (aside

from positive gold price movements). But the group’s low cost structure, ungeared

balance sheet, operational diversity and best-in-class management make it our top

defensive pick, and we initiate coverage with a HOLD.


8090

100110120130140150160



Key data

Key financials


Sales (US$m) 1,138 1,120 1,198

EBITDA (US$m) 540 514 554

EPS adj (US$) 3.02 2.75 2.86

DPS (US$) 0.50 0.50 0.60

PE adj (x) 28.1 30.9 29.7

EV/EBITDA (x) 14.5 15.2 14.1

Div yield (%) 0.59 0.59 0.70




Nick Chalmers UK Sales Desk

+44 (0)20 7710 7450 +44 (0)20 7710 7600 [email protected]

Stock code RRS LN

Market cap (£m) 5,156

FTSE All-Share / Mining - SEC 14322

1mth perf (%) 22.1

3mths perf (%) 40.4


12mth high-low (p) 5888 - 3868

Free float (%) 94

36

Mining


2013A 2014E 2015E 2016EProduction (koz) 910 1,173 1,253 1,273Gold price (US$/oz) 1,377 1,264 1,275 1,300Total cash costs (US$/oz) 715 700 664 660All-in sustaining costs (US$/oz) 785 767 727 724

2013A 2014E 2015E 2016EPE adj 28.0 30.7 29.6 30.4EV/EBITDA 14.5 15.2 14.1 12.9Div yield (%) 0.6 0.6 0.7 0.8EPS growth (%) na (8.9) 3.9 (2.6)


Sales 1,138 1,120 1,198 1,273Share of JV profits & other income 60 85 105 86Operating costs (740) (782) (861) (880)Other costs (49) (52) (52) (52)EBITDA 540 514 554 606EBITDA margin(%) 47.4 45.9 46.2 47.6Depreciation (131) (143) (164) (179)EBIT 409 371 389 427EBIT margin (%) 35.9 33.1 32.5 33.6Net interest (6) (1) 0 0PBT rep 402 370 389 427Tax (77) (79) (91) (130)Net Profit 326 290 298 297Non-controlling interests (47) (36) (33) (39)Attributable Net Profit 278 254 265 258EPS normalised (US$) 3.02 2.75 2.86 2.78DPS (US$) 0.50 0.50 0.60 0.65


Non current assets 2,970 3,056 2,994 2,881Current assets 406 446 704 1,088Non current liabilities 81 82 82 82Current liabilities 238 197 243 266Net debt/(cash) (35) (102) (347) (719)


Cash flow from operating activities 464 342 441 532Cash flow from investing activities (728) (224) (102) (66)Cash flow from financing activities (72) (65) (79) (94)Net cash flow (336) 52 259 371Cash at end of year 38 105 350 722


Randgold Resources is an Africa-focused gold mining and

exploration company with its shares quoted on the London Stock

Exchange and NASDAQ. The group currently operates five mines -

Loulo, Gounkoto and Morila in Mali, Tongon in Cote d'Ivoire and

Kibali in the DRC.

Senior management

Mark Bristow - chief executive

Graham Shuttleworth - chief financial officer

Christopher Coleman - non-executive chairman

Key dates

09/02/2015 - Q4 2014 and full-year results

07/05/2015 - Q1 2015 results

06/08/2015 - Q2 2015 results

Major shareholders

BlackRock - 17.3%

Van Eck - 7.9%

Wells Fargo & Co - 4.9%

Website

www.randgoldresources.com


37

Mining

Premium quality, premium price Randgold has established an unrivalled suite of high-quality operations in Africa, its strict internal

investment criteria (new projects must have at least 3Moz reserve potential and be capable of delivering

an IRR of >20% at US$1,000/oz gold) seeing a near three-fold increase in production delivered over the

past seven years (we estimate consolidated gold output of (1.17Moz for 2014) whilst maintaining a cash

cost position below the industry average (we estimate 2014 total cash costs at US$700/oz).

Figure 31: Group consolidated* production and cash cost forecasts

*Loulo-Gounkoto and Tongon fully consolidated, Morila and Kibali on Randgold’s equity-attributable share Source: Oriel Securities estimates

This unwavering commitment to growing profits over chasing ever-increasing production scale alone is

driven by what we consider to be a sector best-in-class management team, led by CEO Mark Bristow.

The group has steadfastly stuck to a mantra of disciplined organic growth, with four of its five operating

mines direct products of greenfield exploration programmes in West Africa, at an average discovery cost

of <US$20/oz. And Randgold has been equally disciplined when it comes to funding mine builds, re-

investing cash flow from operations rather than launching regular equity issues or taking out expensive

debt (features that have been common place across the wider gold industry over the past decade).

In our view it is this disciplined management of both costs and capital whilst growing the business,

together with a track-record of making significant grassroots discoveries, that has seen Randgold

become the marquee name in the UK-quoted gold equities market. Its shares trade at sector-leading

P/E, EV/EBITDA and P/NAV multiples of 30x, 14x and 1.8x respectively, a premium which would be

difficult to justify were it not for the fact that, quite simply, Randgold routinely outperforms its mid and

senior-tier peers, whether it be delivering against its production and cost targets or exploration success.

But with production now plateauing at around 1.3Moz pa, Randgold is entering a consolidation phase –

this in itself is not necessarily a negative, but if at least part of the group’s market premium reflects its

historic ability to find and develop company-transforming assets, then the pressure is on the recently

overhauled exploration team to find the next mine (it is now five years since the last major discovery,

Gounkoto). We would never rule out a bonanza find given Randgold’s track record and extensive

ground-holdings in prospective addresses, but M&A may now look more attractive to a group that has

historically been somewhat ambivalent towards it (the joint acquisition of Kibali its only major buy),

mindful of the risks of diluting rather than creating value on a per-share basis. Capital constraints across

the industry have resulted in many assets trading at substantial discounts to NPV, potentially providing a

unique opportunity for well-capitalised companies to unlock value through M&A.

Despite the lack of visible catalysts for outperformance in the near-to-medium term, we consider the

downside risks attached to Randgold are relatively low given the group’s low cost structure, ungeared

balance sheet, operational and geographical diversity and (perhaps most importantly) its disciplined

management approach. We therefore believe Randgold will continue to be the defensive gold

stock of choice in the UK market, and initiate coverage with a HOLD and 5,400p Target Price.

Production has

reached a sustainable

>1Moz pa at cash

costs of under

US$700/oz

Success built on

exploration – real

value creation

Premium market

rating justified in our

view

M&A may now look

more compelling

38

Mining

Valuation Our sum-of-the-parts core NAV estimate is detailed below, calculated using an 8% discount rate and our

House gold price assumption of US$1,300/oz (from 2016). We base our production and cost forecasts

on Randgold’s published short-term (five-year) and long-term (ten-year) market guidance, but assume

some reserve upside in our cash flow models according to the group’s guidance on future brownfield

developments (see pp42-43). Our NPV estimate of the undeveloped Massawa project is based on the

published 2010 prefeasibility study parameters – we consider this a more speculative component of our

NAV estimate given Randgold has yet to make an investment decision on the project, but believe the

risks could be to the upside given that current work is aimed at optimising the project economics.

Figure 32: Sum-of-parts valuation

US$m p/share

Loulo-Gounkoto NPV8% 1,903 1,355

Kibali NPV8% 1,373 978

Tongon NPV8% 740 527

Morila NPV8% 31 22

Massawa NPV8% 345 246

Exploration nominal 100 71

Projects valuation 4,493 3,198

Net cash (at 30/09/14) 61 43

In-the-money options 9 6


Company NAV 4,339 3,088

*Assuming 93m shares out and in-the-money options, and £1 = US$1.51 exchange rate Source: Oriel Securities estimates

Randgold’s current share price equates to approximately 1.8x our base-case core NAV estimate – an

US$1,800/oz gold price assumption would be required for our NAV to equate to the current price without

application of a multiple. The table below illustrates core NAV sensitivity to gold price and discount rate.

Figure 33: Core NAV (p/sh) sensitivity to long-term (from 2016) gold price assumption and discount rate

Gold price (US$/oz)

Discount rate 1,000 1,100 1,200 1,300* 1,400 1,500 1,600

12% 1,456 1,833 2,206 2,578 2,949 3,319 3,690

10% 1,587 2,000 2,407 2,812 3,218 3,622 4,026

8%* 1,742 2,196 2,643 3,088 3,533 3,977 4,421

5% 2,030 2,559 3,080 3,598 4,116 4,634 5,150


In contrast to most other UK-quoted gold companies, Randgold has a multi-year track-record of positive

operational cash flow, EBITDA and net profit, and we therefore feel it is appropriate to set our Target

Price in relation to its historic earnings and cash-flow multiples. Applying an equally-weighted blend

of Randgold’s three-year average EV/EBITDA, P/E and P/CF multiples to our 2015 EBITDA,

earnings and operational cash-flow forecasts results in a (rounded) Target Price of 5,400p. This

is within 5% of Randgold’s current share price, and we therefore recommend HOLD.

Figure 34: Historic market multiple and Target Price derivation

2012A 2013A 2014F 2015F

EBITDA US$m 665 540 512 554

EV/EBITDA x 12.8 10.7 12.2 11.9

Attributable Net Profit US$m 432 278 252 265

P/E x 20.6 20.8 25.1 22.2

Cash flow from operating activities US$m 148 464 339 441

P/CF x 60.4 12.5 18.6 30.5

Average multiple-derived Target Price GBp 5,400

*Assuming 93m shares out and in-the-money options, and £1 = US$1.50 exchange rate Source: Oriel Securities estimates, Bloomberg

39

Mining

Upcoming catalysts Q4 2014 and full-year results, and Gounkoto underground feasibility study (9 Feb 2015)

Q1 2015 results (7 May 2015)

Q2 2015 results (6 Aug 2015)

Risks Our Target Price is derived by applying historic market multiples to our 2015 forecasts – we

believe Randgold’s traditionally high multiples (relative to its mid and senior gold peers) reflects

what has to date been a strong forecast growth profile, but also market expectations that past

exploration successes will be repeated. Given the group is now entering somewhat of a

consolidation phase in terms of production, current multiples could be at risk over the longer

term if the company fails to deliver further exploration success and/or growth by other

means.

Our cash-flow models of Randgold’s key operations assume future reserve additions. The group

has a strong track-record of resource growth and reserve replenishment, but there can be no

guarantee that this will continue to be the case going forward.

Should the gold price fall below our long-term price assumption of US$1,300/oz for a prolonged

period of time there would be a material negative impact on our financial estimates and valuation.

40

Mining

Company overview

Since its creation around two decades ago as a junior explorer, Randgold has evolved into the UK

market’s pre-eminent gold company, and is the largest pure-gold play by market capitalisation quoted

on the LSE. Focused solely on Africa, exploration has been the foundation of the group’s success, with

major discoveries to date including the 7.5Moz Morila deposit, the 7Moz Yalea deposit and the 5.5Moz

Gounkoto deposit (all in Mali), the 4Moz Tongon deposit (Côte d’Ivoire) and the 3Moz Massawa deposit

(Senegal). With the exception of Massawa, all of these discoveries have been taken to production, and

the group recently built its fifth mine, the giant Kibali operation in the DRC, a product of its first major

foray into M&A (Kibali was jointly acquired with AngloGold Ashanti as a feasibility-stage project in 2009).

Figure 35: Randgold’s African footprint

Source: Randgold Resources

As at 31 December 2013, total gold resources under control stood at 45Moz (at an average grade of just

over 3g/t), of which Randgold’s equity-attributable share was 29Moz. Total and equity-attributable

reserves stood at 24Moz (at an average grade of 3.6g/t) and 15Moz respectively, with reserves reported

at an economic cut-off grade calculated at a conservative US$1,000/oz gold price assumption.

Figure 36: Resources* and reserves* by asset

Tonnes (Mt) Au grade (g/t) Total gold (Moz) Attributable (Moz)

Loulo-Gounkoto (80%) 101 4.3 14 11

Morila (40%) 29 0.7 1 0

Tongon (89%) 45 2.5 4 3

Massawa (83%) 59 2.4 5 4

Kibali (45%) 215 3.2 22 10

Total resources 448 3.1 45 29

Loulo-Gounkoto (80%) 50 4.7 8 6

Morila (40%) 14 0.7 0 0

Tongon (89%) 31 2.2 2 2

Massawa (83%) 21 3.1 2 2

Kibali (45%) 90 4.0 11 5

Total resources 206 3.6 24 15

*As at 31 Dec 2013 (resources reported at a cut-off grade based on US$1,500/z gold, reserves at US$1,000/oz) Source: Randgold Resources

Multiple >3Moz

resource grassroots

discoveries

41

Mining

This substantial reserve base sustains group consolidated (all assets >50% owned are fully

consolidated in Randgold’s accounts, assets <50% owned are JV accounted) production of >1Moz – we

estimate 1.2Moz for 2014 (up from 0.9Moz in 2013, reflecting the first full year of production contribution

from Kibali), rising to a steady-state of around 1.3Moz in 2015. Moreover, the inherent low operating

cost-structure of Randgold’s mines (driven by the relatively high-grade of its resources and

straightforward mining methods and processing techniques employed) enables this production base to

maintain comfortable gross operating margins (>30%) even at current gold pricing levels – we forecast

2014 total cash costs at US$700/oz (compared with US$715/oz in 2013), falling to US$664/oz in 2015.

Figure 7: Consolidated* production and cash cost forecasts

*Loulo-Gounkoto and Tongon fully consolidated, Morila and Kibali on Randgold’s equity-attributable share Source: Oriel Securities estimates

Loulo-Gounkoto Complex (Mali) – still the bedrock of group production The Loulo-Gounkoto complex in western Mali comprises the Yalea and Gara underground mines at

Loulo and the adjacent Gounkoto open-pit, with ore from both processed through a central facility at

Loulo. Geologically, the complex lies within the Kedougou-Kenieba inlier of Birimian rocks, which is host

to a number of other substantial gold deposits in both Mali and across the border in neighbouring

Senegal. Loulo-Gounkoto is owned 80% owned by Randgold and 20% by the Government of Mali.

Open-pit production commenced at Loulo in 2005, and gold output has built steadily thereafter, first with

the commissioning of the underground operations in 2007 and then with the addition of open-pit

production in 2011 from neighbouring Gounkoto (a greenfield discovery by Randgold two years earlier).

The complex is now firmly established as a long-life, high-production asset, with 2013’s gold production

total of 580koz set to be trumped by 2014 figures (we forecast 655koz, which would represent a beat on

Randgold’s production guidance of 640koz provided at the beginning of the year) following plant

upgrades. Production should increase to over 700koz pa by the end of 2016 on rising head grades, and

with total cash costs of <US$700/oz the operation should comfortably maintain solid operating margins,

even in the event of further deterioration in the gold price.

Kibali (DRC) – the emerging giant The large-scale Kibali project comprises 10 permits covering an area of 1,836km² in the Moto goldfields

of north-eastern DRC, some 560km north-east of the city of Kisangani and 150km west of the Ugandan

border town of Arua. The project is a joint venture between Randgold (45%), AngloGold Ashanti (45%)

and the Congolese para-statal organisation SOKIMO (10%).

After acquiring the project (in conjunction with AngloGold Ashanti) through the ~US$500m takeover of

junior Moto Goldmines in 2010, the 22Moz resource was subject to an intense period of evaluation and

re-working, culminating in a development plan for a ~600koz pa combined open-pit/underground

operation (backed by 11Moz of reserves) at an estimated eventual total capital outlay of US$1.8bn (of

which we estimate around 85% had been expended by the end of 2014).

Production broke

through 1Moz in 2014,

and we estimate at

~US$700/oz total

cash costs

Loulo-Gounkoto

could sustain

>700koz pa over the

longer term

42

Mining

The first phase of production (open pit) came on stream in late 2013, and we estimate 2014’s output at

530koz, which should rise to 600koz this year. The underground mine is still under construction, with

first ore expected to be accessed this year and steady-state levels reached in 2017. The higher-grade

(>5g/t) underground ore will replace a portion of the lower-grade (~3g/t) open-pit ore feed to the plant,

ensuring a ~600koz pa gold production rate is sustained over an estimated 17-year life. We estimate

total cash costs will average under US$600/oz, offering healthy margins even at current gold price

levels.

Tongon (Côte d’lvoire) – getting back on track Tongon is located in the north of Côte d’lvoire, 55km south of the border with Mali. Randgold holds an

89% equity interest, with the balance held by the Government of Côte d’lvoire (10%) and a local

company (1%). Brought into production in 2010, the open-pit has around five years remaining on current

reserves, but the operational life could be extended should nearby satellite discoveries be developed.

After a successful initial start-up focused on the oxide portion of reserves, production levels stuttered,

and costs rose, following the transition to treating 100% sulphide ore in 2012. Plant upgrade initiatives

began in 2013 to address efficiency issues, and the latest of these (an upgrade of the crushing circuit

(completed in Q4 2014) and flotation circuits (scheduled completion in Q1 2015), to improve throughput

rates and gold recovery levels respectively) are expected to bear fruit going forward, with production

increasing to a sustainable rate of around 300koz pa at total cash costs of around US$650/oz

(compared with 234koz at US$828/oz in 2013) by the end of next year.

Morila (Mali) – the original company maker keeps giving A joint venture between Randgold (40%), AngloGold Ashanti (40%) and the Government of Mali, Morila

was discovered, developed and part-funded by Randgold, and was the company’s first operating mine

with its commissioning in October 2000. Since that time it has produced over 6Moz (generating over

US$2bn of cash for its stakeholders), and though originally scheduled to close in 2013 (following its

conversion from open-pit to stockpile treatment operation in 2009) a pit pushback and planned tailings

re-treatment project could see it continue producing gold (albeit at much reduced levels) for another two

to three years, depending on the prevailing gold price.

Production upside opportunities Randgold’s five-year production plan (upon which our own forecasts are based) envisages steady-state

gold output of around 1.3Moz pa (on a partially consolidated basis) by the end of this year, based on

existing reserves and installed or in-development mining and processing facilities only. However, with

the exception of Morila, all the group’s existing operations have longer-term production upside on

conversion of resources not currently included in reserves and/or on the drilling and development of

known extensions/satellites to current resources. The company expects that some of these

opportunities (in addition to the development of a new stand-alone operation, a role it currently

envisages being fulfilled by the Massawa project in Senegal) will enable it to at least maintain current

production levels over the longer term (~10 years). We consider the following areas of production

upside potential have the greatest visibility at this stage, and include them in our modelled longer-term

production and cost estimates:

Gounkoto underground: Gounkoto has long been considered to have considerable potential at depth,

where mineralisation was not closed off when the initial open-pit resource was drilled. Drilling last year

confirmed the potential for a 1Moz underground reserve at an average grade of >5g/t, and we expect

this to underpin an imminent feasibility study of an underground mining operation. Randgold is targeting

2018 for the start of decline development, with the aim of getting Gounkoto underground up to full

production rates by the time the current open-pit reserves are exhausted around 2020, enabling the

wider Loulo-Gounkoto complex to maintain a >600koz pa production rate beyond that date. No formal

capex guidance has been provided for the underground project, but given the project largely comprises

a simple decline from the south of the existing open pit, the required investment should be relatively

modest (we estimate US$100m over 2-3 years).

Kibali will benefit

from higher-grade

underground ore

from next year

Plant upgrades to

bear fruit

Resource upside

opportunities could

see existing

operations sustain

1.3Moz pa rate for the

next ten years

43

Mining

Loulo underground extensions: Mineralisation at both the Yalea and Gara deposits is considered to

be open at depth below the current underground mining block models, and specific high-grade targets

are now the focus of further planned optimisation drilling with the aim of extending the overall life of the

operations but also bringing forward higher-grade ore in the mining schedule. Randgold does not

formally include any reserve upside at Yalea and Gara in its ten-year forecasts, but given its track-

record of reserve replenishment we feel comfortable modelling in some additions – we conservatively

assume 30% additional ounces to the current 5Moz reserve, at the same average grade of 5g/t.

Kibali further resource to reserve conversion: Randgold’s track-record of resource growth and

resource-to-reserve conversion at Kibali is impressive, the group having increased resources by 25% to

22Moz in the six years since acquiring the project and grown reserves from 4.5Moz to 12Moz during the

same period. Current in-fill drilling is focused on Gorumbwa, an area of inferred resources on the

southern flank of the current US$1,000/oz pit shell that was a centre of historical mining. The company

currently estimates that Gorumbwa has the potential to add >300koz to current open-pitable reserves.

Tongon in-fill and satellites to add reserves: Reserves at the Southern Zone pit, the predominant

source of production at Tongon, are sufficient to facilitate gold output at the ~300koz pa level until

around 2019-20. However, recent in-fill drilling has added 450koz to the resource inventory, a significant

portion of which we would expect to be converted to reserve (replenishing 2014 depletions from mining),

while further opportunity exists below the current grade-control drilling and immediately beneath the

base of the US$1,000/oz pit shell. Together with the potential for developing satellite discoveries

adjacent to the current open-pit operations, these areas of additional reserve potential give Randgold

confidence that Tongon’s projected life-of-mine could be extended by at least two years.

Massawa still under review: The Massawa project in Senegal has a substantial drill-defined resource

of 4.6Moz at 2.4g/t and has already been the subject of economic studies. However, a large proportion

of the ore is refractory, and given this added layer of complexity (Randgold is not experienced in

processing refractory ore), the project does not currently form part of the group’s five-year plan. But

Randgold is in the midst of reinterpreting the project geology and remains sufficiently optimistic on

development potential to include Massawa in its ten-year production plan, with current feasibility and

resource-modelling work focussed on the potential for discrete higher-grade zones of mineralisation

amenable to gravity gold recovery, which could materially improve the project economics. Better

understanding the detailed metallurgy of the refractory gold is also a key objective. We currently include

Massawa in our long-term estimates (assuming first production in 2020), but caution that the operational

and cost parameters that we model (which are based largely on the 2009/10 prefeasibility study) are

subject to (potentially significant) change with completion of the current optimisation work.

Figure 8: Randgold recently outlined its longer-range (ten-year) production targets


44

Mining

Exploration – still Randgold’s “engine” Since inception, Randgold’s business-development mantra has been value growth through exploration,

and to this day the group retains a substantial greenfield and brownfield exploration programme aimed

at delivering projects that can fulfil its development-decision minimum criteria of having reserve potential

of at least 3Moz and being capable of yielding an IRR of over 20% at US$1,000/oz gold. The exploration

team was recently restructured to reinvigorate and renew focus on this core value (we note it has been

five years’ since the group made its last major greenfield discovery, Gounkoto), and is now headed up

at group-level by Joel Holliday (who was West Africa exploration manager when Gounkoto was

discovered).

Under this new regime, the main exploration focus for 2015 is on the following areas:

Develop a more accurate geological model for Massawa to take the project up the value curve

Further explore targets on the Senegal-Mali shear zone, leveraging knowledge of the Loulo district

Refine knowledge of the existing exploration portfolio in Côte d’lvoire while continuing to build

overall ground-holding in the country (which management views as having one of the better mining

fiscal regimes in West Africa, but also considers to be relatively under-explored)

Continue resource expansion at Kibali while enlarging wider exploration footprint in Central Africa

Figure 9: Randgold has a substantial exploration footprint in both West (left-hand side) and Central (Right-hand side) Africa


Exploration team

recently reorganised

45

Mining

Management

Mark Bristow – chief executive Mark Bristow has been chief executive of Randgold since its inception, which was founded on his

pioneering exploration work in West Africa. Mr Bristow has subsequently led the company’s growth

through the discovery and development of world-class assets into a major gold-mining business. He has

also played a significant part in promoting the emergence of a sustainable mining industry in Africa. A

geologist with a PhD from Natal University, Mr Bristow has held board positions at a number of global

mining companies and is non-executive chairman of Rockwell Resources International.

Christopher Coleman – non-executive chairman Christopher Coleman is head of banking and asset finance and a managing director of Rothschild

Group. Mr Coleman serves on a number of other boards and committees of the Rothschild Group,

which he joined in 1989. A graduate of the London School of Economics, he was a non-executive

director of the Merchant Bank of Central Africa from 2001 to 2008. Mr Coleman is also a non-executive

director of the US company Papa John’s International Inc.

Graham Shuttleworth – finance director and chief financial officer Graham Shuttleworth joined Randgold in 2007, but has been associated with the company since its

inception, initially as part of the management team involved in listing the company on the LSE in 1997,

and subsequently as an advisor. A chartered accountant, Mr Shuttleworth was previously a managing

director and head of metals and mining for the Americas for the global investment banking division of

HSBC. In that role he led, or was involved in, a wide range of major mining industry transactions,

including Randgold’s NASDAQ listing and subsequent equity offerings.

Joel Holliday – group exploration manager Joel Holliday is a geologist with 18 years’ experience in minerals exploration in projects in Europe,

South America and across Africa. He joined Randgold in 2004 and until recently was exploration

manager for West Africa following several years as exploration manager for the Loulo district, during

which time the Gounkoto and Loulo 3 deposits were discovered.

Rod Quick – group general manager, evaluation Rod Quick is a trained geologist with 20 years’ experience in the gold mining industry. He joined

Randgold in 1996, and has been involved in the exploration, evaluation and production phases of all the

group’s projects since Morila. Mr Quick was given overall responsibility for all of Randgold’s project

development and evaluation activities in 2009.

Ted de Villiers – group general manager, mining A qualified mining engineer, Ted de Villiers has extensive experience in mining operations, contracting

and consulting. Mr de Villiers joined Randgold in 2010, with executive responsibility for the group’s

rapidly expanding mining operations, tasked with ensuring a consistent production stream.

Paul Gillot – group metallurgist and deputy general manager, capital projects Paul Gillot has 24 years’ operational and management experience in the mining industry and moved into

the project-development area with the commissioning of the Tongon mine. He has overall responsibility

for the group’s metallurgical activities.

46

Mining

Recommendation history

Amara Mining plc Centamin plc Randgold Resources Limited

Date Recommendation Date Recommendation Date Recommendation

Initiated today: BUY Initiated today: BUY Initiated today: HOLD

Disclosures on interests Oriel Securities is a market maker or liquidity provider in the securities of the following issuer(s): Amara Mining plc, Centamin plc and Randgold Resources Limited

CertificationsI, Nick Chalmers, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers, and I, Nick Chalmers,certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report.

47

Mining

Disclaimer

© Copyright 2015 Oriel Securities Ltd, all rights reserved.

Additional information with respect to any security referred to herein may be made available on request. This research material is a marketing communication. It is not investment research and has not been prepared in accordance with legal requirements designed to promote investment research independence and is also not subject to any prohibition on dealing ahead of the dissemination of investment research.

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CANADIAN DISTRIBUTION

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In contrast, under FCA rules, Oriel Securities must only disclose when it or any of its affiliates hold major shareholdings in the company covered in this report, including shareholdings exceeding 5% of such company’s total issued share capital. UNITED STATES’ DISTRIBUTION

This report is distributed in the United States by Oriel Securities and is intended for distribution in the United States only to "Major US Institutional Investors" as defined in Rule 15a-6 under the US Securities Exchange Act of 1934, as amended.

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Oriel Securities Limited, Registered office: 150 Cheapside, London, EC2V 6ET, Tel: 020 7710 7600, Registered in England No. 4373759

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