Kingsgate Consolidated : Patersons Broker Report on Kingsgate

KINGSGATE CONSOLIDATED LIMITED

Research Note

CLEAR VALUE IN CHILE, WITH THE BONUS OF POTENTIAL WINDFALL THROUGH CHATREE LITIGATION

• Kingsgate Consolidated Limited (KCN) offers compelling value, with its Chilean project, Neuva Esperanza nearing the end of DFS, and our valuation based on PFS data (discounted by 25%) generating a valuation of $1.25 vs. KCN's current share price of $0.43. We do not include Chatree in our base case valuation, but highlight the upside on the current insurance claim is $200m, or $0.89 per KCN share, with further potential upside through the current international arbitration with the Thai Government.
• Nueva Esperanza a world class asset. The silver-gold project, located in the highly prospective Maricunga Belt in Chile boasts 1.9Moz of gold equivalent resources (AuEq60 - meaning silver converted to gold on a ratio of 1 to 60), with the PFS released April 2016 showing average annual AuEq60 production of 91koz per annum, at AIC of $US913/oz. DFS is due for completion 1H18.
• Chatree the wild card. Since commencing production in 2001, the Chatree Gold Mine (Thailand) has produced approximately 1.8Moz gold and more than 8.6Moz silver, averaging 125-135koz gold per annum over recent years. In May 2016, the Thai Government announced all gold mines in Thailand (of which Chatree was the only one) were to be shut down by the end of 2016. KCN are currently pursuing the Kingdom of Thailand via The Australia Thailand Free Trade Agreement (TAFTA). In addition, the Company is pursuing a $200m claim under its political risk insurance (mediation set for March 2018). We haven't assumed any value for this asset under our base case, but highlight the upside could be of the order of several $100m.

• Further exploration upside. KCN continues to enjoy exploration success in Chile, with the recent success at Cerro Blanco West. The Company holds 45km2 within the Maricunga Belt in Chile, the site of defined gold resources of over 100Moz of AuEq60, including mines such as Salares Norte and La Coipa.

• Current Board Challenge not expected to be successful. Metal Tiger PLC who owns 6.7% of KCN has requested a spill of the current board. Metal Tiger is an AIM listed Company capitalised at c£21m. We do not view their challenge as likely to succeed.

KCN is very well known to the investment market through its successful operation of the Chatree gold mine in Thailand over a 15 year period. The mine did have a chequered history, most notably being delays in permitting the nearby Chokdee tenements, the extended voluntary suspension in 2015 over accusations that the mine was the source of elevated arsenic and manganese (which was subsequently disproven), and more recently the forced closure of the mine by the Thai government (KCN managed to turn an $80m debt into a

$38m cash balance over the final 7 months of operation - a quite remarkable effort in such a short time frame). Despite the volatility, the mine has consistently delivered into guidance, and has received a number of awards for environment excellence, whilst generating considerable cash flow over its 15 year mine life. The Company is currently pursuing two separate legal cases to seek compensation over the premature closure of the mine. KCN acquired its Nueva Esperanza project in Chile through the agreed takeover of Laguna Resources NL in 2010. The project has been the subject of a number of feasibility studies, the most recent showing significant improvements through both the expanded resource base, and substantially lower cost inputs. The Company is currently focussed on finalising the DFS on the project, with results expected early in calendar 2018. Chile currently is the world's largest copper producer, and top 20 global gold producer, and is viewed as a highly favourable mining investment destination. Neuva Esperanza is located within the Maricunga Belt in Chile, where defined total gold resources exceed 100Moz AuEq60, with KCN's Nueva Esperanza project currently boasting 1.9Moz AuEq60. KCN also made a couple of less successful acquisitions in Dominion Mining, and Bowden's Silver project, and these investments have subsequently been divested.

KCN owns 100% of the Nueva Esperanza Project, located in the Domeyko Cordillera of the Atacama Region of Chile. The property comprises contiguous Mining Concessions with a total area of 9,326 hectares. The Company also owns and has the surface rights to an area of 4,020 hectares. The project is located in the Maricunga province, a +100Moz district boasting world class deposits such as Salares Norte and La Coipa.

Nueva Esperanza is a gold and silver deposit with c.73% of its revenue generated from silver. The project is currently at feasibility study stage, with the DFS due 1H 2018 (PFS released April 2016). The Nueva Esperanza project includes three orebodies - Arqueros, Chimberos and Teterita. Chimberos was previously mined as an open pit producing 4.2Mt at a grade of 0.23g/t Au and 294g/t Ag. Arqueros was previously mined as an underground mine producing 1.2Mt at a grade of 1.34g/t Au and 364g/t Ag. No historic mining has been undertaken at Teterita, which exhibits a similar style of mineralisation to Arqueros, but is characterised by having zero gold endowment, but very high grades of silver.

Mineralisation at Nueva Esperanza is an epithermal system characterised by silicified mantos silver deposits at Arqueros and Teterita, gold veins at Arqueros and gold and silver hydrothermal breccias at Chimberos.

There are also a series of gold-bearing satellite silicified structures which are being systematically tested. Mineralisation is controlled by north, north east and North West trending silicified feeder structures with deposition occurring at the level of a paleo water table. Silver generally occurs as halide salts that are amenable to rapid leach kinetics in cyanide and gold as electrum and native gold.

Chimberos was historically mined by Kinross Gold in 1998-99, with 700 koz AuEq60 at 5.1 g/t AuEq60 mined. KCN has extended the resource here, following the discovery of a westward extension from the historical pit, which delivered 250koz Au and 5.1 Moz Ag to the project inventory. Historical mining at Arqueros occurred via underground mining from 1999-2004, with 289koz AuEq60 at 7.5g/t AuEq60 mined. Mineralisation here is high sulphidation gold-silver mineralisation hosted in vuggy silica mantos and ledges.