Citi Research Equities

17 May 2017 04:32:31 ET │ 64 pages Base Metals Australia/NZ

Lithium Juniors Initiation Paddling Hard to Catch Electric Wave of Demand

 Initiating Coverage — We initiate coverage on Pilbara Minerals with a Buy/High Risk recommendation (target price A$0.65/share) and on Galaxy Resources with a Clarke Wilkins AC Neutral/High Risk recommendation (target price A$0.55/share). Both companies are +61-2-8225-4858 at the forefront of the wave of lithium supply expected to hit the market over the next [email protected] few years, and by 2023 each is expected to contribute ~11% of global supply. Trent Allen +61-2-8225-4862  Lithium Market — The lithium market is an arm wrestle between strong demand [email protected] growth that is being increasingly driven by the EV market (70% of the incremental lithium demand by 2020) vs a building wave of supply from existing and new Harsh Bardia, CFA producers. Hard rock or spodumene projects have lower capex and a shorter lead +61-2-8225-4836 [email protected] time and are expected to capture an increasing share of the market near-term. From ~40% in 2013, hard rock mines are expected to be ~55% of global supply by Alexander Barkley 2020, but longer-term are at risk from the lower operating cost brine projects. +61-2-8225-4834 Despite the strong demand growth, we expect this increased supply to cool lithium [email protected] prices from ~US$12-15kt for LCE, ~US$900/t for spodumene, towards our long- term prices of U$7,500/t (real) and U$550/t over a 5 year period. See Lithium: Paradigm Shift in Supply and Demand.

 Galaxy Funding Growth from Cash Flow — Galaxy recently re-commissioned the Mt Cattlin mine in WA that is expected to produce ~160kt of spodumene in 2017/18 (20kt of LCE), increasing to 200kt in 2019 (27kt) as recoveries improve. With contracted prices of US$905/t if the 6% target product spec can be achieved, the strong cash flow from the project will be used to fund the studies and capex for the promising Sal De Vida brine project (25ktpa LCE with potential to double to 50ktpa) in Argentina. Galaxy also has another hard rock project James Bay in Canada.

 Pilbara Focused on Pilgangoora — The Pilgangoora project in the Pilbara region of WA is targeting commissioning in 1Q18 and 1st shipment in 2Q18, but we think 2H18 is more realistic. The launch of a US$80-100m bond issue will go help fund the project, but still leaves a A$35m shortfall that will need to be funded by equity issuance or prepayments. Initial site works have already started, long lead-time items ordered and stage 1 volumes contracted. A PFS has already been released to double the throughput to 4mtpa that would increase production to 79ktpa LCE, which is likely to be approved once capacity for stage 1 has been demonstrated.

 Risks — The key risks for both stocks are lithium prices and project execution. Lithium prices spiked dramatically higher in 2016, but the wave of supply this has encouraged has the potential to overwhelm demand growth, even if it continues to surprise to the upside. Undoubtedly the delivery of projects will disappoint relative to company expectations, as we have already seen, but how Galaxy and Pilbara fare in this regard will be critical for absolute and relative performance.

See Appendix A-1 for Analyst Certification, Important Disclosures and non-US research analyst disclosures. Citi Research is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only

Prepared for Harsh Bardia a single factor in making their investment decision. Certain products (not inconsistent with the author's published research) are available only on Citi's portals. Not for distribution in the People's Republic of China, excluding the Hong Kong Special Administrative Region and Qualified Foreign Institutional Investors.

Lithium Juniors Initiation 17 May 2017 Citi Research

Data Summary

Current Fiscal Year Next Fiscal Year Rating Target Price EPS EPS Company Ticker Currency Price Date & Time Old New Old New Div Yld (%) ETR (%) Last Rpt Year Old New Old New Galaxy Rsrcs GXY.AX A$ 0.50 16 May 16:00 - 2H - 0.55 0.0 10.0 Dec-16 - 0.03 - 0.05 Pilbara Minerals PLS.AX A$ 0.42 16 May 16:00 - 1H - 0.65 0.0 54.8 Jun-16 - -0.02 - -0.01 1 = Buy, 2 = Neutral, 3 = Sell, H = High Risk Source: Citi Research

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Contents

Lithium Miners Delivering 4 Calm after the Storm 6 Supply Side Visibility Improving, but Still Opaque 7 Tantalum Market Overview 9 ESG Focus 11 Pilbara Minerals Limited (PLS.AX) 12 Hard Rocking the Lithium Market 14 Bull/Bear: Pilbara Minerals Limited (PLS.AX) 16 Balance Sheet and Cash Flow 20 Pilgangoora Lithium Project 22 Product Specification 26 Offtake 27 Capital Requirements 28 Operating Costs 29 Board and Management 32 Galaxy Resources Limited (GXY.AX) 33 Back to the Future: Galaxy Returns to Mining 35 Bull/Bear: Galaxy Resources Limited (GXY.AX) 37 Mt Cattlin 42 Sal De Vida 45 James Bay 50 Galaxy Board and Management 53 Pilbara Minerals Limited 54 Galaxy Resources Limited 55 Appendix A-1 58 Prepared for Harsh Bardia

3 Lithium Juniors Initiation 17 May 2017 Citi Research

Lithium Miners Delivering After a strong rally in lithium carbonate prices during early 2016, prices have moderated and stabilized at ~US$15/t, although have begun to tick up recently (Figure 5). Lithium prices continue to remain significantly above historical averages driven by rapid growth in Electric Vehicle and battery storage demand.

Incentivized by higher prices we have seen a wave of new explorers/developers entering the market, as well as existing producers announcing expansion plans. In this report we initiate coverage of two ASX listed lithium miners who are fast approaching critical mass in terms of project delivery and scale in the global lithium market. Galaxy Resources and Pilbara Minerals together are expected to deliver ~21% of the global lithium supply by 2020 driven by the development of hard-rock resources, with Galaxy having further options to augment capacity in brine based resources and Pilbara the potential to double production at its core project.

Galaxy Resources

We initiate coverage of Galaxy Resources with a Neutral/High Risk rating and a $0.55 target price. Galaxy is an ASX listed miner with significant exposure to both spodumene and brine based lithium reserves. The company has restarted the Mt Cattlin mine after it sold its Chinese lithium carbonate conversion plant in 2015 to repay debt and return focus back on the upstream mining business. Our target price of $0.55/sh is based on 1x group NPV. We believe the next catalyst for the company is finding funding partner for Sal de Vida and making final investment decision on the project.

Pilbara Minerals

We initiate coverage of Pilbara Minerals with a Buy/High Risk rating and a $0.65 target price. Pilbara is currently developing its maiden mine Pilgangoora in the Pilbara region of Western Australia. The mine once fully ramped in 2020 is expected to produce 44kt LCE spodumene. Our target price of A$0.65/sh is based on a 1x NPV multiple.

Figure 1. Galaxy Resources NPV valuation (A$1,073m) Figure 2. Pilbara Minerals NPV Valuation (A$933m)

James Bay 4%

Mt Cattlin 38%

Sal de Vida 58% Pilgangoora 100%

Source: Company Reports and Citi Research Estimates Source: Company Reports and Citi Research Estimates

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4 Lithium Juniors Initiation 17 May 2017 Citi Research

Figure 3. Lithium Supply – Capacity Share Over Time

Source: Citi Research Estimates

Figure 4. Lithium Demand – Profile Over Time

Source: Citi Research Estimates Prepared for Harsh Bardia

5 Lithium Juniors Initiation 17 May 2017 Citi Research

Calm after the Storm

Post the fireworks of 2016 when the spot lithium carbonate price trebled before correcting 25%, The Future is Electric, the last two quarters have been much more stable. Prices again showed signs of positive momentum towards the end of MQ17, but we expect this likely to be short lived as new players (Mt. Cattlin and Mt. Marion) ramp up production during 2017/18 (Red Hot Demand Meets Cool Wave of Supply). On the other hand the spodumene price is finally catching up with benchmark carbonate prices and we expect a robust pricing environment in 2H17 and into 2018.

Figure 5. Lithium carbonate prices (US$/t) Figure 6. Citi lithium carbonate price forecast

25,000 25,000

20,000 20,000

15,000 15,000

10,000 10,000

5,000 Lithium carbonate US$/t Lithium Carbonate 99% 5,000 Lithium Carbonate 99.5% - - Jul-15 Jul-16 Oct-15 Apr-16 Oct-16 Apr-17 Jan-16 Jan-17 Mar-18 Mar-19 Mar-20 Mar-17 Sep-17 Sep-18 Sep-19 Sep-20 LT (real) Source: AsianMetal, Citi Research Source: Citi Research Estimates

Figure 7. Spodumene (SC6) prices Figure 8. Citi spodumene price forecast

1000 1,000 900 900 800 800 700 700 600 600 500 500 400 400 Spodumene (SC6) US$/t Spodumene (SC6) 300 US$/t Spodumene (SC6) 300 200 200 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Mar-17 Mar-18 Mar-19 Mar-20 Sep-17 Sep-18 Sep-19 Sep-20 LT (real) Source: Company reports, Citi Research Source: Citi Research Estimates

Figure 9. Citi price forecast

US$/t 2016 2017E 2018E 2019E LT Lithium Carbonate 99% 16,139 13,707 11,250 9,500 7,500

Spodumene 6% 570 905 875 750 550 Source: Citi Research Estimates

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Demand forecast

The lithium market is witnessing a shift in demand and we expect 2017 to be the first year that lithium consumption for batteries outstrips that for non-battery industrial demand. This has important implications for product quality (level and type of impurities) as these attributes will become a more important consideration in price realisation as manufacturers look to consistent product specification and security of supply.

This shift is not driven by declining usage in non-battery industrial demand which is expected to continue to grow at 4% CAGR between 2015-2025 driven by recovery in advanced economies along with positive momentum from emerging markets like China and India. Instead the shift is driven by the combination of higher growth rates in Consumer electronics and EV demand.

Consumer electronics demand growth is expected to slow down after almost doubling between 2010 and 2015. However, we still expect growth rates above global GDP driven by higher intensity battery packs for smartphones, smartphone penetration in rural markets and wearables penetration in urban markets, partly offset by weaker notebook/tablets demand. We forecast the lithium demand from consumer electronics sector to grow at CAGR of 5.1% between 2016 and 2025.

Figure 10. Citi Lithium Demand estimates by segment

Summary 2015 2016 2017E 2018E 2019E 2020E 2021E Industrial application LEC kt 110 113 118 123 128 133 139 3% 3% 4% 4% 4% 4% 4% Consumer Electronics LEC kt 53 55 57 61 64 68 71 3% 4% 4% 5% 6% 5% 5% Battery Storage LEC kt 0 0 0 1 2 3 4 88% 117% 50% 100% 150% 80% 50% Automotive LEC kt 25 49 61 76 117 150 166 205% 94% 25% 25% 54% 29% 10% Total LEC kt 188 217 236 260 311 354 380

13% 15% 9% 10% 20% 14% 7% Source: Citi Research estimates

Supply Side Visibility Improving, but Still Opaque

The lithium supply situation remains fluid with projects progressing, projects falling behind aggressive schedules and new projects continuing to emerge.

Since our last lithium market update (Red Hot Demand Meets Cool Wave of Supply) Mt. Catlin and Mt. Marion have started shipping spodumene concentrate from the Esperance and Kwinana ports respectively. We have moved these projects from under construction to base supply.

Albemarle's strategy to increase capacity to 165kt LCE by 2021 was another major development during the quarter, (Albemarle Corp (ALB) - Investor Day Key Takeaways), where management also nearly doubled its Li demand forecast, calling for ~35kt/year in additional LCE consumption (from ~15-20kt/year prior guidance) over the next 5 years. Prepared for Harsh Bardia

7 Lithium Juniors Initiation 17 May 2017 Citi Research

The emergence of DSO (direct shipping ore) supply is another new development in the lithium space. The current price environment makes it economically feasible to ship the unprocessed ore to China, primarily from Australia. Mineral Resources (MIN.AX) has already started shipping DSO from the Wodgina mine to China and Pilbara Minerals has also entered into an off-take deal with Shandong Ruifu. Assuming a 50% recovery; these two companies can alone supply ~40kt LCE on an annualised basis (16% of global supply in 2017) from DSO. However we believe that the arrangement is not economically feasible at our long term price forecast and is likely more opportunistic in nature to help miners monetise current high prices as well as to partly fund their core development projects.

Figure 11. Lithium project funding since 2016 Figure 12. Lithium project funding by type

300 500 Equity Debt Off-take/Other 250 400 200

150 300 US$ Mn 100 US$ Mn 200 50 - 100

- Equity Debt Off-take/Other

Source: Company reports, Citi Research *assuming proceeds from PLS bond issue Source: Company reports, Citi Research and equity placement with General Lithium/ Ganfeng

The lithium sector has seen a plethora of project exploration and development announcements but the sector still looks short on funding in our view. Since 2016 the sector has received a total funding of ~US$900m in the form of equity/debt and offtake prepayments. Several advance stage projects are still waiting to finalise the project funding with the key issue being around valuation and long term supply demand balance for the industry.

Current cost positioning and future trends

The rapid development of battery market and higher prices has led to the Chinese manufacturers looking to aggressively secure lithium offtake, which is underpinning projects with higher opex costs.

Once supply catches up with demand, cost positioning will differentiate between producers and marginal supplier. Mineral based miners have an inherent cost disadvantage from two stage process (mining and mineral conversion) vs integrated processing facility for brines. Reagent cost remains the most important cost component for both methods of production and Figure 15 highlights the relative cost positioning of key producers, where new suppliers could be at risk if prices fall back to 2014/15 levels.

Given the current growth trends we don’t see this scenario anytime soon, however brine based producers will generate the highest industry margins through the cycle, in our view. Prepared for Harsh Bardia

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Figure 13. Mining + mineral conversion Figure 14. Brine processing Contractor Natural gas 11% 8% Other 5% Salt harvesting 16% Transport 7% Reagents 43% Maintenance 3% Other Reagents 6% 54%

Labour Maintenance 14% 6%

Labour Energy Mining 10% 7% 10% Source: Roskill, Citi Research Source: Roskill, Citi Research

Figure 15. Cost Curve for Existing Operations Figure 16. Cost Curve for Key Projects

8000 Brine Mineral 8000 Brine Mineral 7000 7000 Zhonghe Rongjie Rongjie 6000 6000 NA LithiumNA

5000 5000 Finland Keliber Qinghai Lithium Qinghai Tibet Mining Tibet Rose (Critical) Cinovec (EMH) Salt Holdings Salt Lake Citic Guo'an

4000 4000 (Sonora) Bacanora Jilin Canada Jilin Jien Pilgangoora (Altura) Pilgangoora Salar d. Hom.(FMC) d. Salar Salar del del (SQM) Salar Atacama Mibra (AMG) Mibra Sal (GXY) Sal de Vida US$/t LCE US$/t LCE Whabouchi (NMX) Whabouchi Silver Peak (ALB) Pilgangoora (PLS) Pilgangoora 3000 Olaroz (ORE) 3000 Cauchari (SQM/LAC) Cauchari Salar de Atacama de Atacama (ALB) Salar La Negra (ALB) La Negra Salar de Rincon de Rincon (Enirgi) Salar 2000 Greenbushes (ALB/Tianq) Greenbushes 2000 Mt Marion (MIN) Marion Mt 1000 Mt Cattlin (GXY) 1000

0 0 0 0 25 50 75 25 50 75 100 125 150 175 200 225 250 150 175 100 125 200 225 250 275 300 325

Source: Company reports, Citi Research Source: Company reports, Roskill, Citi Research

For more details please read Lithium: Paradigm Shift in Supply and Demand.

Tantalum Market Overview

Galaxy Resources and Pilbara Minerals are expected to produce significant amounts of tantalum as a by-product from their hard rock operations. Below we present a brief overview of the tantalum market.

Tantalum is a hard, bluish grey, transition metal that is highly corrosion-resistant. The metal finds one of its major uses as capacitors and high power resistors in electronic equipment. It is also used in laboratory equipment, surgical instruments and implants due to its chemical inertness. The main source of tantalum is from minerals such as tantalite, columbite, wodginite and microlite contained in pegmatite ore bodies. As per USGS, Congo (Kinshasa) and Rwanda together produced ~70% of the global tantalum volumes (~1,100t) in 2015. We believe the tantalum market is likely to grow in line with global GDP growth over next few years. Prepared for Harsh Bardia

9 Lithium Juniors Initiation 17 May 2017 Citi Research

We believe the tantalum market is likely Figure 17. World Mine production and Reserves (t) to grow in line with global GDP growth over next few years. Mine Production Reserves 2015 2016e Australia NA NA 69,000 Brazil 115 115 36,000 China 60 60 NA Congo (Kinshasa) 350 450 NA Rwanda 410 300 NA Other 117 140 NA

World Total (rounded) 1,100 1,100 >100,000 Source: USGS, Citi Research

Australia used to be a major producer of tantalum (45% of global production in 2000) but curtailment of the Wodgina and Greenbushes operations has meant that global supply is now dominated by Central Africa.

Figure 18. Ta2O5 CIF China USD/lbs.

100

90

80

70

60 Ta2O5 CIF China USD/lb

50

40

Source: AsianMetal, Citi Research

Conflict resources – Tantalum is considered as one of the most commonly mined conflict minerals. Conflict resources are minerals extracted in a conflict zone and proceeds are used to propagate terrorist activities and fighting. Dodd–Frank Wall Street Reform and Consumer Protection Act 2010 requires manufacturers to audit and report use of conflict minerals in order to reduce the trade of such resources. Supply from non-conflict zones like Australia should help to promote clean source and reduce trade in tantalum from conflict zones.

Impact of new supply – The emergence of new hard-rock miners in lithium space over recent years is also poised to increase the supply of tantalite which is a key by- product from these new mines. We expect significant rise in tantalite supply over next few years (Pilbara Minerals alone is projected to produce ~10% of global supply once fully ramped). We view this supply to be easily absorbed by the market looking for clean/conflict free source for OEMs currently dependent on central Africa region. However, we expect prices to remain subdued in $55-65/lb range to some extent capped by the cost of mining in Central Africa. Prepared for Harsh Bardia

10 Lithium Juniors Initiation 17 May 2017 Citi Research

ESG Focus

The incremental lithium demand is mostly driven by its use in battery technologies for electric vehicles and energy storage. Galaxy Resource and Pilbara Minerals fit on ESG themes as renewable energy (grid storage) and sustainable transportation (electric vehicle). A key consideration for the lithium battery to be called truly green energy depends on the primary source of the electricity to charge the batteries. While battery storage technology has mostly evolved around capturing renewable electricity, the same cannot be generalized for electric vehicle charging. Take the example of China where coal fired power generation contributes ~75% (Figure 19) of total electricity supply (though it has reduced from 84% a decade back). The primary push in China for electric vehicle is more driven by pollution control (another ESG component) rather renewable energy promotion. We argue that there could be diverse motive for electric vehicle adoption but ultimately it scores better on ESG front over internal combustion engines (ICE) vehicle due to the benefits from lower urban emissions and a possible channel to move away from fossil based fuels.

Figure 19. Thermal Power as % of Chinese power generation mix

Source: WIND, Citi Research

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Company Focus

Pilbara Minerals Limited (PLS.AX) Initiate with a Buy

 Initiation of Coverage  Initiate with a Buy, $0.65 Target Price — We initiate coverage of Pilbara Minerals with a Buy/High Risk rating and a $0.65 target price. Pilbara is currently developing the Pilgangoora mine in Western Australia. Once fully ramped in 2020 Pilgangoora is expected to produce 44kt LCE spodumene. Completion of the

mine will also mark the shift of supply dominance from brine based players historically to mineral based miners, in our view. The company has been able to Buy/High Risk upgrade its resources base from 9Mt to 156Mt over last three years with reserves Price (16 May 17 16:00) A$0.42 alone supporting a mine life of 30+ years (@ 2mtpa). Target price A$0.65 Market Cap A$536M  Production and Cost Profile — We expect the company to commission US$397M production during 3Q'18 (company guiding for early 2Q'18) and hit the Expected share price return 54.8% annualized full capacity by 2H'19. This is based on 85% plant utilization and Expected dividend yield 0.0% 72.5% Li recovery rates. The company has also entered into a DSO supply Expected total return 54.8% agreement with Shandong Ruifu that might add ~20kt LCE of supply on annualized basis until end of 2018 (current contract term). DSO supply is not included in our base case valuation for Pilbara and we highlight this as potential upside in our Bull/Bear scenario analysis. Operating cost for Pilgangoora project for the initial 5 years is expected to be ~US$220/t LCE (real) for 6% concentrate generating EBITDA margin of ~52% for Pilbara Minerals, in our forecasts.

 Valuation — Our rounded target price of A$0.65/sh is based on 1x NPV. Our DCF valuation uses a WACC of 10% and is in-line with other ASX base metal companies under our coverage. Long-term assumptions include spodumene prices of US$550/t real and A$/US$ of 0.75.

 Balance Sheet and Cash Flow — At 31 March 2017 Pilbara had net cash of A$65m. The company has launched a US$80-100m bond issuance, which if completed would assist with funding the project capex. However, even with placement proceeds of A$45m to General Lithium (A$18m) and Ganfeng (A$27m) this still leaves a funding gap of ~A$35m (assumes A$30m required for WC purposes. Once in production we forecast strong free cash flow with the company being debt free by end FY22. We expect Pilbara to likely defer capex for the 4mtpa expansion option until commissioning of initial capacity to incorporate any learning from phase 1 and partly fund the expansion from operating cash flows.

PLS.AU (Y/E Jun) 2016A 2017E 2018E 2019E Reported Profit (A$m) -55.6 -23.2 -9.5 79.6 Core Net Profit (A$m) -43.5 -23.2 -9.5 79.6 Core EPS (A¢) -5.3 -1.8 -0.6 5.4 Core EPS Growth (%) -520.6 65.6 64.7 941.8 PE Ratio (x) -8.0 -23.1 -65.5 7.8 DPS (A¢) 0.0 0.0 0.0 0.9 Dividend Yield (%) 0.0 0.0 0.0 2.2 Franking Rate (%) 0.0 0.0 0.0 100.0 P/Operating Cashflow (x) -63.6 -47.1 -138.9 8.2 ROE (%) -85.0 -15.9 -6.5 46.7

Prepared for Harsh Bardia Source: Company Reports and dataCentral, Citi Research.

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Lithium Juniors Initiation 17 May 2017 Citi Research

PLS.AX: Fiscal year end 30-Jun Price:$0.42; TP:$0.65; # Shares: 1277m; Market Cap: A$536m; Recomm: Buy/High Risk Profit & Loss (A$m) 2016 2017E 2018E 2019E 2020E Comdty & FX Forecasts 2016 2017E 2018E 2019E 2020E

Sales revenue 0 0 0 233 294 Lithium Carbonate Price (US$/t) na 14,521 12,500 10,250 8,963 Cost of sales 0 0 0 -107 -143 Spodumene Price (US$/t) na 453 890 813 670 EBITDA -41 -23 -5 127 157 Tantalite Price (US$/lb) na 55.1 55.9 57.0 58.1 Depreciation/Amortization 0 0 0 -6 -11 AUDUSD (analyst) (x) 0.74 0.77 0.74 0.73 0.76 EBIT -41 -23 -5 121 146 Net interest -2 0 -4 -7 -6 Production Volumes 2016 2017E 2018E 2019E 2020E Earnings before tax -43 -23 -9 114 140 SC Production (kt) na na 0.0 198.7 300.2 Tax Recurring 0 0 0 -34 -42 LiCO3 Equiv (kt) na na 0.0 29.5 44.5 Exceptional/Other -12 0 0 0 0 Tantalite Production (klbs) na na 0.0 208.9 315.6 Reported net profit -56 -23 -9 80 98 Core NPAT -43 -23 -9 80 98 Production Costs 2016 2017E 2018E 2019E 2020E Balance Sheet (A$m) 2016 2017E 2018E 2019E 2020E C1 Cash Cost (US$/t) na na na 321 282 Cash & cash equiv. 100 261 30 55 56 Net fixed & other tangibles 1 64 202 315 340 Total assets 103 326 234 373 398 Short-term debt 0 0 19 19 22 Long-term debt 0 134 115 96 97 Total liabilities 4 134 134 131 137 Shareholders' equity 98 192 100 242 261 Total equity 98 192 100 242 261 Net debt -100 -127 103 59 64

Cashflow (A$m) 2016 2017E 2018E 2019E 2020E Operating cashflow -5 -11 -4 75 95 Capex -5 -33 -221 -16 -56 Net acq/disposals 0 0 0 0 0 Exploration exp/Other -13 -8 -5 -5 -5 FCF ex acqns & explor exp -20 -52 -231 55 34 Net change in cash 97 161 -231 25 1

Per share data 2016 2017E 2018E 2019E 2020E Reported EPS (¢) -7 -2 -1 5 7 Reserves & Resources Reserves Resource Core EPS (¢) -5 -2 -1 5 7 Amount Grd.() Amount Grd.() DPS (¢) 0 0 0 1 1 Pilgangoora (mt) 70 1.26 156 1.25 CFPS (¢) -1 -1 0 5 6 BVPS (¢) 9 13 7 16 18 Wtd avg ord shares (m) 823 1,277 1,475 1,475 1,475 Wtd avg diluted shares (m) 823 1,277 1,475 1,475 1,475

Valuation ratios 2016 2017E 2018E 2019E 2020E Valuation PE (x) -8.0 -23.1 -65.5 7.8 6.3 WACC (%) 10.0 EV/EBIT (x) -13.9 -18.2 nm 5.1 4.1 EV/EBITDA (x) -13.9 -18.2 nm 4.9 3.8 NPV Valuation US$M A$/sh. FCF yield (%) -3 -8 -36 10 6 Pilgangoora 532 0.58 Dividend yield (%) 0 0 0 2 3 Corporate Costs -31 -0.03 Payout ratio (%) 0 0 0 18 18 Net Cash (debt) 79 0.09 Operating performance 2016 2017E 2018E 2019E 2020E WC & Provisions 1 0.00 EBITDA margin (%) nm nm na 54 53 Total 581 0.63 Operating ROE (%) -85 -16 -6 47 39 Operating ROIC (%) -8,454 -73 -4 34 33 Net debt to equity (%) -101 -66 104 25 24 Debt to total capital (%) 0 41 57 32 31

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13 Lithium Juniors Initiation 17 May 2017 Citi Research

Hard Rocking the Lithium Market

The Story

Pilbara Minerals is an ASX listed miner currently developing its maiden lithium ore mine Pilgangoora in the Pilbara region of Western Australia. The mine is under construction and is expected to produce 44kt LCE of spodumene (based on 2mtpa ore feed processing) once fully ramped up by 2020, contributing ~12% of global lithium supply in 2020.

Completion of the Pilgangoora mine will also mark the shift of supply dominance from historically brine based players to mineral based miners, based on our estimates. Pilbara has been an exploration success story having increased the resource from 9Mt to 156Mt over last three years, with reserves alone supporting a mine life of 30+ years based on the initial 2mtpa mine.

Figure 20. Pilgangoora Resource Profile upgrades over period*

1.6%

1.4%

1.2%

1.0%

0.8% 52Mt @ 1.28% (Sep-15) 0.6% 80Mt @ 1.28% 156Mt @ 1.25% Grade (Li2O %)Grade (Feb-16) (Jan-17) 0.4% 9Mt @ 1.01% 130Mt @ 1.22% (Jul-16) 0.2% (Jun-14)

0.0% 0 20 40 60 80 100 120 140 160 180 200 Resource Size (Mt)

Source: Company reports, Citi Research *bubble size indicating LCE contained

We believe the company is well positioned to capitalize on the lithium market boom driven by electric vehicle growth and emergence of battery storage industry. The company raised A$100m in equity during April 2016 to fund the development of Pilgangoora, with the Definitive Feasibility Study (DFS) for a 2 mtpa plant (44kt LCE) and Pre-feasibility Study (PFS) for a 4mtpa plant (79kt LCE) released in September 2016.

Given the early stage construction of the mine and pending regulatory approvals, Figure 21. Key financial metrics we expect a 3-6 month delay in plant commissioning v the aggressive timetable put A$m (JYE) FY18E FY19E FY20E forward by the company. Revenue - 233 294 EBITDA (5) 127 157 Pilbara initially entered into an offtake agreement with General Lithium Corp. to NPAT (9) 80 98 supply 140ktpa of spodumene for 6 years and secured a second offtake agreement FCF (231) 55 34 in May 2017 to supply additional 160kt of spodumene from stage 1 production to Source: Citi Research Estimates Ganfeng Lithium's (10 years terms extendable for another 10 years).

Pricing of these offtake contracts is linked to preceding 6 month Chinese domestic and import pricing of lithium carbonate to be reset every 6 months. The agreement also includes binding equity subscription for both offtake agreements. The General Lithium deal includes a placement of A$17.8m @ A$0.50/share while the Ganfeng agreement includes a financing support of at least U$20m for stage 1 funding.

The company has also entered into a DSO contact to supply 1.9Mt of run-of-mine crushed and unprocessed 1.5% lithium ore to Shandong Ruifu over an 18 month Prepared for Harsh Bardia period. As the agreement is subject to approvals and pre-payments we have not

14 Lithium Juniors Initiation 17 May 2017 Citi Research

included it in our base case, but with a US$10m prepayment and generation of operating cash flow it would help to fund the development of the main project if it proceeds.

Company timeline

The exploration success in delineating the Pilgangoora project and overall lithium thematic drove strong share price gains for Pilbara in 2015 & 2016, although some of this has been given back as the sector has cooled and the project has moved into the construction phase.

Figure 22. Share Price Performance

1.00 Reserves upgrade (69.8Mt Offtake and @1.26%) Financing with 0.90 Ganfeng 0.80 Resource upgrade (80.2Mt @ Resources 1.26% Li2O) upgrade (156.3Mt 0.70 @1.25%) Resource upgrade (52.2Mt @ 0.60 1.28% Li2O) 0.50 A$/share 0.40

0.30 Offtake agreement EPC contract DSO Offtake awarded to 0.20 A$100m raising RCR agreement U$80-100m Tomlinson 0.10 Bond issue launched 0.00 Jul-15 Jul-16 Oct-15 Apr-16 Oct-16 Apr-17 Jun-15 Jan-16 Jun-16 Jan-17 Mar-17 Mar-16 Feb-16 Feb-17 Nov-15 Dec-15 Nov-16 Dec-16 Aug-15 Sep-15 Aug-16 Sep-16 May-16 May-17 Source: DataCentral, Company reports, Citi Research

Figure 23. Pilbara Minerals: Key developments

Date Event 17-May-17 U$80-100m senior secured bond issue launched 02-May-17 Offtake agreement and Financing support with Ganfeng 25-Jan-17 Resource upgrade (156.3Mt @1.25%) 18-Jan-17 EPC contract awarded to RCR Tomlinson 24-Nov-16 First Ground Broken at Pilgangoora for Site Works 10-Nov-16 Off-Take Agreement to Supply DSO 20-Sep-16 Pilgangoora 2mtpa DFS and 4mtpa PFS released 25-Aug-16 Cooperation Agreements with Altura Mining 22-Aug-16 Reserves upgrade (69.8Mt @1.26%) 4/07/2016 Off-take agreement with General Lithium for 140ktpa 07-Apr-16 A$100m equity raising 14-Jan-16 Suspension of Tabba Tabba commissioning 01-Feb-16 Resource upgrade (80.2Mt @1.26%) 24-Nov-15 A$12m equity raising 24-Sep-15 Resource upgrade (52.2Mt @1.28%) 23-Sep-15 acquires 100% of Tabba Tabba from JV partner Valdrew

01 -Jun-15 A$6.5m equity raising Source: Company reports, Citi Research

Prepared for Harsh Bardia

15 Lithium Juniors Initiation 17 May 2017 Citi Research

Bull/Bear: Pilbara Minerals Limited (PLS.AX)

Prepared for Harsh Bardia

16 Lithium Juniors Initiation 17 May 2017 Citi Research

Production and cost profile

Pilbara is planning for commissioning to start in 1Q18 and 1st shipment in 2Q18, but as is typical for development stage projects, this has already slipped from commissioning starting in 4Q17 and 1st shipment in 1Q18.

Figure 24. January 2017 Project Delivery Schedule Figure 25. May 2017 Project Delivery Schedule

Source: Company Reports Source: Company Reports

Given further delays are likely as the project moves through the construction phase, we assume commissioning starting in 2Q18 and 1st shipment in 3Q18, with full capacity by end 2019. This drives a production forecast of 199kt (29.5kt LCE) of spodumene in FY19, increasing to 300kt in FY20+ (44kt LCE).

Operating cost for Pilgangoora project for first 5 years of operation is expected to be ~US$220/t LCE (real and after Ta by-product credits) for 6% concentrate, although we expect higher costs initially until the project reaches full capacity. This generates an attractive EBITDA margin of ~52% at our long-term price forecasts.

Figure 26. Pilgangoora production profile Figure 27. Pilgangoora project cash cost and margin

90 300 60%

75 55% 60 250

45 50% Kt LCE 30 200 US$/t Spodumene US$/t 15 45%

- FY19 FY20 FY21 FY22 FY23 FY24 150 40% FY19 FY20 FY21 FY22 FY23 FY24 Production (33% weight on phase II) Production unweighted Capacity EBITDA Margin (%) Cash cost- real(LHS)

Source: Citi Research Estimates Source: Citi Research Estimates

Sensitivity analysis

We have run a series of sensitivities above and below our base case spodumene price assumptions and AUDUSD exchange rate. Results presented below in Figure 28 and Figure 29. Prepared for Harsh Bardia

17 Lithium Juniors Initiation 17 May 2017 Citi Research

Figure 28. Sensitivity of earnings and NPV to Spodumene price

2017 2018 2019 2020 2021 2022 2023 2024 2025 Spodumene Price EBITDA Base case (23) (5) 127 157 145 163 177 181 185 +10% (23) (5) 147 182 171 191 207 212 216 -10% (23) (5) 107 131 119 134 147 150 154

Underlying NPAT Base case (23) (9) 80 98 87 100 111 115 118 +10% (23) (9) 94 116 106 121 133 137 142 -10% (23) (9) 65 80 69 80 90 92 95

NPV/sh Base case 0.63 +10% 0.77 -10% 0.50 Source: Citi Research Estimates

Figure 29. Sensitivity of earnings and NPV to FX

2017 2018 2019 2020 2021 2022 2023 2024 2025 AUDUSD EBITDA Base case (23) (5) 127 157 145 163 177 181 185 +10% (23) (5) 107 132 119 134 147 150 153 -10% (23) (5) 151 187 177 197 214 218 223

Underlying NPAT Base case (23) (9) 80 98 87 100 111 115 118 +10% (23) (9) 66 80 69 80 89 92 95 -10% (23) (9) 97 119 110 125 138 142 147

NPV/sh Base case 0.63 +10% 0.50 -10% 0.80 Source: Citi Research Estimates

Valuation, Target Price and Risks

Our NPV for Pilbara of A$0.65/share, based on the following assumptions:

 Prices – long term spodumene price of U$550/t and AUDUSD of 0.75.

 Capacity – we include the stage 1 capacity of 2mtpa and put a 33% probability on the expansion to 4mtpa.

 Capex Cost – we assume stage 1 capex of A$250m and stage 2 capex of A$120m.

 Exploration – we do not include any cost or benefit for exploration spend or the potential for additional resources to be discovered at other projects.

The sensitivity and risk around these assumptions is discussed in further detail below. Based on these assumptions we generate an NPV for Pilgangoora of $853m with an IRR of 36%. Prepared for Harsh Bardia

18 Lithium Juniors Initiation 17 May 2017 Citi Research

Figure 30. Pilbara Minerals NPV valuation

A$m A$/share Pilgangoora 853 0.58 Exploration - - Corporate Costs (49) (0.03) Net Cash (Debt) 127 0.09 WC & Provisions 1 0.00 Total 933 0.63 WACC 10%

Source: Citi Research Estimates

With no near-term earnings as the project is constructed and commissioned we base our target price purely on our NPV of A$0.65/share. This is typical of the methodology we apply to development companies, but will look to transition to a blend of PE & EV/EBITDA based multiples and NPV, typically weighted 50:50 between the two methodologies, as the company transition to generating earnings.

Figure 31. Pilbara Resources Target price calculation

P/NPV 1.0x 0.63 Rounded 0.65 Last Px* 0.42

Upside/Downside 55% Source: Citi Research Estimates, *pricing as on close 16 May 2017

Shareholding Structure

Plibara has quite an open share register with the only substantial being Mineral Resources Ltd (MIN.AX; A$9.46; Not Rated; 16 May 17; 16:00) after the A$50m agreement regarding the first right of refusal (ROFR) for offtake and removal of the 2.5% revenue royalty in November 2016.

Figure 32. PLS: Key Shareholders * Figure 33. PLS: Board and Management holding

Mineral Resources 8.2% Neil Biddle 2.6% UBS 4.6% John Young 1.5%

Top 20 34.6% Kenneth Brinsden 0.07%

Anthony Kiernan 0.01% Source: IRESS, Bloomberg, Citi Research as on 30 Apr 2017 Source: Bloomberg, Citi Research

Figure 34. PLS issued options

Expiry date No. of Vested/ Exercise options Unvested price 22-Dec-16 1,250,000 Vested $0.05 2-Mar-17 4,625,000 Vested $0.03 22-Mar-17 11,000,000 Vested $0.10 1-Dec-17 3,268,182 Vested $0.15 16-May-18 37,500,000 Vested $0.40 16-May-18 800,000 Unvested $0.40 16-May-19 31,500,000 Unvested $0.40 16-May-18 7,000,000 Vested $0.65 6-Sep-19 13,000,000 Unvested $0.63

Total 109,943,182 Source: Company reports, Citi Research Prepared for Harsh Bardia

19 Lithium Juniors Initiation 17 May 2017 Citi Research

Risks

Funding – Pilbara needs ~A$250m to build the 2mtpa capacity stage 1 (~A$370m for 4mtpa) and the recently announced bond issue offer (U$80-100m), on top of current cash position of ~A$65m, goes a large way to funding this. Our assumption also includes equity subscription proceeds from General Lithium (A$18m), Ganfeng (A$27m) and a further A$35m placement for cash buffer and contingencies for a total proceeds of ~A$80m. The equity placements to General Lithium and Ganfeng are subject to regulatory approval in China and represent a risk given the tightening capital controls.

Regulatory – We believe geopolitical risk is low for the Pilgangoora project given its location in Western Australia mining region. However the project still requires several approvals (even to ship the DSO ore from Port Hedland) and any delay in the process may affect the potential cash generation capacity and timing for the company.

Operational – Given the early stage and lack of any past experience in the spodumene mining/processing, we believe there is a significant risk at operational level for the Pilgangoora project. Galaxy Resources is still working on getting the recoveries and product quality at its Mt Cattlin mine as per desired specifications as is Mt Marion. We believe the decision to upgrade to 4mtpa plant depends on how quickly and smoothly the company ramps up to 2mtpa profile and consistent product quality.

Lithium price – On the macro front lithium price presents the key risk for the Pilgangoora project scope and valuation. Price in turn is driven by a number of factors including global demand for EVs and supply side response from other lithium producers. We believe the company will likely be able to maintain heathy margins on our long term spodumene price of $550/t.

Conversion Capacity – We expect demand growth for lithium to continue to remain strong over the next few years, but there is a risk for Pilbara that the construction of conversion capacity in China fails to develop at the rate of spodumene supply, Galaxy experienced the challenge of building and ramping up a conversion facility, which results in an oversupply of spodumene and pressure on the price relative to the lithium carbonate price. Mitigating this risk is the offtake contract with two of the key players in the China lithium industry.

Balance Sheet and Cash Flow

At 31 March 2017 Pilbara had net cash of A$65m. This leaves the very pertinent question of how the our estimate of A$250m (A$234m company expectation) capex for the project is funded.

Firstly, with ~A$18m spent to MQ17 on long-lead time items (ball mill, high pressure grinding rolls and concentrate filter press) and development, this leaves ~A$230m of capex remaining to be funded when fully approved.

Assuming the current bond offer of U$80-100m is closed at the top end of the range would mean a debt proceed of ~A$133m.

This leaves a remaining funding requirement of ~A$100m. Given minimum cash levels need to be ~A$30m, equates to 3 months working capital at full production, this leaves a ~A$65m funding gap. Prepared for Harsh Bardia

20 Lithium Juniors Initiation 17 May 2017 Citi Research

This funding gap is partly covered by the subscription agreements signed with General Lithium (A$17.8m @ A50¢) and Ganfeng (US$20m or ~A$27m committed placement), but we have also allowed for a top-up equity issuance of A$35m in our estimates to create a buffer against overruns or delays and also prepare for stage 2 expansion.

Figure 35. Pilbara Minerals’ FCF and yield profile Figure 36. Dilution Impact from equity placements

120 20% Price Share Amount 80 A$ mn A$mn 10% 40 General Lithium Issue 0.50 36 17.8 - Ganfeng 0.43 63 26.7 0% Further Issue 0.35 100 35.0 (40)

Total 0.40 198 79.4 (80) -10% (120) -20% (160) (200) -30% (240) (280) -40% FY18 FY19 FY20 FY21 FY22

FCF FCF Yield

Source: DataCentral, Citi Research Estimates Source: Citi Research Estimates

Figure 37. PLS cash position based on 60% debt financing Figure 38. Pilgangoora Stage 1 capex and funding source

350 300

300 250 250 Cash Buffer

200 200 Exploration, corporate & others 150 Stage 1 Capex 150

100 A$ Mn Equity - additional placement PLS PLS Cash balance A$Mn 50 100 Equity - Ganfeng - Equity - General Lithium 50 Debt

Cash Base Case 4 Mtpa Min Cash 0

Source: Citi Research Estimates Source: Citi Research Estimates

In addition to cash flow, financing for the expansion to 4mtpa could come from either additional debt or finalization of the proposed A$65m prepayment from Ganfeng that is associated with the additional offtake of 75-150kt.. Prepared for Harsh Bardia

21 Lithium Juniors Initiation 17 May 2017 Citi Research

Figure 39. Pilbara net debt bridge 2016-2020 for base case Figure 40. Pilbara net debt bridge 2016-2020 for 4mtpa (100%) expansion case

500 500

400 400

300 300

200 200

A$ Mn 100 A$ Mn 100

- -

-100 -100

-200 -200 Net Cash Capex Royalties Exploration Dividends Equity Cash from net Net Cash Capex Royalties Exploration Dividends Equity Cash from net at the end raising from debt/(cash) at the end raising from debt/(cash) of 2016 operation at the end of 2016 operation at the end of 2020 of 2020

Source: Citi Research Source: Citi Research

Pilgangoora Lithium Project Location

The company's flagship Pilgangoora project is located in the Pilbara region of Western Australia about 120km south-south east of the Port Hedland (one of the major bulk handling ports in Australia). The project tenements cover 49 sq.km of area comprising of three exploration and three mining leases.

The project shares common boundaries with Altura Mining's lithium project of the same name, and the two companies signed an access agreement in Aug 2016 to derive synergies from site access, operational and strategic opportunities. Prepared for Harsh Bardia

22 Lithium Juniors Initiation 17 May 2017 Citi Research

Figure 41. Pilgangoora project location

Source: Company reports

Geology

The Pilgangoora project is a lithium-tantalite deposit that lies within the East Strelley greenstone belt and is about 30km east of Wodgina. The centre of the project comprises of three pegmatite groups namely Eastern, Western and Central (Figure 43). In addition two outlying pegmatite groups, Monster and Southern, have also been identified within Pilbara Minerals' tenements. In the feasibility report the LOM strip ratio for the Pilgangoora project is expected to be ~4x.

Figure 42. Base of 70Mt Reserve Pit Figure 43. Pilgangoora central mineralisation

Source: Company reports

Source: Company reports Prepared for Harsh Bardia

23 Lithium Juniors Initiation 17 May 2017 Citi Research

Resource/Reserve and Mine Life

Based on the current reserve of 70mt @ 1.26% Li2O the mine life of the 2Mtpa initial mine is estimated at ~35 years.

Pilbara minerals has also completed a Pre-feasibility study to double the project capacity to 4Mtpa, which would reduce the mine life to ~19 years, although this has

the potential to increase given the resource of 156mt @ 1.25% Li2O (subject to economics given the deepening pit and rising strip ratio).

Figure 44. Pilgangoora Resources

Category Tonnage (Mt) Li2O (%) Ta2O5 (ppm) Fe2O3 (%) Li2O (T) Ta2O5 (Mlbs) Measured 17.6 1.39 151 0.44 244,000 5.9 Indicated 77.7 1.31 125 0.58 1,017,000 21.5 Inferred 61.1 1.13 125 0.71 691,000 16.8

Total 156.3 1.25 128 0.61 1,952,000 44.2 Source: Company reports, Citi Research

Figure 45. Pilgangoora Reserves

Category Tonnage (Mt) Li2O (%) Ta2O5 (ppm) Fe2O3 (%) Li2O (T) Ta2O5 (Mlbs) Proven 17.5 1.31 143 0.94 230,000 5.5 Probable 52.6 1.25 128 1.07 653,000 14.8

Total 69.8 1.26 132 1.04 883,000 20.3 Source: Company reports, Citi Research

Mining & Processing

Ore at Pilgangoora will be mined through a conventional open pit truck and hydraulic excavator based mining method. The ore at hard rock lithium mines is typically hard and abrasive, which drives higher levels of wear on equipment and machinery and will need to be managed. The pit will have 10m benches and based on the current reserve will reach a depth of ~250m.

With multiple ore horizons the management of dilution between waste and ore is critical. Pilbara has tried to minimize this risk through the extensive amount of mine plan drilling that has already been undertaken, at a not insignificant upfront cost.

Aside from dewatering of the mine the other challenge that is likely to be presented from the mine side is the presence of potential acid forming material in the Eastern and Central deposits that will need to be categorized and stockpiled correctly.

As has been experienced by other spodumene producers in Australia, the key challenge for Pilbara is likely to come in the form of the processing facilities. The key processing steps (Figure 46) are: crushing, feed preparation, dense media separation, gravity separation, grinding, flotation, magnetic separation (to reduce iron content) and dewatering. There is ongoing test work to improve recoveries and optimize reagent usage. The concentrate plant is expected to process 2Mtpa, with a nominal feed capacity of 270tph and availability of 85% to produce 314ktpa of concentrate. Prepared for Harsh Bardia

24 Lithium Juniors Initiation 17 May 2017 Citi Research

Figure 46. Pilgangoora plant process flow

Source: Company reports

The processing flow sheet at Pilgangoora is more similar to Greenbushes than Mt Cattlin in that there will be a flotation circuit from day 1.

Since the DFS there has also been additional metallurgical testing and pilot scale process programs targeted at the heavy media separation (HMS) and gravity & flotation circuits. This additional test work is aimed at optimizing operating parameters and reagent usage and should not result in significant mechanical changes to the plant that could driver delays/higher capex costs.

We base our production assumptions for Pilgangoora on 85% plant utilization and 72.5% Li recovery rates, which drives production of 300ktpa of concentrate at full production for stage 1.

The target recovery level from the DFS was 77.5%, which is significantly higher than Mt Cattlin, but lower than the >80% achieved from the higher grade Greenbushes. If this can be achieved then there is upside to our production estimates.

In addition to grade, the other aspects that impact recovery for a hard rock lithium mine are:

 Crystal size

 Impurities in the crystal

 Density of the material

 Quality of the water used in processing

Prepared for Harsh Bardia  Grind size

25 Lithium Juniors Initiation 17 May 2017 Citi Research

Further work is also being undertaken to optimize the flow sheet for the potential expansion to 4mtpa, including on whether installation of a hydro flow circuit ahead of the DMS and flotation circuit could reduce the load on that part of the plant. By removing product grade material ahead of these circuits would increase the effective capacity of the plant, but is still only in the evaluation stage.

The concentrate will be trucked the ~130km to Port Hedland, with the use of cranes to load the Rotabox on to ships. Shipments will utilize ~30kt handysize vessels and not be constrained by the same tidal flows that affect the capsize ships that dominate trade through the port.

Product Specification

The target final product specification is a 6% Li2O chemical spodumene concentrate with medium iron. Spodumene concentrate is further processed at conversion facilities in China to make it consumable for various industrial/battery uses – need ~7.5t of spodumene concentrate to produce a tonne of lithium carbonate (90% recovery).

This 6% grade spodumene concentrate seems to be rapidly become the default specification from the hard rock lithium miners, although achieving this specification is not as straight forward as Mt Marion has discovered with product split between 4% and 6% grade material at the moment as commissioning continues. Mt Cattlin also had to make extensive plant modification to achieve this specification.

To minimize this risk Pilbara has appointed Primero who has been involved in a number of lithium projects in Australia, including Mt Cattlin that operationally appears to be commissioning well.

For the tantalum concentrate the target grade was increased from 5% in the PFS to 30% Ta2O5 in the DFS, with further off site dry secondary mineral dressing

Technical Grade

There is also the potential to be able to produce a technical grade lithium spodumene, 6.5-7.5% grade depending on further testing and recoveries, which could be ~10% of production or 4.5kt LCE.

Aside from grade, technical concentrate also has a low iron ore content and is likely to only be produced from certain parts of the orebody, largely from the Eastern Domain.

The technical lithium spodumene market is currently dominated by Greenbushes (~85% market share) and is largely used in the glass and fiberglass market. The current market is ~27kt (LCE) a year so supply from Pilgangoora would represent ~17% of annual demand for stage 1 capacity, and therefore require growth in the overall market to avoid collapsing the premium to chemical spodumene.

We do not include the production of technical concentrate in our forecasts, but it could represent some upside for the project given the c20% price premium and only notional additional costs to produce the product.

Prepared for Harsh Bardia

26 Lithium Juniors Initiation 17 May 2017 Citi Research

Offtake

Pilbara Minerals has 2 key offtake contracts:

 General Lithium – 140ktpa of chemical grade spodumene for 6 years (option to extend for another 4 years). The delivery period starts from 1Q 2018 with prices linked to Chinese domestic and import pricing of battery grade Li2CO3. Along with off take agreement the company also entered into a MoU with GLC to participate in evaluation and development of an offshore spodumene conversion plant to process the concentrate from Pilgangoora.

 Ganfeng Lithium – stage 1 spodumene volumes (160kt) in an agreement with Ganfeng Lithium. The CIF based pricing is linked to lithium carbonate prices and is reset every six months for 10 years with an option for Ganfeng to extend the contract for a further 10 years. Subject to further agreement and investment decision, the offtake provision includes 75-150kt of stage 2 volumes and A$65m cash pre payments or debt facility to fund 50% of the stage 2 capex. Ganfeng is China’s largest fully integrated lithium company (mkt cap >US$4b) and also has an interest in Mt Marion, LAC (Cauchari-Olaroz project in Argentina) and other projects.

Figure 47. Pilgangoora product split (300kt)

140kt SC6 160kt SC6 (contracted to (contracted to General Ganfeng Lithium) Lithium) 47% 53%

Source: Company reports, Citi Research

DSO

In Nov 2016 the company signed another off-take agreement to supply 1.9Mt of run- of-mine 1.5% lithia ore to Shandong Ruifu (Chinese lithium carbonate producer) over a two year term with delivery from late 2017 (previous guidance of July 2017). Pricing of crushed but unprocessed ore is undisclosed, but the company indicated healthy implied operating margins and a potential U$10m prepayment.

To crush and prepare the ore Pilbara signed a non-binding MOU with Atlas Iron (CEO Ken Brinsden used to be CEO of Atlas) to use the infrastructure at the nearby Mt Dove mine that is now closed.

The agreement is subject to several approvals including the company securing access to the bulk export facilities, obtaining of authorizations for shipment of the ROM product, clearance from Global Advanced Metals (GAM) as they have right of first refusal clause for tantalum in ore, Pilbara’s Board final investment decision for

Prepared for Harsh Bardia project development, commencement of mine construction and regulatory approvals in China.

27 Lithium Juniors Initiation 17 May 2017 Citi Research

There is potential for other DSO agreements as Chinese spodumene producers look to find more consistent and better quality ore supply – Mineral Resources has already begun shipping DSO ore from Port Hedland from the Wodgina mine (purchased the lithium rights from GAM in 2016 who retain the tantalum rights, but is also an iron ore mine operated by Atlas).

Although DSO sales would allow an early start to mining and boost cash flow, we do not think it is a sustainable business and given the various approvals required do not include it in our base case estimates.

Tantalum

For tantalum there is a first right of refusal offtake with Global Advanced Metals (GAM), and offtake contracts for the concentrate are yet to be finalized.

Tantalum is primarily used in capacitors, that are used in electronic devices like mobile phones, laptops, computers etc. Other uses are in superalloys (aircraft engines). Source of supply is becoming an increasing focus given the shift in production from Australia to Rwanda & the DRC and USA legislation aimed at conflict material.

Capital Requirements

Pilbara recently increased the capex estimate for the initial 2mtpa project to A$234m (Citi est A$250m).

This was up from A$224m (A$214m in capex and A$10m in pre-production costs) in the September 2016 Definitive Feasibility Study (DFS) and the original cost estimate in the March 2016 pre-feasibility study of A$184m. Part of the cost increase from the PFS to the DFS was driven by scaling certain parts of the plant, primary crusher and crushed ore stockpile, to handle the potential expansion to 4mtpa.

The most recent increase in costs was driven by the incorporation of flowsheet changes after additional test work (has delivered operating cost savings) and additional requirements for the access road rail crossings.

The cost for the expanded 4Mtpa capacity was previously estimated at A$362m (Citi A$370m) when the pre-feasibility study (PFS) published on the same day as DFS in September last year.

The capex cost does not include any cost of the modifications required to produce technical grade spodumene concentrate (testwork ongoing) or DSO shipments.

On a LCE basis this equates to US$4,000/t, which is similar to other proposed hard rock lithium projects. Prepared for Harsh Bardia

28 Lithium Juniors Initiation 17 May 2017 Citi Research

Figure 48. Pilgangoora Capital cost for 2Mtpa plant and 4Mtpa Figure 49. PLS vs peers on project capital intensity expansion option

400 18,000 16,000 Brine Mineral 14,000 300 12,000 10,000

200 8,000 A$ Mn 6,000 4,000 100 2,000 -

0 Process Plant/ Owners Costs Other Costs Contingency TOTAL Infrastructure

Base case 2Mtpa Expansion option 4Mtpa Source: Company reports, Citi Research Source: Company reports, Citi Research Estimates

Operating Costs

The DFS study estimated operating costs for the 2mtpa plant to be A$276/t (US$207/t @ 75¢ A$) after A$100/t (US$75/t) of tantalum credits. This operating cost would fall to A$331/t for the expanded 4mpta (PFS)

Costs in the first 5 years were expected to be lower at US$189/t, increasing due to depth of the mine and grade to US$196/t over the first 15 years.

All inclusive LOM average operating cost after accounting for tantalite by-product credits and royalties (Govt./Pvt. and native title) are expected to be A$319/t, which has been fallen from A$344/t (A$307/t @ 4mtpa) due to the settlement with Mineral Resources that removed the 2.5% revenue royalty.

The company has recently lowered the cost guidance by c$15/t (spodumene) driven by process optimization, however we have used the conservative DFS/PFS numbers as our base case as these gains are likely to be offset by other factors – history of mining projects says that costs typically underestimated.

We assume lower tantalum prices than the DFS so our life of mine costs for the 2mtpa case are higher at US$220/t. Whilst further test work has the potential to deliver further cost savings relative to the DFS, this is offset by few mining projects being able to deliver on DFS estimates.

We do however recognize that costs will be lower in the initial years, and allow for escalation after the first 5 years over LOM. Prepared for Harsh Bardia

29 Lithium Juniors Initiation 17 May 2017 Citi Research

Figure 50. Cash Operating Costs Estimate Details Figure 51. PLS vs peers on operating cost

450 8000 Brine Mineral

400 7000 Royalties 350 6000 NA LithiumNA

Ocean Freight 5000 Finland Keliber 300 Rose (Critical) Cinovec (EMH)

G&A, selling & Other 4000 (Sonora) Bacanora Jilin Canada Jilin Jien 250 (Altura) Pilgangoora Mibra (AMG) Mibra Sal (GXY) Sal de Vida US$/t LCE Whabouchi (NMX) Whabouchi 3000 (PLS) Pilgangoora Transport and Loading (SQM/LAC) Cauchari

200 de Rincon (Enirgi) Salar 2000 A$/t ofA$/t concentrate 150 Processing 1000 100 Mining 0

By product credits 0 25 50 75

50 100 125 150 175 200 225 250 275 300 325

0 2 Mtpa 4 Mtpa

Source: Company reports, Citi Research Source: Company reports, Roskill, Citi Research Estimates

Current status

Pilbara recently updated the development schedule that showed a slipping in the timeline as highlighted earlier, but this was to be largely expected given the aggressive timeline that companies trying to advance projects adopt.

Figure 52. Pilgangoora project delivery schedule

Source: Company reports, Citi Research

Operations – The company has awarded EPC contract for Pilgangoora project to engineering firm RCR Tomlinson in 2 stages. Stage 1 is FEED (Front-end Engineering and Design) program to determine the overall scope of the work, timeline and cost with total commitment from the company is fixed at ~A$10m. Post stage 1 Pilbara Minerals has option to proceed with stage 2 construction for a total price cap of A$148m (Including cost incurred in stage 1).

During last quarter of 2016 the company purchased 300-person Rail camp 3 facility from Roy Hill for an undisclosed price. OTOC has been given contract to de- construct, transport, erect and commission initial 60 rooms and common facility for a lump sum commitment of A$4.8m. The company expects the commissioning of

Prepared for Harsh Bardia the full camp at Pilgangoora site during second quarter of 2017.

30 Lithium Juniors Initiation 17 May 2017 Citi Research

Project financing – The recently announced bond issue offer (U$80-100m), on top of current cash position of ~A$65m, goes a large way to financing the project capex. Our assumption also includes equity subscription proceeds from General Lithium (A$18m), Ganfeng (A$27m) and further A$35m placement for cash buffer and contingencies for a total proceeds of ~A$80m. The equity placements to General Lithium and Ganfeng are subject to regulatory approval in China and represent a risk given the tightening capital controls.

Prepared for Harsh Bardia

31 Lithium Juniors Initiation 17 May 2017 Citi Research

Board and Management

Tony Kiernan, Non-Executive Chairman, LLB

Mr. Kiernan has over 35 years of experience in the field of management and operation of publicly listed companies. He also holds Chairman post in ASX listed Chalice Gold Mines and Venturex Resources and former chairman of BC Iron, Uranium Equities, FYI Resources and directorship in several public listed companies. During the course of his career as a lawyer he has worked and advised extensively in the field of resources and information technology

Ken Brinsden, Managing Director and CEO, B. Eng (Mining)

Former Managing Director of Atlas Iron, Mr. Brinsden joined Pilbara Minerals in Jan 2016 as CEO and was promoted as managing Director and CEO in May 2016. He is a mining engineer with over 20 years of experience. His field of knowledge includes mine management, production, and brown-fields and green-fields development roles across various commodities

Brian Lynn, Chief Financial Officer, CA, B.Bus.

Former Chief Financial Officer of Atlas Iron, Mincor Resources NL and executive director of Tethyan Copper Co, Mr Lynn has over 25 years of experience in the Resources Sector. He is a Chartered Accountant by profession.

Prepared for Harsh Bardia

32 Lithium Juniors Initiation 17 May 2017 Citi Research

Company Focus

Galaxy Resources Limited (GXY.AX) Initiate with a Neutral

 Initiation of Coverage  Initiate with a Neutral/High Risk; $0.55 target price — We initiate coverage of Galaxy Resources with a Neutral rating and a $0.55 target price. Galaxy is an ASX listed miner with significant exposure to both spodumene and brine based lithium reserves. With the restart of the Mt Cattlin mine and disposal of the lithium

carbonate conversion plant in China the company has moved its focus back to upstream mining business. Neutral/High Risk Price (16 May 17 16:00) A$0.50  What's Next — With Mt Cattlin re-commissioning and operational issues getting Target price A$0.55 resolved, the company's future focus area will be the development of other Market Cap A$988M projects in its portfolio. Recent debt (US$40m debt facility) and equity financing US$732M (A$61m rising) along with cash flow from spodumene concentrate sale means Expected share price return 10.0% that Galaxy can fund the initial development of Sal De Vida (SDV) - recently Expected dividend yield 0.0% announced the development team to advance the project further. The company is Expected total return 10.0% looking at de-risking the project further through pilot plant (1,200tpa capacity) test works and initial development that would allow Galaxy to extract more value if and when it divests a part of the project to fund further capital obligations.

 Valuation — Our rounded target price of A$0.55/sh is based on 1x group NPV. Our DCF valuation uses a WACC of 10% and is in line with other ASX base metal companies under our coverage. Long-term assumptions include lithium carbonate price of US$7,500/t (2017 real), spodumene price of US$550/t and A$/US$ of 0.75.

 Balance sheet and cash flow — The company reported gross debt of A$40m (net debt A$31m) as at 31 Dec 2016, which is a marked improvement from A$193m debt during 1H'13. The sale of the Jiangsu conversion facility has been one of the major milestones for the reduction in leverage. The recent equity placement further enhanced balance sheet flexibility and allows initial stage funding for SDV project development. We expect leverage to stay at reasonable levels despite construction of US$376m Sal de Vida project (assuming 70% project financed). Mt Cattlin is expected to generate cash flow of ~A$50m during 2017 (after accounting for prepayments of 2016 volumes).

GXY.AU (Y/E Dec) 2016A 2017E 2018E 2019E Reported Profit (A$m) 122.8 49.9 107.1 64.2 Core Net Profit (A$m) 47.4 49.9 107.1 64.2 Core EPS (A¢) 3.1 2.6 5.4 3.3 Core EPS Growth (%) 337.2 -17.7 110.7 -40.0 PE Ratio (x) 16.0 19.4 9.2 15.4 DPS (A¢) 0.0 0.0 0.0 0.0 Dividend Yield (%) 0.0 0.0 0.0 0.0 Franking Rate (%) 0.0 0.0 0.0 0.0 P/Operating Cashflow (x) 289.5 23.8 9.5 15.1 ROE (%) 16.6 11.0 22.1 11.7

Prepared for Harsh Bardia Source: Company Reports and dataCentral, Citi Research.

33

Lithium Juniors Initiation 17 May 2017 Citi Research

GXY.AX: Fiscal year end 31-Dec Price:$0.50; TP:$0.55; # Shares: 1976m; Market Cap: A$988m; Recomm: Neutral/High Risk Profit & Loss (A$m) 2016 2017E 2018E 2019E 2020E Comdty & FX Forecasts 2016 2017E 2018E 2019E 2020E

Sales revenue 0 171 231 227 201 Lithium Carbonate Price (US$/t) 16,139 13,707 11,250 9,500 8,563 Cost of sales 0 -94 -97 -110 -126 Spodumene Price (US$/t) 570.0 905.0 875.0 750.0 570.0 EBITDA -8 69 126 109 66 Tantalite Price (US$/lb) 55.0 55.4 56.4 57.6 58.8 Depreciation/Amortization 0 -17 -18 -21 -24 AUDUSD (analyst) (x) 0.74 0.77 0.74 0.73 0.76 EBIT -8 52 108 87 42 Net interest -9 -2 -1 -13 -27 Production Volumes 2016 2017E 2018E 2019E 2020E Earnings before tax -17 50 107 74 15 SC Production (kt) 11.3 159.7 162.7 186.5 186.5 Tax Recurring 65 0 0 -10 -4 LiCO3 Equiv (kt) 1.5 22.5 23.3 26.7 26.7 Exceptional/Other 75 0 0 0 0 Tantalite Production (klbs) na na 271.5 263.3 263.3 Reported net profit 123 50 107 64 10 Core NPAT 47 50 107 64 10 Production Costs 2016 2017E 2018E 2019E 2020E Balance Sheet (A$m) 2016 2017E 2018E 2019E 2020E C1 Cash Cost (US$/t) na 352 334 337 359 Cash & cash equiv. 9 105 62 95 78 Net fixed & other tangibles 531 530 659 849 1,031 Total assets 554 655 743 966 1,131 Short-term debt 40 0 0 0 50 Long-term debt 0 40 40 220 342 Total liabilities 81 223 206 409 633 Shareholders' equity 473 432 537 557 498 Total equity 473 432 537 557 498 Net debt 31 -64 -22 125 314

Cashflow (A$m) 2016 2017E 2018E 2019E 2020E Operating cashflow 3 41 104 65 16 Capex -21 -15 -147 -212 -205 Net acq/disposals 2 0 0 0 0 Exploration exp/Other 5 0 0 0 0 FCF ex acqns & explor exp -19 26 -43 -146 -189 Net change in cash 5 95 -43 33 -17

Per share data 2016 2017E 2018E 2019E 2020E Reported EPS (¢) 8 3 5 3 1 Reserves & Resources Reserves Resource Core EPS (¢) 3 3 5 3 1 Amount Grd.() Amount Grd.() DPS (¢) 0 0 0 0 0 Mt Cattlin (mt) 10 1.04 16 1.09 CFPS (¢) 0 2 5 3 1 SDV LiCO3 Eq. (mt) 1 7 BVPS (¢) 26 22 27 28 25 Wtd avg ord shares (m) 1,474 1,940 1,976 1,976 1,976 Wtd avg diluted shares (m) 1,518 1,940 1,976 1,976 1,976

Valuation ratios 2016 2017E 2018E 2019E 2020E Valuation PE (x) 16.0 19.4 9.2 15.4 96.7 WACC (%) 10.0 EV/EBIT (x) nm 18.7 8.8 12.0 28.9 EV/EBITDA (x) nm 14.2 7.6 9.7 18.5 NPV Valuation US$M A$/sh. FCF yield (%) -2 3 -4 -15 -19 Mt. Cattlin 291 0.20 Dividend yield (%) 0 0 0 0 0 Sal de Vida 448 0.32 Payout ratio (%) 0 0 0 0 14 Exploration 32 0.02 Operating performance 2016 2017E 2018E 2019E 2020E Corporate Costs -70 -0.05 EBITDA margin (%) nm 40 54 48 33 Net Cash (Debt) 22 0.02 Operating ROE (%) 17 11 22 12 2 WC, Closure Costs & Provisions 50 0.04 Operating ROIC (%) 18 12 24 13 5 Total 773 0.54 Net debt to equity (%) 7 -15 -4 22 63 Debt to total capital (%) 8 9 7 28 44

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Back to the Future: Galaxy Returns to Mining

The story so far

Galaxy Resources is an ASX listed miner with significant exposure to both spodumene and brine based lithium reserves. The company's portfolio includes three major properties 1) Mt Cattlin hard rock mine in Australia, 2) Sal de Vida brine project in Argentina and 3) hard rock James Bay project in Canada. Only Mt Cattlin is operational at present which is expected to produce 160kt of spodumene in 2017 (~20kt LCE).

Mt Cattlin mine is expected to produce The company started its operational journey back in 2010 with commencement of 160kt of spodumene in 2017 (~20kt LCE) the Mt Cattlin operations. The group then decided to move into the downstream representing 9% of the global LCE lithium market with construction of the Jiangsu conversion plant in China to produce supply, in our view battery grade lithium carbonate. After commissioning issues dwindled cash reserves and high leverage put pressure on the balance sheet, the Jiangsu plant was sold in 2015 to its competitor Tianqi Lithium for an enterprise value of US$173m.

Mt Cattlin was idled in mid-2012 as the delayed commissioning of the Jiangsu plant had meant that considerable stockpiles of spodumene concentrate had been built up. Additionally, a 3 year spodumene concentrate feedstock supply contract was signed with Talisman in 2013 that was lower cost, and better quality, than the production from Mt Cattlin.

When cash was tight Galaxy farmed out a 50% stake in Mt Cattlin to General Mining in 2015 who planned to restart the operation. Galaxy once again moved to 100% ownership of Mt Cattlin after taking over General Mining in 2016 (A$263m EV).

Galaxy’s interests in the James Bay hard rock property and Sal de Vida brine project came through the acquisition of Lithium One in 2012 (C$112m EV).

The current focus of the company is to ramp up Mt Cattlin operations to expanded throughput of 1.6Mtpa (800ktpa originally) and maintain product quality with >5.5% Li2O grade and <5% mica content. The company has contracted 120kt off take volumes for 2017 at US$830/t for 5.5% spodumene grade, with US$15/t uplift for every 0.1% increase in Li2O grade indicating possible realization of US$905/t for a 6% grade.

What is the next catalyst for GXY? Figure 53. Key financial metrics

A$m (DYE) 2017e 2018e 2019e 2020e With Mt Cattlin commissioning progressing and mica issue largely resolved, the Revenue 171 231 227 201 company's future focus area will be the development of other projects in its portfolio. EBITDA 69 126 109 66 Recent debt (US$40m debt facility) and equity financing (A$61m rising), along with NPAT 50 107 64 10 cash flow from spodumene concentrate sale, means that Galaxy should be able to FCF Yield fund the initial development of Sal De Vida (SDV). 3% -4% -15% -19% Source: Citi Research Estimates Galaxy recently announced the appointment of development team to advance this project and is looking at de-risking the project further through a demonstration plant (1,200tpa). This further test work, a pilot plant has already been built to test the brine, will further de-risk the project and also allow better value realization for any equity stake.

We expect Galaxy to bring in customer/technical partners on both the SDV and James Bay projects, which could be announced by the end of 2017. Prepared for Harsh Bardia

35 Lithium Juniors Initiation 17 May 2017 Citi Research

Figure 54. Share Price Performance

0.70 A$61m equity placement Oftake Contracts @ US$830/t 0.60 Delays in Sal de Vida DFS

0.50

0.40 Mt Cattlin R&R update 0.30 A$/share Review to restart prod Sal de Vida DFS 0.20 GMM & GXY Merger 0.10 Production at Mt Cattlin Oftake Contracts @ US$600/t 0.00 Jun-15 Jun-16 Oct-15 Oct-16 Apr-16 Apr-17 Feb-16 Feb-17 Dec-15 Dec-16 Aug-16 Aug-15

Source: Company reports, Datacentral, Citi Research

Figure 55. Galaxy Resources: Key developments

Date Event Feb-17 Raised A$61m via private placement (SDV development /general corporate) Feb-17 Appointment of development team for Sal De Vida project Jan-17 US$40m debt facility from BNP Paribas Dec-16 120k Li concentrate offtake for CY17 delivery @US$830/t for 5.5% Li2O Nov-16 Mt Cattlin ore commissioning & Li concentrate production Aug-16 Sal de Vida revised DFS Aug-16 GMM takeover successfully closed Jul-16 CY16 offtake revised to 45kt @ US$600/t May-16 GMM and GXY announcement merger Apr-16 Repeat pegmatites encountered under Mt Cattlin Apr-16 Production commences at Mt Cattlin Mar-16 Offtake announced for 60kt in CY16 @ US$600/t Oct-15 Sales/distribution agreement with Mitsubishi Oct-15 Independent review supports near term production at Mt Cattlin Jun-15 GMM revise terms to acquire up to 50% of Mt Cattlin Apr-15 Galaxy completes sale of Jiangsu plant to Tianqi Feb-15 GMM sign agreement to operate and purchase up to 100% of Mt Cattlin Jun-13 Iggy Tan resigns as MD and Anthony Tse appointed as interim MD Nov-12 Incident at Jiangsu plant - sodium sulphate pipe rupture Sep-12 Sal de Vida DFS results Jul-12 Galaxy completes merger with LithiumOne (Sal de Vida) Mar-12 Galaxy opens Jiangsu Li Carbonate Plant in China Dec-10 Acquires 20% of James Bay project (earn up to 70%) Sep-10 Commissioning at Mt Cattlin Jun-10 Ore mining commences at Mt. Cattlin Oct-09 DFS results for Jiangsu Plant Jan-09 Mt Cattlin DFS results Dec-07 Mt Cattlin PFS results

Feb -07 Galaxy debuts on ASX after IPO Source: Company reports, Citi Research

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36 Lithium Juniors Initiation 17 May 2017 Citi Research

Bull/Bear: Galaxy Resources Limited (GXY.AX)

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37 Lithium Juniors Initiation 17 May 2017 Citi Research

Earnings Forecast vs Consensus

Figure 56. Consensus forward EPS profile vs share price performance

0.07 0.80

0.06 0.70 0.60 0.05 0.50 0.04 0.40 0.03 0.30 EPS A$/share 0.02 0.20 A$/share Share price 0.01 0.10 0.00 - Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17

Historical Mean 12/2017 Historical Mean 12/2018 Share price LHS

Source: Bloomberg as of 16 May 2017, Citi Research

Valuation, Target Price and Risks

Our NPV for Galaxy of A$0.54/share assumes long term lithium carbonate price of U$7,500/t and spodumene price of U$550/t. From a timing perspective we assume a ramp up of Mt Cattlin to full capacity in FY18, followed by SDV reaching full capacity by 1H'2023. SDV is still not fully funded and carries inherent construction risk while there is a potential upside by doubling the project footprint which is not considered in our base case (please see bull/bear chart for potential upside/downside catalysts).

Figure 57. Galaxy Resources NPV valuation

A$m Risk Weighting A$m A$/share Mt Cattlin 404 100% 404 0.20 Sal de Vida 622 100% 622 0.32

James Bay 45 100% 45 0.02 Corporate Costs (98) (98) (0.05) Net Cash (Debt) 30 30 0.01 WC, Closure Costs & Provisions 70 70 0.04

Total 1,073 1,073 0.54 WACC 10%

Shares on issue 1,976 Source: Citi Research Estimates

Our rounded target price of A$0.55/share is based on a 1x NPV multiple. We believe the company will generate significant cash flow once the capex cycle for SDV is complete (base case IRR of 21%).

There are limited listed pure play lithium producers for a peer comparison of Galaxy Resources and Pilbara Minerals. The table below has a list of companies with significant lithium exposure. Given the early stage and under construction nature of lithium these miners, we believe DCF approach is the most appropriate for valuation purpose. Prepared for Harsh Bardia

38 Lithium Juniors Initiation 17 May 2017 Citi Research

Figure 58. Global Companies with Significant Lithium Exposure

M Cap Close Target EV/EBITDA (Citi e) EV/EBITDA (Consensus) Company Ticker Ccy USD Mn Price Price Rating 2017 2018 2019 2017 2018 2019 Albemarle ALB.N US$ 12,445 112.37 116 Neutral 15 14 13 15 14 13 FMC FMC.N US$ 10,140 75.67 75 Neutral 22 19 17 21 12 12 Ganfeng Lithium 002460.SZ Rmb 4,918 45.00 31.9 Sell/H 30 28 29 25 17 13 SQM SQM.N US$ 4,237 35.20 36.5 Neutral/H 12 12 13 11 10 9 Tianqi Lithium 002466.SZ Rmb 6,756 46.79 49.6 Neutral/H 17 19 21 15 14 9 Orocobre # ORE.AX A$ 533 3.41 3.9 Buy/H 12 8 7 Galaxy Resources GXY.AX A$ 697 0.48 0.55 Neutral/H 14 7 8 12 5 7 Pilbara Minerals PLS.AX A$ 379 0.40 0.65 Buy/H na na 5 5 3 Source: IBES, Citi Research, and dataCentral. Financials and ratios are Financial year basis. # ORE multiples are on SDJ entity level. Pricing as at 1400 AEST17 May 2017

Recent Transactions

There have been a number of transactions in the lithium industry that give a useful valuation benchmarks for both the spodumene and brine projects of Galaxy. We have used Neometals' recent announcement to exit from the Mt Marion project and Ganfeng Lithium's investments in Lithium Americas and Pilbara Minerals as benchmark multiples (Figure 60) for Mt Cattlin and Sal de Vida.

These transactions would imply a 17% premium to our NPV and 19% premium to the current EV of the company.

Figure 59. Galaxy asset valuation based on recent transaction Figure 60. GXY implied valuation on recently announced transaction multiples* multiples

1,000 Neo metals exit Pilbara-Ganfeng LAC-Ganfeng Asset Mt Marion Pilgangoora Cauchari-Olaroz Supply type Hard rock Hard rock Brine 800 Transaction value (U$m) 96^ 20^ 49 Interest 13.8% 5.0% 19.9% Capacity (LCE kt) 30 44 25 600 Multiples (k$/t) 23 9 20 U$ Mn 400 U$m Mt Cattlin Sal de Vida Total Recent transaction 403* 492 896 200 multiples Citi E 303 467 769

Current GXY EV^ 754 - Recent transaction Citi E Current GXY EV multiples

Mt Cattlin Sal de Vida

Source: IRESS, Citi Research Estimates Source: Company reports, Citi Research *Hard rock average multiples ^deal yet to close. ^ as on 16 May 2017

Sensitivity analysis

We have run a series of sensitivities around our lithium carbonate price assumptions and AUDUSD exchange rate, which are the key valuation drivers for Galaxy. Results presented below highlights that our NPV is highly sensitive to both commodity prices and FX movements (see Figure 61 and Figure 62). Prepared for Harsh Bardia

39 Lithium Juniors Initiation 17 May 2017 Citi Research

Figure 61. Sensitivity of earnings and NPV to lithium price

Sensitivity 2017 2018 2019 2020 2021 2022 Lithium Price 100% EBITDA Base case 69 126 109 66 113 201 +10% 74 145 127 82 138 239 -10% 64 106 90 49 87 163

Underlying NPAT Base case 50 107 64 10 38 100 +10% 55 126 66 22 57 127 -10% 45 88 55 (3) 28 73

NPV/sh Base case 0.54 +10% 0.65 -10% 0.44 Source: Citi Research

Figure 62. Sensitivity of earnings and NPV to FX

Sensitivity 2017 2018 2019 2020 2021 2022 AUDUSD 100% EBITDA Base case 69 126 109 66 113 201 +10% 56 106 90 51 93 174 -10% 84 149 132 84 136 235

Underlying NPAT Base case 50 107 64 10 38 100 +10% 37 87 56 1 39 83 -10% 65 131 68 21 52 121

NPV/sh Base case 0.54 +10% 0.48 -10% 0.62 Source: Citi Research

Ownership Structure

Figure 63. Galaxy Resources: Top Shareholders

Top Shareholders % Board and Management^ 5.5% Paradice Investment Mgmt.* 3.4% Acorn Capital* 3.1%

Top 20 Shareholders * 24.9% Source: ^Company reports as on 31 Dec 2016, IRESS *as on 30 Apr 2017

Risks

Mt Cattlin Operations – Galaxy has guided for 160kt of spodumene production in 2017 based on 50% plant recovery. The company is also targeting a clean, low mica (<5%) spodumene (minimum 5.5% grade) product from Mt. Cattlin after installing additional reflux classifiers and plant reconfiguration. The company recently announced reaching nameplate throughput of 210tph (7 day average), but we believe there is still operational risk until we see consistent throughput and grade delivery from the refurbished plant over a longer period.

Funding – SDV project development is subject to securing funding within a reasonable timeframe. The company is also open to strategic partnerships to offload a part of equity interest in the project. Given a substantial part of our base case valuation comes from development/monetisation of the SDV project, any delays in funding will adversely affect the future cash flow stream and hence DCF derived valuation of the company.

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40 Lithium Juniors Initiation 17 May 2017 Citi Research

Regulatory – Whilst geopolitical risk is low for the Mt Cattlin project given its location in Western Australia mining region, the SDV project still carries a significant regulatory risk considering that the project is still in approval phase and located in Argentina. The country is placed in tier 4 group (out of 5 tier, Australia is tier 1) as per EuroMoney country risk indicator.

Lithium price – on the macro front, the lithium price presents the key risk for the company valuation. The lithium price is driven by a number of factors including global demand for EVs and supply side response from other lithium producers. We believe the company will be able to maintain reasonable margins on our long term spodumene price of $550/t and lithium carbonate price of U$7,500/t.

Balance Sheet and Cash Flow

The company reported gross debt of A$40m (net debt A$31m) as at 31 Dec 2016. This is a marked improvement from A$193m debt during 1H'13 before the sale of Jiangsu conversion facility that was the key milestone for debt reduction.

Galaxy recently secured a debt facility of US$40m along with private placement of A$61m to further enhance balance sheet flexibility and fund the initial stages of the SDV project. We expect leverage to stay at reasonable levels despite construction of the US$376m Sal de Vida project.

Mt Cattlin is expected to generate cash flow of ~A$50m during 2017 as the company utilizes ~A$230m of accumulated deferred tax loss shield. The company is expected to utilize cash flow from Mt Cattlin operations along with offtake/stake sale in the SDV project to fund its equity portion in the project, in our view.

Figure 64. Galaxy net debt bridge 2016-2020

800

700

600

500

400 A$ Mn 300

200

100

- Net Debt at Capex Interest cost Royalties Equity raise Cash from net debt at the end of net from the end of 2016 operation 2020

Source: Citi Research estimates

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Mt Cattlin Location

Mt Cattlin is located 40km inland from the south coast of Western Australia and 2km north of the township of Ravensthorpe. Ravensthorpe has a population of ~500 people and is serviced by its own airport within 30km of the town. The company trucks lithium concentrate to Esperance Port, Western Australia from where it is shipped to Chinese customers.

Figure 65. Location of Mt Cattlin Figure 66. Mt Cattlin Site Layout

Source: Company Reports, Citi Research Source: Citi Research

Geology

The Mt Cattlin Project lies within the Ravensthorpe Terrane, with host rocks comprising both the Annabelle Volcanics to the west, and the Manyutup Tonalite to the east. The interaction between these rock types spreads through the Project area. The Annabelle Volcanics at Mt Cattlin consist of intermediate to mafic volcanic rocks, comprising both pyroclastic material and lavas.

The pegmatites which comprise the orebody occur as a series of sub-horizontal dykes, hosted by both volcanic and intrusive rocks.

Resource/Reserve and Mine Life

Figure 67. Mt Cattlin Resource

Category Mt Li2O (%) Ta2O5 (ppm) Li2O (t) Ta2O5 (Mlbs) Measured 2.54 1.20 152 31,000 0.853 Indicated 9.53 1.06 170 101,000 3.566 Inferred 4.34 1.07 132 47,000 1.267

Total 16.42 1.09 157 178,000 5.686 Source: Company Reports, Citi Research

Figure 68. Mt Cattlin Reserve

Reserve Mt Li2O (%) Ta2O5 (ppm) Li2O (t) Ta2O5 (Mlbs) Proven 2.43 1.11 141 26,973 0.755 Probable 7.54 1.02 152 76,949 2.528

Total 9.97 1.04 149 103,730 3.276 Source: Company Reports, Citi Research

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Based on 1.6mtpa throughput the current reserve/resource base (we assume 50% of resource conversion to reserves in our base case) can support a mine life of ~9 years. Once the plant is fully commissioned we expect exploration activity to increase to extend the mine life/underpin a further expansion of capacity (can capex for flotation circuit be justified given current mine life).

Mining Method

Galaxy has appointed Piacentini as contractor for the in-pit mining services including drilling and blasting while Qube Logistics is appointed for haulage services.

 Drill and Blast – Conventional drilling and blasting method is used to excavate Figure 69. Mt Cattlin mining operations and truck ore from the Mt Cattlin mine. The LOM strip ratio of 4:1 is mostly constant throughout the mining plan. The crushing circuit has a nameplate capacity of 1Mtpa but aims to achieve a 1.6Mtpa throughput by increasing the crushing size to 12mm, from 6mm and increasing the crushing hours from 12 hours per day to 16+. The company has managed to reduce the coarse tailings grade from the DMS circuit from 0.4-0.5% Li2O to 0.2% and aims to further reduce it to 0.1%.

Source: Company reports  Mica content control – the initial concentrate production at Mt Cattlin had high mica content (~20%) that attracted penalties by the consumer and also higher transportation charges. One of the objectives of the reconfigured plant is to reduce the mica content below 5% that will improve product quality and realization. This includes a redesign of the mica removal circuit to incorporate reflux classifiers and combine mica removal with lithium beneficiation as a single operation. The company installed a second reflux classifier to the fines circuit to accommodate closer particle size range in each unit and decrease the loss of lithium to tails. The company recently guided to a targeted 6% Li2O specification with ~1% mica and the new plant appears to be consistently achieving mica at <2% .

Offtake

In Mar-16 General Mining and Galaxy Resources announced the signing of binding term sheets for 60kt at US$600/t in CY16 and 120kt for CY17 at a price to be agreed in 4Q16. In Jul-16 the terms were revised down by 15kt for CY16 volumes to 45kt at the same price of US$600/t. The revised CY16 term sheets included a total of US$13.5m in prepayments. Due to the reconfiguration of the plant in 2016 contracted volumes were not met and the company has been required to deliver contracted volumes during 1H of 2017.

2017 contracts are for 120kt at a minimum 5.5% grade for $830/t, increasing by $15/t for every additional 0.1% grade improvement – realized price if 6% grade can be achieved is US$905/t.

Figure 70. Offtake Development

Announcement Date 8-Mar-16 12-Jul-16 14-Dec-16 2016 Volume 60kt 45kt 2016 Pricing US$600/t US$600/t 2017 Volume 120kt

2017 Pricing US$830/t* *US$830/t for minimum 5.5% Li2O and US$15/t for each 0.1% improvement Source: Company Reports, Citi Research

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Product Quality

The true test of product quality will come when the 2017 priced shipments are reported as currently there is no incentive to deliver a higher grade than the 5.5% into the legacy contracts - no price escalation for higher grade as this only applies to 2017 contracts.

Initial performance of the plant has been positive, but being able to consistently achieve design throughputs, recoveries and product specification will now need to be demonstrated.

Once this is achieved the target will be to increase recoveries to drive higher production and lower costs.

Capital Requirements

After taking over General Mining Galaxy announced in July 2016 plans to double the annual throughput at Mt Cattlin from 0.8mt to 1.6mtpa. The upgrade is expected to deliver substantial operational efficiencies as well as increased production.

Galaxy appointed plant engineering company Primero to review the status of Mt Cattlin plant construction, commissioning and production schedule. The object of reconfiguration was to reduce mica content in finished concentrate below 5% of total mass, improve lithium content to above 5.5% Li2O and lower operational cost by removing the flotation circuit. The total capital cost of plant modification and throughput increase is estimated at ~A$22m by the company, which was largely funded by the US$13.5m in prepayments from Chinese customers.

Operating Costs

Mt Cattlin operating costs are expected to be U$300-330/t at 60% recovery rates and U$350-400/t at 50% recoveries.

Once tantalite production begins in 2018, net cash costs could fall to ~U$300/t (U$4,600/t in LCE terms based on input cost of 7.5t spodumene and U$2,300/t conversion cost).

Figure 71. Mt Cattlin total cost in LCE units before Ta credits

6,000

5,000

4,000

3,000 Cash cost (US$/t LCE) costCash (US$/t 2,000

1,000 2017 2018 2019 2020 2021 2022

Cash Cost (net of Ta credit) Ta credit/t Conversion cost

Source: Citi Research Estimates

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Sal De Vida

During 2012 Galaxy Resources acquired Canadian exploration and development company LithiumOne with a notional deal value of A$105m based on 1.8 fully paid Galaxy share for each LithiumOne share. LithiumOne owned the Sal de Vida lithium brine & potash project in Argentina and James Bay Pegmatite Project in Quebec.

Location

Galaxy's Sal de Vida project is situated in North Western Argentina in the Puna region, which is part of the lithium triangle bordering Chile and Bolivia.

The project is located on the eastern part of the Salar del Hombre Muerto at an altitude of ~4,000 metres and about 390km from Salta City, which is accessible via all season roads. The western side of the Salar del Hombre hosts FMC's Fenix operation that has been in operation since 1997.

Figure 72. Sal de Vida project location

Source: Company Reports

Geology

Sal de Vida is situated on the eastern side of Salar del Hombre Muerto that lies in the high altitude plateau. The basin is divided into eastern and western sub-basins by outcropping basement at Farallon Catal. Probable source of lithium is the

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the surface by volcanic hydrothermal vents. In addition to the brines, the Salar hosts near surface deposits of ulexite, a sodium-calcium borate mineral mainly used for the production of boric acid.

The concentration of lithium in Sal de Vida brines averages about 810mg/L Li. The brines also have other elements in the form of potassium, sulphate and magnesium. The potassium concentration averages around 9,100mg/L K, while Mg:Li ratio of approximately 2.4 and SO4 Li ratio of 12.1.

Resource/Reserve and Mine Life

SDV has a large resource that underpins a long-life operation with the DFS based on a mine life of >40 years. Even at expanded capacity from phase II (50kt) the mine life is ~23 years based on LCE eq. reserves as presented in Figure 74, with upside from resources to extend this.

Figure 73. Sal De Vida Resources Resources Brine Volume Avg. Li (mg/l) In situ Li (kt) Li2CO3 eq. (kt) Avg. K (mg/l) In situ K (kt) KCl eq. (kt) (m3) Measured 7.2 x 108 787 565 3,005 8,695 6,241 11,902 Indicated 7.0 x 108 712 501 2,665 8,021 5,641 10,757 M+I 1.4 x 109 750 1,066 5,670 8,361 11,882 22,659 Inferred 3.8 x 108 764 294 1,562 8,428 3,237 6,174 9

Total (M+Ind+Inf) 1.8 x 10 753 1,360 7,232 8,377 15,119 28,833 Source: Company report, Citi Research

Figure 74. Sal De Vida Reserves Reserves Tonnes Category Li total Mass Eq. Li2CO3 K total Mass Eq. KCl Proven 34,000 181,000 332,000 633,000 Probable 180,000 958,000 1,869,000 3,564,000

Total 214,000 1,139,000 2,201,000 4,197,000 Source: Company report, Citi Research

The key determinants of the quality of a lithium brine resources are the grade and Mg/Li ratio.

Figure 75. SDV's low Mg/Li ratio ensures robust project economies

14000 20 18 12000 16 10000 14 8000 12 10 PPM

6000 8 Mg / Li 4000 6 4 2000 2 0 0

Li (ppm) Mg (ppm) Mg/Li

Source: Company reports, Citi Research

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Of the producing brine operations, Salar de Atacama (SQM & FMC) stands out for grade – Uyuni and Rincon not in production. The grade of SDV is similar to Orocobre’s Olaroz operation and the other advanced projects (LAC’s Salar de Cauchari), but higher than FMC Hombre Muerto operation in Chile.

The Mg/Li ratio is the other critical driver of brine economics as this is largely what drives the reagent usage, which is typically ~50% of operating costs. The SDV brine has an Mg/Li ratio of 2.4 that is similar to other producing operations/advanced projects.

As discussed in our Lithium report new extraction technologies to lower reagent usage for these high Mg/Li brines has the potential to disrupt the industry by making these undeveloped Salar’s economic.

Mining (Extraction) Method

Brine projects use pumping from wells to extract the solution from the salar. The mine modelling has adopted a cyclical pumping concept between the southwest and east well fields. The cycle involves 6 years of pumping in the southwest well field before then rotating to the east well field for 4 years, which lets the brine levels in the unused field to recover. The model assumes a southwest well field pumping average rate of 1,500 m3/d from a total of 20 wells, with the east well-field utilizing 30 wells with a projected pumping rate of 1,000 m3/d.

The average respective well field is expected to produce brine at an average annual rate of 30,000m3/d. Grades are expected to initially average ~810 mg/L lithium and 9,100 mg/L of potassium, with average final grade over 40 years expected to be 590 mg/L of lithium and 6,700 mg/L of potassium.

Figure 76. Pond configuration for a typical brine extraction project

Source: Orocobre presentation, Citi Research

Capital Requirements

The estimated cost of the SDV project from the DFS was US$376m, including a contingency of US$34m. Prepared for Harsh Bardia

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Figure 77. SDV Capital cost as per revised DFS

Direct costs US$m % General 7 2% Brine Extraction Wells 27 7% Evaporation & Liming Ponds 89 24% Lithium Carbonate Processing 63 17% Plant (Battery Grade) Potash Processing Plant 25 7% Reagents 7 2% On Site Infrastructure 53 14% Supporting Buildings & 4 1% Sanitary Treatment Offsite Infrastructure 5 1% Transfer station 1 0% Direct costs subtotal 281 75% Indirect costs 61 16% Contingency 34 9%

Total capex 376 100% Source: Company report, Citi Research

Capex Cost Comparison

The key difference in capital intensity for lithium projects is driven by two key factors: the source of lithium (brine vs minerals) and final product (lithium carbonate, lithium hydroxide or spodumene).

Typically mineral based projects have a lower capital intensity, but this is somewhat misleading as they produce spodumene as an end product. Spodumene requires further processing at conversion capacity and therefore sells at a much lower price.

The higher capex for brine projects is therefore offset by a higher value final product (lithium carbonate).

The chart below shows capital cost in equivalent carbonate units. Whabouchi's higher capex despite being is a mineral based project as driven by the final product being a high purity lithium salt (hydroxide/carbonate) from Nemaska's proprietary integrated plant technology.

Figure 78. Capital intensity of key lithium projects

18,000 16,000 Brine Mineral 14,000 12,000 10,000 8,000 6,000 4,000 2,000 -

Source: Company reports, Citi Research Estimates

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Operating Costs

On an operating cost basis SDV is expected to sit amongst the other brine producers, which is appropriate given the grade and Mg/Li ratio.

Although higher capex, brine projects have a considerably lower operating cost than hard rock mines, after allowing for the additional conversion/transportation costs required to produce a comparable product.

Figure 79. Cost Curve for Existing Operations Figure 80. Cost Curve for Key Projects

8,000 Brine Mineral 8,000 Brine Mineral 7,000 7,000 Zhonghe Rongjie Rongjie 6,000 6,000 NA LithiumNA

5,000 5,000 Finland Keliber Qinghai Lithium Qinghai Tibet Mining Tibet Rose (Critical) Cinovec (EMH) Salt Holdings Salt Lake Citic Guo'an

4,000 4,000 (Sonora) Bacanora Jilin Canada Jilin Jien Pilgangoora (Altura) Pilgangoora Salar d. Hom.(FMC) d. Salar Salar del del (SQM) Salar Atacama Mibra (AMG) Mibra Sal (GXY) Sal de Vida US$/t LCE US$/t LCE Whabouchi (NMX) Whabouchi Silver Peak (ALB) Pilgangoora (PLS) Pilgangoora 3,000 Olaroz (ORE) 3,000 Cauchari (SQM/LAC) Cauchari Salar de Atacama de Atacama (ALB) Salar La Negra (ALB) La Negra Salar de Rincon de Rincon (Enirgi) Salar 2,000 Greenbushes (ALB/Tianq) Greenbushes 2,000 Mt Marion (MIN) Marion Mt 1,000 Mt Cattlin (GXY) 1,000

0 0 0 0 25 50 75 25 50 75 100 125 150 175 200 225 250 100 125 150 175 200 225 250 275 300 325

Source: Company reports, Citi Research Source: Company reports, Roskill, Citi Research

Costs for SDV will be initially higher as these type of operations have a significant portion of fixed costs, and costs are expected to reduce over time as the reagent usage is optimized.

Figure 81. SDV production and operating cash cost through ramp-up

30 5,000 4,500 25 4,000 3,500 20 3,000 15 2,500 2,000 10 1,500 Production (LCE kt) (LCE Production 1,000 5 500 LCE) (U$/t costOperating Cash 0 - 2020 2021 2022 2023 2024 2025

Production LHS Operating Cost (real)

Source: Citi Research Estimates

The largest cost component for brine producers is reagents, in part driven by the cost of logistics in getting them to remote locations at altitude. The key to achieving the targeted cost is therefore both reagent consumption as well as the cost of

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49 Lithium Juniors Initiation 17 May 2017 Citi Research

Figure 82. SDV Operating cost composition as per revised DFS

Maintenance 6.1% Salt Removal Energy 9.0% 6.9%

Camp Services 3.7% Manpower 13.0% Site Vehicals 0.5%

Personal Transportation 0.7% Packaging 0.7% Product Reagents Transportation 52.9% E&C G&A 2.7% 0.3% 3.4%

Source: Company report, Citi Research

Current status

In February 2017 Galaxy announced appointment of SDV development team to advance the project. The planned initial site work includes 45ha test evaporation ponds and drilling of two 150m deep production wells (one already drilled) to feed the test ponds. The company will also construct a camp facility to accommodate 60 people, an 8" fresh water pipeline for camp and plant needs and all vehicle alternative road access to the site.

The company is also working on demonstration plant by upgrading the existing pilot plant facilities during Q2'17 and has concluded a topographic study in order to facilitate initial evaporation pond and commercial ponds at a later stage.

We expect Galaxy making final investment decision on SDV by the end of current financial year with a 30 months construction period followed by a 36 months ramp up period. Based on above parameters we estimate SDV commercial production from 2H'2020 and ramp up to full capacity by 2023. The key risk to our estimates are 1) delays in securing funding partner for the project and 2) operational challenges given unique chemistry of each brine and limited skill expertise for overall industry.

James Bay

Galaxy acquired an initial 20% interest in the James Bay pegmatite project from Canada based LithiumOne in Dec'10 for a cash consideration of C$3m, with the right to earn up to a 70% stake through funding a DFS within 2 years. Ultimately Galaxy consolidated 100% ownership of the project through the acquisition of LithiumOne in early 2012. Our valuation model incorporates James Bay using relative comps of other undeveloped resource projects (U$34m or A$45m, Figure 83). Prepared for Harsh Bardia

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Figure 83. James Bay valuation using relative resource valuation

M&I (mt)^ % U$ Lithium Resources Resources grade Li contained EV* U$/tLi Altura Mining 35.7 1.05% 0.37 170 454 Prospect Resources 33.2 1.12% 0.37 19 52 Sayona Mining 7.24 0.97% 0.07 11 159 Tawana Resources # 25 1.25% 0.31 68 218

James Bay (using avg. U$/t Li) 11.75 1.30% 0.15 34 221 Source: Bloomberg, Company reports, Citi Research, * as on 16 May 2017. ^ excluding inferred resources # current period targets

Location

The James Bay project is situated in northwest Quebec near Eastmain River and in the northeast part of the Superior Province. The property is accessible by paved road (~380km north of Mattagami town hosting an airport and mining infrastructure) and by aircraft (airstrip 15km away).

Figure 84. Location of James Bay

Source: Company Reports, Citi Research

Geology

The James Bay deposit (discovered in 1966) lies within the Archean Lower Eastmain greenstone belt. The area is mostly composed of metavolcanic and metasedimentary rock. The property hosts 15 different pegmatite swarms with up to seven dykes in each swarm. Overall the pegmatite outcrops form an intermittent corridor that is about 4km long and 300 metres wide.

Current geological surveys indicate that the pegmatite dykes at James Bay are almost always spodumene-bearing. The crystallisation of post-magmatic fluids enriched in light elements such as lithium, boron and beryllium formed pegmatites. Spodumene crystal size at James Bay are mostly coarse with >5cm in length and sometimes >100cm.

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Resource/Reserve and Mine Life

Figure 85. James Bay Resources

Resources 000 Tonnes Li2O % Indicated 11,750 1.30% Inferred 10,470 1.20%

Total 22,220 1.28% Source: Company reports, Citi Research

Figure 86. Major lithium projects

3.0% Greenbushes 2.5%

2.0% Mt Cattlin Whabouchi Mt Marion

1.5% James Bay Arcadia

Grade (Li2O %) (Li2O Grade 1.0% Authier Earl Grey Mibra Pilgangoora South Pilgangoora 0.5% Rose Project Länttä/Outovesi/Syvaj arvi 0.0% 0 20 40 60 80 100 120 140 160 Resource Size (Mt)

Source: Company reports, Citi Research

Current status

Galaxy has recommenced work on the DFS study in early March 2017 with an exploration and development budget of C$3.5m. The work is expected to take the lessons learnt from the Mt Cattlin engineering and flow sheet design and be completed by the end of 2017 (6 to 9 months from commencement). The company is also undertaking further diamond drilling to expand the current resource base and to better understand geology of the resource - program will comprise ~28,000m of drilling and is likely to lead to an updated/increased Resource/reserve. The DFS work will also include bulk sampling, pilot scale metallurgical testwork and phase 1 Environmental and Social Impact Assessment.

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Galaxy Board and Management

Anthony Tse, Managing Director: Over 20 years of experience in diverse industries such as technology, internet, mobile, media & entertainment and resources & commodities. Previously held position includes senior management role in Star TV (News Corporation), deputy general manager at Tom Online, Director of Corporate Development at Hutchison Whampoa's TOM Group, President of China Entertainment Television (a joint venture between TOM and Time Warner), and CEO of CSN Corp.

Martin Rowley, Independent Non-Executive Chairman: Mr. Rowley is a graduate from University of Western Australia with a B.Com degree. He is executive director and co-founder of First Quantum Minerals Ltd (LSE and TSX listed miner that owns Ravensthrope nickel project in WA) and non-executive chairman of Forsys Metals corp (TSX listed uranium explorer/developer). He previously held position of non- executive Chairman and director of Lithium One Inc which was acquired by Galaxy in 2012.

Alan Rule, Chief Financial Officer, Galaxy recently appointed Mr. Rule as its CFO who has over 20 years of corporate experience. He has previously served as CFO for Sundance Resources, Paladin Energy and Mt Gibson Iron.

Jian-Nan Zhang, Non-Executive Director: Mr Zhang is a past managing director of Winly Trade & Investment in China and currently holds the post of Deputy General Manager of Fengli Group (Australia) Pty Ltd, a subsidiary of the Fengli Group in China. Fengli Group is a private industrial group with diversified interests in mineral resource exploitation, international trade of steel, coal trade, precision steel pipe manufacture, metallic material wholesale, purchase, sale and processing of steel scrap, loading and unloading in wharf, cargo distribution, transportation and allocation, and bonded warehousing.

Peter Bacchus, Non-Executive Director: with over 20 years of investment banking experience Mr. Bacchus hold an MA in economics from Cambridge University and a Member of the Institute of Chartered Accountants, England & Wales. He is chairman and CEO of Bacchus Capital Advisers, a merchant banking and M&A boutique. Previously he held position of European Head of investment banking at Jefferies, Global Head of Metals & Mining at Morgan Stanley and Head of Investment Banking, Industrials and Natural Resources at Citigroup, in Asia and Australia. He is also a non-executive director of UK-listed mining group NordGold, and South African and US listed Gold Fields.

John Turner, Non-Executive Director: over 25 years of experience and currently posted as the leader of Fasken Martineau's Global Mining Group (an international law and litigation firm). He has been part of several corporate finance and merger and acquisition deals in the resources sector globally and also acted for the financial arranger or sponsor of several global projects in the resources sector.

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53 Lithium Juniors Initiation 17 May 2017 Citi Research

Pilbara Minerals Limited

Company description

Pilbara Minerals is an ASX listed miner currently developing its maiden lithium ore mine Pilgangoora in Western Australia. The mine is under construction and is expected to produce ~44kt LCE spodumene (based on 2mtpa ore feed processing) once fully ramped up by 2020 contributing ~12% of global lithium supply.

Investment strategy

We rate PLS Buy/High Risk. The Pilgangoora project is a large low cost spodumene project with long mine life (30+ years based on 2mtpa footprint). The outlook for spodumene pricing (which in turn linked with lithium carbonate pricing) is positive (though we expect some pullback from the recent rally) spurred by forecast stability in industrial applications, modest growth in consumer electronics and rapid growth in electric vehicle production. However, we highlight typical risk associated with under development project namely funding, regulatory and commissioning risk.

We rate the company High Risk due to underlying lithium price volatility and uncertainty around project start and ramp up.

Valuation

Our rounded target price of A$0.65/sh is based on 1x NPV. Our DCF valuation uses a WACC of 10% and is in line with other ASX base metal companies under our coverage. Long-term assumptions include spodumene prices of US$550/t real and A$/US$ of 0.75.

Risks

We rate PLS High Risk reflecting our concern around the project's funding, construction and ramp up schedule.

Downside risks to achieving our target price include:

- Delays, may be experienced in commissioning the Pilgangoora lithium project and reaching nameplate capacity and additional capital expenditure.

- Higher than expected operating costs at Pilgangoora.

- The spodumene price, which may fall below our expectations.

Upside risks to achieving our target price include:

- Higher spodumene prices coupled with faster than expected delivery of the project and production ramp up.

-Decision to proceed with 4 mtpa plant under favorable price environment

If the impact of these risk factors is more or less negative than we currently anticipate, then the share price could fail to reach or exceed our target price.

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54 Lithium Juniors Initiation 17 May 2017 Citi Research

Galaxy Resources Limited

Company description

Galaxy Resources is an ASX listed miner with significant exposure to both spodumene and brine based lithium reserves. The company's portfolio includes three major properties, namely the Mt Cattlin hard rock mine in Australia, Sal de Vida brine project in Argentina and the hard rock based James Bay project in Canada. Only Mt Cattlin is operational at present which is expected to produce 160kt of spodumene in 2017.

Investment strategy

We rate GXY Neutral / High Risk. Restart and ramp up of Mt. Cattlin operations is a significant step forward for Galaxy Resources that ensures sustainable cash flow for the miner, in our view. We see further upside potential from SDV project execution that can help the company cement its position as low cost lithium supplier. The outlook for lithium carbonate pricing is also positive (though we expect some pullback from the recent rally) spurred by forecast stability in industrial applications, modest growth in consumer electronics and rapid growth in electric vehicle production. We believe the current share price appropriately reflects the risk/reward profile of the company.

We rate the company High Risk due to underlying lithium price volatility and uncertainty around project start and ramp up.

Valuation

Our rounded target price of A$0.55/sh is based on 1x group NPV. Our DCF valuation uses a WACC of 10% and is in line with other ASX base metal companies under our coverage. Long-term assumptions include spodumene prices of US$550/t real, lithium carbonate price of US$7,500/t and A$/US$ of 0.75.

Risks

We rate GXY High Risk reflecting our concern around Mt Cattlin’s construction and ramp up schedule and also with SDV approval and finding.

Downside risks to achieving our target price include:

- Mt Cattlin operations yet to reach a steady state and product quality might deviate from guided range.

- The company is yet to secure project funding for SDV and any delays in financing may adversely impact the project timing.

- Higher than expected operating costs at Mt Cattlin.

- The spodumene price, which may fall below our expectations.

Upside risks to achieving our target price include:

- Higher spodumene prices coupled with faster than expected delivery of the project and production ramp up.

- Decision to proceed with SDV project under favorable lithium carbonate price Prepared for Harsh Bardia environment.

55 Lithium Juniors Initiation 17 May 2017 Citi Research

If the impact of these risk factors is more or less negative than we currently anticipate, then the share price could fail to reach or exceed our target price.

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Appendix A-1 Analyst Certification The research analysts primarily responsible for the preparation and content of this research report are either (i) designated by “AC” in the author block or (ii) listed in bold alongside content which is attributable to that analyst. If multiple AC analysts are designated in the author block, each analyst is certifying with respect to the entire research report other than (a) content attributable to another AC certifying analyst listed in bold alongside the content and (b) views expressed solely with respect to a specific issuer which are attributable to another AC certifying analyst identified in the price charts or rating history tables for that issuer shown below. Each of these analysts certify, with respect to the sections of the report for which they are responsible: (1) that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner, including with respect to Citigroup Global Markets Inc. and its affiliates; and (2) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in this report. IMPORTANT DISCLOSURES

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58 Lithium Juniors Initiation 17 May 2017 Citi Research

Citigroup Global Markets Inc. is acting as an advisor to FMC Corporation in relation to the Company's announced acquisition of DuPont's Crop Protection business. Due to Citi's involvement in Albemarle Corporation’s (the Company) acquisition of Rockwood Holdings Inc., Citi Research restricted publication of new research reports on the Company, and suspended its rating and target price of the Company on July 15, 2014 (the Suspension Date). Please note that the Company’s price chart available on Citi Research’s disclosure website, does not reflect that Citi Research did not have a rating or target price between the Suspension Date and February 11, 2015 when Citi Research resumed full coverage. Due to Citi's involvement in BASF SE’s (the Company) acquisition of Albemarle Corporation’s surface treatment business, Citi Research restricted publication of new research reports on the Company, and suspended its rating and target price of the Company on June 17, 2016 (the Suspension Date). Please note that the Company’s price chart available on Citi Research’s disclosure website, does not reflect that Citi Research did not have a rating or target price between the Suspension Date and June 20, 2016 when Citi Research resumed full coverage. Citigroup Global Markets Inc. or its affiliates has received compensation for investment banking services provided within the past 12 months from Galaxy Resources Limited, FMC Corporation. Citigroup Global Markets Inc. or its affiliates expects to receive or intends to seek, within the next three months, compensation for investment banking services from Tianqi Lithium Industries. Citigroup Global Markets Inc. or an affiliate received compensation for products and services other than investment banking services from Albemarle Corp, SQM, FMC Corporation in the past 12 months. Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following as investment banking client(s): Galaxy Resources Limited, Tianqi Lithium Industries, FMC Corporation. Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following as clients, and the services provided were non-investment- banking, securities-related: SQM, FMC Corporation, Albemarle Corp. Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following as clients, and the services provided were non-investment- banking, non-securities-related: Albemarle Corp, SQM, FMC Corporation. Citigroup Global Markets Inc. or an affiliate received compensation in the past 12 months from Albemarle Corp. Citigroup Global Markets Inc. and/or its affiliates has a significant financial interest in relation to FMC Corporation. (For an explanation of the determination of significant financial interest, please refer to the policy for managing conflicts of interest which can be found at www.citiVelocity.com.) Disclosure for investors in the Republic of Turkey: Under Capital Markets Law of Turkey (Law No: 6362), the investment information, comments and advices given herein are not part of investment advisory activity. Investment advisory services are provided by authorized institutions to persons and entities privately by considering their risk and return preferences. Whereas the comments and advices included herein are of general nature. Therefore, they may not fit to your financial situation and risk and return preferences. For this reason, making an investment decision only by relying on the information given herein may not give rise to results that fit your expectations. Furthermore, Citi Research is a division of Citigroup Global Markets Inc. (the “Firm”), which does and seeks to do business with companies and/or trades on securities covered in this research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Analysts’ compensation is determined by Citi Research management and Citigroup’s senior management and is based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc. and its affiliates (the “Firm”). Compensation is not linked to specific transactions or recommendations. Like all Firm employees, analysts receive compensation that is impacted by overall Firm profitability which includes investment banking, sales and trading, and principal trading revenues. One factor in equity research analyst compensation is arranging corporate access events between institutional clients and the management teams of covered companies. Typically, company management is more likely to participate when the analyst has a positive view of the company. For securities recommended in the Product in which the Firm is not a market maker, the Firm is a liquidity provider in the issuers' financial instruments and may act as principal in connection with such transactions. The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product. The Firm regularly trades in the securities of the issuer(s) discussed in the Product. The Firm may engage in securities transactions in a manner inconsistent with the Product and, with respect to securities covered by the Product, will buy or sell from customers on a principal

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59 Lithium Juniors Initiation 17 May 2017 Citi Research

The Firm is a market maker in the publicly traded equity securities of SQM, FMC Corporation. For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Research product ("the Product"), please contact Citi Research, 388 Greenwich Street, 28th Floor, New York, NY, 10013, Attention: Legal/Compliance [E6WYB6412478]. In addition, the same important disclosures, with the exception of the Valuation and Risk assessments and historical disclosures, are contained on the Firm's disclosure website at https://www.citivelocity.com/cvr/eppublic/citi_research_disclosures. Valuation and Risk assessments can be found in the text of the most recent research note/report regarding the subject company. Pursuant to the Market Abuse Regulation a history of all Citi Research recommendations published during the preceding 12-month period can be accessed via Citi Velocity (https://www.citivelocity.com/cv2) or your standard distribution portal. Historical disclosures (for up to the past three years) will be provided upon request. Citi Research Equity Ratings Distribution 12 Month Rating Catalyst Watch Data current as of 31 Mar 2017 Buy Hold Sell Buy Hold Sell Citi Research Global Fundamental Coverage 47% 39% 14% 1% 98% 1% % of companies in each rating category that are investment banking clients 64% 63% 61% 61% 64% 47% Guide to Citi Research Fundamental Research Investment Ratings: Citi Research stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks. Risk rating takes into account both price volatility and fundamental criteria. Stocks will either have no risk rating or a High risk rating assigned. Investment Ratings: Citi Research investment ratings are Buy, Neutral and Sell. Our ratings are a function of analyst expectations of expected total return ("ETR") and risk. ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months. The Investment rating definitions are: Buy (1) ETR of 15% or more or 25% or more for High risk stocks; and Sell (3) for negative ETR. Any covered stock not assigned a Buy or a Sell is a Neutral (2). For stocks rated Neutral (2), if an analyst believes that there are insufficient valuation drivers and/or investment catalysts to derive a positive or negative investment view, they may elect with the approval of Citi Research management not to assign a target price and, thus, not derive an ETR. Analysts may place covered stocks "Under Review" in response to exceptional circumstances (e.g. lack of information critical to the analyst's thesis) affecting the company and / or trading in the company's securities (e.g. trading suspension). As soon as practically possible, the analyst will publish a note re-establishing a rating and investment thesis. To satisfy regulatory requirements, we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system. However, we reiterate that we do not consider Under Review to be a recommendation. Investment ratings are determined by the ranges described above at the time of initiation of coverage, a change in investment and/or risk rating, or a change in target price (subject to limited management discretion). At other times, the expected total returns may fall outside of these ranges because of market price movements and/or other short-term volatility or trading patterns. Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management. Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stock's expected performance and risk. Prior to May 1, 2014 Citi Research may have also assigned a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period. The relative call may have highlighted a specific near-term catalyst or event impacting the company or the market that was anticipated to have a short-term price impact on the equity securities of the company. Absent any specific catalyst the analyst(s) may have indicated the most and least preferred stocks in the universe of stocks under consideration, explaining the basis for this short-term view. This three-month view may have been different from and did not affect a stock's fundamental equity rating, which reflected a longer-term total absolute return expectation. Catalyst Watch Upside/Downside calls: Citi Research may also include a Catalyst Watch Upside or Downside call to highlight specific near-term catalysts or events impacting the company or the market that are expected to influence the share price over a specified period of 30 or 90 days. A Catalyst Watch Upside (Downside) call indicates that the analyst expects the share price to rise (fall) in absolute terms over the specified period. A Catalyst Watch Upside/Downside call will automatically expire at the end of the specified 30/90 day period; the analyst may also close a Catalyst Watch call prior to the end of the specified period in a published research note. A Catalyst Watch Upside or Downside call may be different from and does not affect a stock’s fundamental equity rating, which reflects a longer-term total absolute return expectation. For purposes of FINRA ratings-distribution-disclosure rules, a Catalyst Watch Upside call corresponds to a buy recommendation and a Catalyst Watch Downside call corresponds to a sell recommendation. Any stock not assigned to a Catalyst Watch Upside or Catalyst Watch Downside call is considered Catalyst Watch Non-Rated (CWNR). For purposes of FINRA ratings-distribution-disclosure rules, we correspond CWNR to Hold in our ratings distribution table for our Catalyst Watch Upside/Downside rating system. However, we reiterate that we do not consider CWNR to be a recommendation. For all Catalyst Watch Upside/Downside calls, risk exists that the catalyst(s) and associated share-price movement will not materialize as expected. NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (i.e., all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc.) are not registered/qualified as research analysts with FINRA. Such research analysts may not be associated persons of the member organization and therefore may not be subject to the FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. The legal entities employing the authors of this report are listed below: Citigroup Global Markets Australia Pty Limited Clarke Wilkins; Trent Allen; Harsh Bardia, CFA; Alexander Barkley Citigroup Global Markets Ltd Chris Montagu Citigroup Global Markets Asia Jack Shang, CFA Citigroup Global Markets Inc Daniel Jester; P.J. Juvekar Banchile Corredores de Bolsa S.A. Andrew McCarthy Prepared for Harsh Bardia

60 Lithium Juniors Initiation 17 May 2017 Citi Research

OTHER DISCLOSURES Any price(s) of instruments mentioned in recommendations are as of the prior day’s market close on the primary market for the instrument, unless otherwise stated. The completion and first dissemination of any recommendations made within this research report are as of the Eastern date-time displayed at the top of the Product. If the Product references views of other analysts then please refer to the price chart or rating history table for the date/time of completion and first dissemination with respect to that view. European regulations require that where a recommendation differs from any of the author’s previous recommendations concerning the same financial instrument or issuer that has been published during the preceding 12-month period that the change(s) and the date of that previous recommendation are indicated. 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