Due Diligence and Valuation Report
Arrowhead Code: 26-02-02 Company: Handa Mining Corporation Coverage initiated: September 18, 2018 Ticker: HAND This document: August 12, 2019 Fair share value bracket: Headquarters: Vancouver, Canada CAD 0.73 to CAD 0.76 (Blended Valuation) Share price (July 26, 2019): CAD 0.03i CEO Jan Nelson Analysts CFO Mark Lotz Natasha Agarwal Sumit Wadhwa Website: www.handamining.com [email protected] [email protected] Arrowhead is updating coverage on Handa Mining with a Market Data fair value of CAD 0.73 in the low bracket and CAD 0.76 in 52-Week Range: CAD 0.025– CAD 0.075ii the high bracket scenario, using the Net Present Value (NPV) and Relative Valuation Methods. Average Daily Volume: 3,360iii Market Cap (July 26, 2019): CAD 1.24 mniv Key Highlights: (1) The company is currently engaged in the development of a copper production plant in South Financial Forecast (in CAD) (FY Ending – Jan.) Africa, and the plant construction is expected to be completed by mid-September 2019; (2) The copper CAD '20E '21E '22E '23E '24E project is a low capex project, and Handa expects the High NI (‘000) 6,868 4,838 4,745 22,690 22,514 project to start generating cash flows from November High EPS 0.13 0.09 0.09 0.41 0.41 Low NI (‘000) 6,893 4,877 4,810 21,861 21,723 2019; (3) All permits and licenses for the project are in Low EPS 0.13 0.09 0.09 0.40 0.40 place and all technical work has been completed; (4) On October 23, 2018, the company announced the acquisition Company Overview: Headquartered in Canada, Handa of the Mejillones Phosphate Project located in Chile. The Mining Corporation (formerly Handa Copper Corporation) is company had formed a strategic alliance with ReThink a junior mining and development company focused on Resources to provide technical support to the project. battery metals (copper) and phosphate (soil fertilizer). With Optimization studies are currently underway for this projects in South Africa and Chile, the company was project, with a drip drilling program expected to be incorporated in 2009. In October 2018, Handa acquired the initiated by June-July 2020; (5) The company is now Mejillones Phosphate Project in Chile from Buccaneer Holding focused on strategic acquisitions in order to deliver cash Limited (BHL), and in February 2019, it signed a joint venture flow; (6) This cash flow generated from the copper oxide (JV) agreement on the Nababeep Copper Oxide Project with processing project is expected to fund the development of O’Okiep Copper Company (OCC) and SHIP Copper Company the Bankable Feasibility Study (BFS); (7) During FY 2019, (SHIP) to fund and build a copper processing plant in the the company raised CAD 0.70 mn and CAD 0.25 mn via Northern Cape Province of South Africa. Its registered office non-brokered private placements to finance the is in Vancouver, and the company is listed on the Toronto development of its Mejillones project, and for working Stock Exchange (TSX) Venture exchange with the symbol capital and general corporate purposes, respectively; (8) ‘HAND’. The company has also raised USD 0.75 mn via debt financing in order to proceed with the construction of its Turnaround from an explorer to producer: As part of its copper oxide plant; (9) Marek Kreczmer submitted his revitalized strategy, Handa Mining is expected to turn around resignation as a director on July 12, 2019, to pursue other from being an explorer of minerals and metals, to a producer opportunities. of minerals and metals, underpinned by the Copper and Phosphate acquisitions in the last nine months. Key Risks: Being a junior mining company, it is exposed to project development risk, commodity price and Copper Oxide Project to help the company become exchange rate risk, financing risk, and regulatory and cash flow positive within the next 5 months: The environmental risks. Nababeep Copper Oxide JV signed by the company should increase and expedite the company’s cash generating ability. Valuation and Assumptionsv: Given the due diligence The project is expected to turn the company’s financials cash and valuation estimates, Arrowhead believes that Handa positive from the end of November 2019. Mining’s fair share value lies in the CAD 0.73 to CAD 0.76 bracket, calculated using Blended Valuation method; with Progress on the Mejillones Phosphate Project: Cash 60% weightage to NPV method and 40% weightage to flows from the Copper Oxide project should allow the EV/Resource multiple based valuation. Our NPV model company to self-fund and proceed with the Bankable suggests a fair value bracket of CAD 1.13 to CAD 1.18, Feasibility Study (BFS) on the Mejillones Phosphate project. while relative valuation provides a fair value of CAD 0.14.
Handa Mining Corporation – Arrowhead BID 1 TSX-V: HAND Due Diligence and Valuation Report See important disclosures on page 31 of this report
Table of Contents 1. SUMMARY AND OUTLOOK ...... 4 2. BUSINESS OVERVIEW ...... 5 2.1 Financial Overview ...... 6 2.2 Nababeep Copper Oxide Processing Project: The JV Agreement ...... 7 2.2.1 Property Description ...... 7 2.2.2 Scoping Studies and Test Work Results ...... 7 2.2.3 Process...... 7 2.2.4 Project Cost, Revenue and Time Estimates ...... 8 2.2.5 Project Acquisition Consideration and Profit Share ...... 8 2.2.5 Project Significance ...... 8 2.3 The Mejillones Phosphate Project ...... 8 2.3.1 Property Description ...... 8 2.3.2 Property Location ...... 8 2.3.3 Climate ...... 9 2.32.4 Local Resources and Infrastructure ...... 9 2.3.5 History of the Project ...... 9 2.3.6 Exploration ...... 9 2.3.7 Drilling ...... 9 2.3.8 Project Cost, Revenue, and Time Estimates ...... 9 2.3.9 Project Acquisition Consideration ...... 9 2.3.10 Project Milestones ...... 10 2.4 Company Milestones ...... 10 2.5 Business Model ...... 11 2.6 Corporate Strategy and Future Outlook ...... 11 2.7 Company Premiums ...... 11 2.8 Company Risks ...... 12 2.9 Shareholding Pattern ...... 13 2.10 Listing and Contact Details ...... 13 3. NEWS ...... 14 4. MANAGEMENT AND GOVERNANCE...... 15 5. INDUSTRY OVERVIEW ...... 16 5.1 Non-Ferrous Metals and Mineral Exploration Industry,, ...... 16 5.2 The Copper Industry ...... 16 5.2.1 Copper End-User Applications ...... 17 5.2.2 Copper Production, ...... 17 5.2.3 Copper Consumption ...... 18 5.2.4 Demand Outlook ...... 20 5.3 The Phosphate Industry, ...... 20 5.3.1 Phosphate End-User Applications, ...... 21 5.3.2 Phosphate Production, ...... 22 5.3.3 Phosphate Consumption ...... 23 5.4 Market Risks ...... 24 5.4.1 Macroeconomic Factors ...... 24 5.4.2 Operating Cash flows at Production Stage ...... 24 5.4.3 Country Environment ...... 24 5.4.4 Weather Conditions ...... 24 5.5 Lifecycle of Junior Mining Companies ...... 24 5.6 Regulatory Framework ...... 25 5.6.1 Regulations in Chile ...... 25 5.6.2 Regulatory Framework in South Africa ...... 26 6. VALUATION ...... 27 6.1 Net Present Value ...... 27 6.2 Relative Valuation ...... 27 6.3 Blended Valuation ...... 28
Handa Mining Corporation – Arrowhead BID 2 TSX-V: HAND Due Diligence and Valuation Report See important disclosures on page 31 of this report
7. APPENDIX ...... 30 7.1 Handa Mining’s Balance Sheet Forecast ...... 30 8. ANALYST CERTIFICATIONS ...... 31 9. NOTES AND REFERENCES...... 32
Handa Mining Corporation – Arrowhead BID 3 TSX-V: HAND Due Diligence and Valuation Report See important disclosures on page 31 of this report
1. Summary and Outlook We are updating coverage on Handa Mining Corporation. The company, headquartered in Vancouver (Canada), is a junior mineral exploration company. The company’s fair share value is CAD 0.73 in the low bracket scenario and CAD 0.76 in the high bracket scenario (Blended Valuation Method).
Key Highlightsvi:
1) In June 2018, the company changed its name from Handa Copper Corporation to Handa Mining Corporation. Also, its stock symbol changed from “HEC” to “HAND”.
2) After being inactive in the market for a while, the company has now revitalized its board and financing strategy. The company is poised to work with a low capital and cost base that deliver a significant profit margin. As part of its revitalized strategy, the company will also be pursuing JV opportunities to gain further exposure to surface mining opportunities which are very close to or in production with a low development capital profile.
3) On February 15, 2019, the company announced that it had signed a JV agreement with OCC and SHIP to fund and build a processing plant that will recover copper from broken rock lying on the surface of properties located in the Northern Cape Province of South Africa, approximately 600 kilometers (km) north of Cape Town. For the first 24 months of full production, Handa will retain 75% of the profit generated. After this period, the company will retain 33% of the profit. Handa intends to high grade the project within the first 24 months to realize optimum return.
4) On October 23, 2018, Handa Mining announced the successful completion of the acquisition of the Mejillones Phosphate Project from BHL, following an agreement signed in January 2018. Accordingly, Handa has acquired from BHL and its subsidiaries 100% ownership of 21 exploration and exploitation concessions believed to be highly prospective for phosphate production. The project covers a contiguous area of approximately 8,200 hectares (ha) situated south of the town and the deep-water port of Mejillones approximately 60 km north of Antofagasta.
5) In October 2018, the company had completed a two-tranche non-brokered private placement financing, raising CAD 0.70 mn from the sale of 14 mn units at CAD 0.05 each. The first tranche raising CAD 0.39 mn (7.8 mn units) was completed on October 2, 2018, while the second tranche worth CAD 0.31 mn (6.2 mn units) was completed on October 23, 2018. All units issued consisted of one common share of the company and one common share purchase warrant. The company also issued 5 mn shares with a fair value of CAD 0.33 mn in connection with the Mejillones project acquisition.
6) For FY 2020, the company has already announced a CAD 0.25 mn non-brokered private placement for 5 mn units at CAD 0.05/unit, and a proposed USD 0.75 mn debt financing. During the year, Handa will also be issuing 5.2 mn common shares to OCC and SHIP (with the balance 2 mn shares issuable 2 years after commencement of production), in accordance with the copper project JV agreement.
7) Venmyn Deloitte, a wholly owned subsidiary of Deloitte, is expected to complete the BFS for the Mejillones phosphate project of Handa Mining. The key priority to be addressed is the mining cost, and the primary focus on Mejillones is to address this issue via a conceptual mine design. These studies are expected to take ~6 months to complete. The expected positive outcome of these will then lead to the initiation of a drilling program to define a reserve and allow for a bulk sample for final metallurgical test work.
8) Marek Kreczmer submitted his resignation as a director on July 12, 2019, to pursue other opportunities.
Handa Mining Corporation – Arrowhead BID 4 TSX-V: HAND Due Diligence and Valuation Report See important disclosures on page 31 of this report
2. Business Overviewvii Incorporated under the laws of the Province of British Columbia on November 10, 2009, Handa Mining is a junior mineral exploration company engaged in the acquisition, exploration and development of prospective precious metal, base metal and other mineral exploration projects in South Africa and Chile. Handa Mining’s head office is in Vancouver, British Columbia, Canada. On February 15, 2019, Handa signed a JV agreement with OCC and SHIP to fund and build a processing plant, located in the Northern Cape Province of South Africa, approximately 600 km north of Cape Town. The capex required for this project is low, and this project is expected to turn the company’s financials cash positive from the end of November 2019. The copper project transitions Handa from being an explorer to becoming a producer.
Exhibit 1: Nababeep Copper Oxide Project
Exhibit 2: Mejillones Phosphate Project
Handa Mining Corporation – Arrowhead BID 5 TSX-V: HAND Due Diligence and Valuation Report See important disclosures on page 31 of this report
The company is also involved in evaluation of the mineralization potential of the Mejillones Phosphate Project – Exhibit 2. The project is located approximately 60 km north of Antofagasta, Chile. Minrom Consulting was hired by the company in March 2018 to conduct a technical study on the work performed on the phosphate deposit. This project is currently in the optimization-study phase and a concept mining study is underway on the project.
2.1 Financial Overviewviii Handa Mining has not yet started generating any revenue. However, it has incurred acquisition costs for the mines and costs related to mining and exploration relating to the phosphate project. As a result, the company has not generated any profits until now. Q1 2020 Results Being in the exploration phase, Handa Mining has not generated any revenues until now. The exploration costs and license fees decreased 21.6% year-on-year (YoY) from CAD 16,411 in Q1 2019 to CAD 12,867 in Q1 2020. The filing and regulatory fees also decreased 0.6% YoY to CAD 9,172 in Q1 2020 from CAD 9,226 in Q1 2019. The office and administrative expenses for the company increased 41.0% YoY to CAD 5,986 in Q1 2020 from CAD 4,244 in Q1 2019. Professional fees also increased considerably by 109.4% YoY to CAD 18,583 in Q1 2020 from CAD 8,873 in Q1 2019, because of the under accrual of the audit fees for FY 2019. The management and consulting fees increased by 28.1% YoY to CAD 90,403 in Q1 2020 from CAD 70,551 in Q1 2019. The increase was largely related to the compensation paid to the new executive chairman in Q1 2020. For Q1 2020, the executive chairman was paid CAD 18,000 compared with nothing for Q1 2019. In Q2 2019, Handa Mining appointed new board members with more active participation in management of the company. Hence, it incurred director fees worth CAD 50,325 in Q1 2020 as compared with none in Q1 2019. The company’s interest expenses stood at CAD 4,029 in Q1 2020. As a result of all the above, the net loss for Q1 2020 was recorded at CAD 204,951 compared with CAD 122,035 in Q1 2019. On March 25, 2019, Handa Mining entered into loan agreements for an aggregate amount of CAD 468,605 (USD 350,000) to fund the start of construction of the copper plant. On April 30, 2019, Handa Mining had a cash balance of CAD 409,323 on its balance sheet.
FY 2019 Results In FY 2019, the company’s net loss increased by 30% on a YoY basis to CAD 0.91 mn from CAD 0.70 mn reported in FY 2018. However, the company intends to begin generating cash flows from its Nababeep Copper Oxide project from October 2019 end, allowing the company to fund the BFS on its Mejillones Phosphate project. A positive cash position is also expected to help the company take advantage of growth opportunities within the copper space that will further increase its cash generative ability. Handa Mining is expected to consider paying out its first dividend at the end of FY 2020. Currently, the company is entitled to 70% of profits generated by its JV Copper Oxide plant (for the first 24 months), after which its share in profits will decline to 33% for the remaining life of the mine (LOM). Handa Mining has been raising money via both equity and debt financing to provide for: (a) copper plant construction, and (b) working capital and general corporate purposes. For FY 2019, key highlights of the company’s financial performance include: An increase in non-current assets from 0 in FY 2018 to CAD 0.47 mn in FY 2019, to a large extent attributable to the CAD 0.40 mn relating to the acquisition of the Mejillones property (as reflected in the exploration and evaluation assets). The company’s accumulated deficit rose from CAD 7.6 mn in FY 2018 to CAD 8.5 mn in FY 2019. However, loss per share held stable at CAD 0.03 over the comparable years. Total shareholders’ equity increased from CAD 0.34 mn on January 31, 2018, to CAD 0.65 mn on January 31, 2019. On January 31, 2019, the number of shares on issue was up by 19 mn – from 29.4 mn on January 31, 2018, to 48.4 mn on January 31, 2019 – 14 mn issued pursuant to a private placement, and 5 mn being issued to BHL towards the acquisition of the Mejillones project. On January 31, 2019, total assets of the company had increased to CAD 0.80 mn from CAD 0.38 mn on January 31, 2018. The company’s cash and cash equivalents stood at CAD 0.30 mn as on January 31, 2019.
Handa Mining Corporation – Arrowhead BID 6 TSX-V: HAND Due Diligence and Valuation Report See important disclosures on page 31 of this report
2.2 Nababeep Copper Oxide Processing Project: The JV Agreement In February 2019, Handa Mining entered into a JV agreement with OCC and SHIP to recover copper from broken rock lying on the surface of properties held by the property owners located in the Northern Cape Province of South Africa, approximately 600 km north of Cape Town. 2.2.1 Property Description The project entails processing historic rock dumps containing copper oxide. Historically, the surface was mined by OCC, which was involved in processing high-grade sulphide material from the rock dumps. The OCC plant was not designed to treat oxide ore, and as a result, this material was stockpiled. It is this material that is now being targeted. The processing plant is located at the Copper Mine of Okiep situated at the village of Nababeep in the Northern Cape Region, South Africa.
The area has good infrastructural facilities and this acts a positive for the company. The first material is to be processed at the site of the processing plant, and hence, no transport costs are expected to be incurred. Further, the cost of transporting the remaining oxide material to site is also low and fixed. This will help the company keep a check on its operating expenses, and thus help generate a higher profit.
2.2.2 Scoping Studies and Test Work Results Initial scoping studies have been completed at the site and have indicated that processing the material is financially viable. Subsequently, METS Projects has been commissioned to complete a more detailed costing and feasibility study. Metallurgical test work has been completed on selected samples by SGS, Randburg, South Africa. The details of the technical teams are mentioned below.
MINRON (Pty) Ltd : Geological consultants (South Africa) – Resource sign off;
METS Process Design & Engineering (South Africa) – Process design and construction; and
ENC Minerals (Pty) Ltd Metallurgical consultants (South Africa) – Metallurgical & process flow.
2.2.3 Process The project requires treating existing ore stockpiles on the site. These stockpiles contain copper oxide ore that can be leached in sulphuric acid, purified by solvent extraction and recovered by electrowinning. Thus, to produce a high-value cathode copper product, a purification step is required prior to electrowinning.
Exhibit 4: Copper Oxide Project Process Flowix
Thus, the processing circuit selected for the purpose includes the following steps:
1. Upfront crushing and screening (existing)
2. Acid copper leaching
Handa Mining Corporation – Arrowhead BID 7 TSX-V: HAND Due Diligence and Valuation Report See important disclosures on page 31 of this report
3. Solvent extraction
4. Electro-winning
Tailings from the process would be dewatered and a dry residue cake produced for future brick making. Screen oversize (>1mm) would be stockpiled for potential future processing in phase 2 of the project.
2.2.4 Project Cost, Revenue and Time Estimates Handa Mining has involved METS Projects to assist with developing a feasibility report to determine the costing and process design for a copper oxide plant capable of treating 12 tons per hour of feed material from historical surface Run of Mine (ROM) stockpiles. The feed grade of the oxide material will vary between 2% and 6% copper. The feasibility study indicated an initial capital requirement estimate of USD 0.75 mn for the project. The financing cost for the plant was funded in two tranches:
1. USD 350,000 of the financing was advanced by a consortium of five arm’s length lenders who provided the funds to Handa on an interest-free basis. The funds are repayable within two years of commencement of production at the plant and the consortium lenders will be entitled to share in an aggregate of 35% of the profit interest attributable to the group on a pro rata basis. In addition, an aggregate of 1,365,000 common shares of Handa and 2,275,000 warrants granted to the consortium lenders. Each bonus warrant will entitle a lender to acquire one common share of Handa at a price of USD 0.05 for a period of four years from the date of issuance.
2. USD 400,000 of the financing was advanced by Mastomode (Pty) Ltd., a company partially owned by one of the directors of Handa and backed by a private lender group. The funds advanced by Mastomode have been provided on an interest free basis and will mature on the maturity date. Mastomode will be entitled to 45% of the profit interest attributable to the group but will not receive any bonus shares or bonus warrants.
2.2.5 Project Acquisition Consideration and Profit Share As part of the agreement, Handa will issue an aggregate of 5.2 mn common shares to the Property Owners; 3.2 mn shares being issued immediately, and the remaining 2 mn being issued following 2 years of production from the plant. For the first 24 months of production, Handa would be entitled to 75% of any profits generated by the plant. Following this period, the company’s share would decrease to 33% of profits attributable to Handa and its partners.
2.2.5 Project Significance The copper project undertaken by Handa Mining marks a significant transition phase for the company by being likely to turn it into a positive cash flow generating company by November 2019. Since the project is a low capex oriented project, the company stands to benefit from quicker transition time, as well as lower funding requirements. Further, the project entails low time risk as all infrastructure and civil requirements are already in place, and low permitting risk as all permits for operation have been acquired. The positive cash flows generated from this project are also expected to provide funding for the BFS for the Mejillones Phosphate Project, discussed below.
2.3 The Mejillones Phosphate Project Handa Mining has acquired Mejillones Phosphate project, for which the technical study and funding have been completed. The project is in the optimization study phase. The exploration of the Mejillones Phosphate Project consisted of reverse circulation (RC) drilling. The Mejillones Phosphate project is located on the Mejillones Peninsula some 60 km north of Antofagasta.
2.3.1 Property Description The Mejillones Phosphate Project covers an area of approximately 8,200 ha. The area consists of a conglomerate of smaller rectangular licenses, which combined, produce the license area. The conglomerate of these smaller licenses comprises the current license area covering 6,300 ha.
2.3.2 Property Location The project is located approximately 60 km north of Antofagasta, bordering the harbor town of Mejillones. The local topography within the license area is generally flat desert terrain, making it easily accessible through either the well- maintained B-272 tarred road or the national (N-1) tarred road.
Handa Mining Corporation – Arrowhead BID 8 TSX-V: HAND Due Diligence and Valuation Report See important disclosures on page 31 of this report
2.3.3 Climate The climate is dominated by virtually no precipitation and average temperatures range between 25°C and 13°C.
2.32.4 Local Resources and Infrastructure The local infrastructure is well-developed with a deep-sea port located within the town of Mejillones, some 5 km from the project site. A well-maintained railroad stretches from Antofagasta to the port in Mejillones, through the project area. High-voltage power lines also cross the project area.
2.3.5 History of the Project The Mejillones Phosphate project was previously owned by Mines Global, which also owned an additional license located close by.
2.3.6 Exploration Historically, no exploration work has been carried out in the area. Recently, exploration work was conducted on the Mejillones Phosphate deposit consisting of 5 scout RC drill holes for a total of 376 meters (m). The primary objective of this drilling campaign was to identify the phosphate-bearing lithology, establish the lateral continuity of the mineralized strata, and determine whether the P2O5 can support economic conditions. The drill hole positions were spread out within the licensed area to obtain a good geographical spread. The formation of the Pampa Mejillones basin, along with the vertical sedimentary cycles and lateral phosphorite distribution, will form the base of the proposed exploration technique. The phosphate mineralization will be irrepressibly of the lower weight percentage grade towards the northwest but will contain thicker successions of mineralized phosphorite associated with finer grained carbonaceous stratigraphy. The shallow sedimentary environment towards the southeast suggests that the phosphate mineralization beds are likely to be reworked due to wave action, resulting in thinner, higher weight percentage P2O5, clastic-phosphorite beds.
2.3.7 Drilling No historical drilling programs have been performed on the phosphate deposit currently under evaluation. The recent RC drilling campaign consisted of 5 RC scouting drill holes delivering a total of 376 m. Drilling commenced in December 2015 for 5 days. The data supplied to Minrom Consulting included the weight of each 1 m material recovered from the scout RC drilling campaign. The results indicate that the coarser grained lithologies (conglomerate and sandstone) produced a higher recovered mass overall than the finer grained lithologies (coquina, limestone and mudstone). Using these recovered weights, along with the mentioned drill hole diameter of 5½” (140 mm), a theoretical recovery mass, and consequently a percentage recovery, was estimated per lithology. The results indicated that the RC drilling recovered an average of 65% of the conglomerate material, 87% of the coquina, 58% of the limestone, 47% of the mudstone, and 69% of the sandstone material. The company expects to conduct a Sonic drilling program on the site in June-July 2020.
2.3.8 Project Cost, Revenue, and Time Estimates The project is estimated to cost USD 2 mn to be mine-ready, and another USD 5 mn to build the mine. Once in production, Handa Mining expects the project to deliver approximately USD 20 mn of free cash flows each month for more than 30 years. The project will require 18 months to be mine-ready, and an additional 12 months to commence production.
2.3.9 Project Acquisition Consideration Handa Mining has acquired 100% interest in the Mejillones Phosphate Project, Chile, from BHL. In consideration for the acquisition, Handa Mining has agreed to the following terms: The company has issued a total of 5 mn shares to BHL. The shares are subject to a hold period of 18 months. Upon making the decision to pursue development of the project, the company will: Issue to BHL an additional 7.5 mn shares, subject to a holding period of 12 months from the date of issuance Pay to BHL a cash amount of USD 3 mn in two tranches; the first tranche of USD 1.5 mn is to be paid six months from the date the company makes the decision to develop the project, and the second tranche of USD 1.5 mn is to be paid six months from the first tranche payment date
Handa Mining Corporation – Arrowhead BID 9 TSX-V: HAND Due Diligence and Valuation Report See important disclosures on page 31 of this report
Once in production, a royalty of 1.5% on revenue will be granted over the LOM of the project. At the company’s election, this right to royalty can be bought outright for an amount of USD 8 mn Acquisition of the project will be subject to delivery of a NI 43-101 report and regulatory and shareholder approvals where required If Handa Mining decides against proceeding with the project within 1 year from the acquisition date (October 23, 2019), then BHL has the option to buy back the shares of Mines Global for 1 USD.
2.3.10 Project Milestones
Exhibit 3: Significant milestones, progress, and expected timelines
01 02 03 04 05
Acquisition of Funding Drilling Mine Plan Feasibility Plan Mejillones
August 2020 December 2020 May 2021
Completed Completed Expected Expected Expected
2.4 Company Milestones
Exhibit 5: Handa Mining Milestonesx
Year/ Event Period
2009 Incorporated under the laws of the Province of British Columbia.
Undertook an arrangement with Hana Mining Ltd. (“Hana”) and Hana Mining Botswana (Proprietary) Ltd. (“Hana Botswana”), wherein Hana was to transfer the ownership of Hana Botswana to the company, with the intention of building a new base metals company. 2010
Obtained a stock exchange listing for its common shares and commenced trading on December 14, 2010, under the symbol “HML” on the TSX Venture Exchange. Acquired 100% interest in the Maboudou and Banda-Kayes projects covering approximately 8,100 2013 sq. km located in the Republic of Congo.
Entered into a letter agreement with Ishara Investment Limited to acquire up to 100% interest in 2014 the Divinie and Makabana prospecting authorizations in the Republic of Congo (RoC).
Signed option agreements for two exclusive research permits in the RoC (Brazzaville) referred to as the ‘Maboudou Project’ and ‘Banda Kayes Project’.
Signed option agreements with respect to two non-exclusive prospecting authorizations in the RoC 2015 (Brazzaville) referred to as the ‘Makabana Permit’ and the ‘Divinie Permit.’
Discontinued its exploration program on the Kuke Property in Botswana as the exploration licenses expired and were no longer active in the country.
Handa Mining Corporation – Arrowhead BID 10 TSX-V: HAND Due Diligence and Valuation Report See important disclosures on page 31 of this report
Acquired the Mejillones Phosphate project in Chile from BHL.
2018 Changed its name from Handa Copper Corporation to Handa Mining.
Decided to discontinue with the Mabadou and Banda-Kayes properties.
2019 Entered a JV with OCC and SHIP to recover copper from their property in South Africa.
2.5 Business Model Handa Mining Corporation focuses on development and mining of minerals and metals that is classified as battery minerals and metals for which the demand will far outstrip the supply and on products that will enable faster crop production. The focus is therefore on supplying the electrical green revolution and infrastructure requirements of a fast- growing world together with the requirement for organic fertilizer that can assist in faster crop production for a growing global population.
2.6 Corporate Strategy and Future Outlook 2.6.1 Strategyxi The company’s strategy mainly focuses on optimizing shareholder’s wealth by focusing attention on collection of field data, interpretation, and evaluation of potential sites for development. Upon successful completion of due diligence, the company has acquired the Mejillones phosphate project, Chile. The original Mejillones Phosphate Project’s license covers an area of approximately 13,000 ha. However, sustained modern exploration has never been carried out. Handa Mining would be the first among competitors to explore and develop this area. Handa Mining revamped its approach of doing business as the conventional way was not yielding positive returns for them and their shareholders. The company formed a strategic compact with ReThink Resources to get financial and technical assistance for the development of their Mejillones Project without further dilution of equity. Now, the company is keen to work with a low capital and cost base to deliver significant profit margin. As part of its revitalized strategy, the company will also be pursuing JV opportunities to gain further exposure to surface mining opportunities which are very close to or in production. The company’s current JV with OCC and SHIP is the foundation stone towards such initiatives, and its turnaround from being an explorer to a producer.
2.6.2 Outlook Handa Mining is looking to accelerate its mining activities by bridging the long-time lag between when a new deposit is found and when it is brought into production. The company’s approach to new projects and shift of focus towards assets that allow for rapid development, have low capital cost requirements and can deliver cash flow within a short period of time is expected to enhance the company’s performance and give it revenue visibility.
For this purpose, the company would be taking advantage of further growth opportunities within the copper space to increase the cash-generative ability of the business.
2.7 Company Premiumsxii Revitalized strategy: Handa Mining has resolved to transition from being an explorer to a producer. This transformation is expected to help the company attain and retain a cash flow positive position, which would also enable it to take advantage of further growth opportunities within the copper space. Access to interest-free debt funding: The company hasn’t had to resort to long-term debt financing even though it has two projects on hand. For its Mejillones Phosphate project, it has got into a strategic alliance with ReThink Resources who would also be providing financial assistance, in exchange for shares and royalty fee. For the Nababeep Copper Oxide JV, Handa Mining has secured the required funding from its directors and private funders, in exchange for shares, warrants and profit sharing.
Handa Mining Corporation – Arrowhead BID 11 TSX-V: HAND Due Diligence and Valuation Report See important disclosures on page 31 of this report
Mejillones Phosphate project accessibility, resource availability and infrastructure: The Mejillones phosphate project site can be accessed from the main national N1 tarred road leading to Antofagasta (60 km south). The well- maintained B-272 tarred road connects the N1 road with the town of Mejillones and intersects the project area. The entire project area can be accessed from these two main roads. The local infrastructure is well-developed with a deep-sea port located within the town of Mejillones, some 5 km from the project site. A well-maintained railroad stretches from Antofagasta to the port in Mejillones, through the project area. High-voltage power lines also cross the project area. The town of Antofagasta is the primary location for companies owning and servicing major copper producing mines located in the north of Chile. This environment provides and stimulates a range of resources relating to professional skill and mining equipment. Good management team with proven track record: The company has a good management with people who have relevant and vast experience in the fields of mining and exploration. These people have also held senior positions in the organizations they worked for previously. 2.8 Company Risksxiii Transition Risk: Handa Mining has had a history of net losses and negative cash flows from operations until FY 2019. None of the company’s properties have advanced to the commercial production stage. However, the company management is now working with a revitalized strategy, which includes Handa Mining transitioning from being just an explorer to also being a producer. The strategic tie-up with ReThink Resources and the Copper Oxide JV that the company signed on February 15, 2019, are part of this new strategy. The company expects to become cash flow positive in FY 2020, and to be able to fund its additional capital requirements from internal cash generated from the business. However, all of this is subject to the company’s plans with respect to the copper project developing as expected. Exploration Risk: The company’s filings with securities regulatory authorities, press releases and other public statements made from time to time are based upon estimates made by company personnel and independent geologists. These estimates are imprecise and depend upon geologic interpretation and statistical inferences drawn from drilling and sampling analysis, which may prove to be inaccurate. There can be no assurance that resource or other mineralization figures will be accurate or that this mineralization could be mined or processed profitably. Commodity Price Risk: An adverse change in the targeted commodities’ prices, or in investors’ beliefs about trends in those prices, could have a material adverse outcome on the company and its securities. Liquidity and Financing Risk: Exploration and development of mineral deposits is an expensive process, and frequently, the greater the level of interim stage success, the more expensive it can become. Until now, the company has had no producing properties and has generated no operating revenues. It has, thus, been dependent upon selling equity in the capital markets and via private placements to provide financing for its continuing substantial exploration budgets and general operations as a public company. While the company has been successful in obtaining financing from the capital markets in recent years, there can be no assurance that the capital markets will remain favorable in the future, and/or that the company will be able to raise the financing needed to continue its operations on favorable terms, or at all. Restrictions on the company’s ability to finance could have a material adverse impact on the company and its securities. Environmental and other Regulatory Requirements: The current or future operations of the company, including development activities and commencement of production on its properties, require permits from various governmental authorities and such operations are and will be subject to laws and regulations governing prospecting, development, mining, production, exports, taxes, labor standards, occupational health, waste disposal, toxic substances, land use, environmental protection, safety and other matters. Companies engaged in the development and operation of mines and related facilities generally experience increased costs, and delays in production and other schedules, because of the need to comply with applicable laws, regulations and permits. There can be no assurance that approvals and permits required to commence production on its properties will be obtained on a timely basis, or at all.
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2.9 Shareholding Pattern On August 12, 2019, the company had 49,789,441 common shares outstanding.
Exhibit 6: Capital Structure (As on August 12, 2019) Exhibit 7: Shareholding Pattern
Shareholders % of total 4.6% 4.1% Walker Paul Elgin 4.6% 2.7% Walker Paul Elgin 2.0% Kreczmer Marek J Kreczmer Marek J 4.1%
Esterhuizen Anton Esterhuizen Anton Gabriel 2.7% Gabriel Power Corp of Canada 2.0% 86.6% Power Corp of Canada
Others Others 86.6%
Total Shares Outstanding 100.0%
2.10 Listing and Contact Detailsxiv Handa Mining is listed on the TSX - Venture (TSXV: HAND) Company Contacts Address: Suite 1500, 701 West Georgia St. Vancouver, BC Canada V7Y 1C6 Contact No: +1 604 601-6926 Fax: +1 604 801-5911 Website: www.handacopper.com
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3. Newsxv - Announced AGM results and director resignation: On July 24, 2019, Handa Mining announced that all resolutions were duly passed by the shareholders in the AGM held on July 12, 2019. Further, it announced that Marek Kreczmer had submitted his resignation, as a director, to pursue other opportunities.
- Announced Q1 2020 results: On June 25, 2019, Handa Mining announced its Q1 2020 results. The net loss for Q1 2020 stood at CAD 0.21 mn, compared with a net loss of CAD 0.12 mn in FY 2018, representing an increase of CAD 0.08 mn in the net loss. Total expenses during the period rose to CAD 0.20 mn in Q1 2020, compared with CAD 0.12 mn in Q1 2019. Exploration costs and license declined from CAD 16,411 in Q1 2019 to CAD 12,867 in Q1 2020. On April 30, 2019, the company had cash and cash equivalents of CAD 0.41 mn.
- Announced FY 2019 results: On May 31, 2019, Handa Mining announced its FY 2019 results. The net loss for the year ended January 31, 2019, was CAD 0.91 mn, compared with a net loss of CAD 0.70 mn in FY 2018, representing an increase of CAD 0.21 mn in the net loss. Total expenses during the period rose to CAD 0.91 mn in FY 2019, compared with CAD 0.23 mn in FY 2018. Exploration costs and license fees rose from CAD 3,044 in FY 2018 to CAD 70,514 in FY 2019. On January 31, 2019, the company had cash and cash equivalents of CAD 0.30 mn.
- Announced the completion of debt financing for the copper processing plant: On May 30, 2019, the company announced that it had completed debt financing of USD 0.75 mn. The proceeds of the financing will be used to fund the construction of a processing plant for the Nababeep Copper Oxide Project, located in the Northern Cape Province of South Africa.
- Moving towards a cash positive position: On May 23, 2019, the company issued a letter to its shareholders stating that it had acquired a 47% stake in a Copper Oxide Processing business in South Africa, funded by directors and private funders. Handa Mining expects to start receiving profits from the operation from October 2019 end. The transition from an explorer to a producer is expected to help the company move towards a cash positive position, and self-fund the BFS of its Mejillones Phosphate project. The company will be considering making its first dividend payment at the end of FY 2020.
- Announced private placement: On April 23, 2019, the company announced that it would issue, by way of a non- brokered private placement, up to 5 mn units at a price of USD 0.05 per unit, for total gross proceeds of up to USD 0.25 mn. Each unit would consist of one common share of the company and one common share purchase warrant. Each warrant, subject to an acceleration provision, shall entitle the holder thereof to acquire one additional common share of the company for a total of five years, at a price of USD 0.05 per warrant share.
- Announced 9M 2019 results: On December 31, 2018, Handa Mining announced its 9M 2019 results. The net loss for 9M 2019 was CAD 0.50 mn, compared with a net loss of CAD 0.11 mn in 9M 2018, representing an increase of CAD 0.39 mn. Total expenses during the period rose to CAD 0.50 mn, compared with CAD 0.11 mn in 9M 2018. Due diligence conducted for acquisition of the Mejillones phosphate project led operating expenses to CAD 0.13 mn. Rise in corporate activities resulted in CAD 0.26 mn in professional and consulting fees. On October 31, 2018, the company had cash and cash equivalents of CAD 0.63 mn.
- Completed acquisition of Mejillones Phosphate project: On October 23, 2018, Handa Mining announced that it had completed the acquisition of the Mejillones Phosphate project in Chile from BHL. Handa had acquired from BHL and its subsidiaries 100% ownership of 21 exploration and exploitation concessions believed to be highly prospective for phosphate production. The company issued 5 mn common shares (subject to a hold period of 18 months) at a deemed price of CAD 0.065 per share to BHL, as initial consideration for the acquisition of the Project. Additional common shares and cash payments may be made to BHL, subject to certain milestones.
- Closed CAD 700,000 of private placement financing: On October 23, 2018, the company announced the closing of its second and final tranche of non-brokered private placement financing by the issuance of 6.2 mn units at CAD 0.05 per unit for proceeds of CAD 0.31 mn. Earlier, on October 2, 2018, the company had closed the first tranche of financing through the issuance of 7.8 mn units at CAD 0.05 per unit for proceeds of CAD 0.39 mn. A total of CAD 0.70 mn was raised in this financing. All units issued in the first and second tranche of the financing consist of one common share of the company and one common share purchase warrant.
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4. Management and Governancexvi The management and governance team have vast experience in the mining and exploration fields and in managing operations. Some of them also possess experience in developing projects in Africa.
Exhibit 8: Management and Governance Name Position Qualifications and Past Experience Jan has completed B.Sc. in Earth Sciences and B.Sc. Hons in Geology. He is a seasoned industry veteran possessing a diverse range of skills acquired as an exploration geologist, mine manager and successful Chief Executive Officer of an intermediate-sized gold producer. He started his career with Gold Fields, one of the world's largest gold producers, where he received an award as the best post-graduate Chief Executive geologist. He also received the Rand Pioneers award as the best Jan Nelson Officer graduating geologist during his final year at university. Acting as Chief Executive Officer of AIM-listed Pan African Resources PLC, Jan oversaw its evolution from an exploration company with a market value of USD 30 mn to USD 550 mn underground gold and platinum producer within a period of 5 years. He has held progressively senior positions with Harmony Gold, beginning as a mine geologist and advancing to the position of acting Mine Manager. Paul is a professional economist with a PhD in Economics from the University of Nottingham. He has over 20 years of experience in analyzing the metals market. Previously, Paul has served as the Global Head of Precious Metals at GFMS, the world's leading precious metals consultancy, for over 12 Executive Dr. Paul Elgin Walker years. Chairman He has been a Director of Handa Mining Corporation since July 2017 and been Executive Chairman since April 2018. Paul has been instrumental in developing LME Precious, the World Gold Council and several financial service companies including Goldman Sachs, Societe Generale and Morgan Stanley. Mark is a Chartered Professional Accountant practicing publicly through his firm Lotz CPA Inc. Having qualified in 1994, he has a wealth of experience in business, tax and consulting in the mining, manufacturing and Chief Financial Mark Lotz digital media sectors. Officer He is a sought-after expert for complex contractual issues and financial quantification. He also serves as the Chief Financial Officer of Vodis Pharmaceuticals Inc. Humphrey has a BSc (Hons) from the University of Zululand, an MSc (Mineral Exploration) from Rhodes University and a PhD in Geology from the University of Natal in Durban. He has held various leadership roles in companies operating in the Dr. Humphrey resources sector over the last 30 years. Non-Executive Lawrence Mbendeni Humphrey has experience in the mineral exploration and mining Director Mathe industries for various commodities, including gold, base metals, diamonds, heavy and industrial minerals as well as coal. At Handa, he is responsible for looking after the members of the technical committee and he also gives support and guidance to CEO on technical matters.
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5. Industry Overview 5.1 Non-Ferrous Metals and Mineral Exploration Industryxvii,xviii,xix According to S&P Global Market Intelligence, the global non-ferrous minerals and metals exploration budget was estimated to be USD 10.1 billion (bn) in October 2018. The budget increased for the second time since 2012, rising by ~19% YoY due to the investor momentum that high commodity prices and improved market conditions generated.
Exhibit 9: Global Non-Ferrous Exploration Budget Exhibit 10: Non-Ferrous Exploration Budget by by Commodity (USD mn) (2018) Region (2018)
Gold Latin America 12.5% 3.2% 8.8% 1.1% Copper Rest of World 2.0% 2.4% Zinc 3.1% 13.3% 28.4% Africa Nickel 7.0% 50.5% Canada Diamonds Australia Uranium 17.5% 13.8% Platinum Group US 21.5% Metal Other Pacific/South East 15.0% Asia
The overall number of companies undertaking exploration remains relatively low. However, the improved investment environment in the sector has resulted in more dormant companies resuming exploration efforts and new entrants into the industry in 2018. Major mining companies increased their budgets between 2017 and 2018, with 14% more allocation for exploration, on an average. Latin America continued to attract the bulk of exploration activities, with the region accounting for 28% of the global exploration budget in 2018.
In 2018, 22% of global exploration budget targeted copper.
5.2 The Copper Industryxx
Copper is a non-ferrous metal and ranks third among the widely consumed industrial metals. It is used for producing electrical equipment, motor components and a variety of other products. Currently, the worldwide copper ore resources estimate stands at 5.8 trillion (tn) pounds, of which only 12% (about 0.7 tn pounds) has been mined throughout history. A very good proportion of the mined copper is still in circulation as copper’s recycling rate is higher than that of any other engineering metal.
Globally, copper demand has accelerated and more than doubled over the past 35 years. A major reason for this is the rapid population-driven shift towards renewable sources of energy and electric vehicles (EVs) to minimize pollution levels. By 2027, the demand for copper is expected to be ~30 mn tons, growing at a CAGR of 2.6%.
South Africa is one of the largest copper-producing countries in the world. Some of the copper reserves located in South Africa are Okiep Copper Mine & Mowana Copper Mine. Palabora Mining Company Limited is one of the leading producers of copper in South Africa, producing approximately 45,000 tons of copper per annum.
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5.2.1 Copper End-User Applications Exhibit 11: End-User Applications
Off-Takers of Copper
Mechanism and Electrical Power Electronics Automobiles Wind Energy Metallurgy
Light Industry Shipping Petrochemicals Solar Energy
Renewable sources of energy, especially wind and solar energy, consume huge amounts of copper in the manufacturing of equipment for power generation. In addition, EVs and batteries have been gaining prominence in the automobiles and transportation sector and entail heavy usages of copper in their making. Characteristic properties of copper, such as being one of the most malleable and ductile metals and a great conductor of electricity, have led to the increased usage of the metal in the above-mentioned industries. Moreover, it being reasonably priced, as compared to other metals holding the same properties as gold and silver, makes it the obvious choice for many manufacturers. 5.2.2 Copper Productionxxi,xxii
Exhibit 12: Global Copper Production (mn MT – metric tons)xxiii,xxiv
21.6 21.5 21.4
21.2 21.0 21.0 20.8 20.6 20.6
20.4
20.2
2018 2019E 2020E
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Exhibit 13: Copper Productionxxv
Major countries in copper mine production in World copper mine capacity (in mn tons) vs 2018 (in 000s MT) utilization (in %) 30 95% 5,800 25 20 90%
2,400 15 1,600 1,2001,200 10 85% 950 870 780 760 710 5 0 80% 2000 2003 2006 2009 2012 2015 2018E 2021E
Capacity (LHS) Utilization (RHS)
Largest copper producing countries possess the largest copper mines in the world. Chile, Peru and China are the three top producers of copper with a total production of approximately 9.8 mn MT of copper in 2018.
CHILE The mining sector in the country is the backbone of the economy and copper exports alone account for one-third of government income. Chile produced 5.8 mn tons of copper in 2018. From 2017-2022, copper production in Chile is expected to grow at a CAGR of 1.8%.
PERU Peru is the world’s third-largest producer of copper, contributing about 12% share in the world production. In 2018, the country produced 2.4 mn tons of copper. Production of copper in Peru is expected to grow at a CAGR of 5.8% from 2017-2022. 5.2.3 Copper Consumption Electrification of energy and transportation is becoming the mega-trend due to the increased concern for the environment resulting in huge demands for copper. A large amount of copper will be required for the production, distribution and transmission of the electricity from these new sources. Renewable sources of energy require more copper as compared to the traditional sources of energy. The trend of increase in the demand for EVs will contribute to the increasing demand for the metal due to the immense use of copper in the manufacturing of batteries used in EVs. Along with the rise in demand from EV manufacturers, the growth of urban consumers and infrastructure investment in India and the ASEAN economies will also contribute to the accelerating growth in the demand for copper.
Exhibit 14: Copper Consumption by Country 2017 2022E Others, 19% Others, 22%
Turkey, 2%
India , 2% India , 2%
Taiwan, 2% Taiwan, 2% Brazil, 2% Brazil, 3%
Italy , 3% Italy , 2% South Korea, 3% China, 50% South Korea, 3% China, 50% Japan , 4% Japan , 4% Germany, 5% Germany, 5% US, 8% US, 7%
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Chile, Peru and China – the top producers of copper worldwide - are likely to be most positively affected by this increase in consumption and demand for copper.
Exhibit 15: Copper Demand in EVs (in ‘000 tons) and % of 2017 demandxxvi
Copper demand in EVs (in 000s tons) and % of Copper demand from renewable energy (in 000s Copper demand in 2017 tons) 2,500 10%
2,000 8%
1,500 6% 370 1,000 4% 175 500 2% 90 158 195 - 0% 110 2017
Wind Solar Other renewables 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E
2010-2016 2017E-2040E Demand (LHS) % of 2017 (RHS)
The 3 top consumers of copper in the world are: China China consumes 50.2% of the total copper production and copper demand from its economy is expected to increase at a CAGR of 3.1% (2017-2022E). The major reason for this massive consumption is China being the leader of the movement of adoption of EVs, which consume a lot of copper in the production of batteries. The EV market has grown at a CAGR of 118% since 2011 leading to increased copper imports into the economy. US The US consumes 7.6% of the total copper production and the consumption is expected grow at a CAGR of 1.6% (2017- 2022E). The anticipated rise in copper demand can be validated by the rise in the hiring rate seen in the wind turbine and the solar panel industry, both of which consume huge amounts of copper. Germany Germany is the third-largest consumer of copper throughout the world consuming 5.0% of the total copper production. The demand from Germany is expected to grow at a CAGR of 1.4% (2017-2022E).
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5.2.4 Demand Outlook Exhibit 16: Global Demand Forecast by Region (in ‘000 tons)
30,000
25,000
20,000
15,000
10,000
5,000
- 2016 2017 2018E 2019E 2020E 2021E 2022E
Asia Europe North America South & Central America Africa Oceania
Wide availability and exceptional conductivity are the main reasons for the accelerating copper demand. Everything from consumer products, automobiles, to semiconductors has copper. Also, copper is widely being used in the renewable energy sector and in the manufacturing of EV batteries, and this trend is not expected to change in the coming years. These features distinguish copper from other metals and brighten its demand outlook.
5.3 The Phosphate Industryxxvii,xxviii Phosphates are materials naturally obtained from raw phosphorus, which is found in many phosphate minerals. According to a market intelligence report, the global market for phosphate is estimated to grow to a value of USD 75.2 bn by 2021. Market growth is expected to be driven by the expanding agricultural industry, and the rising demand for nutritious food products coupled with increasing health awareness among consumers.
For application purposes, phosphate ions are generally combined with elements such as potassium, ammonium, calcium, sodium, rubidium and others. Thus, the phosphate market is categorized based on its compounds with different materials such as ammonium phosphate, calcium phosphate, phosphoric acid, potassium phosphate, and sodium tripolyphosphate.
Of these, ammonium phosphate leads the global phosphate market owing to its increasing use in manufacturing of fertilizers, mainly in developing countries in Asia Pacific and Latin America. There is, however, a gradual shift among the developed countries, for instance, in US and Europe, towards more eco-friendly fertilizers, indicating potential for diminishing usage of phosphorous fertilizers in the region going forth. Calcium phosphate is finding increasing use in the pharmaceutical industry and is expected to witness rising demand from the healthcare, food & beverage and chemical industries.
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5.3.1 Phosphate End-User Applicationsxxix,xxx Exhibit 17: Phosphate Types and End-User Applications
Phosphate
Ammonium Potassium Sodium Calcium phosphate Phosphoric acid phosphate phosphate tripolyphosphate
End Users
Drinking Water Food & Beverages Animal Feed Pharmaceuticals Fertilizers Treatment
Bakery Dental Care
Meat & Seafood Excipients
Nutritional Active ingredients Supplements
Dairy
Food and Beverage Industry Rise in demand for meat and meat products, along with growing consumer awareness regarding sodium reductions, is expected to boost the food phosphates market size. Within the food & beverage industry, consumption of phosphates is increasing in carbonated soft drinks, bottled coffee beverages, dairy products, meats and eggs. There has been an increase in bakery product consumption owing to the presence of various fast food chains and retail outlets, and that is likely to favor product demand. Rising popularity and demand for packaged food and beverages, owing to convenience and improved shelf life, is also catalyzing the use of phosphate in this industry.
Drinking Water Treatmentxxxi Rising water pollution levels have stimulated demand for phosphate in water treatment applications, owing to its efficient sorbent properties. Phosphate and purified phosphoric acid are used for water treatments to reduce the risk of pipework corrosion, control the pH of water, prevent deposit of limescale, and control the red and black liquors (precipitation of iron compounds).
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Animal Feed Industry A strong outlook for feed applications to enhance the livestock health is expected to drive the market for phosphate. High protein content, along with improved product quality, safety, and suitability for feed applications, has enhanced the product demand. Mineral-rich feed products enhance the milk production and calves’ growth rate, improve immunity, and prevent metabolic diseases such as hematuria, ketosis, and milk fever.
Pharmaceutical Industry Phosphate is commonly and increasingly being used in medicines that help to prevent kidney stone formation in the human body. Moreover, developments in the biomedical sector and increasing product adoption in dental and orthopedic applications are further expected to boost the demand and penetration for phosphate in pharmaceutical applications.
Fertilizers Shifting of farmers’ focus to boost crop yield, due to limited arable land, is expected to propel the industry share in fertilizer applications. In addition, rising product scope in the manufacture of phosphoric acid, dental powders, luminescent materials, textiles, pottery & porcelain will drive the business growth. The product is also used as a food additive, nutritional supplement, meat tenderizer, and in clarifying syrups. 5.3.2 Phosphate Productionxxxii,xxxiii Besides the geology and mineral potential, there are certain other aspects which drive exploration activity in a region. These factors include the presence of required infrastructure such as ports and railway lines, favorable government regulations, weather conditions, political stability and security of tenure. Countries which fulfill these characteristics are the ones which are in high demand for mineral exploration. The Morocco and Western Sahara region currently leads with a 71.4% share in global phosphate reserves, followed by China (4.6%) and Algeria (3.1%).
Exhibit 18: Phosphate Reserves – Top Countriesxxxiv
15.9% Morocco and Western Sahara
China 2.4% 2.6% 3.1% Algeria
4.6% Syria
Brazil 71.4%
Others
Increasing investments in crop production and other agricultural products, coupled with the rising population, have led to the dominance of the Asia-Pacific region within the phosphates market. Surging demand for packaged food and beverages along with growing use of phosphates in the agricultural industry is fueling demand for phosphate in North America. Moreover, rising demand for nutritious food products, along with increasing health concerns among consumers, presents a sizable growth opportunity for the phosphate market in Latin America.
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xxxv Exhibit 19: 2018E Phosphate Production – by Country
China 17.9%
Morocco and Western Sahara 3.3%
US 4.8%
51.9% Russia 10.0%
Jordan
12.2% Others
China leads in phosphate production at a global level, accounting for 51.9% of estimated world phosphate production in 2018. Morocco and the Western Saharan region stand second with 12.2%, followed by the US at 10.0%. 5.3.3 Phosphate Consumptionxxxvi The global phosphate rock market is expected to reach 268.0 mn MT by 2024 because of its increasing demand in the downstream sector for producing fertilizers. It is the only global resource which is used in the agriculture and fertilizer industries.
The Asia Pacific region is anticipated to maintain its dominant position owing to the presence of numerous agriculture- oriented economies. Europe and North America have implemented regulations banning the use of phosphate in detergents, due to environmental issues, but in countries such as Brazil, China, and India, growing demand for cleansing and detergent agents are projected to drive the market in the next few years.
Overall, rising population, coupled with the increased demand for nutritious food in the Asia Pacific region, is expected to drive demand for phosphate. Latin America is projected to be the second-largest phosphate consuming market, because of its rapidly growing agricultural sector. Consumption demand of phosphate for non-fertilizer nutrient use is anticipated to increase to about 45.9 mn MT by 2020, growing at a CAGR of 3.7%, compared with demand driven by its fertilizer nutrient use, which is estimated to reach about 6.8 mn MT by 2020, growing at a CAGR of 2.2%.
The Mosaic Company (US), SA Exhibit 20: Estimated World Demand for Phosphate (2015-2020) (mn OCP (Morocco), Nutrien Ltd. MT)xxxvii (Canada), EuroChem (Switzerland), Innophos Holdings 50 44.1 45.0 45.9 41.2 41.9 43.2 Inc. (US), ICL (Israel), Jordan 40 Phosphate Mines Company PLC (Jordan), PhosAgro (Russia), 30 Maaden - Saudi Arabian Mining Company (Saudi Arabia), and 20 Avantor Performance Materials 5.7 6.0 6.2 6.5 6.7 6.8 LLC (US) are some of the key 10 players in the global phosphates 0 market. 2015 2016 2017 2018 2019 2020
Non-fertilizer nutrient use Fertilizer nutrient use
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5.4 Market Risksxxxviii 5.4.1 Macroeconomic Factors Since mineral exploration and production require substantial financial investment and commitment, the industry is highly dependent on market conditions. A global, regional, or localized economic downturn, and declining customer and business confidence may reduce consumer demand or inhibit the industry’s ability to secure funds for production. Downturns such as credit market tightness can impact its liquidity and that of its customers, suppliers and other business partners. The industry is highly dependent on market prices for the metal and, therefore, is strongly affected by any fluctuations in the prices. Low metal prices entail diminished exploration activity and vice versa. A mine typically takes 10-15 years to develop following its discovery; however, commodity prices drive the current exploration activity, whereas the production commodity prices may be different. This impacts the future profitability of the business. Other factors include currency fluctuations, especially those relating to the USD, which usually move in reverse direction to the metal prices. This is primarily because the USD is the benchmark pricing mechanism for most commodities. Therefore, the USD is widely used as an exchange medium when it comes to international trade for raw materials. When the value of the USD appreciates, the value of commodities rises in terms of local currency. Therefore, high USD prices may lead to low commodity/metal prices, which also adversely impacts the activities in the industry. 5.4.2 Operating Cash flows at Production Stage Companies in this industry do not realize operating cash flows until the production stage, when the metal/mineral is ready for sale. This typically takes 10-15 years after the beginning of the exploration activities; therefore, the funds of the investor get trapped for long periods of time without any operating cash flows or significant returns. During this time, negative economic conditions may adversely impact the business, which might also hamper the industry’s potential revenue-generating capabilities. 5.4.3 Country Environment The companies in the industry have significant international exposure; it is subject to risks related to the different legal, political, social, and regulatory requirements and economic conditions of many jurisdictions. This is a major risk factor for the industry as the security of tenure is essential for generating investment and stable operations of any mineral exploration or production company. Risks include restrictions on foreign trade or investment, termination or substantial modification of international trade agreements, compliance with a variety of laws and regulations, local currency fluctuations, and increase in transportation and other shipping costs. 5.4.4 Weather Conditions Exploration, mining and extraction operations are strongly affected by unfavorable weather conditions and natural disasters. Heavy rain and snowfall-related matters or natural disasters can negatively impact operations in the affected regions, as well as operations of the global economy. Moreover, growing concerns about climate change may result in the imposition of additional regulations or restrictions that may impact the business. Several governmental bodies have introduced or are contemplating regulatory changes in response to climate change, including regulating greenhouse gas emissions. 5.5 Lifecycle of Junior Mining Companiesxxxix Within the overall mining industry, junior mining companies serve the purpose of feeding the pipeline for large mining firms. Large firms constantly need to replace their depleting reserves. While the large companies conduct their own exploration, they also take over properties from mid-tier and junior mining companies.
Exhibit 22 illustrates different types of mining companies. The major mining companies typically own and operate large producing mines globally that generate cash flow and revenue; these firms are present across all nodes of the value chain. They work on several projects simultaneously, and hence, have a deep footprint.
Mid-tier companies also participate across the industry value chain, although to a lesser degree as compared with the major firms. They typically operate fewer and smaller mines; however, they still generate revenue.
Junior mining companies include small-scale producers and pure-play exploration companies. The junior producers typically operate one or two mines and conduct exploration near their mines, while the junior exploration companies only focus on exploration of promising projects.
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Exhibit 21: Lifecycle of Junior Mining Companies
The mining industry is highly cyclical, depending on the contraction and expansion of the world economy. Mining companies witness big changes in pricing, and hence, have volatile earnings and cash flows over the years. Large mining companies need access to good exploration projects; therefore, they typically invest in brownfield or greenfield exploration projects. They also provide financial and intellectual capital to junior exploration companies to generate exploration ideas.
Mining companies initiate with the exploration phase – where an economically viable mineral deposit has not been discovered. These properties have asset values derived from the potential of discovery. Only a few exploration properties ultimately become mining properties; however, until the exploration potential is well-tested, they have little value.
Development properties are those where an economically viable deposit exists and has been validated during feasibility and pre-feasibility studies; however, these are not yet financed or under construction. These properties are at an advanced stage. Production properties are mines that have started producing the mineral.
5.6 Regulatory Frameworkxl 5.6.1 Regulations in Chile Mining in Chile is regulated by three legal entities, namely: The Chilean Constitution, The Minings Concession Act No. 18,097 and The Mining Code (MC) and its Regulation (Decree No 1/1989). MC establishes regulations related to mineral exploration, exploitation and benefit. Moreover, the Ministry of Mining, along with the National Geology and Mining Service, approves technical and safety issues of mining projects, and promotes investment in the area. The Mining Sites and Facilities Closure Act No. 20,551 regulates closure of mines and their facilities and The Mining Activity Royalty Act No. 20,026 and No. 20,469 establish special tax over mining sales. To conduct exploration activities, a mining concession is required, which is granted by the state which owns the properties. The exploration concession is limited to two years (extendable for another two years if the owner requests an extension but subject to waiver of half of the area originally granted) and does not allow companies to exploit minerals. To conduct mining, an exploitation concession is required, which is of indefinite duration, contingent on the payment of mandatory license fee and fulfillment of requirements of the MC. Foreign entities can own mining rights in Chile, except in the state-owned lands located 10 km from the country borderline or 5 km from the coast.
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5.6.2 Regulatory Framework in South Africa Mining Law in South Africa is regulated by the Mineral and Petroleum Resources Development Act,28 of 2002 (MPRDA) which is the chief force of legislation dealing with acquisitions or right to conduct reconnaissance, prospecting and mining. This industry is administered by the Department of Mineral Resources and is affected by the Law of Contract, Law of Delict and the Common Law of South Africa. On September 27, 2018, the Minister of Mineral Resources published The Broad-Based Socio-Economic Empowerment Charter for the South African Mining and Minerals Industry, 2018 (2018 Mining Charter), after extensive consultations with the various stakeholders of the industry in the country.
In terms of the 2018 Mining Charter, a new mining right must have a minimum of 30% black economic empowerment (BEE) shareholding distributed as follows: At least 5% non-transferable carried interest to qualifying employees. At least 5% non-transferable carried interest or “equity equivalent benefit” to host communities. At least 20% effective ownership in the form of shares to a BEE entrepreneur, 5% of which must preferably be for women.
In South Africa, the same procedures and regulations are applicable to all the minerals except petroleum.
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6. Valuation The Fair Market Value for one of the company’s publicly traded shares stands between CAD 0.73 and CAD 0.76 on August 12, 2019, using blended valuation (NPV and EV/Resources Multiple).
6.1 Net Present Value
Valuation Risk free rate (Rf) 1.5% Beta 1.3 Country risk premium 0.0% Cost of equity 12.1% Terminal growth rate 0.0% Cost of debt (after tax) 0.0% WACC (Discount Rate) 12.1%
Year Ending - Jan 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E FCFF (Low) Free Cash Flow to Firm (1,454) (3,119) (12,350) 14,973 14,231 14,092 13,648 13,525 Discount factor 0.95 0.85 0.75 0.67 0.60 0.54 0.48 0.43 Present Value of FCF (1,378) (2,637) (9,319) 10,081 8,549 7,554 6,528 5,772 FCFF (High) Free Cash Flow to Firm (1,479) (3,158) (12,415) 15,803 15,022 14,844 14,338 14,163 Discount factor 0.95 0.85 0.75 0.67 0.60 0.54 0.48 0.43 Present Value of FCF (1,402) (2,671) (9,368) 10,639 9,024 7,957 6,858 6,045
Arrowhead Fair Value Bracket Low High
Present Value of FCF 59,872 62,326
Shares O/S (000s) 52,914 52,914 Intrinsic Value per share 1.13 1.18
6.2 Relative Valuation The Fair Market Value of one of Handa Mining Corporation’s publicly traded regular shares stood at CAD 0.14 on August 12, 2019.
Current Market Cap Estimated Enterprise Company Namexli (in CAD Resources EV/Resources Value (in Mn)xlii (tons)xliii CAD Mn) Arianne Phosphate Inc 57 85 86,65,00,000 0.0000001x
Avenira Ltd 6 14 4,21,00,000 0.0000003x
Centrex Metals Ltd 30 21 1,44,00,000 0.0000015x
Aguia Resources Ltd 27 24 8,32,10,000 0.0000003x
Average 0.000000 5x
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(All figures are in CAD mn, unless stated differently)
Particulars Handa Resources 6,35,70,000.0 PEER EV/ Resources 0.0000005 Relative Valuation Discount 20% Enterprise Value 7.0 Net Debt 0.3 Implied Equity Value 7.3
Shares o/s (MM) 52.9
Intrinsic Value per share 0.14 Current Market Price 0.03 Upside / (Downside) 451.0 %
6.3 Blended Valuation The Fair Market Value of one of Handa Mining Corporation’s publicly traded regular shares stood between CAD 0.73 and CAD 0.76 on August 12, 2019, according to the blended valuation method.
Blended Valuation High Low NPV 1.18 1.13 Relative Valuation 0.14 0.14 Weighted Average 0.76 0.73
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Important information on Arrowhead methodology The principles of the valuation methodology employed by Arrowhead BID are variable to a certain extent depending on the subsectors in which the research is conducted, but all Arrowhead valuation research possesses an underlying set of common principles and a generally common quantitative process. With Arrowhead Commercial and Technical Due Diligence, Arrowhead extensively researches the fundamentals, assets and liabilities of a Company, and builds solid estimates for revenue and expenditure over a coherently determined forecast period. Elements of past performance, such as price/earnings ratios, indicated as applicable, are present mainly for reference purposes. Still, elements of real-world past performance enter the valuation through their impact on the commercial and technical due diligence. Elements of comparison, such as multiple analyses may be to some limited extent integrated in the valuation on a project-by-project or asset-by-asset basis. In the case of this HANDA MINING report, there are no multiple analyses integrated in the valuation.
Arrowhead BID Fair Market Value Bracket The Arrowhead Fair Market Value is given as a bracket. This is based on quantitative key variable analysis, such as key price analysis for revenue and cost drivers or analysis and discounts on revenue estimates for projects, especially relevant to those projects estimated to provide revenue near the end of the chosen forecast period. Low and high estimates for key variables are produced as a tool for valuation. The high-bracket NPV valuation is derived from the high-bracket key variables, while the low-bracket NPV valuation is based on the low-bracket key variables. In principle, an investor who is comfortable with the high-brackets of our key variable analysis will align with the high- bracket in the Arrowhead Fair Value Bracket, and likewise in terms of low estimates. The investor will also take into account the Company intangibles – as presented in the first few pages of this document in the analysis on strengths and weaknesses and other essential Company information. These intangibles serve as supplementary decision factors for adding or subtracting a premium in the investor’s own analysis. The bracket should be understood as a tool provided by Arrowhead BID for the reader of this report and the reader should not solely rely on this information to make his decision on any particular security. The reader must also understand that on one hand, global capital markets contain inefficiencies, especially in terms of information, and that on the other hand, corporations and their commercial and technical positions evolve rapidly: this present edition of the Arrowhead valuation is for a short to medium-term alignment analysis (one to twelve months). The reader should refer to important disclosures on page 31 of this report.
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7. Appendix 7.1 Handa Mining’s Balance Sheet Forecast All figures in CAD ‘000, unless stated Low Bracket estimates Exhibit 22: differently Consolidated Balance Sheet
Year Ending - Jan 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E Total current assets 7,812 12,009 7,574 33,048 55,195 77,203 99,937 1,22,547 1,45,028 Total non-current 942 1,023 10,267 9,238 8,815 8,435 8,094 7,789 7,515 assets TOTAL ASSETS 8,754 13,031 17,841 42,286 64,010 85,638 1,08,031 1,30,336 1,52,543 Total current 193 193 193 2,778 2,778 2,778 2,778 2,778 2,778 liabilities Total non-current 600 ------liabilities TOTAL 793 193 193 2,778 2,778 2,778 2,778 2,778 2,778 LIABILITIES Total shareholder's 7,961 12,838 17,648 39,508 61,232 82,860 1,05,253 1,27,558 1,49,765 equity TOTAL LIABILITIES & 8,754 13,031 17,841 42,286 64,010 85,638 1,08,031 1,30,336 1,52,543 EQUITY
All figures in CAD ‘000, unless stated High Bracket Exhibit 23: differently estimates Consolidated Balance Sheet
Year Ending - Jan 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E Total current assets 7,787 11,945 7,445 33,939 56,877 79,637 1,03,128 1,26,445 1,49,573 Total non-current 942 1,023 10,267 9,238 8,814 8,435 8,094 7,789 7,515 assets TOTAL ASSETS 8,729 12,968 17,712 43,177 65,691 88,071 1,11,222 1,34,234 1,57,088 Total current 193 193 193 2,968 2,968 2,968 2,968 2,968 2,968 liabilities Total non-current 600 ------liabilities TOTAL 793 193 193 2,968 2,968 2,968 2,968 2,968 2,968 LIABILITIES Total shareholder's 7,936 12,775 17,519 40,209 62,723 85,103 1,08,254 1,31,266 1,54,120 equity TOTAL LIABILITIES & 8,729 12,968 17,712 43,177 65,691 88,071 1,11,222 1,34,234 1,57,088 EQUITY
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8. Analyst Certifications Bracket integrate alongside the rest of their stream of information and within their decision-making process. I, Natasha Agarwal, certify that all the views expressed in this research report accurately reflect my personal Past performance of securities described directly or views about the subject security and the subject indirectly in this report should not be taken as an Company, based on the collection and analysis of public indication or guarantee of future results. The price, information and public Company disclosures. value of, and income from any of the financial securities I, Sumit Wadhwa, certify that all the views expressed in described in this report may rise as well as fall and may this research report accurately reflect my personal be affected by simple and complex changes in views about the subject security and the subject economic, financial and political factors. Company, based on the collection and analysis of public information and public Company disclosures. Should a security described in this report be denominated in a currency other than the investor’s Important disclosures home currency, a change in exchange rates may adversely affect the price of, value of, or income derived Arrowhead Business and Investment Decisions, LLC has from the security. received fees in 2017, 2018 and 2019 and will receive fees in 2019 from Handa Mining Corporation for This report is published solely for information purposes researching and drafting this report and for a series of and is not to be considered in any case as an offer to other services to Handa Mining Corporation, including buy any security, in any state. distribution of this report and networking services. Neither Arrowhead BID nor any of its principals or Other than disclosures relating to Arrowhead Business employees own any long or short positions in Handa and Investment Decisions, LLC, the information herein Mining Corporation. Arrowhead BID's principals is based on sources Arrowhead BID believes to be currently have a mandate for investment banking reliable but is not guaranteed by Arrowhead BID and services from Handa Mining Corporation and expect to does not purport to be a complete statement or receive compensation for investment banking activities summary of the available data. from Handa Mining Corporation in 2019 or 2020. Arrowhead Business and Investment Decisions, LLC is Aside from certain reports published on a periodic basis, not responsible for any loss, financial or other, directly the large majority of reports are published by or indirectly linked to any price movement or absence Arrowhead BID at irregular intervals as appropriate in of price movement of the securities described in this the analyst’s judgment. report.
Any opinions expressed in this report are statements of Arrowhead BID’s judgment to this date and are subject to change without notice.
This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, any of the financial or other money-management instruments linked to the company and company valuation described in this report, hereafter referred to as “the securities”, may not be suitable for all investors.
Investors must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary.
Investors are advised to gather and consult multiple sources of information while preparing their investment decisions. Recipients of this report are strongly advised to read the Information on Arrowhead Methodology section of this report to understand if and how the Arrowhead Due Diligence and Arrowhead Fair Value
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9. Notes and References i Source: Bloomberg: 52 weeks to August 12, 2019 ii Source: Bloomberg: 52 weeks to August 12, 2019 iii Source: Bloomberg: 3 months to August 12, 2019 iv Source: Bloomberg v Arrowhead Business and Investment Decisions Fair Value Bracket-AFVBTM. See information on valuation on pages 27-29 of this report and important disclosure on pages 31 of this report vi Source: Company Filings, Company Website and Presentation vii Source: Company website and Company Filings viii Source: Company Filings ix Source: Handa Mining Corporation Copper Oxide Feasibility Study Report PO52 x Source: Company Website and Filings xi Source: Company Presentation xii Source: Company Filings xiii Source: Company Filings xiv Source: Company Website xv Source: Company Website xvi Source: Company Website xvii Note: Copper exploration falls under non-ferrous exploration xviii Source: Global Exploration Budget Trends 2018 ( https://pages.marketintelligence.spglobal.com/Exploration-budgets-rise-for-2nd-consecutive-year-by- 19percent-MS-content.html) xix Source: https://www.spglobal.com/marketintelligence/en/documents/world-exploration-trends-march-2019.pdf xx Source: https://www.icsg.org/index.php/component/jdownloads/finish/170/2876 xxi Source: https://www.cochilco.cl/Research/Expected%20copper%20production%20forecast%20in%20Chile%202017%20-%202028%20(Abstract).pdf xxii Source: https://www.dbs.com/aics/pdfController.page?pdfpath=/content/article/pdf/AIO/102018/181008_insights_copper_SparX.pdf xxiii Source: https://www.cochilco.cl/Presentaciones/Informe%20Tendencias%20Q4%202018%20%28prensa%29%20actualizada.pdf xxiv Source: https://seekingalpha.com/article/4236760-copper-outlook-2019-supply-demand-analysis# xxv Source: https://investingnews.com/daily/resource-investing/base-metals-investing/copper-investing/copper-production-country/ xxvi Source: https://www.dbs.com/aics/pdfController.page?pdfpath=/content/article/pdf/AIO/102018/181008_insights_copper_SparX.pdf xxvii Source: Market & Market Report (https://www.marketsandmarkets.com/Market-Reports/phosphates-market-237175254.html) xxviii Source: https://www.grandviewresearch.com/industry-analysis/phosphate-rock-market xxix Source: Market study by GM insights (https://www.gminsights.com/industry-analysis/calcium-phosphate-market) xxx Source: Market study by GM insights (https://www.gminsights.com/industry-analysis/phosphate-market) xxxi http://www.prayon.com/en/our-activities/products/industrial-applications/water-treatment.php xxxii Source: USGS Statistics: https://minerals.usgs.gov/minerals/pubs/commodity/phosphate_rock/ xxxiii Source: https://www.marketresearchfuture.com/reports/phosphate-market-1921 xxxiv Source: U.S. Geological Survey, Mineral Commodity Summaries, February 2019 (https://prd-wret.s3-us-west- 2.amazonaws.com/assets/palladium/production/atoms/files/mcs-2019-phosp.pdf)
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xxxv Source: U.S. Geological Survey, Mineral Commodity Summaries, February 2019 (https://prd-wret.s3-us-west- 2.amazonaws.com/assets/palladium/production/atoms/files/mcs-2019-phosp.pdf) xxxviSource: http://markets.businessinsider.com/news/stocks/the-global-phosphate-rock-market-is-expected-to-reach-268-0-million-tons-by-2024-1012431452 xxxvii Source: http://www.fao.org/3/a-i6895e.pdf xxxviii Source: Reuters xxxix Source: ‘Valuation of Metals and Mining Companies’ Basinvest (2010); ‘Mineral Exploration and Development: Risk and Reward’, Colorado School of Mines (2010); ‘Strategic Analysis of a Junior Mining Exploration Company’, Simon Fraser University (2005) xl Source: ICLG Chile’s Mining Law; ICLG US Mining Law; Practical Law – China’s Mining Law; Peru’s mining & metals investment guide (EY) xli Source: Company Filings xlii Source: Bloomberg xliii Source: Company Filings
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