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INVESTING IN GOLD AND GOLD STOCKSThe Myth of Leverage

7 April 2017

Commercial

Garry Stein – Managing Director & CEO, CAF Limited Over forty years of experience in executive roles

in natural resources, banking, investment management, mergers & acquisitions, private equity and strategic planning

Record of investment success

• president of a top-performing resource based mutual fund

• head of investments for a Canadian bank with first quartile performance on a US$1 billion plus portfolio

• head of asset/liability management for a major Canadian bank

• manager of a large high-income bond fund and

• several other advisory and investment management roles

Record of funding and development in the mining industry

Chairman CIM Greater China

Introducing Commodity Advance Funding

(“CAF”)

Unique structured finance streaming product

Significant differences from traditional streaming• fixed high yield and term• no commodity or equity

market risk

Significant benefits for investors and investees compared to streaming and other financing alternatives

Risk mitigation

Experienced proven team

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“A mine is a hole in the ground, with a liar at the top!”

--- Mark Twain

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Can I successfully speculate on the price of gold?

How do I take advantage of my view?

How do I choose which gold mining company in which to invest?

Some Fundamental Questions

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Determinants of Gold Prices

Supply & Demand

Gold Prices

Source: goldprice.org 6

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Limited, Finite Supply: Precious Rare Metal

Fewer new discoveries

Lower grade

Higher costs

Small, Finite

Supply

*Source: http://demonocracy.info/infographics/world/gold/gold.html

All the Gold in the world, displayed in 400oz bullion bars.

Keep in mind the Gold bars have a lot of wasted space

between them, making the stacks of gold appear larger than

they really are.*

Price is Demand Driven

-1,000.0

-

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Ton

nes

Gold DemandTrend

Jewellery Total barand coin invest.

ETFsand similar

Technology Central banks

Source: Metals Focus; GFMS, Thomson Reuters; ICE Benchmark Administration; World Gold Council

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But look who manipulates at the margin……

2015

Jewellery Total barand coin invest.

ETFsand similar

Technology Central banks

Source: Metals Focus; GFMS, Thomson Reuters; ICE Benchmark Administration; World Gold Council

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Want to know the best Gold Forecast?

St = S0 (1+rt) + wt + ct

where St is the futures price for delivery at time t; S0 is the spot price at time t = 0 when the stream is booked; rt is the opportunity cost of tying up funds in inventory from time t through time T (i.e., the financing cost); wt is the total cost of carrying the inventory (i.e., warehouse costs, insurance, spoilage, etc.) over the period and; ct is the “convenience yield” over the time interval t through T.

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Why Gold

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Two of Many Views

“Gold is money. That's it"

“Gold gets dug out of the ground in Africa, or some place,” said Buffett in

1998. “Then we melt it down, dig another hole, bury it again and pay

people to stand around guarding it. It has no utility. Anyone watching from

Mars would be scratching their head.”

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Gold and Gold MiningValue Relationship

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How Gold Prices are reflected in Gold Mining Stock Values

Varies with stage of development (risk/return)

in-situ valuations

NPV

PE / Market Multiples

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The Big MythBuy my stock: we’re highly levered to the price of gold

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Changing Gold Price Impact on NPV

-300%

-200%

-100%

0%

100%

200%

300%

-25% -17% -9% -2% 0% 6% 13% 21%∆ N

PV

% ∆ Gold Price

Gold Price Leverageimpact of OPEX

NPV 800 NPV 1000 NPV 1200

Highest Leverage means highest cost

Leverage works two ways with 100% downside

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Changing Gold Price Impact on Options Value

-150%

-100%

-50%

0%

50%

100%

150%

-40% -32% -25% -17% -10% -2% 0% 5% 13% 20%

∆ O

ptio

n V

alu

e

% ∆ Gold Price

Gold Price Leverageoptions

$800 Option $1,000 Option $1,200 Option

Higher leverage from options and…

Downside limited to option premium

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Gold Price Leverage: Options vs Gold Shares

-3

-2

-1

0

1

2

3

-40% -32% -25% -17% -10% -2% 0% 5% 13% 20%∆ V

alu

e

% ∆ Gold Price

Gold LeverageOptions vs Mining

∆NPV 800 $800 Option ∆NPV 1200 $1,200 Option

At or out of the money options

provide the best risk/return performance

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Mining Stocks Can be a Great Investment: Irrespective of Gold Price

Eight Steps to Choosing Winners

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1. Low Cost

i. SG&A

ii. Production Costs

iii. Discovery Costs

iv. Development Costs

2. Expanding resources

3. Expanding production

4. Managing the balance sheet

5. Stage of Development (if you have the skills)

Eight Steps for Mine Evaluation

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Valuation

Exploration PlanningFeasibility &

Construction Production Closure

Risk

Stages of Mine Development

2 Investment Windows

requiring 2 different selection skills

Time

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1. Low Cost

i. SG&A

ii. Production Costs

iii. Discovery Costs

iv. Development Costs

2. Expanding resources

3. Expanding production

4. Managing the balance sheet

5. Stage of Development

6. Relative Valuation

Eight Steps for Mine Evaluation

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8. Do your home work and avoid the crowd!

“Moreover, a prudent owner, before he buys shares, ought to go to the mine and carefully examine the nature of the vein, for it is very important that he should be on his guard lest fraudulent sellers of shares should deceive him.”

--Georgius Agricola, de re Metallica, 1556

Look for:

Good Operator/Strategy

Properly Financed

Value Proposition

Good Management

UNIQUE STRUCTURED FINANCE STREAMING PRODUCT

ALTERNATIVE FINANCING FOR NATURAL RESOURCE COMPANIES

SECURITIZED HIGH YIELD MID-TERM INVESTMENTS

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THANK YOU

CAF