Canada Research Published by Raymond James Ltd.
Dundee Precious Metals Inc. July 18, 2014 DPM-TSX Company Report - Initiation of Coverage Adam Low CFA | 416.777.4943 | [email protected] Wayne Lam CFA, (Associate) | 416.777.7042 | [email protected] Outperform 2 Mining | Precious Metals - Gold C$7.50 target price More Precious than Meets the Eye Current Price ( Jul-15-14 ) C$5.13 Total Return to Target 46% 52-Week Range C$7.00 - C$2.50 Recommendation Suitability High Risk We are initiating coverage of Dundee Precious Metals with an Outperform rating Market Data and a 6-12 month target price of C$7.50. We recommend buying DPM’s shares. Market Capitalization (mln) US$671 Current Net Debt (mln) US$75 Analysis Enterprise Value (mln) US$751 Diversified and vertically integrated – Dundee Precious Metals is a diversified and Shares Outstanding (mln, f.d.) 140.0 vertically integrated mining company with two operating gold mines (its flagship 10 Day Avg Daily Volume (000s) 449 Chelopech mine in Bulgaria, and Kapan in Armenia), a specialized copper smelter Dividend/Yield US$0.00/0.0% (Tsumeb in Namibia), and a construction-ready gold project (Krumovgrad in Bulgaria), as well as stakes in three junior gold exploration/development companies. Key Financial Metrics Tsumeb is now a second source of cash flow – The Tsumeb smelter turned a corner 2013A 2014E 2015E in 1Q14, generating its first sizeable profit (EBITDA of US$10.2 mln) since the P/E company acquired it in March 2010. We expect this turn-around to be sustainable, 28.4x 14.1x 11.2x thus making Tsumeb a second source of cash flow in addition to Chelopech. P/NAV 0.75x NA Abundant organic growth opportunities – The company’s best organic growth EBITDA (mln) opportunities are the Krumovgrad gold project, an investment in a holding furnace US$103 US$117 US$139 at the Tsumeb smelter, and the potential to expand and optimize the Kapan mine. Au Production (000s oz) The development of Krumovgrad would provide more diversification and add a 153.3 148.1 166.7 fourth operating asset. An investment in a holding furnace at the Tsumeb could raise Cu Production (000s MT) capacity and further improve the economies of scale, thus increasing the cash flow 21.0 19.9 19.8 from the smelter. An expansion of Kapan’s throughput to 1.0 mln tonnes/year Au Cash Cost (US$/oz) (nearly double) would enable margin expansion by spreading the fixed costs over a US$329 US$566 US$607 larger volume of production, and could be the impetus to transition the mine from Concentrate Smelted (MT) operating at a loss to generating a profit. 152,457 194,547 234,600 A track record of overcoming challenges, often through innovation – The Gold Price (US$/oz) management team has proven itself adept at resolving complex social, technical, US$1,413 US$1,321 US$1,350 and metallurgical challenges. It has turned-around two loss making operations in Copper price (US$/lb) incredibly different jurisdictions (Chelopech and Tsumeb). At Chelopech the team US$3.33 US$3.14 US$3.25 implemented innovative solutions to improve both the underground mining capacity and increase the metal recoveries in the mill. At Tsumeb the company has overcome Company Description some community opposition and invested in technology to make the smelter a Dundee Precious Metals is a vertically integrated gold unique and industry-leading processing facility for complex copper concentrates. and copper producer. It operates the Chelopech mine in Bulgaria, the Tsumeb copper smelter in Namibia, Valuation and the Kapan mine in Armenia. Dundee Precious Metals’ shares trade at a P/NAV of 0.75. This compares to the average for the junior gold producer peer group of 0.85. Our target price of C$7.50 is based on a 70%/30% weighting of a 1.1 multiple applied to our NAV estimate of C$6.88/share and a 10.0 EV/EBITDA multiple applied to our 2014 EBITDA estimate (in-line with risk and liquidity-adjusted historic producer multiples). Refer to our Valuation & Recommendation section for details.
EPS 1Q 2Q 3Q 4Q Full Revenues NAV Mar Jun Sep Dec Year (mln) 2013A US$0.01 US$0.12 US$(0.10) US$0.14 US$0.17 US$345 2014E 0.07A 0.08 0.07 0.11 0.34 383 C$6.88
2015E 0.11 0.11 0.11 0.11 0.43 444 NA Source: Raymond James Ltd., Thomson One
Please read domestic and foreign disclosure/risk information beginning on page 42 and Analyst Certification on page 42. Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2 Canada Research | Page 2 of 47 Dundee Precious Metals Inc.
Table of Contents
Investment Overview ...... 3
Key Investment Risks ...... 5
Company Overview ...... 7
Financial Analysis & Outlook...... 10
Valuation & Recommendation ...... 11
Chelopech Mine ...... 16
Tsumeb Smelter ...... 22
Krumovgrad Project ...... 26
Kapan Mine ...... 32
Partially-Owned Exploration Entities ...... 36
Appendix: Management & Board of Directors ...... 39
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Investment Overview
We are initiating coverage of Dundee Precious Metals with an Outperform rating and a 6-12 month target price of C$7.50. Our target price is based on a 70%/30% weighting of a 1.1 multiple applied to our net asset value (NAV) estimate of C$6.88/share and a 10.0 EV/EBITDA multiple applied to our 2014 EBITDA estimate of US$117 million. Dundee Precious Metals is a diversified and vertically integrated mining company with two operating mines, a specialized copper smelter, and a construction-ready gold project, as well as stakes in three junior gold exploration/development companies (53.1% of Avala Resources, 45.5% of Dunav Resources, and 12% of Sabina Gold & Silver). In 2014 we expect Dundee Precious Metals to sell 148,100 ounces of payable gold and 43.8 million pounds of payable copper (its two primary metals) at a C1 gold cash cost of US$566/ounce and a sustaining gold cash cost of US$1,191/ounce (both net of by-product credits). This is broadly in-line with the 2013 performance. The major change that we envision occurring in 2014 is the emergence of the company’s smelter as a profit centre. We forecast throughput of 194,547 tonnes (an increase of 28% year-over-year) at an operating cost of US$347/tonne (a 20% improvement year-over-year). The company’s most significant asset is the Chelopech underground gold-copper mine in Bulgaria. Chelopech is a producing mine that is exploiting a high-sulphidation epithermal deposit. The deposit has high grades of gold, copper, and silver with reserves of 23.9 million tonnes grading 3.25 grams/tonne gold, 0.99% copper, and 7.3 grams/tonne silver. The mine is operating sustainably at a throughput of 2 million tonnes/year, and accounts for 49% of our mine-site NAV. The Chelopech mine has elevated levels of arsenic, which prompted the company to acquire the Tsumeb smelter to secure access to one of the few facilities in the world with the ability to treat the copper concentrates that the mine produces. We forecast the mine to sell 125,300 ounces of payable gold contained in copper and pyrite concentrates, and 41.4 million pounds of payable copper in concentrate in 2014. Over the remaining mine life of 12 years we forecast average annual production of 130,100 ounces of gold and 35.1 million pounds of copper, at a sustaining cash cost of US$744/ounce of gold (net of by-product credits). Dundee Precious Metals’ Tsumeb copper smelter in Namibia is the asset that truly differentiates it versus its peers. First, it provides the company with vertical integration, as it processes the majority of the copper concentrate produced by Chelopech. This is a capability that other companies of this size do not possess. Second, Tsumeb is a very unique smelter given that it has been designed to process complex copper concentrates, with an emphasis on those with elevated levels of arsenic. This is a competitive advantage within the smelting industry, as it means that it is operating in a market niche with relatively little competition. Third, the smelter has recently transitioned from operating at a loss to generating a profit. Going forward, we expect the smelter to be a source of operating cash flow, and for these cash flows to be less susceptible to swings in commodity prices than the company’s mines. This is due to the lower volatility of the revenue streams from the smelting business (processing premiums for concentrate impurities, treatment charges, and the by-product sales of sulphuric acid and arsenic trioxide) relative to precious and base metal prices. The smelter’s current capacity is 240,000 tonnes/year of concentrate, a number which we envision increasing by 33% to 320,000 tonnes/year in 2017 following optimizations and the addition of a holding furnace. This will enable it to treat an increasing volume of third-party concentrate from which the company generates tolling revenue. The smelter accounts for 28% of our mine-site NAV. The Krumovgrad gold project in Bulgaria is Dundee Precious Metals’ most important development-stage asset, and it accounts for 13% of our mine-site NAV. Krumovgrad is a low- sulphidation epithermal deposit. The project is essentially “construction-ready” as a feasibility study has been recently completed, and the environmental impact assessment (EIA) has been approved. The company is now awaiting the local permits to commence construction. The project had previously faced some local opposition, but management has redesigned the mine to reduce the potential environmental impact, and has recently gained the support of the municipal authorities. Dundee Precious Metals intends to be in a position to commence construction within 6-12 months. Although Krumovgrad has a short mine life of only 8 years, the project has the attractive attributes of a high grade (we model 4.0 grams/tonne gold), a relatively low initial capital cost (we forecast US$203 million), and an enticing IRR (our estimate is 23%). We forecast
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average annual production of 81,400 ounces of gold and 36,600 ounces of silver in a precious metals concentrate at a sustaining cash cost of US$517/ounce of gold (net of by-product credits). The Kapan underground polymetallic mine in Armenia is currently the company’s second operating mine. Although it generates revenue from four metals – gold, zinc, silver, and copper – the majority of the revenue comes from gold. The Kapan mine has suffered from a number of challenges, notably poor low equipment availability and levels of productivity, and ore dilution. Given these difficulties Kapan only accounts for 10% of our mine-site NAV. However, therein lies the opportunity. Should management be able to turn-around the Kapan mine as they have achieved at Chelopech and Tsumeb, it may be possible to return the operation to profitability from EBITDA losses in three of the last five quarters. Management is currently evaluating an expansion of the mine to improve the economies of scale. We forecast Kapan to have an 11 year mine life, producing 44,500 ounces of gold/year at a sustaining gold cash cost of US$1,005/ounce of gold (net of by-product credits).
Our key investment considerations for Dundee Precious Metals’ shares are: A strong management team that thinks “outside the box” – Dundee Precious Metals has a strong management team, and one that we consider able to “punch above its weight” given the market capitalization of the company. In our view, aside from the major mining companies there are few management teams that can match Dundee Precious Metals’ ability to manage as many assets in as many jurisdictions. Not only does this management team preside over an array of assets, but it has also proven itself adept at resolving complex social, technical, and metallurgical challenges. It has turned around two loss making operations in two incredibly different jurisdictions, the Chelopech mine in Bulgaria and the Tsumeb smelter in Namibia. At Chelopech the team implemented innovative solutions (the installation of underground crushing and conveying, and the implementation of staged flotation reactors in the copper flotation and pyrite recovery circuits) to improve both the underground mining capacity and increase the metal recoveries in the mill. At Tsumeb the company has overcome some community opposition to the operation of the smelter and invested in technology to make the Tsumeb smelter a unique, industry-leading processing facility with a competitive advantage in the market of treating complex copper concentrates. Transformation of the Tsumeb smelter into a second significant source of cash flow – Since completing the acquisition of the asset in March 2010, the Tsumeb smelter has generally operated at a loss. A major transformation occurred in 1Q14 with the smelter once again generating a profit due to a series of improvements (an increase in capacity, greater efficiency, and higher-priced contracts). First, the company has completed the installation of a second and refurbished oxygen plant. This was the driver for an increase in annual concentrate smelting capacity from 170,000 tonnes/year to 240,000 tonnes/year from the Ausmelt furnace. Second, the increase in capacity from the Ausmelt furnace also enabled the company to permanently close the less efficient reverberatory furnace. These changes resulted in a significant improvement in operating costs, to US$307/tonne of concentrate smelted in 1Q14, down from US$433/tonne in 2013. Third, new off- take contracts for copper concentrate with higher tolling fees led to an increase in revenue per tonne of concentrate smelted to US$569/tonne in 1Q14 as compared to US$450/tonne in 2013. The net effect of these changes has been a material improvement in profitability per tonne of concentrate smelted to US$110/tonne in 1Q14 from a loss of US$124/tonne in 2013. We expect the improved profitability of the smelter to be maintained going forward. Attractive valuation – Dundee Precious Metals is attractively priced relative to the peer group of junior gold producers. Its shares are currently trading at a P/NAV multiple of 0.75, a 12% discount to the average of 0.85 for the junior gold producer peer group. Based on P/CF the company’s shares are trading at a significant discount to the peer group average, using either 2014 or 2015 estimates. For example, Dundee Precious Metals’ 2014 and 2015 P/CF are 6.2 and 5.5, as compared to the peer group at 10.6 and 7.6, respectively. The same can be said on a P/E basis, on which the company’s shares are trading at 14.1 for 2014 and 11.2 for 2015, as compared to the peer group at 20.1 and 14.8, respectively. With regard to EV/EBITDA the company’s shares continue to appear inexpensive using either our 2014 or 2015 estimates. For example, Dundee Precious Metals’ 2014 and 2015 EV/EBITDA multiples are 6.4 and 5.4, as compared to the peer group at 9.2 and 5.8, respectively.
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Abundant organic growth opportunities – In addition to its operating assets, Dundee Precious Metals has numerous opportunities to deploy its cash flow to achieve organic growth. The best opportunities are represented by the Krumovgrad gold development project, the option to invest in a holding furnace to further increase the capacity of the Tsumeb smelter, and the potential to expand and optimize the Kapan mine. The development of Krumovgrad would provide additional diversification and lead to a fourth operating asset. The investment in a holding furnace at the Tsumeb smelter could increase capacity by an additional 44,000 tonnes/year of concentrate (which would equate to an 18% boost to the current capacity) by eliminating a processing bottleneck, and further improve the economies of scale, thus improving the profitability and the cash flow from the smelter. An expansion of Kapan’s throughput to 1.0 million tonnes/year (nearly double the current capacity) as is currently being contemplated would enable margin expansion by spreading the fixed costs over a larger volume of production, and could be the impetus to transition the mine from operating at a loss to generating a profit. Exploration upside – We consider the exploration potential to be an underappreciated component of the Dundee Precious Metals story. The Chelopech mine has had a history of reserve/resource replacement, and we believe that it has the potential to continue this trend. Metal zonation has been observed, and the mineralization can be characterized as lead-zinc rich in the east-northeast to copper-gold rich in the west-southwest. This may suggest that the hydrothermal system that is responsible for the mineralization at Chelopech extends at depth to the southwest. Specifically, the company has recently had success with exploration down-plunge of Blocks 151 and along strike of Block 19 (two of the major producing ore-bodies), and Block 19E remains open to the northeast and to the southwest. Chelopech also has the potential to deliver a game-changer on exploration based on the porphyry potential of the property. The Chelopech deposit is a high-sulphidation epithermal system that may be associated with a porphyry-style system at depth. The Sveta Petka licence to the immediate north of Chelopech, for which the company is awaiting a drilling permit, is being reviewed as a porphyry exploration target. We note that the Chelopech mine is in close proximity to two operating copper porphyry mines, Assarel/Medet and Elatsite, so the presence of a porphyry deposit is not inconceivable. At Kapan, the mineralized veins remain open at depth, and the partly owned Serbian exploration assets have the potential to deliver gold-copper porphyry deposits. Possible participant in industry consolidation – Dundee Precious Metals could play the role of either consolidator or acquisition target. As the owner of two profitable, high margin operations (the Chelopech mine and the Tsumeb smelter) as well as numerous other assets that could benefit from development/optimization (the Krumovgrad project and the Kapan mine) or yield exploration success (Chelopech, Kapan, and the Serbian projects), we view the company as a potential acquisition target. In our opinion, these attributes could make the company enticing for larger precious metal or base metal mining entities. The company’s ability to generate cash flow from both Chelopech and Tsumeb, as well as its strong management team could also enable Dundee Precious Metals to make acquisitions. However, we note that until the sulphuric acid plant is completed at Tsumeb the company will not have any free cash flow to spare for acquisitions and thus any transactions in this regard would likely need to be completed using shares. Additionally, any development-stage mining asset gained via acquisition would have to compete with the company’s Krumovgrad project for capital. Potential catalysts for the shares: 1) A sustained increase in the capacity of the Tsumeb smelter in 2H14, and corresponding economies of scale, as it ramps-up throughput following the commissioning of the second oxygen plant in early 1Q14; 2) a preliminary economic assessment study for the expansion of the Kapan mine – 3Q14; 3) receipt of the Krumovgrad land use and construction permits – 2H14; 4) completion of the acid plant at the Tsumeb smelter – early 2015; and 5) ongoing exploration results from Chelopech and Kapan.
Key Investment Risks
General risks experienced by mining companies – Mining operations are typically subject to a number of risks, including: environmental compliance issues, personnel accidents, metallurgical/other processing problems, unexpected rock formations, ground or slope failures, flooding, fires, earthquakes, rock bursts, equipment failures, and consultant errors. Interruptions
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to mining operations can occur due to inclement weather conditions, road closures, port closures, inconsistent electricity or water supply, and/or local protests. Metal price uncertainty – Our net asset value estimate and target price are highly leveraged to our metal price forecasts. Deviation from these forecasts could result in materially different performance. Project permitting risk – 13% of our net asset value (NAV) is derived from the Krumovgrad gold project in Bulgaria. The company has faced some local opposition during the permitting process for the development of the project. Although the company appears to be making progress towards resolving the issues, should the permitting remain unresolved it could delay the start-up of the project and reduce our net present value estimate for the asset. Uncertainty of third-party demand for complex copper concentrate smelting – In 2013 the Tsumeb smelter obtained 49% of its copper concentrate feed internally from the Chelopech mine, with the remainder sourced from third-parties. Chelopech is currently operating at close to design throughput and the smelter is expanding its capacity, which means that the proportion of third- party concentrate will need to increase going forward in order to keep the smelter at close to full utilization. Should an expected increase in the demand for Tsumeb’s toll treatment services fail to materialize, the consequence would be a less robust growth forecast for Tsumeb than we currently model. Foreign country/geopolitical risk – Dundee Precious Metals has operations in Bulgaria, Namibia, and Armenia, and investments in Serbia. All of these are developing countries that can at times be subject to political change and variations in sentiment with respect to the mining industry. However, we believe that the company has been very pro-active in taking measures to mitigate these foreign country/geopolitical risks. Bulgaria accounts for 62% of our mine-site NAV, and has recently experienced some political upheaval. In February 2013 protests forced the resignation of the government at the time and led to a parliamentary election in May 2013. Only one year into a four-year term, the new left-leaning government has already faced five no-confidence votes called by the opposition and the ruling party had a poor showing in the European Parliament elections in May 2014. These events have led to plans for another parliamentary election to be held on October 5, 2014. Although Bulgaria’s federal politics have been dramatic, we note that this has had relatively no impact on Dundee Precious Metals’ mines. The Chelopech mine continues to operate without interference from government, and the Krumovgrad project, which had faced some local political obstacles, appears to be making progress towards resolving these issues and has repeatedly won rulings by the federal judiciary. It is also worth noting that while Bulgaria is currently experiencing some turmoil, it has been part of the European Union since January 1, 2007, and thus has the underlying stability of the E.U. Namibia accounts for 28% of our mine-site NAV, and while Namibia is one of the most politically stable countries in Africa the company’s Tsumeb smelter has in the past faced criticism from the local community and the federal government regarding the environmental and health impacts of the smelter. The company has made significant investments to address these concerns and is in the process of meaningfully reducing employee exposure to arsenic and reducing SO2 emissions. We believe that Dundee Precious Metals has successfully secured its social license to operate in Namibia. Armenia accounts for 10% of our mine-site NAV, and while the company’s Kapan mine has not been subject to any notable disputes, the mine is located very close to the country’s border and the neighboring Nagorno-Karabakh region. Armenia has had adversarial relations with Azerbaijan to the east, and a tenuous relationship with Turkey to the west. Armenia and Azerbaijan have fought two wars in the past century, the most recent one from 1988 through 1994, due to competing claims over the disputed Nagorno-Karabakh region, and the two countries remain technically at war. While the countries do not have diplomatic relations, there is not any active fighting at present, and the mine itself has not been directly affected by the conflict in the past. Currency fluctuation – A large proportion of Dundee Precious Metals’ operating costs are denominated in foreign currencies, particularly the Bulgarian lev, the Namibian dollar, and the Armenian dram, while effectively 100% of the company’s revenue is earned in U.S. dollars. An increase in the value of the lev, Namibian dollar, or the dram relative to the U.S. dollar would have a negative impact on the company’s profit margin. We note that the lev is pegged to the €, and the Namibian dollar is pegged to the South African rand.
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Company Overview
Company summary – Dundee Precious Metals is a diversified and vertically integrated mining company with two operating mines (its flagship gold-copper Chelopech mine in Bulgaria, and the polymetallic Kapan mine in Armenia), a specialized copper smelter that treats complex copper concentrates (Tsumeb in Namibia), and a construction-ready gold project (Krumovgrad in Bulgaria), as well as stakes in three junior gold exploration/development companies (53.1% of Avala Resources, 45.5% of Dunav Resources, and 12% of Sabina Gold & Silver). All of the company’s mining assets feature life-of-mine grades that are above the industry average: Chelopech is 3.25 grams/tonne gold and 0.99% copper, Krumovgrad is 4.0 grams/tonne gold, and we forecast Kapan to have 1.9 grams/tonne gold, 0.32% copper, 1.4% zinc, and nearly 35 grams/tonne silver. The majority of the copper concentrates (containing gold and silver by- products) produced at Chelopech are smelted at Tsumeb, which is one of the few facilities in the world with the ability to treat the high-arsenic copper concentrates from the mine. In addition to receiving concentrates from Chelopech, the Tsumeb smelter also toll treats copper concentrates from third-party customers. Dundee Precious Metals has been generating nearly all of its operating cash flow from Chelopech, which is a well-run, efficient mine, that is operating at close to capacity. The recent addition of a pyrite recovery circuit at Chelopech is responsible for our forecast of higher gold production at the mine. Over the last couple of years the cash flows from Chelopech have largely been reinvested in the Tsumeb smelter, which is now starting to show the fruits of this investment. In 1Q14 Tsumeb generated US$10.2 million EBITDA as an expansion of the smelter has finally given it the economies of scale to generate a profit. The Kapan mine has been challenging to operate. Management is in the late stages of a preliminary economic assessment for Kapan to determine if an expansion is viable. An expansion of Kapan could be the catalyst that is needed to transition this mine from losing money to running profitably. Exhibit 1 shows the locations of the company’s assets. Exhibit 1: Locations of the Dundee Precious Metals’ Assets
Source: Dundee Precious Metals Inc. Company history – Dundee Precious Metals Inc. started as a passive closed-end investment company that primarily invested in the shares of precious metals companies. In June 2000 the company merged with Hope Bay Gold Corp., a precious metals exploration firm, and effectively redefined itself as a gold exploration company. Since then the company has made two transformative acquisitions (the Bulgarian mining assets and the Tsumeb smelter) that have shaped it into the corporation that it is today, as well as the purchase of the Kapan mine. In September 2003 the company acquired the Bulgarian mining assets of Navan Mining Plc, consisting of the Chelopech mine and the Krumovgrad project. In August 2006 the company acquired 80% of Vatrin Investment Ltd., the private entity that owned the Kapan mine in Armenia. Dundee Precious Metals subsequently increased its stake in Vatrin and Kapan by an additional 15% in December 2007, and purchased the remaining 5% in December 2010. In March 2010 the
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company acquired the Tsumeb smelter from Weatherly International, thus transforming into a vertically integrated producer. From March 2009 through September 2011 the company sold its Canadian and Serbian exploration properties in exchange for common shares and warrants of Avala Resources, Dunav Resources, and Sabina Gold & Silver. The formation of a strong management team – Over the last 5 years the company has materially strengthened its management team. The first major change was the hiring of Rick Howes as the General Manager and Executive Director of the Chelopech mine in early 2009. Mr. Howes led the efforts to optimize and automate the Chelopech mine, an endeavor which turned the mine into a consistently profitable operation. He was promoted to President & CEO in April 2013, succeeding Jonathan Goodman, who led the company during its acquisitive phase, and is now Executive Chairman. In his new role of Executive Chairman Mr. Goodman has assumed the leadership of the company’s strategic plan. In November 2012 the company hired David Rae as the Senior Vice President of Operations, and he became the champion of the operational turn-around of the Tsumeb smelter. In May 2014, Mr. Rae was promoted to Executive Vice-President and COO. Other notable management additions over the last few years are Mr. Hume Kyle as CFO, Mr. Michael Dorfman as Senior Vice-President of Corporate Development, and Mr. Richard Grosse as Senior Vice-President of Exploration. Success at turning around tough operations – The management team has successfully turned- around the fortunes of two operations: Chelopech and Tsumeb. Prior to acquiring Chelopech in September 2003, the mine had been bankrupt, and in 2013 it generated US$152.6 million in adjusted EBITDA. Exhibit 2 shows the dramatic progression of the increase in output at Chelopech under the company’s stewardship. In March 2010 when the company acquired the Tsumeb smelter it was in poor condition. Very little capital had been invested in the operation for a period of 10 years, employee morale was low, emission controls were lacking, employee exposure to arsenic was elevated, and legacy waste from the operation was an issue. Although the revitalization of the smelter has weighed on the company over the last couple of years, particularly due to the significant capital investment that has been made in the facility, in our view success can be claimed in its turn-around as of 1Q14. In 1Q14 the benefit of the investment in a second oxygen plant at Tsumeb was realized through higher smelting volumes and EBITDA of US$10.2 million. This compares to an aggregate EBITDA loss of US$4.2 million over the previous nearly 4 year period. Exhibit 2: Chelopech’s Production History from 2004 to 2013
2500 140
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0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Contained Cu (kt) Contained Au (k Oz) Ore Processed (kt)
Source: Dundee Precious Metals Inc., Raymond James Ltd. Setting an example as a good corporate citizen – Not only has Dundee Precious Metals revitalized Chelopech and Tsumeb, but it has also significantly improved the safety standards and environmental mitigation efforts at each. For example, from 2004 (its first year of ownership) to 2013, per tonne of ore mined the Chelopech mine has reduced the tonnes reporting to the tailings facility by 36%, lowered the decant water discharge from the tailings facility to zero (from 0.65 m3), decreased fresh water use by 76%, achieved an 18% drop in electricity consumption, and is using 38% less fuel. When Dundee Precious Metals acquired the smelter in March 2010 its condition was in a poor state. Upon assuming control Dundee Precious Metals took immediate
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action to improve the operation, including the implementation of new safety measures, an increase in salaries, an investment in safer working conditions (a new baghouse and more cooling towers), the initiation of international standards for health and environmental monitoring, and a rebranding of the company with the local communities and government authorities. Overall, the company invested US$110 million in emissions and dust capture upgrades, and it is currently spending an additional US$240 million for a sulphuric acid plant and new converter furnaces. The sulphuric acid plant and the new converters will significantly reduce the sulphur dioxide emissions, and will result in the production of sulphuric acid that can be sold to domestic customers. Production profile – In 2013 Dundee Precious Metals sold payable metals in concentrate of 153,274 ounces of gold, 46.3 million pounds of copper, 13.5 million pounds of zinc, and 552,590 ounces of silver, and smelted 152,457 tonnes of concentrate. The cash costs achieved in 2013 were US$329/ounce of gold (C1, net of by-product credits), and US$433/tonne of concentrate smelted. Relative to its original guidance for the year the company essentially achieved the mid- point of production for each of the metals, and costs were also generally in-line. For 2014 management has provided production guidance for metal contained in concentrate of 155,000 – 174,000 ounces of gold, 45.5 – 50.0 million pounds of copper, 11.6 – 15.9 million pounds of zinc, and 678,000 – 870,000 ounces of silver. Additionally, the company expects to smelt 190,000 – 220,000 tonnes of concentrate, and produce 27,000 – 33,000 ounces of payable gold in pyrite concentrate. The cash cost guidance for 2014 is US$335/ounce – US$505/ounce of gold (C1, net of by-product credits), or US$710/ounce – US$815/ounce of gold on a sustaining basis. Management expects the cash costs per ounce of gold sold in pyrite concentrate and per tonne of concentrate smelted to be US$1,050/ounce and US$280/tonne – US$350/tonne, respectively. Based on a mid-year preliminary production update the company appears to be tracking towards the low-end of its guidance for gold, copper, and silver, and the top-end of guidance for smelting volumes. Specifically, management noted that Chelopech’s gold production is expected to be below the middle of the range of the 2014 guidance, and Kapan’s 2014 production guidance is likely to be revised lower due to low throughput in 1Q14 and a fatal accident that disrupted operations in 2Q14. Exhibit 3 shows our forecasts for the aggregate gold and copper production as well as the C1 gold cash cost, and Exhibit 4 shows our forecast for Tsumeb’s smelting volumes and operating costs. Relative to the 2014 guidance our estimates are at the more conservative end of the ranges given by management. Our production and cash cost forecasts for Chelopech and Kapan are at the low- end of guidance, and our estimates are in-line with the mid-point of the volume and operating cost guidance for Tsumeb. Exhibit 3: Forecast of Dundee Precious Metals’ Gold & Copper Production, and Operating Costs
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300.00 700
600 250.00
500 200.00 400 150.00
300 GoldCash Cost ($/oz) 100.00 200
TotalCu / Au Production (mlnlbs/ 000's oz) 50.00 100
- - 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
Cu Production (mln lbs) Gold Production (oz) Gold Cash Cost ($/oz)
Source: Raymond James Ltd.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2 Canada Research | Page 10 of 47 Dundee Precious Metals Inc.
Exhibit 4: Forecast of Tsumeb’s Smelting Output and Operating Costs
350 400
300 350
300 250
250 200 200 150 150
100
100 CashCost /Tonne (US$/tonne) TotalConcentrate Smelted (000's tonnes) 50 50
- 0 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Source: Raymond James Ltd. Management ownership – The company currently has 140.4 million basic shares outstanding and 150.8 million on a fully diluted basis. As of June 24, 2014 the management team and the Board of Directors collectively owned approximately 0.7% of the basic common shares outstanding, and 3.0% on a fully diluted basis. The company has one large shareholder, Dundee Corporation, with 25.4% of the common shares outstanding.
Financial Analysis & Outlook
Dundee Precious Metals has a reasonably healthy balance sheet. As of March 31, 2014 the company had US$38.7 million in cash, US$113.5 million in debt, and positive net working capital of US$62.3 million. On June 26, 2014 the company announced a significant increase in its revolving credit facility to US$275 million from US$150 million (and we note that as of March 31, 2014 the company had only drawn US$50 million from its revolving credit facility, thus leaving ample borrowing capacity). The additional US$125 million to the revolving line will provide the capital to fund the company’s discretionary growth projects, notably the Krumovgrad gold project, a possible expansion of the Kapan mine, and the potential addition of a holding furnace for the Tsumeb smelter. We expect the company’s existing cash, cash flow from operations, plus the funding available from the revolving credit facility to be adequate to fund the company’s capital expenditures. For 2014 we forecast exploration spending of US$10 million (in-line with guidance of US$8 – US$11 million), sustaining capital expenditures of US$43.7 million (in-line with guidance of US$37 – US$45 million), and growth capital expenditures of US$108.8 million, predominantly related to the completion of the sulphuric acid plant at Tsumeb. As shown in Exhibit 5, we expect Dundee Precious Metals to demonstrate growth in revenue, EPS, and EBITDA in each of 2014 and 2015. The key drivers for this growth are an increase in gold production at Chelopech following the commissioning of the pyrite recovery circuit in 1Q14, and significantly higher volumes that are expected to be smelted by the Tsumeb smelter now that the second oxygen plant has been commissioned in 1Q14.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2 Dundee Precious Metals Inc. Canada Research | Page 11 of 47
Exhibit 5: Dundee Precious Metals’ Financial Summary
Income (US$mln) 2013A 2014E 2015E FY-13A FY-14E FY-15E Revenues 344.7 383.2 443.7 Average share price C$ 5.13 5.13 5.13 Operating Costs (201.3) (213.6) (258.9) Average/Current share price USD 4.76 4.76 4.76 SG&A (24.3) (38.0) (30.0) Valuation (US$) Exploration (17.7) (10.0) (10.0) Market Cap 662 668 668 Royalty Expense 1.2 (4.8) (6.2) Plus: Net Debt 35 87 128 EBITDA 102.6 116.8 138.7 Less: Peripheral Assets 0 0 0 DD&A (53.6) (63.9) (55.2) Plus: Buy out of Minorities 6 5 5 EBIT 49.0 52.9 83.4 Enterprise Value 703 759 800 Net Interest Expense (9.8) (10.1) (8.6) EBITDA (US$) Tax (12.2) (10.9) (17.9) EBITDA Corporate 103 117 139 Other Expenses (3.0) 17.9 3.0 EBITDA Minority Adjustments 0 0 0 Net Income 22.5 47.6 60.0 EBITDA Other 0 0 0 Wtd. Avg. Shares O/S 133.6 140.0 140.4 EBITDA Other 0 0 0 EPS Basic (C$) 0.17 0.34 0.43 Total EBITDA 103 117 139 Cashflow (US$mln) 2013A 2014E 2015E EBIT (US$) Operating 99.5 101.7 121.2 EBIT Corporate 49 53 83 Investing (209.4) (151.3) (162.3) EBIT Other 0 0 0 Financing 37.2 28.0 33.8 EBIT Other 0 0 0 Net Change in Cash (72.7) (21.5) (7.3) EBIT Other 0 0 0 Balance Sheet (US$mln) 2013A 2014E 2015E Total EBIT 49 53 83 Cash & Equivalents 48.9 27.3 20.0 Free Cash Flow to equity (US$) Other Current Assets 113.9 119.8 119.8 EBITDA 103 117 139 Current Assets 162.8 147.1 139.8 Cash Taxes (12) (11) (18) PP&E 771.5 878.9 985.9 Change in Net Working Capital 23 6 0 Other Assets 53.5 57.2 57.2 Capital Expenditures (191) (150) (162) Total Long-term Assets 825.0 936.1 1,043.1 FCF to the firm (78) (38) (41) Total Assets 987.8 1,083.2 1,182.9 Net Interest Expense (10) (10) (9) Short term debt 16.6 16.3 16.3 Net Borrowing (6) 27 34 Other current Liabilities 68.5 79.9 79.9 FCF to equity (US$) (94) (21) (16) Current Liabilities 85.2 96.2 96.2 FCF Yield* (14%) (3%) (2%) Long-term Debt 67.1 97.7 131.5 Operating Free Cash Flow (US$) Other Liabilities 84.0 84.4 84.4 EBITDA 103 117 139 Total Long-term Liabilities 151.1 182.1 215.9 Maintenance Capex (10.7) (12.8) (11.0) Minority Interest 6.3 4.8 4.8 Net Working Capital Inflation (1.4) (1.2) (1.2) Shareholders' equity 745.2 800.1 866.1 Total OpFCF 91 103 126 Total Liabilities + Equity 987.8 1,083.2 1,182.9 Copper US$/lb 3.33 3.14 3.25 Basic Shares O/S 139.2 140.4 140.4 * FCF to Equity/Market Capitalization Source: Dundee Precious Metals Inc., Raymond James Ltd.
Valuation & Recommendation
Rating & Target Price
We rate Dundee Precious Metals’ shares as Outperform with a 6-12 month target price of C$7.50. Our target price is based on a 70%/30% weighting of a 1.1 multiple applied to our net asset value (NAV) estimate of C$6.88/share and a 10.0 EV/EBITDA multiple applied to our 2014 EBITDA estimate of US$117 million.
Net Asset Value
Our estimate for the NAV of Dundee Precious Metals of C$6.88 per share is primarily based on our discounted cash flow (DCF) analysis for the Chelopech mine (49% of our mine-site NAV), the Tsumeb smelter (28%), the Krumovgrad project (13%), and the Kapan mine (10%). By country our assessment of the NAV exposure is as follows: 62% Bulgaria, 28% Namibia, and 10% Armenia.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2 Canada Research | Page 12 of 47 Dundee Precious Metals Inc.
Our DCF models use a 5% discount rate for the Chelopech, Krumovgrad, and Kapan mines, and an 8% discount rate for the Tsumeb smelter. Our use of differing discount rates conforms to our standard Raymond James Ltd. discount rates of 5% for precious metals and 8% for base metals assets. Corporate debt and SG&A have been subtracted from the aggregate asset value for the mineral properties to arrive at our NAV for the company. The details of our NAV estimate, as well as our metal price forecasts, are shown in Exhibit 6. Exhibit 6: Net Asset Value Estimate for Dundee Precious Metals
Dundee Precious Metals Inc. Ownership US$ (mln) US$/shr Valuation Basis Projects Chelopech 100.0% 560.9 3.72 NPV @ 5% Real FY End 2014E Tsumeb 90.0% 334.5 2.22 NPV @ 8% Real FY End 2014E Krumovgrad 100.0% 167.7 1.11 NPV @ 5% Real FY End 2014E Kapan 100.0% 100.2 0.66 NPV @ 5% Real FY End 2014E Exploration 100.0% 80.0 0.53 BEE cash flows for Tsumeb 100.0% 24.5 0.16 NPV @ 8% Real FY End 2014E Other Assets Cash and Marketable Securities 27.3 0.18 Balance sheet as at FY-14E Working Cap net of Cash and ST Debt 39.9 0.26 Balance sheet as at FY-14E Options 33.1 0.22 various expiry dates Debt and Obligations Short Term Debt (16.3) (0.11) Balance sheet as at FY-14E Long-term Debt (97.7) (0.65) Balance sheet as at FY-14E Corporate SG&A (211.5) (1.40) DCF @ 8% Real FY-14E Deferred Taxes (5.6) (0.04) Balance sheet as at FY-14E Provision for Contingencies - 0.00 NET ASSET VALUE 1,036.9 $6.88 C$6.88
Fully Diluted Shares Outstanding 150,811,466 Basic Shares Outstanding 140,395,648 Copper: '13A=US$3.33/lb, '14E=US$3.14/lb, '15E=US$3.25/lb, '16E=US$3.50/lb, '17E=US$3.50/lb, L-T=US$3.00/lb Zinc: '13A=US$0.87/lb, '14E=US$0.95/lb, '15E=US$1.10/lb, '16E=US$1.30/lb, '17E=US$1.25/lb, L-T=US$1.10/lb Silver: '13A=US$23.89/oz, '14E=US$21.03/oz, '15E=US$22.00/oz, '16E=US$22.00/oz, '17E=US$22.00/oz, L-T=US$21.50/oz Gold: '13A=US$1,413/oz, '14E=US$1,321/oz, '15E=US$1,350/oz, '16E=US$1,350/oz, '17E=US$1,350/oz, L-T=US$1,250/oz Source: Raymond James Ltd.
Sensitivity Analysis
The sensitivity of our NAV, earnings, and cash flow estimates to a 10% change in the gold and copper prices are shown in Exhibits 7 and 8, respectively. As shown by these exhibits, our estimates for Dundee Precious Metals’ NAV, earnings, and cash flow are more sensitive to the gold price than they are to the copper price. We estimate that 42% of the company’s life-of-mine revenue will be derived from gold, 33% from smelting, 19% from copper, and 3% each from zinc and silver. Exhibit 7: Sensitivity of the NAV, Earnings, and Cash Flow to the Gold Price NAV EBITDA EBITDA CFPS CFPS EPS EPS 2014E 2015E 2014E 2015E 2014E 2015E C$/shr US$mln US$mln US$/shr US$/shr US$/shr US$/shr % Change 21% 4% 13% 3% 11% 7% 22% 10% 8.30 121 156 0.79 0.96 0.36 0.52 Base Case 6.88 117 139 0.76 0.86 0.34 0.43 -10% 5.45 112 121 0.74 0.77 0.32 0.33 % Change (21%) (4%) (13%) (3%) (11%) (7%) (22%) Source: Raymond James Ltd.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2 Dundee Precious Metals Inc. Canada Research | Page 13 of 47
Exhibit 8: Sensitivity of the NAV, Earnings, and Cash Flow to the Copper Price NAV EBITDA EBITDA CFPS CFPS EPS EPS 2014E 2015E 2014E 2015E 2014E 2015E C$/shr US$mln US$mln US$/shr US$/shr US$/shr US$/shr % Change 10% 3% 1% 2% 1% 5% 2% 10% 7.54 120 140 0.78 0.87 0.36 0.43 Base Case 6.88 117 139 0.76 0.86 0.34 0.43 -10% 6.21 114 137 0.75 0.86 0.32 0.42 % Change (10%) (3%) (1%) (2%) (1%) (5%) (2%) Source: Raymond James Ltd. The sensitivity of our estimated NAV to the discount rate and the long-term gold and copper prices are shown in Exhibits 9 and 10, respectively.
Exhibit 9: Sensitivity of the NAV to the Discount Rate and the Long-Term Gold Price NAV (C$/Share) Gold Price (US$/lb) Discount Rate 1000 1250 1500 5% 5.27 6.88 8.48 8% 4.78 6.09 7.39 12% 4.25 5.26 6.26 P/NAV @ C$5.13/share Gold Price (US$/lb) Discount Rate 1000 1250 1500 5% 0.97 0.75 0.61 8% 1.07 0.84 0.69 12% 1.21 0.98 0.82 Source: Raymond James Ltd.
Exhibit 10: Sensitivity of the NAV to the Discount Rate and the Long-Term Copper Price NAV (C$/Share) Copper Price (US$/lb) Discount Rate 2.50 3.00 3.50 5% 7.85 8.45 9.05 8% 6.32 6.88 7.44 12% 5.62 6.16 6.70 P/NAV @ C$5.13/share Copper Price (US$/lb) Discount Rate 2.50 3.00 3.50 5% 0.65 0.61 0.57 8% 0.81 0.75 0.69 12% 0.91 0.83 0.77 Source: Raymond James Ltd.
Relative Valuation
Dundee Precious Metals is attractively priced relative to the peer group of junior gold producers. Its shares are currently trading at a P/NAV multiple of 0.75, a 12% discount to the average of 0.85 for the junior gold producer peer group. Based on P/CF the company’s shares are trading at a significant discount to the peer group average, using either 2014 or 2015 estimates. For example, Dundee Precious Metals’ 2014 and 2015 P/CF are 6.2 and 5.5, as compared to the peer group at 10.6 and 7.6, respectively. The same can be said on a P/E basis, on which the company’s shares are trading at 14.1 for 2014 and 11.2 for 2015, as compared to the peer group at 20.1 and 14.8, respectively. With regard to EV/EBITDA the company’s shares continue to appear inexpensive using either our 2014 or 2015 estimates. For example, Dundee Precious Metals’ 2014 and 2015 EV/EBITDA multiples are 6.4 and 5.4, as compared to the peer group at 9.2 and 5.8, respectively. Exhibits 11 through 15 show the valuations for the peer group.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2 Canada Research | Page 14 of 47 Dundee Precious Metals Inc.
Exhibit 11: Junior Gold Producer Peer Group Relative Valuation (as of July 15, 2014) Company Name Symbol Rep. Price Price Target Stock Target S/O Mkt Cap Net Debt EV EPS P/E CFPS P/CF Prod. (koz Au) Total Cash Cost NAVPS P/NAV Currency ($) (rep. cur.) Price Rating Return (mln) ($mln) ($mln) ($mln) 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E ($) (x)
Alacer Gold ASR-T USD C$2.66 C$2.66 C$3.75 OP2 41% 290 $772 ($292) $480 $0.25 $0.16 10.7x 17.0x $0.44 $0.38 6.0x 7.0x 182 154 $452 $505 $3.26 0.76x Alamos Gold AGI-T | N USD C$9.43 C$9.43 C$14.75 MP3 56% 127 $1,201 ($400) $801 $0.11 $0.30 85.8x 31.4x $0.52 $0.65 18.2x 14.5x 156 181 $698 $667 $12.13 0.70x AuRico Gold AUQ-T | N USD C$3.91 C$3.91 C$5.25 OP2 34% 248 $970 $142 $1,112 ($0.23) ($0.11) nm nm $0.23 $0.36 16.7x 11.0x 219 253 $800 $736 $3.79 1.03x B2Gold BTO-T | BTG-N USD C$2.92 C$2.72 R R R 678 $1,979 $179 $2,019 R R R R R R R R R R R R R R Detour Gold DGC-T CAD C$13.62 C$13.62 C$18.00 SB1 32% 157 $2,144 $500 $2,644 ($0.16) $1.00 nm 13.6x $0.89 $1.98 15.3x 6.9x 450 550 $881 $734 $14.73 0.90x Dundee Precious Metals DPM-T USD C$5.13 $4.77 $7.50 OP2 46% 140 $720 $75 $745 $0.34 $0.43 14.1x 11.2x $0.76 $0.86 6.2x 5.5x 148 167 $566 $607 $6.88 0.75x Endeavour EDV-T USD C$0.88 $0.82 C$1.30 OP2 59% 413 $364 $219 $582 $0.14 $0.22 6.4x 4.0x $0.34 $0.45 2.6x 2.0x 385 399 $880 $824 $1.47 0.60x Rio Alto Mining RIO-T USD C$2.59 $2.41 C$3.50 OP2 35% 177 $458 ($30) $396 $0.22 $0.16 10.7x 14.7x $0.31 $0.31 7.7x 7.8x 215 193 $636 $644 $3.20 0.81x SEMAFO SMF-T USD C$4.51 $4.19 C$5.00 MP3 11% 276 $1,245 ($62) $1,096 $0.11 $0.31 36.7x 13.4x $0.34 $0.59 12.4x 7.1x 209 253 $718 $535 $3.57 1.26x Average 39% 20.1x 14.8x 10.6x 7.6x 0.85x Source: Raymond James Ltd.
Exhibit 12: Comparison of the Junior Gold Producer Peer Group 2014E P/E Multiples (Capped at 30x) 35.0x
30.0x
25.0x
20.0x 20.1x 15.0x
10.0x
5.0x
0.0x EDV RIO DPM SMF DGC AUQ AGI P/E Avg.
Source: Raymond James Ltd.
Exhibit 13: Comparison of the Junior Gold Producer Peer Group 2014E P/CF Multiples 20.0x 18.0x 16.0x 14.0x 12.0x 10.0x 10.6x 8.0x 6.0x 4.0x 2.0x 0.0x EDV ASR DPM RIO SMF DGC AUQ AGI P/CF Avg.
Source: Raymond James Ltd.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2 Dundee Precious Metals Inc. Canada Research | Page 15 of 47
Exhibit 14: Comparison of the Junior Gold Producer Peer Group 2014E EV/EBITDA Multiples 20.0x 18.0x 16.0x 14.0x 12.0x 10.0x 9.2x 8.0x 6.0x 4.0x 2.0x 0.0x ASR RIO EDV DPM SMF AGI AUQ DGC EV/EBITDA Avg.
Source: Raymond James Ltd.
Exhibit 15: Comparison of the Junior Gold Producer Peer Group P/NAV Multiples 1.2x
1.0x 0.85x 0.8x
0.6x
0.4x
0.2x
0.0x EDV AGI DPM ASR RIO DGC AUQ SMF P/NAV Avg.
Source: Raymond James Ltd. In our opinion, Dundee Precious Metals’ shares should trade at least in-line with the peer group, and arguably deserve a premium given the diversification of its assets, its vertical integration, the low volatility of the revenue from the Tsumeb smelter, and its significant exploration upside, particularly at Chelopech and at its partially owned properties in Serbia. We expect the company’s valuation multiple to increase as the market gains comfort in the turn-around of the Tsumeb smelter, as the Krumovgrad project achieves success on its permitting milestones, and with continued favourable exploration results.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2 Canada Research | Page 16 of 47 Dundee Precious Metals Inc.
Chelopech Mine
Chelopech Overview Chelopech is Dundee Precious Metals’ flagship asset, and it accounts for 49% of our mine-site net asset value. It is a 100% owned, high-grade underground gold-copper mine in central-western Bulgaria. It produces copper concentrates that contain significant gold, as well as some silver and elevated levels of arsenic. Gold accounts for approximately 75% of our estimated life-of-mine revenue at Chelopech. At Chelopech the management team has demonstrated an admirable ability to add value. Prior to acquiring the mine it had gone into receivership under the previous operator, and over the last 10 years management has increased annual throughput more than threefold, vastly improved the efficiency of the operation as highlighted by the installation of underground crushing and conveying, and implemented innovative uses of technology such as the staged flotation reactors (SFRs). These changes have led to the operation returning to profitability, and generating cash flow that has since been deployed at Kapan and Tsumeb. Management has also recognized and capitalized on incremental opportunities, such as the recently completed construction of the pyrite recovery circuit, which is now recovering approximately half of the gold that was not captured in the copper concentrate and was previously being discarded with the tailings. Additionally, Chelopech has a history of reserve replacement, and we consider the exploration potential to be significant. In 2013 Chelopech sold 131,923 ounces of gold, 43.9 million pounds of copper, and 182,670 ounces of silver. For 2014 management is forecasting production of 126,000 to 138,000 ounces of gold, 42.7 to 46.2 million pounds of copper, and 210,000 to 230,000 ounces of silver in copper concentrate at a C1 gold cash cost of US$285 – US$430/ounce (net of by-product credits). Additionally, the company expects to produce an additional 27,000 to 33,000 ounces of payable gold from the recently commissioned pyrite recovery circuit at Chelopech. Production in 1Q14 was lower-than-anticipated due to a delay in sequencing some of the higher-grade stopes, which resulted in lower grades and lower recoveries driven by the treatment of a greater proportion of ore with high sulphur content. Management expects to recover much of the 1Q14 production shortfall through the remainder of the year. As was evident in a 2Q14 preliminary production update, some quarter-over-quarter improvement was made, although management now expects Chelopech’s gold production for the year to be below the middle of the guidance range, and mid- way through the year Chelopech has produced approximately 60,898 ounces of gold, 20.0 million pounds of copper, and 101,700 ounces of silver. We forecast 2014 payable metals sales of 100,400 ounces of gold, 41.4 million pounds of copper, and 170,600 ounces of silver in copper concentrate at a C1 gold cash cost of US$497/ounce, plus 24,800 ounces of payable gold in pyrite concentrate. Exhibit 16 shows a photo of the process plant at Chelopech. Exhibit 16: The Process Plant at Chelopech
Source: Dundee Precious Metals Inc. Since the start of production in 1954, Chelopech has processed over 23 million tonnes of ore at just over 1.2% copper. Initially operated as a state owned entity, production peaked at 512,000 tonnes/year in 1988 following an expansion program. At that time the copper concentrate that was produced was sent to the nearby Pirdop smelter, located 10 km east of Chelopech. In April 1990, the Bulgarian government ruled that the Chelopech concentrates could no longer be treated at the smelter due to relatively high levels of arsenic, and the mine was placed on care
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2 Dundee Precious Metals Inc. Canada Research | Page 17 of 47
and maintenance in February 1992. In 1994 the mine was acquired by Navan Mining Plc and operations resumed until 2002, when the company went into receivership. During this period, it is estimated that 4.8 million tonnes of ore was treated at Chelopech at an average grade of 1.4% copper and 3.9 grams/tonne gold. Mining operations continued under an appointed administrator until Dundee Precious Metals acquired the mining operations in September 2003. The company owns the land on which the mining activities are conducted, and the mine operates under a concession agreement that was granted in 1999 for a period of 30 years. The mining license covers an area of 266 hectares and includes the Chelopech mining operation and the surrounding area.
Chelopech’s Location, Climate, Topography, and Infrastructure The Chelopech mine site is located in central-western Bulgaria, 75 km east of the capital of Sofia, and approximately 350 km to the west of the Black Sea port of Burgas, as shown in Exhibit 17. The mine is at the foot of the Balkan Mountains, at an elevation of approximately 730 metres. The village of Chelopech, with a population of nearly 1,700 is in close proximity, roughly only 1 km from the mine. The local region has a mining history and educational standards within Bulgaria are high. The previous communist regime had placed an emphasis on mineral exploration and mining, which has led to a large pool of available technical staff and operating personnel. Chelopech has excellent access to infrastructure, as Bulgaria has a widespread network of paved roads and a comprehensive rail network. The mine is accessible via major roads from Sofia and is linked to the Black Sea port of Burgas through both roads and railway. Chelopech is also well situated in terms of availability of power and water sources. The mine obtains power via above ground transmission lines from the Bulgarian power grid, and the mine currently has permits to use fresh water from nearby storage facilities. Water requirements are supported by the local Kachulka dam, which is owned by the Chelopech Municipality, and water catchments and transport facilities, which are owned by the mine. Permits for future water requirements were obtained in 2008 from the Dushantzi dam. The area has a subtropical European climate with mild winters and hot summers. Average annual rainfall in the region is 704 mm with the majority occurring in the fall and winter months, with the peak in December at nearly 96 mm. Exhibit 17: Location of the Chelopech Mine
Source: Dundee Precious Metals Inc.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2 Canada Research | Page 18 of 47 Dundee Precious Metals Inc.
Chelopech’s Mineral Reserves, Mineralization, and Exploration Chelopech is a high-sulphidation epithermal deposit that is located in the Panagyurishte metallogenic district in the central part of the Srednogorie zone, a Late Cretaceous volcano intrusive zone. The Panagyrishte district has a north-northwest alignment of copper porphyry deposits (Assarel, Elatsite, and Medet) and epithermal copper-gold deposits (Chelopech, Elshitsa, and Radka). Within the district is a Precambrian metamorphic basement that consists of granitoid gneisses, amphibolites, and metasediments. Overlying this are Permian terrigenous volcanics, and this in turn by a terrigenous and transgressive marginal marine sequence of Triassic, Jurassic, and Cretaceous ages. The Chelopech deposit is related to Cretaceous magmatic activity that created the Chelopech Formation. The Chelopech Formation reaches thicknesses of up to 2,000 metres and consists of Lower and Upper volcanic sequences. The mineralization is hosted in the Lower Chelopech Formation, within sulphide-rich stockwork zones that have notable silica overprinting. These zones are typically surrounded by haloes of silica-sericite alteration. The Chelopech deposit lies below a sedimentary cover, which has protected it from erosion. The Chelopech deposit is characterized by multiple fault and fluid flow events, and the mineralization takes various shapes, including lenses and pipes, most of which dip steeply to the south. The ore bodies at Chelopech are grouped into two major mining areas: the Central and Western Zones. The Central Zone consists of 5 ore blocks: 8, 16, 17, 18, and 19, and the Western Zone is comprised of 8 ore blocks: 5, 25, 103, 145, 147, 149, 150, and 151. In 2013 the majority of the ore came from three blocks, nearly equally split between blocks 19, 150, and 151. Exhibit 18 shows a 3D illustration of the Chelopech deposit. There is a positive correlation between copper, gold and sulphur, as well as between copper and arsenic, and there is a strong relationship between copper mineralization and stockwork veining. Roughly 45% of the copper occurs as arsenides and sulfosalts, 50% as chalcopyrite, and 5% as oxides. The gold is predominantly refractory and fine grained. Exhibit 18: 3D View of the Chelopech Deposit
Source: Dundee Precious Metals Inc. As of December 31, 2013 the Proven and Probable reserves at Chelopech were 23.9 million tonnes grading 3.25 grams/tonne gold, 0.99% copper, and 7.3 grams/tonne silver for contained metal of 2.5 million ounces of gold, 523 million pounds of copper, and 5.7 million ounces of silver. The reserves have been estimated based on metal prices of US$1,250/ounce gold and US$23.00/ounce silver. The reserve statement is shown in Exhibit 19.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2 Dundee Precious Metals Inc. Canada Research | Page 19 of 47
Exhibit 19: Chelopech’s Proven & Probable Reserves
Gold Silver Copper Chelopech Tonnes (M) Grade (g/t) Oz (mln) Grade (g/t) Oz (mln) Grade (%) Pounds (mln) Proven 10.6 3.30 1.1 9.9 3.4 1.21 283 Probable 13.3 3.24 1.4 5.3 2.3 0.82 240 Proven & Probable 23.9 3.25 2.5 7.3 5.7 0.99 523 Source: Dundee Precious Metals Inc., Raymond James Ltd. The Chelopech mine has had a history of reserve/resource replacement, and we believe that it has the potential to continue this trend. Under the ownership of Dundee Precious Metals ore blocks 145 and 147 have been discovered. Since purchase of the mine in 2003, DPM has conducted several drilling programs in order to confirm the historic mineral resource data and initiated the Deeps Exploration Program in 2008 to increase reserves surrounding the existing ore bodies. This program includes exploration of the Chelopech North, Chelopech Southwest and Chelopech Western "Deeps" zones. These areas were identified as having the highest potential for increasing reserves to the life of mine plan, which was extended in 1Q14 from 2023 to 2025. Metal zonation has been observed, and the mineralization can be characterized as lead-zinc rich in the east-northeast to copper-gold rich in the west-southwest. This may suggest that the hydrothermal system that is responsible for the mineralization at Chelopech extends at depth to the southwest. Specifically, the company has recently had success with exploration down-plunge of Blocks 151 and along strike of Block 19 (two of the major producing ore-bodies), and Block 19E remains open to the northeast and to the southwest. Chelopech also has the potential to deliver a game-changer on exploration based on the porphyry potential of the property. The Chelopech deposit is a high-sulphidation epithermal system that may be associated with a porphyry-style system at depth. The Srednogorie volcanic intrusive belt, which Chelpech is within, contains a large number of epithermal and porphyry deposits (as shown in Exhibit 20). The Sveta Petka licence to the immediate north of Chelopech, and for which the company is awaiting a drilling permit, is being reviewed as a porphyry exploration target. We note that the Chelopech mine is in close proximity to two operating copper porphyry mines, Assarel/Medet and Elatsite. Exhibit 20: Significant Deposits Within the Srednogorie Volcanic Intrusive Belt
Source: Dundee Precious Metals Inc.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2 Canada Research | Page 20 of 47 Dundee Precious Metals Inc.
Mining at Chelopech Chelopech is an underground mine that has been operating reliably at 2 million tonnes/year. The mining method that is being used is conventional long-hole open stoping with paste fill. The ore bodies are developed at 30 metre vertical intervals below the existing sublevel caving operation. The stopes are designed to be 20 metres wide in between levels, and range in length from 35 metres to 60 metres, depending on the geotechnical conditions. Each ore body is designed with multiple horizons so that more than one stope can be in production simultaneously. At the projected throughput rate of 2 million tons per annum, it is expected that at least six stopes need to be producing ore at any given time, with up to twenty being drilled, mucked, or filled simultaneously. In 4Q12 a major mine/mill expansion was completed, raising the production rate to a sustainable 2 million tonnes/year. The expansion of the underground infrastructure featured a new ore handling system that replaced the previous train haulage and shaft hoisting. The new system uses ore passes to deliver ore to the primary jaw crusher, which is installed underground at the 190 level. Six underground conveyors, over a length of 3.9 km, transport the ore from the crusher to the surface to a reclaim stockpile. The new ore handling system is shown in Exhibit 21. Exhibit 21: Underground Crushing and Conveying System at Chelopech
Source: Dundee Precious Metals Inc.
Processing at Chelopech Chelopech uses conventional milling and flotation to produce copper concentrates that contain significant gold, as well as some silver and elevated levels of arsenic. Following a number of upgrades completed in 4Q12 the mill is operating at a sustainable throughput rate of 2 million tonnes/year. The copper circuit recovers approximately 55% of the gold, 85% of the copper, and 42% of the silver in the ore. In 1Q14 the company finished the construction of the pyrite recovery circuit, which is designed to recover approximately half of the gold that was not captured in the copper concentrate and was previously being discarded with the tailings. The crushed ore is reclaimed from the surface stockpile and conveyed to the SAG mill for grinding in a closed-circuit with cyclone classifiers. The cyclone underflow is returned to the SAG mill for additional grinding, while the overflow is sent to the flotation circuit. The rougher and scavenger flotation cells create a bulk sulphide concentrate, which is then forwarded to the 3-stage cleaner circuit to produce the copper concentrate. In mid-2013 the second and third stages copper
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cleaner flotation cells were replaced with staged flotation reactors (SFRs). The SFRs improve recoveries and reduce energy consumption by separating the agitator and separation functions of the float cell, enabling a more efficient contact between the air bubbles in the cell and the minerals. Tailings from the concentrator are thickened at the plant and either filtered at the backfill plant to be used as underground fill or directed to the tailings management facility. The paste backfill plant further dewaters the thickened tailings and combines it with cement, and then uses gravity to transport the backfill to the mined out stopes. Due to the high arsenic content of the concentrates, and the lack of a suitable smelter in Bulgaria, the company purchased the Tsumeb smelter to secure access for the treatment of Chelopech’s concentrates. Nearly all of the copper concentrate is transported to the company’s Tsumeb Smelter in Namibia for processing. In late 2012, the company signed an off-take agreement with Xiangguang Copper Co. (XGC). This agreement was primarily for the sale of its pyrite concentrate, but also included a small proportion of Chelopech’s copper concentrate. In 2013 approximately 25% of the copper concentrate was sent to XGC.
Our Chelopech Forecast We forecast average annual production of 130,100 ounces of gold, 15,900 tonnes of copper, and 158,900 ounces of silver over the 12 year mine life (through to 2025E). 77% of our forecasted life- of-mine revenue is generated from gold, with 22% from copper, and the rest attributed to silver. These production estimates are dependent on recoveries of 52% and 83% for gold and copper in the copper concentrate, respectively (before the pyrite recovery phase). Our estimated life-of- mine average grades are 3.25 grams/tonne of gold, 0.99% of copper, and 7.3 grams/tonne of silver, which is in-line with DPM estimates as outlined in the Chelopech NI 43-101 technical report published in March 2014. Our analysis is based on C1 gold cash costs of US$627/ounce and sustaining gold cash costs of US$744/ounce (both net of by-product credits). Using a 5% discount rate, we estimate a net present value (NPV) of US$561 million. We have applied a 10% corporate income tax rate, and a 1.5% in-situ royalty rate based on the value of the payable metals in the mined ore (as per the Concession Agreement from 1999). Our assumptions for the Chelopech mine are shown in Exhibit 22. Exhibit 22: Raymond James Ltd.’s Chelopech Mine Estimates
Sustaining Capex US$11 million/year Mill Capacity 2.0 million tonnes/year Copper Production 15,900 tonnes/year Gold Production 130,100 ounces/year Silver Production 158,900 tonnes/year Life-of-Mine C1 Gold Cash Cost US$627/oz of Au Life-of-Mine Sustaining Gold Cash Cost US$744/oz of Au Mine Life 12 years Mineralized Material 23.9 million tonnes Copper Grade 0.99% Cu Gold Grade 3.25 g/t Au Silver Grade 7.3 g/t Ag Income Tax Rate 10% Corporate Tax In-situ royalty rate (%) 1.5% NPV (after-tax, 5% discount rate) US$561 million
Source: Raymond James Ltd.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2 Canada Research | Page 22 of 47 Dundee Precious Metals Inc.
Tsumeb Smelter
Tsumeb Smelter Overview The Tsumeb smelter in Namibia is currently 100% owned and is Dundee Precious Metals’ second- most important asset, representing 28% of our mine-site net asset value (NAV) estimate. The company acquired the smelter in March 2010, from Weatherly International for US$33 million plus assuming the obligations of the smelter, with the intent to secure the downstream processing of the copper concentrates produced at its Chelopech mine. The high arsenic content of the Chelopech concentrates limits the number of smelters that can accept it as a feedstock, with the Tsumeb smelter being one of the select few. In addition to processing copper concentrate from Chelopech, Tsumeb also provides toll processing of concentrates from third-party customers around the world, including from mines operating in Botswana, the Democratic Republic of Congo, Greece, Peru, Poland, and Russia. The smelter produces copper blister bars (containing 98.5% copper), arsenic trioxide (As2O3), and shortly it will also produce sulphuric acid (H2SO4). The copper blister bars are delivered to refineries for final processing, the arsenic trioxide is sold to third parties (primarily in Asia), and the sulphuric acid that will soon be produced will predominantly be sold to mining operations in Namibia. In 2013 Tsumeb smelted 152,457 tonnes of concentrate at an operating cost of US$433/tonne. Management’s guidance for 2014 is throughput of 190,000 – 220,000 tonnes of concentrate smelted at an operating cost of US$280 – US$350/tonne. In 1Q14 the company smelted 49,150 tonnes of concentrate at a cost of US$307/tonne. A preliminary production update in early July 2014 indicated that the company smelted 60,322 tonnes of concentrate in 2Q14, for 109,472 tonnes through 1H14. As such, relative to its guidance Tsumeb appears to be on-track to achieve the high-end for its volumes and the mid-point for costs. Our 2014 forecast is slightly conservative, and is close to the low-end of the guidance, at 194,547 tonnes of concentrate smelted at a cost of US$347/tonne. We expect the year-over-year increase in volumes smelted to significantly improve the profitability. For example, in 2013 the smelter incurred an EBITDA loss of US$7.0 million, while in 1Q14 it generated a profit of US$10.2 million. Exhibit 23 shows the panorama of the Tsumeb smelter. Exhibit 23: Panorama of the Tsumeb Smelter
Source: Raymond James Ltd. In 2013, 49% of the smelter’s concentrate feedstock came from the Chelopech mine, with the remainder consisting of toll processing of concentrate for third-parties. The smelter’s current capacity is 240,000 tonnes/year of concentrate, a number which we envision increasing by 33% to 320,000 tonnes/year in 2017 following optimizations and the addition of a holding furnace. As output is gradually increased to 320,000 tonnes/year, we expect the proportion of the capacity filled by Chelopech concentrates to fall to an average of 32%, thus significantly boosting the allocation for third-party concentrate from which to generate toll smelting revenue. There is potential to eventually increase the capacity by an additional 31% to 420,000 tonnes/year by operating both of the oxygen plants simultaneously, however, this would need to be justified by higher levels of toll smelting demand. An increase in volumes can have a dramatic effect on profitability, due to economies of scale and considering that approximately 75% of the smelter’s operating expenses were fixed costs as of 1Q14. We estimate that operating the smelter at an
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annual rate of 420,000 tonnes/year would increase our NAV for the smelter by approximately 56%, and for Dundee Precious Metals overall by 19%. We view the Tsumeb smelter as an important differentiator for Dundee Precious Metals, relative to other junior mining companies, as well as a key contributor of value. First, it provides the company with vertical integration, from the mine site to nearly finished metal, which is a capability that other companies of its size do not possess. Second, Tsumeb is a very unique smelter given that it has been designed to process complex copper concentrates, with an emphasis on those with elevated levels of arsenic. This is a competitive advantage within the smelting industry, as it means that it is operating in a market niche with relatively little competition. Third, the smelter has recently transitioned from operating at a loss to generating a profit. Going forward, we expect the smelter to be a source of cash flow, and for its cash flows to be less susceptible to swings in commodity prices than the company’s mines. This is due to the lower volatility of the revenue streams from the smelting business (processing premiums for concentrate impurities, treatment charges, and the by-product sales of sulphuric acid and arsenic trioxide) relative to precious and base metal prices.
History of the Smelter The smelter was originally commissioned in 1963 by Newmont Mining to treat complex polymetallic ores from the Tsumeb mine. During its history the smelter has featured copper and lead processing plants, and has produced cadmium, arsenic trioxide, and sodium antimonite as by-products. The Ausmelt furnace, the heart of the current operation, was built in 1996 to treat lead concentrates, and was re-commissioned in 2008 to smelt copper concentrates. The copper mines were closed in 2008 during the worldwide financial crisis, and at the beginning of 2009, not long before its acquisition by Dundee Precious Metals, Weatherly converted Tsumeb into a toll smelter for complex copper concentrates. In addition to Newmont and Weatherly, the smelter has passed through numerous other owners prior to Dundee Precious Metals, including Gold Fields, and Ongopolo Mining and Processing. When Dundee Precious Metals acquired the smelter its condition was in a poor state. Very little capital had been invested in the operation for a period of 10 years, employee morale was low, emission controls were lacking, employee exposure to arsenic was elevated, and legacy waste from the operation was an issue. Upon assuming control Dundee Precious Metals took immediate action to improve the operation, including the implementation of new safety measures, an increase in salaries, an investment in safer working conditions (a new baghouse and more cooling towers), the initiation of international standards for health and environmental monitoring, and a rebranding of the company with the local communities and government authorities. The smelter is subject to an agreement with the government that limits the environmental liability for activities from prior to 1999.
Location of the Smelter The smelter is located in the town of Tsumeb, in the Oshikoto region of northern Namibia, approximately 430 km north of the capital city of Windhoek. It is the major employer in Tsumeb, which has a population of approximately 20,000. The smelter is linked by rail to the port of Walvis Bay, Namibia (600 km to the southwest) as well as to the Rossing uranium mine in the country. The rail access is used to deliver the copper concentrate and other supplies to the smelter, and to transport the copper blister bars, sulphuric acid, and the arsenic trioxide to the port or in-country customers. Power for the mine is supplied by NamPower, the national power utility, from the electricity grid.
The Competitive Advantage of the Tsumeb Smelter Tsumeb is one of the few smelters in the world with the ability to process complex copper concentrates, with an emphasis on those with elevated levels of arsenic. This gives it a competitive advantage within the smelting industry. Other smelters with similar capabilities have either been closed, have lower arsenic tolerances, or have limited capacity to toll treat third-party concentrates, thus making the Tsumeb smelter effectively a one-of-a-kind facility. For example, Dowa’s Kosaka smelter in Japan ceased processing copper concentrates in March 2008 to focus on
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metal recycling, Doe Run’s La Oroya smelter in Peru closed in 2009 following bankruptcy (only the zinc and lead operations were restarted in 2012), and Southern Copper’s San Luis de Potosi smelter in Mexico was closed in March 2010. At present the greatest smelting competition for Tsumeb comes from Glencore’s Horne smelter in Canada, and Xiangguang Copper Co.’s (XGC) smelter in China. However, Horne focuses on recycling (it is the largest processor in the world of electronic scrap containing copper and precious metals) and we estimate that its arsenic handling capacity is a fraction of Tsumeb’s. XGC may pose the greatest threat given that it has an off-take contract with Dundee Precious Metals to treat 24,000 tonnes/year of copper concentrates from Chelopech (approximately 1/5 of Chelopech’s annual production); however, based on the size of XGC’s operation we surmise that XGC needs to do significant blending of high-arsenic content concentrates with a large proportion of clean copper concentrate in order to keep its arsenic tolerance within specification.
The Copper Smelting Process at Tsumeb The facility has two primary smelting furnaces: a top-submerged lance (TSL) Ausmelt furnace, which is the heart of the operation, and the old reverberatory furnace, which was closed in August 2013, and a secondary set of converter furnaces. The Ausmelt furnace effectively upgrades a concentrate containing 20% copper to a 55% copper matte, and the converter upgrades the matte into a 98.5% blister copper (gold is also contained in the blister). Copper concentrate (with an average copper grade of approximately 20%), reverts (recycled raw material feed), fluxes (chemicals or rock, such as limestone, that are added to assist in reduction), fuel (charcoal and heavy furnace oil) and copper dusts are charged into the Ausmelt furnace. The lance descends into the furnace delivering oxygen enriched air for combustion, and the exothermic reaction of the sulphur in the concentrates provides most of the energy for the smelting process. The molten material forms a slag and a matte (metal sulphides) phase at the bottom of the furnace. The slag has a lower density and floats on top of the matte, and both are tapped from tap holes in the bottom of the furnace. Off-gases from the Ausmelt are cooled and distributed to the baghouse, where solids (baghouse dust) are separated from gas, and the gas is cleaned prior to being exhausted from a stack. Dust from the baghouse contains high levels of arsenic and is taken to the arsenic plant for processing into arsenic trioxide, or disposed of in the on-site waste facility. The slag is granulated in water and is sent to the slag mill for additional processing if it contains more than 0.6% copper. The slag mill features screening, milling, and conventional flotation circuits to concentrate the copper. The concentrates from the slag mill are re-smelted, and the tailings are sent to the old tailings facility to the west of the smelter. A simplified flowsheet for the Ausmelt furnace is shown in Exhibit 24. Exhibit 24: Simplified Flowsheet for the Ausmelt Furnace
Source: Dundee Precious Metals Inc.
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The matte from the Ausmelt furnace is sent to the converters for further upgrading into copper blister bars. In the converters air is blown into the matte and the oxygen reacts with the sulphur to provide the energy for the conversion of the matte into blister copper. A slag is formed when oxidized iron reacts with silica that is added during the blowing stage. This slag (containing the iron) is skimmed, granulated in water, and sent to the slag mill for further concentration of any remaining copper. Off-gases from the converters containing the sulphur as SO2 are cooled and pass through a baghouse. Similar to the Ausmelt baghouse, the dust that is collected in the baghouse is either sent to the arsenic plant or the waste disposal site.
Recent Investments, and those that are Currently In-Progress Since acquiring the smelter in March 2010, Dundee Precious Metals has made significant investments to make the facility more environmentally friendly, and to improve its efficiency. The company has invested US$110 million in emissions and dust capture upgrades, and has installed a second oxygen plant to increase the capacity of the Ausmelt furnace. It is currently investing an additional US$240 million for a sulphuric acid plant and new converter furnaces. The sulphuric acid plant and the new converters will significantly reduce the sulphur dioxide emissions, and will result in the production of sulphuric acid that can be sold to domestic customers. The project is expected to be completed in 1Q15, with the first sale of sulphuric acid in 2Q15, and is being managed as a lump-sum turnkey contract (LSTK) by Outotec. Although we expect the sale of sulphuric acid to generate only a minimal return on capital, the addition of the sulphuric acid plant is crucial, as we view it as the investment that is needed to secure the social license to operate the smelter in the country. We estimate remaining capital expenditures of US$100 million in 2014 and US$15 million in 2015 to complete the construction of the sulphuric acid plant. Dundee Precious Metals has secured off-take agreements for the sale of the sulphuric acid with Rossing Uranium Ltd. for 225,000 tonnes/year, and Weatherly International for its Tschudi copper mine. Through these two agreements Tsumeb has effectively sold all of its expected acid production for the next few years. The company has also signed an agreement with Protea Chemicals Ltd., an industrial chemicals company operating throughout Sub-Saharan Africa, to provide transport logistics and marketing for any remaining acid that needs to be sold.
Opportunities for Additional Optimization There are three opportunities for further increases in output from the smelter. We deem the first two to have a high probability and include them in our model. First, optimizations and improving the utilization rate from 81% to the goal of 90% is expected to increase the smelter’s capacity from 240,000 tonnes/year to 276,000 tonnes/year. This increase can be achieved with negligible investment. Second, management is currently reviewing an investment in a holding furnace, with a decision likely to be made in 2015. The addition of a holding furnace would enable an increase in the smelter’s capacity from 276,000 tonnes/year to 320,000 tonnes/year. We estimate an incremental investment of US$83 million in 2016 for the holding furnace. A holding furnace would remove the bottleneck as matte transitions from the Ausmelt furnace (a continuous process) to the converters (a batch process), and would act as a slag cleaner, thus eliminating the need for the slag mill. Third, Dundee Precious Metals has the option to operate both of its oxygen plants that supply the Ausmelt furnace simultaneously (the company is currently only using the newer of the two oxygen plants). This would raise the smelter’s capacity by an extra 100,000 tonnes/year (a 31% increase), for little incremental investment other than installing additional cooling equipment. We have not included this option in our model, as it is contingent on significantly higher demand for third-party toll-processing, which is difficult to discern.
Tsumeb Smelter Forecast We forecast 2014 smelter throughput of 194,547 tonnes of concentrate at an operating cost of US$347/tonne. This implies a utilization rate of 81% relative to the current capacity of 240,000 tonnes. We estimate modest throughput growth from 2014 through to 2016 as the smelter benefits from full years of production at the expanded capacity and utilization improves modestly. We forecast the next major growth initiative to be the addition of a holding furnace for US$83 million in capital expenditure in 2016, which would enable the capacity to increase to 320,000 tonnes/year in 2017. The resulting economies of scale from the additional output should drive the
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operating costs as low as US$255/tonne. Over the life of the smelter we forecast an average operating cost of US$259/tonne. We estimate the Tsumeb smelter to have a net present value (NPV) of US$372 million on a 100% basis at an 8% discount rate. Although Dundee Precious Metals currently owns 100% of the smelter, we expect that it will need to sell 10% of the project to a local Namibian partner to satisfy Namibia’s Black Economic Empowerment (BEE) policies. We expect the BEE partner to pay for the stake through a sweep of 10% of the after-tax operating cash flows generated by the smelter. We calculate Dundee Precious Metals’ 90% stake to be worth US$334 million, plus a NPV of US$24 million for the 10% cash flow sweep. The summary of our financial assumptions and estimates for the Tsumeb smelter are shown in Exhibit 25. Exhibit 25: Raymond James Ltd.’s Tsumeb Smelter Estimates
Expansion Capex US$198 million Sustaining Capex US$552 million Current Concentrate Smelting Capacity 240,000 tonnes/year Current Capacity Utilization 81% Sulphuric Acid Production (Average) 270,484 tonnes/year Revenue per Tonne of Concentrate Smelted US$552/tonne Operating Cost per Tonne of Concentrate Smelted US$259/tonne Year Terminal Value Starts 2051 Tax Rate 33% Corporate Tax IRR 23% NPV (after-tax, 8% discount rate), 100% basis US$372 million Source: Raymond James Ltd.
Krumovgrad Project
Krumovgrad Overview Krumovgrad is Dundee Precious Metals’ most important development-stage asset. It is a 100% owned open pit gold project in southeastern Bulgaria, for which the company has recently completed a feasibility study, has received the environmental impact assessment (EIA) approval, and is now awaiting the local permits to commence construction. The project had previously faced some local opposition, but management has redesigned the mine to reduce the potential environmental impact, and has recently gained the support of the municipal authorities. Dundee Precious Metals intends to be in a position to commence construction within 6-12 months. Although Krumovgrad has a short mine life of 8 years, the project has the attractive attributes of a high grade (we model 4.0 grams/tonne), a relatively low initial capital cost (we forecast US$203 million), and an enticing IRR (our estimate is 23%). Krumovgrad accounts for 13% of our mine-site net asset value. Exhibit 26 shows an illustration of the Krumovgrad gold mine upon completion of construction.
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Exhibit 26: An Illustration of the Krumovgrad Gold Mine Upon Completion
Source: Dundee Precious Metals Inc. State funded prospecting of the area began in the early to mid-1990s, and in June 2000 Navan Mining Plc was awarded an exploration licence. Dundee Precious Metals purchased Navan’s Bulgarian mining assets in September 2003, including Krumovgrad. In 2005, a feasibility study was completed that was based upon processing the ore using leaching with cyanide and recovery of the gold from a carbon-in-leach (CIL) plant. However, the plan faced significant community and political opposition regarding the potential environmental impact of the project. Management has since taken numerous steps to improve community acceptance of the project, and in 2012 the mine plan was re-engineered to eliminate the use of cyanide. The new design features a conventional flotation process combined with an integrated facility for waste rock and tailings. The estimated gold recoveries from flotation are 8% to 10% lower than they were in the original plan, and the footprint has been significantly reduced in the new project scope from 300 to 85 hectares as shown in Exhibit 27. Exhibit 27: Reduced Footprint of the Krumovgrad Project
Source: Dundee Precious Metals Inc.
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The Krumovgrad project has had a short but contentious permitting history, however, the company has recently made significant progress regarding the permits and the social license to operate. Although Dundee Precious Metals received a 30 year concession to operate the mine in August 2009 and the environmental (EIA) approval from the federal government for the Krumovgrad project in November 2011, it has continued to face some local opposition. The granting of the EIA was appealed by the Krumovgrad Municipal Council (KMC) and three non- governmental organizations (NGOs). Bulgaria’s Supreme Administrative Court (SAC) dismissed the appeal in September 2012. This decision was appealed, and in March 2013 the SAC again rejected the appeals in a final resolution. While this resolved the validity of the EIA, the company still needs to obtain four key municipal-level approvals: 1) the detailed development plan (DDP), 2) water discharge permit, 3) tree clearing permit, and 4) an investment design and construction permit. The DDP is the pre-requisite approval that is needed for these final permits, and has been the focus of the most recent challenges to the project. In October 2012 the company submitted an application for the draft terms of reference for the DDP to the KMC. By January 2013 the KMC had not issued a decision by the statutory deadline and the company filed an appeal against the KMC’s silent refusal. In October 2013 the Administrative Court in Kardzhali issued a ruling which overturned the refusal by the KMC to issue permission for the preparation of the DDP. The KMC has since appealed this ruling twice, and both times the Administrative Court in Kardzhali has dismissed the appeal, the last of which occurred in February 2014, and the resolution was final and may not be appealed any further. In March 2014 the KMC voted not to approve the terms of reference and the preparation of the DDP, and their decision was presented to the Governor of Kardzhali District. The Governor refused to ratify their decision, and returned the matter to the KMC for further consideration. Independent of the Governor’s action, the company filed an appeal of the KMC’s decision with the Administrative Court in Kardzhali in order to preserve its legal rights. On July 10, 2014 the company announced that the KMC had finally approved the terms of reference for the DDP, and voted to allow management to proceed with the preparation of the DDP. Dundee Precious Metals also noted that the community leaders are now indicating that the company has addressed the concerns of the community, and that the project should proceed with the appropriate monitoring. We view this as a substantial positive change in attitude from the local community, and this is essentially the milestone that was required to shift Krumovgrad from a possible to a probable development project. We believe that the current goodwill with the community will facilitate a positive outcome for obtaining the final local permits.
Krumovgrad’s Location, Climate, Topography, and Infrastructure The Krumovgrad project is located in the East Rhodope, a mountainous range in southeastern Bulgaria, as shown in Exhibit 28. The mineral deposit is located 3 km south of the city of Krumovgrad, and approximately 320 km by road from Bulgaria’s capital Sofia. The project lies only 230 metres above sea level in a rugged landscape with moderately hilly topography. Infrastructure in the area is good with reliable road access and international airports both in Sofia and in the city of Plovdiv (located approximately 100 km to the northwest), and power and water are available within close proximity. While the water balance is generally expected to be positive on an annual basis, rainfall is highly variable. The Krumovitsa Rivers, which flows past the foot of the project site, will act as a backup source of freshwater. Weather in the area is similar to the climate of subtropical Europe, with mild winters and hot summers. The average annual precipitation is 703 mm, with precipitation higher in the winter and lower in the summer.
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Exhibit 28: Location of the Krumovgrad Project
Source: Dundee Precious Metals Inc.
Krumovgrad’s Mineral Reserves, Mineralization, and Exploration The Krumovgrad region is located in the East Rhodope, which comprises the eastern portion of a large metamorphic complex called the Rhodope massif. Upper Cretaceous extension led to uplift and formation of the Kessebir metamorphic core complex. Basement rocks in the area consist of Precambrian and Paleozoic metasediments, gneisses and amphibolites of the Kessebir core complex. This is overlain by conglomerates, sandstones, siltstones and limestones of the Krumovgad Group. The basal Sharovo Formation, which is the primary host to the gold-silver mineralization within the license area, consists of coarse to fine breccia and sands deposited from the basement during the rapid uplift of the Kessebir core complex. Krumovgrad is a low-sulphidation epithermal gold deposit. The primary structural control on the deposit was the unconformable fault contact of the Sharovo Formation and the underlying basement rocks of the Kessebir core complex that forms a shallow, north dipping lower bound. A second-order structural control are northeast-southwest transfer faults that bound the deposit to the north and south. The deposit’s dimensions are approximately 600 metres long (north-south) and up to 350 metres wide (east-west). There are two types of mineralization, categorized as the Wall Zone and the Upper Zone. The Wall Zone was the initial stage of mineralization, and is hosted by a shallow dipping siliceous body that forms the hangingwall of the contact between the Kessebir core complex and the overlying sedimentary rock. The Upper Zone features east-west trending steeply dipping epithermal veins that cross-cut the Wall Zone and extend upwards into the sedimentary breccia unit above the Wall Zone. The Wall Zone has superior continuity relative to the Upper Zone and has relatively low gold grades, except in regions through which the higher grade Upper Zone veins pass. The gold in the ore is typically found as fine, and occasionally liberated particles of electrum. As of March 21, 2014 the Proven and Probable reserves at Krumovgrad were 6.2 million tonnes grading 4.0 grams/tonne gold and 2.2 grams/tonne silver for contained metal of 807,000 ounces of gold and 443,000 ounces of silver. The reserves have been estimated based on gold cut-off grades of 0.6 grams/tonne and 0.8 grams/tonne for the Upper Zone and the Wall Zone,
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respectively at metal prices of US$1,250/ounce for gold and US$23.00/ounce for silver. The reserve statement is shown in Exhibit 29. Exhibit 29: Krumovgrad’s Proven & Probable Reserves Grade (g/t) Contained Metal (000's oz) Tonnes Category (mln) Gold Silver Gold Silver Proven 2.59 5.4 2.8 449 235 Probable 3.61 3.1 1.8 358 208 Total 6.20 4.0 2.2 807 443 Source: Dundee Precious Metals Inc., Raymond James Ltd.
Mining at Krumovgrad Krumovgrad is being designed as a conventional open pit operation. The mine will use a small- scale, owner-operated fleet consisting primarily of two 3.7 m3 hydraulic shovels and eight 40 tonne haul trucks. The fleet will move an annual average of 2.7 million tonnes of ore and waste rock at a strip ratio of 2.6:1. The open pit will be excavated through 4 phases of cutbacks to a final depth of 115 metres and a width of 350 metres. Illustrations of the pit design and the mining phases are shown in Exhibit 30. Exhibit 30: 3D Pit Design and Mining Phases
Source: Dundee Precious Metals Inc.
Processing at Krumovgrad Krumovgrad will use conventional milling and flotation to produce a precious metals concentrate containing gold and silver. The company will build a process plant with a capacity of 840,000 tonnes/year on a ridge approximately 1 km south of the open pit. The plant is being designed to operate with an availability of 91.3% and achieve recoveries of 85% and 70% for gold and silver, respectively. Run-of-mine ore will feed a jaw crusher, and then discharge onto a conveyor for
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delivery to the grinding circuit. The grinding will consist of a single semi-autogenous (SAG) mill in a closed circuit with hydrocyclones. The oversize from the SAG mill will report to a pebble crusher, and the overflow from the hydrocyclones will proceed to the tertiary grinding circuit consisting of two vertical mills, also in a closed circuit with hydrocyclones. The overflow from these hydrocyclones will feed the flotation circuit comprised of 4-stage rougher and scavenger flotation, followed by a 2-stage cleaner to produce the final concentrate. The company may install the staged flotation reactors (SFRs) that it has successfully used at Chelopech, in the rougher flotation circuit at Krumovgrad. The discharge from the scavenger flotation will be pumped to the tailings facility for dewatering and thickening. An integrated mine waste facility will be built adjacent to the mill. The tailings will be thickened to a paste with a solids density ranging from 56% to 68% and placed into cells within the tailings facility created using waste rock from the mine.
Our Krumovgrad Forecast We estimate Krumovgrad to produce 81,400 ounces/year of gold and 36,600 ounces/year of silver at a C1 gold cash cost of US$468/ounce and a sustaining gold cash cost of US$517/ounce (both net of by-product credits). The primary metal produced at Krumovgrad is gold at an average grade of 4.0 grams/tonne, representing 99% of our forecasted life-of-mine revenues. Our total expected initial capital expenditure for the mine, which will require a development lead time of approximately 2.4 years, is US$203 million. Over the mine life of 8 years (from 2017E to 2024E), we forecast a net present value (NPV) of US$168 million, based on a 10% corporate income tax and a 2.3% in-situ royalty payable to the Bulgarian government. The royalty rate structure is a sliding scale net smelter return royalty of 1.44% to 4% based on pre-tax profitability. Our assumptions for the Krumovgrad project are shown in Exhibit 31. Exhibit 31: Raymond James Ltd.’s Krumovgrad Project Estimates
Initial Capex US$203 million Sustaining Capex US$3 million/year Mill Size 0.8 million tonnes/year Gold Production 81,400 ounces/year Silver Production 36,600 ounces/year Life-of-Mine C1 Gold Cash Cost US$468/oz of Au Life-of-Mine Sustaining Gold Cash Cost US$517/oz of Au Mine Life 8 years Strip Ratio 2.6:1 Mineralized Material 6.2 million tonnes Gold Grade 4.0 g/t Au Silver Grade 2.2 g/t Ag Income Tax Rate 10% Corporate Tax In-situ Royalty Rate (%) 2.3% IRR (%) 23% NPV (after-tax, 5% discount rate) US$168 million Source: Raymond James Ltd. The key parameters of the March 2014 Krumovgrad Feasibility Study Report is shown in Exhibit 32. The technical report assumes gold and silver prices of US$1,250/ounce and US$23/ounce of gold and silver, respectively. The main discrepancies between our estimates and those contained in the feasibility study are with respect to our long-term gold and silver prices of US$1,250/ounce and US$21.50/ounce starting in 2019E and our estimates regarding initial and sustaining capital expenditures. As well, the technical report used a 7.5% discount rate versus ours 5% rate, which conforms to our standard Raymond James Ltd. discount rates of 5% for precious metals and 8% for base metals assets.
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Exhibit 32: Krumovgrad Project Feasibility Study Parameters
Initial Capex US$164 million Sustaining Capex US$1.6 million/year Mill Size 0.85 million tonnes/year Gold Production 85,800 ounces/year Silver Production 38,700 ounces/year Life-of-Mine C1 Gold Cash Cost US$404/oz of Au Mine Life 8 years Strip Ratio 2.6:1 Mineralized Material 6.2 million tonnes Gold Grade 4.0 g/t Au Silver Grade 2.2 g/t Ag Income Tax Rate 10% Corporate Tax In-situ Royalty Rate (%) 2.6% IRR (%) 26.3%
NPV (after-tax, 7.5% discount rate) US$144 million Source: Dundee Precious Metals Inc.
Kapan Mine
Kapan Overview Kapan is Dundee Precious Metals’ second operating mine, and it accounts for 10% of our mine- site net asset value. It is a 100% owned underground polymetallic mine in southeastern Armenia that produces copper and zinc concentrates containing gold and silver. The majority of Kapan’s revenue is derived from precious metals. The mine has suffered from a number of challenges, notably low equipment availability and low levels of productivity, and ore dilution. However, therein lies the opportunity. Should management be able to turn-around the operation as they have achieved at Chelopech and Tsumeb, it may be possible to return the operation to profitability from EBITDA losses in three of the last five quarters. Management is currently evaluating an expansion of the mine to increase the economies of scale, and recent investments in a new drill rig and mine development to access more working faces within the mine could improve the productivity and lower the unit operating costs. An expansion is expected to be relatively straightforward, requiring only additional mining equipment and some additional grinding and flotation capacity, and could be implemented in little more than a year with minimal capital expenditure. In 2013 Kapan sold 21,351 ounces of gold, 2.4 million pounds of copper, 13.5 million pounds of zinc, and 369,920 ounces of silver at a C1 gold cash cost of US$965/ounce (net of by-product credits). For 2014 management had forecasted production of 29,000 to 36,000 ounces of gold, 2.8 to 3.8 million pounds of copper, 11.6 to 15.9 million pounds of zinc, and 468,000 to 640,000 ounces of silver at a C1 gold cash cost of US$485 – US$855/ounce (net of by-product credits). Production in 1Q14 was well-below the run-rate needed to meet the annual guidance, as the mine operated at approximately only 64% of capacity as the underground crews focused on mine development rather than the production of ore. 2Q14 was hampered by fatality of an underground driller, following which operations were suspended, and investigations regarding the accident were conducted over a three week period. Management is assessing if this will have any impact on mine production for the balance of the year, and anticipates making revisions to its guidance for Kapan when it releases its 2Q14 financial results on July 31, 2014. During the first half of 2014 the mine produced 9,336 ounces of gold, 1.0 million pounds of copper, 6.1 million pounds of zinc, and 197,235 ounces of silver. The throughput rate is expected to improve marginally in 2H14 when the mine should be back to full utilization. We forecast 2014 payable sales of 22,800 ounces of gold, 2.4 million pounds of copper, 11.1 million pounds of zinc, and
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422,000 ounces of silver at a C1 gold cash cost of US$832/ounce (net of by-product credits). Exhibit 33 shows a photo of the process plant at Kapan. Exhibit 33: The Process Plant at Kapan
Source: Dundee Precious Metals Inc. The Kapan area has a long history of mining. The Centralni copper deposit was the focus of artisanal mining from 1843 to 1863, and was still being mined until 2007 when it was closed by Dundee Precious Metals due to the depletion of the ore. Industrial scale mining in the area commenced in the 1920s by state-run companies, and continued until 1990 when it ceased due to the collapse of the Soviet Union. Mining resumed in 1995 by an Armenian private entity, which operated the mine until it encountered bankruptcy in 2004 and was purchased by Vatrin Investments Ltd. Dundee Precious Metals acquired 80% of Vatrin in August 2006, and increased its stake by an additional 15% in December 2007 and purchased the remaining 5% in December 2010. Today, the Kapan asset consists of one 88.2 km2 exploration licence and one mining licence, which is comprised of the operational Shahumyan underground mine. The licence to mine from Shahumyan was recently extended to 2025.
Kapan’s Location, Climate, Topography, and Infrastructure The Kapan mine is located in southeastern Armenia in the Syunik Region, and is directly east of the town of Kapan and is approximately 320 km south of the capital of Yerevan, as shown in Exhibit 34. The mine site is in a mountainous area at the end of the Arachadzor mountain range at an elevation of 800 metres. Although there is no direct connection from the site to the national railroad system, road access is extensive and exists between all major regions of Armenia. All cargo shipments are routed through ports in Georgia and international flights depart from the Zvarnots International Airport, located 10 kilometres west of Yerevan. The area has a continental climate, and weather in the region is characterized by short mild winters and warm to hot summers, with average annual precipitation of 590 mm. The town of Kapan has a population of 40,000, and provides most of the services and labour for the mine. Electrification of the Kapan region is provided by the United Energy of Transcaucasia system and power on site is supplied by the Russian owned Electric Networks of Armenia. Approximately 70% of the water for the mill is reclaimed from the tailings, and the remaining make-up water is available from the Voghdji River, which flows through Kapan.
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Exhibit 34: Location of the Kapan Mine
Source: Dundee Precious Metals Inc.
Kapan’s Mineral Reserves, Mineralization, and Exploration The Kapan mine is located in the eastern portion of the Zangezour mining region, within the Lesser Caucasus region of the Tethyan orogenic belt. The Shahumyan deposit that is currently being exploited at the mine is a polymetallic vein deposit that is located along a corridor of Middle Jurassic andesites within a series of northwest-southeast trending faults. Shahumyan is thought to sit on top of a felsic intrusive body, with large district-scale faults having enabled the movement of hydrothermal fluids. The mineralization at Shahumyan is hosted by more than 80 steeply dipping sub-parallel polymetallic quartz carbonate veins. The veins are narrow, ranging in thickness from 0.2 to 3.5 metres, and are found in zones that are typically 10 to 15 metres wide and are shadowed by a halo of argillic alteration and disseminated mineralization. The veins trend east-west with a strike of up to 500 metres and a known vertical extent of approximately 300 metres, and most of the veins remain open at depth. Two types of veins have been identified: chalcopyrite-pyrite veins and stockwork, and polymetallic vein systems hosted by a volcano-sedimentary rock sequence. The mineralization is primarily semi-massive to massive sphalerite, pyrite, chalcopyrite, galena, and bornite with some tennantite, tetrahedrite, enargite, chalcocite, covellite, tullurides, and native gold and silver. As of Jan 31, 2013, the Indicated plus Inferred resources at the Shahumyan deposit were 13.4 million tonnes grading 2.4 grams/tonne gold, 43 grams/tonne silver, 0.40% copper, and 1.8% zinc. The resources have been estimated based on gold-equivalent cut-off grade of 2.24 grams/tonne. The resource statement is shown in Exhibit 35. Exhibit 35: Indicated and Inferred Resources for Kapan’s Shahumyan Deposit Category Tonnes (mln) Au (g/t) Ag (g/t) Cu (%) Zn (%) Contained Au (000s oz) Indicated 2.8 2.6 50 0.40% 2.1% 237 Inferred 10.6 2.3 41 0.40% 1.7% 790 Total 13.4 2.4 43 0.40% 1.8% 1026 Source: Dundee Precious Metals Inc., Raymond James Ltd.
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Mining at Kapan The Shahumyan deposit at Kapan is mined underground with an average production rate in 2013 of 1,300 tonnes/day. This is expected to increase to a rate of 1,700 tonnes/day in 2H14 due to expected performance improvements as development in the mine opens up more working faces. Access to the mine is provided by two decline ramps, one to each of the north and south sections of the mine, and the portals for both are at the 780 metre elevation. Cross-cuts from the declines intersect the veins at right angles, with mine levels developed at 10 metre vertical intervals. In the south section, capital development is done using mechanized electro-hydraulic drill jumbos and the vein drives are excavated using hand-held pneumatic machinery. In the north section, the capital development is also performed using hand-held drilling equipment. The mine method used is sub-level open stoping, with blast holes drilled upwards from the lower sub-level. Each stope is typically 40 metres high and 60 metres along strike. Crown pillars are left between the vertical stopes, and are currently not recovered. The ore is then mucked by load- haul-dump (LHDs) machines into diesel haul trucks and transported to the surface. Once complete the stope is filled with mine development waste.
Processing at Kapan Kapan uses conventional milling and sequential flotation to produce copper and zinc concentrates containing gold and silver. The process plant currently has excess throughput availability relative to the 1,700 tonnes/day mine, with milling capacity of 2,100 tonnes/day and flotation capacity of 2,300 tonnes/day. Should management elect to proceed with an expansion at Kapan to 2,800 tonnes/day (1 million tonnes/year) only minimal investments would be required in the process plant, a small amount of additional grinding equipment and some additional flotation cells. Kapan achieves good recoveries for all of its metals, with expected recoveries of 88% for gold, 85% for copper, 88% for zinc, and 85% for silver. The mine also produces quality concentrates, with concentrate grades of 20% and 60% for copper and zinc, respectively. Ore is fed to a primary jaw crusher and a secondary cone crusher. Tertiary crushing reduces the ore to 20 mm. The grinding circuit consists of a rod mill, followed by a ball mill, and when necessary a small regrind mill. The primary cyclone overflow from the grinding feeds the differential flotation circuit. The copper concentrate (containing gold and silver) is floated first. The copper cleaner and scavenger tails are pumped to a conditioner, and from there the slurry proceeds to the zinc rougher flotation. The zinc rougher is followed by a scavenger and then a 3- stage cleaner to produce the zinc concentrate. The copper and zinc concentrates are transported by truck to Yerevan and then by rail to the Poti port in neighbouring Georgia. All of the concentrates are currently sold to Louis Dreyfus Commodities Metals Suisse S.A., and they are primarily routed to Chinese customers, with a small proportion going to the Pirdop smelter in Bulgaria (approximately 10 km east of the Chelopech mine). The zinc scavenger tails are the final process tailings. The tailings are pumped to the containment at Geghanush, a valley fill facility located to the south of the mine.
Our Kapan Forecast We forecast average annual production over an 11 year mine life (through 2024E) of 44,500 ounces of gold, 798,100 ounces of silver, 2,400 tonnes of copper, and 9,700 tonnes of zinc. Our average estimated grades for gold, silver, copper, and zinc over the life-of-mine are 1.9 grams/tonne, 34.7 grams/tonne, 0.32%, and 1.4%, respectively. Gold represents 51% of the life- of-mine revenue in our forecast, with 19% from zinc, 16% from silver, and 14% from copper. Over the life-of-mine we estimate a C1 gold cash cost of US$674/ounce and a sustaining gold cash cost of US$1,005/ounce (both net of by-product credits). Our estimated NPV of US$100 million is based on a 5% discount rate and long term gold price of US$1,250/ounce starting in 2019E. We have forecasted expansion capital expenditures of US$10 million, and a sustaining capital requirement of US$11 million/year. We have applied a 20% corporate income tax rate, and a royalty rate of 7.2% payable to the Armenian government. The royalty is based on gross sales multiplied by a sliding scale royalty rate starting at 4% and increasing based on mine profitability. Our assumptions for the Kapan project are shown in the Exhibit 36.
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Exhibit 36: Raymond James Ltd.’s Kapan Mine Estimates
Expansion Capex US$10 million Sustaining Capex US$11 million/year Initial Mill Capacity 0.6 million tonnes/year Expansion Mill Capacity 1.0 million tonnes/year Copper Production 2,400 tonnes/year Zinc Production 9,700 tonnes/year Gold Production 44,500 ounces/year Silver Production 798,100 ounces/year Life-of-Mine C1 Gold Cash Cost US$674/oz of Au Life-of-Mine Sustaining Gold Cash Cost US$1,005/oz of Au Mine Life 11 years Mineralized Material 10 million tonnes Copper Grade 0.32% Cu Zinc Grade 1.4% Zn Gold Grade 1.92 g/t Au Silver Grade 34.7 g/t Ag Income Tax Rate 20% Corporate Tax Average Life-of-Mine Government NSR Royalty Rate 7.2% NPV (after-tax, 5% discount rate) US$100 million Source: Raymond James Ltd.
Partially-Owned Exploration Entities
In addition to its wholly-owned assets Dundee Precious Metals also owns an interest in three exploration and development-stage companies with assets in Serbia and Canada. In our view, the company’s partial ownership of these companies allows it to participate in the exploration success of these entities, while not having to directly incur any of the exploration expenses. It is a portfolio approach that has suffered in terms of the marketable value of the securities owned as the mining sector has fallen out of favour, but it has also provided the company with a potential pipeline of future mining projects.
Avala Resources Ltd. (Serbia) Dundee Precious Metals owns a 53.1% stake in Avala Resources Ltd. (AVZ-TSXV), a Canadian- based exploration company that is focusing on the Timok gold project in Serbia. The company’s stake was received via the July 2010 sale of the project to Avala in exchange for cash, common shares, and warrants. The Timok project is a north-trending sediment-hosted gold mineralized belt that is located on the western margin of the Timok Magmatic Complex in eastern Serbia. Avala has defined gold over a strike length of approximately 50 km at the project, as defined by soil sampling. In 1Q14 Avala was also granted the right to explore on the Bigar Istok licence, which is located immediately east of the existing Potoj Cuka Tisnica exploration licence that hosts the current Timok deposits. The Timok project is comprised of numerous targets, including the Korkan, Bigar Hill, and Kraku Pester deposits, which were the subject of a June 2014 preliminary economic assessment (PEA). The study outlined an open pit mine with an initial life of 8.4 years producing 680,000 ounces of gold at a C1 cash cost of US$788/ounce and a sustaining cash cost of US$843/ounce. The pre- production capital expenditure to construct the 1.68 million tonnes/year mine was estimated to be US$177 million. The net present value based on a gold price of US$1,300/ounce and a 5% discount rate was US$65 million, generating an IRR of 14.3%. The mineral resource estimates for the Timok project were updated in conjunction with the PEA. The Indicated and Inferred resource estimates at a cut-off grade of 0.30 grams/tonne are shown in Exhibit 37.
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Exhibit 37: Timok Project Resource Estimate (as of May 1, 2014) Category Indicated Inferred Tonnes Grade Au Contained Au Tonnes Grade Au Contained Au Deposit (mln) (g/t) (mln oz) (mln) (g/t) (mln oz) Bigar Hill 39 1.2 1.5 1.3 1.3 0.1 Korkan 22 1.1 0.8 2.7 0.9 0.1 Kraku Pester 6 1.1 0.2 0.3 0.8 0.0 Total 67 1.1 2.5 4.30 1.0 0.1 Source: Avala Resources Ltd., Raymond James Ltd.
Dunav Resources Ltd. (Serbia) Dundee Precious Metals owns a 45.5% stake in Dunav Resources Ltd. (DNV-TSXV), another Canadian-based exploration company that is working in Serbia. Dunav’s holdings include its most important asset the Tulare copper-gold porphyry project, and the Dergmen gold-copper porphyry project 20 km to the northwest. The Tulare project is within the Lece Magmatic Complex, which is the second largest magmatic complex in Serbia after the Timok Magmatic Complex, which hosts Avala Resources’ projects. Dundee Precious Metals’ accumulation of the interest in Dunav stems from the September 2011 sale of the Tulare project in exchange for common shares and warrants. The Tulare project consists of two copper-gold porphyry deposits, Kiseljak and Yellow Creek, and a number of exploration targets. In June 2014 Dunav announced a mineral resource update for Kiseljak and an initial resource estimate for Yellow Creek. The combined Inferred resource for the two is estimated to be 547 million tonnes grading 0.23% copper and 0.22 grams/tonne gold, containing 2.8 billion pounds of copper and 3.8 million ounces of gold, using a cut-off grade of 0.15% copper-equivalent for Kiseljak and 0.30% for Yellow Creek. Kiseljak is conceptually thought to be exploitable by open pit (the current resource estimate for the deposit is constrained within a pit shell), and Yellow Creek is considered to be potentially suitable for underground bulk mining. The combined Inferred resource estimate for the Tulare project is shown in Exhibit 38. Exhibit 38: Tulare Project Resource Estimate (as of March 31, 2014)
Category Inferred Cut-off Tonnes Grade Grade Contained Contained Au Grade Grade Deposit (CuEq %) (mln) Cu (%) Au (g/t) Cu (bln lbs) (mln oz) CuEq (%) AuEq Kiseljak 0.15 459 0.22 0.20 2.2 3.0 0.34 0.58 Yellow Creek 0.30 88 0.30 0.30 0.6 0.8 0.48 0.81 Total 547 0.23 0.22 2.8 3.8 0.36 0.62 Source: Dunav Resources Ltd., Raymond James Ltd. Dunav intends to commence a preliminary economic assessment (PEA) on the Kiseljak and Yellow Creek deposits in 2H14, and complete an internal review and assessment on the Degrmen project in 3Q14.
Sabina Gold & Silver Corp. (Nunavut, Canada) Dundee also holds approximately 12% of the outstanding common shares of Sabina Gold & Silver Corp. (SBB-TSX), as well as some special warrants. The company’s stake was received via the sale of the Back River gold project to Sabina in March 2009. Sabina is an exploration company with a focus on gold and silver projects in Canada’s most northern territory of Nunavut. Sabina’s primary assets are the Back River gold project, and a silver production royalty on Glencore’s Hackett River project. Back River is a high-grade gold project that is currently at the feasibility and permitting stage. It was the subject of an October 2013 pre-feasibility study that outlined a 5,000 tonne/day operation with a series of open pits and underground mines producing 287,000 ounces of gold per year at an average total cash cost of US$685/ounce over a period of 8.4 years. The pre-production capital expenditure to construct the mine was estimated to be US$605 million. The net present
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value based on a gold price of US$1,350/ounce and a 5% discount rate was US$290 million, generating an IRR of 16.5%. Going forward, Sabina intends to start work on a feasibility study in 3Q14 and to complete the assessment in 1H15, and is targeting to receive the final permits for the project by 2H16. Should they be able to maintain this timeline the Back River project could achieve its first gold pour by late 2018. Exhibit 39 shows the sizeable, high-grade resource estimate for Back River that was used for the pre-feasibility study (based on gold cut-off grades of 1.52 grams/tonne to 2.00 grams/tonne for the various open pits, and 6.00 grams/tonne for the underground). Exhibit 39: Back River Project Resource Estimate (as of October 2013) Grade Au Contained Au Category Tonnes (mln) (g/t) (mln oz) Measured & Indicated 28 5.8 5.3 Inferred 8 7.3 1.9 Total 37 6.2 7.2 Source: Sabina Gold & Silver Corp., Raymond James Ltd. In October 2011 Sabina sold the Hackett River project to Xstrata (now Glencore) in exchange for $50 million and a silver production royalty. The silver royalty is based on the receipt of 22.5% of the first 190 million ounces of silver produced from the property, and 12.5% of all of the silver produced thereafter.
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Appendix: Management & Board of Directors
Shares Options Warrants Fully Management Title Description (mln) (mln) (mln) Basic % Diluted % Rick Howes President, CEO Rick Howes is a Professional Engineer and holds a Bachelor of Science in Mining Engineering from Queen’s University in 0.1 0.7 - 0.1% 0.5% & Director Kingston, Ontario. He has over 30 years experience in the mining industry, including Inco’s North Mine which won the 2006 Ryan Award as the safest mine in Canada. Mr. Howes joined Dundee Precious Metals in early 2009 as General Manager and Executive Director of Chelopech Mining. He was appointed Executive Vice President & COO in November 2010, and President & David Rae Executive VP & DavidCEO in Rae April is 2013.a seasoned international mining and smelting executive with extensive experience in Africa, Europe and Canada. - 0.2 - - 0.1% COO He has held increasingly senior operating and executive roles with international mining companies including Falconbridge, Xstrata and most recently, Andean American. Mr. Rae holds a Bachelor of Science in Physical Metallurgy from Leeds University in Yorkshire, England. Mr. Rae was appointed SVP, Operations in November 2012, and Executive Vice-President & COO in May Adrian Goldstone Executive VP, Adrian2014. Goldstone obtained his Bachelor of Science and Master of Science with honours from the University of Auckland. Over 0.1 0.4 - 0.0% 0.3% Sustainable the last 25 years, his career has included periods in government, industry and consulting. Prior to joining Dundee Precious Business Metals in 2006 Mr. Goldstone was the Managing Director of Kingett Mitchell Ltd., a diversified resources and environmental Development consultancy based in New Zealand. Mr. Goldstone has 20 years of experience in the minerals sector in development and operating projects and in corporate positions and has been involved in minerals projects in Africa, Russia, Europe, Asia, the Americas, Australia and New Zealand. Mr. Goldstone is a member of the Council of the New Zealand Minerals Industry Association and is a director of Avala Resources Ltd. He is also recognized internationally as an expert on water management and cyanide use in the minerals industry and has given numerous lectures, papers and short courses to industry and other Hume Kyle Executive VP & Humegroups. Kyle has over 25 years of private sector and public accounting experience, bringing a broad range of financial expertise - - - - - CFO and business experience to Dundee Precious Metals, including strategic planning, mergers and acquisitions, financial planning and reporting, taxation, treasury, risk management and corporate communications. Prior to joining DPM, Mr. Kyle held increasingly senior financial executive positions in a number of large, publicly traded, multinational energy and natural resource businesses, including TransAlta Corp. and Fort Chicago Energy Partners. Mr. Kyle is a Chartered Accountant and Chartered Financial Analyst and holds a Bachelor of Arts degree in economics and accounting from the University of Western Ontario and a Graduate Diploma in accounting from McGill University. He has also served on a number of corporate and industry boards and has been an active supporter of local organizations, including the United Way. Mr. Kyle was appointed Lori Beak Senior VP, Ms.Executive Beak hasVice over President 20 years & CFO of experience in June 2011. in the resource and financial industry serving in a corporate secretarial capacity to 0.0 0.2 - 0.0% 0.1% Investor & public companies since 1986 including International Corona Resources Ltd., and most recently with Dundee Corp. and Dundee Regulatory Wealth Management Inc. Ms. Beak was appointed Corporate Secretary of Dundee Precious Metals in 2001, Vice President in Affairs and 2003 and assumed responsibility for investor relations in December 2008. She is also a member of the Canadian Society of Corporate Corporate Secretaries and the Canadian Investor Relations Institute. Secretary Michael Dorfman Senior VP, Michael Dorfman has more than 10 years of investment banking experience with a focus on the mining sector. Prior to joining - 0.2 - - 0.1% Corporate Dundee Precious Metals in April 2011, he worked in the investment banking groups of Stonecap Securities, Thomas Weisel Development Partners, and Merrill Lynch Canada. During this time, Mr. Dorfman advised senior management teams on numerous mergers and acquisitions and corporate finance transactions. He was responsible for originating, structuring, and executing buy and sell-side M&A mandates as well as equity and debt capital markets transactions. Mr. Dorfman holds an Honours in Business Administration from the Richard Ivey School of Business at the University of Western Ontario.
Richard Grosse Senior VP, Richard Gosse brings over 28 years of experience in minerals exploration working for such companies as BHP, Anglo American 0.0 0.1 - 0.0% 0.1% Exploration and Rio Tinto in a number of different commodities. He brings extensive experience in intrusive hosted and sediment hosted deposits as well as mesothermal, epithermal and porphyry gold and copper deposits. He has most recently served as Vice President, Exploration with Turquoise Hill Resources and SouthGobi Resources. Richard holds a B.Sc. Geology from Queen's University and an M.Sc. Mineral Exploration from the Royal School of Mines in London. John Lindsay Senior VP, John Lindsay is a Professional Engineer with over 30 years of experience in mining and holds a Bachelor of Science in - 0.1 - - 0.0% Projects Metallurgy from Strathclyde University in Glasgow, Scotland. Most recently, he was Vice-President-Capital Projects Execution with Barrick Gold Corp. Mr. Lindsay has held a variety of senior roles with SNC Lavalin Group Inc, AMEC Americas Limited and De Beers Consolidated Mines Ltd, where his responsibilities included metallurgical design, operations management and oversight and governance of major mining projects. He has served as an executive committee member of the Canadian Institutive of Mining and Metallurgy, Toronto branch. Mr. Lindsay joined Dundee Precious Metals in 2014.
Jeremy Cooper VP, Mr. Cooper has over 30 years retail and investment banking experience particularly in the mining sector. Prior to joining DPM, 0.0 0.2 - 0.0% 0.2% Commercial he was Managing Director and Global Head of Deutsche Bank's Mining Finance team which provided advice and finance for Affairs mining and smelter clients around the world. Mr. Cooper has been with Dundee Precious Metals since the acquisition of the Chelopech mine in September 2003. His responsibilities have included the sales of Chelopech concentrate and coordination of the acquisition of Deno Gold and Namibia Custom Smelters. He was appointed Vice President, Commercial Affairs in May Ilya Garkov VP & General Dr.2010. Garkov holds a Ph.D degree in Mining of Minerals from the University of Mining and Geology in Sofia and has been - - - N/A N/A Manager, DPM employed by Chelopech Mining EAD for 17 years. He also holds a certificate and diploma in Management from the Open Krumovgrad University in Bulgaria. Dr. Garkov was promoted to Chelopech Mine Operations Manager in 2008 and to Vice President, Mining EAD in 2011. Dr. Garkov was then appointed General Manager of Kapan. Most recently, Dr. Garkov was appointed VP and General Manager, Krumovgrad to develop the workforce and operational readiness plan from detailed design through to operation. Nikolay Hristov VP & General Nikolay Hristov obtained M.Sc and Ph.D degrees in Mineral Processing from the University of Mining and Geology in Sofia and - 0.1 - - 0.1% Manager, DPM has completed courses in both Engineering Geo-ecology and International Economic Relations. He has also completed a Chelopech EAD variety of management courses at the Open University in Bulgaria. Prior to joining Chelopech Mining EAD in 2004, Nikolay held positions in mineral processing, research and development. Starting as a metallurgist with Dundee Precious Metals, Nikolay has been promoted to Process Plant Manager and most recently as General Manager, Chelopech Mine. Hratch Jabrayan VP & General Hratch Jabrayan has over 13 years experience in project management, contract negotiations, and risk analysis and mitigation. - - - N/A N/A Manager, DPM Mr. Jabrayan joined Dundee Precious Metals in May 2011 as Director of Administration at Kapan Mine. In his new role of VP Kapan CJSC and General Manager of the Kapan Mine, Mr. Jabrayan will oversee all aspects of the operation and continue to make improvements to ensure the long term sustainable success of Kapan. Brent Johnson VP, Brent Johnson has over 15 years’ experience working as an environmental professional in the resources sector throughout - - - N/A N/A Environment Africa. His work typically focuses on ensuring environmental, health and social safeguarding in development projects, and involves the identification and mitigation of complex impacts and lowering of risk. Mr. Johnson has a post graduate degree in environmental science from the University of the Witwatersrand and is a registered Professional Natural Scientist with South Africa’s Council for Natural Scientific Professions. He joined Dundee Precious Metals as the Environmental Manager at Tsumeb in 2010 and was appointed Vice President, Environment in May 2014. Hans Nolte VP and General Hans Nolte obtained a chemical engineering degree from the University of Stellenbosh, South Africa and has spent more than - - - N/A N/A Manager, DPM 25 years in the mining sector, specifically the smelting industry as a metallurgist where his career has included a broad range Tsumeb (PTY) of general and project management and consulting. Hans began his career as a metallurgist with the Tsumeb Corp. From there Ltd. he was transferred to the Tsumeb Smelter as a superintendent and eventually promoted to Metallurgical manager of Tsumeb Corporation (“TCL”). When TCL was liquidated in 1998 Hans joined Ongopolo Mining and Processing as the General Manager of smelters and in 2006 when Weatherly Mining International took over Ongopolo Mining, Hans was appointed as the Managing Director of smelters. He was appointed Managing Director of the smelter when it was acquired by Dundee Precious Metals in March 2010.
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Shares Options Warrants Fully Directors Title Description (mln) (mln) (mln) Basic % Diluted % Jonathan Executive Jonathan Goodman has over 25 years' experience in the resource and investment industry. He has served as a geologist, senior 0.4 0.7 0.0 0.3% 0.7% Goodman Chairman analyst, portfolio manager and senior executive. Mr. Goodman joined Goodman & Company, Investment Counsel Ltd. in 1990, where he was responsible for the selection of Canadian equities and played a major role in developing asset allocation strategies, before becoming the company’s President. He was also a founder of investment firm Goepel Shields and Partners. Mr. Goodman graduated from the Colorado School of Mines as a Professional Engineer and holds a Master of Business Administration from the University of Toronto. He is also a Chartered Financial Analyst, and is a director of several publicly-traded resource companies. Peter Gillin Lead Director Mr. Gillin brings a wealth of public and mining company experience to the board of directors of Dundee Precious Metals Inc. He - - - 0.0% 0.1% was most recently Chairman & CEO of Tahera Diamond Corp. and is the former President & CEO of Zemex Corp. He has also been a senior investment banker, having previously served as Vice-Chairman of N M Rothschild & Sons Canada Ltd. and as a Managing Director of Scotia Capital. He is currently a director of Silver Wheaton Corp., Ivanhoe Mines and Trillium Health Care Products Inc. and is a member of the Independent Review Committee of TD Asset Management Inc. Mr. Gillin is a Chartered Financial Analyst.
Rick Howes Director, President & CEO of Dundee Precious Metals. 0.1 0.7 - 0.1% 0.5% President & CEO Derek Buntain Director Derek Buntain resides in the Cayman Islands, where he is President of The Dundee Merchant Bank. He has over 30 years of 0.1 0.1 - 0.0% 0.1% experience in the investment industry in Canada and abroad. His background includes positions in research, international arbitrage, corporate and government finance and mergers and acquisitions, with Burns Bros. and Merrill Lynch Canada Inc. He was President of Canadian Express Ltd. and, in 1996, became President of Goodman & Company (Bermuda) Limited, an investment management firm. Mr. Buntain attended Dartmouth College and the University of Western Ontario, where he earned a MBA. He is also a fellow of the Canadian Securities Institute and a director of several publicly-traded companies. Murray John Director Murray John is President & CEO of Dundee Resources Ltd., a private investment company, and is also director, President & CEO of 0.1 0.1 0.0 0.0% 0.1% Corona Gold Corp., an exploration company. Prior to September 2004, Mr. John was an investment banker with Dundee Securities Corp., a securities dealer. Mr. John began his investment career with Goodman & Company, Investment Counsel Ltd. as a mining analyst in 1993 and subsequently worked as a portfolio manager specializing in precious metals equities from 1995 to 1998. He joined Dundee Securities Corp. as a research analyst in 1998 and moved to the mining investment banking team in early 2001. After graduating from the Camborne School of Mines in 1980, he acquired extensive experience working as a mining engineer for Strathcona Mineral Services Ltd., Nanisivik Mines Ltd. and Eldorado Nuclear Limited. He also serves on the board of directors of several other public resource companies. Mr. John received a MBA from the University of Toronto in 1992.
Jeremy Kinsman Director An experienced diplomat, Jeremy Kinsman was born in Montreal and educated at Princeton University and the Institut d’Etudes 0.0 0.1 - 0.0% 0.0% Politiques, Paris, before joining the Canadian Foreign Service in 1966. From 1992 to 2006, Mr. Kinsman was a Canadian Ambassador or High Commissioner in Moscow, Rome, London and Brussels, accredited to 15 countries. He directs an international democracy support project for the Community of Democracies. A Contributing Writer for Policy Options magazine, he also writes a column for cbc.ca. Recently Diplomat-in-Residence at Princeton University, he is currently Resident International Scholar at the Institute of Governmental Studies at the University of California, Berkeley and also Distinguished Visiting Diplomat at Ryerson University in Toronto. Mr. Kinsman is an adviser to the new Canadian Museum for Human Rights in Winnipeg and also serves on a variety of non-profit boards in his home province of British Columbia. Garth MacRae Director Garth MacRae brings to the board of directors of Dundee Precious Metals over 30 years of experience in the resource industry, as 0.1 0.1 - 0.0% 0.1% well as over 16 years of public accounting experience. Mr. MacRae has held executive positions with Hudson Bay Mining, Brinco Limited and Denison Mines Ltd. and served as Vice Chairman of Dundee Corp. from 1993 until 2004. He also served as Chairman of Dundee Precious Metals from 1995 until 2002. Mr. MacRae holds a Chartered Accountant designation. He is also a director of several publicly-traded natural resource companies. Peter Nixon Director Peter Nixon has spent more than three decades in the investment industry, specializing in the natural resource sector and 0.0 0.1 - 0.0% 0.0% working primarily in research and institutional sales. He helped found the investment firm Goepel Shields & Partners and was subsequently President of the firm’s U.S. subsidiary. He later joined Dundee Securities, with the mandate to expand the company’s activities in the United States. Mr. Nixon is also a director of several publicly-traded natural resource companies. Ronald Singer Director Ronald Singer is a Chartered Accountant. He was a senior partner with Hyde Houghton, Chartered Accountants, until his 0.0 0.1 - 0.0% 0.0% retirement. His practice focused on corporate clients, both private and public, and specialized in the purchase and sale of businesses and corporate reorganizations. Mr. Singer is also Chairman of the board of governors for the Dynamic family of mutual funds and a consultant to the Cree Economic Enterprises Company of Quebec. Mr. Singer was named a Fellow of the Quebec Order of Chartered Accountants in 1988. Anthony Walsh Director Mr. Walsh has over 20 years’ experience in the field of exploration, mining and development. Most recently Mr. Walsh was - 0.0 - - 0.0% President & CEO of Sabina Gold & Silver Corp., prior to which he served as President & CEO of Miramar Mining Corp., Senior Vice President & CFO of a computer leasing company, and CFO & Senior Vice President, Finance of International Corona Mines Ltd., a major North American gold producer. Earlier in his career, he held various positions at Deloitte, Haskins & Sells, a firm of Chartered Accountants. Mr. Walsh graduated from Queen's University in 1973 and became a member of The Canadian Institute of Chartered Accountants in 1976. He also serves on the board of directors of several publicly-traded exploration and development companies. Donald Young Director Donald Young has more than thirty five years experience working in the mining industry and, for many years, in public practice. 0.0 0.1 - 0.0% 0.1% He is a retired KPMG LLP partner. Before joining KPMG, he worked for Placer Dome Inc. (now Barrick Gold). In public practice, he worked as an audit partner and, for a few years, as a management consulting partner focused on operational and organization reviews, governance, and control/ risk management. He is a Fellow and past president of the British Columbia Institute of Chartered Accountants. He is a member of the Institute of Corporate Directors. He currently serves on the boards of Midas Gold Corp. and Wildcat Silver Corp. He has served on the boards of other publicly listed and not for profit organizations, including Science World British Columbia, British Columbia Safety Authority and the Canadian Institute of Chartered Accountants.
Source: Dundee Precious Metals Inc.
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Company Citations Company Name Ticker Exchange Currency Closing Price RJ Rating RJ Entity Alacer Gold Corp ASR TSX C$ 2.85 2 RJ LTD. Alamos Gold Inc. AGI NYSE US$ 10.28 3 RJ LTD. AuRico Gold Inc. AUQ NYSE US$ 4.31 2 RJ LTD. B2Gold Corp. BTO TSX C$ 3.09 R RJ LTD. Barrick Gold Corporation ABX NYSE US$ 18.90 3 RJ LTD. Denison Mines Corp. DML TSX C$ 1.36 2 RJ LTD. Detour Gold Corp. DGC TSX C$ 14.90 1 RJ LTD. Endeavour Mining Corp. EDV TSX C$ 0.94 2 RJ LTD. Ivanhoe Mines Ltd. IVN TSX C$ 1.47 2 RJ LTD. Rio Alto Mining Ltd. RIO TSX C$ 2.61 2 RJ LTD. SEMAFO Inc. SMF TSX C$ 4.95 2 RJ LTD. Silver Wheaton SLW NYSE US$ 27.11 1 RJ LTD. SNC-Lavalin SNC TSX C$ 56.35 3 RJ LTD. Turquoise Hill Resources Ltd. TRQ TSX C$ 3.64 UR RJ LTD.
Notes: Prices are as of the most recent close on the indicated exchange and may not be in US$. See Disclosure section for rating definitions. Stocks that do not trade on a U.S. national exchange may not be registered for sale in all U.S. states. NC=not covered.
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RATINGS AND DEFINITIONS Raymond James Ltd. (Canada) definitions: Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to perform generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of funds for more highly
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2 Dundee Precious Metals Inc. Canada Research | Page 43 of 47
rated securities. Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next six to twelve months and should be sold. Raymond James & Associates (U.S.) definitions: Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and outperform the S&P 500 over the next 12-18 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next 12-18 months. Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon. Raymond James Latin American rating definitions: Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0% over the next twelve months. Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over the next twelve months. Market Perform (MP3) Expected to perform in line with the underlying country index. Underperform (MU4) Expected to underperform the underlying country index. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon. Raymond James Euro Equities, SAS rating definitions: Strong Buy (1) Expected to appreciate, produce a total return of at least 15%, and outperform the Stoxx 600 over the next 6 to 12 months. Outperform (2) Expected to appreciate and outperform the Stoxx 600 over the next 12 months. Market Perform (3) Expected to perform generally in line with the Stoxx 600 over the next 12 months. Underperform (4) Expected to underperform the Stoxx 600 or its sector over the next 6 to 12 months. Suspended (S) The rating and target price have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and target price are no longer in effect for this security and should not be relied upon. In transacting in any security, investors should be aware that other securities in the Raymond James research coverage universe might carry a higher or lower rating. Investors should feel free to contact their Financial Advisor to discuss the merits of other available investments. Suitability Categories (SR): Total Return (TR) Lower risk equities possessing dividend yields above that of the S&P 500 and greater stability of principal. Growth (G) Low to average risk equities with sound financials, more consistent earnings growth, at least a small dividend, and the potential for long-term price appreciation. Aggressive Growth (AG) Medium or higher risk equities of companies in fast growing and competitive industries, with less predictable earnings and acceptable, but possibly more leveraged balance sheets. High Risk (HR) Companies with less predictable earnings (or losses), rapidly changing market dynamics, financial and competitive issues, higher price volatility (beta), and risk of principal. Venture Risk (VR) Companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated with success, and a substantial risk of principal.
RATING DISTRIBUTIONS
Coverage Universe Rating Distribution Investment Banking Distribution RJL RJA RJ LatAm RJEE RJL RJA RJ LatAm RJEE Strong Buy and Outperform (Buy) 68% 55% 50% 48% 38% 22% 0% 0% Market Perform (Hold) 30% 40% 50% 37% 20% 9% 0% 0% Underperform (Sell) 3% 5% 0% 15% 40% 0% 0% 0%
RAYMOND JAMES RELATIONSHIP DISCLOSURES Raymond James Ltd. or its affiliates expects to receive or intends to seek compensation for investment banking services from all companies under research coverage within the next three months. Company Name Disclosure Dundee Precious Metals Inc. Raymond James Ltd - the analyst and/or associate has viewed the material operations of Dundee Precious Metals Inc. Raymond James Ltd - within the last 12 months, Dundee Precious Metals Inc. has paid for all or a material portion of the travel costs associated with a site visit by the analyst and/or associate.
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STOCK CHARTS, TARGET PRICES, AND VALUATION METHODOLOGIES Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry- or company-specific occurrences. Target Prices: The information below indicates our target price and rating changes for DPM stock over the past three years.
Valuation Methodology: Our valuation is based on historic risk and liquidity adjusted producer P/NAV and EV/EBITDA multiples.
RISK FACTORS General Risk Factors: Following are some general risk factors that pertain to the projected target prices included on Raymond James research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or practices could alter the prospective valuation. Risks - Dundee Precious Metals Inc. General risks experienced by mining companies – Mining operations are typically subject to a number of risks, including: environmental compliance issues, personnel accidents, metallurgical/other processing problems, unexpected rock formations, ground or slope failures, flooding, fires, earthquakes, rock bursts, equipment failures, and consultant errors. Interruptions to mining operations can occur due to inclement weather conditions, road closures, port closures, inconsistent electricity or water supply, and/or local protests. Metal price uncertainty – Our net asset value estimate and target price are highly leveraged to our metal price forecasts. Deviation from these forecasts could result in materially different performance. Project permitting risk – 10% of our net asset value (NAV) is derived from the Krumovgrad gold project in Bulgaria. The company has faced some local opposition during the permitting process for the development of the project. Although the company appears to be making progress towards resolving the issues, should the permitting remain unresolved it could delay the start-up of the project and reduce our net present value estimate for the asset. Uncertainty of third-party demand for complex copper concentrate smelting – In 2013 the Tsumeb smelter obtained 49% of its copper concentrate feed internally from the Chelopech mine, with the remainder sourced from third-parties. Chelopech is currently operating at close to design throughput and the smelter is expanding its capacity, which means that the proportion of third-party concentrate will need to increase going forward in order to keep the smelter at close to full utilization. Should an expected increase in the demand for Tsumeb’s toll treatment services fail to materialize, the consequence would be a less robust growth forecast for Tsumeb than we currently model. Foreign country/geopolitical risk – Dundee Precious Metals has operations in Bulgaria, Namibia, and Armenia, and investments in Serbia. All of these are developing countries that can at times be subject to political change and variations in sentiment with respect to the
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mining industry. However, we believe that the company has been very pro-active in taking measures to mitigate these foreign country/geopolitical risks. Bulgaria accounts for 62% of our mine-site NAV, and has recently experienced some political upheaval. In February 2013 protests forced the resignation of the government at the time and led to a parliamentary election in May 2013. Only one year into a four-year term, the new left-leaning government has already faced five no-confidence votes called by the opposition and the ruling party had a poor showing in the European Parliament elections in May 2014. These events have led to plans for another parliamentary election to be held on October 5, 2014. Although Bulgaria’s federal politics have been dramatic, we note that this has had relatively no impact on Dundee Precious Metals’ mines. The Chelopech mine continues to operate without interference from government, and the Krumovgrad project, while encumbered in some local political obstacles, appears to be making progress towards resolving these issues and has repeatedly won rulings by the federal judiciary. It is also worth noting that while Bulgaria is currently experiencing some turmoil, it has been part of the European Union since January 1, 2007, and thus has the underlying stability of the E.U. Namibia accounts for 28% of our mine-site NAV, and while Namibia is one of the most politically stable countries in Africa the company’s Tsumeb smelter has in the past faced criticism from the local community and the federal government regarding the environmental and health impacts of the smelter. The company has made significant investments to address these concerns and is in the process of meaningfully reducing employee exposure to arsenic and reducing SO2 emissions. We believe that Dundee Precious Metals has successfully secured its social license to operate in Namibia. Armenia accounts for 10% of our mine-site NAV, and while the company’s Kapan mine has not been subject to any notable disputes, the mine is located very close to the country’s border and the neighboring Nagorno-Karabakh region. Armenia has had adversarial relations with Azerbaijan to the east, and a tenuous relationship with Turkey to the west. Armenia and Azerbaijan have fought two wars in the past century, the most recent one from 1988 through 1994, due to competing claims over the disputed Nagorno-Karabakh region, and the two countries remain technically at war. While the countries do not have diplomatic relations, there is not any active fighting at present, and the mine itself has not been directly affected by the conflict in the past. Currency fluctuation – A large proportion of Dundee Precious Metals’ operating costs are denominated in foreign currencies, particularly the Bulgarian lev, the Namibian dollar, and the Armenian dram, while effectively 100% of the company’s revenue is earned in U.S. dollars. An increase in the value of the lev, Namibian dollar, or the dram relative to the U.S. dollar would have a negative impact on the company’s profit margin. We note that the lev is pegged to the €, and the Namibian dollar is pegged to the South African rand. Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available for Raymond James at rjcapitalmarkets.com/Disclosures/index and for Raymond James Limited at www.raymondjames.ca/researchdisclosures.
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RAYMOND JAMES LTD. CANADIAN INSTITUTIONAL EQUITY TEAM WWW.RAYMONDJAMES.CA EQUITY RESEARCH INSTITUTIONAL EQUITY SALES HEAD OF EQUITY RESEARCH HEAD OF SALES DARYL SWETLISHOFF, CFA 604.659.8246 MIKE WESTCOTT 416.777.4935 CONSUMER MICHELLE MARGUET (MARKETING COORDINATOR) 416.777.4951 CONSUMER & RETAIL TORONTO (CAN 1.888.601.6105 | USA 1.800.290.4847) KENRIC TYGHE, MBA 416.777.7188 LAURA ARRELL (U.S. EQUITIES) 416.777.4920 KRISZTINA KATAI (ASSOCIATE) 416.777.7060 SEAN BOYLE 416.777.4927 ENERGY JEFF CARRUTHERS, CFA 416.777.4929 OIL & GAS ENERGY SERVICES, HEAD OF ENERGY RESEARCH RICHARD EAKINS 416.777.4926 ANDREW BRADFORD, CFA 403.509.0503 JONATHAN GREER 416.777.4930 TIM MONACHELLO (ASSOCIATE) 403.509.0562 DAVE MACLENNAN 416.777.4934 MICHAEL BARTH (JR ASSOCIATE) 403.509.0511 ROBERT MILLS, CFA 416.777.4945 OIL & GAS PRODUCERS DOUG OWEN 416.777.4925 KURT MOLNAR 403.221.0414 BRADY PIMLOTT (ASSOCIATE) 416.777.4993 BRADEN PURKIS (SR ASSOCIATE) 403.509.0518 NICOLE SVEC-GRIFFIS, CFA (U.S. EQUITIES) 416.777.4942 GORDON STEPPAN, CFA (ASSOCIATE) 403.221.0411 NEIL WEBER 416.777.4931 SR. OIL & GAS PRODUCERS | OIL SANDS ORNELLA BURNS (ASSISTANT) 416.777.4928 CHRIS COX, CFA 403.509.0523 SATBIR CHATRATH (ASSISTANT) 416.777.4915 MATTHEW MURPHY (ASSOCIATE) 403.509.0534 VANCOUVER (1.800.667.2899) INDUSTRIAL & TRANSPORTATION SCOT ATKINSON, CFA 604.659.8225 INDUSTRIAL | TRANSPORTATION, HEAD OF INDUSTRIAL RESEARCH NICK POCRNIC 604.659.8230 BEN CHERNIAVSKY 604.659.8244 TERRI MCEWAN (ASSISTANT) 604.659.8228 THEONI PILARINOS, CFA 604.659.8234 GREG JACKSON (ASSOCIATE) 604.659.8262 MONTREAL (514.350.4450 | 1.866.350.4455) DWARD UDEWILL SSOCIATE E G (A ) 604.659.8280 JOHN HART 514.350.4462
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