S2R.asx Speculative Buy
S2 Resources Ltd (S2R)
19 Oct 2015 S2 RESOURCES LTD (S2R) Share Price $0.170 Price Target - 12 months $0.30 Can success be repeated with SIR mark II? th Brief Business Description: S2 Resources (S2) listed on the ASX on the 19 October 2015 as the Gold and base metal explorer demerged entity from Sirius Resources NL. The Company holds exploration Hartleys Brief Investment Conclusion assets located south of Kalgoorlie in WA (Polar Bear) and in Scandinavia S2R formed through the demerger of Sirius (through an equity interest in Sakumpu Exploration – a private Finnish Resources. Ow ns 100% of the Polar Bear Project, located south of Kalgoorlie and currently company). S2 is currently focused on gold and base metal exploration, holds a 67% interest in exploration assets in advancing discoveries towards (potential) development. Scandinavia. Resource drilling underw ay at the Baloo gold deposit for maiden resource in Q1 S2 has the people (talented and committed team with a track record of first- CY16. Walk-up drill targets generated in class discoveries and project developments), funding (healthy cash position Scandinavia. of ~A$22.2m – implies cash backing of ~11cps) and ground (proven Issued Capital 207.4m prospectivity through gold and nickel discoveries), which in our opinion, sets - diluted ITM 207.4m the Company up well for continued success. - fully diluted 236.1m Market Cap A$35.3m We initiate coverage of S2 Resources with a Speculative Buy - diluted ITM A$35.3m recommendation with a 12-month price target of 30cps. The Company’s low - fully diluted A$40.1m EV provides strong leverage to positive exploration results and new Cash (30 Sep 15a) A$22.2m discoveries. With advanced stage exploration underway, we anticipate good Debt (30 Sep 15a) A$0.0m EV A$13.1m near-term catalysts for share price appreciation, including a maiden resource Projects for the Baloo oxide gold zone at Polar Bear, due in Q1 2016. Polar Bear Project 100% Key Asset of Polar Bear – Baloo gold and Taipan nickel Scandinavian Assets 67% The 100%-owned Polar Bear Project is located near the gold mining districts Au Ni Cu Reserves (Kt) - 100% na na na of St Ives (~12Moz), Higginsville (~2Moz) and Norseman (~10Moz), and Resources (Kt) -100% na na na contains the Baloo gold and Taipan nickel discoveries. The project area is Board largely unexplored, as the tenure covers the salt lake sediments of Lake Jeff Dow ling (Non-Exec Chairman) Cowan, and wind-blown sediments of the Polar Bear Peninsula. Mark Bennett (CEO/MD) Significant gold mineralisation was discovered at Baloo in late 2014. The Anna Neuling (Exec Director) oxide gold zone now spans some 700m of strike, with diamond drilling Company Address Level 2, 1 Manning Street defining a primary (free-milling) high-grade shoot (10m x 70m) which remains Scarborough WA 6019 open down-plunge to the south. Gold grades for the deposit have been very S2 Resources good in parts, with many +5g/t Au (up to 8.35g/t Au) zones reported to date. 0.18 25. Metals X’s Higginsville gold mine is the nearest operation, located only 10kms 0.16 20. to the west of Baloo, and currently has idle mill capacity (we would estimate 0.14 0.12 15. to be ~0.5Mtpa). S2 has commissioned an RC rig for the deposit drill-out, to 0.10 A$ M 0.08 enable an initial resource estimate for the shallow gold zone. We see scope 10. for good maiden resource for oxide zone which could grow over time with the 0.06 0.04 5. addition of primary mineralisation (~300Koz potential). Mining of the shallow 0.02 Baloo deposit may be feasible and could provide early cash flows, but will be 0.00 . Oct-14 Feb-15 Jun-15 Oct-15
determined by the planned drilling and development studies. Volume - RHS Source: IRESS S2R Shareprice - LHS Scandinavia - world-class address and walk-up drill targets Sector (S&P/ASX SMALL RESOURCES) - LHS Sakumpu holds exploration permits in Sweden and Finland. S2 currently holds a 67% interest in Sakumpu and has an option to increase its ownership
Gold & Base Metal: Explorer / Developer to 80% by investing a further A$2m. Recent exploration includes airborne EM Mike Millikan surveys (interpreted data expected late October), mapping and sampling. Resource Analyst Previous recon drilling at the Tienpaa prospect, Finland highlights high-grade Ph: +61 8 9268 2805 nickel (12.8m @ 2.9% Ni from 124.5m) and gold (1.6m @ 3.9g/t Au), which E: [email protected] is yet to be followed up. Rock chip sampling in Sweden (Brannas prospect), The analyst has a beneficial interest in S2R shares has identified outcropping disseminated copper sulphides, with grades of 1.6% -1.8% Cu, and anomalous Au, Ag and Pt. IP surveys are underway to define the extent of the sulphide zone with results expected late October.
Hartleys Limited ABN 33 104 195 057 (AFSL 230052) 141Page St Georges 1 of 19 Terrace, Perth, Western Australia, 6000 Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Further information concerning Hartleys’ regulatory disclosures can be found on Hartleys website www.hartleys.com.au
Hartleys Limited S2 Resources Ltd (S2R) 19 October 2015
SUMMARY MODEL
S2 Resources Limited Share Price Oct-15 S2R $0.170 Speculative Buy
Key Market Information Directors & Management Company Details
Share Price $0.170 Jeff Dowling (Non-Exec Chairman) Level 2, 1 Manning Street Market Capitalisation $35.3m Mark Bennett (CEO/MD) Scarborough WA 6019 Cash $22.2m Anna Neuling (Exec Director) +61 8 6166 0240 Debt $0.0m Jeffrey Foster (GM Project Generation) Net Debt (Cash) -$22.2m John Bartlett (GM Exploration) www.s2resources.com.au Issued Capital 207.4m Su-Mei Chan (CFO) Issued Capital (fully diluted ITM options) 207.4m Options 28.65m @ A$0.277 Top Shareholders (est) m shs % Issued Capital (fully diluted all options) 236.1m Mark Creasy Investment Companies 71.74 34.6% EV $13.1m Board 1.36 0.7% Preliminary Valuation $0.26 12Mth Price Target $0.30 Investment Summary
Projects Interest Location Commodity Owns 100% of the Polar Bear Project, located south of Kalgoorlie and currently holds a 67% interest in exploration assets in Scandinavia. Polar Bear Project 100% WA Au, Ni Highly experienced board and management. Strong track record. Scandinavian Assets 66.67%* Finland, Sweden Au, Ni Resource drilling underway at the Baloo gold deposit for maiden resource in Q1 CY16. Walk-up drill targets generated in Finland and Sweden. * Subject to stage 1 program S2R can interest ownership to 80.01% for A$2m Key Milestones Project
Lists on the ASX 19-Oct-15 Resource drilling - Baloo gold oxide Q4 CY15 Polar Bear Resources Mt Grade Metal Attr. Maiden resource - Baloo gold oxide Q1 CY16 Polar Bear Ongoing exploration - Finland/Sweden CY15/CY16 Scandinavia No JORC resources Ongoing exploration - Au, Ni CY16 Polar Bear
Unpaid Capital No (m) $ (m) Ave Pr % Ord
P&L FY2015F FY2016F FY2017F Options 30-Jun-16 0.00 0.00 0.00 0% Net Revenue na na na 30-Jun-17 0.00 0.00 0.00 0% Total Costs na na na 30-Jun-18 0.00 0.00 0.00 0% EBITDA na na na 30-Jun-19 0.00 0.00 0.00 0% Deprec/Amort na na na 30-Jun-20 28.65 7.95 0.278 14% EBIT na na na Total 28.65 7.95 0.278 12% Net Interest na na na Pre-Tax Profit na na na Tax Expense na na na NPAT na na na Comments Abnormal Items na na na Reported Profit na na na S2R formed through the demerger of Sirius Resources NL.
Analyst: Mike Millikan Phone: +61 8 9268 2805 Last Updated: 19/10/2015 Sources: IRESS, Company Information, Hartleys Research
Page 2 of 19 Hartleys Limited S2 Resources Ltd (S2R) 19 October 2015
COMPANY OVERVIEW S2 Resources Ltd (S2) listed on the ASX under the code “S2R” on the 19th October S2R is an ASX listed 2015 and was formed through the demerger of assets from the highly successful Sirius gold and base metal Resources (SIR). The Company has 207.4m ordinary shares, 28.65m unlisted options explorer and ~A$22.2m in cash. S2 is focused on gold, nickel and other base metal exploration. The Board of S2 comprises: Dr Mark Bennett (MD and CEO), former Sirius MD and CEO and current non-executive director of Independent Group (IGO); Anna Neuling S2R is the demerged (Executive Director), former Corporate and Commercial director of Sirius; and Jeff entity of Sirius Dowling (Non-executive Chairman), former chairman of Sirius. In addition, Jeff Resources Foster (GM Project Generation), John Bartlett (GM Exploration) and Su-Mei Chan (CFO) have also joined S2 and are all former Sirius employees.
Fig. 1: S2R Market Cap and EV at different share prices The Company is S2R managed by the core A$m 120.0 (former) SIR team
100.0 45cps
40cps 93.3 35cps 83.0 S2R trading range of 80.0 72.6 15cps to 30cps 30cps 71.2 62.2 implies market cap 60.0 25cps 60.8 51.9 levels of ~$31m to 20cps 50.4 15cps 41.5 ~$62m (or EV’s of 40.0 40.0 31.1 ~$9m to ~$40m) 29.7 20.0 19.3 8.9 0.0 0.10 0.12 0.14 0.16 0.18 0.20 0.22 0.24 0.26 0.28 0.30 0.32 0.34 0.36 0.38 0.40 0.42 0.44 0.46 0.48 0.50 Exploration is Share price $ currently focused on -20.0 MC EV the Baloo gold prospect in WA and Source: Hartleys Estimates early stage The Company owns 100% of Polar Metals and 100% of Sirius Europa. Polar Metals exploration prospects owns 100% of the Polar Bear Project, and other proximal tenements both 100%- in Finland and owned and in joint venture (80% S2 interest). Sirius Europa currently owns 67% of Sweden Norse Exploration, which in turn owns 100% of Sakumpu Exploration, a private Finnish company. Sakumpu owns the mineral exploration titles in Finland and Sweden. Sirius Europa’s ownership of Norse and in-turn Sakumpu is expected to increase to 80% by the end of 2016, subject to investing a further A$2m. Fig. 2: Sirius Resources – demerger of S2 Resources (LHS): Asset Locations (RHS)
Source: S2 Resources Ltd Page 4 of 19 Hartleys Limited S2 Resources Ltd (S2R) 19 October 2015
POLAR BEAR
Fig. 3: Polar Bear Projects Snap Shot
Project area located Polar Bear to the south of
Kalgoorlie, WA Interest: 100% (Polar Bear and Norcott) and 80%( Eundynie JV) Location: South of Kalgoorlie Tenement coverage: ~550km2
Project stage: Advanced stage discovery and delineation
Tenure covers Reserves/Resources: None; Resource drill-out underway 2 ~550km , considered Scale: Potential for early starter oxide gold operation largely unexplored Mine Life: na and highly prospective for gold and base Operating costs: na
metal deposits Source: S2 Resources Ltd Polar Bear Project (100% S2) Tenure within the Polar Bear area span ~550km2, with the main Polar Bear Project
100%-owned by S2 and consists of 25 tenements covering over 150km2. The project Located within a major is located just over 100kms south of Kalgoorlie near the gold mining districts of St Ives gold corridor within a (~12Moz), Higginsville (~2Moz) and Norseman (~10Moz). region of +100Moz The project area is considered largely unexplored, as the tenements covers the salt gold endowment lake sediments of Lake Cowan, and wind-blown sediments of the Polar Bear Peninsula. The ground has proven prospectivity, containing the Baloo gold and Taipan nickel discoveries.
Fig. 4: Polar Bear Project Location Maps
Source: S2 Resources Ltd Page 5 of 19 Hartleys Limited S2 Resources Ltd (S2R) 19 October 2015
Polar Bear is situated within the southern portion of the Norseman–Wiluna Greenstone Belt and across a major fault boundary separating the Kalgoorlie Terrane to the east from the Norseman Terrane to the west. The boundary between these Terranes is a major regional shear referred to as the Zuleika Shear. The Kalgoorlie and Norseman Terranes are both high historic producers of nickel and gold. The southern portion of the Kalgoorlie Terrane includes the Kambalda Domain, which hosts the highly productive Kambalda group of nickel sulphide deposits and the Kambalda-St Ives group of gold deposits. The Norseman Terrane hosts the Widgiemooltha group of nickel sulphide deposits and the Norseman gold deposits. Baloo Gold– shallow, good-grade and remains open Significant gold Significant near-surface gold mineralisation was discovered at the Baloo prospect in discovery at Baloo late 2014 through reconnaissance aircore drilling. The oxide gold mineralisation occurs under a thin layer of salt lake sediments (from ~3m) and has been defined over some 700m of strike, trending north-south.
Fig. 5: Polar Bear Project Location (LHS); Baloo Prospect (RHS)
Source: S2 Resources Ltd The oxide gold is associated with quartz veining and arsenopyrite alteration within
fresh to variably weathered bedrock, interpreted to be the top of a potentially Impressive shallow significant primary mineralised system. Some of the early aircore highlights include: gold results in the 49m @ 2.69 g/t Au from 8m to EOH, including 33m @ 3.81 g/t Au from 24m to oxide, supergene zone EOH.
24m @ 4.87g/t Au from 4m to EOH; including 2m @ 13.7g/t Au from 4m and 6m @ 12.4g/t Au from 12m. 30m @ 2.53 g/t Au from 4m to EOH; including 9m @ 4.48 g/t Au from 6m, and 10m @ 3.2 g/t Au from 24m to EOH.
Page 6 of 19 Hartleys Limited S2 Resources Ltd (S2R) 19 October 2015
Baloo mineralisation Mineralisation defined at Baloo consists of: a broad oxide gold zone (up to 50m wide) consists of oxide, immediately below lake sediments; a zone of supergene gold, comprising a sub- supergene and horizontal blanket ~1-10m thick, up to 100m wide; and a primary gold zone (fresh primary gold quartz veins within a shear zone) with reported grades +5g/t Au (up to 8.4g/t Au).
Fig. 6: Baloo - Cross Section- 6480920 (LHS) and 6480880mN (RHS)
Source: S2 Resources Ltd The shear zone occurs at the contact between shale/mudstones and andesitic volcanics, which is similar in geological setting to Gold Fields’ (St Ives) Invincible deposit, located ~60km north of Baloo. Described as one of St Ives’ most important Baloo has a similar discoveries and like Baloo is located 100% on a salt lake. Within 20 months from geological setting to discovery, Invincible moved to a +1.3Moz resource (4.5g/t Au) and 0.5Moz reserve St Ives’ Invincible (4.1g/t Au) for a discovery cost of <$25/oz. Invincible provides free-milling ores (+93% deposit recoveries), with mineralisation from ~10m compared to Baloo which is <5m. Our rough back of envelope calculations for resource potential from reported drilling at Baloo provides an indicative shallow, oxide resource of +200Koz, with more drilling information required to refine our basic estimates and scope for additional ounces once primary mineralisation is drilled into resource categories. S2 has commissioned a RC rig for the deposit drill-out, with a maiden resource estimate for the shallow oxide zone expected to be released in early 2016 (before the end of the March Quarter).
Metals X’s (MLX) Higginsville gold mine is the nearest operation, located only 10kms to the west of Baloo, and currently has idle mill capacity. We estimate that the 1.4Mtpa Higginsville mill is currently operating at 65% capacity, potentially providing S2 with a toll treatment option. Toll-treatment of the shallow gold may be feasible and could provide early cash flows for S2, but will be determined by the planned drilling. We assume a resource of over 1Moz would be required to justify a standalone operation.
Recently completed Diamond drilling has been used to outline the extent and nature of the primary gold diamond drilling mineralisation within fresh rock. The gold mineralisation in the primary zone focused on the mineralisation was delineated to the south of the oxide gold zone and is associated southern plunge with narrow but high-grade quartz veins similar to Norseman. Drilling completed to extension of date has defined a primary high-grade shoot (10m thick and 70m wide) which remains mineralisation in the open down-plunge to the south. Gold grades for the deposit have been very good in primary zone parts with many +5g/t Au (up to 8.35g/t Au) zones. Some of the better results (considered close to true widths) include: 7.6m @ 8.35g/t Au from 125.2m and; 9.8m @ 4.97 g/t Au from 111.5m 2.5m @ 10.85g/t Au from 157.4m 28.3m @ 0.86g/t Au from 214.1m, including 1.25m @ 9.52g/t Au from 216.6m 0.6m @ 13.95g/t Au from 188.6m and 0.3m @ 62.5g/t Au from 252.6m Page 7 of 19 Hartleys Limited S2 Resources Ltd (S2R) 19 October 2015
The metallurgical characteristics of the primary gold zone have already been tested with 15 samples submitted for cyanide leach testwork. The cyanide extractable Testwork completed to recovery in these samples averaged 89.3%, highlighting that the primary date highlights that mineralisation is free-milling (not refractory) and amenable to conventional processing. the primary gold zone is free-milling and Monsoon, Nanook and Bindy gold prospects amenable to The new gold corridor, beneath the lake sediments of Lake Cowan, spans over 10km conventional through the Baloo, Monsoon and Nanook gold prospects. processing The Monsoon gold prospect is located ~3km south of Baloo, along trend. Monsoon is located in a similar geological setting to Baloo with gold associated with quartz veining and arsenopyrite alteration within a north-northeast trending shear zone along a mafic/shale contact. Completed aircore drilling (80m x 40m grid) has defined new
sporadic mineralisation over 1km of strike with some of the better results of: 12m @ 16.9 g/t Au from 68m 12m @ 1.34 g/t Au from 20m, including 4m @ 3.29 g/t Au from 28m The new gold corridor, beneath the lake 32m @ 2.47g/t Au from 16m. sediments of Lake At the Bindy and Nanook prospects (located ~10km south of Baloo), reconnaissance Cowan, spans over drilling has confirmed the presence of extensive gold mineralisation with the Nanook 10km through the anomaly defined over 2km and the Bindy anomaly over 1.8km. Aircore drill Baloo, Monsoon and intersections for the Nanook Prospect include 13m @ 23.89g/t, 8m @ 2.89g/t, 6m @ Nanook gold prospect 2.71g/t and 9m @ 2.54g/t gold. Equally strong results were achieved for the Bindy prospect with 8m @ 3.96g/t gold found within the core of the gold anomaly. Prior to the demerger 12 RC holes were completed along two lines over a strike of 400m at Nanook, with some of the better results including 8m @ 1.14g/t Au from 56m and 8m @ 1.5g/t Au from 60m.
Fig. 7: Polar Bear Location (LHS); New Gold Trend – Baloo, Monsoon & Nanook (RHS)
Source: S2 Resources Ltd
Page 8 of 19 Hartleys Limited S2 Resources Ltd (S2R) 19 October 2015
Taipan nickel discovery Sirius made a high-grade nickel discovery at the Taipan prospect in mid-2014, with a discovery intercept of 4.1m @ 3.8% Ni, 2.45% Cu, 0.08% Co and 2.5g/t Pt+Pd from 104.4m. An extensive basal contact (Taipan Trend) has now been defined within ~90% of the prospective stratigraphy masked beneath salt lake sediments and unexplored. Nickel sulphide mineralisation has been defined over a strike extent of The Taipan nickel 250m and down dip over 150m within two zones. discovery was made in Disseminated nickel sulphide mineralisation has also been intersected at the base of mid-2014 a thick ultramafic package at the Taipan North prospect, located ~2km north of Taipan. To date mineralisation has been intersected over a 200m strike length and is open
along strike and at depth. RC drill intercepts include 40m @ 0.47% Ni, 0.02% Cu and Nickel exploration is 0.01% Co from 99m, including 5m @ 1.02% Ni, 0.09% Cu and 0.02% Co from 109m. expected to Fig. 8: Polar Bear Projects Snap Shot recommence in 2016
Nickel mineralisation has also been confirmed at Taipan North
Source: S2 Resources Ltd
Page 9 of 19 Hartleys Limited S2 Resources Ltd (S2R) 19 October 2015
Eundynie JV Project (80%)
S2 Resources holds an 80% interest in six exploration licence through the Eundynie JV. The project tenure covers ~103km2 and is directly adjacent to, and contiguous to the Polar Bear land holdings. The ground covers the northern extension of the Baloo trend and portions of the ultramafic stratigraphy considered prospective for nickel sulphide mineralisation. Other Polar Bear ground consists of JV Norcott Project (100%) and 100% owned The Norcott project area spans a large exploration licence application over 250km2 in exploration licences size which is 100% owned by S2 Resources. The ground is considered under- explored and highly prospective for gold and nickel mineralisation, located to the east of Polar Bear.
Fig. 9: Eundynie JV and Norcott Project Areas
Source: S2 Resources Ltd
Page 10 of 19 Hartleys Limited S2 Resources Ltd (S2R) 19 October 2015
SCANDINAVIAN ASSETS
Fig. 10: Sakumpu Assets Snap Shot
Extensive unexplored Sakumpu ground holdings in highly endowed belts Interest: Owns 67% of Norse Exploration which owns 100% of Sakumpu of Finland and Location: Lapland Greenstone Belt (LGB) Finland; Skelleftea Belt Sweden Sweden held Tenement coverage: 1,467km2 of reservations in Finland; 271km2 of permits in Sweden
Project stage: Early stage exploration for precious and base metals
Reserves/Resources: na Scale: na
Mine Life: na S2 acquired an initial Operating costs: na 67% interest in assets Source: S2 Resources Ltd held by a private Finnish company, Exploration in highly endowed belts in Finland and Sweden Sakumpu for A$2m S2 owns 67% of Norse Exploration, which in turn owns 100% of Sakumpu Exploration (a private Finnish company). S2 acquired the initial 67% interest for A$2m and is expected to increase its interest to 80% by sole-funding Sakumpu’s exploration program to the end of 2016. Sakumpu is expected to have ~A$2m in working capital to be used to fund exploration. Sakumpu is managed by quality explorers with extensive in-country experience; with Graham Brown the former global head of exploration for Anglo American plc; Jim Sakumpu’s exploration Coppard is the former head of Arctic exploration for Anglo American plc and Alain is managed by a team Chevalier is the former exploration manager for Lundin Mining. Sakumpu has of four ex-Anglo established logistics and exploration is underway. American and Lundin Mining executives who Fig. 11: Corporate Structure have a proven history of discovery, and extensive local knowledge, experience
The ground is adjacent to major gold and base metal deposits and is relatively unexplored Source: S2 Resources Ltd
Sakumpu is one the largest holders of Exploration Reservations (1,467km2) in the Central Lapland Greenstone Belt (LGB) of Finland and the second largest holder of
Exploration Permits (271km2) in the Skelleftea Belt of Sweden. Both belts are considered highly prospective for precious metals (gold, platinum) and base metals (copper, zinc and nickel).
Page 11 of 19 Hartleys Limited S2 Resources Ltd (S2R) 19 October 2015
The LGB of Finland contains a number of significant deposits, including Agnico Eagle
Mines Limited’s Kittila gold mine, Anglo American Plc’s recently discovered Sakatti Ground surrounds nickel-copper–platinum deposit, and First Quantum Minerals Limited’s Kevitsa some world-class copper-nickel mine. deposits The Skelleftea - Boliden district of northern Sweden contains a number of significant copper-zinc-silver-gold sulphide deposits, including the Boliden mine, the Kristineberg mine, and the Storliden mine, and also contains the Bjorkdal gold deposit.
Fig. 12: Sakumpu – Finland Holdings (LHS);
Source: S2 Resources Ltd
Sakumpu is part way through the first of a two year reconnaissance exploration program aimed at defining new prospects in previously unexplored areas around various significant precious and base metal deposits. Sakumpu is part way The ground holdings, though early stage exploration are very prospective for shear- through the first of a hosted gold deposits, magmatic copper-nickel-PGM deposits and VMS zinc-copper- two year recon silver deposits. Both countries remain attractive investment destinations. program aimed at defining new Recently completed exploration included airborne electromagnetics (VTEM survey), prospects in with data being processed and expected to be available in late October 2015. previously unexplored In Finland, a review of regional drilling data has highlighted the presence of nickel and areas around gold mineralisation at the Tienpaa prospect: significant precious and base metal Recon drilling reported 12.75m @ 2.85% Ni and 1.6m @ 3.87g/t Au from 124.5m. deposits Never followed up, provides a walk-up drill target.
In Sweden, rock chip sampling has identified outcropping disseminated copper sulphide mineralisation in a mafic host rock at the Brannas licence:
Copper grades from rock chip sampling included 1.6% Cu up to 1.8% Cu, with Walk-up drill targets anomalous Au, Ag and Pt. have been generated IP surveys underway to define the extent of the disseminated sulphide zone with– and are expected to results expected late October 2015. be systematically tested by drilling in the coming months
Page 12 of 19 Hartleys Limited S2 Resources Ltd (S2R) 19 October 2015
RESERVES & RESOURCES
No JORC-compliant reserves or resources. GEOGRAPHIC EXPOSURE S2 Resources is primarily focused on gold and base metal projects located within Australia and Europe.
Fig. 13: Project Location – Australia and Europe
Source: S2 Resources Ltd
Page 13 of 19 Hartleys Limited S2 Resources Ltd (S2R) 19 October 2015
DIRECTORS, SHAREHOLDERS
Fig. 14: Director and Management Holdings Economic Exposure of Board and key management Total Total Shares Total Options Economic Exposure Position millions rank Directors Mark Bennett CEO & Managing Director 1,295,001 12,500,000 13,795,001 1 Jeff Dowling Non-Exec Chairman 12,500 2,500,000 2,512,500 3 Anna Neuling Exec Director 50,000 8,750,000 8,800,000 2 1,357,501 23,750,000 25,107,501 Management Jeff Foster GM Project Generation na na na John Barlett GM Exploration na na na Su-Mei Chan CFO na na na Source: S2 Resources Ltd
Directors and Management (as summarised from S2R website)
Jeff Dowling (Non-Executive Chairman) Jeff was recently Sirius’ non-executive chairman and is a highly experienced corporate leader with 36 years' experience in professional services with Ernst & Young. Jeff has held numerous leadership roles within Ernst & Young which focused on the mining, oil
and gas and other industries. Jeff's professional expertise centres around audit, risk and financial acumen derived from acting as lead partner on large public company
audits, capital raisings and corporate transactions. Jeff's career with Ernst & Young culminated in his appointment as Managing Partner of the Ernst & Young Western Region for a period of 5 years. Jeff also led Ernst & S2R board and Young's Oceania China Business Group, responsible for building Ernst & Young's management team has Oceania relationships with Chinese Corporations. Jeff has a Bachelor of Commerce extensive exploration, from the University of Western Australia and is a fellow of the Institute of Chartered development and Accountants, the Australian Institute of Company Directors and the Financial Services mining experience Institute of Australasia. with companies including Sirius Mark Bennett (CEO/MD) Resources NL, Mark was the managing director and CEO of Sirius from its inception to its merger with Lionore, BHP and Independence Group, and was recently appointed as a director of Independence WMC just to name a Group following the merger. few He is a geologist with 25 years' experience in gold, nickel and base metal exploration and mining. He holds a BSc in Mining Geology from the University of Leicester and a
PhD from the University of Leeds and is a Member of the Australasian Institute of Mining and Metallurgy, a Fellow of the Geological Society of London, a Fellow of the Australian Institute of Geoscientists and a Member of the Australian Institute of Company Directors. He has worked in Australia, West Africa, Canada and Europe, predominantly for LionOre Mining International Limited and WMC Resources Limited at locations such as Kalgoorlie, Kambalda, St. Ives, LionOre's nickel and gold mines throughout Western Australia, Wiluna and most recently Nova, the Fraser Range and Polar Bear. Positions held include various technical, operational, executive and board positions including Managing Director, Chief Executive Officer, Executive Director, Exploration Manager and Chief Geologist.
Page 14 of 19 Hartleys Limited S2 Resources Ltd (S2R) 19 October 2015
Mark is a two times winner of the Association of Mining and Exploration Companies "Prospector Award" for his discoveries which include the Thunderbox Gold Mine, the Waterloo nickel mine and most recently the world class Nova-Bollinger nickel-copper mine.
In addition to his technical expertise, Mark is very experienced in corporate affairs, equity capital markets, investor relations and community engagement and has led Sirius from prior to the discovery of Nova all the way through feasibility, financing, permitting and construction, and latterly through the schemes of arrangement to merge with Independence and to demerge S2.
Anna Neuling (Executive Director) Anna was the Company Secretary and CFO of Sirius from the company's inception in 2009 and was Sirius’ Executive Director – Corporate and Commercial until its recent merger with Independence Group.
Anna worked at Deloitte in London and Perth prior to joining LionOre Mining International Limited in 2005, until its takeover by Norilsk Nickel. She holds a degree in mathematics from the University of Newcastle (UK). She is a Fellow of the Institute of Chartered Accountants in England and Wales and has held a number of senior Ex SIR management executive positions in the resources industry, including CFO and Company Secretarial team roles at several listed companies. She is responsible for the corporate affairs of the company, the company secretarial function, human resources, public and investor relations functions, and general commercial matters.
Jeff Foster (GM Project Generation) Jeff is a geologist with over 20 years worldwide experience in various roles for WMC Resources Limited and BHP Billiton Limited, and as a director of the Brisbane-based consultancy Geodiscovery group. He was recently General Manager - Project Generation for Sirius and is a former executive director of Sirius. He holds BSc and MSc degrees and is also Adjunct Professor at the ARC Centre of Excellence in Ore Deposits at the University of Tasmania.
He is a recognised authority on nickel deposits, having advised several multinational mining companies and published numerous papers on the subject, and has been involved in the targeting and discovery of nickel sulphides in Canada.
John Barlett (GM Exploration) John is a geologist with over 20 years' experience in gold, nickel and base metal exploration and mining. He was recently General Manager - Exploration for Sirius. He holds a BSc (Hons.) in Geology from the University of Tasmania and is a Member of the Australasian Institute of Mining and Metallurgy.
John has worked predominately in Australia and Indonesia with LionOre, INCO and Newexco, and has been involved in the discovery of a number of economic deposits, including the Southern Star gold mine, the Lounge Lizard nickel mine, the Nova- Bollinger Project and most recently the Baloo Gold Deposit.
Su-Mei Chan (CFO) Su-Mei is a member of the Certified Practicing Accountants Australia since 2008 with fourteen years' experience in public practice and company accounting. Her knowledge and skills are predominantly within the mining resources sector with companies such as Terex Mining Australia Pty Ltd, Apex Minerals NL, Consolidated Minerals Limited and most recently as Financial Controller at Sirius Resources.
Page 15 of 19 Hartleys Limited S2 Resources Ltd (S2R) 19 October 2015
MAJOR SHAREHOLDERS Mark Creasy is the major shareholder with ~35% of the issue capital.
Fig. 15: Top 20 Shareholders Shareholder No of Shares % 1 Yandal Investments Pty Ltd
15 BNP Paribas Noms Pty Ltd
17 Perth Select Seafoods Pty Ltd 1,960,000 0.9% 18 Yandal Investments Pty Ltd 1,850,000 0.9%
19 AMP Life Limited 1,825,254 0.9% 20 BT Portfolio Services Ltd
Total: Top 20 162,938,359 78.6% Remaining Holders Balance 44,462,919 21.4%
Total on Issue 207,401,278 100.0% Source: S2 Resources Ltd
OPTIONS AND UNPAID CAPITAL The option table below includes the additional 28.7m options @ 27.78cps, 4 year
period.
Fig. 16: Options on issue or to-be-issued Unpaid Capital No (m) $ (m) Ave Pr % Ord If options are Options converted then S2 30-Jun-16 0.00 0.00 0.00 0% raised ~A$8m 30-Jun-17 0.00 0.00 0.00 0% 30-Jun-18 0.00 0.00 0.00 0%
30-Jun-19 0.00 0.00 0.00 0% 30-Jun-20 28.65 7.95 0.278 14% Total 28.65 7.95 0.278 12% Source: S2 Resources Ltd
Page 16 of 19 Hartleys Limited S2 Resources Ltd (S2R) 19 October 2015
PRELIMINARY PRICE TARGET
METHODOLOGY
Our S2 valuation and Our S2 valuation and price target is considered highly speculative. price target is We consider Polar Bear to be in the advanced stages of exploration, with both gold considered highly and nickel discoveries but as yet no JORC-compliant resources released. Whereas speculative the Scandinavian assets are only the early stages of exploration, with no discoveries as of yet reported. Independent market valuation for Polar Bear as part of the Demerger documentation Preliminary price assigned ~A$19.6m as the preferred value (range of A$12.6m (lower) and A$26.5m target of 30cps (upper)). Only A$2m was assigned to the Scandinavian assets. We see more value and assign a discounted A$38m (or 18cps) for Polar Bear, and some small value for the Scandinavian assets (at this stage). With an operating (third party) mill only 10kms The Company’s from the Baloo, we remain of the opinion that the gold deposit can be commercialised. current cash position All three of our small, medium and larger scale gold production simulations assume provides funding for at processing through the Higginsville plant (big assumption that commercial terms can least 2 years on the be reached for both parties) and assumes 0.5Mtpa of idle capacity can be used. A current exploration discount rate of 14% is used, since it is pre-resource with size, grade and contained spend-rate ounces unknown as yet. Our preliminary price target of 30cps is derived from both a discounted cashflow analysis of a small-scale gold operation at Baloo and perception of exploration value in the search of other gold and base metal deposits (which we regard as high).
Fig. 17: Hartleys S2 Price Target Price Target Methodology Weighting 19/10/2015 12 Month
Polar Bear - small-scale gold (NPV@14) + Scandinavian Assets 60% $0.21 $0.25 Polar Bear - med-scale gold (NPV@14) + Scandinavian Assets 20% $0.35 $0.38 Polar Bear - larger-scale gold (NPV@14) + Scandinavian Assets 10% $0.50 $0.55 Exploration value only 5% $0.14 $0.16 Cash Backing 5% $0.11 $0.11 Risk weighted composite $0.26 12 Months Price Target $0.30 Share price - Last $0.170 12 mth total return (% to 12mth target + dividend) 74% Source: Hartleys Estimate
Page 17 of 19 Hartleys Limited S2 Resources Ltd (S2R) 19 October 2015
RECOMMENDATION & RISKS
INVESTMENT THESIS & RECOMMENDATION We initiate coverage of S2 Resources with a Speculative Buy recommendation and
with a 12-month price target of 30cps. The Company’s low EV provides strong leverage to positive exploration results and new discoveries. With advanced stage exploration underway, we anticipate good We initiate coverage near-term catalysts for share price appreciation including a maiden resource for the of S2R with a Baloo oxide gold zone at Polar Bear, due in Q1 2016. Speculative Buy recommendation S2 has the people (talented and committed team with a track record of first-class discoveries and project developments), funding (healthy cash position of ~A$22m – implies cash backing of ~11cps) and ground (proven prospectivity through precious and base metal discoveries), which in our opinion, sets the company up well for continued success.
Polar Bear remains highly prospective for significant gold and nickel mineralisation, but remains largely unexplored, as the tenure covers the salt lake of Lake Cowan, and We have a 30cps 12- wind-blown sediments of the Polar Bear Peninsula. S2 has commissioned an RC rig month price target for the Baloo gold deposit drill-out, to enable an initial resource estimate for the shallow mineralisation. We see scope for a good maiden resource for the oxide zone which could grow over time with the addition of primary mineralisation (~300Koz potential). Mining of the shallow Baloo deposit may be feasible and could provide early cash flows, but will be determined by the planned drilling and development studies. A mining licence application has already been submitted over the Baloo area.
S2 Resource currently holds a 67% interest in the Scandinavian assets and has an option to increase this interest up to 80% for a further investment of A$2m. The ground holdings, though early stage exploration are very prospective with walk-up drill targets already generated. Both countries (Finland and Sweden) remain attractive investment destinations.
SIMPLE S.W.O.T. TABLE Strengths - Track record of first class discoveries Has already made - High-grade gold and base metals high-grade discoveries - Highly experience board and management - Strong cash position - Highly prospective ground and team to execute Weaknesses - No JORC reserves or resources- mine life unknown Exploration Upside - No processing infrastructure - No cash flow generation Opportunities - Potential gold development Exploration upside - - M&A activity Threat of commodity Threats - Exploration downside price weakness - Commodity prices and market sentiment - Potential takeover
- FX Source: Hartleys Research
Page 18 of 19 Hartleys Limited S2 Resources Ltd (S2R) 19 October 2015
RISKS Key risks for S2 Resources include establishing resources which can be converted to reserves, development studies and funding (both for ongoing exploration activities and any potential future development).
Fig. 18: Key assumptions and risks for valuation Downside risk to share Risk of not realising Assumption price if assumption is Comment assumption incorrect
Model parameters for our Med Meaningful We have made a number of large assumptions in preliminary S2R valuation our S2R preliminary valuation, based on and price target incomplete information (ie no resourcse, reserves, or development studies). S2R has no production history. Any changes to our assumptions have both upside and downside risks.
Favourable commodity Low Meaningful S2R remains sensitive to changes in commodity prices prices, exchange rates and market sentiment. Though with no current operations, direct impact from commodity prices is limited.
Upside from exploration Med Moderate S2R is currently well funded for planned exploration activities (~A$22m in cash end of Sep 2015). We consider the Company’s ground to be highly prospective and under-explored, and a potentially significant gold discovery has already been made at Baloo. However, the lack of exploration success would have a negative impact on the Company.
Conclusion At this stage we consider the assumptions have a low to medium risk of not being achieved.
Source: Hartleys Research
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HARTLEYS CORPORATE DIRECTORY
Research Trent Barnett Head of Research +61 8 9268 3052 Institutional Sales Mike Millikan Resources Analyst +61 8 9268 2805 Carrick Ryan +61 8 9268 2864 Scott Williamson Resources Analyst +61 8 9268 3045 Justin Stewart +61 8 9268 3062 Simon Andrew Energy Analyst +61 8 9268 3020 Simon van den Berg +61 8 9268 2867 Janine Bell Research Assistant +61 8 9268 2831 Chris Chong +61 8 9268 2817 Digby Gilmour +61 8 9268 2814 Corporate Finance Veronika Tkacova +61 8 9268 3053 Grey Egerton- Director & Head of +61 8 9268 2851 Wealth Management Warburton Corp Fin. Nicola Bond +61 8 9268 2840 Richard Simpson Director +61 8 9268 2824 Bradley Booth +61 8 9268 2873 Paul Fryer Director +61 8 9268 2819 Adrian Brant +61 8 9268 3065 Dale Bryan Director +61 8 9268 2829 Nathan Bray +61 8 9268 2874 Ben Wale Associate Director +61 8 9268 3055 Sven Burrell +61 8 9268 2847 Ben Crossing Associate Director +61 8 9268 3047 Simon Casey +61 8 9268 2875 Tony Chien +61 8 9268 2850 Stephen Kite Associate Director +61 8 9268 3050 Tim Cottee +61 8 9268 3064 Scott Weir Associate Director +61 8 9268 2821 David Cross +61 8 9268 2860
Registered Office Nicholas Draper +61 8 9268 2883 John Featherby +61 8 9268 2811 Level 6, 141 St Georges TcePostal Address: Ben Fleay +61 8 9268 2844 PerthWA 6000 GPO Box 2777 James Gatti +61 8 9268 3025 Australia Perth WA 6001 John Goodlad +61 8 9268 2890 PH:+61 8 9268 2888 FX: +61 8 9268 2800 Andrew Gribble +61 8 9268 2842 www.hartleys.com.au [email protected] David Hainsworth +61 8 9268 3040 Note: personal email addresses of company employees are Neil Inglis +61 8 9268 2894 structured in the following Murray Jacob +61 8 9268 2892 manner:[email protected] Gavin Lehmann +61 8 9268 2895 Shane Lehmann +61 8 9268 2897 Hartleys Recommendation Categories Steven Loxley +61 8 9268 2857 Andrew Macnaughtan +61 8 9268 2898 Buy Share price appreciation anticipated. Scott Metcalf +61 8 9268 2807 Accumulate Share price appreciation anticipated but the risk/reward is David Michael +61 8 9268 2835 not as attractive as a “Buy”. Alternatively, for the share Jamie Moullin +61 8 9268 2856 price to rise it may be contingent on the outcome of an Chris Munro +61 8 9268 2858 uncertain or distant event. Analyst will often indicate a Michael Munro +61 8 9268 2820 price level at which it may become a “Buy”. Ian Parker +61 8 9268 2810 Neutral Take no action. Upside & downside risk/reward is evenly Charlie Ransom +61 8 9268 2868 balanced. (CEO)Brenton Reynolds +61 8 9268 2866 Reduce / It is anticipated to be unlikely that there will be gains over Conlie Salvemini +61 8 9268 2833 Take profits the investment time horizon but there is a possibility of Mark Sandford +61 8 9268 3066 David Smyth +61 8 9268 2839 some price weakness over that period. Greg Soudure +61 8 9268 2834 Sell Significant price depreciation anticipated. Sonya Soudure +61 8 9268 2865 No Rating No recommendation. Dirk Vanderstruyf +61 8 9268 2855 Speculative Share price could be volatile. While it is anticipated that, Samuel Williams +61 8 9268 3041 Buy on a risk/reward basis, an investment is attractive, there Jayme Walsh +61 8 9268 2828 is at least one identifiable risk that has a meaningful possibility of occurring, which, if it did occur, could lead to significant share price reduction. Consequently, the investment is considered high risk.
Disclaimer/Disclosure The author of this publication, Hartleys Limited ABN 33 104 195 057 (“Hartleys”), its Directors and their Associates from time to time may hold shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities. Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising from any advice mentioned in publications to clients.
Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs. Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued. Hartleys however, does not warrant its accuracy or reliability. Hartleys, its officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law.
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