Saturn Minerals 18 April2012 6

Leaders in Corporate Research

Saturn Minerals Inc CDN$ 23c 18 April 2012

Third coal discovery points the direction
forward

Share Price: 23c
Saturn Minerals Inc (SMI, TSX-V. SMK, Xetra®) is a mineral
exploration specialist whose major focus is on the Cretaceous coal
play in Eastern Central Saskatchewan and Western Manitoba, in
an area known as the Pasquia Hills.
Saturn has started to release results from its winter drill program.
On the face of it a relatively small amount of actual drilling has
been achieved however that drilling has resulted in a new coal find
of significant thickness and provided data that strongly points to a
short to mid term direction for the exploration program.
It should be said at the outset that a second warm winter on the
Saskatchewan/Manitoba border has resulted in reduced, aborted
12m High: CDN$0.380
or amended exploration programs for most operators in the area.
12m Low: CDN$0.160 Saturn was not excepted though its early decision to use
Market Cap: CDN$18.1m helicopter access and support rather than trust the backwoods
logging tracks to survive the meltwaters was proven a sound
Shares in Issue: 82,222,251 choice. It should be noted that the last two winters have been
82,222,251 fully diluted subject to the well-documented La Nina phase of the El Nino
Effect. The El Nino cycle is expected to revert to a neutral state
Cash: CDN$0.5m cash (31 December 2011). about now (April 2012). That should be good news for those
wishing for a lasting hard freeze in North America this coming
winter.

TSX-V Code: SMI Saturn’s discovery, the third coal find in three years drilling, is a
composite thickness of 26m starting at a depth of 15m and ending
Sector: Mining at 45m. It has been christened Thunder. In the context of the
Market: TSX-V district finds so far, this is very shallow and on the thicker side. It is
certainly of a bulk mineable thickness and taken with the depths of
Website: www.saturnminerals.com
the other finds seems to imply a general trend of ‘deep’ intercepts
Company Contact: +1 604 685 6989: in the west to shallow in the east. Deep here is a relative term, but
a strip ratio of 5-10 in the west drops to 2 in the east of the district.
Description: Canadian energy minerals Coal quality tests (proximate analysis) are underway but the visual
explorer and First Nations partner with description and deportment of the coal and any partings through
extensive properties in a new coal province the 26m intercept strongly suggest to us that it will be comparable
to earlier finds and therefore of a saleable quality.
Analyst: Ian Falconer The new find is on the same geophysical trend as the Karolina
Tel: 020 79293399
discovery on the Overflowing property but around 2km away. The
company has named the N-S oriented feature the Overflowing
Email: research@hardmanandco.com Trend and it is along this 8km long trend that we expect Saturn to
focus its coal exploration efforts going forward.
We feel that this discovery should provide strong enough support
for the company’s geological model to commit to a full resource
estimation program next winter and we look forward to hearing
both confirmatory coal quality results and that significant financing
has been achieved.
Group Declared Adjusted Adjusted P/E Divi Yield
Y/E
Sales Profit Profit EPS ratio
$m $m $m $ c. %
2009A 0 (2,327,000) (0.05) N/A N/A N/A
2010A 0 (873,000) (0.02) N/A N/A N/A
2011E No Estimates
2012E No Estimates

Hardman & Co. Leaders in Corporate Research 1
Tel: +44(0)20 7929 3399 www.hardmanandco.com


Saturn Minerals Inc 18 April 2012

What This Discovery Means for Saturn’s Coal Program

Apart from the obviously good news that 26m of coal has been found starting at 15m depth this
announcement has other implications for coal exploration in the region.

Shallowing to the East
Coal discoveries seem to be getting generally shallower to the east. This reflects the macro-
sedimentary environment across the region and suggests that at a regional scale sediment influx was
broadly east to west. That doesn’t mean to say that local sediment flow could not have been in any
direction but, as can easily be seen in a winding river, water may appear to flow back up a valley for a
short distance before it curves back towards the sea. This simple finding has broad exploration and
production implications that can be distilled into two very simple mining parameters, the Strip Ratio –
that amount of overburden that must be removed compared with the thickness of the saleable coal
seam below it and the starting depth – the minimum depth at which coal occurs. These parameters
provide simple but effective first pass comparative tools.
The lower the strip ratio and the shallower the depth, the better the likely economics of a coal deposit.

Paleao-Valley Geophysical Model Effective In Trend
Geophysics is proving a reliable guide towards coal discovery in some situations, but not necessarily
an accurate definer of resource quantity or quality. This is no big news to geological explorers but
each new resource district has a balance between the use of discovery tools like geophysics and
geochemistry, and evaluation tools such as drilling of cores and running of downhole logs. Both the
massive Karolina discovery and the new Thunder discovery were located by geophysical anomaly
within the larger anomalous trend. A good analogy might be a string of pearls hidden under a blanket.
The sense of touch (geophysics) can tell that there are distinct entities along a defined line, but can’t
resolve the reason for the line (the string) or the nature of the entities (the pearls could be cultured or
wild, or even just glass beads). Only direct observation of the physical entities themselves can resolve
their nature.

Karst Pit Geophysical Model Needs Refinement Outside Trend
In other situations i.e. outside the linear trend, now named the Overflowing Trend, geophysical
evidence alone is not providing the same degree of reliability. This may reflect the very different
characteristics of Saturn’s dual provenance sedimentary model with the paleo-valley/graben model
providing the district-scale basin available for sedimentation and the micro-environmental changes
defining localised coal deposition rates and preservation. Outside that relatively conventional
erosion/sedimentation environment the hypothesised karstic pit depositional environment lacks the
consistency of surficial erosion and instead provides a collapsed surface upon which accelerated
clastic sedimentation may occur where it intersects with surface drainage or organic sedimentation
may occur where there is little intersection with surface drainage. The potential uneven collapse
depths dependent on different amounts of cavernous dissolution, followed by highly localised infill
mechanisms make the karstic pit environment much more variable. Potentially they contain vast
thicknesses of continuous coal, but not every pit will contain the same coal, from the same time or of
the same quality so targeting just the karstic pits is a higher risk exploration strategy than following the
trend. It is unknown if more than one trend exists in the district. The other operators in the Pasquia
Hills District have not released sufficient evidence to evaluate.

Stratigraphy Not Yet Established
The new discovery holes did not reach Devonian basement. In fact they did not reach deep enough to
run the down-hole geophysics tools required for stratigraphic correlation logs to be produced. There
are other ways (mineralogical, paleontological, isotopic and geochemical) to establish a stratigraphic
correlation but they are very time consuming and expensive compared to the relatively quick and
simple down-hole logs. Until we know where in the coal sequence this new discovery lies drawing a
line between discovery holes is not a valid exercise. In other words we can’t say that there is any
continuity between the Karolina and Thunder discoveries or whether we would expect to find another
50+m of coal below the current max depth of the hole at Thunder (~50m).




But if It Were
If the top of Thunder corresponds to the top of Karolina the average dip is around 1 in 70, effectively
flat where mining engineering is concerned, but enough slope to affect in-pit hydrogeology. This
means that the coal can be pre-drained by gravity without any complex engineering, and any
accumulated water easily pumped a short distance into water handling facilities or re-injected down-
dip. This makes working conditions in-pit easier and reduces the residence time required on stock-
piles to air-dry production. Or if coal-to-liquids manufacture is the end-use then it allows a consistent
moisture content to be achieved, again reducing time and cost impacts from the manufacturing
process. Put at its most basic, close to flat-lying coal is the best coal to mine.

Flat-lying and Thick Is Best All Round
The coal intersected is described as “three thick seams and a series of thinner, lower coal seams
totalling 25.85m in thickness”. This description suggests that the majority of the 26m thickness is a
bulk mineable target with or without washing, though coal quality tests will be required to confirm our
analysis. Over 5m thickness, less than 50m depth and flat-lying would be a great coal mining target
where present over a decent areal extent. Such pits are easily engineered to be geomechanically
stable. The machinery can be scaled to a desired production rate and static handling plant can be
sited in optimum positions rather than compromising to be able to store large amounts of overburden.
Not only is mining easier, but once mining has been completed remediation is easier and quicker than
with deeper, steeper pits.

Going Forward

Saturn has stated that it is considering contracting out a re-analysis of its geophysics data to provide a
second opinion and possibly generate a new set of targets. This may have significant value in
distinguishing which of the karstic targets is likely to hold coal and which is more likely to hold clastic
sediment (muds, sands & gravels).

We feel that the next order of the day should be an all out effort to define a maiden resource. Such a
program will inevitably provide extra data to support or challenge the current geological model but it
should also materialise the effort and investment put into the prospects so far.

Having situated the Overflowing Trend prospects in the palaeo-environment as some of the shallowest
possible, shown that multiple geophysical anomalies of the same order as the Thunder discovery exist
along that 8km long trend, proven that almost 90m continuous thickness of coal can be present along
parts of that trend and that the company has the support and involvement of the local First Nations, it
seems the right next move to systematically test the dimensions of the coal discoveries as a matter of
priority. It is hard to think how much further the advance of the project can be de-risked.

The petroleum exploration program is running separately, and is generally a summer activity due to
the larger scale of drilling requiring that large amounts of drilling fluid be stored (without freezing). We
discussed that program in our previous note.

Analysis

Saturn continues to deliver excellent results for its shareholders and ample evidence that a substantial
coal resource may exist on its licenses. It now needs to buck the current Canadian junior trend and
raise funds for a substantial drill program next winter. It seems to us that the potential rewards are
easy to see, so lets look at the exogenous risks.

Weather risk

The last two warm winters have forced shortened drill programs due to problems gaining access to
sites, not activity on the sites themselves. This can be mitigated to a great degree by using helicopter
access and by careful site selection. However some compromise is likely between ideal drill location
and a drill site that is both accessible and useful. The Canadian reporting code allows for drilling to be
executed on an irregular pattern, so that shouldn’t really be a problem in todays computerised world.



What is need is an extended period of stable cold weather, the normal for the Saskatchewan/Manitoba
border region. While we can’t predict the weather, the appropriate experts say that the La Nina/El Nino
climatic variation is due to have subsided by the coming winter and with that in mind, to see the
extremes experienced in the northern hemisphere in winter 2011/12 would be exceptionally unusual.
Beyond that there are other solutions, drill pads & rigs that specially made for heli-access, driving new
or replacement roads through the muskeg or even just waiting another year.

So the risk of the weather getting in the way of exploration is a chimera. At most it increases costs or
causes a delay. It will not prevent exploration.

Commodity risk

Coal is currently on the up globally. Indonesia’s move to restrict exports so that its own industry has a
longer supply life is a hedge on a national sale against coal prices rising. If enacted as stated it must
have knock-on effects in the Pacific seaborne thermal coal market. Southern and South Eastern Africa
is an area of current expansion both of coal mining and coal-fired power with long term export deals
being struck with Indian power generators and steel makers, while the Indian coal and steel sectors
are mired in corruption & controversy. The whole sub-continent is struggling with power shortages,
and Pakistan in particular even though it sits on vast low grade coal reserves.

The long term and continuing use of coal is accepted by all major and credible studies, most of which
see global use of coal increasing until 2050. The global market for thermal coal is forecast to fall after
2050, but there are sub-trends apparent before then such as the increase in coal quality (reduction in
ash and sulphur content) due to stricter emissions standards leading to the higher use of coal washing
and lower use of brown coals. So while the use of ALL coals may be forecast to fall after 2050 that is
not true for the higher quality coals. Their use will continue to rise until substantially after 2050 unless
there is a major technological breakthrough. In Saskatchewan the natural expression for that would be
a move away from the southern brown coal fields (currently firing Boundary Dam) towards the higher
quality coals seen in the Pasquia Hills area, though that move is somewhat mitigated by the likely use
of captured CO2 in Enhanced Oil Recovery. The use of metallurgical coal is not forecast to fall until
global population starts to fall, for which there are no firm forecasts before 2100. There is no realistic
alternative in iron & steel production.

Urban demand for liquid fuels will drop in middle and high income markets (Europe, Japan, Coastal N
America, Australasia, Coastal S America, Coastal China & Urban India) and in many cases will be met
by increased high quality thermal coal use. However we do not believe that vehicular electrification will
impact liquid fuel consumption in intra-continental North America, Australasia, Africa, South America,
Rural India, Central & SE Asia or the vast majority of Russia for the foreseeable future. These markets
will continue to be dominated by incremental increases in efficiency of ICEs and the vehicles they
propel.

There is a credible argument that a technology that abates CO2 emissions from coal-powered
generation as well as industrial CO2 production such as steel, providing a permanently captured and
useable CO2-based product (such as a long-life building material) will encourage the long term use of
coal in the energy systems of all nations, not just those committed to reduce carbon emissions. The
other by-products of large-scale coal use (gypsum, fly ash, heavy metals, etc) are all being used in
commercial or pre-commercial enterprises providing environmentally positive and often profitable
outcomes for raw materials previously seen as waste or pollutants. Indeed in the UK we are now
starting to see old fly ash being mined to recover remainder fine coal and be processed as a filler for
plastics (http://rktron.com/about-rocktron) and in Australia fly ash is being used for magnesium metal
production (http://www.latrobemagnesium.com). We believe that the elimination or use of fly ash as a
product of electricity generation would bring coal with CCS into a credible environmental comparison
with any other electricity generation mechanism in a full life-cycle analysis (i.e. one that includes the
mining phase for all its components and credits its by-products).




So our belief is that commodity risk in coal is on a national policy level (or in the case of the EU an
economic bloc level). Where research is being conducted into the use of coal, solutions to its negative
aspects are being found. In the most liberalised markets the profitable solutions will prevail, in more
structured markets some encouragement of environmentally benign or beneficial uses of coal & its
products can be expected. Policy makers will decide and it is for coal producers and users to convince
them that their product can and will be used to best economic effect, whether that be by replacing
crude oil as a raw material for transportation or by using all the products of combustion.

Financing Risk – we are still in the grip of tight credit terms but good projects will always attract
investors. A trend towards vertical integration of commodities supply chains suggests that major
traders, power generators and steel makers will provide a higher proportion of start-up finance for new
projects than historically. We cannot discount the idea that in areas where CO2 can be captured and
used for Enhanced Oil Recovery, oil companies may wish to secure strategic supplies of CO2 arising
from power generation or that in the face of decreasing returns from macro-scale oil refineries
downstream oil companies may diversify into Coal-to-Liquids production on a regional scale.

Conclusion

It is now time for Saturn to push forward with a resource estimation drill program. If there are any
major pieces of preparation work left outstanding but required to de-risk such an investment we can’t
see them.




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Saturn Minerals 18 April2012 6

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