The value of exploration in mining and the current state of exploration in South Africa

The value of exploration in mining and the
current state of exploration in South Africa
14 November 2018

www.sibanyestillwater.com
• Exploration geology is about seeking and finding the similarities and distinctive
features, understanding these similarities which define the mode of occurrence, and
using that understanding to source new mineral opportunities
• Exploration properties form a continuum from grass roots to those with favourable
geology, geochemical and/or geophysical anomalies, mineralization, showings,
and finally to those with defined mineral deposits
• Exploration is the mining sectors equivalent to R&D
– To maintain our resource base we need to replace what we mine through
discovery and development
• Within the South African context, junior mining companies have been seen as too
risky an investment by private equity firms, family offices, financial institutions and
wealthy individuals and therefore the sector has suffered considerably
• The lack of development of new and existing projects within the
mining sector is anticipated to create a future supply shortfall
• A demand - supply gap will materialise in various commodities
over the next decade due to lack of new project investment
1
Introduction
BFS
PFS
Scoping study
Drilling and definition
Target confirmation
Target identification

• General strengthening of exploration activity in the current global exploration space
– Global spending rose to approximately USD8.4 Bn in 2017 which represents the first
annual increase in exploration spend after four years of declining investment
– Trends correlate very strongly with spot metal prices as this provides equity market
support for explorers and the an opportunity for companies to resume drilling on their
most promising projects
• The main focus of the exploration spend in 2017 was on gold and base metals
• With the positive trend in metals prices these trends are expected to continue going
forward
2
Global Exploration Trends – Exploration back in play
Source: S&P Global Market Intelligence

3
Global Exploration Trends – Who is filling the pipeline
• Recent exploration efforts have been increasingly focused on or near operating mines
– A long-term swing away from grassroots exploration has been exacerbated by a combination of
scarce funding for junior explorers and spending cuts by the majors
– Improved market sentiment over the past 18 months seems to have slowed the decline in
grassroots exploration
• Although the mining industry widely accepts that exploration is important for the sector’s future, the
major miners continue to allocate only a small proportion of their revenues to exploration efforts
– From 2012 to 2016, these producers slashed exploration spending at a faster pace than their
revenues declined, causing a fall in the group’s ratio of exploration spend to revenue, from 3.2% in
2012 to a 12-year low of 1.8% in 2016
• Junior companies now account for a much larger percentage of discoveries made
Source: MinEx Consulting, March 2017 Source: S&P Global Market Intelligence
Number of discoveries made by company type

4
Global Exploration Trends - Number of discoveries by region
• Exploration and resource development is a highly complex business with a high failure rate
• The traditional top three destinations for exploration spending, Canada, Australia and the
U.S., led again in 2017
• With allocations totalling US$5.55 billion, the top 10 countries accounted for 70% of the
US$7.95 billion global surveyed
• Africa attracted 14% of the global budget, focused mainly on the Democratic Republic of
Congo, Burkina Faso, Tanzania and South Africa
Source: S&P Global Market Intelligence Source: MinEx Consulting, March 2017

5
Global Exploration Trends – Commodity focus
• Gold still dominates exploration drilling
• Exploration activity by the America’s and Australia with West Africa also
featuring quite strongly
Source: S&P Global Market Intelligence Source: MinEx Consulting, March 2017

Global Exploration Trends - Depth of cover of discoveries
Source: MinEx Consulting, March 2017
6

• SA is blessed with some of the worlds largest deposits including Cr, Mg, Au, PGM’s,V, vermiculite, coal
and diamond deposits
• SA still has an abundance of untapped resources as well as the know how to exploit it and the
infrastructure to access it
• Potential is huge
– Mining investment could almost double in the next four years if the country was to return to the top
25% of the most attractive mining investment destinations worldwide
– Resulting in 200 000 jobs being created in the economy with 50 000 direct jobs created in mining
alone
– Substantially increasing output, exports, procurement, direct / indirect taxes, and royalties paid to
the fiscus
– Mining industry would be in a better position to increase its transformation and contribution
towards infrastructure development and social projects in mining-affected communities
SA Exploration
Platinum
Vanadium
Chrome
Coal
Gold
Iron Ore
Manganese
Base Metals
Diamonds
Source: usgs.gov
7

• RSA Inc has not provided an enabling environment for exploration activity
• Fraser Institute’s mining investment attractiveness rankings in 2017 have RSA in 48th position (out of 91)
– 20th for our mineral potential (assuming best policy and regulatory practice) and dragged lower by
our mineral policies at 81st
– Clearly there is a mismatch between the mineral potential and the policy scorecard
• The last world-class exploration discovery was Venetia diamond mine in 1980; existing and ageing
mineral deposits were discovered by farmers, prospectors, and entrepreneurs in the late 1800’s and early
1900’s
• Lack of exploration means South African mining is in decline as new orebodies are not being
found/developed
– South Africa still offers prospectivity – a $2.5 trn treasure trove
• Juniors = transformation opportunity as this is where wealth is created and built, based on
entrepreneurship whilst creating jobs
8
SA Exploration

9
Stages of Exploration
• Confidence improves as new
information is analysed and
assumptions are revisited
• As confidence increases, so do
costs and timeframes
• Accurate and reliable resource
models are critical inputs to a
sound economic assessment
• Technology plays a key role
• Expert operators are able to
compress timeframes by
synchronising workstreams
without compromising on
quality
• Deep knowledge, expertise are
key differentiators
Source: Botswana Diamonds Plc, 2018

Mining Sector Pipeline
• The mining industry is dependent on a functioning pipeline of projects
– The pipeline starts at early stage and discovery projects through exploration to resource definition, feasibility
study and eventual development to production
– Smooth flow is dependent on consistent investment in all phases through the pipeline
• Traditionally the types of investors in the various stages differ
– Early stage projects depend on seed or angel investors
– After some risk has been removed traditionally private equity and high-net-worth individuals invest
– At the development and pre-production phase, institutions will typically invest/ ipo
• Currently there is a mismatch in the pipe line as there is very little appetite for risk in South African mining
– Seed or angel investors, private equity and institutions are all concentrated around the production and
development phases of the pipeline
• When the pipeline runs dry
– Investors will reach a moment of realisation, then rush to find early stage investments again
• And so the cycle continues
Source: Pella resources, 2015
Seed Funders/Angels Private Equity Institutions
Seed Funders/Angels
Private Equity
Institutions
Seed Funders/Angels
Private Equity
Institutions
Healthy Sector
Future
expectation
Current
environment
10

11
Value Curve
Value position on the curve increases with increased certainty in project economics
Time, exploration and development
spend
Exploration Pre-development Capex Production
Unit-based valuation
(Yardstick Method)
DCF, reserve/resource and cash flow
based valuation
Private equity funds,
hedge funds
Private equity funds, hedge funds,
general public
Institutions, general public,
banks
Inferred
Indicated
Measured
Probable
Proven
Resources
Sources of finance
BFS
PFS
Juniors activity
Primary zone for
acquisitions and
partnerships
Mid Tier activity
Discovery
Reserves
Valuation
Operations
Defined Exploration
targets only
Major activity
Value Triggers
• The mining pipeline is associated with a value curve
• At each milestone in the curve there is a specific increase in the value
• This allows investors to choose a point of investment and to elect a point of exit
• It provides for flexibility in the individual investors harvesting strategy
Valuation methodology

• SA mining is in decline and facing closures as resources are mined out of existing
operations due to:
– Rampant cost increases
– A lack of trust between stakeholders
– Volatile commodity prices
– Significant deterioration in productivity
– AND a lack of new projects to replace existing operations as they reach end of
life
• Lack of new projects can be ascribed to
– Lack of investment due to a difficult regulatory environment
– Reduced propensity of international companies to deploy capital in SA
– General trend to exit South Africa due to rising costs of doing business
– An environment that has not fostered a pipeline of exploration and
development
• All this means less opportunities for all stakeholders: namely government, unions,
employees and investors
• Major adjustments are needed to the regulatory framework to incentivise a culture
of exploration that used to be so prevalent in SA
• A healthy mining industry has a good balance with juniors finding and developing
projects and majors funding and operating them
12
State of South African Mining
Major resuscitation plan required for the exploration sector

South Africa’s dependence on mining
Source: International Council of Mining and Metal, 2018
Significance of the mining’s contribution to economies
13

• Jobs creation often in the more marginalised and rural parts of the country resulting in social stability and increased
taxes
• Pipeline for future mining
– Avoid social instability caused by retrenchments as jobless will be absorbed in new operations
– Creates opportunities for other industries
• Unions – Bigger membership
• Employee’s - Safe legal jobs (a second chance)
14
Benefits of Increased Exploration
Labor/capital/activitylevel
Time
Source: Pella resources, 2015

15
Benefits to Stakeholders
Source: Botswana Diamonds, 2018
Investors Government
Explorers
Prospectivity
Track record of economic
production
Security of tenure
Revenue
Job creation
Beneficiation
Sustainable
development
Political stability
Good governance
Security of investment
Tax incentives
Enabling
regulatory
environment
Social license
to operate
Economic
Growth
Credit rating
Commercial
return

• Requires transparency and stability
– Transparent mineral tenure manage system and access to mining/geological
information
– Stability of regulatory framework, so the rules of the game can be abided by
• Modernize the DMR
– Implement a modern real-time and ‘use or lose’ mineral policy with the ability to
access mineral rights rapidly and transparently
• Facilitate Exploration
– Develop entrepreneurial Junior exploration and development companies as well as
a State and Industry backed Minerals Development Fund (MDF) which supports
black entrepreneurs, and Junior explorers and developers
• Transform the industry – Create genuine black ownership
– Existing mineral and mining policies and BEE Charter(s) are in need of modernization
to revive the industry
• Provide modern geological information and technical support
– Valuable old geological information exists in State archives and extensive modern
info exists in numerous public domains - this requires urgent capture to assist explorers
• Provide Incentives to restart exploration and development
– Innovative tax and financial interventions should be considered by Government as
per our competitors (eg. flow-through shares, matching exploration funds) to drive
exploration
• Implement modern enabling Policy and Regulations
16
Reviving Exploration

• In the short term
– Commodities are expected to be driven by the on going trade war between US and China which
is driving growth expectations
– Rising fed rates, EU move away from negative rates and China’s delevearging may also hurt
growth and expansion
• Over the long term commodities are expected to be driven by a number of factors namely:
– Chinese Belt and Road Initiative which is expected to cost an estimated $1.3 trillion by 2027
– Development initiatives in India would create further demand
– Growth in other developing markets since growth in developing markets is more commodity-
friendly than growth in advanced economies
– Trade war resolution
17
Demand for Commodities
Source: Macquarie September 2018

South African Regulatory Climate
• Local and foreign explorers and investors, recognize the treasure trove of geology and minerals, and the
quality of people and skills in RSA, but are reluctant to commit new long term investment given poor and
uncertain mineral policy, ownership/BEE complexity, lack of transparency, and corruption
Mining Charter
• The Mining Charted Gazetted on 27 September 2018 makes no reference to prospecting rights therefore
as per the pre 2017 charters, requirements for prospecting rights will apply as contemplated the MPRDA
• Mantashe at the Joburg Mining Indaba said prospecting rights fell outside the obligations laid out in the
charter for mining rights
– “Why should we put a target on prospecting because for prospecting you are just looking, you
haven’t started creating wealth … once you have discovered something, then the BEE
requirement must kick in”
MPRDA
• New set of regulations to be release in the near term, these are set to govern prospecting and mining
license requirements
• Peru, like RSA, has a lengthy history of Colonial legacies, poverty, and disadvantaged indigenous
peoples; investor friendly mineral policy interventions have helped it become a favored international
exploration and mining jurisdiction, with consequent economic growth and poverty reduction. Examples
like this should be interrogated
12J Funds
• As a way to encourage investments in the mining sector, which is one of the largest employers in South
Africa, Treasury introduced a tax incentive under Section 12J of the Income Tax Act
– By way of illustration, if an investor invests R1 million in a Section 12J Fund, the investor will receive a
tax credit of up to R450 000 at the end of his/her tax year
– Due to the tax deduction reducing an investor’s exposure, Section 12J Funds have been an
extremely attractive vehicle for companies to attract equity funding
18
Regulation Around Exploration
No empowerment requirements in new charter for prospecting rights….this is a win for SA exploration!

• Exploration is expensive but essential to a prosperous mining sector and mining economy
• Companies are having too settle for lower grades, more complex geology and politically
questionable jurisdictions as the pipeline of projects dwindles
• A successful exploration sector requires input from all stakeholders
– Mining houses to share information and provide a market for juniors and explorers
o Old data can be reviewed with modern big data techniques to enhance
geological knowledge and generate new targets for exploration
– Government to create a conducive and more favourable environment then other
major jurisdictions since we are all competing for the same capital
– Governments need to balance earnings with investment attractiveness
– Labour to be more flexible and improve productivity
• The existing MPRDA, Charters, and BEE policies require modernization, with the caveat that
policy consistency and certainty of tenure, limitation of discretionary powers,
transparency, and communication between role players are paramount; transformation is
non-negotiable
19
Conclusion
Exploration dollars are orphans in need of a home

Appendices

Other material that could be incorporated into preso
12. Rising Real
Estate Prices
1. Rising
Interest Rates
2. Falling
Share Prices
3. Falling
Commodity
Prices
4. Falling
Overseas
Reserves
5. Tighter
Money
6. Falling Real
Estate Value
7. Falling
Interest Rates
8. Rising Share
Price
9. Rising
Commodity
Prices
10. Rising
Overseas
Reserves
11. Easier
Money
BOOM
SLUMP
CORPORATE
FAILURE
SLOW
DOWN
GLOOM
RECOVERY
BEGINS
HESITANT
UNEVEN
RECOVERY
GENERAL
RECOVERY
STRONG
RECOVERY
Source: financialplanningmalaysia.com
Originally compiled by “The Evening
Standard”, London from a study of
trade cycles over 150 years
ECONOMIC
CLOCK
21

22

World Exploration Expenditure by Commodity
23

Number of discoveries by size
24

Number of discoveries by Commodity
25

Number of discoveries by quality
26

Tier 1, 2 & 3 Discoveries: 2007-2016
27

The value of exploration in mining and the current state of exploration in South Africa

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