What’s Down the Track?GLEN COLGANOctober 2014

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All share price information is as at 20 October 2014.

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Argonaut’s Perspective

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Where are we at and where might we go?

How did we go?

The Broader Market vs Resources

Australian Economic Performance

Resource Sector Performance

Commodity Prices

Funding Companies + Funding Projects

Corporate Activity + Asset Transactions

Resource Services

Summary and Implications

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How did we go?

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The score card – a self assessment

Global economic growth is improving, albeit modestly, some improvement in the US, Europe coming off a low base, Japan providing strong stimulus and China continues to grow ½Stimulus by central authorities and accommodative policy settings will remain in place for some time to come Commodity prices are generally regarded as being at low levels and the expectation is for improvement over time Equity market conditions to fund exploration and development will remain challenging Project development may require alternative funding models and groups to bridge some of the financing gap A slow down has its benefits, recalibration of labour and input costs and broader expectations Investors, financiers and bankers are looking for resource companies with high quality projects run by high quality management Cashflow margins, earnings, capital discipline and share holder returns (dividends) are key metrics M + A activity, asset divestment and project consolidation at moderated valuations provide opportunity

Increased competition for fewer projects, margin pressure and low utilisation of gear Preferred exposure to production and higher quality projects ½Short-term lack of positive catalysts Stocks performed well, sector fully valued ½

Resources

Resource Services

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Mark

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Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14-20%

-15%

-10%

-5%

0%

5%

10%

The Broader Market vs. Resources

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Although Resources as a whole have underperformed the broader market in CY2014, the Small Resources in particular have dramatically underperformed

S&P/ASX 200 -4%

S&P/ASX 200 Resources -11%

S&P/ASX Small Resources -18%

Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-140

1000

2000

3000

4000

5000

6000

7000

8000

As bad as it gets for Small Resources...yet to get better

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The S&P/ASX Small Resources Index is currently trading at 10 year lows

S&P/ASX Small Resources 1789 points

S&P/ASX Small Resources Index 10-Year Historical Performance

Australian Economic Performance

7

Australia has outperformed the majority of developed economies although question marks remain over commodity prices

FY2009 FY2010 FY2011 FY2012 FY2013 FY2014

$1,376bn$1,403bn

$1,434bn

$1,486bn

$1,525bn

$1,569bnAustralian Real GDP FY2009-14

Iron Ore Spot Price vs. AUD:USD Exchange Rate (YTD)

Interest rates remain at historically low levels Having a benign effect on growth as the global

economy continues its slow recovery

AUD is trending downwards as demand for commodities retreats

Key commodity prices have fallen in recent months – most prominently iron ore and gold Softer AUD is providing somewhat of a cushioning

effect for Australian producers

Australian economic growth has been slightly below trend

Economic Update

Outlook

Australia’s economic outlook remains opaque as weak growth in key developed economies is expected to persist in the medium term

The RBA remains bound as it balances managing the exchange rate with preventing a housing bubble from inflating

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-1460

70

80

90

100

110

120

130

140

150

160

0.80

0.85

0.90

0.95

1.00

Iron Ore Spot Price (USD/t 62% CFR China) (LHS) AUD:USD (RHS)

Gold

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Gold equities have demonstrated their leverage to the physical, having outperformed early in 2014 and more recently underperforming as the gold price experiences weakness

Relative Performance of Gold Price in CY2014 Physical gold price decline has accelerated over the past two months although the coinciding AUD depreciation has provided some relief for Australian producers

The US economic recovery is beginning to take hold with interest rate expectations driving a firmer USD providing a headwind for gold: it is still premature for investors to turn to gold as a hedge against inflation

The geopolitical situation in the Ukraine and the Middle East may be providing the gold price with some support

Producers continue to concentrate on reduction of unit costs per ounce, reporting an “all-in” cost - the sub $1,000 AISC per ounce club is quite exclusive

Despite some operational failures and margin compression, gold equities look good value, although investors should stick to quality projects run by quality management

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Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-1480

90

100

110

120

130

140

150

Spot Gold (AUD) Spot Gold (USD) Gold Stock Composite HUI Index ASX 200

Jan-14

Jan-14

Jan-14

Feb-14

Feb-14

Feb-14

Mar-14

Mar-14

Mar-14

Apr-14

Apr-14

May-14

May-14

May-14

Jun-14

Jun-14

Jun-14

Jul-1

4Ju

l-14Ju

l-14

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Aug-14

Sep-14

Sep-14

Sep-14

Oct-14

Oct-14

40

60

80

100

120

140

160

Nickel LME Spot Copper LME Spot Zinc LME Spot Iron Ore 62% CFR

Looming deficit pushing prices higher with up to 10% of supply slated for closure in the next 3-4 years

Lack of capital & exploration to limit supply

Other Metals

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Nickel and zinc look positive, copper expected to improve, iron ore remains challenging

Relative Performance of Key Metal Commodities (YTD) After a strong rise from February following the

Indonesian ban on unprocessed mineral exports, nickel has declined; Philippines threatening with a similar ban

Ni producers making good returns following difficult conditions and a period of belt tightening

Commitment to brownfields exploration

+12.1%

+8.3%

-9.7%

-40.1%

Zinc

Nickel

Copper

Iron Ore A combination of lower demand and a surge of supply

from the major mining houses has been the driving factors behind the commodity’s decline

Rollercoaster likely to continue with re/de-stocking cycle while macro themes and uncertainty to keep pressure on prices

Higher cost producers appear increasingly marginal, hard decisions to come

Soft price assumes a large surplus Supply response is invariably over-estimated LME stocks are at the lowest levels in 6 years

Jan-14

Jan-14

Jan-14

Feb-14

Feb-14

Feb-14

Mar-14

Mar-14

Mar-14

Apr-14

Apr-14

May-14

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May-14

Jun-14

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4Ju

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l-14

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Aug-14

Aug-14

Sep-14

Sep-14

Oct-14

Oct-14

-100%

-50%

0%

50%

100%

150%

200%

Argonaut Nickel Composite Argonaut Copper Composite Argonaut Iron Ore Composite

Relative Performance of Metals Equities (YTD)

+68.1%

-4.0%

-61.7%

Jul-14 Aug-14 Sep-14 Oct-14-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Argonaut Nickel Composite Argonaut Copper CompositeArgonaut Iron Ore Composite

Jul-14 Aug-14 Sep-14 Oct-1480

85

90

95

100

105

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115

Nickel LME Spot Copper LME Spot Zinc LME SpotIron Ore 62% CFR

Other Metals – Recent Performance

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Commodity prices and resources equities have struggled so far in FY15

Relative Performance of Key Metal Commodities (Financial Year to Date)

-17.9%

+3.1%

-5.0%

-13.8%

Relative Performance of Metals Equities(Financial Year to Date)

+0.4%

-12.6%

-39.8%

The uranium market remains in surplus despite the cessation of the Russian HEU program in 2013. This is largely due to Japanese reactors remaining idle

Restart of Japanese reactors has been much slower than anticipated with all 48 operable reactors still offline

The uranium spot price remains below many producers’ cost of production, leading to some operations being placed onto care and maintenance i.e. Paladin’s Kayelekera operation

Triggers for a price recovery remain on the horizon as utilities resuming contracting

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14$0

$10

$20

$30

$40

$50

$60

$70

$80

Energy

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Energy markets have not remained immune to economic headwinds

Price (US$ per pound)

Uranium Spot Price

Monthly Uranium Prices: Long-term vs. Spot

Source: Cameco

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Oil & Gas Uranium

Weaker Chinese and European growth in combination with growing supply of West African and North Sea crude has seen the price of Brent fall relatively rapidly

Potential for US self sufficiency threatening to remove a substantial volume of demand from the market although China has balanced out the impact so far with increased consumption

Widespread geopolitical risks have so far failed to have any material impacts on the supply side

Gas is restricted to localised markets; demand for energy overseas has led to the development of a burgeoning LNG industry in Australia

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Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14

80.0

85.0

90.0

95.0

100.0

105.0

110.0

115.0

Brent Oil Price (USD/bbl)Price (US$ per barrel)

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FY2011 FY2012 FY2013 FY2014 FY2015 to date0

1000

2000

3000

4000

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7000

0

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10

15

20

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$2,786.9b

$5,869.5b

$3,416.6b$3,250.5b

$708.4b

30

36

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Raising Capital in a Challenging Equity Environment

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Resources sector players have taken advantage of buoyant market windows to raise capital

Equity Capital Markets Activity for WA-listed Resources Companies

Source: Business News WA

Value of ECM deals

Number of Resources IPOs

A cash crisis among small explorers

Small developers and exploration companies are experiencing a “cash crisis” as equity investors have become increasingly risk averse 212 metals & mining companies listed on the ASX currently have less than $500k in cash A further 101 companies currently have less than $1m in the bank

Lower commodity prices experienced over the past 12 months forced the industry into cost cutting and led to a 12 per cent decrease in exploration expenditure Western Australia has endured the largest fall in exploration expenditure, dropping 17 per cent Greenfields and brownfields exploration fell equally, suffering a 33 and 32 per cent decrease respectively

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Exploration activity has been subdued and a cash crisis has developed among small explorers

Mineral Exploration Expenditure, by deposit typeExploration Expenditure, by State

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Funding Projects

A number of projects continue to attract significant interest from equity investors, financiers and corporates alike Gold Road Resources (ASX: GOR) : $10m + $23m Sirius Resources (ASX: SIR) : $189m Northern Star (ASX: NST) : $100m Orbis Gold (ASX: OBS) : $20m (currently subject to a $160m takeover proposal from SEMAFO) Poseidon Nickel (ASX: POS) : $30m Saracen Minerals (ASX: SAR) : $61m Macphersons Resources (ASX: MRP) : $8.8m Phoenix Gold (ASX: PXG) : $16.8m Rox Resources (ASX: RXL) : $4.5m

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Good projects continue to attract equity capital

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-140.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

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Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-140.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50Gold Road Resources (ASX: GOR) YTDSirius Resources (ASX: SIR) YTD

Corporate Activity

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The focus for M+A in recent times has largely been around opportunistic acquisitions of quality assets

FY2014 Resources M+A deals by location of target

Source: Herbert Smith Freehills Public M&A Report 2014

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Resources M+A deals market value by CommodityRecent Resources M+A Transactions

Australian public M+A deal numbers rebounded in FY2014, driven by a surge of activity in the oil & gas sector

Western Australia leads the way in the quantity of M+A deals in the resources space

Gold leads all commodities both in terms of quantity and value of deals, as consolidation continues to be a prominent theme in the sector

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Date Bidder Target

Aug-14 BC Iron Iron Ore Holdings

Jul-14 Norton Goldfields Bullabulling

Jun-14 B2Gold Papillon Resources

May-14 Baosteel/Aurizon Aquila Resources

Feb-14 RTG Sierra

Jan-14 Eldorado Glory Resources

Dec-13 Centamin Ampella

Oct-13 Minotaur Exploration Breakaway ResourcesGold Iron Ore Other Coal Total

$1.74b

$1.35b

$0.89b

$0.41b

$2.42b

$1.42b

$0.52b

$0.12b

FY13FY14

Key Commentary

FY2012 FY2013 FY2014 FY2015 to date

$1,400m

$1,601m

$2,063m

$383m

Asset Transactions

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Individual asset transactions have become more attractive as companies are showing a preference to pick and choose specific assets to acquire

Asset Transaction Activity for WA-based Resources Companies

Source: Business News WA

The current metals and mining market has forced companies to rationalise asset portfolios Driven by the majors divesting non-core and more expensive

operations Quitting idle or exploration assets as company austerity initiatives

take effect

Recent examples include: Northern Star’s purchase of Jundee from Newmont for $82.5m,

51% of EKJV and Kanowna Belle from Barrick for $75m, and Plutonic from Barrick for $25m

Saracen’s acquisition of Thunderbox and Bannockburn from Norilsk for $20m plus a royalty

Poseidon Nickel’s purchase of Black Swan and Lake Johnston from Norilsk

Metals X’s $7.7m purchase of the Meekatharra gold operations of Reed Resources and its $40m acquisition of Alacer Gold’s Higginsville and South Kalgoorlie operations

Cassini Resources’ acquisition of BHP’s West Musgrave Project for $250k upfront and $10m after the first year of production

Talisman’s acquisition of the Sinclair Nickel mine from Glencore for $8m upfront

Other potential sales: BHP Billiton’s Nickel West business Cliffs’ Koolyanobbing iron assets

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Resource Services – FY14 Results and Commentary

The majority of resource services companies saw a decline in profit in FY14

“As bad as it gets” view in the industry – remains to be seen Conditions still very competitive Focus on balance sheet and cash flow, weak earnings forgiven

if balance sheet remains strong Pursuit of diversification Many investors have abandoned the sector and are taking a

“wait and see” attitude to future investment in resource services

Upgrades to earnings needed to drive share prices higher

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The Resource Services sector experienced a difficult past 12 months as mining investment tailed off and the industry entered into the production phase

Flat; 3%

Up; 34%

Down; 63%

Key Themes FY14 Profit compared to FY13

Outlook Commentary

FY11 1H12 FY12 1H13 FY13 1H14 FY140%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Positive Cautious or Neutral Negative

2010 2011 2012 2013 20140.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

14,000.0

16,000.0

18,000.0Construction Feasibility Maintenance Production

Val

ue ($

billi

on)

Resource Services Contracts Awarded

Resource Services – Historical P/E Multiples

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Price and earnings downgrades have kept resource services stocks within their 3 year trading band

Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-142x

4x

6x

8x

10x

12x

14x

16x

18x

Forw

ard

P/E

Average last 5 years = 10.0x

Average last 3 years = 9.3x

Current resource services P/E multiple = 8.8x

Historical Forward P/E Multiples

Summary/Implications

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Deep value, patience required

Resources Global economic growth remains subdued, Europe increasingly precarious, US improvement continues, China rebalancing Accommodative policy settings remain, however US QE measures winding down Commodities: Bulks continue under pressure; Base metals to improve; Precious metals to remain volatile Weaker AUD providing some relief High quality assets will attract significant equity funding; debt funding available for robust projects; specialist funds active Junior resources sector to remain cash deficient Producers will be prudent with capital expenditure and concentrate on cost cutting, putting pressure on service providers Key themes of cashflow margins, earnings, capital discipline and shareholder returns will remain central to investor focus Undervalued assets and companies remain vulnerable to opportunistic acquirers The Resources sector represents the best value in decades, with opportunities across the spectrum from producers, developers and

advanced explorers

Resource Services Highly competitive environment Margins tight and low utilisation of gear Construction in decline with limited visibility of project pipeline FY14 results a cyclical low, outlook commentary suggests “not getting worse”… remains to be seen Investor sentiment towards the sector remains negative, focus on cashflow generation and balance sheet strength Deep value but a continuing lack of positive catalysts

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