07 June 2017 Ticker: WAF AU/CN (Net) cash: A$16m Market cap: C$130m Price: C$0.27/sh West African Resource: site visit We see the West African as a new story since April of this year with the discovery that the 246koz @ 34g/t already defined at M1 to 190m has now been hit in drilling to >350m depth, at higher grades, and remains open with visible gold ~350m below surface. Given the structural controls provide continuity to depth, and 1,400oz per vm endowment, this pro-rates to 420koz-1.4Moz at 350-1,050m depth. We think the first 420koz could be in the bag given the recent drill success. This materially improves the economics of the project even ~180kt pa of underground ore (given the short strike length) would produce 120koz conservatively assuming 32g/t in-situ dilutes to 22g/t ROM. Better still, while the open pit doesn t have the same margins, it reduces unit costs and increases production markedly. Before any value is given to the M5 underground (larger tonnage but <10g/t), we estimate an M1 South underground could drive total production of ~200koz pa at ~US$450/oz AISC when underground and pit operated simultaneously, including ~125koz pa at AISC of ~US$350/oz from the underground ore only. The next catalyst comes with a 3Q resource upgrade, which should not only add ounces at M1 South, but could drive the M5 pit deeper and larger given the recent drilling success. Quantifying the upside Very simply, the ultimate value depends on the underground ounces and grade. We see 30g/t in-situ as a base case given (i) this is the grade in the existing 43-101 resource, and (ii) deeper drilling has intersected materially higher grade. On ounces, we expect ~420koz from M1 South existing drilling (250koz compliant resource already defined to ~190m, shoots now drilled to ~350m), or ~560koz by 3Q if drill depth can be extended to 450m. In the medium term, if drilling proves ore shoots to 750-1,050m depth, the 1,400oz per vertical meter would pro-rate this to 1.1-1.5Moz, respectively. Using PEA economics with underground unit costs ~15% higher than close peer Roxgold, we estimate the NPV 8% of a combined pit and underground at US$314m at spot gold prices, based on 560koz of M1 South ore (Table 1). The underground drives a ~50% IRR and under two-year payback even assuming underground ore doesn t commence until year two. The NPV lifts to >US$500m if 1.4Moz could be achieved to ~1000m depth (Table 2). NPV, M1: 650koz 22gt (US$m) US$1050 US$1150 US$1281 US$1350 US$1450 10% discount 174 219 282 311 359 8% discount 197 246 314 346 398 6% discount 223 276 350 385 441 Ungeared project IRR: 37% 44% 52% 56% 62% Table 1 Project NPV (US$m) sensitivities to gold price and discount using 650koz and 22g/t UG ore
Site visit NPV8 1200 vs M1 gold (US$m) 246koz 420koz 560koz 980koz 1400koz ROM grade: 12g/t 162 214 248 324 356 ROM grade: 22g/t 186 266 314 446 549 ROM grade: 32g/t 201 288 349 511 647 Ungeared project IRR at 22g/t: 41% 51% 53% 55% 55% Table 2 Project NPV (US$m) sensitivities to M1 UG ounces and diluted ROM grade Background: West African Resources released an open-pit only FS in April of this year, forecasting 93koz LOM average production over 9 years producing 810koz at US$759/oz AISC from a 2Mtpa open pit operation with capex of US$124m. However, the company subsequently extended the previously defined core of extreme high grade (>30g/t) at the M1 South deposit, and has thus refocussed on drilling this year and next to defining an underground resource base. This year the residual 12,000m of a 30,000m programmed is targeted to complete by 3Q17 wet season, and will be used in a resource update at that time. The first five deep holes at M1 South have surprised on the upside with multiple >100g/t hits showing good continuity to depth we think this will lead the company to continue to drill that resource at depth in 2H17 ahead of a deeper resource in mid-2018 and associated underground feasibility. Structural setting: West African s project comprises two discrete types of gold mineralisation; (i) the main NNE-SSW trending trans-crustal shear hosting the low-grade large-tonnage M5 deposit, and (ii) a bend to NNW-SSE around a granitoid to create smaller dilation zones in the higher-grade M1 South deposit (Figure 1). Regionally, gold mineralisation is coincident with N-S compression, which results in the main M5 structure experiencing sinistral movement with its NE orientation putting it into a compressional regime. However, the M1 structure, which has splayed off M5 as it wraps around a granitoid to the north, is NW/SE so saw dextral movement. Although this implies compression on M1 as well, a series of fault steps can be seen in plan, in our view each of these resulted in a tightly focussed dilation zone in 3D, ie shoots.
Source: West African Minerals Figure 1 Plan map of resource area, M1 and M5
Lithological control on gold: Geologically, M1 South appears entirely structurally controlled, ie some minor porphryies do occur in the sequence, but aren t controlling gold. While fold hinges aren t obvious in the core, tight isoclinal folding could be controlling the precise ore location. At M5, the main shear has been intruded by a series of small porhyries creating rigid bodies and far more typical pressure shadow mineralisation each time the bodies step right and create a dilation zone. However, the dilation zones of M1 aren t present to focus strike-extensive fluids into small zones, hence the lower grade at M5. That said, where the M1 structure intersects the M5 structure in the southern end of the ore body, it may have caused an offset and dilation zone, and this is precisely where the M5 underground potential comes in (recent hits of 27m @ 12.6g/t). There are two critical implications to the above structural and lithological controls on M1 gold endowment potential firstly this is not a tension gash quartz vein (eg Roxgold, Bonterra), but a structurally controlled fluid-focus zone, meaning there is potential for much higher fluid flow, and thus gold endowment, as exemplified by the hard, silicified wall rock indicative of large fluid flow. Secondly, given this is a mesothermal (mid-crust) orogenic system (deep seated faults), and the steeply dipping stratigraphy, the structures should have good vertical continuity at M1. Also in a third dimension the M5 shear sees reverse movement which has created small drag folds this would appear to control higher grade shoots as evidenced by 15 south dip to some high-grade zones.
Figure 2 High grade ore at (A) M1 South hole DD109, (B) showing visible gold in small drag fold, and (C) at M5 deeps in hole DD102 M1 South high-grade potential before recent drilling: The existing M1 South pit has a pit inventory of 212koz @ 7.96g/t, but this is (i) only the pit constrained ounces, and (ii) as a reserve, is reduced by ore loses and 20% dilution. Also, these ounces comprise high grade domains modelled with ordinary kriging
(OK), and low-grade skins modelled with multiple indicator kriging (MIK). To look at underground ounce potential one must go back to the drawing board and start with the in-situ resource in the DFS ore estimate for the high-grade OK domain: 246koz @ 33.7g/t. This shows that the pit-constrained indicated and inferred 298koz @ 7.5g/t picked up a large tonnage of lower grade material that wouldn t be mined underground. Also, this gives a vertical endowment of 1,400koz/vm (similar to Roxgold s Yaramoko project in Burkina), enabling a pro-rata estimation of the depth potential. M1 South high-grade potential after recent drilling: Quantifying this, since the above 246koz @ 34g/t was calculated to ~190m vertical depth (100mRL), West African released 1.5m @ 250g/t and 1m @ 149g/t (bulks out to 29.5m @ 20.7g/t Au at 275m below surface), 2.5m @ 57.6g/t (bulks to 15m @ 12.4g/t at ~350m below surface), 0.5m @ 151g/t Au (bulks out to 4m @ 54g/t Au from ~260m below surface), and 3m @ 105g/t Au (bulks to 9.5m @ 43g/t from ~250m below surface). There are also holes outstanding such as DD111 with visible gold at ~350m below surface (Figure 3). New equipment has just arrived in Burkina Faso to allow wedging of these drill holes for expected results down to ~400-450m depth to be included in the 3Q resource update. On this basis, the ~30g/t resource envelope looks to be sustained at depth, with grades well above this in places. Where drilled, the M1 South shoots have a vertical endowment of 1,400oz per vertical meter, meaning 246koz @ 33.7g/t to ~190m pro-rates to: (i) (ii) (iii) (iv) 420koz to 350m: depth of current drilling 560koz to 450m: potential depth of drilling pre 3Q resource 980Koz to 750m: deep potential 1.40Moz to 1050m: Current Roxgold LOM plan Figure 3 M1 South long and cross sections, purple = 500-1,000g/t*m, ie 10m @ 50-100g/t Source: West African Minerals
Mining scenario: The 2Q17 DFS sees 894koz @ 1.66g/t Au and 5:1 strip. In modelling the move to underground mining, we leave this untouched except halving the depth of the M1 South pit from 170m to 85m for 785koz @ 1.5g/t but a calculated 1.1:1 strip ratio. Assuming a 20m crown pillar is left in-situ, this leaves 120koz of M1 in a pit, with a residual total pittable resource of 786koz @ 1.5g/t but with 1.14:1 strip. Using the vertical endowment pro-rated anywhere from 350-1,050m depth above gives 420-1.4Moz, which we model in a relatively small 500tpd (180ktpa) underground operation (less ~120koz extracted to 85m depth in an open pit). Economics: A good template is provided by the 274ktpa Roxgold operating in Burkina Faso. We have modelled US$25m initial decline development as compared to US$31m for RoxGold (savings from in-pit decline plus smaller operations), and US$31/t sustaining underground development (~US$6m pa, mainly for decline development with similar vertical endowment to Roxgold). Mining costs were lifted from US$94/t at Rox to US$110/t to reflect the small scale and harder rock, although processing costs were modelled at US$17/t vs. US$27/t at Rox given the West African operation is much larger at 2Mtpa. Adding G&A of US$4.92/t per the PEA drives LOM average C1 costs of US$485/oz, AISC of US$534/oz, and C3 costs of US$694/oz. Based on spot US$1,281/oz gold an 8% discount and M1 underground inventory of 560koz, this drives a project NPV (net of minorities) of US$314m discounted to build start, lifting to US$549m for a 1.4Moz underground endowment (Table 1, Table 2). Why we like West African 1. Existing compliant 246koz @ 33g/t in high grade M1 South Shoot 2. Depth extension at M1 South from drilling support 400-500koz at similar grade 3. Potential to grow to >1Moz at high grade if shoots continue to depth 4. Open pit inventories of ~800koz, plus M1 South UG, could provide 200koz pa at <US$500/AISC Catalysts June 2017: Assay results from ~350m deep hole DD111 intersecting visible gold at M1 South 3Q17: Completion of 30,000m drill programme 2H17: Updated resource statement Brock Salier Partner, Sprott Capital Partners T: +44.207.659.0841 M: +44.7400.666.913 bsalier@sprottcapital.com Sprott Capital Partners is a division of Sprott Private Wealth LP. ( SPW ). SPW is a member of the Investment Industry Regulatory Organization of Canada ( IIROC ) and a member firm of the Canadian Investor Protection Fund ( CIPF ) The general partner of SPW is Sprott Private Wealth GP Inc. Sprott Private Wealth GP Inc. is an indirectly wholly-owned subsidiary of Sprott Inc., which is a public company listed on the Toronto Stock Exchange under the symbol SII. Sprott Asset Management LP ( SAM ) a registrant is the investment manager to the Sprott Funds and is related to SPW. Disclaimer: The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of SPW's Research department.the information contained in this report is drawn from sources believed to be reliable but the accuracy or completeness of the information is not guaranteed, nor in providing it does Sprott Private Wealth LP. and/or affiliated companies or persons ( SPW ) assume any responsibility or liability whatsoever. This report is not to be construed as an offer to sell or a solicitation of an offer to buy any securities. SPW may participate in an underwriting of, have a position in, or make a market in, the securities mentioned herein, including options, futures or other derivative instruments thereon, and may, as principal or agent, buy and sell such products. Disclaimer: The information and or materials contained in this electronic transmission is derived from sources believed to be reliable when transmitted, but the accuracy or completeness of the information is not electronically secure or guaranteed, nor in providing it does Sprott Private Wealth LP. and its subsidiary companies ( SPW ) assume any responsibility or liability whatsoever. This includes but is not limited to the transmission of securities trading order details to or from SPW. SPW cannot guarantee execution of trading orders sent to or from SPW electronically as the timely receipt or integrity cannot be assured. Please contact your advisor directly to place your order. The opinions and/or recommendations contained herein may not represent those as expressed by SPW as a firm or entity. Information and/or materials contained herein is for informational purposes only, and does not constitute an offer or solicitation by anyone in any jurisdiction in which an offer or solicitation cannot legally be made, or to any person to whom it is unlawful to make a solicitation. WARNING: From time to time, our spam filter may delay delivery of legitimate e-mail. If your message is time-sensitive, please ensure that you request that we acknowledge receipt.
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