CANADA

Prices as of close of 16 December, 2015 In US$ unless otherwise noted

Source: Thomson ONE, Macquarie Research, December 2015

Analyst(s)

Macquarie Capital Markets Canada Ltd. Michael Gray

+1 604 639 6372 [email protected]

David Doyle, CFA

+1 416 848 3663 [email protected]

Duncan Lai, CFA

+1 778 373 1379 [email protected]

Mohamed Abo Daff

+1 416 848 3537 [email protected]

Macquarie Capital (Europe) Limited Matthew Turner

+44 20 3037 4340 [email protected]

Macquarie Securities (Australia) Limited Ben Crowley

+61 8 9224 0839 [email protected]

18 December 2015

Global Gold Developers & Explorers

2016 - Picking the winners

Impact

• We are Bullish on those explorers/developers with quality assets and cash as we believe they have the best shot at being part of M&A and/or advancing assets - they are ICG, GSV & GOR as reinforced with no TP reductions. Otherwise, we reflect mainly downward NAV/TP revisions, on albeit good assets, driven by an ongoing difficult financing market & lack of exploration assets buys.

• We have also updated our Macquarie price deck and are maintaining a long-term real gold price of $1250/oz and silver price of $18/oz (Fig 1). In fact, our Commodities team views gold as one of the few commodities in 2016 to hide and seek refuge [LINK]. Our CADUSD FX rate is maintained at 0.69 in 2H16 as David Doyle continues to expect sequential weakness in the Canadian currency as part of his leading view [LINK]. We have also made some company-specific model adjustments to reflect updates/expectations and lower EV/oz valuations.

  We maintain an Outperform rating on all our developer and explorer names.

  Sector Thesis

• Developers: we are down to top pick MAG Silver amongst the developers we cover as we have moved ROG and TXG up to producer status for 2016 [LINK]. There continues to be a lack of developers globally with only nine single-asset precious metal companies (we are aware of) that are at least at the PFS stage and have any sight on production. EV/M&I oz for these companies range from

  ~$9-$300/ozAu (average of ~$56/oz & median ~$45/oz; Fig 6). We would specifically point to the Canadian developers PVG CN (not rated) and TMR CN (not rated) as likely drawing interest as leveraged by the CADUSD and safe jurisdiction themes.

• Explorers: Outperformance from Canadian, US & Australian Gold Belt plays with Integra Gold up 61%, Gold Standard up 69% & Gold Road up 44% YTD. We continue to prefer high grade/high margin assets in safe jurisdictions. Heading into 2016, our explorer themes based on our perspective & experience are: 1) strategic investments increase & underpin valuations via validation;

• monetization of non-core assets to generate cash & shed high holding costs;

• roll-up "Oban-strategy" continues as resource plays without cash capitulate;

• safe jurisdictions with currency leverage will be the M&A focus; and 5) high grade/high margin projects continue to be coveted and attract a premium.

  Outlook & Top Picks

• We think that "boldness" from the seniors will (eventually) creep back into the marketplace as the pressure increases to nail down future production pipelines. Will it happen in 2016 or does this not happen until 2017?

• Our top picks: Amongst developers - Buy MAG for its world-class silver Juanicipio JV asset being developed by top-notch operator FRES with AISC projected at LINK].

Amongst explorers - Buy ICG for its well-located, near-permitted, high-grade Lamaque gold asset that is approaching critical mass and will have +100km of drilling in 2016; Buy GSV for its multiple targets on the +100moz Carlin Trend and advancement of Pinion to a PEA in 2016; Buy GOR for Gruyere's potential for a +10-year mine life and +250kozpa with exposure to the weakening A$.

Please refer to page 15 for important disclosures and analyst certification, or on our website

www.macquarie.com/research/disclosures.

The 2016 exploration landscape

It has been a vicious period for the explorers...

We do not need to go into gory detail of the acute lack of funds available for the explorers, but we highlight some events that underscore the tough market in 2015 that will likely continue in 2016:

• Assets were sold at a discount to exploration sunk costs - Mega Precious Metals was acquired by YRI for only ~$15m (TEV$3/oz). The Monument Bay Belt asset in Manitoba, Canada had +$20m spent on it over the past four years and a +4moz gold resource was documented. As highlighted in our M&A explorer/developer table, five transactions were at a low

• "Rollee" CEOs did not have any other options - A number of companies have had to capitulate and take the only exit out there in being part of a roll-up strategy. Both Oban Mining (OBM CN, not rated) and First Mining Finance Corp (FF CN, not rated) have been the "Rollers" using mainly cash and shares respectively for their resource acquisition strategy.

• Annual costs to run a junior are high - Between the audit, legal and listing fees along with property holding costs, office costs and employees & contracts/consulting fees, the SG&A burn rate can vary from $700kpa to +$5mpa - and the $700kpa is often without any exploration being conducted!

  
  

  ...but there are "glass half full" aspects going forward

  We think the following positives for the exploration sector have been at work in the background:

• Survival brings focus - we think the majority of explorers that are still active have developed a stronger focus on potential value-creation activities.

• Data is being crunched - with millions of $ worth of exploration data collected over the past cycle, there was often a rush to drill. Now targets are being massaged and honed for more surgical drill testing with fewer $.

• Currency leverage - The weak Canadian and Australian currencies in particular are providing an advantage for developers and explorers that have potential for a mainly CAD cost structure and/or capex.

• Strategic investments are being made - We expect strategic investments will be in favour as ICG (ELD investment) and GSV (OGC investment) have significantly outperformed since these market validation investments were made. The runway for fully-funded programs in 2016 +/- 2017 is a breath of fresh air. Similar investments are also seen with buy-side funds such as Resource Capital Funds (a number of juniors) which continue to be very important.

• New discoveries being made - At the Sept/15 Beaver Creek Precious Metals Summit we highlighted new discoveries [LINK].

• M&A is happening in the background - Since Jan/14 there have been 16 non-producer transactions involving 45moz for an aggregate of $2.7bn (all $3/oz - $136/oz TEV). The highlight transaction was Goldcorp's acquisition of Probe's 4.4moz Borden asset in Ontario for $442m.

• Salaries are being cut - We think the R&D business is all about being very low-cost and the innovators having lots of skin in the game. Several companies have slashed salaries in favour of long- dated, low-price warrants.

• Drilling costs have come down - We note that drilling costs are down in some cases +50% and allowing exploration budgets to be stretched.

• Roll-ups provide cash & assets with a lower G&A - Oban Mining & First Mining are on the other hand good examples of roll-up consolidation models where talent and cash are aligned for sustained exploration and/or holding cost funds to maintain projects. Investors like the move to one CEO & one CFO vs five of each as more funds are put into the ground or earmarked for additional asset searches.

• Canadian Charity Flow Through (CCFT) - This innovative CCFT structure is where: 1) the front-end buyer gets a flow-through and a charity tax credit; 2) the company typically gets equity at a significant premium to market; and 3) the back-end buyer gets a discount to market price. This structure has resonated and allowed a number of explorers to raise funds and mitigate dilution.

  
  

  
  

  Fig 1 M&A transactions in the precious explorer/developer metal space since Jan 1, 2014

  
  

  
  

  Announcement Date Target Name Acquirer Name	Announced Value (US$m)	Deal Premium (Last Px)	Deal Premium Resource (m EV/Reserve EV/Resource (20 VWAP) oz AuEq) (US$/oz) (US$/oz)				Gold Price
  Explorers/Developers 20-Aug-15 King of the Hills/Kailis (SBM) Saracen Mineral 30-Jul-15 Romarco Oceana Gold 9-Jun-15 OBM/EAG/RYG/CRG New Oban 24-Apr-15 Mega Precious Metals Yamana Gold 19-Jan-15 Probe Goldcorp 23-Dec-14 Murgor Resources Alexandria Minerals 18-Dec-14 Caballo Blanco Timmins Gold 17-Dec-14 Paramount Gold & Silver Coeur Mining 13-Oct-14 Orbis Semafo 8-Oct-14 Chaparral Gold Goldrock/Waterton 3-Sep-14 Cayden Resources Agnico-Eagle 19-Aug-14 Chucapaca (GFI) Buenaventura 25-Jul-14 Kestanelik (Chesser) Nurol Holdings 3-Jun-14 Papillon Resources B2Gold 21-May-14 Sulliden Gold Rio Alto Mining 10-Feb-14 Navachab (ANG) QKR Corporation	$3 $659 $46 $15 $442 $3 $25 $154 $139 $19 $146 $81 $40 $570 $273 $110	n/a 71.8% n/a 150.0% 49.0% 50.0% n/a 43.9% 54.8% 19.6% 42.5% n/a n/a 20.6% 43.4% n/a	n/a 72.7% n/a 150.0% 57.0% 52.5% n/a n/a n/a n/a n/a n/a n/a 42.4% 46.8% n/a	0.4 4.8 6.4 4.4 4.4 0.4 1.0 3.5 2.6 1.7 n/a 6.1 0.8 4.2 2.4 1.9	- - - - - - $0 $0 $0 $0 $0 - - - $267 $57	$8 $136 $7 $3 $101 $8 $25 $44 $53 $11 $0 $26 $53 $135 $112 $25	$1,152 $1,096 $1,178 $1,193 $1,280 $1,175 $1,199 $1,197 $1,242 $1,221 n/a $1,300 $1,307 $1,244 $1,415 n/a
  Average:	$170	55%	70%	3.00	$46	$47	$1,228
  Median:	$96	46%	55%	2.62	$0	$26	$1,210

  Source: Company reports, Thomson ONE, Macquarie Research, December 2015

  
  

  
  

  Adjusting our price deck

  Our global Commodities team's forecasts for precious metal prices has been updated and incorporated into our models [LINK]. These forecasts call for a long-term $1250/oz gold price (in real, 2015 dollars) by 2019 or $1400/oz when adjusted for inflation. Overall, our team's gold price forecasts reflect "living with non-zero rates":

  "We have made only small changes to our gold price forecast. Our thesis for a number of years has been that gold should rally post the first Fed rate hike and that thesis is now about to be tested (unless the Fed causes a major market shock by not raising rates on Wednesday, when we would expect to see a substantial gold rally). We therefore see a stronger price in 1Q 2016 and a slightly firmer price in 2016 as a whole. That said, we have reduced our price forecast to reflect two things - monetary policy between the US and other currency areas, and two, the general malaise in commodity pricing, reflecting concern over Chinese demand, something which (at least at the retail level) appears to

  be affecting gold too."

  
  

  For silver, "Solar could be the saviour" is our theme as follows:

  "Meanwhile we have made more substantial changes to our silver price forecast, reducing our price expectations by between 5-11% between now and 2018. While we expect it to continuing largely driving its direction from the gold price, we had thought that in the run up to the Fed it could outperform gold on the back of an improving global economy. The global economy hasn't improved, however, and silver hasn't outperformed. As with gold we are forecasting an improved 1Q 2016 post the first Fed rate hike, and some support should come from strong solar demand. With the Paris COP21 Summit set to give renewable a further boost, most notably in India, such that for the first time in a number of years we can make the case for relatively aggressive industrial demand growth. But whether silver can make gains is likely to depend on whether silver investors, who have bought it as it has gone down, remain keen."

  Figure 1 highlights the old vs new commodity price estimates. Note that our EPS/CFPS estimates are based on the nominal forecasts (include inflation expectations) while our valuations are driven by real prices (2015 dollars) and costs (excluding inflation expectations).

  
  

  We have maintained our Economic Strategist David Doyle's forecast for a low 0.69 CADUSD FX by 2H16 [LINK]. His view is driven in part by the continued weak performance from the Canadian manufacturing sector and subdued outlook for final domestic demand as business capex faces substantial ongoing headwinds from the energy sector and there is limited ability for further increases in real consumer spending and housing investment activity to drive broader growth.

  
  

  Fig 2 Macquarie commodity estimates drive valuations

  
  

  
  

  Unit		Spot 12/16/2015	2015E	2016E	2017E	2018E	2019E	2020E	LT (2015 $)
  Gold	$/oz	1069	Previous	1,150	1,149	1,256	1,344	1,400	1,400	1,250
  			New	1,157	1,144	1,219	1,319	1,400	1,400	1,250
  			Δ%	1%	(0%)	(3%)	(2%)	0%	0%	0%
  Silver	$/oz	14.11	Previous	15.90	16.81	19.38	22.00	22.56	23.00	18.00
  			New	15.69	15.29	18.13	20.25	22.25	22.50	18.00
  			Δ%	(1%)	(9%)	(6%)	(8%)	(1%)	(2%)	0%
  Copper	$/lb	2.07	Previous	2.57	2.59	2.60	2.93	3.33	3.52	3.15
  			New	2.50	2.29	2.39	2.13	2.04	2.40	2.85
  			Δ%	(3%)	(12%)	(8%)	(27%)	(39%)	(32%)	(9%)

  Source: Bloomberg, Macquarie Research, December 2015

  
  

  
  

  Developers, few out there on the planet

  Since our Mar/15 update of 12 covered & uncovered developers [LINK] there have been the following changes to that list: i) Romarco was taken over by OGC; ii) both ROG and TXG are still technically developers, but have been moved into our producer sub-sector [LINK] (both with production in 2016);

  iii) MAG Silver has been added to the group given its likely Juanicipio production in 2018; iv) RMX has suspended status after briefly flirting with production but encountered multiple issues at its Phoenix mine;

  v) Guyana's Aurora asset and Aureus's New Liberty assets are now pouring gold and thus removed; vi) Midway was removed as it has applied for receivership as its Pan resource was significantly flawed and it became a valuation land-mine; and vii) we have added TMAC (TMR CN, not rated) and Red Eagle (RD CN, not rated).

  Our revised developer group is now comprised of nine companies as follows:

• 4 proposed open-pit projects (1 require conventional mills/ 3 heap leaches)

• 5 are designed as underground mines with mill processing

• 5 are expected to first pour gold in 2016

• 2 are projected to pour gold in 2017

• 1 is projected to have a Ag-Au-Pb-Zn concentrate in 2018 (MAG)

• Mix of geographies with 4 North American projects vs 2 in Africa, 2 in South America and 1 in Europe. These projects would contribute, on average, ~ 1.3mozAupa to global supply (if able to execute on PFS/FS parameters).

• We note that if RMX's Phoenix project does not work out then ~165kozpa production would be lost to the market.