Undervalued nickel laterite developer : Axiom Mining (ASX:AVQ)

EQUITY RESEARCH

RCR MARCH 2015 Disclaimer & disclosure attached. Copyright© 2015 by RCR Pty Ltd. All rights reserved. 1

INVESTMENT POINTS

♦ Isabel is world scale. Previous work (INCO, Kaiser Engineers) at Isabel gave an estimate of mineralisation (non JORC compliant) of 159Mt @1.05% Ni and 0.06% Co (equivalent to 1.6Mt of contained nickel) to a depth of only ~6m.

♦ AVQ’s initial drilling has indicated prevalence of higher grade saprolitic ore (>1.5% Ni) below 8m depth. This suggests potential for significantly higher tonnage and better grades than the INCO-Kaiser estimates.

♦ AVQ is aiming for first production in late 4Q15 with ~2Mtpa direct shipping ore (DSO) operation. Discussions with project partners/funders underway.

♦ A 2Mtpa DSO operation would give Axiom a low capex (~US$25-35M) fast track route to production. On our projections the project is robust generating strong cashflow (forecast ~A$50Mpa assuming US$60/t DSO price) and laying the foundations for a larger scale ore upgrading project.

♦ The nickel price (and DSO prices) are forecast to move into an uptrend in 2H15 due to looming supply deficits.

♦ Our base case valuation for AVQ of A$0.050/share is based on risk-discounted scenario of initial DSO production from Isabel at 1.5% Ni. Our medium term target (6 months) is A$0.035/share assuming Sumitomo is unsuccessful in its appeal against the court ruling.

♦ Assuming 1.8%Ni DSO product raises our valuation to A$0.076/share (due to increased DSO product value from US$60/t to US$80/t).

♦ Our valuation is underpinned by benchmarking listed DSO producer: Asia Nickel Corp – US$2.4bn market cap = US$132M per Mtpa DSO production. AVQ is currently capitalised at ~US$31M.

♦ Six month share price catalysts include likely dismissal of SMM appeal against the court ruling and near term cash injection (~A$4.8M) from court costs claim, further high grade Isabel drilling results, anticipated positive milestones in Isabel Project financing/partnering.

EXPLORATION AND FINANCIAL FORECASTS

23 MARCH 2015

SOLOMON ISLANDS, VIETNAM, AUSTRALIA

(QLD)

NICKEL-COBALT, GOLD, SILVER, BASE

METALS

ADVANCED EXPLORATION

EXCHANGE: ASX:AVQ

CAPITAL PROFILE

DIRECTORS

Stephen Williams (Non Exec Chairman) Ryan Mount (CEO and Managing Director)

Mr Ryan Mount CEO and Managing Director Tel: +(61) 7 3319 4100 Newstead, QLD, Australia Tel: +67 7 29877 Honiara, Solomon Islands www.axiom-mining.com

Analyst: Dr Tony Parry [email protected]

52 week range (A$/share) 0.032 to

Debt (A$M) - Mar '15F

Enterprise value (A$M)

Avg monthly volume (M)

Cash (A$M) - Mar '15F

Price/Cash (x)

Price/Book (x)

Listed company options:

Share price (A$) 0.0110.008

Number of shares (M) 3605.4

Options and warrants (M) 437.7

Convertible notes (M) * 0.00

Fully diluted * (M) 4043.0

Market capitalisation (undiluted) (A$M) 39.7

0.0

37.9

Major shareholders: Drake Private Investments (7.5%),

Anitua Ltd (6.9%), Admark Investments P/L (3.6%)

262.5

1.7

22.7

4.0

No

0

0.01

0.02

0.03

Ma

r-1

4

Ap

r-14

May-1

4

Jul-

14

Aug

-14

Sep

-14

Oct-

14

No

v-1

4

De

c-1

4

Jan

-15

Feb

-15

Sh

are P

rice (

$/S

hare

)

AVQ – Axiom Mining Limited Limited

Source: Commsec

AXIOM MINING LIMITED

Axiom is focused on low capex DSO production in 4Q15 at the Isabel Nickel Project (80% AVQ) – potentially one of the Pacific’s largest and most attractive laterite deposits.

Share Price: A$0.011 Recommendation: Speculative Buy

Excellent recent drilling results have indicated a strong likelihood of premium grades (>1.5% Ni) at Isabel, which will strongly enhance project economics and support project financing. The current share price is 78% below our base case valuation of A$0.050/share (assuming 2Mtpa initial production), a massive discount amplified by investor concerns over a court appeal by Japanese giant Sumitomo over ownership of Isabel. Based on the September 2014 resounding court judgement in favor of AVQ, we think that the appeal stands little chance of success.

Exploration and evaluation (A$M)

Corporate & Litigation (A$M)

Exploration/(Expl.+ Corporate) (%)

Funding duration at current burn (years)

Shares on issue (pr end) (m shares) **

Drilling - RAB (M) *

Drilling - RC/Diamond (M) *

Capital raisings (A$M)

Funding from JV partners (A$M)

Cash (A$M)

Cash backing (Ac/share)

Net asset backing (Ac/share)

* All drilling metres are RCR estimates. ** Assumes 1:15 share consolidation April 2015 (subject to s/h approval).

5.00

Year End September Dec-14a Mar-15F 2014a 2015F 2016F

0.4

1.65 2.10 3.86 7.75 6.60

0.86 1.00 9.14 3.90

66 68 30 67 57

0.1 0.3

3352.5 3605.4 3605.4 240.4 240.4

0 5,000 0 5,000 40,000

1,300 1,500 0 4,000 14,000

0.1 4.6 14.5 4.7 0.0

0 0 0 0 0

0.2 1.7 1.2 3.3 4.3

0.0 0.0 0.0 1.4 1.8

0.1 0.3 0.1 5.6 9.4

EQUITY RESEARCH


KEY PROJECTS

* Isabel granted, subject to appeal by Sumitomo. ^ SOE - State-Ow ned Entity

Early Expl Vietnam

Project

80% *

Ownership

72%

West Guadalcanal

Isabel Nickel Project *

porphyry

Metal

laterite

/Option Partner

JV

Status

Adv ExplNi-Co

SOE ^

Au-Ag

Type

Target Project

DSO

Route

Process

Au

Sol. Isl.

Location

100%

Early Expl

na

Sol. Isl.naepithermalna Early Expl

Cardross

Landowners

Quang Tri

porphyryna100%

Quang Binh 63%

naCu-Au-Ag-Zn

Au Vietnam

SOE ^

naporphyry

Aus (Qld)Mid Expl

COMPANY COMMENT Overview: AVQ listed on the ASX in Nov ’06 with a Pacific Rim focus. Its initial focus was on gold and base metals exploration in North Queensland and the Sepon region in Vietnam. Since 2010 its primary focus has shifted towards the Solomon Islands with the Isabel Nickel Project. It also holds other prospective gold exploration ground near the Gold Ridge deposit on the Island of West Guadalcanal, also in the Solomons. History of the Isabel Nickel Project: Isabel has been known about for over fifty years. International Nickel Company (INCO) discovered the deposit in 1956. INCO spent over US$15M on the digging of over 4,000 bulk sampling test pits, along with over 1,500 auger drill holes and feasibility studies. From 1991 to 1993, Kaiser Engineers undertook further exploration (including test pits and testing of bulk samples) and outlined a (non-JORC compliant) historical mineralised zone estimate of 159Mt averaging 1.045% Ni and 0.06% Co, over two separate deposits, to a depth of only about 6 metres. Since then the project has been relatively un-touched. Axiom’s Court Battle for Ownership: The Japanese giant Sumitomo Metal Mining (SMM) spent millions challenging Axiom’s 80% ownership of the project in a three year court battle, which is clear indication that the project is of great significance to such a major company. Axiom scored a resounding win over SMM with judgement in the court battle handed down on 24 September 2014. SMM has appealed the ruling (to be heard from 26 May 2015), but we consider it has little chance of success, given the initial ruling stating that SMM’s actions were an abuse of the court process. Axiom’s Strategy: AVQ has spent many years developing strong relationships with the customary landowners including forming a JV whereby the landowners have a 20% interest in the Isabel Nickel Project. AVQ has developed key relationships and demonstrated a strong commitment to social responsibility The CEO is based in the Solomon Islands. He has an "open door” policy which has put him close to the people, and this has helped smooth the way for the government and community support of all AVQ's projects in the Solomon Islands. Size and Significance of Isabel Nickel Project: The original 159Mt @1.045% Ni non-JORC historical estimate of mineralisation established by Kaiser Engineers was based on a surface resource of shallow predominantly limonitic material to an average depth of only ~6m. We understand that very little drilling or test pitting extended below this depth. The initial drilling results from AVQ’s resource confirmation program, drilling deeper into the saprolitic zone below the limonitic zone have confirmed that mineralisation continues into this deeper zone and as expected the grades are significantly higher – greater than 1.5% Ni in most of the deeper holes drilled (see page 3). This grade increase is very significant for DSO pricing and project economics. In addition, there are further areas of the deposit that were not sampled by INCO or Kaiser in their resource definition work, due to land access issues. From the depth extensions indicated by recent drilling and further resource areas undrilled, we believe that Isabel has the potential to be a very large (>300Mt) high grade ore body similar to the premium deposits in New Caledonia and Indonesia. Little wonder that the Japanese giant Sumitomo put so much effort and investment to try and grasp ownership of this project. Getting Isabel into Production: AVQ will move as quickly as possible to establish an initial ~2Mtpa DSO operation. First production is targeted for late 2015. Project logistics are straightforward with deep-water channel access close to the deposit for shipping/barging. The potential resource spans two separate islands (San Isabel and San Jorge) with a deep water

channel in between. No relocation of human settlements will be required. AVQ is continuing drilling of selected higher grade mineralised zones to confirm a modest initial mineable reserve (e.g. 10-20Mt) on which a start-up DSO operation could be established. Environmental permitting, application for and granting of a mining lease, contractual negotiations with customers and completion of an updated feasibility study are now being addressed. Initial funding has come from an A$5M strategic partnership with the Anitua Group. Further project funding (probably loans from potential customers, World Bank etc rather than equity) will be sourced in 2H15. Larger Scale Development Options: An initial ~2Mtpa DSO operation is likely to be the first small step in AVQ’s development of the potentially major Isabel resource. The next stages of development will be aimed at a major expansion of production and introducing metallurgical processing of the ore on site to increase the value-adding, probably with an existing nickel player as a partner. We think that this is a very sensible approach rather than trying to go it alone. It will de-risk both technical and capital raising risk by bringing in an established nickel producing partner as plant owner and operator. All too often we see junior companies trying to maintain full control and go it alone with large scale projects, with little success. Nickel and DSO Pricing: The nickel price and DSO prices have eased significantly since the Indonesian export ban caused a dramatic rise in mid-2014. Our analysis (see page 6) indicates that a significant recovery, particularly in DSO prices, is likely in 2H15. The good news is that even assuming current prices, we forecast strong profitability and cashflow for AVQ’s proposed initial 2Mtpa DSO operation. West Guadalcanal Project (WGP): An initial scout drilling program (2,500m) of selected epithermal gold-silver targets at the WGP started in 4Q14, as well as further trenching work. The location has the right credentials - it is on a similar structure to St Barbara’s (ASX:SBM) Gold Ridge operation in the East part of Guadalcanal, which is based on a 2.06 Moz gold resource. AVQ has defined a 1.5km long mineralised zone in the East of the Taho prospect (see map page 7). Vietnam and North Queensland Projects: Gold-focused exploration in Vietnam (potential for Sepon style mineralisation) and North Queensland (possible intrusion-related gold systems) continues with a minimal level of activity due to the priority given to the Solomons projects. Corporate: AVQ is funding the current intensive Isabel development program at Isabel through an A$5M cash injection from strategic partner (and driller) Anitua Limited. AVQ should receive a further A$4.8M in June from Sumitomo (court costs recovery) which should see it through to the project financing stage without a further equity raising. The company intends to undertake a 15:1 share consolidation on 15 April 2015 (subject to shareholder approval).

Investment Comment: There is no doubt in our mind that Isabel is a real “company maker” for AVQ – a quality project that most mining juniors can only dream about. But we see the AVQ share price reflecting only a fraction of the potential value of Isabel largely due to Sumitomo’s desperate bid to appeal the court judgement regarding ownership. We are mining analysts, not legal analysts, but if, as we expect, Sumitomo’s appeal is rejected by the courts in early June 2015, those who accumulate shares at current levels should see an immediate handsome reward generated on their investment in AVQ.

EQUITY RESEARCH


Map showing location of Axiom’s Solomon Islands Projects

Source: Axiom Mining

Note: The Isabel Nickel Project (80% ownership by AVQ) consists of two extensive shallow mineralised nickel laterite zones on the islands of Santa Isabel and San Jorge. AVQ also has a 100% stake in the West Guadalcanal gold-silver-copper epithermal exploration project, approximately 30km west of St Barbara’s Gold Ridge Mine (ASX:SBM). It is in a prolific gold-

copper belt as indicated by other operating mines on the map.

The first set of results from AVQ’s confirmatory resource drilling of the Isabel Nickel Project have confirmed higher grade nickel laterite zones (>1.5% Ni)

particularly in the (approx. 8-20m depth) saprolitic zone which was not fully drilled by previous explorers (INCO and Kaiser Engineers). This signals tonnage

increases as well as higher grades for the eventual resource.

Hole ID Intersection1 Easting* Northing* RL EOH

ISD14-001 4.95m @1.06% Ni from 1.2m 0578426 9066114 73m 12.6m

ISD14-002 5.4m @ 0.91% Ni from surface 0578504 9066072 77m 13.0m

ISD14-003 20.7m @ 1.74% Ni from surface, including 12.45m

@ 2.28%Ni from 8.25m 0578786 9066164 123m 30.6m

ISD14-004 14.4m @ 1.94% Ni from 1.5m, including 7.65m @

2.67% Ni from 8.25m 0578808 9066150 131m 30.0m

ISD14-005 18.25m @ 1.63% Ni from 4.75m, including

13.75m @ 1.83% Ni from 9.25m 578831 9066132 148m 26.8m

ISD15-001 7.5m @ 1.26% Ni from surface, including 3.0m @

1.37% Ni from 4.5m 578780 9066195 120m 20.1m

ISD15-002 6.6m @ 1.19% Ni from surface, including 4.6m @

1.34%Ni from 2m 578906 9066094 150m 25.4m

ISD15-003 7.6m @ 0.99% Ni from surface 578906 9066134 160m 30.0

ISD15-004 13.7m @ 1.02% from 1.5m 581055 9065712 150m 20.0m

ISD15-005 16.5m @ 1.49% Ni from surface, including 10m @

1.85% Ni from 6.5m 581025 9065726 145m 16.5m

ISD15-006 16m @ 1.66% Ni from 0.5m, including

11.4m @ 1.92%Ni from 5.1m 581050 9065900 140m 18.5m

ISD15-0072 12.6m at 1.73% Ni from 1.0m, including 4.6m @

2.24% Ni from 9m 581050 9065900 140m 29.0


1.16% Ni from 5.3m 581050 9065800 135m 18.1m


1.62% Ni from 8.5m 581050 9065750 130m 17.6m

ISD15-010 7.5m @ 1.12% Ni from 3.5m, including

3.5m @ 1.16% Ni from 7.5m 581050 9065675 125m 12.0m

EQUITY RESEARCH


The drilling map below shows drilling locations for the Kolorosi Ridge drilling. Of note are the large number of previous drill hole locations from the INCO-Kaiser exploration. AVQ’s drilling to date has clearly just “scratched the surface”. It is encouraging that

all five of the central holes recently drilled (from ISD15-001 to ISD15-002 on the map) intersected higher grade saprolites from 4.5m to 9.25m below surface. Drilling is continuing.



The second series of shallow drill holes (five holes to date)

have been focused on the Havihua Ridge. Three of the

six reported intersections indicated grades of >1.5% Ni in the lower saprolite zone.

EQUITY RESEARCH


Schematic showing typical wet tropical laterite profile and highlighting drilling results from AVQ’s recent drilling.


The project logistics at the Isabel Nickel Project are very favourable for a low capex initial operation producing approximately 2Mtpa of direct shipping ore.

The initial Kolorosi Ridge orebody likely to be mined is shallow (surface

outcropping) and close to the proposed ore loading facility for barge transfer to 50,000t capacity vessels moored in the deep water channel. Similar logistics

exist at the other orebodies.


EQUITY RESEARCH


Activities are now getting underway after the >3 year delay resulting from the court injunction. The first step will be to drill out the high grade target zone at Kolorosi Ridge to generate 10-20Mt of reserves to underpin the initial start-up 2Mtpa DSO

operation. AVQ is targeting first shipments late in 4Q15 after the anticipated granting of a mining licence in mid-2015.

Source: Axiom Mining DIRECT SHIPPING ORE PRICES

Nickel Ore – DSO – Price Chart (US$/t)

Source: Axiom Mining, Ferroalloy.net

DSO prices have stabilised after the mid-year 2014 DSO price spike flowing from high nickel prices and the

Indonesian export ban. The price of direct shipping nickel ore into China is still about twice what it was in

January 2014. We expect prices for 1.5% Ni ore (blue line) to further strengthen to at least US$60/t in

2H15 for the following reasons:

• Chinese nickel pig iron producers have been destocking. Inventories of ore at Chinese ports are

down about 20% since the end of November 2014.

• The Indonesian Government recently confirmed that the export ban will not be lifted.

• We expect the nickel metal markets will move into deficit in 2H15 leading to stronger nickel prices.

• DSO prices have stabilised and resumed a slight upwards trend.

Note that the price

premium for 1.8% Ni ore relative to 1.5% Ni ore is at least US$20/tonne. This

puts into perspective the significance of higher grade

mineralisation indicated at >8m depth in the recent drilling. There is every chance

that AVQ could be shipping 1.8% Ni DSO.

EQUITY RESEARCH


BENCHMARK VALUATION - A LISTED NICKEL DSO PRODUCER (PSE:NIKL)

West Guadalcanal Gold Project: Trenching at Taho has defined a 1.5km long gold

mineralised zone. Trenches uncovered large high grade pods (e.g. trench HVTC067: 21m @ 2.96 g/t, including 4m @ 13.59 g/t Au).


Share Price (PHP): * 27.90

Share Price (US$) 0.62

Share on Issue (M): 3796

Market Cap (US$M) 2367

Annual DSO Production (CY14) (Mt): ** 17.9

Market Cap per Mt DSO produced annually (US$M /Mtpa): 132.2

* Share price as at 19 March 2015, exchange rate US$/PHP = 44.75

** Production is stated in million w et metric tonnes per annum.

Implied Value of AVQ 2Mtpa Initial DSO operation

Implied value of 2Mtpa DSO Production (US$m): 264.4

Implied value of 2Mtpa DSO Production (A$m)*: 311.1

* A$/US$=0.85 long term

A$m cents/share

Implied value 1.6 Mtpa (AVQ equity) - 30% risk discount 174.2 0.048



Nickel Asia Corporation PSE:NIKLNickel Asia Corp. is currently

capitalised at ~US$2.4bn and shipped 17.9Mt of DSO in 2014. The market cap ratio is US$132M per

annual million tonnes shipped. Applying this ratio to AVQ’s potential 2Mtpa initial production (1.6Mtpa AVQ equity), and applying a 50%

risk discount suggests a potential A$124.4M market cap target for AVQ (i.e. A$0.035/share). This does not include future value-added

production expansion potential. NIKL had total laterite resources of

428Mt (Dec ’13). The Market Cap:resources ratio is US$5.53/t. If AVQ proves up resources of just 100Mt (80% equity) then applying

the same ratio implies a benchmark US$442M (A$574M) market capitalisation (A$0.16/share).

EQUITY RESEARCH


CORPORATE VALUATION AND DSO PROJECT SUMMARY

Note: Our base case valuation of A$0.050 per share assumes 1.5%Ni DSO product and US$60.00/tonne DSO pricing for the initial 2Mtpa operation. These valuation parameters are considered conservative since recent drilling has indicated a strong possibility that 1.8% Ni product could be shipped. In this case we would apply US$80/tonne pricing and the valuation increases to A$0.076/share.

NAV Risk

Risk Adjusted

Equity NAV Factor Value

(%) (A$M) (%) (A$M)

Assumptions

Nickel Laterite DSO Price (CIF China) : US$/wet tonne 60 60 40 50 70 80

Long Term Exchange Rate : A$/US$ 0.85 0.85 0.85 0.85 0.85 0.85

Development Projects

Isabel Ni Project (Solomons) 2Mtpa DSO 1 : NPV @ 10% 80% 106.0 70% 59.4 14.0 30.2 88.5 117.6

Isabel Ni Project - Long Term Expansion Potential 2 : Comp. with NIKL 80% 552.0 30% 132.5 31.2 110.4 154.6 176.6

Exploration Projects

West Guadalcanal Gold Project : RCR est. 100% 6.0 50% 3.0 2.0 2.5 3.5 4.0

Vietnam Exploration Properties : RCR est. 72%/63% 3.0 50% 1.1 0.7 0.9 1.3 1.4

Queensland Exploration Properties : RCR est. 100% 3.0 50% 1.5 1.0 1.3 1.8 2.0

Sub-total Isabel & Other Exploration Projects 670 197.4 49.0 145.3 249.6 301.7

Assets

+ Cash (Mar '15F) 1.7 1.7 1.7 1.7 1.7 1.7

+ Tax losses (Mar '15F) 3 20.5 20.5 20.5 20.5 20.5 20.5

Liabilities

- Corporate Overheads : NPV @ 10% 25.4 25.4 25.4 25.4 25.4 25.4

- Interest Bearing Debt 0.0 0.0 0.0 0.0 0.0 0.0

- Corporate - convertible Debt 0.0 0.0 0.0 0.0 0.0 0.0

AVQ Net Assets 666.8 194.2 45.8 142.1 246.3 298.5

Ordinary Shares on Issue (M) 3605.4 3605.4 3605.4 3605.4 3605.4 3605.4

Fully Diluted Shares (M) 4043.0 4043.0 4043.0 4043.0 4043.0 4043.0

Cash on Option Conversion 8.7 8.7 8.7 8.7 8.7 8.7

AVQ Net Asset Value per share : A$/share 0.185 0.054 0.013 0.039 0.068 0.083

AVQ Net Asset Value Diluted : A$/share dil 0.167 0.050 0.013 0.037 0.063 0.076

Valuation Notes

1 See DSO Project assumptions in the table below . Assumes initial 5 year operation at 2Mtpa. NPV risk-discounted by 30% due to early stage project status.

2 Future Production Base Case: Expanded 5Mtpa assumed, valued at US$132/Mtpa (current PSE:NIKL production valuation), discounted by 70%.3 Assumes 30% tax rate

AXIOM MINING LIMITED - CORPORATE VALUATIONRisk-discounted project valuations. Shows base case and sensitivity to nickel laterite prices.

Adjusted

Nickel Laterite Ore Sensitivity

(A$M)

ISABEL NICKEL PROJECT SUMMARY *

MINEABLE RESOURCE ESTIMATES

DSO Ore Nickel Iron Contained

Mt % % kt Ni

Initial high grade DSO ore 10.5 1.50 20.00 157.5

Note: This assumed reserve only relates to an initial small scale 5 year DSO operation.

We expect an eventual resource >100Mt to be confirmed with further drilling.

MINING METHOD Shallow open pit - free digging

Open pit strip ratio: zero pre-stripping required - ore is outcropping at surface.

PROCESS METHOD Direct shipping of laterite ore

PRODUCTION RATE :Mtpa ore 2.0 Wet metric tonnes

CAPITAL COSTS :US$M 30.0 Capex to establish shallow mining and ship loading

% 5.0 Sustaining capital (% of initial capex)

RECOVERY - NICKEL :% 100 Direct shipping ore - no recovery factor applied

LOM AVERAGE OPERATING COSTS (C1) :US$/t 15.00 Mining and loading costs

:US$/t 3.00 Overheads

:US$/t 17.00 Shipping costs to N China (basis 50,000t shipments)

TAX (SOLOMON ISL) :% 30.0 Probable 3-5 year tax holiday for export projects

ROYALTY (SOLOMON ISL) :% 3.0 Mines and Minerals Amendement Bill (2014)

MINE LIFE :Years 5 Based on initial fast track DSO operation only

COMMISSION DATE :Quarter 4Q15 Rapid development timetable anticipated

Assumed Life of Mine Reserves

* These figures are preliminary in nature and are intended to provide only a general indication of project potential scale and economic robustness. The assumptions above have been inputted into our base case

financial model for the proposed initial DSO operation at Isabel.

INITIAL FAST TRACK DSO MINING AND SHIPPING - 5 YEAR MINE LIFE

EQUITY RESEARCH


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Source: IMX

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Undervalued nickel laterite developer : Axiom Mining (ASX:AVQ)

Economy & Finance

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