drilling confirms seam thicknesses and structure · analysis on track to a release a maiden coking...

JAMESON RESOURCES LTD

18 October 2012

RESEARCH NOTE

DRILLING CONFIRMS SEAM THICKNESSES AND STRUCTURE

EVENT

JAL nears completion of resource definition drilling at Crown Mountain.

We conducted a site visit to JAL’s Crown Mountain and Dunlevy projects.

ANALYSIS

On track to a release a maiden coking coal resource by year end.

JAL is ahead of schedule having completed 37 of 39 holes in its resource

definition drilling program at Crown Mountain. Coal seam thicknesses have

conformed to expectations and coal quality results are due in mid-November.

There is no available historical coal quality data for Crown Mountain, so we

view this test work as the most important de-risking activity. The Company

expects to announce a maiden JORC resource in late 2012.

Commencement of reconnaissance drilling hinges on permitting.

During our site visit to Dunlevy we inspected a number of exposed coal

seams which were subject to a trenching program in 2009. The Company is

all set to commence a reconnaissance drilling program to test these surface

exposures, however it remains hamstrung by delays in receiving the Dunlevy

coal licenses and exploration permits. JAL is confident that these licenses are

imminent and that drilling can begin before year end.

Steady stream of news flow to occur throughout late 2012.

If all goes according to plan, the short-term catalysts for JAL are:

1) the release of drilling results and coal quality test results for Crown

Mountain in mid-November,

2) the issue of coal licenses for Dunlevy in mid-November,

3) the commencement of drilling at Dunlevy in December, and

4) the release of the maiden resource for Crown Mountain in December.

EARNINGS IMPACT

We do not provide earnings forecasts for this stock.

RECOMMENDATION AND PRICE TARGET

Retain our BUY and valuation range of $0.43 to $0.70/share.

New sources of seaborne coking coal supply remain scarce.

Western Canada provides excellent exploration opportunities for coking coal

in a low risk jurisdiction with well-established rail and port infrastructure. We

believe that the lack of high quality investment options in the coking coal

sector will see JAL attract a premium valuation.

18 October 2012

Company Information

Code JAL

Last Price $0.29

12 Month Price Target N/A

Total Shareholder Return N/A

Valuation Range $0.43 - $0.70

Shares on Issue 154.8m

Market Capitalisation $44.9m

Free Float 100%

Monthly Turnover $4.4m

Share Price Performance

Analyst Details

Mark Savich, CFA

+61 8 9346 0320

[email protected]

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Jameson Resources S&P/ASX 300 Resources

BUY

mailto:[email protected]



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KEY TAKEAWAYS FROM OUR SITE VISIT

The Elk Valley Coalfield and the Crown Mountain project

Crown Mountain is an advanced exploration asset in the Elk Valley region, southeast British Columbia. The

sheer extent of coal mineralisation throughout the region was obvious from the helicopter flyover during our

site visit. These are the most important producing coalfields in British Columbia and host five large open-pit

coking coal mines operated by Teck Coal Ltd. Total production from these mines is 24Mtpa making Teck the

world’s second largest supplier of seaborne metallurgical coal.

We gained a new appreciation for these mines in the Elk Valley, which are some of the most profitable

suppliers of seaborne metallurgical coal. Teck’s coal operations have a total cash cost of C$114/t (including

mining, washing and transportation). The Elk Valley produces a high quality product and Teck sells

approximately 90% of its coal production at the premium hard coking coal benchmark price.

The extensive outcropping coal seams on the Crown Mountain property are interpreted to be among the same

seams currently being mined at Teck’s Line Creek operation. As we stood on Crown Mountain the Line Creek

mine is visible directly along strike. While the coal quality test results for Crown Mountain are not due until

mid-November, Line Creek offers the most logical point of reference for coal quality expectations.

JAL is nearing completion of a 39 hole drilling program at Crown Mountain and we believe this will deliver a

robust coal resource by year end. Given the thicknesses of the coal seams and the favourable geometry of the

syncline, the North pit could potentially have a strip ratio as low as 5:1 (waste BCM to ROM tonne). While in

the south the geometry is slightly less favourable, the coal seams outcrop at surface and the South pit could

also have a low strip ratio. Recent drilling at Crown Mountain has intersected additional seams which could

further enhance the economics. Teck is currently mining across the Elk Valley at an 11:1 strip ratio.

The Peace River Coalfield and the Dunlevy project

Dunlevy is a grassroots exploration asset in the Peace River region, northeast British Columbia. This region

hosts three metallurgical coal mines operated by Walter Energy Inc and one mine operated by Anglo

American Plc. Total production from these open-pit mines is 6Mtpa, consisting of hard coking coal and ultra-

low volatile PCI coal.

A revelation from our site visit was the large scale and geological simplicity of the Dunlevy project. It is most

comparable to the undeveloped Carbon Creek deposit which contains 700Mt of metallurgical coal resources

over a similar aerial extent to which Dunlevy has surface exposures of coal seams. Relative to the existing

mines in the Peace River, Carbon Creek is an order of magnitude larger and has simpler flat-lying geology.

During our helicopter flyover along the strike of the Dunlevy syncline we viewed the gently dipping strata and

could see the width from ridge to ridge to get an appreciation of the scale across strike. While on site we

inspected a number of exposed coal seams of potential economic thicknesses along existing road cuts.

We believe the large scale and geological simplicity in the northeast of the Peace River will more than

compensate for possibly thinner seams and marginally lower coal quality. Further enhancing the economics of

Carbon Creek / Dunlevy area is the potential to barge coal production down the nearby man-made Williston

Lake. Cardero recently released a PFS for the Carbon Creek project and has decided to pursue this barging

option, which could unlock a low cost infrastructure solution to access the Canadian National Rail line.

With all that said, Dunlevy remains a grassroots prospect having been subject to only geological mapping and

hand trenching in 2009. This is an encouraging start, however it remains too premature to draw any

conclusions as the exact number of seams and thicknesses until drilling has been completed.

While JAL is eager to commence its maiden reconnaissance drilling program to test surface exposures of

coal, it is hamstrung by delays in receiving the Dunlevy coal licenses and exploration permits due to a well

known backlog in processing permits in British Columbia. JAL is optimistic that these licenses are imminent

and drilling can begin before year end.



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CROWN MOUNTAIN PROJECT – EXPLORATION ACTIVITIES

JAL nears completion of its inaugural drilling campaign

JAL has almost completed the second phase of its confirmatory drilling program. These programs will include

39 RC holes for 6,000m as well as three large trenches. Down-hole geophysics has been undertaken on all

holes.

Crown Mountain was subject to historical exploration including geological mapping, 18 drill holes, trenching

and a 2.5t bulk sample. Based on this data we believe the project hosts an open-pit Measured and Indicated

resource of at least 15Mt.

Importantly, JAL’s recent drilling confirmed the geological structure and coal seam thicknesses seen in the

historical drilling. Therefore, our resource expectation is unchanged.

Figure 1. Drill Hole Location Map of the Crown Mountain Project

North Prospect (Looking North)

South Prospect (Looking South)

Source: Jameson Resources, Blackswan Equities



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Coal seam thicknesses and structure look attractive

The Crown Mountain deposit has been separated by the Crown Mountain Thrust fault into two distinct zones.

The North prospect is an open syncline that plunges to the south. The South prospect is a single westerly

dipping limb of the syncline.

The 39 holes being drilled by JAL are designed to penetrate the Mist Mountain Formation (coal-bearing unit)

and to terminate in the Moose Mountain Formation (basal sandstone). The average drill hole depth is 150m,

thus being confined to approximate open-pit limitations.

At the North prospect up to 200m of the Mist Mountain Formation exists. Based on previous drilling data, the 8

seam ranges in thickness from 12 to 22m, the 9 seam ranges from 4 to 6m and the 10 seam has a cumulative

thickness of over 10m. JAL has stated that the coal intersections seen in its recent drilling programs generally

conform to the database from historical drilling.

At the South prospect up to 190m of the Mist Mountain Formation exists. Based on previous drilling data, the 9

seam ranges from 4 to 6m and the 10 seam ranges from 8 to 15m. The 8 seam does not exist in the south.

Figure 2. Cross Sections of the North and South Prospects

Source: Jameson Resources

Coal quality remains the largest unknown variable

Coal quality test work is currently being performed by Birtley Laboratories in Calgary. This will include

proximate analysis, ultimate analysis, petrography, washability and a selection of other tests for metallurgical

coal.

All samples from the first phase of 25 drill holes and two trenches have been delivered to the lab. JAL expects

the results to be announced in mid-November.

There is no historical coal quality data available for Crown Mountain, so we view this test work as the most

important activity in de-risking the project.

Initial JORC resource estimate expected by year end

Once the second phase of drilling has been completed and the coal quality test work is received, JAL will

calculate an initial JORC compliant resource.

Norwest Corporation, a leading international consulting group, has been retained to manage the exploration

program and resource calculation.



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CROWN MOUNTAIN PROJECT – DEVELOPMENT POTENTIAL

Targeting open-pit coal seams with low strip ratios

JAL is a targeting three major coal seams which are amenable to open-pit mining. We believe that the current

resource definition drilling has confirmed Crown Mountain has the potential to host a modest resource with an

attractive strip ratio. Teck has a site cash cost of C$77/t (including mining and washing) and is currently

mining at an 11:1 strip ratio (waste BCM to ROM tonne).

Line Creek offers a point of reference for coal quality expectations

All of the coking coal produced in the Elk Valley region is washed to meet customer specifications, with a

typical washing yield of 60 to 70%. The results from coal quality test work at Crown Mountain are still pending.

Geological mapping and down-hole geophysical logs suggest that the seams correlate to the coking coal

seams (No. 8, No. 9 and No. 10) which are currently being mined at the Line Creek operation.

We believe a reasonable expectation is that the coal quality at Crown Mountain will be comparable to that at

the Line Creek mine, which is only 10km along strike to the north.

World-class railways and ports will offer low transport costs

A key attraction of the Crown Mountain project is that it is located only 15km by road to Canadian Pacific Rail

line which connects to the Westshore and Neptune Terminals at Vancouver.

Coal production is likely to be transported by road for 15km to the rail head north of Sparwood and then railed

for 1,100km to the Port of Vancouver for export. Teck’s operations have a transportation cost of C$37/t which

is in-line with industry standards (10c/t/km for trucking, 2c/t/km for rail haulage and $8/t for port). To rail the

coal north to the Ridley Terminal would cost an additional $5/t.

Figure 3. Satellite Image of the Elk Valley Region

Source: Google Earth, Blackswan Equities

Line Creek Washing Plant

Canadian Pacific Rail Line



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DUNLEVY PROJECT – EXPLORATION ACTIVITIES

Maiden drilling program at Dunlevy remains hamstrung by licensing delays

The Dunlevy project comprises a very large land position and has the potential to host substantial quantities of

metallurgical coal. In 2009, a program of 53 hand trenches along new and existing road cuttings was

completed. This exposed a number of separate coal seams of economic thicknesses, ranging from 0.8 to

3.5m. However, the project remains untested by drilling.

While JAL is enthusiastic to commence its initial scout drilling program to test these surface exposures, the

Company must wait for the Dunlevy coal license applications and exploration permits to be issued.

Consultations between the Province of British Columbia and the First Nations groups have been ongoing for

some time. JAL is confident that a resolution is imminent and hopes to begin drilling before year end.

Figure 4. Peace River Coal License Application Locations


Williston Lake at the Dunlevy Inlet (Looking West)

WAC Bennett Dam (Looking West)

Barging route will enhance the economics of the northeast of the Peace River Coalfield

Dunlevy is located 90km from the Canadian National Rail line which connects to the Ridley Terminal. While

the railway is accessed by an all-weather road, there is the potential to significantly reduce transportation

costs, capital intensity and regulatory risk by barging down the nearby man-made Williston Lake.

Cardero Resource Corporation announced the results of a Prefeasibility Study for the Carbon Creek project in

September 2012. The Company elected to go forward with using the Williston Lake as a barge transportation

route, delivering coal to the railhead at the town of Mackenzie. This is a total distance of 175km. Coal will then

be transported on the existing Canadian National Rail line to the Ridley Terminal for shipment.



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Dunlevy offers significant size and simple geology

The Gething Formation hosts the major coal seams in the Peace River Coalfield, which extends for 400km

through the northeast of British Columbia. The Peace River is a geologically complex region with a

considerable amount folding and faulting at the four existing mines in the area.

However, the Dunlevy project shares more similarities to the undeveloped Carbon Creek deposit, which is an

order of magnitude larger and has simpler flat-lying geology relative to the existing mines in this region.

Dunlevy appears to have gently dipping strata within a large, open syncline. Along trend 20km to the

southeast of Dunlevy is the Carbon Creek deposit which contains 28 seams of economic thicknesses. Carbon

Creek has 700Mt of in-place metallurgical coal resources (60% mid-vol HCC, 34% PCI and 6% thermal) over

a similar aerial extent to which Dunlevy has surface exposures of coal seams.

Due to the recessive nature of the Gething Formation outcropping coal seams at Dunlevy are relatively

sparse. Drilling is required to determine the number of seams contained at Dunlevy.

We believe the below long sections of various deposits in the Peace River offers good visual comparison of

the immense size of Carbon Creek relative to other deposits.

Figure 5. Cross Sections of Various Peace River Projects at the Same Scale

Source: Cardero Resource Corporation

Gething Formation is proven to produce a metallurgical products

The samples taken from hand trenching at Dunlevy during 2009 were weathered, so the assessment of any

coking properties could not be accurately determined.

In the Carbon Creek area, coals of the Gething Formation are generally mid-vol bituminous by ASTM

standards. Carbon Creek’s product mix is expected to be 60% mid-vol hard coking coal, 34% PCI coal and 6%

thermal coal. The lower seams of the Gething Formation at Carbon Creek (seams 14, 15, 27, 31 and 40) host

the hard coking coal.

Walter Energy’s coal production in the Peace River Coalfield demonstrates that the Gething Formation can

produce a hard coking coal and ultra-low volatile PCI coal. Its hard coking coal has been established as a key

blend in five of the world’s ten largest steel mills and its PCI coal has been recognised as one of the world’s

premier ultra-low volatile PCI coals.

The Gething Formation coal seams generally wash very well to significantly lower ash contents while still

experiencing reasonable yields, thus increasing their suitability as metallurgical products.



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10km by 4km target area could host substantial tonnages

Coal seams at Dunlevy are contained within the Dunlevy Creek Syncline, which is a broad, open fold,

bounded by tighter anticline folds to the southwest and northeast. The Dunlevy Creek Syncline plunges gently

to the southeast. Multiple coal seams up to 3.5m in thickness have been mapped on the property.

The west limb of the fold is interpreted to dip at between 5º to 8º. Good potential for both open-pit and

underground mineable resources lie over an area of 10km by 4km within this gently dipping west limb of the

syncline. This area will be the first target of JAL’s reconnaissance drilling program of up to 20 holes.

JAL’s maiden drilling program will aim to establish the number of seams, seam thickness, coal quality and

seam correlation across the Dunlevy property. This drilling is expected to begin immediately once the

regulatory approvals are received.

Figure 6. Drill Hole Location Map and Interpretive Cross Section of the Dunlevy Project


Dunlevy Syncline (Looking South along Strike)

and Williston Lake in the Distance

Outcropping Coal Seam in a Road Cutting



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ESTABLISHED RAILWAYS AND PORTS

Railways

Western Canadian coal companies benefit from world-class railways. The miners operate under long-term

arrangements with the two rail operators in the region, Canadian Pacific Rail and Canadian National Rail. We

understand that both these rail operators have available line capacity and rolling stock.

Deep water ports

Western Canadian coal companies are also well serviced by three established deep water ports. The

Westshore Terminal had total shipments of 27.3Mt in 2011, of which Teck is the largest single user. Its

capacity is 29Mtpa and is expanding to 33Mtpa. The Neptune Terminal has a capacity of 9Mtpa and is

expanding to 12.5Mtpa by 2013 and then to 18.5Mtpa. Teck currently has exclusive usage of this terminal.

The Ridley Terminal had total shipments of 9.4Mt in 2011. Its capacity is 12Mtpa and is expanding to 24Mtpa

in 2014. While these ports have excess capacity and are expanding, we note that securing space is becoming

increasingly competitive.

Figure 7. Map of Jameson’s Projects and Existing Infrastructure

Source: Jameson Resources, Teck Coal

Westshore Terminals

Neptune Coal Terminal

Ridley Terminals



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This research has been prepared by Blackswan Equities Ltd ABN 26 129 623 383 ("Blackswan"), holder of Australian Financial Services License No. 331703, for exclusive use by its clients. This document must not be copied either in whole or in part or distributed to any other person. If you are not the intended recipient, you must not use or disclose the information in this research in any way. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research contains general advice only and does not take into account your objectives, financial situation or needs. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction outside Australia where such distribution or availability or use would be contrary to law or regulation or which would subject Blackswan to any registration or licensing requirement within such jurisdiction. Before acting on this general advice you should consider the appropriateness of the advice having regard to your objectives, financial situation or needs. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. The price of securities can and does fluctuate. This research is based on information obtained from external sources which we believe to be reliable however Blackswan makes no representation or warranty that it is accurate, complete or up to date. All historical information is sourced from ASX company releases. Opinions expressed are subject to change without notice. No officer, employee, or agent of Blackswan accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. Blackswan officers, employees, or agents may have interests in the financial products referred to in this report by acting in various roles including adviser, underwriter or dealer, arranger or holder of principal positions. Further, they may buy or sell those securities as principal or agent and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. Blackswan or its associates may receive fees, brokerage or commissions for acting in those capacities and the reader should assume this is the case. Blackswan acted as Joint Lead Manager to Jameson Resources Ltd in relation to the capital raising announced on 23 December 2011 to raise $6.0 million. It received fees at normal commercial market rates. This research accurately reflects the personal views of the responsible analyst about the subject securities. The responsible analyst is employed by Blackswan under Australian Financial Services License No. 331703 and receives compensation based on overall revenues of Blackswan. Analyst disclosure of interests relevant to this report: The analyst attended a site visit to Jamseon Resources projects in September 2012 and declares a beneficial interest in Jameson Resources Ltd shares.

Sales Email Telephone

Michael Bartley Investment Advisor [email protected] +61 8 9346 0352

Brian Bates Head of Private Wealth [email protected] +61 8 9346 0314

Mark Bellini Dealers’ Assistant [email protected] +61 8 9346 0356

Paul Berson Senior Investment Advisor [email protected] +61 8 9346 0328

Michael Bowden Senior Investment Advisor [email protected] +61 8 9346 0307

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Paul Cooper Investment Advisor [email protected] +61 8 9346 0316

Nick Dempster Senior Investment Advisor [email protected] +61 8 9346 0357

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Tim Lyons Executive Chairman [email protected] +61 8 9346 0324

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Steve Wood Senior Investment Advisor [email protected] +61 8 9346 0305

Research Email Telephone

Rhys Bradley Research Analyst - Resources [email protected] +61 8 9346 0318

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Corporate Email Telephone

Sarah Hopps Investor Relations [email protected] +61 8 9346 0345

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Administration Email Telephone

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drilling confirms seam thicknesses and structure · analysis on track to a release a maiden coking...

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