26 September 2017: Wishbone Gold Report: Align Research

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Wishbone Gold joined AIM in July 2012 as a gold exploration vehicle. The 2015/16 recession in the resources sector led the management to sensibly mastermind the acquisition of the gold trading business Black Sand in 2016, seeking to grow cash flow/profits via a different gold strategy.

Rapid growth in gold trading using the Marc Rich/Glencore model Wishbone is financing equipment to dramatically improve gold production for artisanal miners in countries in Central America and Africa: the model is first being implemented in Honduras. In this way, the company can negotiate long term gold off-take contracts with attractive margins as Marc Rich + Co AG pioneered, which was the basis of Glencore.

Key data

23rd September 2017

First mill in production shortly with three more to follow in 2018

Artisanal miners provide 20% of world gold production. In Honduras,

EPIC WSBN

Share price 0.70p

Wishbone has a pipeline of 4 projects and is teaming up with its US mining equipment supplier, Scotia International and the Honduran government. Rapid growth is expected by rolling out this strategy in S. America & Africa.

Proven management led by Sirius Minerals' ex-CEO/Chairman

Aligning interest with shareholders, Wishbone management own the majority of the shares. CEO/Chairman Richard Poulden held the same roles

52 week high/low Listing

Shares in issue Market Cap Sector

AIM 1,301,410,482

£9.1m Mining

1.17p/0.60p

at Sirius Minerals where he oversaw its transformation into a substantial potash company, with the share price rising from under 2p to 40p.

DCF analysis suggests upside of over 180%

Investors enjoyed 200% increase in the last 18months. Discounting forecast cash flows of the gold trading arm and using a peer comparison of the gold exploration projects gives a target price of 1.97p. With the shares currently trading at 0.70p we see material upside & initiate coverage of Wishbone Gold with a Conviction buy stance.

This investment may not be suitable for your personal circumstances. If you are in any doubt as to its suitability you should seek professional advice.

This note does not constitute advice and your capital is at risk. This is a marketing communication and cannot be considered independent research.

18 month share price chart

Analyst details

Dr Michael Green michael.green@alignresearch.co.uk

IMPORTANT: Wishbone Gold is a research client of Align Research. Align Research & a director of Align Research holds an interest in the shares of WSBN. For full disclaimer information please refer to the last page of this document.

Wishbone Operations

• Precious metals trading - Wishbone owns a 100% of Dubai-based Black Sand FZE which holds a gold, precious metals and gem trading licence to operate in the United Arab Emirates.

• Exploration projects - Wishbone holds four Exploration Permits for Minerals (EPM) in north east Queensland, Australia and which are highly prospective for gold and other metals with numerous mineral shows having been seen.

Gold

For centuries, gold has been seen to be a store of value in turbulent times. Over the last twenty years, the precious metal has certainly provided protection in times of economic turmoil. A good example was the 2011 US debt downgrade/Eurozone sovereign debt crisis, when the gold price peaked above the $1,900 per ounce level. Subsequently, as the world financial system has become more stable, the yellow metal has given up some of these gains.

Gold price over the last twenty years. Source: BullionVault

The value of gold is due to its relative rarity, along with being easy to mint and fabricate, as well as being corrosion-resistant. Half of the world's consumption of new gold goes into jewellery, with 40% made into bars and coins for the investment market. The remaining 10% is used by industry in electronics, computers, medicine and dentistry.

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The price of gold is reactive to a potent combination of fear and market expectations. The biggest drivers of the price tend to be macroeconomic factors and political uncertainty, along with movements in interest rates and, of course, supply and demand considerations. Mounting political or economic uncertainty, whether it is in the US, China or the Eurozone, are powerful forces that have dramatically moved the gold price over the years.

There is a strong negative correlation between interest rates and the price of gold. This is because there is an opportunity cost in holding gold as it pays no dividend or income. When interest rates are low or the gold price is forecast to strengthen on the back of mounting economic or political concerns, investors believe that this is a price worth paying. But in times of rising and high interest rates, the opportunity cost of holding gold increases as a decent return could be made in investing funds elsewhere.

Supply issues

Global mined gold production hit an all-time high of 3,100 metric tons in 2015 and remained fairly static in 2016. A range of industry commentators believe that gold production is set to decline this year. However, the average grade of gold mined continues to fall as the high- grade mines of the past have increasingly become exhausted. This is well illustrated by South Africa, where today gold production is just 20% of the level it was forty years ago.

At the same time, exploration is no longer replacing the ounces of gold that have been mined. Since 2010 the number of major new gold discoveries has fallen dramatically. This is due to low precious metal prices in the past which failed to encourage junior miners to explore for gold, along with tighter environmental regulations and a lack of success with the drill bit which has served to reduce the number of new gold mines coming on stream.

In our view, it does seem that investors might have seen peak gold production and that a substantial decline in new gold supply is on the cards. Earlier on this year, leading US broker, BMO Capital Markets predicted a decline of a third in new gold supply from 2020 to 2025.

Demand

Last year global demand for gold was at the highest level seen since 2013, as political uncertainty pushed investment demand 70% higher. Brexit and the election of Donald Trump created an unprecedented level of political uncertainty, which led to large institutional investment flows into gold. However, this was balanced by consumers in China and India, the two biggest gold markets, buying less gold.

Recently, gold moved strongly upwards to the $1,350 level. We believe that over the medium term and beyond, the underlying fundamentals seems to be getting stronger for the price of gold, with decreasing mine supply combining with increasing demand for gold as a safe haven investment in times of economic difficulties. In addition, slow growth and low inflation have led to mushrooming levels of global debt which could trigger another economic crisis where gold once again would be attractive as a safe haven.