Association for Mineral Exploration BC

Vancouver, Canada

December 9, 2014

Presented by John Kaiser

www.KaiserResearch.com

Confronting the Potential Extinction of a Canadian Institution

• A brief history of the resource juniors 1978-2014

• Core resource sector narratives & where they stand today

• State of the resource junior universe

• Structural problems facing the resource juniors

• Solutions to avert the extinction of a Canadian institution

Presentation Outline

Is it just cyclical or is this time different?

1978-1980: The First Gold Bubble

1981-1982: Volcker Shock Treatment

• Seasonal Pump & Dump

• Inflation driven commodity boom

• Gold spikes to $850, silver to $50

• Heavy margining of $2+ paper

• Interest rates pushed to 20%

• Severe global recession

• Vancouver brokerage firms fail

• Liquidity evaporates

• New margin requirements

• $2,000 gold just around the corner

1983-1987: The Hemlo Dream

1988-1991: The Reform Years

• 20 million oz Hemlo discovery

• Brokers sell SMF financings

• IPOs become non-resource rig jobs

• Flow-thru financings

• Offshore exempt institution PP’s

• Mushroom Brokers & Phone Rooms

• Trade floor & desk front running

• Scam Capital of the World

• Matkin Commission

• Reverse Takeover mechanism

• VSE electronic order book

• SEC Penny Stock Rule

• Quarterlies with balance sheets

• Eskay Creek, Mt Milligan, Fort Knox

1992-1996: The Great Discovery Boom

1997-2002: The Great Betrayal

• Dia Met & diamond boom

• Third World Frontiers – Pierina

• Friedland & Voisey’s Bay

• Bre-X finds 100 million oz deposit

• Special Wt institutional PP’s

• Deregulation: discount brokers

• Analyst & newsletter gurus

• Internet stock forums

• Busang, Timbuktu, Golden Rule, desert dirt frauds hurt credibility

• NI 43-101 reporting reform

• SEDAR launched

• Dot-Com bubble marginalizes juniors

• $200,000 mailout pump & dumps

• Gold hits $265, base metals suffer

• VSE & ASE become CDNX

2008-2009: Financial Crisis Blindsiding

2003-2007: Super-Cycle - The Rise of China

• PP 4 month hold, brokers clip & flip

• RTOs of capital pools

• BRIC driven base metal super-cycle

• Institutions fund feasibility work

• Uranium bubble

• Eleonore & Fruta del Norte

• Majors buy 200+ juniors for $140 billion

• Real Estate Bubble collapses

• Great Recession

• Commodity prices collapse

• Obama becomes president

• US adopts monetary policy in form of QE while China opts for Keynesian fiscal stimulus

2009-2011: The Second Gold Bubble

2011-2014: The Mother of all Bears

• V-shaped commodity recovery

• Gold Bugs & “fiat currency debasement”, “hyper-inflation”, “conspiracy”

• Security of supply boom – rare earths

• Gold stocks peak after Tea Party victory on Nov 10, 2010

• Eurozone fights PIIGS with austerity

• Fukushima kills uranium revival

• Washington gridlock stalls economy

• Climate change deniers rule

• Wall Street backlash against apocalyptic gold bug narrative

• Cost escalation claws back price gains

• Prop traders terrorize juniors

• Commodity Cycle: Where is the global economy going and what are the macro-economic drivers?

• Security of Supply: Metal price trends arising from innovation, policy, depletion, process technology, and geopolitics. Are there any bright spots and what should be watching out for?

• Gold/Silver Bug: The perpetual hope for higher gold & silver prices is not linked to an argument supporting higher real prices, and itsideological taint has become a poison for the juniors.

• Exploration Discovery: Who is still exploring for world class deposits, what does it take to discover one, and do the resourcejuniors still have a role to play?

Key Narratives that drive the Resource Sector

Pebble Oyu Tolgoi

Duluth-TMM

• Usage Innovation that drives demand: Demand surges due to innovation that generates new applications, ie rare earth magnets.

• Policy Trends that drive demand: Politically driven trends that displace old technologies with new technologies, ie climate change & renewables, oil anxiety & electric cars.

• Process Innovation that drives supply: New processing technologies or higher grade deposit discoveries that make possible lower cost, scalable primary supply that enables demanddevelopment as applications get commercialized ie scandium

• Deposit depletion that disrupts supply: ie HREO clay deposits

• Policy Trends that disrupt supply: Resource nationalism, environmental restrictions, strategic export controls

• Geopolitical supply disruptions: Civil strife, ie Islamic State

• Transportation supply disruptions: International strife, embargoes, sanctions, ie Putin, Ebola – the end of globalization

Security of Supply

During last 6 years major

enriched scandium

deposits have been found that offer scalable

primary supply potential.

10-40 yearsMining cash flowProduction9

1-3 yearsBuilding the mineConstruction8

1-3 yearsSecuring approval, negotiate offtake, production decision, 8-12% error margin

Permitting, Marketing & Feasibility (FS)

7

1-2 yearsProduce a mineable reserve, detailed engineering for mining plan and associated costs, 15-25% error margin

Prefeasibility (PFS)6

1 yearEvaluating recoveries and optimal processing method, initial economic analysis with 30%-35% error margin

Preliminary Economic Assessment (PEA) & Metallurgy

5

1-2 yearsUpgrading resource estimate from inferred category

Infill Drilling4

1-2 yearsDefining the limits of a discovery & producing initial 43-101 resource estimate

Discovery Delineation3

1-2 yearsFiltering for drill targetsTarget Generation & Drilling

2

1 yearConceptual, land acquisitionGrassroots1

Time Required

ObjectiveExploration Cycle

Stage

Stage

Mine Exploration & Development Cycle

IKEMonroe

KwanikaTorrential

$1 billion buyout by Barrick

This would help with a cyclical turnaround, but where is the funding going to come from?

• Order Book Fragmentation

• Proprietary Trading Culture – Flash Boys

• Reporting Obfuscation

• Accredited Investor Restriction

• Client Relationship Model

A Broken Capital Market

• Unfair Trade Execution

• Capital Inflow Interception

• Problems visualizing potential outcomes

• Too small a capital pool

• Extinction of “expert”intermediaries

Alternative Trading Systems = Market Fragmentation

Violation of First Come First Serve Principle

• Elimination of Short Sale Uptick Rule

• Day Trading Accounts

• High Frequency Trading

• Algo supported prop trading

• Systemic capital inflow interception

• Downward bias for venture capital valuations

• Litigation mitigation boilerplate that serves legal ass-covering and intimidates investors

• Archaic filing of data as unstructured information

• Profusion of unconnected dots

• Demographic erosion of sectoral sophistication

• Denial of junior sector’s inherent uncertainty

• Regulatory hostility towards statistical nature of the exploration process

• Death of the rumour mill, network hubs & momentum trading by ordinary speculators

• Future requires “slow gambling” on fundamental outcomes as alternative to volatility gambling

Regulatory War on Investor Knowledge

• Accumulated wealth

• High income earners

• Inherited wealth

• Lottery winners

• Criminals

• Nepotistic Employees

How is the concept of merit and sophistication represented by the accredited investor definition?

• 4 month hold, clip & flip, recycle of proceeds

• Missing retail after-market is a cyclical AND structural problem – dilution treadmill

• Price discovery mechanism no longer converts “encouraging results” into higher priced funding that rewards the highest risk investors

• Accredited investor private placements as lottery ticket bets on best case outcome not viable

• Regulatory compliance burden no longer justified

Accredited Investor Private Placement Funding Model is Broken

The Client Relationship

Model

Serving the needs of a supposed rocking chair nation

Or

the need of a Matrix style financial sector to feed itself by bleeding the wealth of the nation while serving the illusion of a return that is other than the random walk of the market?

• Create a single exchange that is regulated as a utility rather than a for-profit entity

• Encourage investors to open two account types between which they can freely move capital:

100% robo-advised100% personal responsibility

• Abandon the accredited investor restriction for private placements where no intermediary is compensated & the company is public & in full regulatory compliance

• Create infrastructure that allows 100% responsibility accounts to participate in private placements without any intermediary

Surviving the Death of the Financial Sector

• Wealth and income do not imply sophistication

• Even less so does it imply sector sophistication

• It is illogical that only 1% can buy 4 month hold stock from treasury where the investment goes directly to work while the other 99% are restricted to buying issued paper in the public market where they can buy as much as they want.

• To resolve this contradiction either 1) prohibit non-accredited investors from trading in public markets, or, 2) allow them the choice of buying restricted stock

• Retail Investor Exemption has too many strings

Why is it time to modify the Accredited Investor Restriction?

• Provide an online interface that allows users to imagine an orebody, turn it into a simplified mine, and apply the discounted cash flow valuation model

• 3 key numbers: Net Present Value, Internal Rate of Return, Risk adjusted discount rate

• Allow this outcome visualization (OV) for a specific project to be publicly shared

• Allow other site members to critique the OV by annotating specific choices

• Allow the visualizer to update and republish the OV

• Preserve the publishing history & develop tools to profile the visualizers

Solving the Outcome Perception Problem

Discounted Cash Flow Model: What is an orebody worth?

Annual Cash Flow(1 + Discount Rate)n

Less Capital Cost

n = year of cashm = mine life (years of mining)

∑m

n=1

Mine Supply Speculation focuses on Future Cash Flow from a Depleting Asset: A Mine is an Annuity

Annual Gross Revenue

less Operating Costs

= Operating Profit

less Taxes

= After Tax Cash Flow

Key Cash Flow Model Inputs

• Tonnage

• Grade

• Recovery

• Payable

• Mining Rate

• Metal Price

• Mining

• Processing

• Royalties

• Concentrate Shipping

• G & A

• Initial Capital

• Sustaining Cost

• Tax Rate

• Depreciation

• Environmental Permitting

• Social License

• Title

• Tax

• Geopolitical

• Technical

• Infrastructure

• Management

Revenue Cost Risk

NSR / tonne

Cash Cost / metal unit

All-In Cost / metal unit Discount Rate %

$ Cost / tonne

Build your deposit, mine it, and share it!

(Screenshots of prototype under development by Kaiser Research Online)

NPV, IRR, Discount Rate

Construct a Discount Rate by subjectively rating specific risk factors which stack on top of the risk free rate

Colour your choice with a self-assessment of confidence

Annotate your choice

Rational Speculation ModelA formal system for valuing a spec stock

Three Steps

� Outcome Analysis – what is the potential fundamental outcome and what would it be worth?

� Probability Analysis – where in the exploration cycle is the project and what is it “worth” now?

� Risk-Reward Analysis – does the market price offer a good, fair, or poor bet?

Note: the fair value range in each exploration stage row for each outcome target column is calculated by multiplying the target value by the success chance. ie stage 4 target $500: 0.05 x $500 = $25, 0.1 x $500 = $50

$2,000$500$100100%Production9

$1,500-2,000$375-500$75-100175-100%Construction8

$1,000-1,500$250-375$50-751.3-250-75%Permitting, Marketing & Feasibility

7

$500-1,000$125-250$25-502-425-50%Prefeasibility6

$200-500$50-125$10-254-1010-25%Metallurgy5

$100-200$25-50$5-1010-205-10%Infill Drilling4

$50-100$12.5-25$2.5-520-402.5-5%Discovery Delineation3

$20-50$5-12.5$1-2.540-1001-2.5%Target Drilling2

$10-20$2.5-5<$1100-2000.5-1%Grassroots1

$2,000$500$100LeverageChance

Outcome Target Fair Value Channels($ Millions)

Success Probability

Exploration Cycle Stages

Rational Speculation Model – Uncertainty Ladder for Metal Projects

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Good Speculative Value for $500 million

outcome, fair value for $100 million outcome

Fair Speculative Value for $2 billion outcome,

poor value for $500 million outcome

The speculative

value depends on

the stage of the

project, the value

implied by the

market, and the

visualized outcome.

Use search engine to find projects & OV communities within a scalable digital map

SimCity – buildings as outcome models for a project?

Farmville – a dynamic virtual reality in search of a gambling overlay

Resource Juniors – a fully regulated physical reality with gambling infrastructure in search of an interactive, graphical investor interface

• Bypass the increasingly obsolete financial sector by going directly to the “retail” investor for capital through elimination of the accredited investor restriction for individuals who accept 100% responsibility

• Acknowledge that regulated disclosure is essential for the viability of the resource juniors

• Insist that a stock exchange is nothing but a utility serving fair order execution and price discovery

• Stop pretending resource exploration is other than high risk wealth creation oriented gambling

• Assert the freedom of the individual to dream, share, and chooseas a fundamental right

• Make it easy for retail to not just understand the nature of the bet but also become empowered as a perception shaping agent

Key Points

Do not make the mistake of thinking that the world will suffer a future metals deficit if the Canadian public resource junior institution is allowed to die.

The majors are loaded up with inventory, and when that runs out, the Chinese state owned enterprises and Aussies will still be around to take care of future supply shortages.

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