Bluestone Resources Inc. Initiating Coverage 2 May 2019 Cerro Blanco - a golden opportunity Bluestone Resources Inc. (‘Bluestone Resources’) is a TSX-V listed, mine development company, developing the Cerro Blanco underground gold deposit in Guatemala. Cerro Blanco will be a high- Target price (CAD) 2.4 grade, low cost, gold mine that could produce 113koz/yr for an Share price (CAD) 1.1 initial eight years, at the low AISC of USD 579/oz, commencing in Q4 2021. Previous owners, Goldcorp, spent over USD 170m on the project, reducing the initial capital requirement while largely de- Ticker BSR.V, BSR.CN Sector Metals & Mining risking underground mine development and de-watering. We Shares fully diluted (m) 103.7 initiate coverage of Bluestone Resources with a BUY Market cap (USDm) 63.5 recommendation and a target price of CAD 2.40/sh. Net debt Q1'19 (USDm) (20) Minority interests (USDm) - Enterprise value (USDm) 44 Free float (%) 33 High grade – high margin – near term production The Cerro Blanco gold deposit is one of the highest-grade gold Performance deposits in the world, containing reserves of 0.94Moz at 8.5g/t gold CAD and 32.2g/t silver. The fully permitted mine will produce 113koz/yr at 1.50 the low AISC of USD 579/oz for its 8-year mine life, commencing in Q4 2021. 1.40 1.30 Resource upgrade to increase valuation by 10-12% 1.20 2019 drilling is targeting conversion of 0.20-0.25Moz of inferred resources, 60% of which could be converted to reserves for inclusion 1.10 within the mine plan. Successful conversion would increase our 1.00 valuation by 10-12% to CAD 2.62-2.68/sh. May-18 Jul-18 Sep-18 Nov-18 Feb-19 Apr-19 BSR S&P/TSX Gblobal Mining (Rebased) Financing the USD 195.7m initial capital to commence Q1’20 Source: Factset To date, over USD 75m in equity has been raised, aided by a supportive register, which includes the Lundin Group (34% holders). Historic transactions and the strong register support our modelled debt-equity financing package of USD 206.5m consisting of 58% debt and 42% equity. Financing should commence in Q1 2020. USDm 2017 2018 2019e 2020e 2021e Revenues - - - - 6 EBITDA (8) (25) (17) (10) (3) EBIT (8) (25) (17) (10) (5) EPS (0.07) (0.40) (0.19) (0.08) (0.06) EPS adj (0.22) (0.39) (0.21) (0.06) (0.06) DPS - - - - - EV/EBITDA - - - - - EV/EBIT - - - - - P/E adj - - - - - P/B 1.02 1.83 1.82 1.17 1.27 ROE (%) - - - - Analysts Div yield (%) - - - - - Jack Garman +44 207 786 4383, [email protected] Net debt (30) (7) (8) (43) 115 Source: Pareto Bluestone Resources Inc. Initiating Coverage Please refer to important disclosures on the last 5 pages of this document Bluestone Resources Inc. Initiating Coverage Investment highlights • We value Bluestone Resources at 0.6x NAV(5%) of CAD 2.39/sh and we initiate coverage with a target price of CAD 2.40/sh. • Bluestone Resources is trading at P/NAV(5%)~0.5x, below our peer group average of 0.7x, we expect Bluestone Resources to trade at 0.6x NAV(5%) close to our target price of CAD 2.40/sh within the next 12 months. • At a 10% discount rate, our 0.6x NAV(10%) valuation is CAD 1.72/sh, which indicates over 60% upside to the current share price. • Cerro Blanco is one of the highest-grade undeveloped gold deposits in the world with contained reserves of 0.94Moz grading 8.50g/t gold. The fully permitted mine will produce 113koz/yr at the low AISC of USD 579/oz for its 8-year mine life from Q4 2021. • The Lundin Group own 34% of Bluestone Resources, and two Lundin Group executives are on the board. We expect Bluestone Resources to trade in line with Lundin Group mining and mine development companies, in addition we expect the Lundin Group to continue to provide strong support as the company advances. Valuation increase opportunities • Current drilling is targeting the conversion 0.20-0.25Moz of inferred resources to the measured and indicated category for inclusion in the mine plan. We estimate a 10-12% valuation increase. • The addition of optical ore sorting could improve recoveries and lower processing costs. Deferring the construction of a paste backfill plant for three years could decrease initial capital by 7% and increase our valuation by 3%. We expect an updated study (optimized mine plan) in Q1 2020. • We have attributed no value to the Mita geothermal project, which to date has received USD 60m in capital expenditure (from previous owners, Goldcorp). The geothermal project could generate up to 20MW of power, sufficient to supply the mine and store or sell additional power. A decision on the project will be taken after Cerro Blanco enters production. Re-rate opportunities • Cerro Blanco has an NPV(5%)/Capex ratio of 1.2x and an initial capital requirement of USD 195.7m, benefitting from over 3,200m of underground development that was completed by the previous owners, Goldcorp. We expect financing to commence in Q1 2020 and highlight successful financing as a catalyst for a re-rate. • Guatemalan presidential elections will commence in June 2019 and should be finalised in August 2019; if elections proceed without controversy, and one of the three frontrunners gains power, we expect our country risk rating to be reduced and the cost of capital to be reduced accordingly. Pareto’s catalyst timeline Catalysts Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 Q3'19 Q4'19 Q1'20 Q2'20 Q3'20 Q4'20 Q1'21 Q2'21 Q3'21 Q4'21 Increased mineral resources Q1’20: Updated economics incorporating value-add opportunities Feasibility study and additional reserves. Upsized CAD 22m financing Q4’19-Q1’20: Re-rate to 0.6x Guatemalan elections NAV(5%) after financing. Q1’21: Re-rate to 0.6-0.8x Inferred resource conversion (5%) NAV in production. Optimized mine plan Financing plan and capital raising Q3’19: Inferred resources Construction 0.20-0.25Moz upgrade, could Production increase valuation by 10-12 %. Source: Pareto 2 May 2019 Pareto Securities Research 2(35) Bluestone Resources Inc. Initiating Coverage Valuation Our valuation Our valuation is based on a sum of the parts discounted cash flow valuation of the Cerro Blanco deposit, discounted at 5%. We have adjusted our valuation for Q1’19e balance sheet items, after tax PV(5%) of G&A, working capital and ITM instruments. Our basecase valuation applies a 0.6x NAV valuation multiple using a long-term gold price of USD 1,326/oz and a silver price of USD 17/oz. Pareto valuation Mining assets Discount Rate Pareto Valuation USDm Multiple CAD/sh Cerro-Blanco 5% 223.22 0.6x 2.12 Exploration 27.80 " 0.25 Total/Average 260.02 " 2.37 Financial adjustments (Q1’19e) Cash & Equivalents 19.82 0.6x 0.18 After-tax PV G&A & Interest 5% (40.56) " (0.37) Working Capital (2.25) " (0.02) Total Debt - " - ITM Instruments 24.22 " 0.22 Net asset value 261.26 " 2.39 Source: Pareto We value Bluestone Resources using a 0.6x NAV(5%) valuation multiple based on comparable data for similar projects in similar jurisdictions, we believe Bluestone We expect Bluestone Resources will be trading at 0.6x NAV(5%) within the next twelve months. This Resources to trade at 0.6x projection is in-line with the trading multiples of Lundin Group mining and mine NAV(5%) within 12 months development companies. Lundin Gold for example, is less than eight months away from first production and trading at 0.6x NAV(5%) (1.0x NAV(10%)). Bluestone Resources is expected to trade at a similar multiple when it reaches the same development stage. Valuation CAD/share 3.98 4.00 3.18 3.00 2.39 2.00 1.53 1.00 1.09 - 52-Week High & Low 0.6x NAV(5%) 0.8x NAV(5%) 1.0x NAV(5%) Share Price Basecase Scenario 1 Scenario 2 Source: Pareto We value Bluestone Resources at a 0.6x NAV(5%) of CAD 2.39/sh, as Cerro Blanco enters production we would expect Bluestone Resources to achieve a higher valuation multiple. At 0.8x NAV(5%) we value Bluestone Resources at CAD 3.18/sh, a 33% increase in our valuation. 2 May 2019 Pareto Securities Research 3(35) Bluestone Resources Inc. Initiating Coverage Valuation sensitivities Bluestone Resources will generate 96% of its net smelter revenue (NSR) from gold and 4% from silver, as a result our valuation is highly sensitive to the gold price. Our basecase valuation uses our long-term gold price of USD 1,326.0/oz, a 15% increase in gold price to USD 1,437.5 increases our 0.6x NAV(5%) by 47% to CAD 3.51/sh. Pareto valuation sensitivities to gold price and discount rate Source: Pareto In addition, our valuation is highly sensitive to discount rate, we have used a discount rate of 5% in our basecase valuation, in-line with our Canadian peers. At a discount rate of 10%, our valuation decreases by 28% to CAD 1.72/sh, which still represents over 60% upside to the current share price. Pareto valuation operational sensitivities Source: Pareto Capital and operating costs have a limited effect on our valuation, largely because the project has very high margins, based on our basecase cost and gold price assumptions. 2 May 2019 Pareto Securities Research 4(35) Bluestone Resources Inc.