Cormark - Bluestone Resources Report

Tyron Breytenbach, P.Geo, (416) 943 6747, tbreytenbach@cormark.com
Nicolas Dion, CFA, Associate, (416) 943 4220, ndion@cormark.com
MORNING MEETING NOTES
JANUARY 30, 2019
 During the past twenty-four months, Cormark Securities Inc., either on its own
or as a syndicate member, participated in the underwriting of securities and
provided financial advice regarding the stock market insight and financial
analysis regarding potential transactions for Bluestone Resources Inc.
Our disclosure statements are located on the second last page of this report
Recommendation: Buy (S)
Target Price: C$3.10

Bluestone Resources Inc. (BSR-TSV)
DFS Milestone Points To Low Funding Hurdle
Current Price C$1.42 Shares Outstanding (MM)
52 Wk High C$1.60 Basic
52 Wk Low C$1.05 Diluted
Cash (MM) $8.9 Mngt. & Dir.
Total Debt (MM) $0.0 Market Cap.
NAVPS C$3.50 Float
P/NAV 0.41x EV
Spot NAVPS* C$4.19 Reserves
Spot P/NAV* 0.34x Total Resource
EV/Reserve
EV/Resource
* Cormark deck is $1,250/oz; spot gold is $1,312/oz
75.0
$63/oz
5.7
C$90.7
63.8
$38/oz
C$82.5
$59.3
0.9 MMoz
1.6 MMoz
Unless otherwise denoted, all figures shown in US$
Investment Thesis:
Bluestone is advancing the high-grade (8.5 g/t Au), high-margin (AISC of
$579/oz) Cerro Blanco asset in Guatemala, which it acquired from Goldcorp in
2017. We believe the strong Management team (ex-Kaminak, ex-OceanaGold)
will be able to navigate through jurisdictional challenges and bring the quality,
low capex asset into production, driving a multiple re-rating.
Highlights:
 Revamped Geological Model: The major change to the mine design is a
more complex geological model requiring a selective mining approach. As a
result, more cut and fill mining is planned, driving a modest increase in AISC to
a still impressive $579/oz (vs 490/oz in the PEA and $555/oz in our model).
 Economics Still Robust: At our $1,250/oz gold deck, Cerro Blanco will
generate a 34% post-tax IRR and payback all capex in 2.1 years. The NPV5%
of $241 MM is in line with our $262 MM estimate.
 Very Fundable: While the new study is a minor downgrade from the PEA in
terms of total NPV (-17%), the DFS is backed by a very detailed picture of the
geology and a much more defendable mine plan. This study, along with the
Lundin-calibre board/team, should ensure the asset gets funded in 2019.
 Maintaining Buy (S) Rating And C$3.10 Target Price: We had already
dialed in higher costs than estimated in the PEA and so our target is
unchanged. BSR looks very undervalued at 0.41x the funded/diluted NAV,
especially considering we give zero value to the >20 MW geothermal asset.
Company Description:
Bluestone has acquired the Cerro Blanco asset in
Guatemala from Goldcorp. The former owners
(Goldcorp/Glamis) have since spent >$230 MM on
exploration and development including an assessment of
the geothermal power capacity. The high grade asset
offers a foundation for growth for the ex-Kaminak
management team. Lukas Lundin (46%) and Goldcorp
(4.9%) are large strategic shareholders.
Source: BigCharts.com, January 29, 2019 (Chart C$)

JANUARY 30, 2019
Reworked Mine Plan:
 Following >14 months of infill drilling, underground mapping and re-logging of 120 historic holes, BSR
delivered an updated resource in late 2018 (note). One of the findings was that the deposit has a
more complex structural control than previously thought. The geological work outlined entirely
new/unmodelled veins but also showed that mineralization is discreetly hosted in a series of parallel
and sub-parallel veins of varying widths in contrast to the bulky model used in the PEA.
 As a result, the DFS mine plan has moved to a more selective approach with a larger proportion of
ore now coming from cut-and-fill mining vs. the PEA which assumed long-hole as the predominant
(89%) mining method. As a result, unit mining costs in the DFS have increased to $67.01/t vs.
$49.06/t in the PEA. However, we expected as much and had been modelling a $58/t mining cost
since initiation.
 Despite the revised mining approach, the project maintains a bottom quartile projected AISC of
$579/oz, among the lowest in our developer coverage universe.
 Other changes include a better understanding of the groundwater conditions and a more conservative
water management plan which along with enhanced ventilation is responsible for the remaining creep
in AISC and the new capex assumption ($196 MM vs $171 MM in the PEA). We note that >40% of
the resource is above the water table, which mitigates this risk in the early years.
 Our full list of assumptions and the DFS results are below; we have adjusted our model to match the
DFS but we dial in some resource conversion (discussed later in report). We also model a 5% NSR
(vs 2% in the DFS) as that is what most producers have historically paid on a “voluntary” basis in
Guatemala.
Figure 1: Mine Plan Assumptions/DFS Results
2017 PEA 2019 DFS Cormark Old Cormark New
Gold Price $/oz 1,250 1,250 1,250 1,250
Silver Price $/oz 16 18 15 15
Mine Life years 9 8 9 9
Tonnes Milled MM tonnes 4.0 3.4 4.0 4.1
Gold Head Grade g/t Au 8.1 8.5 8.1 8.5
Silver Head Grade g/t Ag 28.0 32.2 27.9 32.2
Ore Throughput tpd 1,250 1,250 1,250 1,250
Au Recovery Rate % 91.3 96 91 96
Ag Recovery Rate % 87.8 85 88 85
LOM Gold Production 952 902 947 1,066
Avg. Annual Gold Production oz 105 113 110 123
Mining Cost US$/t ore 49.1 67.0 58.0 67.0
Processing Cost US$/t ore 26.3 19.8 30.0 19.8
Site services US$/t ore 19.2 19.2
G&A Cost US$/t ore 17.3 11.8 20.0 11.8
Operating Cost US$/t ore 92.6 117.8 108.0 117.8
Pre-Production Capex US$MM 171 196 143 196
LOM Sustaining & Closure Capex US$MM 112 140 111 157
Royalty % 2.0 2.0 5.0 5.0
AISC (net of by-product) US$/oz Au 490 579 555 617
After Tax & Royalties
NPV (5% discount) US$MM $317 $241 $262 $251
IRR % 43.9 34.0 50.0 33.3
Payback years 1.8 2.1 1.7 2.4
Source: Company Reports, Cormark Securities

JANUARY 30, 2019
 During the past twenty-four months, Cormark Securities Inc., either on its own or as a syndicate member, participated in the
underwriting of securities and /or provided financial advice regarding the stock market insight and financial analysis regarding potential
transactions and/or received a fee for the non-brokered placement of securities for these companies
Figure 2: AISC - Cormark Developer Coverage
1,022
891
860
785 783 781 764
728 718 700 689
662 653 638 630 626 613
585 579 568 547 523
$0/oz
$200/oz
$400/oz
$600/oz
$800/oz
$1,000/oz
$1,200/oz
AISC(US$/oz)
Source: Company Reports, Cormark Securities
New Defendable Study Lowers Funding Hurdle:
 The DFS economics show a 34% post-tax IRR and $241 MM NPV5% at $1,250/oz. While this is a
step-down from the PEA, the new document is supported by a much more thorough work plan and
oversight from the Lundin-centric board/technical advisory committee is highly defendable.
 At spot gold, we estimate capital payback of ~1.8 years which will help BSR secure debt/royalty
funding which is targeted for H2/19.
Opportunities For Improvement:
 The easiest route to NAV growth is the ongoing conversion and expansion of the resource as 357 koz
of inferred were excluded from the DFS. These ounces are immediately adjacent to planned
infrastructure (and in many cases above the water table) and should be accretive to the economics.
We model a 50% conversion rate of the inferred going forward.
 Given the discreet, vein-hosted style of mineralization, BSR will evaluate optical ore sorting as the
technology continues to evolve and improve. The technology is being tested out at comparable
resources like Orion/Dalradian’s Curraghinalt deposit with very encouraging results.
 Finally, a review of the backfill assumptions may allow BSR to reduce capex/opex by switching to
alternatives to paste fill.
 We also need to mention the non-mining upside and we continue to flag the >20 MW geothermal
asset that has already had $60 MM spent on evaluating its resource. The geothermal asset could
either be sold, we estimate a market value of >$100 MM based on CF multiples of peer Polaris
Infrastructure (PIF:T, Buy rating, C$25.00 target, covered by MacMurray Whale), or farmed out to
provide energy cost savings ($0.10/kwh vs. $0.18/kwh diesel generated power) at the mine.

JANUARY 30, 2019
Figure 3: Low Hanging Resource Fruit
Source: Company Reports
Maintaining Buy (S) Rating, C$3.10 Target:
 We are maintaining our Buy (S) rating and C$3.10 target, which continues to be based on a funded
and diluted NAV and our $1,250/oz gold price deck. The target increase is due to lower assumed
equity dilution as the share price improves.
 Our C$3.10 NAV assumed the mine is 40% equity funded at C$1.40 share price and our
unfunded/takeout NAV at spot ($1,312/oz) gold is over $5/sh.
 At 0.41x NAV BSR offers substantial value (Year 1 pre-tax CF is multiples of current EV) and while
the project comes with obvious social/political risk, we believe the market is being too punitive as
Bluestone should not be simply painted with the same brush as its neighbors. We have more hope for
a favorable outcome at Escobal (or at least less noise) following the takeout offer from Pan American.
 We recommend owning this stock into its production ramp-up which should see a large re-rating of its
multiple, before re-evaluating the position once the mine starts to produce gold and cash. The
company has $9 MM in cash and with the full capex funding unlikely until H2/19, we expect BSR
might top up ($15-25 MM) given the large and supportive shareholder (Lukas Lundin).

JANUARY 30, 2019
 During the past twenty-four months, Cormark Securities Inc., either on its own or as a syndicate member, participated in the
underwriting of securities and /or provided financial advice regarding the stock market insight and financial analysis regarding potential
transactions and/or received a fee for the non-brokered placement of securities for these companies
Figure 4: Valuation ($1,250/oz)
US$MM US$/Share
Assets
Cerro Blanco NPV5% 250.8 1.68
Ounces outside mine plan (448 koz @ $15/oz) 6.7 0.04
Other Exploration Assets 10.0 0.07
Corporate Adjustments
Current Cash 11.8 0.08
Cash from ITM Options/Warrants at Target 10.0 0.07
Future Equity Financing 104.3 0.70
Total USD 393.5 2.63
Total CAD C$523.3 C$3.50
Basic Shares Outstanding (Current) 63.84
ITM Options/Warrants at Target 11.12
New Shares To Fund Capex @ C$2.00/sh 74.47
Fully Financed & Diluted Shares Outstanding 149.43
Current Bluestone Price C$1.42
Price/NAV 0.41x
Source: Cormark Securities
Figure 5: Peer Comps P/NAV At $1,250/oz
Median: 0.44x
0.0x
0.2x
0.4x
0.6x
0.8x
1.0x
1.2x
♦OSK
♦SIL
MAG
♦AXR
♦GSV
LUG
♦AMM
MAX
VIT
RIO
CDV
♦PRB
♦BGM
♦SBB
♦SOLG
♦OLA
ORG
RGD
♦BSR
♦WAF
ORE
♦IDM
♦ER
FF
♦C
GQC
♦GFG
P/NAV
Source: Cormark Securities
We, Tyron Breytenbach and Nicolas Dion, hereby certify that the views expressed in this research report accurately reflect our personal views about
the subject company(ies) and its (their) securities. We also certify that we have not been, and will not be receiving direct or indirect compensation in
exchange for expressing the specific recommendation(s) in this report.

JANUARY 30, 2019

JANUARY 30, 2019
RECOMMENDATION TERMINOLOGY
Cormark’s recommendation terminology is as follows:
Top Pick our best investment ideas, the greatest potential value appreciation
Buy expected to outperform its peer group
Market Perform expected to perform with its peer group
Reduce expected to underperform its peer group
Our ratings may be followed by "(S)" which denotes that the investment is speculative and has a higher degree of risk associated with it.
Additionally, our target prices are set based on a 12-month investment horizon.
For Canadian Residents: This report has been approved by Cormark Securities Inc. (“CSI”), member IIROC and CIPF, which takes
responsibility for this report and its dissemination in Canada. Canadian clients wishing to effect transactions in any security discussed should do
so through a qualified salesperson of CSI. For US Residents: Cormark Securities (USA) Limited (“CUSA”), member FINRA and SIPC, accepts
responsibility for this report and its dissemination in the United States. This report is intended for distribution in the United States only to certain
institutional investors. US clients wishing to effect transactions in any security discussed should do so through a qualified salesperson of CUSA.
Every province in Canada, state in the US, and most countries throughout the world have their own laws regulating the types of securities and
other investment products which may be offered to their residents, as well as the process for doing so. As a result, some of the securities
discussed in this report may not be available to every interested investor. This report is not, and under no circumstances, should be construed
as, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the
business of a securities broker or dealer in that jurisdiction. This material is prepared for general circulation to all clients and does not have
regard to the particular circumstances or needs of any specific person who may read it. This report is provided for information purposes only and
does not constitute an offer or solicitation to buy or sell any securities discussed herein.
The information and any statistical data contained herein have been obtained from sources believed to be reliable as of the date of publication,
but the accuracy or completeness of the information is not guaranteed, nor in providing it does CSI or CUSA assume any responsibility or
liability. All opinions expressed and data provided herein are subject to change without notice. The inventories of CSI or CUSA, its affiliated
companies and the holdings of their respective directors, officers and companies with which they are associated may have a long or short
position or deal as principal in the securities discussed herein. A CSI or CUSA company may have acted as underwriter or initial purchaser or
placement agent for a private placement of any of the securities of any company mentioned in this report, may from time to time solicit from or
perform financial advisory, or other services for such company. The securities mentioned in this report may not be suitable for all types of
investors; their prices, value and/or the income they produce may fluctuate and/or be adversely affected by exchange rates.
No part of any report may be reproduced in any manner without prior written permission of CSI or CUSA.
A full list of our disclosure statements as well as our research dissemination policies and procedures can be found on our web-site at:
www.cormark.com

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