xx

*VSA Capital acts as corporate broker to Regency Mines. This research brochure is a MARKETING COMMUNICATION. It is not investment research and has not

been prepared in accordance with legal requirements designed to promote investment research independence and is also not subject to any prohibition on

dealing ahead of dissemination of investment research. #Priced at close, 18 January 2012

20 January 2012

MINING

Regency Mines Plc

Ticker: RGM:LN AIM Price: 1.76p#

Market Cap: £11.26 million

BUY

Year End June (£k) 2009 2010 2011 2012E 2013E 2014E 2015E 2016E

EBITDA -456 -507 -1,260 -1,565 -1,619 -1,700 -1,785 -1,874

Income Before Tax -717 602 1,826 -1,861 -1,780 -1,732 -1,700 -1,813

Net Income -717 516 2,143 -1,861 -1,780 -1,732 -1,700 -1,813

EPS (pence) -0.27 0.13 0.4 -0.29 -0.28 -0.27 -0.27 -0.28

#Priced at close,18 January 2012

Potential world class deposit & game changing technology; a powerful combination

Mineral exploration and investment company with PNG nickel asset

The company’s principal asset is its joint venture with Direct Nickel Ltd (DNi) in the

Mambare nickel laterite project in Papua New Guinea (the Mambare Project),

owned and operated by Oro Nickel Exploration. Regency is also the major

shareholder of DNi, which owns a nickel laterite treatment technology at pilot plant

stage. VSA Capital visited the Mambare Project and DNi pilot plant in Nov. 2011.

Successful 2011 drilling programme to culminate in 1Q maiden resource estimate

In 1999 Anaconda estimated a resource potential of 628mm tonnes of nickel at

0.78% or 198mm tonnes at 1.01% within a 158 km2 area of the Mambare Plateau.

Importantly, these estimates only looked at one of the two mineralised zones. The

most recent exploration programme was completed late last year and Oro Nickel

intends to release a compliant resource estimate this quarter. Oro Nickel is

targeting a maiden resource estimate of 30mm tonnes at 1.0% nickel. Prefeasibility

drilling should commence following release.

Geothermal is a potential source of cheap energy for the Project

Oro Nickel has applied for two exploration licences over ground prospective for

geothermal potential and expects approval in 2012.

DNi adds game changing technology to the mix

The DNi process is a hydrometallurgical process for treating nickel laterites and

targeted at making DNi one of the lowest cost global nickel producers. A pilot plant

has now been completed and tests will commence this quarter.

Regency increases pre-tax profit by 205%

Regency Mines released its final results for the period ending 30 June 2011 on 2

December 2011, showing a pre-tax profit of £1.83mm (up from £0.60mm in 2010)

and EPS of 0.40p (up from 0.13p in 2010). This increase can be attributed

predominantly to its investment in Red Rock Resources.

Public company investments of £5.56mm represent almost 50% of market cap

The market therefore currently attributes just £5.71mm to Regency’s 50% stake in

Oro Nickel Exploration Limited, its 7.81% stake in Direct Nickel Limited, its

Australian assets and its -£1.02mm net cash figure.

VSA initiates coverage with a recommends BUY on a 15.65p target price

We have tried to attribute value to these assets to determine at what price Regency

should be trading. Through net present value analysis (& others) we derive a target

price of 15.65p, assuming the initial resource estimate is announced as expected.

Source: Bloomberg

Next news Maiden Resource Est.

Price % Change 1 month 3 month 12 month +10% -9% -250%

Major TD Waterhouse Nominees 16.67%

Shareholders Barclays Pers. Inv. Man 10.30%

Hargreaves Lansdown 7.02%

Contributing Analyst Jessica Pendal 0203 005 5016

jpendal@vsacapital.com

Company Description:

Mineral resource and investment company.

Its principal asset is the JV with Direct Nickel

Ltd in Mambare, Papua New Guinea.

Ticker: Bloomberg/TR RGM/RM4

Bourse: Market LN-AIM / Frankfurt

Sector Mining

Price Target 15.65p

12 Month High/Low 6.70-1.45p

Shares in Issue 639,848,194

Net Cash at June 2011 (£1.02m)

Enterprise Value £12.28m

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Initiation Connected Research*

2

Snapshot

• Formed in 2004 and listed on AIM in early 2005.

• Company’s principal asset is the joint venture with Direct Nickel Ltd (DNi) in the Mambare nickel laterite

project in Papua New Guinea (the Mambare Project). Regency is also the major shareholder of DNi,

which owns a nickel laterite treatment technology at pilot plant stage.

• The Mambare Project is owned and operated by Oro Nickel Exploration Limited (registered name

Canopus No. 83 Limited), a wholly owned subsidiary of Oro Nickel (Vanuatu) Limited which is a company

owned by Regency Mines and Direct Nickel in equal shares. It is located in Oro Province on the north-

east coast of Papua New Guinea. Aside from the Mambare Project, that entity also owns a non-exclusive

licence from DNi for lateritic treatment technology.

• The Mambare Project area was explored by several companies between 1960 and 1971.

• In 1999 Anaconda Nickel Limited reviewed the results from the work done during those 11 years

(considering a 158 square kilometre area of the Mambare Plateau) and estimated a resource potential

of 628 million tonnes at 0.78 percent or 198 million tonnes at 1.01 percent. Importantly, these

estimates only looked at one of the two mineralised zones.

• The most recent exploration programme was successfully completed late last year and Oro Nickel

intends to release a compliant resource estimate this quarter. Once the maiden resource estimate has

been delivered, prefeasibility drilling should commence.

• Oro Nickel is targeting a maiden resource estimate of 30 million tonnes at one percent nickel with

around a third of this being classified at least to the indicated category, and the remainder to at least the

inferred. This is taken from Areas 1, 2 and 3 which comprises approximately five percent of the entire

tenements.

• Geothermal energy represents a potential source of cheap energy for the Mambare Project. Operational

expenditure could be reduced significantly. It is already utilised in Papua New Guinea by Lihir Gold Mine,

which operates in the nearby New Ireland Province and is well established across the world. Oro Nickel

has applied for two exploration licences over ground prospective for geothermal potential and expects

them to be approved in 2012.

• DNi is a private Australian mineral processing company established in 2005. It is focused on developing

patented nickel laterite production technology that is intended to make DNi one of the lowest cost

global nickel producers. The DNi process is a hydrometallurgical process for treating nickel laterites that

has many advantages over other conventional nickel laterite processing techniques. The latest pre-

feasibility study by Aker Solutions stated that “both capital and operating costs demonstrate significant

improvements over alternative technologies for the processing of nickel laterites… This report confirms

the technical and economic viability of the process through the use of conventional equipment and

conservative design. The testwork has confirmed a robust and adaptable process…A well-managed and

funded demonstration plant program would provide sufficient data to allow a full-scale plant to be

designed and built.” That demonstration plant has now been completed and tests will commence this

quarter.

3

Contents

Snapshot 2

Valuation and Conclusion 4

Introduction and Background 7

The Nickel Laterite Story 7

The Mambare Nickel Laterite Project 9

Direct Nickel Limited 14

Other Assets 16

Financial Analysis 17

Management and Shareholders 18

Appendices 21

Profit & Loss 22

Cash Flow 23

Balance Sheet 24

Politics in Papua New Guinea 25

4

Valuation and Conclusion

Regency Mines’ public company investments are valued at £5.56 million (see Figure 13, Investment Assets, on page

16 and Figure 2 Regency Mines Valuation, page 5). This represents almost 50 percent of the company’s current

market capitalisation. Hence we can deduce that the market is attributing only a £5.71 million valuation to Regency’s

50 percent stake in Oro Nickel Exploration Limited, its 7.81 percent stake in Direct Nickel Limited, its Australian

assets and its net cash of -£1.02 million, at present.

VSA Capital has attempted to attribute some value to these assets to determine at what price per share Regency

should be trading.

Absolute Valuation

Net asset value

On a historical net asset value basis (using the Balance Sheet for the period ended 30 June 2011) Regency Mines

should be trading at 2.27 pence per share, as can be seen in Figure 1, Regency Mines NAV, below. This is

approximately 30 percent higher than the current market price of 1.76 pence per share. Given that this is an historic

number, we do not rely on this calculation for more than a base from which to work.

Figure 1: Regency Mines Net Asset Value (NAV)

Current Net Asset Value (£k)

Cash & Cash Equivalents 1,166

Trade and other Receivables 1,036

Current assets 2,202

Property, Plant & Equipment 169

Investment in Associates 5,495

Goodwill 54

Available for Sale Financial Assets 6,113

Exploration Assets 3,120

Non-current Assets 14,952

Total Assets 17,153

Trade & Other Payables 826

Short-term Borrowings 2,181

Current liabilities 3,007

Deferred Tax Liabilities 8

Non-current Liabilities 8

Total Liabilities 3,015

NAV 14,138

Per Share (pence) 2.21

Source: VSA Capital & Regency Mines Plc

5

Sum of the parts valuation

On a sum of the parts valuation, it can be seen from Figure 2, Regency Mines Valuation, below, that Regency should

be trading somewhere in the range of 1.79 pence per share to 29.51 pence per share. In this calculation the listed

assets are taken at their market value as of 18 January 2012 and the cash and debt are taken at their book value as

of the latest final results (30 June 2011). Hence it is only Regency’s interest in Direct Nickel Limited and Oro Nickel

Exploration Limited that are given a low, medium and high value.

In the low valuation Oro Nickel Exploration Limited is valued at its book value as at 30 June 2011, that is those

exploration expenses invested in the project to date that have been capitalised, and Direct Nickel Limited is valued at

Regency’s cost of acquisition of the shares.

In the medium valuation Oro Nickel Exploration Limited is valued compared to its peers on an enterprise value per

resource basis and Direct Nickel Limited is valued at A$100 million, which was the value ascribed to it by its IPO

brokers (when it was looking to list early last year). As noted below, given the small size of the peer group we have

included this valuation for comment only and will not use it in determining our target price.

In the high valuation Oro Nickel Exploration Limited is valued on a net present value basis and Direct Nickel Limited is

valued at 50 percent of the Mambare Project net present value, plus A$25 million. The latter amount equates to the

approximate value of funds that has been invested in the technology to date.

These calculations then give us a value per share range of 1.79 pence to 29.51 pence. Averaging out the low and high

valuation we attain a target share price of 15.65 pence.

Figure 2: Regency Mines Valuation (Low, Medium and High)

Value attributed to

Regency Mines (£ '000)

Market Cap

(£ '000)

% held by

Regency

Mines

Low Medium High

Listed Assets Alba Mineral Resources 740 16 104 104 104

Oracle Coalfields 14,990 11 1,416 1,416 1,416

Red Rock Resources PLC 26,170 20 4,036 4,036 4,036

5,556 5,556 5,556

Private Company Investments Direct Nickel Ltd 8 3,808 5,077 14,525

Exploration Assets Oro Nickel Exploration 50 3,120 11,454 169,736

Cash (as at 30 June 2011) 100 1,166 1,166 1,166

13,649 23,252 190,983

Debt 100 (2,181) (2,181) (2,181)

TOTAL 11,468 21,071 188,802

Per Share (pence) 1.79 3.29 29.51

Source: VSA Capital & Regency Mines Plc

6

Relative Valuation

Peer comparison

We have identified two truly comparable companies to comprise Regency Mines’ peer group; Resource Mining Corp

and Mindoro Resources Ltd. Both of these companies have nickel laterite deposits as their flagship asset at a similar

stage of exploration to the Mambare Project and are located in Papua New Guinea (in the case of Resource Mining

Corp) or in a comparable location; Mindoro’s project is located in the Philippines which not only boasts a similar

geology and route to consumer but is also comparable on a political and security risk basis. That is, in Control Risks’

latest “Riskmap” (2012) which was published in November 2011, both Papua New Guinea and the Philippines were

given a medium ranking for their political risk. With regards to their security risk, however, Papua New Guinea is

ranked as high while the Philippines is given the ranking of medium.

These companies have an average enterprise value per contained tonne of nickel of US$7.51. Figure 3, below , shows

how this compares to Regency Mines’ in situ resource (that is 50 percent of the Mambere Project) under various

scenarios. From this it can be seen that the targeted initial compliant resource estimate is valued much more

expensively than its peers but the other estimates are similar to the average. This is not surprising considering the

targeted initial compliant resource estimate is modest. Note that where this project will have a competitive edge is

its processing capabilities.

Figure 3: Regency Mines: Peer Comparison

Exploration

Companies Market Ticker Asset Location

Contained

Ni (mt)

Ave.

Grade

EV

(USD

m)

EV/

Resource

(USD)

Resource Mining Corp ASX RMI Wowo Gap Papua New Guinea 1.32 1.06 4.99 3.78

Mindoro Resources Ltd TSX MIO Agata Philippines 2.13 1.01 23.95 11.23

Average 7.51

Mambare AIM RGM Mambare Papua New Guinea

Oro Nickel Initial

Resource Estimate

(compliant) 0.15* 1.00% 19.07 127.15

Regency Estimate Low 2.25* 1.13% 19.07 8.48

Regency Estimate High 2.50* 1.25% 19.07 7.63

Source: VSA Capital Limited, Regency Mines Plc, Resource Mining Corp and Mindoro Resources; * attributable to Regency

However, as the peer group is so small, we do not rely on this calculation for more than academic comment.

Conclusion & Price Target

Accordingly, assuming the initial resource estimate is announced as expected, and based on the averaging out the

low and high valuations from our sum of the parts calculations, VSA Capital places a BUY recommendation on

Regency Mines PLC with a target share price of 15.65 pence.

7

Introduction and Background

Regency Mines Plc is a mineral exploration and investment company. It was formed in 2004 and in early 2005 it

listed on the Alternative Investment Market of the London Stock Exchange. It is also listed on the Frankfurt Exchange

and trades on the PLUS Markets platform.

The company’s principal asset is its joint venture with Direct Nickel Ltd (DNi) in the Mambare nickel laterite project in

Papua New Guinea (the Mambare Project). Regency is also the major shareholder of DNi, which owns a nickel

laterite treatment technology at pilot plant stage. VSA Capital visited the Mambare Project and the DNi Pilot Plant in

November 2011.

The Nickel Laterite Story

Long term demand for nickel to grow alongside BRIC countries

Nickel is mainly used to make alloys and, specifically, 65 percent of nickel produced is consumed in the production of

stainless steel. Hence, its demand profile largely follows that of stainless steel and therefore its growth pattern

should follow that of the BRIC countries (Brazil, Russia, India and China). This is particularly so because the unique

properties of nickel mean there are very limited options for substitution (as any substitution results in a reduction in

performance). Hence, not surprisingly, historically demand for nickel has increased at a higher rate than the average

increase in World GDP.

Current reliance on sulphide deposits cannot continue

Laterites currently account for around 70 percent of nickel contained in land-based deposits but contribute only 40

percent of world production (Source: British Geological Survey, September 2008). This is mainly due to the high cost

of setting up a nickel laterite plant (so a large ore reserve is usually required for a project to be viable). Accordingly,

unless there is a surprise development, the world will continue to rely heavily on nickel sulphide deposits for its

stainless steel needs. The problem then lies in the recently highlighted issue that conventional nickel sulphides are

suffering from a lack of major new discoveries (mature nickel camps currently account for approximately 45 percent

of global nickel production).

The price of nickel is around US$19,500 per tonne

After hovering between US$10,000 and US$20,000 per tonne from 2004 until mid-2006, the price of nickel began a

rapid rise, crossing the US$55,000 per tonne mark in early 2007. This was followed by two years of decline with the

price struggling to stay above US$10,000 per tonne at the end of 2008 and going into 2009. Since then prices have

recovered slightly (with a recent peak of US$27,600 per tonne hit in April 2010) and currently the price is sitting at

around US$19,500 per tonne. This can be seen in Figure 4 below.

8

Figure 4: LME Spot Price of Nickel (USD per tonne)

Source: Bloomberg

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9

The Mambare Nickel Laterite Project

Joint venture with DNi

The Mambare Project is owned and operated by Oro Nickel Exploration Limited (registered name Canopus No. 83

Limited). Regency acquired 75 percent of that company in 2006 and the remaining 25 percent was purchased in

2009. Earlier this year Regency entered into an agreement with DNi whereby Oro Nickel Exploration Limited is now a

100 percent subsidiary of Oro Nickel (Vanautu) Limited which is owned by Regency Mines and DNi in equal shares.

Aside from the Mambare Project, that entity also owns a non-exclusive licence from DNi for lateritic treatment

technology.

Located near Kokoda in Papua New Guinea

The Mambare Project is located in Oro Province on the north east coast of Papua New Guinea, approximately two to

20 kilometres north of the town of Kokoda. Kokoda itself is 78 kilometres from Popondetta (the provincial capital

and main source of everyday supplies) and about 120 kilometres from the underutilised Port of Oro Bay. This can be

seen in Figure 5 below.

Figure 5: Location of Tenements

Source: Oro Nickel Exploration Ltd.

10

Laterite deposit rich in a number of different minerals

The Mambare Project is a laterite deposit which, alongside the nickel, contains iron, magnesium and cobalt. It is a

layered system commencing with a layer of volcanic ash, typically three metres deep. This is followed by a layer of

iron rich limonite, a transition layer (which boasts higher concentrations of cobalt) and a layer of saprolite, in which

the higher grade nickel and magnesium can be found. The upper level of the saprolite is clay, increasingly rocky with

depth down to bedrock. Throughout the saprolite layer are various sized boulders, coated with high grades of nickel.

At the base is peridotite bedrock, increasingly fresh with depth. Figure 6, below, shows representative pieces of drill

core from each of these layers.

Figure 6: Representative Pieces of Drill Core Showing Layers of Laterite

Ash overburden Limonite (top) and saprolite clay (bottom) Rocky saprolite Peridotite bedrock

Source: VSA Capital

Progress is made in 2011

The Mambare Project area was explored by several companies between 1960 and 1971. In 1999 Anaconda Nickel Ltd

reviewed the results from the work done during those 11 years (considering a 158 square kilometre area of the

Mambare Plateau) and estimated two resource potentials. These can be seen in Figure 7 below.

Figure 7: Anaconda Estimate (1999)

Cut-off

Tonnes

(m) Grade

1 0.50% 628 0.78%

2 0.80% 198 1.01%

Source: Anaconda Nickel Ltd

Importantly, these estimates only looked at the limonite zone.

Since taking control of the Mambare Project, and prior to this year, Regency completed some drilling, test pitting,

ground magnetometer surveys and ground penetrating radar work. From this work the company came up with a

very rudimentary (and non-compliant) resource estimate of 4.5 to 5 million tonnes of contained nickel. This

breakdown can be seen in Figure 8, below.

11

Figure 8: Regency Mines Estimate (2006)

Tonnes(m) Grade (%) Contained Ni (mt)

Limonite 200 1.00% 2.0

Saprolite 200 1.25%-1.50% 2.5-3.0

Total - Low Range 4.5

Total - High Range 5.0

Cobalt 200 0.10% 0.2

Source: Regency Mines Plc

However, this work proved to be preliminary and hence it was not until 2011’s £2 million exploration programme

(which consisted of almost 3,500 metres of drilling, test pitting and ground penetrating radar work) that the project

made real progress. After being delayed by extreme weather and visa issuance problems this programme was

concluded in December 2011 with all objectives achieved. The programme concluded with around 135 holes, less

than was originally planned as the final average profile achieved was deeper than was initially intended. This may

increase the thickness of the resource.

Figure 9, below, provides some perspective of where the most recent drilling has occurred in respect of the entire

tenements (note the plateau area, outlined in yellow, is 20 kilometres by 6 kilometres). The broadly spaced 2008

drilling took place in the southern third of the 2011 drilling area, as well as further down the slope from the 2011

drilling towards Kokoda.

Figure 9: Location of 2011 Drilling

Source: Oro Nickel Exploration Limited

Preliminary analysis of the drill cores (that is, using handheld XRF core testing on a wet basis) has delivered

impressive results, including 5.5 metres at 2.5 percent nickel and 16.05 metres at 1.42 percent nickel. Handheld XRF

core testing generally understates grade by around 32 percent due to the moisture content of the core. Hence, lab

results are expected to be significantly higher.

12

Maiden resource estimate expected in Q1 2012 of 30mt ore at 1% nickel

With the conclusion of the most recent exploration programme, it is expected that a maiden (JORC compliant)

resource estimate will be delivered during this quarter. While it was acknowledged that access issues (see below)

could cause delays in transporting samples from site, putting pressure on the anticipated release of the estimate, it

is now understood that transportation of samples is on schedule. Hence there is little risk that the release of the

resource estimate will be delayed beyond this quarter. This is particularly so as Oro Nickel has contingency plans in

place in case delays are triggered as a result of a shortage of independent consultants, an issue which has plagued

the industry over the past year.

Oro Nickel is targeting a maiden resource estimate of 30 million tonnes at one percent nickel (equating to 300,000

tonnes of contained nickel). This target includes a third of the resource being to at least the indicated category under

JORC guidelines, with the remainder to at least the inferred category (drill hole spacings have generally been 200

metres but some zones in Area 1 have been drilled to 100 metre spacings).

Notably, this calculation will be taken from work done in Areas 1, 2 and 3 which comprises only five percent

(approximately) of the entire tenements. Only the southern area of the 2011 drilling, Area 3, will include drillhole

results from the 2008 drill programme. However it is possible that some additional 2008 drill results from outside

this area may be included in the inferred category (due to the acquisition of additional ore density data during the

2011 programme).

Next steps and timeline to production

Once the maiden resource estimate has been delivered prefeasibility drilling will commence and Oro Nickel will look

to complete a feasibility study thereafter before obtaining finance and permitting to develop the mine and plant.

Due to the large size of this project, it is anticipated that construction will take at least two years and hence

production is not likely until 2017. Alongside developing the mine and plant, Oro Nickel will work on developing a

geothermal project to provide the Mambare Project (including a processing plant) with power. Licence applications

for this purpose were submitted approximately six months ago and approval is expected in 2012.

Geothermal energy will provide major cost advantage

Geothermal energy, that is a green energy source derived from heat stored in the ground, is a potential source of

cheap energy for the Mambare Project, significantly reducing its operational expenditure. It is already utilised in

Papua New Guinea by Lihir Gold Mine who operate in the nearby New Ireland Province and is well established across

the world. However, a geothermal energy project typically takes a number of years to advance through the stages of

exploration and development to reach production. Ergo, it is hoped that approval is granted soon so that this

process can commence and the project can be progressed in line with the Mambare mine. Nevertheless, if this

option does not prove to be viable there are a number of other energy sources that the company may consider,

including grid, diesel generated and hydro power.

At present there is no national grid system, due mainly to challenges posed by Papua New Guinea's difficult

topography. Instead there are a few small grids (mostly powered by hydroelectricity) and diesel powered thermal

generating plants, both of which tend to suffer from regular blackouts. Currently, neither of these options are open

to the Mambare Project but this is not to say they will not be in the future. The main power provider, PNG Power

Limited, has publically stated that it will expand its programme to provide electricity to rural areas through the

development and implementation of a five year Rural Electrification Plan. Further, earlier this year the Government

of Papua New Guinea signed a K150 million (c. £46 million) Loan Agreement with the Asian Development Bank to

kick start a Town Electrification Investment Program. Commenting on the plan, PNG Power Limited’s CEO stated that

13

the programme opens a distribution corridor which allows PNG Power to be able to supply electricity to people as

far inland as Kokoda in Oro Province. Nonetheless it would not be astute to depend on the Government following

through with these plans in time to be useful for the Mambare Project.

A third source of power would be low cost hydroelectric generation which is currently used by Highlands Pacific

(Kainantu Gold) and Harmony Gold (Hidden Valley) and is a part of the Wowo Gap mine plan. Water is in abundance

in Papua New Guinea and overall hydro supplies about 65 percent of the power requirements of PNG Power.

Determining which option is the most economic requires detailed study and will presumably be a part of any

prefeasibility study undertaken by Oro Nickel. At this stage, a more immediate concern is access.

Access is a challenge

The road connecting Popondetta with the Port of Oro Bay is fully sealed, but only around half of the road between

Popendetta and Kokoda is sealed (Figure 5, Location of Tenements, page 5); nonetheless it is viable. Both roads cross

a number of rivers where many of the bridges were washed away in the November 2007 cyclone and resultant

floods and two of which were made inaccessible while we were at site. Two of these bridges have yet to be replaced,

restricting access to the site when heavy rain increases the depths and/or speed of the rivers (as the vehicles

normally relied upon cannot cross).

Further, when there is heavy rain the eight wheel vehicle used to the cross the river (just beyond Kokoda and at the

base of the mountain on which the Mambare Project lies) and climb the mountain cannot be used. This means that

one must swim or float on a rubber tube across the river and hike up the mountain (which can take two to eight

hours). This is not ideal when supplies need to be couriered to the camp or samples need to be brought down. The

site does have a helipad and this is used to transport heavy loads (for example drilling equipment) but its high cost

restricts its constant use, as does weather affecting visibility.

A road between Kokoda and the site is being considered. Such an investment would improve current operations

significantly (and in any event would be needed when the mine goes into production). It would mean:

• drill access would be significantly easier (at present the drilling is restricted to man-portable rigs which

must be disassembled and carried in parts for up to several kilometres, with the heaviest part weighing

approximately 80 kilograms and carried on a stick by four men);

• transporting supplies, samples and equipment could be done with ease;

• the remote site camp is unnecessary (instead the base camp at Kokoda, which is currently almost

exclusively used to store samples, could solely be utilised); and

• the local employees could return to their homes each evening (decreasing the cost of messing and

providing accommodation etc).

This does not, however, solve the issue of the missing bridges between Popondetta and Kokoda and while it seems

that the government has recently awarded the tenders to reconstruct the bridges (materials were seen near some of

the sites of the missing bridges), not much confidence can be put in the government’s ability to finish this project

swiftly and it is a real problem that funds may not be available. Further, the current political situation (see Appendix,

page 25) adds another layer of difficulty.

14

Direct Nickel Ltd

Private mineral technology company

DNi is a private Australian mineral processing company established in 2005. It is focused on developing patented

nickel laterite production technology that is intended to make DNi one of the lowest cost global nickel producers.

Regency Mines is the company’s largest single shareholder (holding 7.81 percent of DNi) but large numbers of shares

are owned by management and directors. Other shareholders include TECK Resources, CSIRO and OZ Minerals.

The DNi process

The DNi process is a hydrometallurgical process for treating nickel laterites. To describe the process very basically, it

begins with a leaching stage which is followed by iron hydrolysis to separate the iron from the nickel and cobalt

bearing solutions. Next, aluminium is removed and then mixed hydroxide precipitation takes the nickel and cobalt

metals out of solution into solid form. Magnesium salts are then decomposed to regenerate the leaching reagent (to

return to the leach) with the residue being magnesium oxide powder which is recycled to the metal precipitation

circuits.

“Game changing technology”

The process has many advantages over other conventional nickel laterite processing techniques. It is designed to

operate with tank leaching at atmospheric pressure (versus High Pressure Acid Leach which operates at 4500kPa)

and is the first to treat both limonite and saprolite ores with a single flowsheet. As can be seen in Figure 10, below,

conventional processes (acid leach, caron process and smelting) are restricted to treating either the limonite or the

saprolite layer.

Figure 10: DNi Process – Single Flow-Sheet

Source: Direct Nickel Limited

15

The process is further advantageous in that it:

• recycles its novel reagents;

• offers high cobalt and nickel recoveries with short residence time (the vast majority of ores leach readily

in around three to four hours and typically result in 90 - 99% recovery of nickel and 90 - 98% of cobalt);

• has substantially lower capital and operating costs than competing processes; and

• is fully scalable.

Figure 11 shows a comparison of the usual capital and operating costs of two conventional processes versus the DNi

process for a medium grade nickel laterite resource; clearly demonstrating the cost benefits of the DNi process.

Figure 11: Opex and Capex Comparisons of Processing Techniques for 1.22% Nickel

Source: Nickel Limited & the Past & the Future of Nickel Laterites by Dr. A.D. Dalvi; Dr. W. G. Bacon; Mr. R.C. Osborne, Inco Limited (2004)

Progress made to date and plans for 2012

The DNi process reagent recycling circuit demonstration was completed in August 2010 at its facility in Charlotte,

North Carolina and, with the assistance of the CSIRO, DNi has now built a pilot plant in Perth, Australia to process

one tonne per day of ore from various deposits. DNi is still waiting on the delivery of a unit necessary for one part of

the process (the thermal decomposition unit); it is expected in early to mid-January 2012. However, all remaining

parts of the plant are now running and undergoing testing. Stage 1 of operation is set to take place during this

quarter with full flow sheet operations commencing in the second half of 2012.

The economics

The most recent prefeasibility study into the process, completed by Aker Solutions, concluded that capital costs per

annual pound of nickel produced are approximately US$11.93 and operating costs per pound of nickel produced are

approximately US$1.84. This study assumed a nickel price of US$17,637 per tonne. Significantly, the recovery of iron,

magnesium and aluminium has not been included in the economics and if these prove to be saleable, they will

provide some upside to the bottom line.

Corporate activity

DNi has recently obtained control of Australian listed Wintech Group Ltd (ASX:WTG), the shares of which are

currently suspended from trading. During the first quarter of 2012 it is anticipated that approval will be granted to

change the name of Wintech Group Ltd to Direct Nickel Limited and the shares will resume trading. This will depend

on market conditions, however, and whether DNi will be able to raise the requisite capacity to fund the next stage of

its development.

15.0016.00

11.93

2.40 2.50 1.84

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

Smelter PAL Dni

CAPEX (USD/lb Ni) OPEX (USD/lb Ni)

16

Other Assets

Aside from that mentioned above, Regency Mines has a number of other projects and interests in listed companies.

Figure 12 lists its other exploration assets, which are all very early stage and located in Australia.

Figure 12: Regency Mines’ Early Exploration Assets

Asset Location

Mineral

Type Recent Activity

Munglinup Western Australia Gold/ Nickel Drilling, Versatile Time Domain Electromagnetic Survey

Kambalda Western Australia Gold/ Nickel Versatile Time Domain Electromagnetic Survey

Bundarra Queensland Gold/ Copper Ground exploration, Versatile Time Domain Electromagnetic Survey

Little Mt Isa Western Australia Gold/ Copper Versatile Time Domain Electromagnetic Survey

Source: Regency Mines Plc

The company is still looking to float out these Australian assets when market conditions improve.

The company also has a significant position in a number of AIM listed mining companies. These are listed in Figure 13

alongside the value attributed to Regency.

Figure 13: Investment Assets

Company Name Mineral Type Asset Location

No. of shares

held by

Regency

Mines (m)

Share

Price

(pence)

Value

attributed

to Regency

Mines (£m)

% held

by

Regency

Mines

Alba Mineral

Resources Uranium & Base-metals Ireland & Mauritania 17.9 0.58 0.10 16.26

Oracle Coalfields Coal Pakistan 23.6 6.00 1.42 11.02

Red Rock Resources Gold & Copper

Greenland, Colombia

& Kenya 145.7 2.77 4.04 19.95

Source: Regency Mines Plc

Of these investments, special mention should be made of Red Rock Resources. That company was established by

Regency with a portfolio of iron and manganese properties and floated in mid-2005. Like Regency, Red Rock has a

number of operating and exploration assets alongside a portfolio of investment assets.

The Melville Bugt Iron Ore Project in Greenland, the Kenyan gold project and its 50.5 per cent interest in Colombian

gold miner Mineras Four Points SA comprise Red Rock’s operating portfolio. Its investment portfolio comprises

Jupiter Mines Ltd, Resource Star Ltd, Cue Resources Ltd and Kansai Mining Corporation (Red Rock’s partner in

Kenya). It should be noted that many of the principle assets of Jupiter Mines and Resource Star originally came from

Red Rock Resources.

Regency’s latest final results show that the majority of its pre-tax profit is attributable to Red Rock Resources, which

is listed on its balance sheet as an associate company. The rise in Regency’s profitability came from an increase in its

share of profits of Red Rock and a gain on dilution of Regency’s interest in Red Rock, which totalled £3.20 million.

Looking then at Red Rock Resources’ final accounts it can be seen that its main profit driver was a one off profit on

the transfer of investment from associate which equated to £14.00 million; this was the sale of a large majority of its

interest in Jupiter Mines Ltd. That sale reduced Red Rock’s holding in Jupiter Mines from more than 20 per cent to

6.25 per cent, hence ceasing its classification as an associate.

17

Financial Analysis

Forecasts

Regency Mines released its final results for the period ending 30 June 2011 on 2 December 2011. Those results

showed a pre-tax profit of £1.83 million (up from £0.60 million for the same period of the previous year) and an

earnings per share of 0.40p (up from 0.13p for the same period of the previous year). As noted above, this increase

can predominantly be attributable to its investment in Red Rock Resources and that company’s sale of

approximately 14 percent of Jupiter Mines.

Figure 14, below, shows some historical financial data and financial forecasts based on the company going into

production during the 2017 financial year. It shows that the profits of the last two years were extraordinary

occurrences and should not be expected again until the Company goes into production. From this it can also be seen

that the company must complete a financing if it is to continue its operations as planned.

Figure 14: Regency Mines Financial Forecasts

Year End June 2009 2010 2011 2012E 2013E 2014E 2015E 2016E

EBITDA (456) (507) (1,260) (1,565) (1,619) (1,700) (1,785) (1,874)

Income Before Tax (717) 602 1,826 (1,861) (1,780) (1,732) (1,700) (1,813)

Net Income (717) 516 2,143 (1,861) (1,780) (1,732) (1,700) (1,813)

EPS (pence) -0.27 0.13 0.40 -0.29 -0.28 -0.27 -0.27 -0.28

Source: VSA Capital & Regency Mines Plc

18

Management and Shareholders

REGENCY MINES PLC

Andrew Bell, MA, LLB, FGS, Chairman and CEO

Andrew Bell began his career as a natural resources analyst at Morgan Grenfell & Co. in the 1970s. His business

experience encompasses periods in fund management and advisory work at leading financial institutions,

international corporate finance work and private equity. Andrew’s listed company directorships are Red Rock

Resources PLC (Chairman), Greatland Gold PLC (Chairman), Jupiter Mines Ltd (Director), Resource Star Ltd

(Chairman) and Cue Resources Inc.

Edmund Bugnosen, BSc, Executive Director

Edmund Bugnosen has a BSc in Mining Engineering from Adamson University in the Philippines and studied

Environmental Science at the International Institute of Hydraulics and Environmental Engineering (IHE) in Holland.

He has worked in both the government and private sectors of the Philippine mining industry. Since 1989 he has

worked out of the UK as a consultant for governments, mining companies, NGOs and development agencies,

including the UN, UNIDO, the World Bank, the EU, ILO, DFID, and the BGS. Edmund has also served as Senior Mining

Engineer in the Department of Mines and Petroleum of Papua New Guinea and as a Technical Assistant to the

Namibian Ministry of Mines and Energy. He has published and presented papers on mining laws and regulations,

small-scale mining and related environmental, social and development issues.

Scott Kaintz, BSc, MBA, Executive Director and Head of Corporate Finance

Scott Kaintz has a MBA from London Business School and Columbia Business School. He started his career as a US Air

Force Intelligence Officer and analyst working across Europe, the Middle East and Central Asia. Scott has held

operational and managerial roles in the defence industry and more recently worked in corporate finance and

investment funds, focusing primarily on capital raising efforts and debt and equity investments in small-cap

companies.

Julian Lee, MA, ACCA, Non-executive Director

Julian Lee qualified as an accountant with Deloitte & Touche in 1996. Subsequently he worked in corporate finance

and venture capital in London and New York. He has co-founded a number of companies in the mining exploration,

healthcare, life sciences, med-tech and FMCG sectors and is currently CEO of Rex Exploration Ltd, an exploration

company focussed on gold and coal exploration in Nigeria.

John Watkins, FCA, Non-executive Director

John Watkins is a chartered accountant and a former partner of Ernst & Young and Neville Russell. He is a director of

Starvest PLC, a substantial shareholder of Regency Mines PLC. In addition, he is a director of Red Rock Resources PLC

and Greatland Gold PLC. He is chairman of Equity Resources PLC and Rare Earths and Metals PLC.

19

ORO NICKEL EXPLORATION LTD

Ian Warden, Project Development Manager (Mambare Project)

Ian Warden, a geologist, previously worked for Rio Tinto Coal Australia, and most recently for AME Mineral

Economics, one of the leading minerals and mining research houses. At Rio Tinto Ian occupied roles in exploration,

mine planning and market analysis based within Australia and in China. His responsibilities at AME included

producing market research focusing on the iron ore and coal markets, forecasting supply demand balances and

prices, as well as managing the bulk commodities mine cost analysis team. Ian also holds the position of Direct

Nickel’s Project Development Manager and in that role he is responsible for reviewing laterite projects and potential

worldwide, identifying properties which provide greatest opportunity for Direct Nickel, developing and executing

strategies to capture these opportunities and supporting existing activities aimed at bringing the Direct Nickel

process into commercial production.

Figure 15: Regency Mines - Top 5 Shareholders

% Stake

TD Waterhouse Nominees 16.67%

Barclayshare Nominees 10.30%

Hargraves Lansdown Nominees 7.02%

HSDL Nominees 5.79%

Starvest PLC 5.36%

Source: Regency Mines Plc

20

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21

Appendices

22

Regency Mines Profit & Loss

Year End June 2009 2010 2011 2012E 2013E

Income Statement [£k]

Gross Operating Profit 43 42 167 0 0

Administration Expenses (366) (495) (1,015) (1,065) (1,119)

Exploration Expenses (133) (53) (413) (500) (500)

EBITDA (456) (507) (1,260) (1,565) (1,619)

Gain on Dilution of Interest in Associate (RRR) 0 183 1,028 0 0

Impairment of Investment in Associate 0 (0) 0 0 0

Impairment of AFS Financial Assets 0 0 (76) 0 0

Share of Profit of Associates (RRR) (271) 931 2,174 (217) (83)

EBIT (727) 607 1,866 (1,783) (1,701)

Finance Cost (net) 10 (5) (40) (79) (79)

Income Before Tax (717) 602 1,826 (1,861) (1,780)

Tax 0 (86) 317 0 0

Net Income (717) 516 2,143 (1,861) (1,780)

EPS (pence) -0.27 0.13 0.40 -0.29 -0.28

Source: Regency Mines Plc, VSA Capital

23

Regency Mines Cash Flow

Year End June 2009 2010 2011 2012E 2013E

Cash Flow Statement [£k]

Net Income (717) 602 1,826 (1,861) (1,780)

Change in Receivables 128 (137) (732) (657) 0

Change in Payables 149 115 485 582 698

Depreciation 9 12 29 67 50

Exploration Property Costs 133 53 0 0 0

Impairment of Exploration Property 52 0 319 0 0

Share Based Payments 5 60 0 0 0

Currency Gains 3 10 (68) 0 0

Finance Costs (net) (10) 5 40 0 0

Share of Profit of Associates 271 (931) (2,174) 217 83

Impairment of Investment in Associates 0 0 0 0 0

Impairment of AFS financial assets 0 0 76 0 0

Exceptional gains on dilution of interest in associate 0 (183) (1,028) 0 0

Operating Cash Flow 23 (393) (1,227) (1,652) (949)

Interest Received 10 (5) (40) 0 0

Purchase of Associate Company Investments (175) (80) (250) 0 0

Purchase of Fixed Assets (5) (29) (160) (300) (200)

Purchase of Available for Sale Investment (77) (256) (5,043) 0 0

Sale of Available for Sale Investment 147 0 0 0 0

Purchase of Subsidiaries (82) 0 0 0 0

Exploration Costs (723) (465) (1,003) (1,500) (1,500)

Investing Cash Flows (905) (834) (6,496) (1,800) (1,700)

Net Proceeds from Share Issue 906 1,055 6,677 300 0

Net Proceeds from Borrowings 0 0 2,181 (200) 0

Financing Cash Flow 906 1,055 8,859 100 0

Net Change in Cash 23 (173) 1,135 (3,352) (2,649)

Cash at Beginning of Year 180 203 30 1,165 (2,186)

Cash at End of Year 203 30 1,165 (2,186) (4,836)

Source: Regency Mines Plc, VSA Capital

24

Regency Mines Balance Sheet

Year End June 2009 2010 2011 2012E 2013E

Balance Sheet [£k]

Cash & Cash Equivalents 203 30 1,166 (2,186) (4,836)

Trade and other Receivables 167 304 1,036 379 379

Current assets 371 334 2,202 (1,807) (4,457)

Property, Plant & Equipment 10 28 169 402 552

Investment in Associates 726 1,414 5,495 6,047 6,482

Goodwill 45 47 54 54 54

Available for Sale Financial Assets 220 413 6,113 6,841 7,396

Exploration Assets 1,594 2,048 3,120 4,620 6,120

Non-current Assets 2,594 3,951 14,952 17,630 19,918

Total Assets 2,965 4,284 17,153 15,823 15,461

Trade & Other Payables 226 341 826 1,408 2,106

Short-term Borrowings 0 0 2,181 1,981 1,981

Current liabilities 226 341 3,007 3,389 4,087

Deferred Tax Liabilities 0 0 8 8 8

Non-current Liabilities 0 0 8 8 8

Equity 2,739 3,944 14,138 12,425 11,366

Total Liabilities & Equity 2,965 4,285 17,153 15,823 15,461

Source: Regency Mines Plc, VSA Capital

25

Politics in Papua New Guinea

On 2 August 2011, while the then undisputed Papua New Guinean Prime Minister Sir Michael Somare was on four

months of extended medical leave, the country’s MPs declared the Prime Minister’s office vacant and elected Peter

O'Neill as his replacement.

Due to Sir Michael Somare’s on-going absence (he has been in Singapore since April 2011 where he received, and

has been recovering from, heart surgery) Sam Abal had been acting as Prime Minister. Despite this, the Speaker

accepted the Opposition’s claim that the prime ministership was vacant and, refusing to hear the angry protests of

key government ministers, the Speaker allowed a vote to fill the vacancy. This saw 48 members of the Coalition,

including the majority of the National Alliance, crossing the floor, giving O’Neill a vote of 70 to 24.

The Somare government challenged the constitutionality of this ‘parliamentary coup’ on 5 August but the National

Court accepted the fait accompli and implied the old government had also accepted it by voting in Parliament. The

challenge was then taken to the Supreme Court. On 12 December, that Court ruled by three to two that Sir Michael

Somare, who is one of Papua New Guinea’s founding fathers and has served as Prime Minister three times since the

Country’s independence from Australia in 1975, was the rightful prime minister. It said that Peter O’Neill had not

been legitimately installed as prime minister in August; the replacement had been unconstitutional and was thus

void. Meanwhile the O’Neill Coalition passed amendments in Parliament in an attempt to maintain O’Neill as prime

minister.

Neither leader was sworn in as prime minister following the court case but O’Neill was denied access to the nation’s

Governor General by police. This meant that there appeared to be two prime ministers, two police chiefs and two

governor-generals. Thankfully, the Commander of the Papua New Guinean Defense Force maintained that his forces

would remain neutral. Despite this there was concern that the army could be pressured to take sides.

On 14 December the Governor General, Sir Michael Ogio, swore in Somare’s Cabinet, despite lawmakers backing

O'Neill storming the gates of his official residence the day before and demanding he meet with O'Neill. Later that

day, however, a majority of the Country's 109 lawmakers voted to suspend Ogio and replace him temporarily with

Speaker Jeffery Nape. Nape then swore O'Neill in as Prime Minister. Somare dismissed Ogio's suspension as corrupt.

The following day, on 15 December, around 500 protesters rallied outside Parliament in support of O'Neill and more

than 150,000 union workers gave the rival leaders 48 hours to negotiate, threatening that essential public services

(including water, electricity and health) could be shut down.

Then, on 20 December, Ogio reversed his decision and backed O’Neill, blaming bad legal advice for his previous

decision to reinstate Somare, who still refused to concede defeat, insisting that he is the Country's rightful prime

minister in charge of a minority government.

Now, a month later, the political stand-off between the two factions continues with both factions looking for ways to

discredit the other. However, Peter O’Neill’s government is effectively ruling the country and Michael Somare

recently announced that he will not stand at the election in mid-year for the East Sepik constituency, a position that

he has held for 43 years.

Thankfully, the political unrest has not seen any violence, a valid fear considering that violence described as the

worst in Papua New Guinea's electoral history erupted during the 2002 elections and resulted in more than 100

deaths. Nonetheless, it makes for an interesting background ahead of this year’s general election. Furthermore, the

impasse has brought to light the extent to which Papua New Guinea’s Parliament, despite being based on the British

parliamentary system, remains defined by the competition for power between individual politicians. The political

26

parties appear weak and to vary little in their policies. Rather, the government is formed of a loose coalition of

individual politicians acting in their own interests and that of their supporters. In fact, the Enga Governor, Peter

Ipitas, recently noted: “PNG politics is not about policy, it's about personality.” More than this, though, both the

coalition and the National Alliance Party are known for the malicious rivalry within their own parties and both parties

have been linked to failing government services across most of the country and allegations of corruption over the

dispersal of development funds. This doesn’t make for the best environment in which to operate and yet the majors

(from both the oil and gas sector and the mining sector) all have a presence in Papua New Guinea suggesting there

must be some truth to the saying that it is an island of gold surrounded by a sea of oil..

27

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28

Disclaimer and Key Contact Details

Chief Executive Andrew Monk +44 (0) 203 005 5001 amonk@vsacapital.com

Head of Equities Nick Redfern +44 (0) 203 005 5005 nredfern@vsacapital.com

Heads of Corporate Finance Peter Damouni +44 (0) 203 005 5007 pdamouni@vsacapital.com

Andrew Raca +44 (0) 203 005 5004 araca@vsacapital.com

Group Finance Director Peter Joy +44 (0) 203 005 5003 pjoy@vsacapital.com

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