Due Diligence and Valuation Report
Arrowhead Code: 27-01-01
Company: Reed Resources Ltd Coverage initiated: 21 April 2011
This document: 6 July 2011 Ticker: ASX:RDR
Fair share value bracket: AU$2.608 to AU$1.974i Headquarters: Perth, Australia Share price on date: AU$0.475ii Executive Chairman: David John Reed Analyst Thomas Renaud Website: http://www.reedresources.com [email protected] +1 (212) 619 6889 vertically integrate via the acquisition or Market Data- construction of a lithium carbonate production 52-Week Range: AU$$0.44 – AU$$0.78iii plant to enhance project returns. The start of Average Daily Volume: 765,675iv mining and production of lithium concentrates will Market Cap. on date: AU$ 125.75MMv provide a steady revenue stream to the group. This project is well advanced. Financial Forecast Data (in AS $) VANADIUM: Reed’s management consider ‘11E ‘12E ‘13E ‘14E ‘15E ‘16E ‘17E Barrambie Vanadium (39.7Mt of ore grading
High 0.82% vanadium pentoxide (V2O5)) a priority profit/ (8.9) (13.3) 122.8 135.0 135.0 139.2 147.8 project. The company has a Memorandum of (loss) MM Understanding (MoU) with NFC of China for a High EPS fixed price engineering procurement and (3.4) (5.0) 46.1 51.0 51.0 52.6 55.8 cents construction contract (EPC). The project is in the Approvals and Financing stage with the aim of Low bringing online a mine with an annual capacity of profit/ (8.9) (20.4) 80.6 88.0 88.4 92.5 97.0 11,200 tons of V O , a mine life of 12 years. (loss) MM 2 5 Low EPS Underpinned by gold: (3.0) (7.7) 30.5 33.2 33.4 35.0 36.6 cents GOLD: In FY11, the company acquired the 2.5Moz Meekatharra Gold Project for AU$28M, including a Fiscal Year (FY) 3Mtpa mill, offices and accommodation. It is in 1st July – 30th June the Feasibility Study stage and has announced a number of resource up grades supporting its Summary investment strategy (refer later). Recently, the Reed Resources Ltd (“Reed” or “The Company”) is company announced settlement of Meekatharra a diversified natural resources company with project and commencement of a Reverse assets in Australia. Its core assets are twofold: Circulation (RC) and diamond core drill program. firstly major new age battery inputs of Lithium Summary view: and Vanadium and secondly significant gold assets. Given due diligence and valuation estimations based on discounted cash flow method, New Age Battery Inputs: Arrowhead believes that Reed’s fair share value LITHIUM: The Mt Marion lithium asset is held 70% lies between AU$1.974 to AU$2.608.vi It is based by Reed with the remainder held by major on the three projects namely Meekatharra gold Australian natural resources player Mineral project, Barrambie vanadium project and Mt Resources Limited (ASX: MIN) (MRL). The venture Marion lithium project. It is a conservative partners expect to commence operations at Mt estimate and discounts the potential value of the Marion by late 2011 with a capacity of 200,000 company’s other projects such as Finnerty and tons per annum of 6% Li2O concentrate Comet Vale. (Spodumene). Reed is evaluating plans to
Reed Resources – Arrowhead BID 1 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Detailed Company Information
Reed Resources is a diversified natural resources group headed by people vastly experienced in mining, finance and project management.
Reed Resources’ asset portfolio includes:
Mt Marion (lithium project) Mt. Marion has estimated reserves of 10.5Mt of lithium ore, and Reed Resources plans an initial production capacity of 200,000 Tpa of 6% Li2O. Reed Resources is fully-funded in the JV by operator Mineral Resources Limited. Reed Resources holds 70% equity interest in the JV. Mt Marion is undergoing further resource exploration and the company expects to complete wet commissioning of the plant by 15 December 2011. Mt Marion will be the world’s second largest source of lithium concentrates. The partners are evaluating a plan to enhance the project returns by down-streaming into the production of lithium concentrates, via acquisition, joint venture or construction.
Barrambie (Vanadium project)
Barrambie is Australia’s highest grade vanadium reserve (39.7Mt of 0.82 % V2O5) with substantial potential to expand. Reed Resources plans an initial production capacity of 11,200 tonnes of V2O5, with nominal mine life of 12 years. New capital and operating cost estimates are due at the end of June 2011 as part of a MoU with Chinese engineering conglomerate, NFC, for a fixed price engineering procurement and construction contract (EPC) and project financing assistance.
Meekatharra project (gold project) Meekatharra is estimated to hold 2.7Moz of gold resources (up 8% since acquisition) and 560Koz of reserves on which the company is completing a Bankable Feasibility Study to initially produce at circa 120,000 oz per annum from December Quarter 2012, at an estimated capex of between AU$40-60M. The company continues to re-optimize the resource inventory and is commencing drilling to define further open-pittable resources within close proximity of its 3Mtpa processing plant 15km south of
Reed Resources – Arrowhead BID 2 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Meekatharra. The company announced a RC and diamond core drill program to target resource extensions, and also to test extensions to mineralization.
Other assets In addition to the above projects the company has other projects which are in early stage and the company is in the process of evaluating the future potential from these assets. Other projects include Mt. Finnerty and Comet Vale. The Comet Vale gold project was in production until last year but is under maintenance and care from June 2010.
For more detail on Assets see Assets and Projects section of this report.
Reed Resources’ portfolio and company premiums Asset Diversification Reed resource is a diversified resource group, with vanadium, lithium, gold, nickel and iron assets in its portfolio. The diversity gives the company a lower product-specific risk overall.
Valuation Reed Resources’ lithium resource has a grade of 1.3% Li2O while Galaxy Resources Ltd, one of its closets peers in lithium mining has a grade of 1% Li2O, and Talison has mineral grade of 3% Li2O. The company will start lithium concentrate production in FY2011. Integrated developer Galaxy Resources Limited’s market capitalization is AU$1.52 per unit of lithium carbonate equivalent (“LCE”) contained in production, concentrate only producer, Talison, is at AU$0.71 per unit of contained LCE . Given Reed’s assets and its association with MRL, its valuation should be between Talison and Galaxy.
Experienced Management Team The company’s management has diverse experience in mining, geosciences, financing and project management. The Company has to date developed a small high-grade underground gold mine, which remains an asset, and a history of acquiring underappreciated assets from distressed public companies and cash starved privateers . David and Chris Reed head the executive, who along with Mr. Craig Fawcett GM of the gold division and Bill Crossley, Group Engineer, are tasked to drive the resource exploration, evaluation and development of this multi-commodity resource house. The company historically defrays risk by seeking partnerships with established players in mining to speed up the development and monetization of its assets. MRL is developing Reed’s lithium asset while foreign players such as NFC would likely finance and manage the vanadium project. Reed’s traditional skill set is in gold and the company is currently building up a dedicated in-house technical team tasked to take the gold project through to production.
Reed Resources’ Portfolio and Company Risks There are significant risks associated with the financing of the larger projects, for example Vanadium project would require a capex of +AU$500M. Since the company has recently raised AU$40M of equity and has minimal revenue stream, it would be difficult for the company to arrange this quantum of capital. The financial risk a large vanadium financing would introduce over the holdings of two relatively lower risk assets (gold and lithium) raises the question of quarantining this into a separate entity, potentially with Li, and we understand the Company is working to this risk mitigation strategy. The company is at a very early stage. Most of its projects are in the development stage with lithium project to come online by end CY11. The company depends on MRL to develop the lithium mine, as it has minimal lithium core competencies. Any delay in financing or the project implementation would hurt its valuation. The company is entering and financing the projects when the price of lithium and gold are at its peak and future price changes would determine the viability of its ventures.
Reed Resources – Arrowhead BID 3 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Reed Resources’ Corporate Strategy Reed Resources is well aware of risk mitigation and being a diversified group with assets in Lithium, Vanadium and Gold. It is or considering developing its non-gold assets with established mining players. This strategy aims to minimize operational and financing risk. It has taken the following steps to attain the strategy.
- Increase value to shareholders by expanding defined resource resources and establishing production pathway’s for each of its existing assets. - It is pursuing JVs and partnerships to speed up the implementation of the projects. It holds lithium reserves at Mt Marion, where MRL has agreed to construct a mining plant and manage production in exchange for 30% equity stake in the project. At Barrambie, Reed Resources has a MoU with China Nonferrous Metal Industry’s Foreign Engineering and Construction Co Ltd (“NFC”) for financing and project financing assistance. - The company’s strategy is to remain capex and opex light. Mt Marion project would see MRL fund the capital investment and would be recovered from the earnings of the project freeing Reed from any immediate cash liability, essentially eliminating its debt burden. - The company has early stage plansto vertically integrate into the lithium value chain, which in our opinion boosts its appeal. Battery-grade lithium carbonate production would add substantial value to its lithium venture when compared with lithium concentrate only project.
Key Metal trends Gold - Key drivers of gold demand: The market for hedging against inflation is the main driver of the gold market. Gold demand increases as inflation rises and as equity and credit lose value. Hence the demand for gold tends to increase in difficult economic times. Jewelry is a secondary driver for gold demand. - Gold market evolution: Gold prices have reached record highs in the US$1,550 range in June 2011. Recession of 2008 saw gold price move up in early 2009. In mid 2009, the climate of recovery brought gold back in the US$1,100/oz range. The Greek crisis of April-May 2010 was an instability factor that propped gold up for the end of the first semester 2010. With the Fed announcing quantitative easing and sovereign crisis worsening in Europe, the gold prices advanced further towards the end of 2010. - Gold is expected to stabilize in range of US$1,200-1,300/oz in the medium- to long-term, as long-term demand seems robust with large developing Asian markets and a general return to gold as a standard of currency. Foreseeable supply of new gold in the next 20-30 years is forecast to increase at a slower pace. Vanadium - Key drivers of Vanadium demand: Vanadium demand is mainly driven by its use in steel production and other non-metal usages. Following are key drivers of Vanadium demand - Developing nations are looking at another construction boom - Developing countries are improving their steel quality by addition of Vanadium. - Prospective evolution of Redox batteries along with its use in Lithium rechargeable cells. - Vanadium market evolution: Currently Vanadium is trading at approximately US$31/kg. Given the current general climate of recovery and technological scene, Vanadium prices are expected to stabilize in range of US$32 to 35 /kg in the midterm. Lithium - Key drivers of Lithium demand: Lithium demand is mainly driven by its use in small-format rechargeable batteries, glass and ceramic production. Lithium is the backbone of efficient and dense battery technology, which is being exploited in Electric Motor Driven cars. Further demand shock for Lithium is expected to come from acceptance of Electric Cars in mainstream market.
Reed Resources – Arrowhead BID 4 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
- Lithium market evolution: Currently Lithium Carbonate is trading at US$5000/t. Given the current Lithium battery technology. Electric cars introduction in mainstream consumer markets and emergence of possible new suppliers of Lithium from brine rich areas along with possibility of recycling projects of Lithium from Batteries, we expect that, Lithium prices should stabilize in range of US$4500-5500 per tonne.
For details, see Technologies and Markets section on pages 21-25 of the report.
Key variables which enter into Reed resources revenue estimations - Variable 1 – Forecast price of gold for 2011-2021: Arrowhead has estimated gold prices to be in the range of US$1,200/oz to US$1,400/oz - Variable 2 – Forecast price of vanadium for 2011-2021: Arrowhead has estimated vanadium prices in the range of US$32/kg to US$40/kg. - Variable 3 – Forecast price of Lithium for 2011-2021: Arrowhead has estimated Lithium prices in the range of US$5,000/t to US$6,500/t - Variable 4 – Hypothesis for annual production at Meekatharra project: annual production to range between 100,000oz/year to 150,000oz/year going from 2013 till 2017. - Variable 5 – Hypothesis for annual production at Barrambie project: annual production to range from 6,000t/year to 6,700t/year going from 2013 till 2021. - Variable 6 – Hypothesis for annual production at Mt Marion project: annual production to range from 150,000t/year to 300,000t/year going from 2013 till 2021.
News:vii
– Reed Resources announces securing options to acquire Nannine Mining centre (July 6, 2011) The company announced that it has secured the opportunity to extend its Meekatharra landholdings by entering into an option to take ownership of the Nannine Mining Centre. The company further updated that it has secured a two year option by paying an option fee of $150,000 and assuming responsibility for maintaining the tenements in good standing during the option period.
– Reed Resources completes the acquisition of Meekatharra project and commences drilling (July 1, 2011) The company announced that settlement of the Meekatharra Gold Project acquisition, and the commencement of a RC and diamond core drill program. The company further informed that the targets includes Chunderloo copper-gold, Bluebird and Paddys Flat areas.
– Reed Resources enters into replacement MoU with NFC and Arccon (June 23, 2011) The company announced that that it has entered into a replacement Memorandum of Understanding (“MOU”) with a consortium of China Nonferrous Metal Industry’s Foreign Engineering and Construction Co. Ltd (“NFC”) and Arccon (WA) Pty Ltd (“Arccon”) for the Barrambie Vanadium Project. This replaces the MOU previously announced on 11 November 2010. The replaced MoU is on the same terms as the original MoU, but extends the period to 31 July 2011.
– Underground resources increased at Meekatharra Gold Project. (June 22, 2011) The company announced an increase in resource estimates at the recently acquired Meekatharra gold project. The previous combined resource of 1.78Mt for 318,000oz has been increased to 1.77Mt for 373,000oz representing a material increase in global grade from 5.4g/t to 6.6g/t.
– Appointment of Dr. Vanessa Guthrie as a Non Executive Director (June 17,2011) Reed resources announced that it has appointed Dr. Vanessa Guthrie as a non Executive Director of the company. The executive chairman of the company believes that Vanessa’s experience and attribute will add significantly to the diversity of skills to the existing team.
– More Positive drilling results at Mt Marion Lithium Projects.(June 8, 2011) The company along with partner MIN continues to advance the Mount Marion Lithium Project. The Mount Marion Project is on schedule for commissioning in the December quarter 2011 with initial
Reed Resources – Arrowhead BID 5 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
capacity of 200,000 tpa of 6% Li2O chemical grade spodumene concentrate, 60,000 tpa of mica and 30 tpa tantalite concentrate. Total contained lithium oxide resources at present are 146,000 tonnes (Li2O).
– Reed resources announced sale of its subsidiary KOTC. (May 20,2011) The company announced the conditional sale of its subsidiary Kalgoorlie Ore Treatment Company Pty Ltd (“KOTC”) to MacPhersons Reward Gold Limited pursuant to a binding MoU. KOTC holds Reed’s Nimbus processing plant and associated assets near Kalgoorlie. The sale subject to due diligence will fetch AU$ 4.5million plus reimbursement cost associated with power line installation and ball mill upgrade prior to the contract becoming unconditional.
– Reed Resources Announced Updated Gold Reserve Estimates at Meekatharra Project. (March 31, 2011) Reed Resources Ltd announced an update of its evaluation to resume operations at the recently acquired Meekatharra gold project. The company further announced that a probable ore reserve at Bluebird, adjacent to the processing plant at Yaloginda, and new mineral resource estimate at the Rand deposit in the Reedy area, continue the success of its systematic re-estimation. The company now has access to about one year’s resource input.
– Reed to raise AU$40MM through Placement and Underwritten Share Purchase Plan (February 24, 2011) The company announced a AU$40M capital raising involving a placement and a share purchase plan. As per the management, both raisings are to be conducted at an issue price of AU$0.58 per fully paid ordinary share in the capital of the company. Bedford Capital Partners Pty Limited acted as corporate adviser to and manager of the capital raising. The company said the capital rising will strengthen its cash position to complete the Meekatharra acquisition and enable help its development plans.
– Reed Resources and MRL Amend Ownership Structure to Align Interests (February 16, 2011). Reed Resources announced signing an MoU with MRL to amend the contractual arrangements regarding the Mt Marion lithium project. Earlier arrangement required MRL to build, own and operate processing facilities, fund all development costs and operate the project to earn 40% of the profits from the operation. Under the revised agreement, MRL would fund and operate the project with the profit rights converted into an equity interest of 30% of the issued and allotted share capital in Reed Industrial Minerals Pty Ltd.
– Reed Resources Acquires 2.5Moz Meekatharra Gold Project for AU$28MM (January 11, 2011) The company has acquired the landholdings and assets of Mercator Gold Australia Pty Limited. The Meekatharra gold project, centered on the Bluebird processing plant, is located 640km northeast of Perth and 10km south of Meekatharra, in the Murchison Region of Western Australia. The project comprises over 800 km2 of tenure covering 100km strike length of the Murchison Greenstone belt, and produced over of 3.5MM ounces of gold.
Reed Resources – Arrowhead BID 6 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Listing Information:
Reed Resources was listed on July 10, 2002onthe Australian Securities Exchange (ASX code: RDR). Its shares also trade on the North American OTC market (DR Symbol: RDRUY). There are approximately 264,742,501 common shares outstanding as of July 1, 2011.
Contacts
Reed Resources Ltd. 97 Outram St West Perth WA 6005, Australia. Email: [email protected] Website: http://www.reedresources.com/
Major Shareholdersviii
Shares Held % of Shares Name of the Holder (in MM) Outstanding David Reed 21.8 8.3 HSBC Custody Nominees (Australia) Limited 16.5 6.3 M & G Investment Management Limited 13.2 5.0 Equity Trustees Ltd. (SGH PI SMALLER CO'S FUND) 9.9 3.8 National Nominees Limited 6.0 2.3
Reed Resources – Arrowhead BID 7 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Management and Governanceix
The management at Reed Resources comprises experienced professionals with a proven track record.
Mr. David Reed Executive Chairman Mr. David Reed started stock broking in 1963, qualified as an accountant in 1967 and became a member of the Perth Stock Exchange in 1971. Mr. Reed was a director and Chairman of CIBC Australia Limited. He has been a prospector, former secretary of the Amalgamated Prospectors and Leaseholders Association, and a private mine owner. In 1984 he founded Mt. Martin Gold Mines NL, which – with partner Newmont Australia – developed the million ounce New Celebration Gold Mine. Mt. Martin merged with nickel producer Titan Resources NL where Mr. Reed was a chairman from 1991 to 1997. In 1998, he was admitted as a Fellow of the Certified Practicing Accountants. In recognition of his service to the community, he was awarded the Order of Australia Medal in 2002.
Mr. Steven Cole Deputy Chairman Mr. Steven Cole has 35 years of professional, corporate and business experience through senior legal consultancy, as well as a range of executive management and non-executive appointments. His extensive boardroom and board sub-committee experience include ASX listed, statutory, proprietary and NFP organizations covering the industrial, financial, educational, professional services, and health and resources sectors.
Mr. Christopher Reed Managing Director Mr. Christopher Reed entered the mining industry in 1990 and co-founded Reed Resources in 2001. He has a Bachelor of Commerce from the University of Notre Dame and a Graduate Certificate in Mineral Economics from WA School of Mines. He is a Member of the AusIMM and vice-president of the Association of Mining & Exploration Companies.
Mr. Peter Collins Non-Executive Director Mr. Peter Collins has over 25 years experience as a geologist in Tasmania and Western Australia. He holds an Honors degree and a Doctorate in Geology from University of Tasmania. Mr. Collins joined Curtin University of Technology in 1987 where he lectures economic geology. He discovered the Sand George deposit at Comet Vale and brings considerable experience in quality geological investigations. He is a member of the Australian Institute of Geoscientists.
Mr. Ian Junk Non-Executive Director Mr. Ian Junk joined the board in December 2003. He is a highly respected mining engineer with considerable experience in narrow vein underground mining and project development. Mr. Junk holds an Honors degree in Mining Engineering from the Western Australian School of Mines and a First Class Mine Managers Certificate. He was instrumental in the purchase and management of the Miiteland Wannaway nickel mines from WMC for the Miitel JV, involving Clough Mining and Mincor Resources NL. Mr. Junk is a member of the Australian Institute of Mining and Metallurgy.
Dr. Vanessa Guthrie Non-Executive Director Dr. Guthrie has more than 20 years of experience in the Australian resources sector and has previously covered roles ranging from Company Secretary of Australia’s largest bauxite operation and with the caliber of Woodside Energy Ltd, Alcoa World Alumina Australia, WMC Resources, RGC Limited, Goldfields Limited and Pasminco Ltd.
Reed Resources – Arrowhead BID 8 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Mr. Jason Carone Joint-Company Secretary Mr. Jason Carone holds a Bachelor of Commerce in Accounting and Business Law from Curtin University, WA and is a member of the Institute of Chartered Accountants since 2000. He joined Reed in September 2007 as Financial Controller and was appointed joint company secretary in March 2009. Mr. Carone brings to Reed over 10 years experience working in various professional and corporate capacities in Australia and Southeast Asia.
Darren Wates Joint Company Secretary Darren holds a Bachelor of Laws and a Bachelor of Commerce from Murdoch University, and a Graduate Diploma in Applied Finance and Investment. Darren joined Reed in December 2010 as Commercial Legal Counsel and in April 2011 was appointed Joint Company Secretary. Darren has over 10 years experience in corporate and commercial law in Western Australia, having worked in the Perth office of a national law firm and more recently in senior consultancy at a specialist corporate, commercial and resources law firm.
Bill Crossley Project Manager – Lithium/Gold Mining engineer with over 35 years experience in the management of mines. Previously Project Manager of the Barrambie Vanadium Project for Reed Resources, General Manager of the Macraes Gold Mine in NZ and Operations Manager for Dominion Mining in the Northern Territory. Fellow of both AusIMM and AICD
Craig Fawcett General Manager – Gold Qualified geologist and engineer who has previously held the positions of Chief Mine Geologist at Tanami Gold and Avoca Resources during both of their respective startup phase of operations. Also held the position of Geology & Mining Manager at Apex’s Wiluna Gold Mine during their restart of operations
Reed Resources – Arrowhead BID 9 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Key Variable Analysis
Variable 1 – Forecast price of gold for 2011-2021 Arrowhead believes that the increasing gold price trends will continue and gold prices will remain above US$ 1200/oz. over the coming years. The precious metal has been a major beneficiary of the sovereign debt issues, and associated currency risks.
Based on this forecast and on hypothesis for an average of price stability, Arrowhead forecasts that a comfortably low estimate for 2011 prices of gold should be US$1200/oz, whereas a prudent high estimate should be US$1,300/oz.
Arrowhead forecast the following gold prices for the coming 10 years:-
Year Low end (US$/oz) High end (US$/oz) 2011 1,200 1,300 2012-2015 1,250 1,350 2017 1,300 1,400
Variable 2 – Forecast price of Vanadium for 2011-2021 Arrowhead believes that the vanadium will trade in the range of US$32/kg to US$35/kg in the near future. Given the current general climate of recovery and Technological scene and increase in the demand for Vanadium in the global market we expect the prices to move in the following trend.
Year Low end (US$/kg) High end (US$/kg) 2011 32 35 2012-2016 35 40 2017-2021 35 40
Variable 3 – Forecast price of Lithium for 2011-2021 Lithium prices are not traded on any exchange and prices are generally negotiated between producers and customers. Roskil, one of the main industry study group forecast the metal price to be rise and stabilize at US$6,500/t. Currently Lithium Carbonate is trading at around US$5000/t levels. Considering the increase in demand for the metal on account of Lithium battery Technology we expect the prices to increase in the future.
Arrowhead estimates the following prices of Lithium carbonate.
Year Low end (US$/t) High end (US$/t) 2011 5,000 5,500 2012-2016 6,200 6,300 2017-2021 6,400 6,500
Variable 4 – Hypothesis for annual production from the Meekatharra project Arrowhead estimates annual production at Meekatharra on the same lines at which the company has projected. We have used the current reserve of 373,000 at a grade of 5.4g/t to 6.6g/t producing for 5 years staring from 2013. Arrowhead believes that the cash cost for the pit would be around AU$750. Arrowhead estimates production at the following levels:-
Reed Resources – Arrowhead BID 10 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Year Low end (oz/year) High end (oz/year) 2013 100,000 110,000 2014-2016 120,000 130,000 2017 130,000 150,000
Variable 5– Hypothesis for annual production from Barrambie project. Reed Resources provided estimates of cost of production at US$20,000/t for the operation at Barrambie project. Arrowhead has taken the same cost of production to value this project and considers that annual production estimates from the operation will be in the following range.
Year Low end (t/year) High end (t/year) 2013 6,000 6,200 2014-2019 6,500 6,700 2020-2021 6,500 6,700
Variable 6 – Hypothesis for annual production from the Mt Marion project. As per the company’s estimates, Mt Marion project has the capacity to produce 200,000 tons of Spodumene. Arrowhead believes that the cash cost per tonne would be around AU$190. Arrowhead estimates following production of Spodumene from Mt Marion project.
Year Low end (t/year) High end (t/year) 2012 150,000 200,000 2013-2019 200,000 300,000 2020-2021 200,000 300,000
Reed Resources – Arrowhead BID 11 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
- Operating cost is pegged below AU$20/kg Assets & Projects vanadium. - Mining cost is estimated at AU$3.09 per The Barrambie Vanadium Project tons. Commodity: Vanadium - Average EBITDA per annum of AU$105MM Company’s interest: 100% at US$30/kg vanadium. Life of the mine: 12 years - Water supply requirements are estimated at 2.5GL/year. Ground water investigations Estimated Production: 11,200 tons of V2O5 per annum have identified a shallow calcrete aquifer forming part of the Cogla Downs drainage Head grade: 0.82% of V2O5 system located approximately 30km north of the proposed mine site. Overview: - A gas pipeline is proposed to be extended The Barrambie vanadium project, owned by from the existing mid–west gas pipeline at Reed Resources, is located 125km north-east of Windimurra located approximately 133 the Windimurra vanadium project in Murchison, kilometers south-west of Barrambie to Western Australia. Windimurra vanadium project Barrambie. is currently being commissioned by Atlantic Limited. Barrambie’s Vanadium reserves are Capital investment can be curtailed by outsourcing, building and operation of crushing, pegged at 65 Mt of ore with 0.82% of V2O5. Accessible reserves are pegged at 39.7Mt of beneficiation, infrastructure and services. same grade.. According to Reed Resources, Barrambie vanadium project can be more profitable or The Barrambie resource estimates: implemented with minimum capex by: 1. Relocating FeV plant offshore; V O TiO Mt 2 5 2 (%) (%) 2. Selling the ore directly to a third party for vanadium extraction; RESOURCE 3. Bolstering production by adding pelletiser Indicated 49.2 0.82 17.3 and grate kiln, which will increase internal Inferred 16 0.81 17.2 rate of return. 4. Signing agreements with buyers of Fe and Total 65.2 0.82 17.3 TiO2, thus improving returns. RESERVE 15.7 Probable 39.7 0.82 Progress:
- Public Environmental Review (PER) Following are details of the Document for the project was submitted Project/Mineralization in 2010 and currently the company is - Barrambie processing plant and associated working to address the responses received infrastructure will target a throughput of 3.2 for PER. M tonnes per annum of vanadium bearing - Reed Resources has entered into a MoU with magnetite mineralization at a grade of Chinese conglomerate NFC and Arccon in
0.82% V2O5 and produce either November 2010. It recently replaced the approximately 11,200 tons of vanadium MoU on the same term as the original, but
pent oxide (V2O5) or 7,700 tons of ferro extended the period to 31 July 2011. As per vanadium (FeV80) per annum, for a the MoU NFC and Arccon are required to minimum 12-year period. provide Reed with an updated, fixed price - Originally the capital cost was estimated to EPC contract quote for the project. The AU$628.9MM by DFS but the company updated EPC quote from NFC and Arccon will expects to achieve significant savings specify the use of Chinese equipment and through by the expected EPC quote from services for Barrambie. The company NFC and Arccon expects it to achieve significant savings compared to the original Definitive
Reed Resources – Arrowhead BID 12 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Feasibility Study (“DFS”) capital cost Mine Structure estimate of AU$500.0 million. - Reed has appointed Sinclair Knight Merz (“SKM”), to work with NFC and Arccon to provide an update of the processing plant operating cost estimates. Recently received draft from SKM indicates that operating cost savings of approximately 6% may be achievable over the DFS estimate on a like- for-like basis. - Reed resources along with NFC are in discussion with potential equity financing partners and lenders to the project. - Reed has signed a contract with Chinese suppliers to save capex while it would work with Arccon, the part of the EPC consortium to retain appropriate Australian expertise and experience, to ensure adherence to Australian standards and work practices and smooth execution of the project.
Source: Mine structure, Company Presentation.
Reed Resources – Arrowhead BID 13 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Mt Marion lithium project The company eyes a capacity of 200,000 Tpa of +6% Li2O, thus becoming world’s second largest Commodity: Lithium spodumene producer. Company’s interest: 100% Life of the Mine: 12 years The company has signed an agreement with Production expected to start in: end 2011 MRL to develop the Mount Marion project. Estimated Production: 200,000 Tpa of 6% As per the terms of the binding agreement: - MRL has converted a 40% profit rights in the Li2O concentrate. Head grade: 1.4 % Li2O project to 30% equity interest in Reed Industrial Minerals Pty Ltd, which holds 100% of the project; Overview: - MRL will build, own and operate the project’s In August 2009, Reed Resources secured an processing facilities; Option to purchase Mt Marion lithium project - MRL will finance the entire development and situated 40km south of Kalgoorlie in the operating costs with accumulated Goldfields region of Western Australia. It development costs being amortized and exercised its rights in January 2011 under the repaid from future cash flows from the Option Agreement and acquired 100% of the project. granted mining leases. The project comprises two mining leases, M15/999 and M15/1000, The company has identified following factors for which cover outcropping spodumene (LiAlSi2O6) efficient and profitable lithium mining: bearing pegmatite. 1. Local trained workforce. 2. Open access HV power line to site. The company plans to become the second 3. Availability of process water 4. largest spodumene producer in the world, with 5. Open rail access to Fremantle (670 Km) 6. Sealed road to port (360 Km) planned output at 200,000 TPA of 6% Li2O.
Project Snapshot: Stage 1: The company plans to export
spondumene concentrate grading 6.5% Li2O in the early stage of production.
Source: Mine structure, Company Presentation.
Mt. Marion Resource Estimates: Stage 2: It has been observed that as the grade of lithium concentrate increases, its value Resource Tons Lithium Iron Grade Classification (Mt) Grade % %Fe2O3 increases disproportionately on cost-adjusted Li2O basis. For example, lithium carbonate is costlier than spodumene concentrate on cost-adjusted Measured 2.1 1.5 1.1 basis. Indicated 3.9 1.4 1.2 Inferred 4.5 1.3 1.9 The company is planning a JV where it would Total 10.5 1.4 1.4 procure output from the concentration establishment and then convert it into lithium carbonate.
Reed Resources – Arrowhead BID 14 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
The company undertook a study of spodumene open pit mine life through depth and strike concentrates’ processing to produce battery- extensions of existing deposits No.1, 2 and 2W. grade lithium carbonate (Li2CO3). The Pre- Feasibility Study undertaken by Hatch, Following is summary of the project’s progress: investigated the feasibility of 17,000 Tpa lithium carbonate production from 120,000 tons Activity Timing chemical grade spodumene concentrate. Lodging Clearing Permit Completed as anticipated Results forecasted that capital expenditure on Resource Estimation Completed as anticipated the project would be AU$63-70M.The project Lodge Works Approval Mining Completed as anticipated capacity would be around 17,000 tons of 99.5% Proposal lithium carbonate. Implied value addition would Decision to Mine Completed as anticipated be AU$270 per ton of spodumene concentrate. Receive Project Approval Completed as anticipated The project’s payback period is estimated to be Commence Site Work Q2 calendar 2011 two years. Assemble Modular Processing Q3 calendar 2011 Plant Commission Plant, and Shift Q4 calendar 2011 Shipment
Progress: Reed Resources has received the final mining approval from the Department of Mines and Petroleum. Subsequently, Mt Marion partners (Reed Resources and Mineral Resources) have agreed to develop a plant with an initial capacity to recover 200,000 Tpa of chemical grade spodumene concentrate, containing some
12,000 tonnes of contained lithium oxide (Li2O). The total contained lithium oxide inventory is some 146,000 (Li2O) tonnes. The plant will also recover some 60,000 Tpa of muscovite mica and 30 Tpa of tantalum concentrate as accessory products. Recently the company announced that Source: Mine structure, Company Presentation. the A third phase strategic resource expansion program was completed at Mt. Marion during March and April with a view to extending the
Reed Resources – Arrowhead BID 15 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
presentation, the total resources at Meekatharra Meekatharra Gold project project are as under:
Commodity: Gold Company’s interest: 100% Life of the mine: 4-5 years Production expected to start on: Late 2012 Estimated Production: ~120,000 oz pa Head grade: 1.7g/t of gold
Overview
The company estimates the project ore reserve as follows:-
Reed Resources acquired Meekatharra gold project in the Murchison region of Western Australia from the Administrators of Mercator Gold Australia Pty Ltd in January 2011. The company paid US$26.7M in cash and two million shares for 100% stake in the project. Key infrastructure inclusive in Reed’s purchase includes a 3Mtpa processing plant, a 184-man Recently the company informed that a new camp and fully furnished offices with a resource model has been constructed and replacement value of over AU$100M. completed for the Vivian-Consols-Mudlode-Fatts ore system at Paddys Flat. The previous The Greenstone Belt within the tenement combined resource of 1.78Mt for 318,000oz has package host several deposits with historical been increased to 1.77Mt for 373,000oz production over 1Moz. Paddys Flat near representing a material increase in global grade Meekatharra has historical gold production of from 5.4g/t to 6.6g/t. 2.3Moz, the Bluebird mining center has produced 1.2Moz and the Reedy Mine has produced 1Moz. Metana Minerals, St Barbara Progress: Mines and Mercator Gold were the previous owners of this tenement holding. Reed Resources’ initial review of the existing reserves and workings has already identified potential for immediate expansion. The company Resources: recently announced the settlement of the Many recognized industry professionals – acquisition and plans to commence RC and including Snowden, Runge and Cube – have diamond core drilling. This program is designed estimated resources at the Meekatharra gold to target resource extension at Prohibition, project. These global resources include low Batavia and Rhens, and also test extensions to grade resources. As per the company mineralization at Chunderloo Sirdar, Rocklea, Whangamata, Paddys Flat and Reedy.
Reed Resources – Arrowhead BID 16 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Diamond core drilling has been designed to - Density of drilling sparse in relation to size collect geotechnical information from the of the land Prohibition ore body and metallurgical samples - Limited drilling beneath 100m around of the Mickey Doolan and Macquarie historical mining centers – exploration mineralization. success in deep holes has been high within the project area.
Source: Mine structure, Company Presentation.
Comet Vale
Commodity: Gold Company’s interest: 100% Estimated Production: 186Koz Head grade: 10.8g/t of Gold
Overview The company recently secured an option to The Comet Vale gold project was in production acquire ownership of Nannine Mining centre until last year but is under maintenance and which will provide an opportunity to extend care from June 2010. The project is landholding at Meekatharra project area. approximately 100km north of Kalgoorlie and covers 25km2 surrounding the historic Comet The company has set targets for the coming Vale gold mining center. It includes high grade three years. resource of 186,000oz at 10.8 Au g/t. The gold lodes at Comet Valehave been drilled to a depth of 400m. Previously, a little exploration had Plans for 2011 systematically explored high-grade Comet Vale - Focus on 10 best ore bodies from extensive lode that had been mined in the Sand Queen database. and Gladsome workings. - Re-estimate resources and optimize
reserves to deliver higher grades. Resource Information: Plans for 2012 - Modifications to optimize mill at approx. The indicated and inferred mineral resource is AU$10MM. 534,000 tons at an average grade of 10.8 g/t Au - Target operational recommencement and a for 186,000 ounces of gold. 120,000-150,000 oz p.a. production rate. Resource Volume Grade Au Classification (bcm) Tons (Au g/t) (ounces) Plans for 2013 Indicated 88,000 238,000 10.8 82,500 - A separate team to advance regional Inferred 110,000 296,000 10.9 103,500 exploration. Total 198,000 534,000 10.8 186,000
Reed Resources – Arrowhead BID 17 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Progress On September 15, 2010 the board of directors approved expansion at Comet Vale. The company’s strategy is to expand the existing resource base at Comet Vale with drilling and delineate sufficient reserves to resume underground production at the Sand Queen gold mine as a mechanized decline operation. In addition, a campaign of exploration drilling is planned and will be drilled on completion of resource expansion. This is expected to total an initial 5,000m and will test the main Comet Vale Source: Mine structure, Company Presentation. both north and south of the Sand Queen mine.
Reed Resources – Arrowhead BID 18 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Resource Information: Mt Finnerty – Iron The company has estimated the following Commodity: Iron ore resources from Mt Finnerty project. Company’s interest: 20% Iron Grade Project Tons(Mt) (%Fe) Overview Mt Finnerty 4.66 53.5 The company has signed a JV with iron ore producer Cliffs Natural resources (80%) to Progress: explore and develop iron deposits at Mt Finnerty. The project is 65km east of Drilling is in progress to test two prospects Koolyanobbing in Western Australia. An airborne outside the existing resources. Drilling at the Mt geophysical survey identified a number of Finnerty prospect aims to test a northerly palaeochannels with potential for large channel extension to mineralization. The testing will iron deposits. The project also contains a small focus on the new prospects, Mt Watt and JORC-compliant inferred resource of 4.66Mt at Maitland. Complex geology has been identified 53.3% fe. at the sites and the company believes that magnetite destruction may have occurred during faulting, forming hematite. Further drilling may confirm the presence of any economic occurrence of iron ore.
Reed Resources – Arrowhead BID 19 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Technologies and Markets
Gold Chemistry and Properties Gold is a chemical element having symbol Au and atomic number 79. It is dense, soft, shiny and the most malleable and ductile pure metal. Pure gold has a bright yellow color and an attractive luster, which it maintains without oxidizing in air or water.
It is a transition metal and can form trivalent and univalent actions in solutions. Compared with other metals, pure gold is chemically least reactive, but it is attacked by aqua regia (a Gold uses mixture of acids), forming chloroauric acid. However it is neither attacked by individual acids Gold has been a highly sought-after precious nor by alkaline solutions of cyanide. Gold metal for coinage, jewelry, and other arts since dissolves in mercury, forming amalgam alloys, the beginning of recorded history, mainly but does not react with it. Gold is insoluble in because of its good resistance to oxidative nitric acid, which dissolves silver and base corrosion which makes it quasi-inalterable over metals. This property is exploited in the gold time; even it left out in the earth’s atmosphere, refining technique known as "inquartation and unlike most other metals. Due to its parting". Nitric acid has long been used to preciousness, rarity, its cost and beauty, it has confirm the presence of gold in items, and this is been linked throughout history to various the origin of the colloquial term "acid test", symbolisms and ideologies and displays of referring to a gold standard test for genuine grandeur and power. This has substantially value. increased its desirability to individuals and states and has placed a premium on its price. Gold Sources and Production The metal occurs as nuggets or grains in rocks, Value Conservation and Transmission: in veins and in alluvial deposits. From Coinage to Central Bank Reserves:
A total of 165,000 tons of gold has been mined Gold has been one of the main coinage metals in human history, as of 2009. This is roughly throughout history and has served as a symbol 5.175B troy ounces or, in terms of volume, of wealth and a store of value. Gold standards about 8,333m3. have provided a basis for monetary policies and modern central banks complement the assets of According to Gold Fields Mineral Services the country, whose currencies they govern and (GFMS), global gold production increased by 7% other currency reserves, with gold reserves as in 2010 compared to 2009, reaching 6,252 hard collateral for a minimal value preservation tonsChina remained the top producer, while of these currencies. Private investors may also Australia came second, followed by the US and hedge their portfolio with gold during distressed South Africa. Russia remained at fifth place. times in equity, debt and cash markets. As all South Africa had lost its prominent position in large international commodities markets, there the global gold market, with production falling in is a large element of speculation which also the last ten years. underlies and animates the gold-as-an- investment market. GFMS believes that global gold production is expected to increase in the short term, but Jewelry: Gold’s main use today is in would then decline on account of fewer large ornamental products and especially jewelry. It is discoveries.x used because of its ostensible value, beauty and its ductility, which enables complex sculpting
Reed Resources – Arrowhead BID 20 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
and craftsmanship. In jewelry, it is used in As the middle classes in emerging economies of different grade alloys. Because of the softness of the world see revenue growth, gold jewelry pure (24k)xi gold, it is usually alloyed with base sales increase in these markets. This has been metals for use in jewelry, altering its hardness the case in countries such as China, the rest of and ductility, its melting point, its color and East Asia and India, adding to the existing other properties. Alloys with lower gold purity, demand from the United States and the rest of typically 22k, 18k, 14k or 10k, contain the Western world. percentages of copper, other base metals, silver or palladium. Also, a structural shift in central bank policy towards gold in recent times is driving the global Red gold – Copper is the most commonly used gold demand. According to the World Gold base metal, yielding a red tint. Council, central banks across the globe became the net buyer of gold in 2010 for the first time in Rose gold – 18k gold containing 25% copper is 21 years removing a significant source of supply found in antique and Slavic jewelry and has a to the market. distinct, though not dominant, copper cast, creating Rose gold. According to the council, 2010 was an outstanding year for gold. The annual demand Yellow gold – 14k gold-copper alloy is nearly rose by 9% YoY to 3,812 tons and was identical in color to certain bronze alloys, and approximately worth US$150bn. The both may be used to produce badges. performance was mainly attributable to strong growth in jewelry demand, the revival of Indian Blue gold– It can be made by alloying with market and strong demand in China. iron. Blue gold is brittle and thus difficult to use in jewelry. It is believed that going forward in 2011; India and China will mainly drive the gold market. Purple gold – It can be made by alloying with Rising income levels, high saving rates and aluminum, although rarely done except in strong economic growth will continue to increase specialize jewelry. Green gold – 14k and 18k gold consumption. The council expects the total gold-silver alloys appear greenish-yellow and gold demand to remain resilient across jewelry, are referred to as green gold. investment and technology sectors over the coming period. White gold – It can be made with palladium or Market Trends: Gold Prices nickel, which is toxic and controlled by legislation in some places such as Europe. Gold prices are rising since 2001, when the price was around US$250. Increased investment and Industrial Uses: Gold has many modern physical demands were pushed up the prices in industrial uses including dentistry and 2010. Commodity prices rose as a result of electronics because of its good resistance to increasing demands, mainly from emerging oxidative corrosion and excellent quality as a countries, and speculative demands from the conductor of electricity. markets.
We believe the price rise to continue in 2011 Gold Market Driver: and beyond with European debt crises yet to be Gold demand is mainly driven by the need for fully resolved, combined with mysterious preservation of value. The main indirect driver implications of loose monetary and fiscal policy for gold is thus the economic situation. When worldwide. However, the rate of increase is not inflation is high, investors find refuge in gold to expected to be as significant as in 2010 with preserve their principal. When equity and debt supply expected to rise in the near future. The markets are depressed, gold is sought as a trend could also be more volatile as gold prices refuge for depreciating assets. already went up by over 30% in 2010. . During the current year, the prices rose to record high, Gold is recognized as the leading precious metal trading as high as US$1,550/Oz. for jewelry in almost all cultures. Gold demand for jewelry in a given country is sensitive Currently, in June 2011, gold is trading in the broadly to the standard of living in that country. range of US$1,500/Oz to US$1,545/Oz.
Reed Resources – Arrowhead BID 21 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Vanadium production is mainly concentrated in China, South Africa and Russia. These countries Gold Price Trend (Last 5 years) together contribute to approximately 90% of the US$/Oz global production. However, these countries 1600 1500 have witnessed regular supply disruptions in the 1400 1300 past. 1200 1100 1000 With over 90% of the vanadium going into steel, 900 its demand is closely linked to steel production. 800 700 The world vanadium reserves are currently 600 500 estimated at over 13 million tons and believed Apr‐06 Oct‐06 Apr‐07 Oct‐07 Apr‐08 Oct‐08 Apr‐09 Oct‐09 Apr‐10 Oct‐10 to be sufficient to meet vanadium demand into the next century.
Vanadium: Vanadium Uses: Vanadium Chemistry and Properties Vanadium is indeed a 20th century miracle Vanadium is a chemical element with the symbol metal. As mankind strives to make products ‘V’and atomic number 23. The element occurs stronger, lighter, safer and more fuel efficient, naturally in about 65 different minerals and in there will be increasing demand for the metal fossil fuel deposits. It is a soft, silvery grey, and the need for significant increase in ductiletransition metal. The element is found sustainable, cost efficient vanadium production. only in chemically combined form in nature. The formation of an oxide layer stabilizes the metal Vanadium is principally used to provide strength against oxidation. Vanadium is corrosion to steel which is used in structural application, resistant at normal temperatures and is oil & gas pipeline, building and cars. It is also resistant to oxidation by hydrochloric acid, used in tool steels and stainless steel. sulfuric acid and saltwater. Vanadium is used in small amounts in ferrous alloys to improve Alloys formed from combination of titanium, toughness and resistance aluminum and vanadium are used in aircrafts components, airframes, rocket motors and gas turbines. Non-steel uses include super alloys, xii Vanadium sources and production welding and hard-facing, magnets and alloys Vanadium is present in small amount in rocks used in nuclear engineering and and residual soils, which are usually considered superconductors. as the source of vanadium in oxidized ores. Important ores include carnotite, patronite, Steel will remain the key end-use market, roscoelite, and vanadinite. Vanadium slag fulfills although growth in aerospace alloys and the approximately 60% of global vanadium supplies emergence of new uses for titanium-vanadium from steel slag where vanadium is a by-product. will see this sector grow the fastest.
Secondary sources include production from Vanadium Market Driver:xiii power station fly ash, oil residues and spent refinery catalysts. These sources are Vanadium consumption is heavily influenced by geographically concentrated in the United steel production, high strength steel grades in States, Japan and the European Union, particular. High strength steels’ use is growing amounting to 20% of world production as construction, energy, and transportation Vanadium is also recovered as pentoxide from industries seek to maximize the strength and certain crude oils and petroleum ashes. minimize the weight of their products. Vanadium demand is growing faster than crude steel Other resources include secondary production, production. or processing of steelmaking slag, oil and coal residues, spent catalysts and uranium co- Vanadium’s increasing uses in other industries products. have also lead to an increase in its demand. Aerospace applications are rapidly expanding, and vanadium consumption is rising with the
Reed Resources – Arrowhead BID 22 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
introduction of the next generation commercial more than double during 2005-2008. However, aircraft. due to the global economic crisis, caused by the Lehman shock, the prices fell considerably in Vanadium is recently in news for its probable 2009 and 2010. use in batteries along with Lithium. These batteries have many competitive advantages. Vanadium is currently trading at in the range of They can be used in stabilizing energy US$ 30/kg to US$31/kg. Given the current distribution in renewable systems and can offer recovery and technological scene, prices are almost unlimited capacity by using sequentially expected to stabilize in range of US$35- larger storage tanks. These batteries have US$40/Kg in the midterm. limited self-discharge characteristics which make them probable candidates in applications where China being the biggest producer of both steel the batteries must be stored for long periods and vanadium, the prices of vanadium will with little maintenance while maintaining a largely depend on the production policy adopted ready state. by China. The growth of steel output and improvement in the quality required by the It is believed that these batteries will be a major regulators in China is expected to keep driver of vanadium demand in the near future. vanadium prices above its present levels.
Market Trends: Vanadium Prices
It is observed that vanadium prices in the last five years have been highly volatile and rose
Reed Resources – Arrowhead BID 23 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Lithiumxiv Country Reserves (Million tons) Lithium Chemistry and Properties: Chile 7,500,000 China 3,500,000 Lithium has the atomic number 3 and symbol Li. It is a soft, silver-white metal belonging to the Bolivia 9,000,000 alkali metal group of chemical elements. Under Argentina 850,000 standard conditions, it is the lightest metal and Australia 580,000 the least dense solid element. Like all alkali metals, lithium is highly reactive and flammable. Other States 7,570,000 For this reason, it is typically stored in mineral Total reserve 29,000,000 oil. When cut, lithium exhibits a metallic luster, but contact with moist air corrodes the surface xv quickly to a dull silvery grey, then black and Global Lithium Reserves (Tons LCE) discolored. Due to its high reactivity, lithium never occurs free in nature, and instead, only appears in compounds, which are usually ionic. Lithium also has high electrochemical potential and expands least when heated compared to other metals.
Lithium Sources and Production: Lithium is found in many minerals, some clays and brines. But the dominant commercial sources today are spodumene ores and salars Global Lithium Reserve Locations (dry lakebeds) where lithium-bearing brines are found just under a layer of crusted salt deposits. Solid mineral sources of lithium are spodumene, petalite and lepidolite. The mineral concentration in the rock formations ranges from 10-20%, which is equivalent to lithium concentration of about 1%-1.5%.
Brine accounts for 66% of total lithium production. Brine has impurities and its composition determines the value of the metal. Lithium Uses: Present challenges are in terms of crushing cost, infrastructure investment. These rocks are found Industrial application of lithium is mostly in form far from civilization, so manpower management of Lithium carbonate (40% of application), while and transportation setups are costly. lithium hydroxide and lithium chloride constitutes about 20% of total lithium use. Deposits of lithium are found in South America Lithium batteries possess required energy throughout the Andes. Chile is the leading density function which ensures acceptable lithium producer, followed by Argentina. Both coverable distance by car. These batteries have countries recover lithium from brine pools. In high power Density attribute implying that they the United States, lithium is recovered from can provide enough energy supply at rate brine pools in Nevada. Many of the world's enough to attain reasonable speed or known reserves are located in Bolivia, which is acceleration. Lithium oxide is a widely used flux along the central eastern slope of the Andes. for processing silica. Lithium application also Global lithium reserves are estimated to be 29m encompasses the pharmaceutical and fine- tons. Country wise breakup of lithium resource chemical industry, Where organ lithium reagents estimates is as under: are produced.
Reed Resources – Arrowhead BID 24 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Electric Vehicles of 5% is expected to add 60000 tons of Lithium Carbonate while 10% market Current Lithium by End Usexvi share would add 120000 tons of incremental lithium demand. As demand for Electric Vehicles increases, lithium demand is poised to compound by 9% annually during the next decade. Ceramics, Grease and Air treatment industry would see its Lithium use increase at rate of world real GDP growth rate of 4%/ year.
Market trends: Lithium prices
Price per tonne of Lithium Carbonate
6,000 5,000 Lithium market driver: Rechargeable batteries and Electric cars to drive demand 4,000 3,000 Price per 2,000 tonne of Lithium
Lithium Carbonate Lithium 1,000 Carbonate US$ Doller per Ton of Ton of per US$ Doller 0
00 0 Year 2 2002 2004 2006 2008 Year
Early 1990 saw Lithium priced at US$4000/t. However, Brine producers entered the industry and brought prices as low as US$1600/t. This led to capacity curtailment in early late
twentieth century. Subsequent to demand pull, Global demand of Lithium is pegged to have prices started picking up in 2004-05 leading to grown at compounded annual growth rate of capacity addition. 5.5% from 2000 to 2009 and is seen to grow by 6.4% to 9.5% during coming 2009-2020. In 2010 the companies with Brine as the source Estimates state 2009 Latium Carbonate of Lithium experienced lack of demand and production at 100,000 Tons. Current demand of excess production, to the extent that they were Lithium is pegged at 120,000 Tons of Lithium pumping lithium back into the lakes. Latest Carbonate equivalents. round of negotiations among producers and buy side industries has indicated price cutting by as Incremental demand in Lithium has been much as 20% by brie majors from South originating from portable battery application. America. Battery application has been growing at 22% compounded annual growth rate. Currently Lithium Carbonate is trading at US$5000/t. Given the current Lithium battery Major impetus for demand growth would be Technology, Electric cars introduction in mass production of electric vehicles, which use mainstream consumer markets and emergence the lithium secondary batteries. Hybrid Electric of possible new suppliers of Lithium from Brine Vehicles whose energy source is a combination rich areas along with possibility of recycling of electric power and gasoline engine uses projects of Lithium from Batteries, we expect 0.5kg-2kg of lithium, while plug in hybrid that, Lithium prices should stabilize in range of electric vehicle requires 2-5kg of lithium in US$4500-5500 per tons. batteries. Electric vehicles where most of energy is derived from batteries require 10-20Kg of Lithium per car manufactured. Market share of
Reed Resources – Arrowhead BID 25 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Reed Resources –Risk Assessment Financing/Capex Risk- MEDIUM a. Barrambie Vanadium project would require substantial capital injection, to the tune of +AU$500M, which is a quite a asking for Reed Resources for minimal current cash flow generation and low liquidity. Reed Resources might finance the deal with equity funding where its profit share would diminish by the extent of other party’s portion in the venture. b. Also movement in exchange rate may have impact on profits of Reed Resources as its directional movement is unpredictable. Operational Risk: Medium a. Lithium reserves at Mt Marion are to be developed by MRL, as Reed Resources don’t have execution capacities of its own. Dependency on the partner could pose a threat to the whole project as such. Exploration Risk: Medium a. Exploration and mining involve risk where the company has few expected results during the exploration stage. There is uncertainty in whether one could define additional reserves. b. Huge potential exists among the brine areas of Andes Mountains in South America, specifically Bolivia. Capacity creation in this part of world would find lithium supply shooting up in response to growing demand, materializing in form of pricing pressure.
Macroeconomic Risk: Medium a. Vanadium demand is dependent on the steel production and prices, along with Quality of steel demand. Though currently the trend is in favor of incremental demand, slowdown in construction or slow down in global GDP growth along with declining steel prices would have impact on profitability of the venture. b. Lithium Consumption is expected to increase because of its battery application in electric cars. Electric cars acceptance in mainstream market is cardinal for future consumption growth. c. Lithium recycling is a viable option once there is critical mass in the market in the form of car batteries. It’s projected that Lithium batteries critical mass would take next 5 years to come in picture. Cost advantage on recycler’s part can have effect on the profitability of Lithium refiners. d. Meekatharra and Comet Vale projects are being implemented at a time of peak commodity cycle. As the world economy stabilizes and interest rates start rising, we may witness Gold price change. Project profitability would be affected by Commodity cycle.
Reed Resources – Arrowhead BID 26 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Reed Resources – Peer comparison
Gold comparables:xvii
Market Market Shares Price Resource Company ASX Code Cap Cap/Resources (MM) ($) (Moz) ($MM) ($/oz)
Apex Minerals NL AXM 5,550 0.01 39 2.2 18
Crescent Gold Limited CRE 1,101 0.05 58 2.8 21
Doray Minerals Limited DRM 62 1 49 0 485
Focus Minerals Limited FML 3,441 0.07 234 2.3 102
Navigator Resources Limited NAV 466 0.04 17 1.7 10
Norton Gold Fields limited NGF 686 0.13 89 6.1 15
Ramelius Resources Limited RMS 292 1.21 353 3.5 101
Saracan Mineral Holding Ltd. SAR 492 0.55 268 3.3 81
Silver Lake Resources Limited' SLR 179 1.80 318 3.0 106
St Barbara limited SBM 326 1.80 585 7.7 76
Westgold Resources Limited WGR 414 0.22 87 3.0 29
Average (ex Doray) 56
Reed Resources Ltd RDR 262 0.50 131 2.9 45
Meekatharra acquisition RDR* 29 2.5 11
$ Market Cap / Resource oz $120 $100 $80 $60 Average $56/oz $40 $20 $0 Reed acq. $11/oz DRM SLR FML RMS SAR SBM RDR WGR CRE AXM NGF NAV *RDR
Reed Resources – Arrowhead BID 27 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
To arrive at the Market cap/Resources multiple of Reed resources we have taken companies’ total gold resource estimates including the recently acquired Meekatharra project in Western Australia. It seems that the company has acquired Meekatharra project at a very attractive price. If we only consider the Meekatharra project the ratio is way below the average at approximately 11 market cap per ounce. The company’s EV/Resource ratio is less than the average of its peers operating in the same region making Reed resources more attractive than it peers. The current average is AU$ 56 market cap per resource ounce as compared to 45 market cap per ounce in case of Reed Resources.
Lithium comparables:
Australian Lithium Market Cap Net Cash EV (1) Prodn (2) EV/Prod Implied Mineral Producers $m $m $m kt pa LCE $/t LCE EV (1x2) Talison Lithium (TSX: TLH) Greenbushes 387 82 306 50.0 6,111 $182m Concentrate producer Reed Resources (ASX: RDR) Mt Marion ? 29.7 LiC developer Galaxy Resources (ASX: GXY) Mt Cattlin 230 34 196 20.3 9,633 $286m
Integrated LiC developer
Reed Resources can be compared to two of its peers having operations in Australia and possessing similar lithium assets namely Galaxy Resources Limited and Talison Lithium. Galaxy Resources wholly owns and operates the Mt Cattlin mine in Western Australia which is also producing spodumene concentrate. Talison Lithium owns Greenbushes Lithium Operations located in south of Perth and produces a range of lithium mineral products and have a well established global customer base.
Enterprise Value of Reed Resources (for its Lithium operation) is in between these two comparable peers. Reed’s lithium resource reserve has a grade of 1.3% as compared to Galaxy resources and Talison Lithium which havemineral grades of 3% and 1% respectively. Also Reed’s resource estimates are in between that of Galaxy and Talison.
Resource Grade Strip Company Pegmatite (kt pa LCE) (Li2O) Ratio
Galaxy Resources Limited (Mt. Flat lying Vein 20.3 1.0% 2.4:1 Cattlin) pegmatite Talison Lithium (Greenbushes) 50.0 3.0% 5.6:1 Incline Vein pegmatite Flat lying Vein Reed Resources (Mt Marion) 29.7 1.3% 3.3:1 pegmatite
Reed Resources – Arrowhead BID 28 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Value
The Fair Market Value of a share of Reed Resources stands at AU$1.974 to AU$2.608.
The Fair Market Value of all shares of Reed Resources stands at AU$522.55 to A U$690.36.
Reed Resources Balance Sheet Forecast
CONSOLIDATED BALANCE all figures in '000 Low bracket AU$, unless stated SHEET estimates differently
year ending June 30th 2010A 2011E 2012E 2013E 2014E 2015E 2016E Total current assets 11,692 47,235 68,149 151,247 299,837 442,774 584,407 Total Non-current assets 45,614 99,039 357,725 605,663 545,127 490,644 441,609 TOTAL ASSETS 57,306 146,274 425,875 756,910 844,964 933,417 1,026,017 Total Current Liabilities 2,099 - 41 409 454 454 461 Total Non-current Liabilities 1,122 41,122 141,122 291,122 291,122 291,122 291,122 TOTAL LIABILITIES 3,221 41,122 141,163 291,531 291,576 291,576 291,583 Total Shareholder's Equity 54,085 105,152 284,711 465,378 553,387 641,841 734,434 TOTAL LIABILITIES & EQUITY 57,306 146,274 425,875 756,910 844,964 933,417 1,026,017
Important information on Arrowhead methodology The principles of the valuation methodology employed by Arrowhead BID are variable to a certain extent depending on the subsectors in which the research is conducted, but all Arrowhead valuation research possesses an underlying set of common principles and a generally common quantitative process.
With Arrowhead Commercial and Technical Due Diligence, Arrowhead extensively researches the fundamentals, assets and liabilities of a company, and builds solid estimates for revenue and expenditure over a coherently determined forecast period.
Elements of past performance such as price/earning ratios, indicated as applicable, are present mainly for reference purposes. Still, elements of real-world past performance enter the valuation through their impact on the commercial and technical due diligence.
We have also presented the comparables method based on Enterprise Value per Resource of Ounce ($/oz) as a secondary measure of fair value , which is not central to the methodology applied towards building the fair value Bracket, but is presented here as additional information.
Arrowhead BID Fair Market Value Bracket The Arrowhead Fair Market Value is given as a bracket. This is based on quantitative key variable analysis, such as key price analysis for revenue and cost drivers or analysis and discounts on revenue estimates for projects, especially relevant to those projects estimated to provide revenue near the end of the chosen forecast period. Low and high estimates for key variables are produced as a tool for valuation.
In principle an investor who is comfortable with the high-brackets of our key variable analysis will align with the high-bracket in the Arrowhead Fair Value Bracket, and likewise in terms of low estimates. The investor will also take into account the company intangibles – as presented in the first pages of this document in the analysis on strengths and weaknesses and on other essential company information.
Reed Resources – Arrowhead BID 29 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
These intangibles serve as supplementary decision factors for adding or subtracting a premium in the investor’s own analysis.
The bracket should be understood as a tool provided by Arrowhead BID for the reader of this report and the reader should not solely rely on this information to make his decision on any particular security. The reader must also understand one the one hand that global capital markets contain inefficiencies, especially in terms of information, and that on the other hand corporations and their commercial and technical positions evolve rapidly: this present edition of the Arrowhead valuation is for a short to medium-term alignment analysis (one to twelve months). The reader should refer to important disclosures on page 19 of this report.
Information on the Reed Resources Incorporated valuation
Reed Resources Valuation Methodology: The Arrowhead fair valuation for Reed resources is based on the discounted cash flow (DCF) method. We have considered only three projects namely Meekatharra (Gold), Barrambie project (Vanadium) and Mt Marion project (Lithium) and valued the company.
Time horizon: The Arrowhead fair valuation for Reed Resources Incorporated is based on a discounted cash flow method. The time period chosen for the valuation is ~122 months (2011-2021). While revenue is expected to ramp up significantly during the period 2014-16 due to the discount factor used, the later years are heavily discounted and have a marginal effect on the valuation. They are included to present a full project cycle situation.
Underlying Business Plan: Reed Resource with diversified projects is in process of developing these assets so as to start production of metals. Reed Resource has been following strategy of acquiring the assets on its own while the development of assets is undertaken along with established mining players. This strategy is aimed to minimize the operational and financing risk.
Terminal Value: Terminal Value is estimated to depend on a terminal growth rate of 0%, representing the maturity, technology change and prospective competiveness in the business.
Prudential nature of valuation: It should be noted that this Arrowhead Fair Value Bracket estimate is a relatively prudential estimate, as it discounts the eventuality of Reed Resources acquiring and producing from any other projects than Meekatharra project, Barrambie project and Mt Marion project before 2021.
Key variables: The upper and lower bounds in the estimation correspond to the extreme positions taken by the following key variables:
- Variable 1 – Forecast price of gold for 2011-2021: Arrowhead has estimated gold prices to be in the range of US$1,200/oz to US$1,400/oz - Variable 2 – Forecast price of vanadium for 2011-2021: Arrowhead has estimated vanadium prices in the range of US$32/kg to US$40/kg. - Variable 3 – Forecast price of Lithium for 2011-2021: Arrowhead has estimated Lithium prices in the range of US$5,000/t to US$6,500/t - Variable 4 – Hypothesis for annual production at Meekatharra project: annual production to range between 100,000oz/year to 150,000oz/year going from 2013 till 2017. - Variable 5 – Hypothesis for annual production at Barrambie project: annual production to range from 6,000t/year to 6,700t/year going from 2013 till 2021. - Variable 6 – Hypothesis for annual production at Mt Marion project: annual production to range from 150,000t/year to 300,000t/year going from 2013 till 2021.
Reed Resources – Arrowhead BID 30 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Analyst certifications multiple sources of information while preparing their investment decisions. Recipients of this I, Thomas Renaud, certify that all of the views report are strongly advised to read the expressed in this research report accurately Information on Arrowhead Methodology section reflect my personal views about the subject of this report to understand if and how the security and the subject company. Arrowhead Due Diligence and Arrowhead Fair Value Bracket integrate alongside the rest of their stream of information and within their Important disclosures decision taking process.
Arrowhead Business and Investment Decisions, Past performance of securities described directly LLC received fees in 2010 from Reed Resources or indirectly in this report should not be taken as for researching and drafting this report and for a an indication or guarantee of future results. The series of other services to Reed Resources price, value of, and income from any of the including distribution of this report and financial securities described in this report may networking services. rise as well as fall and may be affected by simple and complex changes in economic, Aside from certain reports published on a financial and political factors. periodic basis, the large majority of reports are published by Arrowhead BID at irregular Should a security described in this report be intervals as appropriate in the analyst’s denominated in a currency other than the judgment. investor’s home currency, a change in exchange rates may adversely affect the price of, value of, Any opinions expressed in this report are or income derived from the security. statements of our judgment to this date and are subject to change without notice. This report is published solely for information purposes, and is not to be considered as an offer This report was prepared for general circulation to buy any security, in any state. and does not provide investment recommendations specific to individual Other than disclosures relating to Arrowhead investors. As such, any of the financial or other Business and Investment Decisions, LLC, the money-management instruments linked to the information herein is based on sources we company and company valuation described in believe to be reliable but is not guaranteed by this report, hereafter referred to as “the us and does not purport to be a complete securities”, may not be suitable for all investors. statement or summary of the available data.
Investors must make their own investment Arrowhead Business and Investment Decisions, decisions based upon their specific investment LLC is not responsible for any loss, financial or objectives and financial situation utilizing their other, directly or indirectly linked to any price own financial advisors as they deem necessary. movement or absence of price movement of the Investors are advised to gather and consult securities described in this report.
Reed Resources – Arrowhead BID 31 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Valuation
Figures are in thousands AU$, unless indicated otherwise.
WACC KEY VARIABLES
Risk-free rate 5.21% xviii Gold , vanadium and lithium Production from Meekatharra, Barrambie and Beta 1.25 xix prices Mt Marion production Risk premium 7.0% xx Additional Risk Premium 5.0% xxi Max value Please refer to Key Variables section Cost of Equity 20.2% Min value Terminal Growth Rate 0% xxii
Time Period ---> 0.08 1.08 2.08 3.08 4.08 5.08 6.08 7.08 8.08 9.08 10.08 Year beginning 1st July 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E
FCFE (High)
Net cash from operation 1,182 26,351 190,026 119,850 172,546 186,490 184,927 168,066 122,514 95,161 131,312 Capital Expenditure (9,149) (64,00) (298,400) (315,200) ------Net Equity/ Debt Addition 100,000 300,000 250,000 - - - - - (25,000) (25,000) 25,000) Free Cash Flow to Equity 92,033 262,351 141,626 (195,350) 172,546 186,490 184,927 143,066 97,514 70,161 106,312 Discount Factor 0.98 0.82 0.68 0.57 0.47 0.39 0.33 0.27 0.23 0.19 0.16 Present Value of FCF 90,632 214,922 96,516 (110,746) 81,373 73,163 60,352 38,841 22,023 13,182 16,616
FCFE (Low)
Net cash from operation 1,182 19,274 147,931 81,045 127,486 140,036 136,965 128,790 89,223 64,399 69,635 Capital Expenditure (9,149) (64,000) (298,400) (315,200) ------Net Equity/ Debt Addition 100,000 300,000 250,000 - - - - - (25,000) (25,000) 25,000) Free Cash Flow to Equity 92,033 255,274 99,531 (234,155) 127,486 140,036 136,965 103,790 64,223 39,399 71,635 Discount Factor 0.98 0.82 0.68 0.57 0.47 0.39 0.33 0.27 0.23 0.19 0.16 Present Value of FCF 90,632 209,124 67,829 (132,746) 60,123 54,938 44,700 28,178 14,505 7,402 11,196
VALUE CONTRIBUTION PER KEY VARIABLE (US$/SHARE BETWEEN ARROWHEAD FAIR VALUE BRACKET HIGH AND LOW VALUE ESTIMATE)
High Low Terminal Value (TV) 526,036 354,451 Present Value of TV 82,214 55,397 Present Value of FCF 596,874 455,880 Present Value of FCF + TV 679,088 511,277 + Cash 11,271 11,271 xxiii Equity Value Bracket 690,359 522,548 Shares on issue (‘000) 264,743 264,743 xxiv Fair Share Value Bracket AU$ 2.608 AU$ 1.974 Current Market Price AU$ 0.475 AU$ 0.475 Current Market Cap. (AU$) 125.75MM 125.75MM Target Market Cap. Bracket (AU$) 690.36MM 522.55MM
Reed Resources – Arrowhead BID 32 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.
Notes
i Arrowhead Business and Investment Decisions Fair Value Bracket - AFVBTM. See information on valuation on pages 29-32 of this report and important disclosures on page 31 of this report. ii Source: Bloomberg as on 6th July 2011 iii 52 weeks to 6th July 2011 .Source: Bloomberg as on 6th July 2011 iv 3 months to 6th July 2011 .Source: Bloomberg as on 6th July 2011 v Source: Bloomberg as on 6th July 2011 vi Arrowhead Business and Investment Decisions Fair Value Bracket – AFVBTM. See information on valuation on pages 29-32 of this report and important disclosures on page 31 of this report. vii Source :News http://www.reedresources.com/announcements.php viii Source: Company ix Source: http://www.reedresources.com/directors.php x Source: http://www.goldsheetlinks.com/production.htm xi K stands for karat, a standard unit of measurement for the purity of gold xii Source: (http://www.australian-shares.com/vanadium-australia) xiii Source : http://www.mmta.co.uk/uploaded_files/Vanadium.pdf xiv Source: http://www.orocobre.com.au/Lithium_Market.htm xv Source: Lithium Supply and Markets 2010 Conference xvi Source: Roskill Information Services Ltd. 2009 estimâtes xvii Source: Company Presentation xviii Source: Bloomberg as on 6th July 2011 xix Source: Arrowhead BID estimate. xx Source: Arrowhead BID estimate. xxi Source: Arrowhead BID estimate. xxii Source: Arrowhead BID estimate. xxiii Cash Position reported by the company in Appendix 5B as on 31st March 2011 xxiv Source :As per Appendix 3B-1st July 2011
Reed Resources – Arrowhead BID 33 ASX:RDR Due Diligence and Valuation Report See important disclosures on page 31 of this report.