Metro Mining : Morgans - MMI Bauxite Hills Funding in Place - Target Price $0.20

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Australia│Equity research│July 14, 2016

FOR AUSTRALIAN DISTRIBUTION ONLY, NOT FOR INTERNATIONAL CLIENTS.

COMPANY SNAPSHOT

Metro Mining Bauxite Hills funding in place

Reuters/Bloomberg: MMI.AX / MMI AU Market cap: US$35.4m

A$47.3m

Current price: A$0.09

Average daily turnover: US$0.01m A$0.01m

Current shares o/s 525.6m Free float: 70%

Chris BROWN

T (61) 7 3334 4885

E chris.brown@morgans.com.au

• Metro Mining (MMI) is moving to develop the Bauxite Hills project, Cape York, with capex of A$40m for 4Mtpy of bauxite production. Submissions - public and government - to MMI's Environmental Impact Statement (EIS) closed on 29 June 2016. Responses and MMI's final statement of environmental commitments is to be lodged for approval, with determination of the EIS anticipated by end 2016.

• Under the terms of an earn-in JV with Mahar San, MMI is earning an 80% interest in the Mahar San volcanogenic massive sulphide project, Myanmar, where in-pit sampling and re-sampling diamond drilling has reported ore grade and width base and precious metal intercepts, with the best channel 4m @ 6.7g/t Au, 261g/t Ag, 1.35% Cu, 11.6% Zn and 2.63% Pb.

• MMI has now announced a placement to Greenstone Resources at A8.5cps to raise A$8.9m. Greenstone will hold a 19.9% stake in MMI, will have representation on the Bauxite Hills development steering committee, and is committed to funding a further A$20m in follow-on equity.

DISCLAIMER:

Morgans Financial Limited (Morgans) does not formally research this company. Investors should consider this desk note as general commentary only. Before making any investment decisions, an investor should speak with a financial adviser to determine what best suits their personal circumstances. FOR AUSTRALIAN DISTRIBUTION ONLY, NOT FOR INTERNATIONAL CLIENTS.

Bauxite Hills - simple and profitable

Bauxite Hills, located 95km north of Weipa, looks to be a relatively simple free-dig mining, trucking and barging operation, with construction scheduled to commence early 2017. MMI's updated (January 2016) Preliminary Feasibility Study evaluated a 4Mtpy operation over 13 years with initial capex of A$40m. MMI's cornerstone shareholder Xinfa Group operates Alumina refineries and Aluminium smelters in China and has expressed interest in offtake agreements.

Seaborne bauxite - in recovery?

After Indonesia brought in its export ban on raw ores (bauxite and nickel laterites) in mid 2014, bauxite prices firmed as seaborne tonnages declined; however, weaker Chinese growth coupled with funding restrictions in 2015 resulted in weaker demand and lower bauxite prices from late-2015. The prospect of new large-scale projects appears unlikely in the short to medium term, with stronger prices as demand increases.

Share price risk

Investors in MMI have experienced a 50% lift in the share price since January 2016 (A6.0cps to A9.0cps) with the release of the expanded PFS and now the funding commitment from Greenstone Resources, as MMI works through the final stages of the regulatory process ahead of the projected development, which is expected to drive the MMI share price over the next 12 months. The acquisition of an 80% interest in the Mahar San copper project in Myanmar offers upside in the event of exploration success.

Figure 1: Metro Mining share price - 1 year

$0.12

$0.10

$0.08

$0.06

$0.04

$0.02

$-

SOURCE: IRESS

IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP

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Bauxite Hills Project

Focus in a broader portfolio

Development of the Bauxite Hills project 95km north of Weipa is the focus for Metro Mining Ltd (ASX:MMI). The PFS is based on a resource of 65.3Mt at a grade of 50.3% Al2O3 defined to JORC Code (2012) standards. The project has had, and continues to enjoy, strong community support. It lies within 1,300sq km of tenements held by MMI on the Weipa Bauxite Plateau. MMI has a 21.9% interest in unlisted Gulf Alumina Ltd, which holds adjacent tenements.

Figure 2: MMI's Tenements & The Weipa Bauxite Plateau

SOURCE: METRO MINING LTD - PRESENTATION DECEMBER 2014

MMI also holds coal tenements in the Surat Basin containing over 4.4 billion tonnes of coal (reported to JORC Code 2012 standards). These include the wholly-owned Bundi project, and the Columboola JV (MMI 49% - China Coal 51%). MMI has recently acquired an 80% interest in the Mahar San copper project, Myanmar.

The Revised Pre-feasibility Study

After a PFS reported in February 2015 by MMI, a Definitive Feasibility Study (DFS) with an accuracy estimated at +/-15% was released for a 2Mtpy operation to satisfy a streamlined regulatory approval process. The approvals received satisfied the streamlined approval process for operations with production below 2Mtpy, meeting the standards for release of a DFS. MMI was subsequently advised by the Queensland Department of Environment and Heritage Protections (DEHP) that a full environmental approvals process would be required for the Bauxite Hills development.

Figure 3: Bauxite Hills Project

SOURCE: METRO MINING LTD - PRESENTATION APRIL 2015

Sensitivity analysis had indicated that a larger 4-5Mtpy project would be more robust. In January a revised study, to Pre-feasibility standards, was released. The project incorporates a shallow open pit operation with low overburden removal, of the order of 0.5m, and free-dig mining of the 1.7m (on average) bauxite horizon, followed by crushing and screening. Product is to be trucked to a barge port to be established on Skardon River for transhipment offshore. Production is modelled from April to December, with a shipping hiatus for the summer wet season. The fundamentals of the Study are shown below:

Figure 4: PFS fundamentals

INITIAL CAPEX - 4Mtpy	A$M	OPERATING COSTS - 4Mtpy			A$/t	A$M/yr
Haul roads, civil & site	3.03	Mine, haul, stockpile		6.27	25.1
Nav. aids, mooring	1.15	Transhipment		8.40	33.6
Infrastructure (BLF, accomm)		27.63	Site & admin		4.13	16.5
Mining & equipment	6.18	Site costs	18.80	75.2
EPC, mobilisation, insurance, other		2.11	Royalty & other		7.27	29.1
Total	40.10	Operating costs	26.07	104.3

SOURCE: METRO MINING LTD - ASX ANNOUNCEMENT JANUARY 2015

The study was based on the resources and reserves, reported to JORC Code 2012 standards, below.

Resources (Measured, Indicated & Inferred)

BH1 & BH6 - 53.5Mt @ 50.6% Al2O3 (38.7% THA#), 11.7 SiO2 (6.3% RxSi*) BH2 - 11.7Mt @ 49.1% Al2O3 (37.4% THA#), 15.7 SiO2 (6.7% RxSi*)

Reserves (Proved & Probable)

BH1 & BH 6 48.2Mt @ 50.2% Al2O3 (38.4% THA#), 11.2% SiO2 (6.4% RxSi*)

# THA - trihydrate available alumina less desilication alumina at 1500C.

* RxSi - reactive silica at 1500C.

ESG and Queensland Legislation

The Bauxite Hills project enjoys strong support from the Traditional Owners, and The Cape York Institute also supports relatively simple economic development in the area, which can incorporate high levels of indigenous employment. While both previous Labor and LNP governments frustrated the Pisolite Hills development - in the face of expert advice in support of the development and the support of a majority of Traditional Owners - neither political party has expressed opposition to development of Bauxite Hills.

In May 2010, the then Labor Queensland Government declared the Wenlock River Basin under the Wild Rivers Act in the face of opposition from Traditional Owners and The Cape York Institute. The Act designated High Preservation Areas extending 500m from waterways, while expert advice was for a 200m buffer - also ignored. This increase from 200m to 500m sterilised 45% of the Pisolite Hills resource. With the election of the single-term LNP government, submissions were sought in early 2013 for the Cape York Regional Plan to supersede the Wild Rivers legislation, this time incorporating input from the Traditional Owners. This incorporated the expert opinion provided for the Wild Rivers legislation to establish an effective High Preservation Area within 200m of waterways. However, in late 2013 the Newman government declared the Steve Irwin Wildlife Reserve effectively sterilising the Pisolite hills project, which covered less than 5% of the 135,000ha covered by the declaration.

Bauxite Hills was not affected by the Wild Rivers Act, legislated by the Labor government, nor by the Declaration by the LNP government.

The market for Bauxite and Bauxite Hills product

World bauxite production is 215Mtpy, and Australia is the world's largest producer responsible for over 60 Mtpy. Much of this production - world-wide and Australian - is by vertically integrated producers including Alcoa, Rio Tinto Alcan, Rusal and Chinalco. China is the largest bauxite importer at a rate of 30- 40Mtpy, with the world-wide seaborne trade estimated at 70Mtpy. Indonesia was the largest contributor to the non-vertically integrated sea-borne trade with exports estimated at 40Mtpy. The Indonesian government banned the export of unprocessed laterite ores of nickel and aluminium from 2014. While this may not be fully maintained longer term, our expectation is that much of the illegal production that has been halted will not re-start, leading to a market opening for new production. Should the ban remain in place, the supply shortage will persist. Indonesian bauxite specifications are reported to be 45-48% total Al2O3, 8-12% SiO2, and a maximum of 14% Fe2O3.

A laterite with a minimum of 40% Al2O3 is classified as bauxite. While there is an openly traded market for bauxite, it is somewhat opaque, and the relationship between specification ranges and price is not linear. As with coking coal, consumers will blend ore from a number of sources to achieve a specification to suit their particular process.