victoria gold initiation of coverage

24 September 2014

Victoria Gold is a research client of Edison Investment Research Limited

Victoria Gold looks to develop its wholly owned Eagle Gold Project, in the Yukon, Canada. With permitting in place and a feasibility study completed, the next step is to finance the required C$430m to develop the mine. Eagle has a currently defined 10-year LOM heap leach project, starting in early CY18 (under our assumptions), producing an average of 195kozpa (after ramp up). Our undiluted base case valuation is C$0.63/share (at a 10% discount rate and Edison assumed gold prices), potentially increasing to C$1.08 based on full crushing plant utilisation and assuming higher head grades delivered from the nearby Olive project. We await metallurgical results and an NI 43-101 resource for Olive to support this upside valuation.

Year end Revenue (C$m)

PBT* (C$m)

EPS* (c)

DPS (c)

P/E (x)

Yield (%)

02/13 0.0 (2.3) (2.6) 0.0 N/A N/A 02/14 0.0 (1.6) (0.9) 0.0 N/A N/A 02/15e 0.0 (3.9) (1.1) 0.0 N/A N/A 02/16e 0.0 (20.0) (5.9) 0.0 N/A N/A

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.

Increasing grade to increase value Recent and ongoing exploration drilling at the Olive project, located only c 4km from Eagle, have returned very favourable gold assays. Assay results announced so far suggest that Olive could potentially yield ore of around 1g/t gold after recovery, similar to the recovered gold grade from the crushing plant over the first three years of production. Olive could therefore enhance the economics of the early years of Eagle’s operation with little to no extra construction capital needed. The current mineralised zone at Olive has been so far delineated with 35 holes and 10 trenches. A 30-hole programme is underway with further results due in H214.

Divestments keep exploration funding off market Victoria Gold has received the third C$10m payment from Premier Gold Mines in connection with its 2012 of the Cove McCoy property in Nevada, US. This divestment has netted Victoria Gold C$28m in cash and shares from Premier, and has allowed the company to continue with exploration and development activities without causing further dilution to shareholders. Current cash and cash equivalent resources should sustain non-construction operations until the end of FY16.

Valuation: Existing design and assays de-risk upside Our base valuation of C$0.63 per share (using a 10% discount rate and gold prices as per page 9) is based on Victoria Gold’s 5 April 2012 feasibility study on the Eagle Gold Project. It states that only c 71% of the nameplate capacity of the crushing plant is utilised. The Olive gold exploration project nearby is returning significantly higher gold grades than Eagle’s LOM average of 0.78g/t. Factoring in the extra crushing capacity and raising the head grade in the early years of production results in a upside valuation of C$1.08 per share. Both valuations are undiluted; for diluted valuations see page 11.

Victoria Gold Initiation of coverage

Eagle enhanced by Olive

Price C$0.13 Market cap C$44m

Net cash (C$m) at 31 May 2014 12.4*

*before receipt of C$10m Cove McCoy sale proceeds in June 2014 Shares in issue 340.1m

Free float 76%

Code VIT

Primary exchange TSX-V

Secondary exchange

N/A

Share price performance

% 1m 3m 12m

Abs (7.1) 0.0 8.3

Rel (local) (4.6) (0.1) (8.2)

52-week high/low C$0.17 C$0.08

Business description

The Eagle Gold Project, Victoria Gold’s flagship project, is located in the 100%-owned Dublin Gulch property in the Yukon Territory, Canada. Victoria Gold also intends to explore its other claims while developing Eagle and is looking to monetise its Santa Fe project in Nevada, US.

Next event

Olive results and resources statement

By end 2014

Analysts

Tom Hayes +44 (0)20 3077 5725

Charles Gibson +44 (0)20 3077 5724

[email protected]

Edison profile page

Metals & mining

http://www.edisoninvestmentresearch.com/research/company/Victoria-Gold

Victoria Gold | 24 September 2014 2

Investment summary

Company description: Yukon gold Victoria Gold intends to develop a large-scale heap leach project called Eagle, located in the Yukon Territory of Canada by 2017. Further drilling at its other exploration projects located very close (c 2km), especially Olive, could materially change the economics of Eagle in the first few years of production.

Valuation: Shares discounted by 76% on an undiluted basis Our base case valuation uses Victoria Gold’s 5 April 2012 feasibility study (FS) on the Eagle Gold Project. The FS details a large open-pit and in-valley heap leach operation. The life of mine is currently estimated at 10 years producing on average 195kozpa after ramp up. Our base case valuation is C$0.63 per share, increasing to C$1.08 per share as we factor in higher head grades (as a result of potential Olive ore being delivered to the future Eagle mine) and full utilisation of the Eagle crushing plant. Assuming a 50/50 debt/equity financing structure and 30c share price to raise the equity portion of the C$430m in capex required (Victoria Gold would not likely raise equity below this price), these valuations on a diluted basis become C$0.39 and C$0.50 respectively.

Financials: Cove sale nets C$28m, last C$10m tranche received At end February 2014 Victoria Gold had C$14.2m in cash. Post year-end the company received the third C$10m tranche from its C$28m sale of the Cove McCoy property in Nevada to Premier Gold Mines. A further C$20m will be received if and when Cove goes into production. This C$10m tranche was received equally in cash and shares. We forecast C$5m will be spent on exploration activities in FY15. Then, under our assumptions, Victoria Gold commences financing for the Eagle project such that our capital expenditure forecasts (C$211m in FY16 and C$219m FY17) are met and our assumption of first Eagle production in CY17 is achieved. Victoria Gold states that it could achieve first production in CY16 (FY17), but we factor in minor development and financing delays.

Sensitivities: Capex and cold temperature operations We summarise the two main sensitivities below:

Victoria Gold to control capex to a maximum C$430m We believe that the date of the FS (2012) and the quoted capex figures contained therein may not accurately reflect the current prices of equipment and mining services required to develop a mine. We therefore use a total initial capex figure of C$430m, an increase of 7.6% over the 5 April 2012 FS, based on our discussions with management. While Victoria Gold does not intend to go above this figure, it is not definitive and we expect further refinements to be made.

Cold temperatures factored into project design Mining at Eagle will be via the open-pit method using conventional truck and shovel equipment to move the waste to dump, and the ore to the in-valley heap leach pad. Due to the location of Eagle in the Yukon, during the winter months the project will experience sub-zero temperatures. To mitigate the effect of cold temperatures leachate pipes will be buried to protect them against frost and the heap leach pad will be situated within a southerly facing valley bottom. Two cold temperature heap leach operations are in production and owned by Kinross, and demonstrate the viability of operating such mines in cold climates. Further details are provided on pages 7 and 8.

Further sensitivities relating to changes in discount rates used, gold price, capex and share prices used to raise the equity component in our diluted valuation are given on pages 11 and 12.


Company description: Cold temperature heap leach

Victoria Gold intends to develop its Eagle gold heap leach project in the Yukon, Canada. While temperatures in this region fall below zero during the winter months and it experiences short warm summers, the company has designed its project to withstand such temperatures and with similar design characteristics as other operating heap leach operations. Exploration upside is promising, with nearby projects only a few kilometres away from Eagle. Assays returned from the Olive project indicate a potentially higher-grade ore stream could be delivered to the Eagle mine site, thereby improving the project’s economics in the first years of operation and requiring little to no extra capital beyond the currently estimated C$430m cost of the Eagle project. The Dublin Gulch property, which comprises the Eagle project as well as numerous projects at various stages of exploration, has been explored by a series of owners, first for tungsten and then for gold. Victoria Gold acquired Dublin Gulch in June 2009 via a friendly all-share takeover of StrataGold, and commenced exploration and drilling later that year.

Geography

Victoria Gold’s Dublin Gulch property, which contains the Eagle project as well as its other exploration projects and targets, is located in the Mayo mining district in central Yukon, Canada. Dublin Gulch is located approximately 85km north of the town of Mayo and 370km due north of the territorial capital, Whitehorse.

Exhibit 1: Location of the Eagle Gold Project, Dublin Gulch, VBW and Aurex claims

Source: Victoria Gold website

Geology

The Eagle project is best described as a large-tonnage reduced intrusion related gold system associated with Cretaceous tombstone and Mayo suite granodiorite intrusions with structurally controlled high-grade gold sulphide veins.

Mineralisation at Eagle is characterised by sub-parallel, gold-bearing sheeted quartz vein arrays that developed proximal to the contact between the Cretaceous-age granitoid Dublin Gulch stock and surrounding metasedimentary country rock. It is the density and continuity of these vein sets that makes the Eagle project a potentially viable operation amenable to open-pit mining, and the


grade of the ore reserve amenable to heap leaching and the carbon-in-leach method of gold extraction.

Reserves based on US$1,200/oz gold Victoria Gold has NI 43-101 compliant gold resources and reserves for its Eagle project only at present. We expect further resources to be announced, the first of which will be estimated for the Olive project, which currently has a 30-drill hole programme underway, with assay results due to be announced during H214. The current mineral resource and ore reserve estimate for Eagle are given in the following exhibits.

Exhibit 2: NI 43-101 compliant mineral resources at a gold price of US$1,500/oz Category Mt Gold grades (g/t) Moz Au Indicated 222 0.68 4.8 Inferred 78 0.60 1.5 Source: Wardrop Engineering January 2009 Mineral Resource estimate

Exhibit 3: NI 43-101 compliant ore reserves at a gold price of US$1,200/oz Category Mt Gold grades (g/t) Moz Au Probable & proven 92 0.78 2.3 Source: Wardrop Engineering April 2012 Feasibility Study

Exploration: High grades from similar deposits nearby

Victoria Gold’s Dublin Gulch claims are host to numerous identified exploration targets that have been investigated both via early stage reconnaissance techniques (grab-sampling, geophysical techniques) as well as by confirmatory drilling. A summary of each of Victoria Gold’s main projects is given in the following sections.

Exhibit 4: Geological map of Dublin Gulch projects

Source: Victoria Gold website

The Potato Hills Trend (PHT) The PHT is a >13km long belt of gold-bismuth-arsenic-antimony and silver-lead-zinc mineralisation that extends to the north-east and south-west of the Eagle project, along, and beyond, the margins


of the Dublin Gulch granodiorite stock. The PHT hosts the advanced-stage Olive project, as well as the earlier-stage Shamrock and Popeye gold dominant exploration projects. Victoria Gold has two distinct silver exploration projects – Rex and Peso. It is important to note that the Olive, Shamrock and Popeye projects are located only 2.5km to 5.0km from Eagle and therefore could supply additional, potentially higher-grade, ore streams to the planned Eagle processing plant. We explore the potential economic benefits of this, especially concerning Olive, on page 10 of this report.

The style of mineralisation along the PHT is characterised not by vein arrays of thin, sub parallel quartz and quartz-sulphide veins such as those found at Eagle, but rather widely spaced, structurally controlled arsenopyrite-sulfosalt veins (in simplified terms, sulfosalts are rare, complex sulphide minerals). The PHT is distinct in both style of mineralisation and grade from Eagle. Mineralisation along the PHT is generally of a slightly higher tenor than at Eagle (ie it has a higher metal content) with visible gold and multi-ounce assays returned from early stage grab samples. A further encouraging factor to exploring the PHT is that the mineralisation along this trend can commonly be seen to overprint Eagle mineralisation and can also been seen to reactivate earlier Eagle veins. The main effect of the PHT overprinting and in-filling earlier Eagle veins is that there are greater amounts of gold in these areas. This is seen in the form of higher-grade drill intercepts and a key reason for Victoria Gold’s management to further explore and investigate its projects close to Eagle.

The Olive target – potential satellite ore-stream for early Eagle years Located a very short distance from the site of planned Eagle project infrastructure are the sites of numerous historically mined gold-sulphide veins at the Olive exploration target. The Olive vein-set consists of gold-bearing quartz-scorodite-arsenopyrite vein material. It was this gold-bearing material that was mined on a small scale at the turn-of the 20th century, via shafts and adits dug into the hillside and via the mining of placer deposits in the surrounding creeks draining the area. A summary of results for 2014 drilling so far is given below.

Exhibit 5: 2014 Olive assay results summary of best intercepts Drill hole From (metres) To (metres) Length (metres) Grade (g/t Au) DG14-584C 60.7 130.4 69.7 2.29 including 65.5 114.9 49.4 2.91 including 85.3 114.9 29.6 3.90 DG14-585C 152.5 164.8 12.3 1.19 DG14-586C 26.8 122.9 96.1 1.22 including 33.4 58.4 25.0 2.19 and 107.3 122.9 15.6 2.02 DG14-596C 30.3 41.7 11.4 0.95 DG14-597C 4.6 10.4 5.8 1.26 and 100.9 123.9 23.0 1.43 DG14-599C 67.1 82.4 15.3 0.93 DG14-600C 3.0 92.6 89.6 1.18 including 42.2 84.7 42.5 2.36 DG14-601C 46.4 51.1 4.7 0.67 Source: Victoria Gold announcement dated 24 June 2014

Previous exploration at Olive includes a 200m exploration trench excavated in 1991, which returned an average gold grade of 1.2g/t over 97.6m. This mineralisation, hosted in the Dublin Gulch granodiorite (ie the same gold-bearing host rock found at Eagle), was verified by Victoria Gold in 2010 via a diamond drill hole, which returned 20.3m at 1.93g/t (from 18.1m to 38.4m) gold and a further 41.1m at 0.96g/t (from 49.1m to 90.2m). Further drilling was undertaken in 2011 and 2012, and a further 3,000m of drilling was recently commenced in May 2014 (see Exhibit 6 for 2014 drill results announced so far from this campaign). Preliminary metallurgical test work has shown that the mineralisation present at Olive is amenable to heap leach, which is critical to realising the value of the Olive project. As a means to consider the effect of higher-grade ore from the Olive target on Eagles economics, we provide a secondary ‘upside’ valuation scenario (page 10).


Rex-Peso – regional silver exploration targets Though Rex-Peso is classified a ‘regional target’ by Victoria Gold, it is only 5km west, by road, from Eagle. The project comprises a number of historic small underground workings accessed by shafts and adits. The deposits are of sulfosalt veins high in lead and silver (up to 224oz/short ton Ag or 7,680g/t Ag). Victoria Gold considers that the project has potential to host gold mineralisation that could be “possibly additive to Eagle”. No drilling has yet been performed at Rex-Peso and this asset is not currently a core focus of Victoria Gold’s exploration efforts.

Santa Fe, Nevada – non-core gold asset Victoria Gold also owns the Santa Fe gold project located in Nevada, US. The Santa Fe property was acquired as part of its friendly takeover of StrataGold in 2009 and covers an area of approximately 26km2. It is 100% owned by the company’s wholly-owned subsidiary Gateway Gold. This project was previously mined by Corona Gold in the 1980s and 1990s with production of c 350koz gold and 700koz silver before mining ceased in 1994. Victoria drilled 12 diamond core holes on the property from August 2009 to August 2010. The majority of the holes targeted sulphide-rich mineralisation present in a steeply dipping post-mineral fault zone (BH Zone) located near the south-east end of the existing open pit. Drilling did not define the full extent of mineralisation, which remains open for expansion. Victoria Gold has not drilled the deposit since and Santa Fe is not a core focus of the company’s exploration activities.

High-grade tungsten project with a PEA completed

Victoria Gold has a little-known tungsten project, called Wolf, located close to its main gold assets (see Exhibit 6). Victoria Gold has not actively marketed Wolf in order to avoid considerations relevant to this smaller, lower-value asset potentially confusing the investment case for the Eagle Gold Project. However, we believe it should be highlighted for the potential to divest this asset for the company. A PEA was completed and announced in 2009; the main assumptions and base case valuation are given in the following exhibit. We also provide a revised scenario using our 10% discount rate assumption, rather than 8%, and the current tungsten price.

Exhibit 6: Wolf Tungsten Project assumptions and valuation Edison valuation based on PEA

mining and processing parameters* General Assumptions

Mine life (Includes one year of pre-stripping and tailings dam construction) 11 years Mining Available Operating Days/Year 350 Production Rate (average) 3,000t/d Process Recovery 82.5% Tungsten Trioxide (WO3) concentrate 45,653t Discount rate 10%* WO3-APT Price ($/dmtu) 375* WO3-APT Price ($/Ib) 17* WO3 discount to APT price (%) 20* WO3 concentrate price (US$/dmtu) 281* WO3 concentrate price (US$/Ib) 13.6* Royalty (%) 1 Valuation DCF value (US$m) 131.2* IRR 42.2%* Source: StrataGold 2009 PEA and Edison Investment Research. Note: *Edison assumptions. **APT spot price as of 16 July 2014.


Mining – cold temperature heap leach

Mining at Eagle will be via the open-pit method of extraction using conventional truck and shovel equipment to move the waste to dump, and the ore to the in-valley heap leach pads. Due to the location of Eagle in the Yukon, during the winter months the project will experience sub-zero temperatures. Four North and South American large-scale heap leaching operations in cold-climates are given in Exhibit 7, two of which are in operation, providing an indication that such operations are feasible.

Cold temperatures factored into Eagle’s design Due to the locality of Eagle in the Yukon, Victoria Gold has had to make sure that the situation of its heap leach pad mitigated as far as possible the cold temperature experienced during the winter months (which can fall to -30°C). Victoria Gold’s engineering consultants have incorporated the following design parameters into Eagle’s mine plan to mitigate the effects of sub-zero temperatures:

situation of the heap leaching pads in the bottom of a valley, which takes advantage of the thermal mass of the valley sides to help reduce the loss of heat from the heap leach pads;

in-situ storage (ie in the dumps) of the pregnant leach solution in the winter months to protect it against freezing;

choosing a valley facing south to catch as much sunshine as possible;

burying the cyanide leachate pipework at 3m below the surface of each ore-stack to protect against frost;

ability to heat the cyanide leach solution in the winter months; and

ore will only be stacked on the heap leach pad during the 250-day ‘summer’ period.

We also understand from management that its further assessment of leaching characteristics at cold temperatures has highlighted the following possible benefits:

a material reduction in cyanide consumption at cold temperatures while still recovering the same amount of gold; and

leach kinetics appear the same whether at cold or warm temperatures.

The main effect of the above benefits would be to reduce the time lost leaching during the coldest 100-day winter period when leaching/stacking operations are suspended. The effect of this on Eagle is explored in our upside valuation scenario on page 10 of this report.

Victoria Gold | 24 S

eptember 2014

8

Exhibit 7: Comparison of similar cold temperature heap leach projects Project Victoria Gold Eagle Project FS Kinross Gold Fort Knox Mine Kinross Gold Maricunga Mine Atacama Pacific’s Cerro Maricunga

Project Status Planned In production In production Planned Location Yukon, Canada Alaska, US Atacama Desert, High Andes, Chile Atacama Desert, High Andes, Chile Conditions ''Continental'' type climate

Average annual temperature of -3°C Average winter low temperature ranges from

-18°C to -30.9°C

Sub-arctic climate Average annual temperature of -2.9°C Average winter low temperature ranges from

-26°C to -32.9°C

Desert environment at high altitude (ie approximately 4,500m)

Temperatures can drop to -29°C

Desert environment at high altitude (ie approximately 4,500m)

Temperatures can drop to -30°C

Start-up year 2017 (current intention) 1996 2005 Unknown Reserves 2.3Moz @ 0.78g/t (FS) 2.9Moz @ 0.49 g/t 2.2Moz @ 0.75g/t N/A Resources (excl P&P reserves) 6.3Moz @ 0.65g/t 1.3Moz @ c 0.50g/t 3.0Moz @ c 0.60g/t 5.9Moz Throughput 10.3Mtpa leached 14.7Mtpa leached 14.6Mtpa leached 29.2Mtpa leached Crush size 6.3mm ROM 10.5mm 19mm LOM strip ratio (W:O) 1.45:1 1.60:1 0.8:1 1.61:1 Recovery 73% (FS) 65% leach 68% leach 79.5% (PEA) Annual production 195,000 Au leach 91,000 Au leach 255,000 Au leach 309,000 Au leach Cash costs US$614/oz (estimated average over LOM) US$569/oz (FY13) US$610/oz (for FY08, FY09, FY10) US$652/oz (estimated average over

LOM) Comment Geology similar to Fort Knox

Grades higher than Fort Knox and Maricunga

Recovery higher than Fort Knox and Maricunga given head grade and crush size

Currently commissioning second leach pad with NO change in design

Recoveries have been higher than initially estimated

ROM rock size to leach pads – still profitable despite the lower grades and recoveries resulting from no secondary crushing

Heap leach, which produced more than 920,000oz Au from 1996 to 2001

Re-commissioned the mine in 2005

Increased porosity of ore aids gold recovery at a relatively coarse grind size

Project estimated to PEA level of accuracy only. No ore reserves have been calculated and only mineral resources have been used in the economic analysis. Capex values will be estimated and not based on quoted values

Initial capex US$399m US$373m (in 1995 incl. approx. US$28m in capitalised interest)

N/A US$515m

Gold price used in base case US$1,325/oz N/A N/A US$1,450/oz Payback (FCF at X% discount) 3.0 years (at 5% discount rate) N/A N/A 4.0 years (at 10% discount rate) Capital intensity (US$/oz) 2,078 4,099 N/A 1,667 Source: Victoria Gold, Edison Investment Research


Mining – conventional truck and shovel operation Victoria Gold’s consultants TetraTech have designed a detailed three-phase heap leach stacking plan based on an average loading rate of 41,300t/d for 250 days a year over the life-of-mine. Over the life-of-mine, 39 leach ‘cells’ will be stacked and used to recover the gold by pouring on cyanide, recovering the pregnant leach solution and delivering this to a conventional carbon-in-column (CIC) circuit. This CIC plant will recover the gold from solution and deliver it to an elution-electro winning circuit where the gold will be deposited onto cathodes, which will subsequently be smelted and the gold poured into doré bars. The following exhibit details the 5 April 2012 FS Eagle mining schedule:

Exhibit 8: Eagle Gold Project 5 April 2012 FS mining schedule

Source: 5 April 2012 FS on the Eagle Gold Project

Valuations and assumptions

The following assumptions have been used in our base case valuation and are predominantly based on Victoria Gold’s 5 April 2012 FS on the Eagle Gold Project.

Exhibit 9: Assumptions used in base case valuation Parameter Unit Value Production during ramp up year (2018 under our assumptions) kozpa 28,000 Average annual production (2019-26) kozpa 195,000 Average gold grade of leachable material g/t 0.78 Metallurgical recovery – Au % 72.9 Stripping ratio (average waste:ore) ratio 1.45:1 Mining cost C$/t 4.77 Processing costs (ore leached) C$/t 6.33 General and administrative costs (ore leached) C$/t 1.11 Total initial capex C$m 430.0 Total LOM sustaining capex C$m 132.9 Commencement of mining year 2017 First project revenues year 2018 Federal and provincial tax rate assumption % 30 Debtor days days 30 Creditor days days 30 US$/C$ exchange rate US$ 0.93 Source: Eagle Gold Project 5 April 2012 FS

Our revised gold price deck is shown in Exhibit 10 below. These numbers are based on the forecast given in our November 2013 sector report Gold – US$2,070 by 2020. However, they have been adjusted for the for the US monetary base as reported for 2013 and 2014 year to date.

Exhibit 10: Edison’s long-term gold and silver prices to CY26 Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Real forecast gold price (US$/oz) 1,457 1,381 1,334 1,402 1,485 1,474 1,420 1,420 1,411 1,407 1,433 1,466 1,481 Source: Edison Investment Research

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Diluted ore grade (g/t Au)

Mater

ial m

ined (

t)

Pre-production material Ore mined (t) Waste Diluted ore grade (g/t)

http://www.edisoninvestmentresearch.com/research/sector/research/#a-10792


Base case valuation Assuming Victoria Gold successfully executes the Eagle Gold Project into an operational gold mine as per its 5 April 2012 feasibility study, and pays out all its surplus cash in the form of theoretical dividends, we estimate the theoretical dividend stream to investors from 2021 to 2027 will be worth C$0.63 in current money terms (undiluted and using a discount rate of 10% to reflect general equity risk). This then rises to C$0.97 in FY20, the first full year of production, as shown in the following graph:

Exhibit 11: Edison’s estimate of theoretical EPS, DPS, dividend discount flow and DCF

Source: Edison Investment Research

Upside case – 71% uplift to base case valuation We provide an additional upside scenario whereby the Olive exploration project results in the eventual definition of code-compliant ore reserves of a higher average gold grade than that currently estimated at Eagle (0.78g/t). This scenario assumes that successful metallurgical test works are completed to understand the compatibility of Olive ores with the Eagle process plant.

For the purposes of this scenario we assume that the gold grade of 0.94g/t already used in the 5 April 2012 FS for the first three years of production is maintained until the sixth year of production. We believe this is consistent with recent drill results and a lower gold recovery factor of about 65% (understood via our discussions with management). We also assume that the currently envisaged base case throughput rate to the crushing plant of 29,500tpd is increased to 41,300tpd, which is its maximum nameplate crushing capacity. This allows for greater delivery of ore to the leach pads during the 250-day leaching period. Although management states it believes it could shorten the 100-day period where no ore stacking takes place (due to an improved understanding of gold recoveries at lower temperatures), we maintain the 250-day leaching period until plans detailing how Eagle can be optimised are released.

The scenario above results in an upside case valuation of C$1.08 per share, representing a 71% uplift to our base valuation.

This upside case takes account of proportional uplift in mining, processing and G&A costs, and a notional 30% uplift in capex to reflect the additional haulage, ore stacking capacity and reagents required.

Fully diluted valuation – still 54% upside to share price For Victoria Gold to pursue a conventional 50/50 debt/equity financing strategy to raise the C$430m required to develop Eagle, at its current share price of around C$0.15, would require raising C$193m in equity via the issue of 1.3bn new shares (equating to dilution of 379%). This would leave a residual funding requirement of C$244m to complete the project. This leads to a fully diluted

-1.00-0.500.000.501.001.502.002.50

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

C$

Net cash flows per share DPS DCF DDF


base case valuation of C$0.26, representing 87% upside to its current share price of around C$0.15.

Victoria Gold states that it would put Eagle’s development on hold rather than raise equity at its current share price of C$0.15, and instead envisages raising equity at a price of C$0.30 or more. If it cannot raise equity at such a price it would look to alternatively fund the project, potentially obtaining financing on a revenue streaming basis (eg by reaching an agreement with companies such as Silver Wheaton or Royal Gold). Therefore, on the basis that Victoria Gold would not pursue development of the Eagle project with a share price below C$0.30, we use this share price to indicate the company’s value on a diluted basis, which is C$0.39 per share. Raising the equity component at a C$0.30 share price would halve dilution (cf raising equity at C$0.15 a share) from 379% to 190%.

The following exhibit is a sensitivity analysis of what our valuation, using the same method as above, would be at different share prices.

Exhibit 12: Sensitivity of our valuation to different share prices used to raise equity Share price (C$) 0.30 0.40 0.50 0.60 0.70 0.80 NPV (C$) 0.39 0.46 0.51 0.55 0.59 0.62 Source: Edison Investment Research

Factoring in the effects of our ‘upside’ valuation the above methodology (ie using C$0.30 share price to raise equity) yields a value of C$0.50 per share (diluted), representing 233% upside to its current 15c share price and would increase (due to our assumption of a 30% increase in capex) dilution from 190% to 258%.

Sensitivities

Further to the usual geological, mining, financing and development risks associated with mining projects worldwide, we highlight the following sensitivities as specific to Victoria Gold and its assets, specifically the Eagle and Olive gold projects.

Reserves unaffected by resource gold price We note that the Wardrop Engineering’s NI 43-101 code compliant resource estimate for Eagle uses a US$1,500/oz gold price and a 0.2g/t gold cut-off grade to define its optimised pit-shells. However, the estimated ore reserve, which sits within the outline of the optimised pit shell, used a US$1,200/oz gold price. Therefore, the higher-than-spot price used to estimate the mineral resource should not affect the ore reserve on which Eagle’s economic analysis was based.

Capital cost estimates – potential to increase from 2012 FS Victoria Gold states in its FY14 MD&A that it is “of the view that there has been an industry-wide escalation in the estimated costs of many mining projects”. As discussed below, we believe that the date of the FS (2012) and the quoted capex figures contained therein may indeed not accurately reflect the current prices of equipment and mining services required to develop a mine. We therefore use a total initial capex figure of C$430m, an increase of 7.6% over the 5 April 2012 FS, based on our discussions with management. While Victoria Gold intends not to go above this figure, it is not definitive, and we expect further refinements to be made.

Cold temperature impact reduced through design As stated, Eagle is a cold temperature heap leach project. We consider the engineering design for Eagle has adequately incorporated into its design the effects of the cold temperatures native to Eagle’s location (see pages 7 and 8 for further details).


First Nations – cooperation via Cooperation Benefits Agreement Victoria Gold has developed procurement and recruitment policies to reflect its commitment to the First Nation of Na-Cho Nyak Dun (NND), communities and local business. Further, the company has developed human resources and business registries and created the position of an NND liaison to help communicate project developments and benefits, including job opportunities, to its First Nation partners. These registries will also provide Victoria Gold with information to help plan local training programmes, identify local skill capacity and identify NND businesses.

Further to above qualitative sensitivities, the following quantitative sensitivity analysis has been performed.

Exhibit 13: Sensitivity to gold price held flat over LOM Gold price (US$) 1,100 1,200 1,300 1,400 1,500 1,600 NPV per share (C$) 0.08 0.24 0.40 0.56 0.72 0.88 Source: Edison Investment Research

Exhibit 14: Sensitivity to discount rate Discount rate (%) 0 5 10 15 20 31 NPV per share (C$) 1.55 0.97 0.63 0.42 0.29 0.15 Source: Edison Investment Research

Exhibit 15: Sensitivity to percentage increases in capex % change in capex -10 0 10 20 30 40 NPV (C$) 0.69 0.63 0.56 0.50 0.43 0.37 Source: Edison Investment Research

Financials

On 18 June 2014 Victoria Gold announced it had received the third and final payment of C$10m in connection the sale of its Cove McCoy property to Premier Gold Mines Ltd. The total sale value for Cove was C$28m and was agreed on 14 June 2012 paid over 24 months plus a further C$20m in ‘contingent production payments’. Upon closing, Victoria received C$4m cash and C$4m in Premier common shares. On 14 June 2013, Victoria received the second payment of C$5m cash and C$5m in Premier common shares. On 16 June 2014 Victoria received the third payment of C$5m in cash and C$5m in Premier common shares.

We assume that Victoria Gold spends C$5m on exploration activities at its projects on the Dublin Gulch property in 2015. The 5 April 2012 Eagle Gold Project FS states total capex of C$399.7m. Our capex estimate assumes a 7.6% escalation to C$430m in the cost of development of Eagle. This is based on our discussions with and the statement by management in its FY14 MD&A that the capex required for Eagle will need to be increased from the FS values given in 2012. Our capex schedule to develop Eagle requires C$211m to be spent in FY16e with C$219m in FY17e.

A financing structure for Eagle has not yet been announced. However, if Victoria Gold was to pursue a conventional 50/50 debt/equity financing structure we estimate that it would need to raise, at a share price of C$0.30, C$93m via the issue of 1.3bn shares in FY16e. This would leave a remaining funding requirement of C$242m to complete development of the project. This equates to a leverage ratio (debt/debt+equity) of 50%. We estimate cash burn over FY15 to be c C$0.8m a month. Including the C$5m in cash received in connection with Cove property sale in June 2014, we estimate that Victoria currently has cash of c C$19m. Therefore, we estimate that Victoria Gold’s cash could sustain its operations until the end of FY16.


Exhibit 16: Financial summary C$000s 2013 2014 2015e 2016e 2017e 2018e 2019e 2020e Year-end 28 February IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 0 0 0 0 0 41,118 340,235 388,010 Cost of Sales 15,796 (2,779) (4,171) (4,171) (4,171) (20,243) (125,815) (136,921) Gross Profit 15,796 (2,779) (4,171) (4,171) (4,171) 20,874 214,419 251,089 EBITDA (3,391) (2,491) (4,171) (4,171) (4,171) 20,874 214,419 251,089 Operating Profit (before amort. and except.) (3,391) (2,491) (4,171) (20,402) (38,651) (13,606) 179,939 216,609 Intangible Amortisation 0 0 0 0 0 0 0 0 Exceptionals 18,308 (364) 0 0 0 0 0 0 Other (1,475) (1,438) 0 0 0 0 0 0 Operating Profit 13,442 (4,293) (4,171) (20,402) (38,651) (13,606) 179,939 216,609 Net Interest 1,046 940 284 432 (17,434) (39,063) (40,712) (30,795) Profit Before Tax (norm) (2,345) (1,550) (3,887) (19,970) (56,085) (52,669) 139,227 185,813 Profit Before Tax (FRS 3) 14,488 (3,353) (3,887) (19,970) (56,085) (52,669) 139,227 185,813 Tax (4,843) 30 0 0 0 0 (41,768) (55,744) Profit After Tax (norm) (8,663) (2,959) (3,887) (19,970) (56,085) (52,669) 97,459 130,069 Profit After Tax (FRS 3) 9,645 (3,323) (3,887) (19,970) (56,085) (52,669) 97,459 130,069 Average Number of Shares Outstanding (m) 339.7 340.1 340.1 340.1 340.1 340.1 340.1 340.1 EPS - normalised (c) (2.6) (0.9) (1.1) (5.9) (16.5) (15.5) 28.7 38.2 EPS - normalised and fully diluted (c) (1.2) (0.4) (0.6) (2.8) (7.9) (7.5) 13.8 18.4 EPS - (IFRS) (c) 2.8 (1.0) (1.1) (5.9) (16.5) (15.5) 28.7 38.2 Dividend per share (c) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Gross Margin (%) NA NA NA NA NA 50.8 63.0 64.7 EBITDA Margin (%) NA NA NA NA NA 50.8 63.0 64.7 Operating Margin (before GW and except.) (%) NA NA NA NA NA NA 52.9 55.8 BALANCE SHEET Fixed Assets 110,076 112,949 112,949 307,727 492,236 457,756 423,275 388,794 Intangible Assets 9,163 0 0 0 0 0 0 0 Tangible Assets 100,853 112,949 112,949 307,727 492,236 457,756 423,275 388,794 Investments 60 0 0 0 0 0 0 0 Current Assets 33,621 25,498 22,701 1,115 1,115 1,115 28,279 32,206 Stocks 0 0 0 0 0 0 0 0 Debtors 14,265 11,008 800 800 800 800 27,964 31,891 Cash 12,489 14,175 21,586 0 0 0 0 0 Other 6,867 315 315 315 315 315 315 315 Current Liabilities (6,087) (3,908) (4,997) (198,161) (438,755) (456,944) (352,169) (191,545) Creditors (6,087) (3,908) (4,997) (4,453) (4,725) (4,589) (9,998) (10,911) Short term borrowings 0 0 0 (193,708) (434,030) (452,355) (342,170) (180,634) Long Term Liabilities (4,616) (3,784) (3,784) (3,784) (3,784) (3,784) (3,784) (3,784) Long term borrowings 0 0 0 0 0 0 0 0 Other long term liabilities (4,616) (3,784) (3,784) (3,784) (3,784) (3,784) (3,784) (3,784) Net Assets 132,994 130,755 126,868 106,897 50,812 (1,857) 95,602 225,671 CASH FLOW Operating Cash Flow (8,946) (3,986) 7,127 (4,715) (3,898) 20,738 150,896 192,331 Net Interest 1,046 940 284 432 (17,434) (39,063) (40,712) (30,795) Tax 4,097 (553) 0 0 0 0 0 0 Capex (3,587) 4,428 0 (211,010) (218,990) 0 0 0 Acquisitions/disposals 14 37 0 0 0 0 0 0 Financing 107 821 0 0 0 0 0 0 Dividends 0 0 0 0 0 0 0 0 Net Cash Flow (7,269) 1,687 7,411 (215,294) (240,322) (18,325) 110,184 161,536 Opening net debt/(cash) (19,664) (12,489) (14,175) (21,586) 193,708 434,030 452,355 342,170 HP finance leases initiated 0 0 0 0 0 0 0 0 Other 94 0 0 0 0 (0) (0) 0 Closing net debt/(cash) (12,489) (14,175) (21,586) 193,708 434,030 452,355 342,170 180,634 Source: Company accounts, Edison Investment Research


Contact details Revenue by geography 303 – 80 Richmond Street West Toronto, Ontario Canada, M5H 2A4 Tel: +1 416-866-8800 Fax: +1 416-866-8801 www.vitgoldcorp.com

N/A

CAGR metrics Profitability metrics Balance sheet metrics Sensitivities evaluation EPS 2012-16e N/A EPS 2014-16e N/A EBITDA 2012-16e N/A EBITDA 2014-16e N/A Sales 2012-16e N/A Sales 2014-16e N/A

ROCE 15e N/A Avg ROCE 2012-16e N/A ROE 15e N/A Gross margin 15e N/A Operating margin 15e N/A Gr mgn / Op mgn 15e N/A

Gearing 15e N/A Interest cover 15e N/A CA/CL 15e N/A Stock days 15e N/A Debtor days 15e N/A Creditor days 15e N/A

Litigation/regulatory Pensions Currency Stock overhang Interest rates Oil/commodity prices

Management team President, Director & CEO: John McConnell CFO: Marty Rendall Mr McConnell is a professional mining engineer with extensive development and operating experience. Previous positions have been with Placer Development Ltd, Cominco Ltd, Strathcona Mineral Services, Breakwater Resources and De Beers Canada, and he was recently president & CEO of Western Keltic Resources until its takeover by Sherwood Copper. Mr McConnell is also a director of Silver Eagle Mines.

Mr Rendall has experience from exploration through to production in a range of commodities including base metals, precious metals and diamonds. His recent positions have been with De Beers Canada and Breakwater Resources. Mr Rendall is a CFA and has a bachelor of business administration.

Executive Vice President: Mark Ayranto Chairman: T Sean Harvey Mr Ayranto has over 15 years of project development experience and has been working in the Yukon for the past six years. He is the Past President of the Yukon Chamber of Mines and is also a member of the Yukon Minerals Advisory Board which advises the Minister of Energy, Mines and Resources on mineral development matters in the Yukon. Mr Ayranto holds a Bachelor of Science and a Masters of Business Administration.

Mr Harvey spent 10 years in investment and merchant banking primarily focused on the mining sector. More recently he has held senior executive and board positions with a number of mining companies, including TVX Gold Inc., Atlantico Gold Inc. and Orvana Minerals Corp. He also serves as a director of Perseus Mining Ltd., Serabi gold Plc.aAnd Sarama Resources Ltd. Sean has an MBA in finance and an LLB specialising in tax and corporate law.

Principal shareholders (%) Kinross Gold Corp 23.70 Sun Valley Gold 12.78 MacKenzie Financial Corporation 1.51 Sprott Asset Management 0.65 Precious Capital 0.62 TD Asset Management 0.54 McConnell, John C 0.53

Companies named in this report Kinross Gold, Stratagold, Premier Gold Mines, Atacama Pacific, Silver Wheaton, Royal Gold

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com DISCLAIMER Copyright 2014 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Victoria Gold and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2014. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960 Schumannstrasse 34b 60325 Frankfurt Germany

London +44 (0)20 3077 5700 280 High Holborn London, WC1V 7EE United Kingdom

New York +1 646 653 7026 245 Park Avenue, 39th Floor 10167, New York US

Sydney +61 (0)2 9258 1161 Level 25, Aurora Place 88 Phillip St, Sydney NSW 2000, Australia

Wellington +64 (0)48 948 555 Level 15, 171 Featherston St Wellington 6011 New Zealand

http://www.vitgoldcorp.com/

http://www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584

http://www.edisongroup.com/

victoria gold initiation of coverage

Documents