avesoro resources (aso ln / cn) turkish know-how meets ... · strike from cardinal resources in...

West African gold producer forms from fragments of downturn

Avesoro owns two West African gold operations with CY18 guidance of

230koz pa at US$980/oz AISC. Control of New Liberty in Liberia was gained

after a subsidiary of Turkish construction conglomerate MNG Group invested

in (now 73% holder), and renamed, LSE listed Aureus Mining. Youga was

acquired from Endeavour as an operating mine, with 13g/t open-pittable

satellite feed from a separate acquisition of the Balogo asset from Golden Rim.

Turkish approach enables ‘we can do it better’ in M&A rush

Avesoro benefits from ex Koza staff with a mantra of owner-operated. This

means Avesoro can; (i) drill cheaper than peers at ~US$50/m using Turkish

owner-operated diamond rigs, (ii) build international-standard plants quicker

and cheaper than peers because of in-house capabilities, (iii) mine cheaper

than peers using owner-operated fleets, and with purchase power greater than

peers given the construction parent, and (iv) has access to cheap capital.

Remember the early days of B2, Randgold and Endeavour?

These companies grew by buy-and-build; and Koza also grew from two to

seven mines in nine years. Larger names become victims of their own success

though, with growth slowed by lack of assets able to move the needle. We

think Avesoro can not only grow with smaller ~100koz pa assets, but can out-

compete peers by optimising existing assets with faster builds and lower costs,

plus cheaper organic ounce addition. Youga exemplifies this, a 1Mt pa 40koz

pa CIL bought for US$25m in 1Q16 with 128koz of reserves – drilling and

satellites have lifted reserves to 512koz, with CY18 guidance of 115koz @

US$825/oz AISC driving and SCPe post-tax US$56m FCF this year alone.

Not just M&A: low-cost drilling and mining unlocks value

Over 170,000m of exploration drilling is planned in 2018 using 24 rigs at a cost

of only US$40-85/m for owner-operated diamond rigs. Near mine at Youga

exemplifies the leverage of this; ~US$3m of drilling there defined an SCPe

100koz to 100m last year. Mining starts this year; with even 60koz at forecast

US$850/oz AISC implying a US$30m gross return. Similarly we estimate low

mining costs at New Liberty, alongside infill drilling, should add +200koz to the

mine plan this year lifting, the SCPe NPV by US$68m, while drilling under the

Balogo pit averaged 3.5m @ 36g/t, supportive of an underground operation.

1xNAV7% C$5.34/sh; >20% FCF yield, acquisitions to speed growth

We estimate Avesoro trades at 0.66xNAV7% at spot US$1,315/oz. This

includes a re-optimised New Liberty (+200koz in-pit), and small extensions to

Youga 13g/t satellite pit Balogo, but excludes Youga pit extensions (SCPe

60koz), Balogo underground, Youga undergrounds, and Liberian regional

exploration (1.1Moz compliant), for which we add a nominal US$50m. While

exploration additions are material given 24 rigs drilling, we see acquisitions as

crucial for both growth, and also dilution of the majority holder to lift liquidity.

Avesoro Resources (ASO LN / CN)

Turkish know-how meets West African gold

Brock Salier, PhD +44-207-659-0841 [email protected] Felix Waechter +44-207-659-0842 [email protected]

SHARE DATA

Shares (basic, FD) 82 / 82

52-week high/low C$5 / C$3

Market cap (US$m) US$230m

Net cash (debt) (US$m) (115)

1.0xNAV7% @ US$1315/oz (US$m) 346

1.0xNAV7% FD (p/sh) C$5.34

P/NAV (x) 0.66x

Average daily value (US$000, 3M) 116

FINANCIALS CY17E CY18E CY19E

Gold sold (000oz) 193 228 184

Revenue (US$m) 134 299 242

AISC (US$/oz) 792 968 997

Income (US$m) (17.1) 21.5 25.3

EPS (US$) (0.21) 0.26 0.31

PER (x) - 10.7x 9.1x

CFPS (US$) (0.01) 0.69 0.66

P/CF (x) - 4.1x 4.3x

EBITDA (US$m) 33.8 107.5 62.4

EV/EBITDA (x) 10.2x 2.7x 3.9x

SPOT VALUATION 1Q18E 1Q19E 1Q20E

1xNAV7% FD (US$m) 345.6 346.1 344.5

1xNAV7% FD (C$/sh) 5.34 5.35 5.33

SOTP 1xNAV7% $1315/oz US$m C$/sh

New Liberty NPV 300 4.64

Youga - Balogo NPV 135 2.09

Central SG&A & fin. cost (24.2) (0.37)

Net cash 4Q17 (115.3) (1.78)

Exploration 50.0 0.77

TOTAL 346 5.34

Source: Fidessa

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Avesoro Resources, 12th February 2018

Sprott Capital Partners

2

Summary

The intangible: drill, build, and mine cheaper than peers

Avesoro’s IP comes from the mainly ex Koza staff and Turkish approach to mining borne out of a construction

background, being (i) ability to mine cheaper than any peer in Africa via owner-operator mining and purchase

economies of scale from their parent company a large international construction contractor, (ii) ability to build

faster and without constraints of outsourced engineering firms by virtue of experience at Koza, and (iii) lowest

cost drilling in Africa at under US$50/m per rig, again based on willingness to owner-operate, and access to high-

quality but low-cost Turkish rigs and staff. These three strengths are supplemented by capital strength from

billionaire owner Mehmet Nazif Günal (Mr MNG), whose personal net worth is estimated at US$1.6bn.

The tangible: New Liberty expansion, Youga satellite ounces and Balogo underground

New Liberty and Youga are solid assets, and both will likely extend their current mine lives in 2018, via a pit-

optimisation at New Liberty from lower mining costs and infill drilling, and strike extensions at Youga. Thereafter,

most of the pits mined by Avesoro have high-grade shoots, drilling on which should define multiple underground

extension opportunities, with feasibility studies to start this year at the highest grade of these, Balogo. Avesoro is

well engaged with capital markets, regularly updating 43-101 reports and mine plans to include changing mine

plans and increasing ounces, hence publication of these in 2018 is a key catalyst to convert drilling success to

investors DCF valuations.

The upside: the drilling machine

We have never met a company able to so quickly, and cheaply, convert near mine ounces into mine plans and

cash generation. However, we think the mine life extensions described above are just the beginning. In Liberia,

the company owns 1,340km2 covering three greenstone belts with 58,000m of drilling complete already and

1.1Moz of compliant resources defined. More recent acquisitions have created plentiful targets, with a systematic

soil, trench, geophysics and drill approach likely to yield a growing resource base in coming years. Similarly in

Burkina Faso the company holds 309km2 of licences around Youga, Balogo and Ouare in the prolific belt along

strike from Cardinal Resources in Ghana (7Moz). Again early work has identified multiple long gold-in-soil

anomalies to be followed up with regional drilling in due course.

Quantifying the intangibles

Cheap drilling: a building block without parallel among peers

Avesoro utilises a fleet of its (group) owner operated diamond drill rigs. The group currently owns eight diamond

drilling rigs, all of which are Turkish manufactured, cost only €150,000, and can drill over 2,500m per month.

However, the main attraction is the cost, which varies from US$35-65/m depending on surface access (higher in

Liberia with jungle cutting requirement). The cost savings aren’t just from drilling, with many examples ranging

from New Liberty setting up an in-house ALS laboratory, through to replacing expensive low-quality wooden core

trays with long-life plastic-covered trays, from Turkey of course. Despite the focus on cost saving, all work done

by the company is to rigorous international standards, follows strict QA/QC protocol and uses internationally

accredited laboratories.

Figure 1. Group-owned turkish diamond drill rig capable of 2,500m per month at under US$50/m costs

Source: SCP



3

Fast low-cost mine builders: quality western equipment, proven with Kokoya eleven month build

Although owned by Avesoro Holdings (parent company) not Avesoro Resources, the precedent of the Kokoya

build is an important demonstration of management capabilities. The project was acquired at PFS stage in 3Q14.

Despite the company being at a formative stage, in-house staff completed engineering designs in a little over six

months, commencing the build in 1Q15, with the plant commissioned just 11M later in April 2016. This 750ktpa /

~85koz pa CIL was built in a very remote location in the Liberian jungle, but despite this, all in costs came to only

~US$65m (including mining fleet) utilising a similar design to that rolled out by Koza many times historically. The

plant is built to western standards, using Czech PSP mills, South African agitators, UK Warman pumps and

Turkish steel. A typical example is the 800,000m3 fuel storage tanks costing around US$250,000 – similar tanks

at New Liberty cost ten times this at US$2.5m. Another example comes from a TMF lift at New Liberty costing

US$2m against historic quotes of US$7.5m. The operability of the mines also seems more efficient than ‘belt and

braces’ sites designed by international consulting firms. For example, the footprint at Kokoya is extremely

compact, creating material operating efficiencies.

Figure 2. Kokoya site and TMF, plant, lab, primary crusher and pit

Source: SCP

Mining: owner-operated efficiencies drives ~10% increase in profit compare to peers

A typical pit mining cost in West Africa is ~US$2.50/t mined including contractor margin. MNG’s owner-operator

approach took costs from US$4.10/t mined in 2015 and 2016 at Youga to US$1.70/t in 2017. At New Liberty a

bad contract meant costs dropped from US$4.61/t in 2016 to US$2.20/t in 1Q17 (harder rock). The 2017 and

2018 fleet acquisitions at Balogo and New Liberty are capable of ~10Mtpa and ~15Mtpa for capex of US$5.9m

and US$19m, respectively, adding capital charges of US$0.12-26c/t. On a rough basis, this drives a US$0.50/t

saving when compared to good contractor. For a typical 8:1 strip open pit this equates to 0.1g/t Au, or a 5%

revenue increase on a 2g/t West African pit, or a 12% increase in earnings on a 40% EBITDA margin operation.

On a bad contract this escalates – using the legacy New Liberty contract, savings equate to a 60% increase in

margin, which precisely defines how Avesoro ended up owning and running New Liberty.

Valuation

Youga / Ouare and Balogo

43-101: Updated 43-101 reports from 2Q17 onward showed an NPV8% at US$1,250/oz of US$118m, or US$91m

discounting 43-101 FCF from 1Q18 at 7%. Our model matches this, with a US$91m NPV7% at US$1,250/oz from



4

1Q17. We then deduct tax (27.5% Balogo/Ouare, 17.5% Youga) and minorities (10%) which drops this to

US$65m, lifting gold to spot US$1,315/oz for US$85m. Escalating trucking and processing in line with power and

reagent inflation costs in Burkina drives a 43-101 based NPV7% of US$80m.

Upward revised 2018 guidance: This 43-101 mine plan sees only 74koz of production vs. CY18 guidance of 110-

120koz given increased high-grade feed from Youga’s new Gassore pit extensions, and increased high-grade

ore feed from Balogo from positive reconciliation to the top-cut resource, and recently drilled satellite ore. As

such, we extend Balogo from 2Q18 to 3Q18, pushing Ouare out commensurately (fleet will move across when

Balogo depleted). This drives a substantial increase in NPV7% to US$135m.

Upside: With a staggering 139,000m of drilling planned for Burkina Faso in CY18 alone, we expect (i) extensions

to pit ore at Youga like Gassore this year, (ii) a growth in Ouare reserves from current ~140koz to potentially

double in the coming 24M, with many high-grade shoots not included in the resource model because of wide-

spaced drilling, as well as satellite targets, (iii) underground resources from Balogo, as well as under multiple pits

at Youga, and (iv) regional satellite resource definition. While these could all be modelled, we more simply add a

US$50m nominal valuation at this stage (including for Liberian exploration upside). Although very qualitative, it is

just this qualitative measure, ie aggressive near-mine drilling to add value, which appeals to us about Avesoro.

That said, the ~US$40m EBITDA generated from US$2m of drilling at Gassore (see ‘Exploration upside’, p14),

even before underground operations are considered, underlies our confidence in this assumption.

New Liberty

43-101: The 43-101 published in 4Q17 showed US$320m of FCF at US$1,300/oz from 1Q18, or an NPV7% of

US$281m – our own model using the same inputs drives a 43-101 NPV7% of US$292m.

Downgraded guidance to 43-101: Guidance for CY18 of 110-120koz is a reduction on the 43-101 144koz, with

sustaining capital of US$45-50m well over US$13m from 43-101 as stripping catch-up continues. As such, we

model in line with guidance, dropping the grade to 2.6g/t from 2.9g/t, and adjusting the stripping plan to show a

more consistent ~32Mtpa (estimated fleet capacity), but lift the gold price to spot US$1,315/oz. Still modelling

mining inventory of 632koz from 1Q18 onward vs. 661koz in the 43-101, this lowers the NPV7% to ~US$224m.

Likely pit expansion: We expect 200-250koz to enter a revised 43-101 pit in CY18 via a mix of infill drilling of

previously excluded inferred ounces, and lowering the mining costs in optimisation to add further ounces. To our

model above we add 200koz to 968koz from 1Q18, dropping the grade from 3.03g/t to 2.86g/t, and lifting the

strip from 16.5:1 to 17.6:1 in reflection of some deeper ounces, but also in-pit conversion. This lifts the NPV7% to

US$300m.

Valuation and sensitivities: 1xNAV7% US$1,35/oz

Based on the DCF models described above, we show a SOTP valuation below, run at spot US$1,315/oz gold,

and par 1xNAV7%. We deduct central SG&A and finance costs, and model cash and debt as estimated at 4Q17.

The DCF already includes +200koz expected for the New Liberty pit, and +60koz at Youga from an extension at

Balogo to 3Q17 and pit optimisation, but excludes the Gassore resource (60-100koz potential pittable at +3g/t),

Balogo underground, and Liberian regional exploration (compliant 1.1Moz, 1,340km2 licences over three

greenstone belts). With investors using a range of discounts, commodity prices and NAV multiples for precious

metal producers, we do not set a price target. Rather, we show 1xNAV at spot gold, and sensitise to inputs

below. Broadly, this reflects the moderately high costs of New Liberty on AISC basis (which includes the high-

strip in early years), showing strong leverage to gold, but maintaining a robust valuation even at US$1,100/oz

gold.

Table 1. SOTP (1xNAV, spot commodity price) DCF valuation and sensitivities

US$m NAVx C$/sh

New Liberty NPV 300 1.0x 4.64

Youga - Balogo NPV 135 1.0x 2.09

Central SG&A & fin. cost (24.2) 1.0x (0.37)

Est. cash 4Q17 23.1 1.0x 0.36

Est. debt 4Q17 (138.4) 1.0x (2.14)

Cash from options - 1.0x -

Exploration value 50.0 1.0x 0.77

1xNAV7% 346 - 5.34

1xNAV asset (US$m) $1115oz $1215oz $1315oz $1415oz $1515oz

9% discount 153 245 330 412 492

7% discount 161 258 346 431 514

5% discount 171 271 363 451 537

Valuation (C$/sh) $1115oz $1215oz $1315oz $1415oz $1515oz

0.8xNAV 1.99 3.19 4.27 5.33 6.35

1.0xNAV 2.49 3.98 5.34 6.66 7.94

1.2xNAV 2.99 4.78 6.41 7.99 9.53

Source: SCP



5

Source: SCP estimates

Ticker: ASO CN / LN Share price Market P/NAV: 0.66x

Author: Brock Salier Market cap 1xNAV2018 FD:

Group-level SOTP valuation Resource / Reserve Mt g/t Au 000oz EV/oz

US$m O/ship NAVx C$/sh Meas., indicated & inferred 45.1 2.1 3,061 113koz

New Liberty NPV 300 90% 1.0x 4.64 Proven & probable 16.7 2.3 1,229 281koz

Youga - Balogo NPV 135 90% 1.0x 2.09 Commodity price CY17E CY18E CY19E CY20E CY21E

Central SG&A & fin. cost (24.2) - 1.0x (0.37) Gold price (US$/oz) 1,315 1,315 1,315 1,315 1,315

Est. cash 4Q17 23.1 - 1.0x 0.36 Share data

Est. debt 4Q17 (138.4) - 1.0x (2.14) Basic shares (m) 81.6

Cash from options - - 1.0x - FD with options (m) 81.6

Drilled oz over 43-101 50.0 - 1.0x 0.77 Ratio analysis CY17E CY18E CY19E CY20E CY21E

346 5.34 FD shares out (m) 81.6 81.6 81.6 81.6 81.6

1xNAV sensitivity to discount and gold price EPS (US$/sh) (0.21) 0.26 0.31 0.49 0.43

1xNAV asset (US$m) $1115oz $1215oz $1315oz $1415oz $1515oz CFPS before w/c (US$/sh) (0.01) 0.69 0.66 1.21 1.04

9% discount 153 245 330 412 492 EV (US$m) 345 295 246 152 75

7% discount 161 258 346 431 514 FCF yield (%) - 25% 24% 43% 35%

5% discount 171 271 363 451 537 PER (x) - 10.7x 9.1x 5.7x 6.5x

1xNAV sensitivity to NAV multiple and gold price P/CF (x) - 4.1x 4.3x 2.3x 2.7x

Valuation (C$/sh) $1115oz $1215oz $1315oz $1415oz $1515oz EV/EBITDA (x) 10.2x 2.7x 3.9x 1.4x 0.8x

0.8xNAV 1.99 3.19 4.27 5.33 6.35 Income statement CY17E CY18E CY19E CY20E CY21E

1.0xNAV 2.49 3.98 5.34 6.66 7.94 Revenue (US$m) 134 299 242 288 280

1.2xNAV 2.99 4.78 6.41 7.99 9.53 COGS (US$m) (129) (228) (201) (231) (229)

Valuation over t ime 1Q18 1Q19 1Q20 1Q21 1Q22 Gross profit (US$m) 4.9 70.9 40.7 57.3 50.8

Mine NPV 435.2 419.8 400.6 382.7 370.9 Expenses (US$m) (10.3) (29.9) (4.9) (5.0) (5.1)

Central costs (24.2) (17.2) (11.7) (10.4) (12.9) Net finance costs (US$m) (11.4) (7.6) (6.0) (5.6) (3.7)

Net cash (115.3) (106.5) (94.4) (75.4) (64.9) Tax (US$m) - (5.1) (2.6) (4.2) (3.7)

Nominal exploration 50.0 50.0 50.0 50.0 50.0 Minority intr. & other (US$m) (0.3) (6.8) (1.8) (2.5) (3.1)

Total (US$m) 345.6 346.1 344.5 346.9 343.0 Net income (US$m) (17.1) 21.5 25.3 40.1 35.2

Total (C$/sh) 5.34 5.35 5.33 5.36 5.30 Cash flow CY17E CY18E CY19E CY20E CY21E

Guidance Prod'n C1 cost AISC Sust cap Expln Profit/(loss) after tax (US$m) (17.0) 21.5 25.3 40.1 35.2

CY18 000oz US$/oz US$/oz US$m US$m Add back D&A (US$m) 44.9 78.4 31.1 60.4 53.0

New Liberty 110-120 630-670 1020-1060 45-50 - Less working cap / other (US$m) (35.8) 1.5 1.2 0.9 (4.4)

Youga 110-120 540-580 805-845 20-25 - Less finance costs (US$m) 10.5 7.6 6.0 5.6 3.7

Group 220-240 620-660 960-1000 65-75 25 Cash flow ops (US$m) 2.6 108.9 63.6 106.9 87.5

Production (100%) CY17A CY18E CY19E CY20E CY21E PP&E (US$m) (38.3) (51.0) (8.6) (7.4) (7.1)

New Liberty prod'n (000oz) 76 116 128 159 147 Other (US$m) (0.5) - - - -

New Lib. cash cost (US$/oz) 870 685 896 725 808 Cash flow investing (US$m) (38.9) (51.0) (8.6) (7.4) (7.1)

New Liberty AISC (US$/oz) 1,266 1,109 992 811 898 Borrowings (US$m) 18.8 - - - -

Youga production (000oz) 116 111 56 60 66 Finance charges (US$m) (9.1) (7.6) (6.0) (5.6) (3.7)

Youga cash cost (US$/oz) 461 587 890 802 776 Debt draw (repayment) (US$m) 16.1 (33.7) (14.3) (21.3) (20.3)

Youga AISC (US$/oz) 478 820 1,007 882 861 Proceed from stock (US$m) 20.0 - - - -

Group prod'n (000oz) 192 228 184 219 213 Cash flow financing (US$m) 45.9 (41.2) (20.4) (26.9) (24.0)

C1 costs (US$/oz) 624 637 894 746 798 Net change in cash (US$m) 9.7 16.8 34.6 72.7 56.3

AISC cost (US$/oz) 792 968 997 830 886 Balance sheet CY17E CY18E CY19E CY20E CY21E

AISC = C1 + sust capex + cap'd stripping + share of cent. G&A Cash (US$m) 23 40 74 147 203

Accounts receivable (US$m) 43 41 41 40 44

Inventories (US$m) 23 26 30 31 31

PPE & exploration (US$m) 255 227 205 152 106

Total assets (US$m) 344 335 350 369 385

Debt (US$m) 138 105 90 69 49

Other liabilities (US$m) 27 31 35 35 36

Shareholders equity (US$m) 421 421 421 421 421

Retained earnings (US$m) (250) (221) (194) (152) (113)

Reserves and other (US$m) 172 135 123 100 77

Liabilit ies + equity (US$m) 344 335 350 369 385

1xNAV7% 1Q18 US$1,315/oz:

C$290m £173m C$5.34/sh 307p/sh

C$3.55/sh 212.5p/sh

US$600/oz

US$800/oz

US$1000/oz

US$1200/oz

0koz

100koz

200koz

300koz

CY17A CY18E CY19E CY20E CY21E

New Liberty Youga Group AISC



6

Corporate structure and history

Avesoro Holdings is the direct parent company of Avesoro Resources, formed in 2Q13 to acquire African

development assets. The group company purchased, built and still owns and operates Kokoya in Liberia,

purchased Balogo and Youga separately before combining and selling to Avesoro Resources in 4Q17, and has a

controlling stake in Avesoro Resources, which will be the acquisition vehicle going forward.

Figure 3. Avesoro Resources group structure

Source: SCP

Amlib / Kokoya: in Liberia, was acquired in 3Q14. A 6M design and 12M build resulted in first production by 2Q16

from a 750ktpa / ~85koz pa CIL. This asset is small with production of ~170koz expected over three years from

2016-2018, so it is unlikely to be acquired by Avesoro Resources. Rather, it acted as a ‘beach head’, being a

starter-operation used to build geological and operating teams and corporate infrastructure.

Aureus / New Liberty: On post 1Q18 1 for 100 consolidation basis, MNG next invested US$30m in Aureus at

321p for a 22% holding in 2Q16, followed by US$60m of $72m at 150p/sh in 4Q16 to assume control with 73.5%

ownership, changing the name and introducing a new operating management team. In 1Q17 the company’s

US$105m project-finance debt was rescheduled to increase the tenor by two years and remove a cash-sweep,

with a further US$35m 3.75% facility put in place by in 3Q17 to fund re-investment at New Liberty.

Endeavour / Youga-Balogo: MNG first purchased the Balogo deposit in 1Q15 for A$8m cash with an existing

185koz @ 6.8g/t. This was followed by the acquisition of the Youga-Ouare 1Mtpa CIL mine from Endeavour for

bought for US$25m with US$5m cash, 128koz reserves and 40-45koz production – drilling and satellite additions

and acquisitions have lifted reserves to 512koz, with a CY18 production target of 115koz @ US$825/oz AISC.

Figure 4. Avesoro Resources mine locations, and MNG Holdings Kokoya project

Source: Google Earth, SCP

New Liberty

Kokoya (not owned)

Balogo

Youga



7

New Liberty (90%)

New Liberty is ~100km NW of Liberia’s capital Monrovia (Figure 5), with access via 80km of sealed road, and international port facilities at Monrovia. The mine runs on diesel generators with 11MW of capacity, with plentiful local water. Operations are governed by a 25 year Mineral Development Agreement with option to extend, with a 3% government royalty and 10% carried equity interest. The 478km2 mining licence was granted in 2009. The area is largely unpopulated with sporadic artisanal workings and no environmental issues, with an amended ESIA produced in 1Q14 prior to an investment by the IFC.

Asset history: Prior owner Aureus completed a DFS in 2Q13, started construction in 3Q14, with first pour in 2Q15. However, the operations suffered from commercial issues via an inefficient legacy mining contract, and commissioning and technical issues with the ball mill, plant, and detox plant. This was exacerbated by a shut-down from a tailings breach, the financial distress from which led to MNG Gold taking control via three equity raisings, with the company renamed to Avesoro Resources in 4Q16.

Figure 5. New Liberty mine and surrounding exploration licences including Weaju and Ndablama

Source: Avesoro Resources

Geology

Western Liberia hosts deformed Archean granite-greenstone belts in a broadly NE-SW trend. The region, which

has been subject to lower amphibolite-grade metamorphism is bounded to the SE by trans-crustal NW-SE shear

zone which introduced additional deformation and caused rotation of the regional strike to an E-W direction

around New Liberty (Figure 5). The deposit itself is a classic example of an Archean lode gold system. East-west

compression of NW-SE structures drove regional sinistral movement. At New Liberty itself a conjugate fault

linked twin parallel regional structures, creating a structurally favourable dilation zone at the deposit. The

chemical trap comes in the form of ultra-mafic host rocks, whose softness likely focussed the conjugate host fault

in the first place, and whose high iron formed a favourable chemical environment to precipitate gold.

Free-milling gold is associated with pyrrhotite (FeS), gersdorffite (NiAsS), and arsenopyrite (FeAsS), and subordinate pyrite, chalcopyrite, and pentlandite. Ore zones average 10m thick, and are near-continuous over 2km of strike. Silicification with abundant magnetite and minor hematite offsets the soft host rocks, giving a standard to slightly high bond work index of 18.8.



8

Figure 6. Regional magnetics showing structure and typical cross section through New Liberty

Source: Aureus, Avesoro Resources, SCP

Resources and reserves

An initial 600koz at 4.4g/t Au was updated to 1.4Moz at 3.2g/t Au in 2006, and to 1.7Moz at 3.5g/t Au in the 2012 DFS. At that time reserves of 924koz @ 3.4g/t were defined at a 15.5:1 strip. Post depletion, 2Q17 reserves are shown in Table 2 based on a 0.8g/t pit and 2.0g/t underground cut-off. These are based on 3.3% ore loss, 13.5% dilution, and an economic cut-off grade of 0.85g/t Au.

Table 2. New Liberty mineral resources and reserves as of July 31st, 2017

Source: New Liberty NI 43-101, Nov 2017; includes stockpiles of 15koz at 1.1g/t Au.

New Liberty exploration upside

Current reserves exclude 325koz @ 2.8g/t Au of inferred, infill drilling of which was completed in 2017 with ~15koz of this material within the current pit shell. The company will also test depth extensions to high grade shoots. The current underground resource of 2.8Mt at 3.3g/t Au beneath the pit is clearly sub-economic but demonstrates that mineralization is open at depth. Stepping away from New Liberty, the company has identified regional targets in a similar geologic and structural setting which it plans to drill in 2018.

Our view: although only 15koz of inferred lies in the current pit shell, a sizeable volume of inferred lies just outside the US$1,300/oz pit. With 14,000m of infill in 2017 we expect reserves to increase by >200koz before depletion. High-grade shoots have underground potential, although at this stage more drilling is needed. Combined with mill improvements and lower mining costs, we expect a revised 2Q18 mine plan to show an additional 200-300koz at 2.7-2.9g/t before depletion.

Figure 7. New Liberty target resource drilling areas


Tonnes

(Mt)

Grade

(g/t Au)

Ounces

(000oz)

Tonnes

(Mt)

Grade

(g/t Au)

Ounces

(000oz)

New Liberty M&I 9.6 3.2 985 New Liberty Proved 0.2 3.03 15

New Liberty Inf 6.4 3.0 620 New Liberty Probable 7.2 3.03 702

New Liberty total 16.0 3.1 1,605 New Liberty total 7.4 3.03 717

Resources Reserves

σ1 σ1

New Liberty dilation zone



9

Mining

The New Liberty Mine is a conventional open pit truck & shovel operation. The mining equipment is owner-

operated and includes a 12m3 and up to six 6.7m3 backhoes (PC2000 and PC1250) and a fleet of 90t haul trucks

and 40t ADTs. Following the updated resource statement in mid-2017, the company devised a new life-of-mine

plan to improve the operation’s performance, which suffered from high dilution and poor reconciliation under prior

owners with only RC grade control used. Key elements include grade control trenching, a new blast monitoring

system to lower dilution using air-deck blasting (stuff holes with bags to lower heave), and geotechnical

assessment to improve the pit design. The resource model block-size was also adjusted to the new mining

equipment, with a revised pit optimization and production schedule. This has resulted in dilution dropping from

15% to only 0-5%.

The aggressive mine plan output saw the total material moved per month triple between August 2017 and March

2018, with total material movement of 47Mt planned for 2018 (Figure 7). The current fleet is capable of handling

~15Mtpa, and was doubled in size at year end 2017. As such, we expect rock movement to be constrained to

~32Mtpa (albeit with flex from contractors as required), and would look for this to be reflected in a smoother mine

plan to be released mid-year.

Figure 8. New Liberty Kinjor Pit


Processing

New Liberty ore is free-milling, using a standard primary crush, ball mill, gravity circuit, and conventional CIL with

elution, electrowinning and smelting. The plant was commissioned in 2015 at 1.1Mt pa nameplate capacity, albeit

with numerous commissioning issues under the prior owner. Upon gaining control, Avesoro has made numerous

clever modifications to lift throughput from 132tph (1.04Mtpa) by addition of more steel balls (150tph / 1.2Mtpa),



10

switching on the unused verti-mill for ball-mill oversize regrind (178tph / 1.4Mtpa) and finally the addition of a

tertiary crusher (200tph / 1.6Mtpa). The above also benefitted from allowing nameplate 50um grind to drop back

to 80um, which has had no impact on recovery. This supports the company’s target US$20/t processing costs,

which has also benefitted from one more falcon in the gravity circuit (60% gravity, so lower cyanide

consumption), and the move to add additional balls (dropped consumption by 10x), then hardened steel balls at

double the unit cost, but one third the consumption.

Our view: the above subtleties very simply differentiate Avesoro from typical juniors, and speak volumes to ‘office

based design’ experience of consultants vs. site based experience of good operators. While we model US$20/t

processing costs going forward, once at full throughput we see potential to drop under this.

Figure 9. Total material movement at New Liberty – each colour represents successive cut-back


Economics

Operating costs: Avesoro forecasts a 22% reduction of mining costs from the January-July 2017 actual of US$2.37/t to an LOM average of US$1.85/t going forward. These savings will be achieved by bringing operations in house, with new and more efficient equipment, thereby saving on contractors’ margins, fuel, labour and drilling costs. Similarly, processing costs are expected to come down from the current ~US$26/t to US$20/t, a 24% reduction. Again, lower unit costs are expected from by-passing contractors but also from increasing mill throughput from 1.1Mtpa nameplate to ~1.65Mtpa. The higher throughput is also forecast to lower G&A unit cost by 30% from ~US$10/t to US$7/t.

Capital costs: Sustaining capital of US$42.5m is expected for the remainder of the mine life. Mine closure costs are budgeted at US$10m. Based on these parameters, Avesoro calculates LOM C1 costs of US$659/oz (vs. US$667 SCPe) and AISC of US$749 (vs. US$735 SCPe).

Regional exploration

Avesoro holds a large land position around New Liberty extending over 1,340km2, with both standalone and

satellite feed targets (Figure 5). The holdings encompass three major greenstone belts at a convergence zone of

major structure. The portfolio was extensively progressed under Aureus management, with 53,800m drilled to

date, and 22,750m of trenching, as well as over 800 pits, 32,000 soils, and 500 BLEG samples taken, but in

addition to this Avesoro acquired Sarama Resources’ exploration licences (‘Cape Mount’) in 2016. Prioritised

gold corridors and drill-ready targets are listed below in order of interest;

1. Cape Mount: preliminary exploration was followed up with only 15 drill holes (highlights of 7.5m @ 3.9g/t Au) on 1km of the 15km ‘Matambo’ gold corridor. Soil anomalies coincide with diorite bodies and magnetic highs on BIF bodies as well as structural intersections on meta-volcanics. Some drilled targets have analogies with granite-hosted Subika deposit at Ahafo (>5Moz).

2. Silver Hills: 15km strike of anomalous soil sampling, Belgium target extends over 1km of this, with high-grade trench results on a BIF unit including 2.3m @ 90g/t Au and 0.9m @ 82g/t Au.



11

3. New Liberty near mine: multiple targets Anomaly B, Western Extension, Anomaly C are drill ready. Targeting based on ultramafics (same host rock as New Liberty) identified from radiometrics, lying on structural corridors. Detailed regolith mapping is now seeing through cover with increasing grade at depth.

4. Ndablama: is a 13km strike soil alteration zone with 10 targets identified. The most advanced is Ndablama where 901koz @ 1.63g/t was defined in a compliant resource historically. Although lower grade, the ore zones are thick and free milling, so the company will now evaluate both standalone and satellite feed opportunities to the existing mill. Avesoro is targeting 2-3moz at >2g/t testing along strike from initial compliant resource.

5. Weaju: hosts a compliant 178koz @ 2.1g/t, with mineralisation open along strike.

Figure 10. Regional exploration targets surrounding New Liberty

Source: Avesoro

Burkina Faso assets: Youga, Ouaré and Balogo (90%)

The Youga plant site lies in southern Burkina adjacent to the Ghana border in a low-risk area. Avesoro operates

a central plant there, with satellite feed from nearby Ouare and higher-grade Balogo operation 150km away. The

plant is accessible by a ~190km partly-sealed road ~3.5 hours from the capital, with low population density in the

mine surrounds. Grid power is supplied from Ghana, and process water is pumped to the project via an 11km

pipeline to the nearby river. The mining and plant licence at Youga covers 29km2, and was awarded in 2003 for

20 years with five-year renewals thereafter.

Youga also has three exploration permits over 127km2 (Youga, Songo, Zerbogo II) with two exploration permits

at Ouaré to the NW of Youga over 135m2, and two at Balogo covering 360km2 taking the total land holding to

705km2. Exploitation permits are granted for Balogo, and expected for Ouaré in due course. The Burkina Faso

fiscal regime covers a 4% royalty and 10% minority.



12

Figure 11. Location and road access to the Youga, Ouaré & Balogo licences


Geology

South-eastern Burkina Faso contains multiple southwest-northeast trending lower Proterozoic greenstone belts bounded by Archean basement. The Youga greenstone belt extends for 400km from Bole in western Ghana into southern Burkina Faso and hosts both the Youga and Ouaré deposits. Both Youga and Ouaré sit along the Bole-Navrongo structure which is the northern boundary of the Youga greenstone belt, and Balogo is located on a splay of the prolific Markoye Fault System which in total hosts c. 20Moz of gold.

Figure 12. Regional geology of Burkina Faso




13

Youga comprises a cluster of mineralized pods mined in separate pits. Pods are distributed throughout the Tarkwaian outlier, a structurally emplaced block of mostly younger sandstones within older mafic schists. During tectonic activity, less competent schists deformed in a ductile manner while the rigid sandstone body experienced brittle deformation; pressure release and cracking allowed inflow of fluids, formation of veins, and precipitation of gold. While each pod has its idiosyncrasies, they all share this genetic framework. Ouaré exploited an analogous rheological contrast, but the rigid block is a felsic pluton. Mineralization occurs on the margin of the granitoids within folded volcanogenic schists. Balogo also formed at the margins of a felsic intrusive, but is entirely hosted in Archean basement rather than in a Proterozoic greenstone belt. As such, the host rocks at Balogo are less iron-rich and comprise deformed metasedimentary schists. Interestingly, the Balogo deposit achieved much higher grades than its greenstone-hosted counterparts above.

Mineralization: While textures vary locally, the overall style of alteration and mineralization is similar at Youga and Ouaré, in keeping with their genetic similarities. Gold is hosted in quartz-sulphide veins, with low sulphide content and variable sulphide composition alongside pervasive wall rock silicification. At Balogo, only the highest-grade portions are quartz-vein hosted, with remaining gold hosted with copper and magnetite as disseminations or as massive pods.

Resources and reserves

At Youga-Ouare Endeavour had defined a global resource of 953koz as at 4Q14, while Balogo was acquired with a resource of 185koz @ 6.8g/t. Post-acquisition, drilling by Avesoro drove an increase of 41% at Youga for a 2Q17 updated resource of 1.3Moz @ 1.5g/t, while the 2Q17 resource at Balogo stood at 114koz @ 6.4g/t net of depletion after mining started in 1Q17.

A low 0.7g/t cut-off grade at Youga lowers the hurdle for adding near-surface ounces. This grows as distance from the plant increases, the cut-off grade rises to reflect the additional trucking costs of 9c/t/km. At Ouaré, 44km away, the cut-off grade rises to 0.82g/t Au, and at Balogo, 154km away, the cut-off grade is 1.2g/t Au. The various cut-off grades show most importantly that the impact of trucking distance is modest on medium-grade open pits, but immaterial on high-grade feed sources like Balogo.

Table 3. Youga (incl. Ouaré) & Balogo resources and reserves as of June 2017

Source: Youga and Ouaré 43-101, Balogo 43-101, June 2017

Mining

Youga, Ouaré and Balogo are conventional open pit truck and shovel operations which all feed the Youga processing plant. Currently the A2NE/W pit at Youga and the Balogo pit are being mined. The higher grade feed from Balogo is set to be depleted by 1Q18 under the current 43-101, although we model extension to 3Q18 given the recent exploration success. After Balogo is depleted, mining will move to Ouaré to provide a steady supply of feed. To date no underground mining has been undertaken, but highlights from several of the pits would indicate that the cores of ore zones range from 20-40gm, which we estimate is economic for underground mining. These zones will be better delineated in 2018. The critical difference between prior operators and Avesoro is mining costs, with a prior contractor costing US$4.10/t, which has dropped to US$1.85/t in November under Avesoro’s owner-operated fleet (SCPe US$2.05/t including capex/depreciation).

Tonnes

(Mt)

Grade

(g/t Au)

Ounces

(000oz)

Youga indicated 15.6 1.4 703

Youga inferred 12.9 1.6 639

Youga resources 28.5 1.5 1,342

Balogo indicated 0.5 6.8 99

Balogo inferred 0.1 4.0 15

Balogo resources 0.6 6.4 114

Youga probable 9.0 1.49 434

Balogo probable 0.3 8.81 78

Total reserves 9.3 3.0 513



14

Figure 13. Open pit at Balogo showing ripping-grade control lines

Source: SCP

Processing

The Youga processing plant was commissioned in 2008 and consists of a three-stage crushing plus single-stage ball milling circuit, followed by a gravity circuit and a standard CIL plant. In the seven years from 2009-2016, throughput averaged 986kt pa, but Avesoro intends to operate the plant at a higher throughput of 1.2Mt pa. Recoveries have historically varied with feed grade and ranged from 88.5%-93.8%. In the last two quarters, Q3 and Q4 2017, recoveries were constant at 89% which is acceptable but leaves some room for improvement. However, since the plant feed going forward will come from new sources with different ore characteristics and grades, predicting future plant performance is tricky, albeit partially offset by new oxygen plants to address this.

Economics

Operating costs: Avesoro predicts impressive LOM mining costs of US$1.61/t at Youga and Ouaré, and US$1.59 for Balogo, though this only represents a 10% savings compared to the US$1.79/t achieved in 2017. Processing costs at the Youga plant are flat at US$17.58/t of ore processed. Trucking costs vary from US$0.06/t to US$0.56/t at the different Youga pits, to US$4.05/t from Ouaré, to US$14.06/t from Balogo.

Capital costs: The mining fleet at Balogo was procured in 2017 for US$5.9m and comprises an excavator, four haul trucks, a drill, a track dozer, and a grader. Quick maths shows the 10Mtpa fleet depreciated over five years gives a 12c/t capital charge, far less than the ~+50c / US$2.50/t cost for margin and inefficiencies of a lease fleet. No acquisitions were made at Youga in 2017. Once the Balogo deposit has been mined out, the mining fleet will migrate to Ouaré and begin mining that deposit. At Ouaré, the fleet will be stocked up with an additional US$5.28m in capital expenditure. The entire fleet will incur US$1.12m in sustaining capital for the remainder of the mine life. Additional capitalized items are the expansion of the tailings storage facility for US$2m, extension of the waste dumps for US$4.8m, environmental and social expenditures of US$9.66m, and a road between Youga and Ouaré, including a bridge over the Nakambé river, for US$1.7m.

Exploration upside

Avesoro Holdings and now Avesoro Resources have taken an aggressive approach to near-mine exploration on the Youga property. Activities commenced upon acquisition in May 2016 with a ground mag survey over 87km2 followed with 42 trenches over 8.7km and 339 drill holes totalling 38,000m. As described in the resources section above, this led to a substantial increase in resources, and some of the mineralization identified since then has already been mined. Sixteen untested gold-in-soil anomalies in favourable structural settings have been identified, and five drill-ready targets are waiting to be drilled in 2018. Additionally, near-surface mineralization at the various pits remains open at depth and the underground potential of high-grade shoots has not been tested.

Youga saw 52,000m drilled in 2H17 across four main target areas, Gassore, West Pit 3 East, West Pit 4 and A2NE Mid Pit Down Dip. The key success was Gassore, where drilling along-strike from an existing pit defined gold over 650m averaging 1.3m @ 8.4g/t to 100m depth, with highlights of 0.75m @ 231g/t, and 6.4m @ 19.6g/t. Of note, drilling has indicated the trend continues for a further 1,950m, which will be tested this year. The company is also taking a grass roots approach, with over 10km of strike length of gold anomalism to be trenched this year. The satellite Ouare project is no different, with five geochemistry in soil targets to be drill tested this year, with historic highlights of 39m @ 5.3g/t and 11m @ 4.3g/t.



15

Our view: We think the Gassore pit extension looks likely to be mined this year, with dimensions drilled simplistically equating to 62koz of gold. Using these dimensions a 100m deep pit would have a strip of ~70:1, while this seems high, using US$2.00/t mining costs (including depreciation), mining would be high at US$575/oz, but processing and SG&A would be diminutive for C1 costs of only around US$675/oz. Simplistically this drives US$40m of EBITDA from 50,000m of drilling (20,000m at Gassore) costing just ~US$2.5m on an asset costing only US$25m, a phenomenal ROI. Better still, the Gassore underground potential looks excellent. Taking a subset of the best 15 holes shows an average of 2.9m @ 14.8g/t, even if this only represents stopes over 50% of the 650m strike, it would equate to 121koz / 100m depth if it continued below the drilled 100m, again in line with Roxgold vertical ounce endowment and very much economic for a deep-seated long-life, albeit tonnage constrained, long-hole operation. This is echoed at Main Pit, West Pit 3 and A2NE deeps, all of which have similar high-grade shoots.

Figure 14. Cross-section and plan map of Balogo showing depth and regional drilling

Source: Avesoro

Balogo saw 11,600m in 2H17 across seven targets. The key success came from drilling down-dip of the pit, with highlights of 6.5m @ 145g/t, 3.7m @ 196g/t and 10.3m @ 69g/t. In fact, the company drilled 12 hits averaging 292g/m (4.4m @ 66g/t), with an overall average of 3.5m @ 36.3g/t to date. In addition, drilling along strike hit high-grade veins at Balogo Hill (highlights of 5.45m @ 21g/t, average 2.1m @ 15.4g/t Au) at <60m down hole, Panga (highlight of 5.1m @ 28g/t, average 3.3m @ 11.6g/t) from <55m down hole, with moderate success at Netiana North, Southeast and Northwest (20g/m highlights from four holes <100m), and Cobra Hill (24g/m from three holes <130m).

Our view: we see good potential for ‘useful’ satellite feed around Balogo, but the down-dip ore shoot shows truly phenomenal grades. Although it has only been drilled over 140m dip extent, even 100m strike at this width and grade could support 155koz at 1,100koz/vm (similar to Roxgold). At these grades even US$800/oz AISC would enable such a resource to translate into US$80m of EBITDA showing the gearing this small company has to even one isolated drill success. Given the depth continuity of Archean systems, this could of course be five times the size of both Roxgold and West African.



16

Figure 15. Cross-section and plan map of Balogo showing depth and regional drilling

Source: Avesoro

Regional exploration: Avesoro holds 127km2 on three licences along strike from the Youga mine. The company

has identified multiple regional soil anomalies but field work has not started in full as the priority was to drill near-

pit ounces at Youga first. To date 15 targets have been selected for further exploration, with three of these

having 3.7km, 2.7km and 2.6km gold in soil anomalies. Around the Ouare project the company holes 134km2 of

permits, with three areas identified from gold in soil anomalies, and only one of these (Ouare itself) tested to

date. At Balogo the company holds 48km2 of licences, with 10 prospects identified, based on 2,700 auger

samples.



17

Disclaimer & Disclosure for Non-Independent Research

Sprott Capital Partners (“Sprott”) is a division of Sprott Private Wealth LP. Sprott Private Wealth UK Limited is an appointed representative of PillarFour Securities LLP which is authorised and regulated by the Financial Conduct Authority. SPW is a member of the Investment Industry Regulatory Organization of Canada (“IIROC”) and a member firm of the Canadian Investor Protection Fund (“CIPF”).The general partner of SPW is Sprott Private Wealth GP Inc. Sprott Private Wealth GP Inc. is an indirectly wholly-owned subsidiary of Sprott Inc., which is a public company listed on the Toronto Stock Exchange under the symbol “SII”. Sprott Asset Management LP (“SAM”) a registrant is the investment manager to the Sprott Funds and is related to SPW. This document has been approved under section 21(1) of the FMSA 2000 by PillarFour Securities LLP (“PillarFour”) for communication only to eligible counterparties and professional clients as those terms are defined by the rules of Financial Conduct Authority. Its contents are not directed at retail clients - PillarFour does not provide investment services to retail clients. PillarFour publishes this document as non-independent research which is a marketing communication under the Conduct of Business rules. It has not been prepared in accordance with the regulatory rules relating to independent research, nor is it subject to the prohibition on dealing ahead of the dissemination of investment research. It does not constitute a personal recommendation and does not constitute an offer or a solicitation to buy or sell any security. Neither Sprott nor PillarFour nor any of its directors, officers, employees or agents shall have any liability, howsoever arising, for any error or incompleteness of fact or opinion in it or lack of care in its preparation or publication; provided that this shall not exclude liability to the extent that this is impermissible under the law relating to financial services. All statements and opinions are made as of the date on the face of this document and are not held out as applicable thereafter. This document is intended for distribution only in those jurisdictions where PillarFour is permitted to distribute its research. Disclaimer: Information and/or materials contained herein are for informational purposes only, and do not constitute an offer or solicitation by anyone in any jurisdiction in which an offer or solicitation cannot legally be made, or to any person to whom it is unlawful to make a solicitation. The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of SPW's Research department. The opinions and/or recommendations contained herein may not represent those as expressed by SPW as a firm or entity. The information contained in this report is drawn from sources believed to be reliable but the accuracy or completeness of the information is not guaranteed, nor in providing it does Sprott Private Wealth LP and/or affiliated companies or persons (“SPW”) assume any responsibility or liability whatsoever. SPW may participate in an underwriting of, have a position in, or make a market in, the securities mentioned herein, including options, futures or other derivative instruments thereon, and may, as principal or agent, buy and sell such products. This includes but is not limited to the transmission of securities trading order details to or from SPW. SPW cannot guarantee execution of trading orders sent to or from SPW electronically as the timely receipt or integrity cannot be assured. Please contact your advisor directly to place your order. WARNING: From time to time, our spam filter may delay delivery of legitimate e-mail. If your message is time-sensitive, please ensure that you request that we acknowledge receipt.

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